For those who want the Securities and Exchange Commission to fulfill its mission of protecting investors, the New Year brings more bleak reality. It's bad enough that the Justice Department never indicted a single Wall Street executive for the fraud associated with the financial crisis, leaving it to the S.E.C. to wrist-slap a few financiers. Now, after a year in which the Dow Jones Industrial Average gyrated drunkenly, it's obvious where lax enforcement is taking us.
During the last five months of 2011, the average difference between the Dow's intraday high and low was a stomach-churning 260 points. New research suggests that high frequency trading (HFT), which accounts for about 60 percent of daily U.S. stock-trading volume, exacerbates volatility. Jim McCaughan, CEO of Principal Global Investors, agrees. But whatever the causes of the Dow's daily rollercoaster ride, millions of Americans are getting off it. Ordinary investors withdrew more than $135 billion from domestic stock mutual funds in 2011.
We need ordinary investors -- and their capital -- back in the market. To fuel economic growth and to generate greater returns for investors themselves, whose future retirement income will be lower because their nest eggs are now invested in CDs (which pay negligible returns but are safe) instead of equities (which can pay considerably higher returns but right now are too scary).
In October 2009, Senator Ted Kaufman (D-DE), then almost a lone voice on emerging equity-market instability, and I met with SEC Chairman Mary Schapiro. Kaufman wanted to discuss the explosive rise of HFT and the proliferation of electronic trading venues. (In only a few years time, we'd gone from a duopoly of the New York Stock Exchange and Nasdaq to more than 60 market centers.)
Two problems already were evident. First, in the name of competition, the SEC had created conditions under which trading venues were catering to HFT to the detriment of long-term investors and market stability. The threat to stability became disturbingly apparent on May 6, 2010, when the Dow dropped a thousand points in minutes. Eight months earlier, Kaufman had given a speech in which he predicted just such an HFT-fueled flash crash.
Second, while markets proliferated and HFT went viral, the S.E.C. did nothing to update its surveillance and monitoring capabilities. A blind S.E.C. left investors susceptible to possibly rampant manipulation and illicit trading practices. HFT, Kaufman believed, urgently needed transparency and regulatory oversight. He was concerned the SEC would dither. He told Schapiro, "I don't believe you're going to do anything about HFT." She replied, "Just watch."
We did. Occasionally we'd see something. But progress has been painfully slow (the "C" in S.E.C. doesn't stand for the speed of light). Today, it's not just Senators complaining, but some of our leading investment advisors and commentators. Michael Price, formerly CEO and President of Franklin Mutual Advisors, in a December 2011 interview blamed the S.E.C. for markets that he says have hurt mutual funds and other traditional, long-only investors. Last week, Gillian Tett of Financial Times wrote the next "flash crash" may hit with a
In response to Kaufman, Schapiro wrote back on December 3, 2009, promising action on three fronts. On November 3, 2010, the S.E.C. finalized a rule that prevents HF traders from having unsupervised access (known in the industry as "naked access") to trading venues and requiring brokers to implement pre-trade risk controls on HFT activity on a market-wide basis. On July 27, 2011, the S.E.C. finalized a rule that requires brokers to collect data of large HF traders, which (when implemented in April 2012) will finally provide the S.E.C. with baseline information about how HF traders operate.
Finally, in early December 2011, Chairman Schapiro said she's "very anxious" to require a "consolidated audit trail" for all HFT. This rule, which she implied might be finalized in the coming weeks, would fill the gaps in reporting requirements that prevent the efficient tracking and policing of orders and trades. A consolidated audit trail would give the S.E.C. eyes. Without it, the S.E.C. can't see what's happening and so can't stop manipulative trading strategies, detect disruptive rogue algorithms, or reduce excessive volatility. Let's hope the S.E.C. implements the consolidated-audit-trail rule swiftly.
Monitoring HFT to detect wrongdoing is crucial. But for this New Year, the S.E.C. should resolve to go even further by completing its market structure review and proposing additional reforms. It can start by rereading the 14 recommendations of the Joint Advisory Committee it convened with Commodities Futures Trading Commission after the flash crash (and Kaufman's August 2010 letter containing his recommendations). Unless the S.E.C. acts soon to regulate HFT effectively and prevent the next flash crash, how many more ordinary investors will have fled the market by the next New Year?
If you propose to be a proponent for change, allow more independent policing, unrestrained review, severe judicial action and fully disclosed transparency in trading activities. The SEC is impotent to all who endeavor to inspect and rectify this system for fair trade and practice. Yes, we expose those engaged in this collusional process, and an abdication of the good old boy system is seen as impossible. Your ship continues to sink.
President Wilson in 1918 lamented that in creating the Federal Reserve System he regretted this action as his single greatest failure. He placed the financial structure into the hands of corporations and greed and corruption. To revise special interests, to control of what was once a free market system, this cannot be restored. In a way that Multi-national corporatism confirmed the growth of corrupt special interests by the definition of oligarchic profit being just another dictatorial plutonomy, we as individuals have lost our ability to correct this.
The JAC has made some interesting recommendations, but this is exactly the problem. You are policing yourself without being independent of results and changes required. HFT is about profit only, and extremely exclusive about who controls what.
Everything in stock markets is about the efficiency and multiplying venues of profit sharing - on how to leverage capital assets even more. The Derivatives trading market, (with their insanely complex value calculation equations) along with complex trading issues about propriety (and impropriety of collusion), and the lack of consequential punishment for criminal behavior, adds up to mistrust by the common investors. You are perceived as common crooks, albeit on a global scale. You are nonetheless petty crooks, which is your problem: Capitalism at its best is wrong when non-accountability and public deception rule.
Look at the current market variations, and we all wonder: WHY? This is out of control, but unfortunately, the consequences will define the growth and destruction of Nations. If enough people believe it's not working correctly, it isn't ! PERCEPTION is everything.
The US stock market today, frankly, is seen as a giant, complicit Ponzi scheme "too big to fail". It is about the leveraging of perceived assets beyond their true, accounted value. Sure, its a legally sanctioned scheme, but the dike has too many leaks in policy, jurisdiction, regulation and prosecution (what's that?)
Perhaps time will show that the "C" in SEC stands for complicity?
Where is the leadership from the White House?
Nothing is gonna happen until the POTUS decides to make it happen.
Since he has not chosen to do so, it won't.
He is either lazy, incompetent, or corrupt.
Your choice.
HF Traders can pay for the privilege of skimming the markets, since they cannot rationally be
called INVESTORS in any way, shape, or form.
A recent article alerted me to the fact that Bernie Madoffs scam was uncovered by a former investment banker, who alerted the SEC repeatedly over a NINE YEAR period to investigate Maddoff for returns that were mathematically impossible. The SEC did nothing until Madoff melted down on his own.
America today locks up FIVE TIMES as many Americans, per capita, as it did prior to the Reagan Administration. So, we know we still believe in Law and Order. What, then, happened to the cops patrolling the finance sector? Is that kind of crime OK?
to upset the apple cart, so to speak, unless the offenses are so egregious and public (i.e. Madoff) that they cannot be ignored. We are being controlled by the F.S.I., and in my opinion no real progress will be made until this condition is corrected. No small challenge there!
Personally, I feel it also demonstrates a decay in the concepts of citizenship, democracy & justice based on the concepts of human dignity & egalitarianism.
Again personally, I feel the Peoples' Occupy Wall Street movement is just the beginning & has the potential of creating real & measurable progress. It IS a challenge however recognizing & identifying the problems in the 'status quo' conditions is the first step in correcting them.
Conversely, there are some who apparently can see no problems in the current conditions. No problems? No solutions.
The current article links to recommendations made by the Joint Advisory Committee: "... we believe these 14 points are the most important ones upon which to focus to ensure the integrity of the markets and to maximize investor confidence in the aftermath of the many market disruptions over the past several years."
An excellent report which identifies problems & offers plausible solutions.