A version of this story appeared on The Baseline Scenario.
The Securities and Exchange Commission (SEC) under Mary Shapiro is trying to escape a difficult legacy -- over the past two decades, the once proud agency was effectively captured by the very Wall Street firms it was supposed to regulate.
The SEC's case against Goldman Sachs may mark a return to a more effective role; certainly bringing a case against Goldman took some guts. But it is entirely possible that the Goldman matter is a one-off that lacks broader implications. And in this context the SEC's handling of concerns about "high frequency trading" (HFT) -- following the May 6 "flash crash", when the stock market essentially shut down or rebooted for 20 minutes - is most disconcerting. (See yesterday's speech by Senator Ted Kaufman on this exact issue; short summary.)
Regulatory capture begins when the regulator starts to see the world only through the eyes of the regulated. Rather than taking on board views that are critical of existing arrangements, tame regulators talk only to proponents of the status quo (or people who want even more deregulation). This seems to be what is happening with regard to HFT.
HFT is a big deal - perhaps as much as 70 percent of all stock trades are now done by "black box" computer algorithms (i.e., no one really knows how these work), and there are major open questions whether this operates in a way that is fair for small investors. (Disclosure: in 2000-2001, I was on the SEC's Advisory Committee on Market Information; I was concerned about closely related issues, although market structure has changed a great deal over the past 10 years.)
The technical, "fact-gathering" activities of bodies like the SEC are of critical importance in both building an overall consensus - do we have a problem, what should we do about it - and also in creating the basis for regulatory action (e.g., the SEC does not even collect the data needed to understand how HFT contributed to the May 6 disaster). And anyone who has ever put together a relatively complicated discussion of this nature can attest that how you frame the issues is typically decisive, i.e., what is presented as the range of reasonable alternative views?
On Wednesday, the SEC will hold a "market structure roundtable" to discuss "high frequency trading, undisplayed liquidity, and the appropriate metrics for evaluating market structure performance." But who exactly will be at this discussion?
The names of panelists for this discussion are not yet public and probably not yet final - but the preliminary list is far too much slanted towards proponents of HFT (6 out of 7 seats at the table; see Senator Kaufman's speech for details), with hardly any representation of people in the markets (e.g., "buy side" mutual funds) who think HFT is potentially out of control or unfair. It looks very much like someone is setting up a love fest for HFT - and a boxing match with 6 tough guys against one lonely critic.
To be fair, after coming under heavy pressure from a leading member of the Senate Banking Committee over the past 48 hours, the SEC is backpedaling quickly and indicating that the panel invitations can be broadened. This is encouraging - perhaps the agency is finally overcoming its tin ear problem.
But nothing other than a balanced panel on June 2 would be acceptable. At the very least, the SEC needs to increase the panel to 10 people - 5 for and 5 against. And all the issues need to be on the table - including exactly who benefits from HFT, how much money they make in this fashion, and whether or not long-term investors (and the broader economy) really gain from such arrangements.
The SEC must understand that it has a long way to go to restore its credibility. Wednesday's quasi-hearing is an important test and many people will be watching carefully.
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yup, always the kind of description you want to hear about a linchpin of the american economy.
let's hope no one pulls this pin. of course if they short it before they pull it, they would make billions. thankfully americans aren't that greedy. right?
of course if the "computer" pulls the pin, then the rich and wall street will get bailed out again, being too big to fail, and everyone will get the shaft while their money helps the greedy and corrupt.
american exceptionalism hard at work.
Even the frauds and crooks usually have some sympathy for those who are not purely their prey. I dealt once with a man who was known as a Mafia judge. He came across some property of mine that had been stolen and went through some pains to get it back to me. Aside from a few necessary judicial rulings, he was the most honest man I ever knew. The thing of it is, you had better be an honest man if you are going to work for the mob!
Big Question - WILL it?
Supposing there was a person's business while another could care less: Who do you think would have the better understanding? Sure, some integrity in both would be nice.
American public from dangerous products or fraud. It's all about the "money", from the Federal level to the State, to the City and Counties. The public be Damned is their motto.
But incredibly, the SEC has done just the opposite by empowering the Wall Street owned and operated black box Depository Trust and Clearing Corporation to create a Three card Monte style, bait and switch, non-settlement, non-delivery of securities system that facilitates the unlimited sale of securities that the seller is never required by anybody to actually deliver, so that the transaction is never properly “settled.” Known as naked short selling or failure to deliver, the scam has the same effect as counterfeiting because by definition and design, it dilutes the actual value of real shares by overpowering the natural laws of supply and demand.
Over the years, the practice has destroyed countless companies and crushed the hopes and dreams of millions of investors worldwide. Yet the SEC, self-proclaimed as “the investors first line of defense against securities fraud” and “the pre-eminent gold standard of enforcement of securities laws,” has not brought a single enforcement action to stop it or punish the perpetrators. Is it any wonder the bad guys have come to feel invulnerable?'
http://calltoaccount.wordpress.com/
The eTrade baby may think his stop-loss orders saved him a pant full, but the next day when the stock is trading above where his stop-loss executed, he's going to be pissing his pants.
That's the deal. It is what it is.
Now, let's take our complaints where the belong, at the top.
I look forward to some ACTUAL change or the 2012 primary.
Try a thought experiment. The next time you turn on the TV and see someone in authority from government or high finance talking, say to yourself, this person is a criminal and has been a criminal most of his or her life because my government or corporations (it's hard to tell them apart these days) have made it possible for him or her to get in a position to further fleece me and my family. How does that make you feel? Well, sorry, but that is reality. Of course I would love to change it but I can't get past the blather of bla bla bla from my senators and congressman about how much they are doing for this country. There is no guilt, no anger, no awareness and no nothing. These folks aren't stupid. They just don't care. I wish it wasn't so.
And by the way, the SEC chair has a net worth of over 27 million dollars (she is THE richest federal government employee). Why don't you put the same guy that exposed Madoff onto Schapiro?