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Is Scream The Movie Coming To An Equity Market Near You? Hopefully Not If Senator Kaufman Is Finally Heard
Senator Ed Kaufman keeps the fight for market integrity alive with the following FT Op-Ed (highlights ours):
Preventing a horror movie ending in the US markets
By Edward Kaufman
High frequency trading, dark pools, and flash orders – unknown to most Americans a few short months ago - have now joined the American lexicon. As phrases, they are easily tossed about. But trying to understand the arcane, high-tech and labyrinthine way stocks are traded - radically transformed from just a few years ago - is far more difficult.
Many on Wall Street assure us there is nothing to worry about. In their view, the dramatic proliferation of competing markets and the extraordinary rise in high velocity trading have had only beneficial results: greater liquidity, narrowed spreads and lower transaction costs for all investors.
Lost in this reflexive defense against meaningful government review, however, is a more overarching concern: the integrity of our capital markets, which are now too fragmented, too opaque and well beyond the effective surveillance of the Securities and Exchange Commission.
That’s why I have urged the SEC to undertake a comprehensive “ground up” review of a broad range of market structure issues before more piecemeal changes occur. We have seen this horror movie before, and only timely regulatory examination can best prevent a sequel: When markets develop rapidly and are not transparent, effectively regulated or fair, the movie’s ending scene can be one of tragedy affecting millions of people.
The facts speak for themselves. We’ve gone from too few stock markets to too many; from an era dominated by a duopoly of the New York Stock Exchange and Nasdaq to a highly fragmented market of more than 60 trading centres.
In competing for market share, those trading centres encourage or permit a variety of questionable practices. Dark pools, for example, which allow confidential trading that takes place away from the public eye, have flourished: Five years ago, there were 18 dark pools comprising 1.5 per cent of the market’s volume; today, over 50 dark pools execute over 12 per cent of market trades. And the total percentage of trades taking place in dark pools or internally at broker dealers, another source of private trading outside public markets, now approaches one quarter. For strictly retail investor orders, it may be twice that amount.
Moreover, in just two years, the percentage of daily stock trading volume by high frequency traders – whose computers are constantly probing the market for miniscule price advantages -- has reportedly skyrocketed from 30 percent to nearly three out of every four trades.
Left unchecked, high frequency trading could develop into a systemic risk, becoming simply too big and too fast to regulate. If all the machines “zig” at the same moment when they should have “zagged”, market chaos could ensue.
And when the average investor loses confidence in the integrity of our markets, when he or she believes that the price at which they are able to buy 100 shares of IBM is higher than it should be, even if only marginally, because of high frequency gaming strategies, then the reputation of our capital markets for basic fairness is significantly tarnished.
The SEC’s review should be all-encompassing, reviving old ideas and examining new ones: should markets be centralised or decentralised; should we separate the markets based on investor types; what should be the role of market makers; what role might there be for real time risk management?
At a minimum, a few simple themes should guide us to a regulatory framework that permits vigorous competition while substantially reducing the possibility of a two-tiered trading network, where long-term investors are vulnerable to powerful trading companies that exist not to value or invest in the underlying companies, but to feed everywhere on small but statistically significant price differentials.
First, we should reconsider the criteria for becoming an exchange or market centre because the market’s unhealthy fragmentation – and the high-speed trading strategies that thrive on it – are growing rapidly.
Second, we should consider rule changes that ensure the best prices are publicly available, not hidden from view in private trades. The strength of a free market is based on this public display. Accordingly, we should reduce “internalisation” (by insisting on meaningful price improvement in comparison to the public quotes or by granting the public quotes the right to trade first) and trading in dark pools (by reducing the permissible threshold for dark trading and defining indications of interest, and other quote-like trading signals, as quotes).
Third, we should root out conflicts of interest by ending payments from market centres that encourage orders to flow their way. The search for best execution by broker-dealers should not be subject to temptation from the highest bidders. Competition for market share includes liquidity rebates and direct access for hedge funds, which also deserves careful review.
Fourth, until regulators can measure execution fairness in milliseconds for stock trades of all kinds, the credibility of the markets cannot be assured. The audit trails and records of order execution in fragmented venues must be synchronised to the millisecond and made readily available in statistically understandable formats to the regulators and the public. Currently, while high frequency traders bank profits in milliseconds, the first column for time on the Rule 605 form, used by regulators to measure execution quality, reads “0-9 seconds.”
Fifth, regulators must also develop more sophisticated statistical tests, such as following volume patterns to gain a granular view of gaming strategies. Only then can regulators separate high frequency strategies that add value to the marketplace from those that inexcusably take value away.
As a nation, our credit and equity markets should be a crown jewel. Only a year ago, we suffered a credit market debacle that led to devastating consequences for millions of Americans. While we must redress those problems, we must also urgently examine opaque and complex financial practices in other markets, including equities, before new problems arise. It is essential to ensure the integrity of US capital markets.
Edward E. Kaufman is a Democratic senator for the state of Delaware
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Yes, we'll all be comforted by a thorough review led by Mary Schapiro's SEC, the same people who were ready to settle with Bank of America for $33 million until a federal judge bitchslapped them.
"That’s why I have urged the SEC to undertake a comprehensive “ground up” review of a broad range of market structure issues before more piecemeal changes occur. We have seen this horror movie before, and only timely regulatory examination can best prevent a sequel: When markets develop rapidly and are not transparent, effectively regulated or fair, the movie’s ending scene can be one of tragedy affecting millions of people."
Sorry to note that Senator Kaufman does not believe in transparency or effective regulation at the Federal Reserve.
Kaufman is currently AWOL on S604. Go figure!
I sure hope Mary doesn't misinterpret the "comprehensive "ground up" review" as a suggestion to shred SEC files...
http://kaufman.senate.gov/services/contact/
Senator Ted Kaufman | Facebook
we should all ask him why?
NO FAILED BANKS YET, 6:02pm EDT.
Could we get two weeks in a row of no take unders?
Something big must be coming if we get none for a few weeks in a row.
FDIC out of funding?
Shhhhhhhhhhhh.
Everything is fine.
I can't hear you. (fingers in ears)
La la la la la la la la la la la.
If they don't fail any I'm going to shit a brick becase it means things start collapsing very very soon.
Too broke to allow banks to fail...
What a sad state of affairs...
Yep, Sheila's out of money, so no more bank failures. Accounting doesn't mean anything anymore anyway. Unless you agree with Denninger, who cites state laws that make it a felony to open a bank that is insolvent and take deposits.
President Obama:
You have failed to take action to remove Mary Schapiro from the disgraced SEC, which history will show as a mistake on the part of your administration, no different than the same mistake of your predecessor who allowed a pathetically incompetent Christopher Cox to oversee the same dredge of an alledged federal regulator.
The actions and inactions of the SEC continue to prove themselves to be akin to a rolling Saturday Night Live parody though, unfortunately, more laughs and giggles can be garnered by the SEC's skits.
In a highly successful effort to prove that Lorne Michaels can be once again outdone, the SEC has just hired a Goldman Sachs employee to be the COO of its enforcement division.
We have moved past The Twilight Zone and are now entering the world of insanity.
If only we had an inspector general do a report on the SEC: IG does report....cites SEC as bumbling and incompentent....no corruption here.
I hope this gets some traction. Kaufman was Biden's Chief of Staff, so maybe they actually have spoken on the issue. It seems like a natural for an Administration dedicated to transparency but their true colors come out when they don't push for this after call by Dem Senator … Alas too many skeletons – too much to hide … Nothing will come of this … Best movie comparison = 2012
Wow, I would certainly trust this administration and the Dem congress, having gutted the recent legislation (not doing anything on Usury crimes - Bead) and gutting that phony derivatives legislation- Franks, and then there was that Food Safety "Modernization" Act to further destroy small farmers and public markets.
Once again, Matt Taibbi nails it - for the masses who may not be aware - in the latest issue of the Rolling Stone (Wall Street Swindle).
Great letter. I had missed the FT today.
ZH has our backs. Thank you.
current headline at HuffPo
http://www.huffingtonpost.com/
Once you understand that once at the top they (both parties) are all "briefed" on the way things are you'll have less bruising on your forehead.
It's disgusting.
from b'berg.
Goldman Sachs CEO Lloyd Blankfein said he didn’t expect a “backlash” when he accepted the government funds.
“Had I know it was as pregnant with this kind of potential for backlash then of course I would not have liked it,” Blankfein said today at a Fortune magazine breakfast in New York.
“We are firm believers in effective regulation and believe that it is systemically important to have a regulatory framework which ensures stability of the financial system,” Goldman Sachs spokesman Lucas van Praag said.
LB....have you paid off the FDIC TLGP funds (22 billion, maybe more?) by borrowing in the cap markets at market rates yet?
Now that we have put our competition out of business, we are in favor of regulation so no one can cheat and steal their way to compete with us.
+1000...They must not allow anybody to take one taxpayer cent from them! They earned the right to take it all...
SCOTTSDALE, Arizona, Oct 16 (Reuters) - Seth Merrin, the outspoken head of block-trading platform Liquidnet, shook up a trading industry conference -- and conjured up the U.S. Revolutionary War -- on Friday when he said high-frequency traders harm traditional market players.
Merrin, whose private market caters mostly to buyside institutions, told an audience here that the world's fastest traders fail to provide liquidity in a broad array of stocks, and when they do, the resulting smaller bid-ask spreads end up costing institutions that trade larger blocks of stock.
"The institutions are the British Army in the Revolutionary War walking down the field in lock-step, proud and in red -- you couldn't get a brighter color. The high-frequency shops are the Americans hiding in the woods in their camouflage, picking them off one by one," Merrin said.
"We all know who won the war ... we kicked their asses," he told a Security Traders Association conference, to laughter.
http://www.iii.co.uk/news/?type=afxnews&articleid=7579009&action=article
Stream of Conscience: Not Evil Just Wrong to Stream Live, for Free, Over Internet This Sunday
http://www.reuters.com/article/pressRelease/idUS172412+16-Oct-2009+PRN20091016
Not the place to plug political propaganda from wsj john fund and "ACORN buster Andrew Breitbart."
Thanks for the pointer.
Tyler: Good sound and fury. Too bad Ted is retiring. Readers must understand that inside the beltway this matters. "Observers" think lobbyists, are not too worried about this as the larger issues of securities reform are still slowly developing. Health care reform remains the focus. After that comes the economy. Then the wars. If Ted was Ron Paul or anyone who was going to stay in the Congress his legitimate points would matter more.
Kaufman is a non-factor. He's already announced he will not seek re-election. Also Kaufman does not serve on Senate Banking. The health care bill is still dominating Congressional agendas. Beyond that, there are the House and Senate versions of financial securities reform. By the time anything happens on dark pools, high frequency trading and flash orders Kaufman will be on to his next job. Its too bad as he's a decent guy with a good staff and a legitimate point of view
Bring back Glass-Steagall (thank you Bill Clinton, Robert Rubin, Alan Greenspan, Arthur Leavitt, Phil Gramm), bring back anti-usury laws (thank you Jimmy Carter), stop naked short-selling, open up and make fully public the ownership of DTCC, InterContinental Exchange, ICE US Trust, Markit Group, Climate Exchange PLC, etc., etc., etc.