Guest Post: We Need a New Stock Market

Tyler Durden's picture

Submitted by Charesl Hugh Smith from Of Two Minds

We Need a New Stock Market

We need a new stock market exchange that is a transparent, retail-trader friendly alternative to the manipulated HFT-dominated pseudo-market we now put up with.

As I noted in The Stock Market Is an "Attractive Nuisance" and Should Be Closed, the stock market now bears little resemblance to traditional markets. Today's market has as much in common with the market of the 1960s as a horse-drawn carriage has with a Formula 1 race car. Most of the trading on the market is done by computers that hold shares for perhaps 11 seconds before skimming a slice from investors who lack the high-speed data flows from the exchanges, warp-speed processing power and sophisticated algorithms.

Can the current pseudo-market be restored to a true open market? To explore this question I contacted financial reporter Scott Patterson, author of the new must-read book Dark Pools: High-Speed Traders, A.I. Bandits, and the Threat to the Global Financial System (print) (Kindle).

CHS: Your book poses this question: what can we do to restore the integrity of our stock markets?


Scott: This is essentially the role of the SEC, and it’s pretty clear that they’ve dropped the ball. In part this is due to the dramatic speed of the technology revolution that has completely overhauled the market. It’s easy to forget that just 10 years ago humans dominated trading. While, as I show in Dark Pools, the revolution had already begun in the early 2000s – sparked in many ways by Josh Levine and The Island ECN he build – it remained in its infancy. But now it’s clear to anyone paying attention that the market has been transformed, like a VW Bug turning into a Formula One race car, and the SEC doesn’t know what’s going on under the hood.


This conclusion isn’t up for debate. Mary Schapiro as much as admitted to Congress last year that she and her agency can’t surveille the market. That really is worrisome for obvious reasons. So what are they waiting for? It’s true that recently the SEC approved the so-called consolidated audit trail, or the CAT, which is billed as a giant eye in the sky for the market. But it’s still in the planning stages and who knows when it will actually be implemented—or whether it will actually be able to capture what’s going on.


CHS: While there are various regulatory “tweaks” that could be put in place (requiring a holding time of 1 minute for all securities, for example), I wonder if we don’t need a more fundamental “re-set” that asks what role the market should play in finance and the economy inhabited by everyday investors.


Scott: I think there are a lot of people in the industry wondering about whether there needs to be a massive overhaul. But it’s probably not a good idea for that to be imposed on the market by the SEC. The uncertainty would be potentially destabilizing. And I just don’t see it happening.


I think the change needs to come from within the market and needs to be imposed by its most important users—I mean, not the high-frequency traders, who are running the show at the exchanges in many ways—but the institutions, the giant mutual fund companies, the pension funds, the long-short hedge funds. They need to exert pressure on the exchanges to stop giving advantages to high-frequency firms.


Part of the problem is that many of these firms haven’t been paying attention to the changes, and again I point to the speed with which they have taken place. But more are waking up – I hope in part because some of them have read my book.

Thank you, Scott, for explaining the realities of the market and for your feedback on what could be done to restore a transparent, open market. It sounds like traditional market heavy-weights--institutions, mutual funds and pension funds--will only regain a say by removing their participation (and liquidity) from the current stock market: exit equities and go on strike, so to speak, until the exchanges and the SEC ban high-frequency trading, outlaw front-running and restore real transparency.

If the traditional heavy-weights abandoned the market, that would leave only the HFT firms and the Federal Reserve's proxies in the market, poaching each other in an ever-tightening circle of parasitic predation.

Removing liquidity that can be skimmed would push the present market into a highly vulnerable instability. The resulting implosion would "clear the decks" for meaningful reform.

If the traditional heavy-weights foolishly continue providing the "dumb money" that's being skimmed, perhaps retail investors could start a small, limited exchange that banned HFT, front-running and all the other manipulations. Such a market could restore one of the market original purposes, raising capital for new enterprises, and enable small retail traders access to an unmanipulated market.

Here are some common-sense rules for such a "new market":

1. Every offer and bid will be left up for 15 minutes and cannot be withdrawn until 15 minutes has passed.

2. Every security--stock or option--must be held for a minimum of one hour.

3. Every trade must be placed by a human being.

4. No equivalent of the ES/E-Mini contract--the futures contract for the S&P 500--will be allowed. The E-Mini contract is the favorite tool of the Federal Reserve's proxies, the Plunge Protection Team and other offically sanctioned manipulators, as a relatively modest sum of money can buy a boatload of contracts that ramp up the market.

5. All bids, offers and trades will be transparently displayed in a form and media freely available to all traders with a standard PC and Internet connection.

6. Any violation of #3 will cause the trader and the firm he/she works for to be banned from trading on the exchange for life--one strike, you're out.

Is such a retail-trader friendly exchange possible? There would certainly be a nice profit in it, for everyone who is tired of providing liquidity for HFT firms would flee the existing exchanges in a New York minute.

Given a choice between listing on the pseudo-market or a legitimate albeit smaller exchange (it would be a binary choice, you can only list in one or the other), many small-cap and micro-cap companies would choose the unmanipulated exchange once liquidity and demand reached critical mass.

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i-dog's picture


Rules, and more fucking rules! When will you statist central planners ever give up on setting rules, and more rules, that insiders never follow and outsiders are continually trying to bypass?

A free market doesn't need rules. HFTs could eat each other and nobody would give a fuck, because each would, in turn, go bk without government bailouts of the banks behind them.

Stop fucking around with the deck chairs!!!!!!!!!!!  Dumb fucking sheep!!!!!!

Spaceman Spiff's picture

Do HFT play by the same existing rules as everyone else though?   If they can flood bids/sells in nanoseconds and front run people, then you don't have a free market.

i-dog's picture

In a free market, there would be competing exchanges using innovative investor safeguard mechanisms to compete for listings and investors. Who, in their right mind, would invest on any exchange that allowed insider HFTs co-located on the exchange floor (with or without 5-minute or 1-hour rules)?

The only reason that exchanges like the NYSE have any flow at the moment is because of GOVERNMENT MANDATES on where insurance, pension, retirement and various other fund types can invest. Without those dictates, no sane human -- other than the usual mindless gamblers looking to make (ie. lose) a quick buck -- would be "investing".

Entrepreneurs looking to raise capital in a free market should be listing on vehicles like Craigslist or eBay ... with prospectuses certified by reputable private peer-reviewed rating organisations. A free market would find innovate new solutions. The current rigged game is a joke.

malikai's picture

See my post above about GLBSE. It's pretty damn close.

BobPaulson's picture

Agreed, though not sure Craigslist and Ebay allow the heavyweights to play. Those guys are all now into angel investing where you meet the startup team face to face before money goes down. I know where I live there is a network of them through word of mouth and friends. Sadly most of that investment money gets pulled into resource plays because the best risk/return ratios are there, thus squeezing out things like technology and othe ventures. Even then, the old boys clubs like those are always looking for an angle on changes in government regulations (environmental regulations, OHS rules, etc) through an opaque and unchanging political party that runs the place.

I don't think rules are the problem as much as the lack of transparency in rules. I hear a lot of ZH'ers rant about how bad rules are, but you do need some structure to protect the average Joe's from the ultrarich and the religious faith in markets to do everything does not cut it IMHO.

i-dog's picture

I used Craigslist and eBay as tongue-in-cheek examples of innovative new market types that satisfy particular needs for the "little guys". The big boys are equally capable of finding and funding innovative new approaches to their needs in the absence of government restrictions on what they can and cannot do.

The purpose of an exchange is to match buyers and sellers of negotiable stock certificates - in a manner that gives a large enough liquidity pool to ensure quick turnaround. I'm sure that innovative solutions would be found by creative entrepreneurs, and adopted by seekers of a liquid market for their shareholders, that are neither mutually exclusive nor one-size-fits-all, if the straight jacket of government oversight were to be removed from each feudal fiefdom.

There is certainly no transparency, regulation or protection in the current straight jacket cabal of "licensed" exchanges, SEC, "licensed" market makers, dark pools and congress insiders.

Cathartes Aura's picture

while I realise this "conversation" is pertaining to the stock market, your idea of using Craigslist (as an "example") is not so far-fetched. . .

years ago there were many creative ways of financing small businesses like coffee shops & local restaurants, using, for example, coupon books whereby the customer paid in advance and got a discount on future purchases.  I've also participated in buying "shares" of a local shop in order to work with others to keep it open, ongoing.

most likely our laws 'n' rules-happy .gov have made all of that too dangerous and forbidden, but it was working there for a while, and most likely could be applied going forward.

unless, of course, it's too late.

Seer's picture

"In a free market, there would be competing exchanges using innovative investor safeguard mechanisms to compete for listings and investors."

You're missing REALITY!

There are NO "free markets." (unless practiced at the local level, which would obviate any big computer-controlled exchange, no?)

Power doesn't cede itself!  You're NOT going to compete against it!  At best it will only "allow" you to do something at a scale that isn't a threat.  Any momentum and it gets co-opted or, drone'd.

omi's picture

Absolutely agree on the mandated forced redirection of everyoen's funds to support financial industry. Remove this and the financialization of everything will shrink.


Also agree on the last point that most of capital raising for companies is done by primate means, exchanges act mostly as a vehicle to pick up when it got dumped.


Bonds are still far largest market, and it's semi-private exchanged.

Sathington Willougby's picture

Your horse keeps shitting everywhere and pissing everyone off.  I'm sure that the car craze will pass one of these days though. 

Seer's picture

Funny... I'm not sure if you were aware of the connections here, but back when the automobile was first being pushed one of the "selling/marketing" points was that it was more environmentally friendly than all the horses which were shitting in the streets (which required wagons to gather up the shit).

Anyway, the planet's finite so, yes, the "car craze" will end one day.  Even if "resources" are still available there's still the little detail of the next glacial period coming along, which, I'd figure, would tend to make cavorting around the countryside in the jalopy a little bit difficult.

Harbanger's picture

"back when the automobile was first being pushed one of the "selling/marketing" points was that it was more environmentally friendly than all the horses which were shitting in the streets "

I thought the affordable price of Fords model T (assembly line) was the selling point. Did you ever hear of the Horse manure crisis of the 1890’s? The Urban planners predicted that 20th century cities were going to be buried in horse shit by 1930 because of horse population growth. Even though cars had already began to be manufactured commercially, they couldn’t imagine how cars could ever replace horses.  Classic planner mentality.

EvlTheCat's picture

New or old, money changers are money changers...

Seer's picture

Yup, and as long as they have the masses tuned to their channels (think iCrap) they'll have the ability to hold off any opposition.  Any "new" way will require advancing to Their cash-out window, which, as it always has, extract tolls sufficient to keep them in their positions.

malikai's picture

Can someone please remind me again why all those people move to countries which are "western" when they clearly hate it?

Eally Ucked's picture

Don't you think it's a bit silly question? It's like asking "what do you prefer being ripped-off or rip off somebody else?"

groundedkiwi's picture

Remind me again why the USA has bases in countries that they hate?

malikai's picture


Well, if those indigenous peoples would just leave so we could move ExxonMobil in, everything would be fine!

Seer's picture

That's the direct approach.  It's only used when the in-direct -humanitarian [govt OR (Western) religion] approach has failed (outright or is just too slow).

“I spent 33 years and four months in active military service and during that period I spent most of my time as a high class muscle man for Big Business, for Wall Street and the bankers. In short, I was a racketeer, a gangster for capitalism. I helped make Mexico and especially Tampico safe for American oil interests in 1914. I helped make Haiti and Cuba a decent place for the National City Bank boys to collect revenues in. I helped in the raping of half a dozen Central American republics for the benefit of Wall Street. I helped purify Nicaragua for the International Banking House of Brown Brothers in 1902-1912. I brought light to the Dominican Republic for the American sugar interests in 1916. I helped make Honduras right for the American fruit companies in 1903. In China in 1927 I helped see to it that Standard Oil went on its way unmolested. Looking back on it, I might have given Al Capone a few hints. The best he could do was to operate his racket in three districts. I operated on three continents.”
? Smedley D. Butler, War is a Racket: The Antiwar Classic by America's Most Decorated Soldier

malikai's picture

I guess that one goes in the list of must reads for me.

Cheers for that.

Democratic koolaid's picture

Stipulation #6 is contradictory and hypocritical "one strike, you're out." Thats A very  totalitarian clause which provokes thoughts of a very un-human thing.  Guest poster needs to lay off the koolaid.


machineh's picture

'1. Every offer and bid will be left up for 15 minutes and cannot be withdrawn until 15 minutes has passed.'

Nobody who has actually traded using limit orders would write something so ignorant.

I used to pen naive 'the government should do X' essays in junior high school.

Chas Hugh Smith is an arrogant little statist who never grew up. 

Seer's picture

Based on the overwhelming DOWN ARROWS that you seem to get isn't it clear yet that you're in the wrong fucking place (troll)?

Well, you are working on your second week as a "participant" here...

blunderdog's picture

There's an election coming up.  Spraypainting "Democrats suck" all over the place is the best some folks can manage.

They'll tell you graffiti is part of the the political discourse.

icanhasbailout's picture

I proposed an "integrity-based" market not long after I learned about HFT something like 2 years ago. We don't need a new market, we need a market.

Eally Ucked's picture

Just ban options, which are clearly casino feature.

icanhasbailout's picture

The problem is the fraud, not the instruments.

Umh's picture

Criminals and politicians commit fraud without instruments all the time. The instruments only make it easier for someone to buy something they don't understand.

Seer's picture

The "problem" is that it's human nature!  Humans are OF nature, and nature, by design, is deceptive.  Fraud, then, is built-in...

BIG = FAIL (all other equations are subjugated)

SoundMoney45's picture

The current market is neither in the best interests of the listed companies with a real business, nor investors who want to invest.  Today, to invest, one must target non-public companies.  An alternate stock exchange in a location other than the US could work with the rules above, and companies could chose to list there.  What investor or corporate executive wants to watch their company's valuation reduced to zero by a market maker selling infinite counterfit stock?

jbvtme's picture

leave it the way it is.  it will fade away like a worn out video game.  trading stocks is like playing golf.  pretty much a waste of a good day.

Umh's picture

If you are spending that much time at it you are doing something wrong. Maybe you just like the frustration?

Carmagnole's picture

The "must be made by a human" rule is not very rational. As the communication is made through computers, based on informations gathered via computers, there is no way to determine exactly the amount of human decision in the process.

If you try by this rule to ban mechanisms made to cheat the system due to their reaction speed, simply enforcing human-friendly reaction times should be sufficient

Democratic koolaid's picture

Guest Poster must be on a cruisade against Computers, or thinks he's neo in the Matrix.

Urban Redneck's picture

There's also the cost factor, depending on how many computerized steps you remove from the process.  Remove too many and it makes GS exhorbitant comissions look cheep and prices most of your target audience out of the market

nasdaq99's picture

better focus on what CAN happen.  congress has billion$$$$$$$$$$ of reasons why this will NEVER happen.  i've written to my congresspeople and get 2 page responses why they are only working on angles that will prevent another flash crash.  they don't give a damn about what they percieve as daytraders issues.


he's just daydreameing.

Tom Green Swedish's picture

It'll never happen.  Congress just passes a law in April that banned them from insider trading.  You think they care about the HFT's?

Tortuga's picture

or that their ho politicians wrote a law.

babylon15's picture

The problem with the stock market isn't the stock market.  The stock market's purpose is so a company can raise capital by selling something valuable - itself.  Well, with zero percent interest rates and permanent unlimited QE, why should any company sell itself?  They can raise as much money as they want by going to the Federal Reserve.  They can get unlimited amounts of cash at 0.00% at any leverage ratio they desire.  They don't need investors.

Seer's picture

And there it is!  The "System" doesn't need or want us to be involved (other than to be force-fed its "products" so that it can continue to keep us distracted and Them in control).

Umh's picture

Because most companies aren't in the free money club. Most companies are paying interest when they borrow. While it is true that big companies like Norfolk Southern can borrow at low interest for long terms they are still paying interest.The 0% interest case seems to be reserved for government favorites and banks.

Winston of Oceania's picture

Decouple from the beast and invest in YOUR local economy.

BobPaulson's picture

Bingo. The trouble is you actually have to do some work to do that, so it is not suitable for most investors.

Seer's picture

When it comes to the "local" "investing" takes on a completely different meaning.

Those in "suits" need to stay away from the real world...

Eally Ucked's picture

I want to do that and stock market can help you. But not in current situation when options and derivatives are the most important thing. I want to invest 50$ I saved in company A, I think it has future, can I do it? No, and why not because some fucked up minds in financial world has all those instruments to get 25$ of your investment, to themselves, and build US GDP. 

Bobbyrib's picture

Perhaps I'm missing something. Please explain how $50 of your investment goes to $25, because of instruments from the fucked up minds in the financial world.