FINRA

Back in August 2009 we asked a very simple question: "Is Goldman's Selective Trading Disclosure A Legal Way For Preferred Clients To Front Run The Market?" Today, nearly three years later, the SEC answers our question. The answer - a resounding yes.

A warning by the SEC in mid-March 2011 regarding repo-to-maturity trades suggests otherwise.  

I will admit that having written extensively and aggressively about Wall Street’s self-regulator FINRA over the last three years, I did not think there was anything more I could see that would surprise me. Today I am surprised, shocked, and saddened. For those in our nation who have a semblance of decency and a desire to see due process reflected in legal hearings and financial arbitration, I believe you will be similarly dismayed. The case to which I will refer strikes deep into the core of Wall Street arbitration.  I hope you are sitting down and do not have any sharp objects nearby as Dow Jones’ Al Lewis provides a scathing expose of a FINRA arbitration entitled Broker Bankrupted in Kangaroo Court,

Just as market regulators were finally getting wise to the fact that they have no clue how how modern market works, what modern market topology is, or how High Frequency Trading impacts the stock market (think Flash Crash), here comes Certichron, the supplier of a time service center at a Savvis market center in Weehakwen, which says it has now mastered sub-nanosecond readouts which are now "compliant with the FINRA Order Audit Trail System and is likely to be compliant with any Consolidated Audit Trail that might be specified by the Securities and Exchange Commission." In other words, here come sub-nanosecond markets.

Had to cross post this discussion with my brother Michael Whalen from The Institutional Risk Analyst. The past articles in The IRA require a $99/yr subscription, but the most recent is free. 

Also note link to comment by Barry Ritholtz on The Big Picture re: the Facebook IPO.  Actually Goldman Sachs led the covert IPO and hype festival last year, but the folks at the SEC and FINRA were sound asleep.  

Chris

Indeed,under US securities law and FINRA rules, it is unlawful and a violation of professional ethics for a registered person or investment advisor to guarantee investment results for any client.

Why would Mary and her friends lie?

Whether it is due to the general investing public finally realizing that the market is neither fair nor efficient, that the scales are tipped against the common man from the moment the 'Buy' (or, more rarely, 'Short') button is pressed, or that as the past two years have shown the market is dominated by insider trading, "expert networks" and big legacy investors surviving only due to the government's intervention on their behalf at critical times, is unknown, but Finra is now officially and finally drowning in a barrage of complaints about market manipulation. And to be sure such glaring reminders as 30 year-old UBS traders being singlehandedly responsible (of course, nobody noticed anything over the months and months of creeping illegal trades) for massive cumulative losses that amount to more than the entire net income for the bank (an odd and convenient scapegoat that), will surely not make Finra's life any easier. As Reuters reports: "A Wall Street regulator said industry complaints about market manipulation and trade reporting have spiked this year, raising questions about the adequacy of banks' internal controls over their traders. FINRA has received complaints this year about banks' audit systems, canceled orders, and brokers misrepresenting whether orders were on behalf of customers. "These are areas that for a long time we were not receiving complaints in, and all of a sudden this past year it's really spiked up," DeMaio, senior vice president in FINRA's market regulation unit, told a FIA options industry conference." That's great: so US investors can sleep soundly knowing full well fiascoes such as UBS' Delta One implosion will be confined to the UK (where, incidentally, the director of market at the local regulator, FSA, just resigned - it is unclear if he will follow a recent previous FSA departure straight into the willing clutches of such a non-market manipulative entity as JP Morgan), and that manipulation is being rooted out in the US at its core at a brisk pace.

It looks like the SAC investigation is about to go to the very top. As we reported over the weekend, Senator Chuck Grassley recently commenced an investigation into at least 20 trades, both stocks and options, at SAC Capital, that may implicate the billionaire with the zamboni in insider trading (despite a very spirited defense that Mr. Cohen is a true humanitarian at, heart having recently purchased none other than the NY Mets, evidence of his civic duty) and lead to an insider trading conviction that would make the Raj Raj affair pale in comparison. Of course, any investigation of SAC would draw many parallels to Madoff, where it would appear impossible that any potential insider trading over the years occurred without the regulator's knowledge. Hence, in a new letter to the SEC, the senator has made it clear that he is now investigating whether or not SEC pursued and/or resolved any of the numerous Finra referrals regarding SAC. Grassley is also seeking: "how the number of referrals over this timeframe compares to similarly situated firms, [and] whether a Wells Notice was ever drafted with regard to SAC Capital related to any of these referrals or related to any other matter (if so, please provide a copy of any Draft or Final Wells Notice)." We expect to discover the answer to the last question to be exactly zero. We also expect that various district attorneys will suddenly jump at the opportunity to earn a few political brownie points now that they smell some very nutritious blood in the water.

Yet another person appears to have flipped out, and attracted the government's attention, this time luckily without any actual casualties. Curiously the target of the latest FBI arrest is not some insane gun toting troglodyte, but a 20 year Wall Street veteran: Vincent McCrudden of Alnbri Management. Presumably the reason for the arrest is that the commodities trader had threatened to kill 47 members of the SEC, CFTC and Finra in a post on his website. The following information has been pulled from his website. While McCrudden's fund appears to have been modest if at all notable, it would be curious to discover just what recent perceived action on behalf of the government may have forced the manager to take the step. The kicker: an email from McCruden to CFTC attorney T.M. sent on December 16, 2010: "You corrupt mother fucker! You're not getting away with this....Merry Christmas!"... Much more in the charge against McCruden presented inside.

FINRA oversees the broker dealers, and 70% are calling for increased transparency. FINRA blew them off. Those 70% represent America more than the large banks located on Wall Street. What truly amazes me is how little attention is being paid to this outfit.

FINRA not only failed, but the question that needs to be fully explored is whether it acted on material, nonpublic information as it liquidated its ARS bonds in 2007, at the expense of the investors it was supposed to be protecting.

And she is so worth every sub-penny of it.

In a landmark development for a return to market integrity, regulators are finally getting serious on this whole "HFT thing" after over a year of disclosures of their illegal and manipulative practices by Zero Hedge. Today, Finra announced it is fining Trillium Brokerage Services, LLC, $1 million for using an illicit high frequency trading strategy. So just what is this illicit high frequency trading strategy, that incidentally is used by the bulk of low latency market quote stuffers, er, participants? "Trillium, through nine proprietary traders, entered numerous layered,
non-bona fide market moving orders to generate selling or buying
interest in specific stocks. By entering the non-bona fide orders, often
in substantial size relative to a stock's overall legitimate pending
order volume, Trillium traders created a false appearance of buy- or
sell-side pressure.... This trading strategy induced other market participants to enter orders
to execute against limit orders previously entered by the Trillium
traders. Once their orders were filled, the Trillium traders would then
immediately cancel orders that had only been designed to create the
false appearance of market activity.... Trillium's traders bought and sold NASDAQ securities in this manner in
over 46,000 instances, resulting in total profits of approximately
$575,000, of which the firm retained over $173,000 and subsequently was
required to disgorge." But. But. But. They just provide liquidity damn it! Plus, just like gold, you can't eat HFT. So Finra is telling us now that HFT has market abusive potential? Egads! Does this mean that that the Goldman announcement from last summer's Aleynikov affair when Goldman lawyer Facciponti said that “The bank has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways”, that he was not merely kidding? Luckily, Goldman will no longer have a HFT division as it is spinning off all of its prop trading. Correct Messers van Praag and Canaday?

Well, glad that is resolved. Now on to fixing it, which alas would mean killing a few hundred billion in annual revenue streams for the parasitic "liquidity providers" (a role they promptly abdicate when the market tends to drop just a little more than they are comfortable with; otherwise yes, the liquidity in Citi, FNM and FRE, as well as AAPL and GOOG options is phenomenal) and which also tend to double as systemic catastrophe factors. Look for many more appearances of "cash cows" on assorted status quo-defensive media venues, as they mount their last defense to preserve a way of life that does nothing to encourage investing within America's increasing skeptical of the capital markets population. From Reuters: "Regulators probing the mysterious May 6 "flash crash" in the stock market are unlikely to find a single cause, though the widespread use of high-speed algorithmic trading was in general likely behind it, the head of the Financial Industry Regulatory Authority said on Monday. "We won't stop until we finish the analysis. But I think the answer is there is unlikely to be a single cause," Finra CEO Rick Ketchum told Reuters on the sidelines of a conference here. "It is much more likely to be a proliferation of algorithmic trading that was all subject to the same triggers and didn't have the same controls."