The Conflict Of Interest Behind The Kauffman ETF Report

By now, everyone has heard about the Kauffman report on ETFs, whose sole purposes is to bash exchange traded funds, which if nothing else, are aggressively stealing market share from mutual funds. The report also tangentially makes a claim that HFTs are in fact innocent, and had no role in the flash crash. While ETFs are certainly not without fault, to say the High Frequency Trading is irrelevant for market crash purposes is naive beyond measure. Yet a more salient question is where did the anti-ETF bias arise at Kauffman, and what is the point of this hit piece out of left field. We decided to dig a little deeper, and found the following conflicts of interest.

A little background, the Chairman of the Kauffman Foundation is one Thomas McDonnell. Here is his bio:

Thomas McDonnell has provided leadership and insight as a Kauffman Foundation trustee since joining the board in 2003. He was elected Chairman of the Board of Trustees in September 2006.

He is president and chief executive officer of DST Systems, Inc., headquartered in Kansas City, Missouri. McDonnell has worked with the company since March of 1969, and served as president since 1973. DST is a leading provider of information processing and computer software services and products to the financial services, communications and healthcare industries. Today, DST operates offices in 14 cities worldwide, employing approximately 8,500 associates domestically and 1,500 associates internationally.

So let's take a look at DST (highlights ours):

DST is Experience

Founded in 1969 as a division of Kansas City Southern Industries, DST was established to develop an automated recordkeeping system for the mutual fund industry. DST has supported the industry’s continued growth and is the largest provider of third-party shareholder recordkeeping services in the United States today.

Headquartered in Kansas City, Missouri, DST is a publicly traded company on the New York Stock Exchange (Symbol: DST) that employs approximately 11,000 associates, both domestically and internationally.

DST is Technology

DST’s products and services are enhanced by the integration of advanced technology and e-commerce solutions. At the heart of this are DST’s Data Centers, including the Winchester Data Center.

Winchester offers state-of-the-art facilities, hardware, maintenance, and support.
Its computers can process more than 25,000 million instructions per second (MIPs). Staffed 24 hours a day, 7 days a week, 365 days a year, Winchester has a self-contained power plant and is designed to withstand tornado force winds without interruption.

And this:

As a consistent leader in providing innovative solutions and comprehensive services, DST also provides the technology infrastructure to support millions of accounts for mutual fund companies, healthcare providers, banks, and insurance companies around the world.

The DST Data Centers enable you to focus on your core business processes while DST manages the technology infrastructure helping you reduce total cost of ownership, system maintenance costs, information technology (IT) resources, and capital budget expenditures.

In other words, the core of DST's business model, and thus McDonnell's wealth, is a reliance on the old mutual fund business model, on providing scalable tech infrastructure for HFTs, and on pretty much everything that bashing ETFs will achieve, while attempting to cast HFTs in an agreeable light. Is there a pattern emerging here?

Yes, one can goal seek our broken market's data to suit pretty much any purpose, and conclusion. Let's not forget that the SEC claimed HFTs had no involvement in the flash crash, despite, as Nanex and Zero Hedge pointed out, it was precisely they, and not Waddell and Reed that were responsible.

And while there is a glaring conflict of interest behind the Kauffman report, that does not mean it is wrong. In fact, it merely confirms what we have been saying for almost two years. That the market is broken. But don't take our word for it. In a recent interview with Securities Technology Monitor, Larry Leibowitz, COO of NYSE Euronext said, and we quote, "I think most of the world views our market structure as kind of a joke, to be completely honest.’’ In this context is it important if HFT of ETFs are a bigger culprit? Of course not. When the entire game is rigged, rampant cheating is permitted, and overall topology is, well, broken, none of it matters one bit.

h/t Nicholas Colas