When a digital dickweed exposes the reality "the equity markets are broken," it can be shrugged off as the rantings of a kid in his mom's basement. When an experienced investigative writer claims "the markets are rigged," it is drowned out with mainstream media propaganda forcing words like liquidity and cost-effective-ness to hide the truth. But when Dick Grasso, the former head of the NYSE says Black Monday's flash-crash exposes the reality that "it's not a fair market," it is going to be hard to regain the collapsed confidence of an investor-class multiple-times-burned by an ever more arrogant group of 'operators' on Wall Street.
Here is what we have been saying for years (and most recently here)...
If HFTs did anything, it was merely to frontrun the buy orders once the selling wave - halted thanks to limit downs being hit - had exhausted itself, and the buying scramble was unleashed around 9:35am leading to a 5% move in less than 10 minutes! It was here that Virtu made its colossal profits, however not from taking the least amount of risk, but merely from frontrunning order flow into a stil chaotic market with gargantuan bid-ask spreads, which incidentally not only does not provide liquidity, but reduces it as it competes with other buy offers for any market offers, also known as "providers" of liquidity, only to immediately flip the transaction to those buyers which Virtu knew with 100% certainty were just behind it. In any other market this would be illegal, except for one in which Reg NMS has made such frontrunning perfectly legal (courtesy of billions spent by the same HFTs who now benefit from it).
And, as The Wall Street Journal reports, former NYSE head Dick Grasso agrees...
Regulation NMS, which stands for national market system and was designed to link all the U.S. markets, was a “sad, sad experiment.”
The regulation, which was passed by the Securities and Exchange Commission in 2005 and implemented in 2007, was designed to ensure investors got the best price available on any public U.S. market. It knitted together all the exchanges and trading venues across the country to create a single, though disparate, market. It required transactions be conducted at the “national best bid or offer,” meaning each venue had to continuously check the prices available at competitors to verify a transaction was compliant. It also meant the NYSE no longer had a monopoly on trading in its own listed stocks, helping spur a host of competitors.
The rules contributed to market hiccups like last month’s swings because they allowed for a major expansion in the number of places where stocks could trade, he said.
“No one anticipated 60 different venues where an IBM or a Microsoft trades,” he said during the television interview.
Mr. Grasso told the Journal that he recommends a broad-based review of the markets as a first step toward addressing the problems he sees...
“A fast market is not necessarily a fair market, as evidenced by that Monday open,” he said in a clip of the interview viewed by The Wall Street Journal, referring to the tumultuous early trading on Aug. 24.
The action that day has drawn scrutiny from regulators, exchanges, institutions and everyday investors—and sparked discussions about how to tweak the market to prevent similar problems. There were nearly 1,300 trading halts, most of them in the first part of the day, and some stocks dropped rapidly before recouping losses in a matter of minutes.
“Frankly, some of the things that went on that day need very close scrutiny,” Mr. Grasso said in an interview Friday with the Journal. “A day like that, where Facebook’s shares go from $86 to $72 to $84 in a matter of minutes will cause the public to lose confidence in the markets.”
We leave it to Mr. Grasso to conclude, rather more honestly and ominously than we are used to for anyone 'in' the club...
“Creating an advantage to an institutional user or a particular type of trader that disadvantages the retail investor is bad for the country, bad for the markets and bad for your business."