Later On

A blog written for those whose interests more or less match mine.

Wall Street’s biggest players are at war with each other

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Pam Martens and Russ Martens report in Wall Street on Parade:

Until March 30, 2014, most Americans and even long-term veterans on Wall Street had no idea how the electrical plumbing responsible for transacting buy and sell orders at stock exchanges and other trading platforms actually worked. That all changed on March 30 when author Michael Lewis went on 60 Minutes and told its 12 million viewers that “The United States stock market, the most iconic market in global capitalism is rigged.”

Lewis was promoting his new book, Flash Boys, which detailed in language the public could easily understand, (devoid of the intentionally cryptic acronyms used across Wall Street) how the stock exchanges, mega Wall Street banks and high frequency traders were conspiring through technology to front run orders from unknowing investors.

In the 60 Minutes interview with Steve Kroft, Lewis drilled down to how the legalized theft had escaped the notice of so many market watchers: “If it’s so complicated you can’t understand it, then you can’t question it,” said Lewis.

At first, the Securities and Exchange Commission denied that the markets were “rigged” and simply tried to ride out the public uproar. Then it decided to create an Equity Market Structure Advisory Committee, effectively bringing together in one room the Wall Street people involved in the mad-scientist technology and market rigging devices to hash it out in a public venue.

The Committee most recently held a meeting on October 27, where slurs, barbs and accusations were thrown at opposing sides by meticulously tailored men using their most polite voices.

Jamil Nazarali, head of Citadel Execution Services, landed the best insult of the day with this gem directed at the stock exchanges:

“This industry is the only one that I am aware of where a for-profit public company regulates its customers and competitors. And I understand that you guys think that that’s important but what is it that you guys do that someone else couldn’t do. All those regulatory functions that you described, why couldn’t some other entity do that? Why does it have to be within your four walls?”

Citadel is a hedge fund and dark pool operator. (Dark pools are trading venues which lack full SEC oversight and trade in the dark without public transparency.)

Nazarali heads up Citadel’s trading operations, also known as “execution” services. Nazarali was throwing a jab at the men from the stock exchanges that had given testimony during the full day conference on how they served a public interest function by regulating their members. Dark pools compete with exchanges for customers and trading volume, are typically also broker dealers and members of the exchanges, and resent being regulated by a competitor.

Citadel is an unlikely candidate to be slinging mud, as we explained in an in-depth article on August 14, 2014.

Thomas Wittman, Executive Vice President of the Nasdaq stock market and Global Head of Equities, zinged both the SEC and dark pools, which are also known as “unlit” markets. Wittman told the Committee:

“Given the intense price competition, we question the time and resources spent by the Commission [SEC] analyzing whether exchanges have fully justified proposals reducing their fees. Nearly 40 percent of the executions occur on venues that lack not only pre-trade price discovery but operational and fee transparency. Yet Nasdaq has encountered difficulty in gaining Commission approval for a fee reduction for members that transact the most volume across three of its options exchanges. I ask, again, in what other industry would a company be prohibited from lowering prices for the most value and value contributing investors.”

As for the value of exchanges versus dark pools, Wittman said: “If you take a look at high volatility times like August 24, you saw that the amount of off-exchange trading almost was cut in half as flow moved to the lit venues which underscores the importance of the lit venues in capital formation.”

The Dow Jones Industrial Average plunged by 1,089 points in the opening minutes of trading on August 24. (See related article below.) Finger-pointing and hostility have grown among competing factions since that day.

Andrew Silverman, a Managing Director at the giant retail broker and investment bank, Morgan Stanley, which also operates dark pools, effectively told the Committee panel: “Look at me, I’m Sandra Dee, lousy with virginity.” For example, Silverman testified: . . .

Continue reading. Silverman’s statement is interesting.

The SEC is a failure as a regulatory agency, fully captured by the business interests it is supposed to regulate (with the cooperation of President Obama, who appointed a Wall Street lawyer to head the commission).

Written by LeisureGuy

19 November 2015 at 11:18 am

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