High-frequency trading firms have been ripping off investors in the $22 trillion U.S. stock market by paying large firms like Goldman Sachs for the right to trade in the secrecy of “dark pools”, paying stock exchanges to purchase locational advantage by placing their servers in direct proximity to the exchanges for lightening fast trading, and buying preferential access to client order flows from broker/dealers in order to get ahead of and scalp profits off unsuspecting clients.
The new investor-owned IEX is an alternative US exchange which delays reports of order executions by 350 millionths of a second, in order to knock out unfair advantage taken by HFT firms. Micheal Lewis’s new book on the issue last week, has now brought a surge of business to the new exchange and away from the other conventional platforms engaged in predatory business practices.
But this is not just a US exchange issue. In Canada the same smart order routing system will soon be available via Aequitas, a new Canadian exchange that will use speed bumps and fees to discourage high-speed trading. Like IEX, Aequitas also rejects the maker-taker model, which pays rebates to market makers for providing bids and offers.
Millions in political lobbying have paid off yet again for the too big to bail and jail banking sector. Meanwhile the derivatives market (now estimated at $693 trillion!) continues to balloon in size and threat to tax payers and the real economy.
“In a victory for banks, global financial regulators backed away from earlier guidelines that the firms had warned would destabilize the $693 trillion derivatives market.
The Basel Committee on Banking Supervision’s final rule, released today, will require banks that broker swaps trades to set aside much less money to protect against a default versus a proposal published last year. The plan now applies a minimum 20 percent risk weighting to money deposited at clearinghouses, which are third-party guarantors that back the transactions, down from 1,250 percent in the original proposal. The change takes effect on Jan. 1, 2017″.
Nomi Prins, author of “All The Presidents’ Bankers,” discusses regulation of big banks, the relationship between the White House and the financial industry and the state of “too big to fail”. Here is a direct video link.
Segment two discusses JPMorgan CEO Jamie Dimon’s recent mea culpa letter to shareholders. Here is a direct link.
Segment three discusses the history of the Glass-Stegall Act and why the next crisis will bring another opportunity to divide banking from speculating backed by the public purse. Here is a direct video link.
Surfing life savings over QE/HFT waves today may seem smart and proactive. But then again its also a fool’s paradise. Like Robert Redford’s character in All is Lost, equity market participants today are wading around on a sinking boat that can plunge at any moment. This chart capturing the glaring disconnect between US household incomes and the S&P over the past 4 years, as compared to the tight correlation 1990 to 2010, offers insight. A 50% fall in the S&P 500 would close the gap and restore historic correlations.
Investigative journalist and author Matt Taibbi has long reported on American politics and business. With an old-school muckraker’s nose for corruption, he examined the events leading up to the 2008 financial crisis in Griftopia. Taibbi has a new book out this week called The Divide: American Injustice in the Age of the Wealth Gap.
The book explores the connections between growing income inequality and a justice system that Taibbi says disproportionately punishes the poor. National Public Radio’s Kelly McEvers talks to Taibbi about his new book. Here is a direct audio link.
James Kidney, 66, a trial attorney from the Securities and Exchange Commission since 1986 offered a honest speech at his March 27 retirement party before a crowd of 70. According to a copy of his remarks obtained by Bloomberg, Kidney said his bosses were too “tentative and fearful” to go after ” the comfortable and powerful” Wall Street leaders. Kidney had campaigned internally to bring charges against more executives in the agency’s 2010 case against Goldman Sachs.
He called the SEC “an agency that polices the broken windows on the street level and rarely goes to the penthouse floors… On the rare occasions when enforcement does go to the penthouse, good manners are paramount. Tough enforcement, risky enforcement, is subject to extensive negotiation and weakening.”
Kidney said what many of us have long suspected, that his superiors were more focused on getting high-paying jobs after their government service than on bringing difficult cases. The agency’s penalties, Kidney said, have become “at most a tollbooth on the bankster turnpike.” SEC spokesman John Nester declined to comment.
Dallas Fed President Richard Fisher, gave a speech to the Asia Society Hong Kong Center last week (read the full text here) where he laid out the glaring concerns and reasons for why the Fed’s QE policies are now in retreat and on track to end by October of this year. In Fisher’s words:
By buying copious quantities of longer-term U.S. Treasury bonds and mortgage-backed securities (MBS), our balance sheet has grown from slightly under $900 billion prior to the crisis to $4.3 trillion at present
Less than a fifth of commercial credit in the highly developed U.S. capital markets is extended through depository institutions. Yet depository institutions alone have accumulated a total of $2.57 trillion in excess reserves—money that is sitting on the sidelines rather than being loaned out into the economy. That’s up from a norm of around $2 billion before the crisis.
The price – to-earnings (PE) ratio of stocks is among the highest decile of reported values since 1881. Bob Shiller’s inflation- adjusted PE ratio reached 26 this week as the Standard & Poor’s 500 hit yet another record high. For context, the measure hit 30 before Black Tuesday in 1929 and reached an all-time high of 44 before the dot -com implosion at the end of 1999.
Since bottoming out five years ago, the market capitalization of the U.S. stock market as a percentage of the country’s economic output has more than doubled to 145 percent— the highest reading since the record was set in March 2000.
Margin debt has been setting historic highs for several months running and, according to data released by the New York Stock Exchange on Monday, now stands at $466 billion.
Junk-bond yields have declined below 5.5 percent, nearing record low.
Covenant-lite lending is becoming more widespread.
In my Federal Reserve District, 96 percent of which is the booming economy of Texas, bankers are reporting that money center banks are lending on terms that are increasingly imprudent.
At the current reduction in the run rate of accumulation, the exercise known as QE3 will terminate in October (when I project we will hold more than 40 percent of the MBS market and almost a fourth of outstanding Treasuries). We will then be back to managing monetary policy through the more traditional tool of the overnight lending rate that anchors the yield curve.
In other words, “we now interrupt the QE (and HFT-driven) mirage of robust investment markets and return you to the reality of the business cycle….bonne chance.”
In 1982 the U.S. Securities and Exchange Commission (financial firm controlled) used Rule 10b-18 to legalize large-scale buybacks so long as they did not exceed 25% of a company’s average daily trading volume over the previous four weeks. Previously the limit had been 15%. See: Share buybacks let income inequality grow, for an excellent summary of how the counterproductive short-term obsession with share buybacks has enriched executive pay scales beyond reason while stagnating meaningful investment and innovation. Talk about a dumb incentive system.
“A new research paper written by William Lazonick of the University of Massachusetts Lowell, which will be presented at the conference of the Institute of New Economic Thinking in Toronto on April 10 to 12, noted that in 2012, the 500 highest-paid executives in the United States received an average pay of $24.4-million (U.S.) – 52 per cent from stock options and 26 per cent from stock awards.
“The more one delves into the reasons for the huge increase in open-market [share] repurchase since the mid-1980s, the clearer it becomes that the only plausible reason for this mode of resource allocation is that the very executives who make the buyback decisions have much to gain personally through their stock-based pay,” Mr. Lazonick said.
As executive pay soared, workers’ wages stagnated when measured against productivity gains. Between 1948 and 1983, when regulations severely limited the size of buybacks, real compensation per hour and gains in productivity per hour closely tracked one other. That’s no longer the case. In the early 1980s, a significant gap between productivity and wages emerged and kept getting wider…
The rule was a godsend to stock-based pay, and buybacks climbed. Between 2001 and 2012, the S&P 500 companies spent an astounding $3.5-trillion on buybacks, an average of $600-million per company per year (perversely, the buybacks peaked in 2007, the pre-crash year, destroying the boardroom argument that buybacks were launched because executives believed their companies’ shares were fundamentally undervalued).
Some companies practised the art with abandon. Exxon Mobil spent $207-billion buying back shares between 2003 and 2012, equivalent to 60 per cent of its profit over those years. Cisco Systems and Hewlett-Packard spend more than 100 per cent of their profit on buybacks. Canada’s BlackBerry and Finland’s Nokia launched huge buybacks even as their market shares were collapsing. Imagine if they had devoted those fortunes to innovation instead?”
Last week, the US Supreme Court struck down restrictions on how much individual donors can contribute to candidates, political parties and political action committees. The Court voted along its party lines, with a 5(Republican)-4 (Democrat) finding that aggregate limits for individual contributions violate the First Amendment right to free speech. The outcome however, clearly amounts to less political influence for those who cannot afford large political donations. Those who value democracy have cause for concern.
Aggregate contribution limits were first introduced following the Watergate scandal in an effort to restore public confidence in the campaign finance system.
“The decision in the case — McCutcheon v. Federal Election Commission — effectively erases the $48,600 limit that individuals may donate in total to candidates for federal office, as well as the $74,600 limit on contributions to political party committees. The decision leaves in place the $2,600 cap that an individual can give to any single candidate for Congress or the presidency. Yet even with that cap, individuals will now be free to spend as much as $3.7 million per election cycle, according to an estimate from the Center for Responsive Politics, up from the previous limit of $123,200.”
This Frontline report from 2012 is worth a revisit in consideration of this recent development. See: Big Sky, Big Money
The following chart offers some perspective on the time increments in which High Frequency Traders armed with advance order info purchased from the brokers and preferential proximity and access from the exchanges, are able to scalp billions from unwitting market participants faster than the eye can see. The chart comes courtesy of this excerpt from “Flash Boys”: See, The Wolf Hunters of Wall Street You can also learn more about the mechanics of HFT in this 2013 film: The Wall Street Code.
Attorney General Eric Holder told the House Appropriations Committee today that the DOJ is now investigating high-speed trading practices to determine whether they violate insider-trading laws. The news follows investigations already underway by New York Attorney General Eric Schneiderman, the Commodity Futures Trading Commission and the Securities and Exchange Commission. However since the SEC is a self-regulatory body paid for by the financial industry itself (see: In Bed with Wall Street and my recent interview with author Larry Doyle here for more) and since employees of the SEC have been moving directly into lucrative paying jobs with HFT firms the past few years, there should be no surprise that the SEC has found no issues to date.
In yet another educational discussion, Michael Lewis talks to Reuters about Wall Street’s highly charged response to his book about high-frequency trading and rigged markets. Here is a direct video link.
All of which reminds me of the following quote from a defeated Herbert Hoover as he left office in 1934, 5 years after the financial crash of 1929 had brought the country to its knees. From 1929 to 1934 the bankers continued largely unscathed by prosecution or reform. It was not until the Pecora Commission brought industry practices to the attention of mainstream America that the politicians were shamed into effecting meaningful reforms that finally broke up the conflicts of interest which had formed the lucrative life blood of the banking cartel. Yes we can do it again.
“The Federal Reserve and I have tried everything on behalf of the bankers but they have fought us, haven’t tried to cooperate, haven’t even told us the truth. They are without ability and without character.” – Departing US President Herbert Hoover, March 1933 (1874–1964)
And so at long last, the exodus away from double-dealing traitor exchanges begins to broaden…long time coming. Nice to see. As I have mentioned several times, if exchanges wish to cater to HFT clients then those exchanges should be left with only HFT clients to work with. Trade your brains out. Investment capital will choose to transact in places where it can be treated with the transparency, fairness and free market principles it deserves.
Interactive Brokers is launching a new service that will for the first time allow retail investors to specify that their orders only go on the new IEX trading platform. Here is a direct video link.
I know, I know…another Lewis clip??!! But the discussion here on the conflicts in the financial media networks as the bought-through-sponsorship hand maidens of financial sales firms and their purchased regulators, has not been covered in other segments and is well worthwhile. Here is a direct video clip from the Comedy Network which can be accessed in Canada. Here it is for US consumption on The DailyShow.com.
“An explosive critique about the investment industry: provocative and well worth reading.” Financial Post
“Juggling Dynamite, #1 pick for best new books about money and markets.” Money Sense
“Park manages to not only explain finances well for the average person, she also manages to entertain and educate, while cutting through the clutter of information she knows every investor faces.” Toronto Sun