By Pam Martens and Russ Martens: July 9, 2014
Wall Street awoke to a big problem this morning. Their army of physicists designing artificial intelligence algorithms to skim money from millions of trades undertaken by the pensions and mutual funds owned by the average American may not be smart enough for a brand new form of competition.
That brand new competition is a group of Senators whose brains are rapidly gathering asymmetric information on the dirty dealings of Wall Street by clustering key Wall Street executives and experts into hearing panels and then drilling down for how things are really operating today at the stock exchanges, in the dark pools, and in the “casinos” run by the high frequency traders.
Equally important, by taking first-hand testimony at this series of hearings, the U.S. Senate is acknowledging two things: the Securities and Exchange Commission has dropped the ball and the Senate no longer trusts that regulator to deal with the problem or provide it with accurate information.
Senator Jack Reed demonstrated how exquisitely this learning curve is working with this insightful statement at yesterday’s hearing before the Senate Banking Committee:
Senator Reed: “The market has changed. The old fashioned nostalgic view of the stock market is capital formation. That’s where you form capital which ultimately created jobs. Now it’s about trading. I’m struck. John Bogle, who will know more about this stuff than I will ever, made a speech a few months ago in April and he said, you know, the numbers tell a story: $56 trillion per year in trading volume as investors buy from and sell to one another, minute after minute, day after day, year after year. That $56 trillion of trading volume dwarfs the capital formation total of $270 billion. Result: short term trading on Wall Street’s casino represents 99.5 percent of the market’s activity and long term capital formation – which is the small investor putting money in hoping that some day it will pay for college for the kids – is just a side show really…The market itself, as he says, it’s a casino.”
In that April 28, 2014 speech, Bogle, the founder of the giant mutual fund family, Vanguard, provided a broader indictment of today’s Wall Street casino, stating:
“But it is only capital formation that adds value to our society. Trading, by definition, subtracts value. Indeed, the casino mentality remains in the catbird seat of finance. Is that good or bad for investors and for our society? As Nobel Laureate in Economic Sciences and New York Times columnist Paul Krugman recently put it, “society is devoting an ever-growing share of its resources to financial wheeling and dealing, while getting little or nothing in return.”
“I might go even further, and suggest that we are getting less than nothing in return. More broadly, be warned by these words of wisdom from the great British economist John Maynard Keynes in 1936: ‘When enterprise becomes a mere bubble on a whirlpool of speculation, the position is serious. For when the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.’ ”
Senator Elizabeth Warren challenged the often heard defense of high frequency trading as that of providing liquidity to the market. She queried witnesses at the hearing on how high frequency traders could be adding any liquidity to the market if they were jumping in and out of stocks all day long with no intention of holding them long term for genuine investment purposes.
When billionaire Ken Griffin, CEO of giant hedge fund Citadel, was asked to address the question by Warren, he went into a dance around the subject of his use of high frequency trading. Warren moved on to Kevin Cronin, Global Head of Trading of mutual fund family Invesco, Ltd, who seemed sincere in his desire to provide useful information to the Senators. Cronin said that the average high frequency trader is likely holding stocks for no more than “a minute.”
Senators from both sides of the aisle have apparently gained new knowledge from the revelations in the complaint recently lodged against Barclays’ dark pool by the New York State Attorney General, Eric Schneiderman. Democrats as well as Republicans were asking yesterday if dark pools should be eliminated. The witness consensus was that there should be a means of allowing large block trades to achieve anonymity to avoid driving down the share price in that stock and harming other investors but the deeply conflicted model where large broker-dealers are now routing the bulk of their own customers’ retail trades into their own dark pools is a serious problem of both ethics as well as draining liquidity from the regulated, lit exchanges.
There was a sense of déjà vu in listening to Senator Warren describe the skimming of trades and Senator Reed explain his epiphany of the “casino” which adds nothing to capital formation to benefit the future prospects of the country, its people, its industries or its job market.
Forever seared in my brain is the image of Laura Flanders having her own epiphany of what motivated Wall Street in the lead up to the bust of 2008. Flanders, in 2009, was interviewing Andrew Cockburn and Leslie Cockburn, producers of the documentary, American Casino, on her show on Grit TV. After the Cockburns explain how the scam worked, fueled by the “crackpot” deregulatory prognostications of then Federal Reserve Chairman Alan Greenspan, Flanders asks, with a blend of contempt and genuine shock frozen on her face: “So you think it was all really a scam to transfer money from the vulnerable and the poor to the wealthy.”
As we have been telling our readers for the past eight years, under its current structure, Wall Street is simply an institutionalized, government-enabled, wealth transfer scheme. (We have even placed a menu heading titled “Wealth Transfer Schemes” on our top menu bar to assist average Americans with achieving their own asymmetric information.) That Wall Street has now deployed high-speed computers, Ph.D.s writing artificial intelligence algorithms, co-located servers inside the stock exchanges to gain micro-second speed advantage, off-exchange, dark pool trading of 100 and 200-share lots of retail customer orders, special order types to fleece other customers – is all simply a high tech acceleration of the wealth transfer scheme to loot the savings of hardworking Americans struggling to put a little aside for their own future and that of their children.
It’s encouraging to, at last, hear and see members of the Senate Banking Committee asking the hard questions that show an awakening to this long, crippling, wealth stripping nightmare.
For full text of the referenced Bogle speech, see: Speech by John Bogle on Financial Reform, April 28, 2014