By Pam Martens and Russ Martens: June 17, 2019 ~

U.S. stock markets have historically been challenged by corrupt actors. But there have been two extreme periods of corruption in the history of U.S. stock markets. One period occurred in the lead up to the 1929 stock market crash when Wall Street cartels were forming pools to wildly manipulate stock prices. That period led to an economic calamity known as the Great Depression. It also led to two years of intense hearings in the U.S. Senate to investigate the structure of the stock market, followed by intense legislative reforms including the Glass-Steagall Act, the Securities Act of 1933 and the Securities Exchange Act of 1934.

The second period was the lead up to the 2008 stock market crash which led to the economic collapse known as the Great Recession. In that period, like 1929, Wall Street banks were allowed to systematically engage in practices to enrich themselves at the expense of the public and the national interest. But instead of seriously reforming Wall Street, the Justice Department allowed the criminals to avoid jail time and a Congress whose members received heavy campaign funding from Wall Street allowed Wall Street to simply move its corrupt practices into ever darker corners of the market.

The Securities Exchange Act of 1934 explains why it is a matter of national interest to protect U.S. markets from corruption by powerful players:

“Frequently the prices of securities on such exchanges and markets are susceptible to manipulation and control, and the dissemination of such prices gives rise to excessive speculation, resulting in sudden and unreasonable fluctuations in the prices of securities which (a) cause alternately unreasonable expansion and unreasonable contraction of the volume of credit available for trade, transportation, and industry in interstate commerce, (b) hinder the proper appraisal of the value of securities and thus prevent a fair calculation of taxes owing to the United States and to the several States by owners, buyers, and sellers of securities, and (c) prevent the fair valuation of collateral for bank loans and/or obstruct the effective operation of the national banking system and Federal Reserve System.

“National emergencies, which produce widespread unemployment and the dislocation of trade, transportation, and industry, and which burden interstate commerce and adversely affect the general welfare, are precipitated, intensified, and prolonged by manipulation and sudden and unreasonable fluctuations of security prices and by excessive speculation on such exchanges and markets, and to meet such emergencies the Federal Government is put to such great expense as to burden the national credit.”

Corrupt stock markets do, indeed, result in national emergencies and do, indeed, put the Federal Government “to such great expense as to burden the national credit.” As a result of the 2008 Wall Street crash, the U.S. Federal debt has doubled to more than $22 trillion, putting critical spending programs that impact the national interest at risk.

The over-riding concept of the Securities Exchange Act of 1934 was that the U.S. stock market had to be “fair” and provide a level playing field to all market participants. One section of the Act reads: “to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest; and are not designed to permit unfair discrimination between customers, issuers, brokers, or dealers…”

The U.S. stock market today is the very antithesis of that definition. If you are obscenely rich, you can afford the fast lane in today’s U.S. stock market. If you are an average American, you get the slow lane.

The fast lane works like this: Wall Street banks and high frequency traders at hedge funds are buying high speed access to trading data from the New York Stock Exchange at a cost of tens of thousands of dollars a month. The New York Stock Exchange is allowing these firms to “co-locate,” that is, locate their computers next to those of the computers of the stock exchange. The New York Stock Exchange is also selling a faster data feed to these high frequency traders. Combined, these practices effectively enable these traders to manipulate stock prices and front-run orders from the public.

In a speech on June 3, Brett Redfearn, the Security and Exchange Commission’s (SEC) Director of the Division of Trading and Markets explained the price of admission to today’s U.S. stock market:

“Instead of a trading floor in Manhattan, the locus of exchange trading now is now largely in suburban data centers in places like Mahwah, Secaucus, and Carteret, New Jersey. These data centers contain rows and rows of server racks, and vital trading advantages can go to those trading firms that have their machines ‘co-located’ in these racks. In addition, exchanges now sell a spectrum of data products and connectivity services in their data centers that have helped fuel a low-latency [faster speed] arms race. These include proprietary data products with expansive trading information, as well as low-latency connectivity services, such as 40 Gb cross-connects and microwave transmission of data among geographically dispersed data centers. These data products and connectivity services can shave crucial microseconds off of the latencies of competing brokers and trading firms.

“The cost of the low-latency data products and connectivity services sold by the exchanges can be substantial. Last year, an industry group submitted a petition for rulemaking to the SEC in which it calculated that the cost of obtaining the fastest data and connections to the major exchanges in 2017 was $194,000 per month. The industry group represented that this was an increase from $72,000 only five years earlier…”

What is the SEC doing to level the playing field? Is it outlawing co-location? Is it outlawing faster data feeds for just those who can pay the exorbitant price? Is it mandating a fair and non-discriminatory market as the law requires? No. It is doing absolutely nothing meaningful and has sat on its hands since 2008 — the year of the worst Wall Street crash since the Great Depression.

Even worse, the man now in charge of overseeing the structure of the U.S. stock market at the SEC, Brett Redfearn, came from a long tenure at the three-count felon bank of JPMorgan Chase, which runs two trading platforms known as Dark Pools.

In his June 3 speech, Redfearn explained Dark Pools like this:

“Dark pools do not display their available trading interest, but allow their participants to interact in a more discreet fashion. Many institutional investors looking to trade in large size prefer to interact in these dark pools when possible as a means to transact without signaling their trading intentions to the market.”

That hardly captures what is actually going on in Wall Street’s Dark Pools today. Under the nose of the SEC, Dark Pools owned by the biggest banks on Wall Street are actually conducting trades in the shares of their own bank stock on a regular basis and have been for at least the past five years. For example, JPMorgan Chase’s Dark Pool, JPM-X, trades millions of shares a month in its own common stock that is listed on the New York Stock Exchange. Goldman Sachs, Citigroup, Bank of America’s Merrill Lynch and numerous others have been doing the same thing.

We know this because Wall Street’s self-regulator, FINRA, began reporting on June 2, 2014, on a three-week delayed basis and aggregated into a weekly total, the stocks that each Dark Pool had traded for the week, including the weekly total of shares and the number of individual trades.

In addition to trading their own stock, the biggest Wall Street banks regularly trade each other’s stock – raising the very real possibility of a trading cartel. Since the major banks on Wall Street have been charged with other cartel activity by the U.S. Department of Justice, it would be naïve to think it couldn’t be happening in the stock market. In fact, it did happen on Wall Street in the 1990s when the major firms rigged prices on the Nasdaq stock market for years and were fined and sanctioned by the SEC of that era.

As one recent example, for the week of May 27, 2019, Bank of America Merrill Lynch’s Dark Pool, Instinct-X, traded 1,046,455 shares of its own bank stock in 2,636 transactions. UBS, another major Wall Street player, traded 5,499,628 shares of Bank of America’s stock in 21,689 transactions in its Dark Pool known as UBS ATS.

None of this could be happening in a fair and efficient and honest stock market structure. What could possibly go wrong?

President Franklin D. Roosevelt assumed the presidency on March 4, 1933 in the midst of a full-scale banking panic created by Wall Street’s corruption. Two days after taking his seat in the Oval Office, FDR was forced to close all of the nation’s banks until March 13. What had fueled the banking panic was the collapse of the Bank of United States some three years earlier. In what was the nation’s largest banking collapse up to that point, the Bank of United States held $268 million for over 400,000 small depositors.

Although the name suggested otherwise, the Bank of United States had no connection to the U.S. government. What it did have, however, was a stock trading arm called the Bankus Corp and it was in that trading unit that the bank had manipulated the share price of its own common stock, brazenly using the money of its depositors. It then further leveraged itself by using the inflated shares as collateral for its loans. Federal regulators eventually determined that other banks had acted in a similar fashion.

Most of the major Wall Street banks today that own Dark Pools and are trading in the shares of their own stock also own commercial banks which hold Federally-insured deposits from Mom and Pop savers across America. For example, JPMorgan Chase owns over 5,000 Federally-insured Chase commercial bank branches across the United States.

At present, there is absolutely nothing that prevents these banks from using their insured deposits to manipulate the price of their own stock. Federal regulators have willfully chosen to remain deaf, blind and silent on this critical threat to the national interest.