Who Owns the U.S. Stock Market?

By Pam Martens and Russ Martens: July 8, 2014

Wall Street Street SignSerious observers of Wall Street are increasingly asking this question: could a group of trading venues with giant pools of capital, operating in the dark, using high-speed algorithms and artificial intelligence that has a massive historical database and gets smarter with each micro-second trade — effectively own the stock market. Today, we take a look at the massive trading control exercised by just five Wall Street firms.

JPMorgan Chase, Bank of America and Citigroup jointly control trillions of dollars in commercial bank deposits with thousands of branch bank buildings stretching across the United States scooping up the life savings of everyday Joes who have no clue these are also the Masters of the Universe on Wall Street.

Goldman Sachs and Morgan Stanley also own FDIC insured banks. Goldman Sachs Bank USA, as of March 31, 2014, has $104.7 billion in assets; Morgan Stanley Bank, N.A., as of the same date, has $108.8 billion in assets.

These institutions have access to the Fed’s discount window, super cheap access to capital from FDIC insured deposits and a massive subsidy of their institutions under the too-big-to-fail doctrine. And, they also own outright or jointly a large swath of anything and everything that passes as a trading venue on Wall Street today.

The dark pool known as BIDS Trading, L.P. says it “was designed to bring counterparties together to anonymously trade large blocks of shares.” According to its web site, it is owned by: JPMorgan Chase, Bank of America Merrill Lynch, Citigroup, Goldman Sachs and Morgan Stanley – along with other financial firms.

Before BATS Global Exchange pulled its planned Initial Public Offering (IPO), its SEC filing said its owners included Citigroup, a subsidiary of Bank of America Merrill Lynch, and others.  BATS has since merged with Direct Edge, whose owners included Goldman Sachs. The combination of BATS with Direct Edge puts four of the 13 public stock exchanges under the control of this one entity.

According to a March 31, 2013 report from Morningstar, the following Wall Street firms were among the major shareholders of the New York Stock Exchange/Euronext: Citigroup, 6.5 million shares; Morgan Stanley, 5.9 million shares; JPMorgan Asset Management (UK) Ltd., 4.9 million shares; Merrill Lynch & Co. Inc., 4.2 million shares; Goldman Sachs & Co., 3.1 million shares. In November of last year, the IntercontinentalExchange Group, Inc. purchased NYSE/Euronext. It is unclear if the Wall Street firms are still stakeholders.

According to an SEC document dated April 27, 2012, the Box Options Exchange is jointly owned by multiple firms which include Citigroup and LabMorgan Corp., a technology think tank at JPMorgan Chase.

The gambit to create dark trading pools dates back to at least 1999. As we previously reported, in September 1999 Citigroup’s Smith Barney, Morgan Stanley, Merrill Lynch and Goldman Sachs partnered with Bernard Madoff to compete head on with the New York Stock Exchange in a venture called Primex Trading. (As we now know, Madoff was running a Ponzi scheme at that time, calling into question how much due diligence was done by lawyers for this joint venture.)

The Nasdaq stock market licensed the Primex Auction System and ran it for two years before abruptly shutting it down on January 16, 2004.

With the intense competition among these Wall Street powerhouses, one has to seriously question why they are always teaming up in joint ventures. As we reported in January 2008 in an article titled “How Wall Street Blew Itself Up,” these same five firms, along with others, were involved in the joint creation of a company, Markit, to price exotic, off-exchange traded derivatives. That company went public last month.

In addition to having their fingers in these other trading pots (no one has ever accused the Justice Department of taking anti-trust seriously when it comes to Wall Street), each of the five Wall Street behemoths also own and operate their own dark pools which are collectively trading billions of shares a week.

One of the most sprawling of these global trading operations is owned by Citigroup. The company owns Automated Trading Desk whose web site says it is trading approximately 200 million shares a day (1 billion a week). Citigroup also owns the following dark pools: Citi Match, Citi Cross, Liquifi, and LavaFlow.

According to some industry estimates, as much as 40 percent of stock trading in the U.S. may now be occurring off of public stock exchanges. These five firms account for a good chunk of that in their own dark pools which function as unregulated stock exchanges that do not make the bids and offers of the stocks they trade publicly available.

On June 30, the Financial Industry Regulatory Authority (FINRA) released a regulatory notice indicating that the SEC had approved new language for FINRA Rule 5210. The upshot of this language change is that it smells like both the SEC and FINRA believe these Wall Street dark pools may be gaming the trading of stocks in wash trades. The relevant part of the new rule language reads as follows:

“Under Rule 5210 and its supplementary material, self-trades resulting from orders that originate from unrelated algorithms or separate and distinct trading strategies within the same firm would generally be considered bona fide transactions. However, self-trades by a single algorithm or trading desk or related algorithms or trading desks raise heightened concerns that this type of trading may not reflect genuine trading interest, particularly if there is a pattern or practice of such trades. This type of trading becomes increasingly problematic when it accounts for a material percentage of the volume in a particular security. Consequently, under new Supplementary Material .02, firms must have policies and procedures in place that are reasonably designed to review their trading activity for, and prevent, a pattern or practice of self-trades resulting from orders originating from a single algorithm or trading desk, or related algorithms or trading desks. The supplementary material was adopted to address those instances where self-trades, even though unintentional, may not reflect genuine trading interest, especially where they account for a significant amount of volume in a security and potentially adversely affect the price discovery process.”

It’s been four years since the Flash Crash on Wall Street sent stocks into a 900-point bungee jump, wiped out over $200 million of investors’ money by improperly triggering stop-loss orders, and shredded public confidence in stock markets.  And still, to this day, the Securities and Exchange Commission does not have a Consolidated Audit Trail (CAT) to properly police who is placing orders, at what time, at what speed, in what securities and in which trading venue.

The SEC is 80 years old. If it really wanted to properly police stock trading on Wall Street, one has to figure it would have had that Consolidated Audit Trail in place long before now.

The concentration of insured deposits in the U.S. among these firms; the fact that over 90 percent of derivative trading is controlled by these same firms; that the same firms, over and over again are jointly owning pieces of the same trading venues; that they are now trading billions of shares a week in darkness, should be enough to send Congressional banking committees into a frenzy of drafting new legislation to rein in this mess.

It hasn’t happened. As Senator Dick Durbin famously said about Congress in 2009, the banks “frankly own the place.”

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