By Pam Martens and Russ Martens: October 27, 2015
The Securities and Exchange Commission will be holding a public meeting today on the structure of today’s opaque and deeply fragmented stock markets (without conceding that they are also rigged, as many informed voices contend). The meeting will begin at 9:30 a.m. and will be webcast on the SEC’s website.
The meeting is considered by many to be a few crumbs sprinkled about the corrupted landscape by Mary Jo White, Chair of the SEC, in the face of a growing campaign to oust her from office.
During the second week of September, CREDO Action had a “Dump (Mary Jo) Truck” making the rounds between Union Station, K Street and the White House. CREDO Action has also collected over 116,000 signatures on a petition urging President Obama to ask for the SEC Chair’s resignation. In June, Senator Elizabeth Warren sent a stern, 13-page letter calling White out on her serial broken promises.
And just a month ago, SEC Commissioner Kara Stein delivered a speech to the Securities Traders Association’s annual conference on market structure that appeared to be an indictment of White’s tenure as Chair of the SEC. One key area that Stein focused on was the dark pools that today dominate the Wall Street landscape. According to an October 1, 2015 list from the SEC, there are now an astonishing 85 dark pools trading stocks in the U.S. That compares with just 10 regulated stock exchanges operated by three holding companies: the Intercontinental Exchange, Nasdaq OMX Group, and BATS Global Markets.
Stein had this to say about the dark pools:
“Of course, dark liquidity has played a role in our securities markets since the earliest days. Dark pool trading, as you know, is not a recent phenomenon. It has been around for decades. The overarching rationale for dark pools was to enable trading of large blocks of securities by institutional investors in a way that helps them obtain the best possible price.
“The challenge is that the dark marketplace is becoming larger and larger. And it is unclear whether dark pools continue to perform the functions that were originally intended. In fact, studies have shown that average execution size at dark pools in the U.S. has decreased to less than 200 shares…
“These private trading platforms attract order flow ostensibly because large investors are concerned about information leakage and the impact on price from placing their orders. Yet, as more and more trading is routed to dark venues that have restricted access and limited reporting, I am concerned about the repercussions. Overall market price discovery may be distorted rather than enhanced. Conflicts of interest may not be readily apparent.”
Stein also said that recent enforcement cases show serious issues in this stock trading arena. In January, the giant Wall Street bank, UBS, paid more than $14.4 million to settle charges that it failed to “properly disclose to all dark pool subscribers an order type that was marketed almost exclusively to market makers and high frequency trading firms, which allowed those participants to place sub-penny-priced orders that then received priority over other orders.”
In August, ITG “paid more than $20 million, including an $18 million penalty (the largest SEC penalty against an ATS to-date), and admitted to wrongdoing, for operating a secret trading desk and misusing the confidential trading information of dark pool subscribers.)”
On the very day of her speech, Stein referenced a settlement with Latour Trading LLC where the company would pay more than $8 million to settle charges that its dark pool violated market rules. (Read the ugly details here.)
The Wall Street Journal reported last week that Credit Suisse and Barclays are in settlement talks with the SEC and New York State Attorney General’s office and could end up paying a combined total of more than $150 million for market violations in their dark pools.
Wall Street On Parade has reported on multiple occasions that the biggest Wall Street banks are today trading the stocks of their own corporate parents in their own dark pools, harkening back to another corrupt era that presaged the 1929 stock market crash.
All, while Mary Jo White dithers.
In her speech on September 30, SEC Commissioner Stein also assailed the SEC’s foot-dragging on creating the Consolidated Audit Trail that would allow the enforcement office of the SEC to reconstruct just whom it is that is causing flash crashes or other manipulations of the market. Stein made these noteworthy remarks:
“In February 2010, then SEC-Chair Mary Schapiro announced the Commission’s initiative to create a consolidated audit trail tracking activity in NMS securities. Just a few months later, the ‘Flash Crash’ of May 6, 2010 demonstrated the overwhelming need for a robust and comprehensive audit trail providing a consolidated view across all of our trading venues. The events that occurred on August 24, along with others in between, reinforce the need for just such an audit trail.
“More importantly, as speed and complexity have become almost insurmountable forces in our marketplace, effective oversight simply cannot happen without the CAT [Consolidated Audit Trail]. That’s why the Commission adopted a final rule mandating that FINRA and the exchanges build it. But as I stand before you today, we have no consolidated audit trail. Construction of the CAT has not yet begun. Counting internal deliberations, nearly six years have been spent choosing someone to build the CAT.
“Two years ago, I asked to have a new role of CAT project manager created at the Commission. This person would have the authority, responsibility, and accountability, both within our building and outside it, to get the job done. And I have consistently advocated for more resources and attention to be paid to developing the CAT. Sadly, I have seen almost no progress.
“Let me tell you what can be achieved in six years. On April 29, 2009, construction began on the most modern and sophisticated attack submarine in the U.S. Naval fleet. Just last month, that attack submarine, the U.S.S. John Warner, was commissioned and launched into the fleet – ready for service. This submarine is reported to be the most powerful attack submarine in the history of the U.S. It is 7,800-tons and 377 feet in length, has a beam of 34 feet, and can operate at more than 25 knots submerged to depths greater than 800 feet. And, it is proof that high-tech projects can be completed early and under budget. That’s what focus and resolve can achieve.”
Clearly, Mary Jo White, who came to the SEC directly from a major Wall Street go-to law firm, isn’t building a CAT because the wolves on Wall Street don’t want any sniffing noses in their dark pools.