By Pam Martens and Russ Martens: March 29, 2022 ~
Robert J. Jackson Jr., NYU Law Professor and Former SEC Commissioner
The above headline regarding Citadel Securities and Virtu Financial comes from a report authored by John Detrixhe that was published at Quartz in February of last year. The report found that as of December 2020 the New York Stock Exchange (NYSE) had a 19.9 percent share of stock market trading versus 13.4 for Citadel Securities and 9.4 percent for Virtu Financial. This gave Citadel Securities and Virtu a combined stock market trading share of 22.8 percent versus 19.9 for the NYSE.
The big problem with this picture is that neither Citadel Securities or Virtu Financial are registered as stock exchanges and neither are regulated by the SEC as stock exchanges. Citadel Securities is a broker-dealer that pays for order flow from at least nine online brokerage firms and has a dubious history of regulatory fines and abusive behavior. Virtu Financial is a market maker and high frequency trading firm that bragged in its IPO prospectus that it had only one losing day in 1,238 days of trading.
Tomorrow at 2 p.m., a Subcommittee of the House Financial Services Committee will hold a hearing on “Oversight of America’s Stock Exchanges: Examining Their Role in Our Economy.” The Subcommittee has released a revealing Memorandum that looks at the myriad problems afflicting stock trading in the U.S. and undermining trust in U.S. markets as the standard for markets around the world. Consider the following paragraph from the Memorandum which focuses on market concentration:
“There are a total of 24 stock exchanges in the U.S. registered with the Securities and Exchange Commission (SEC) as NSEs [National Stock Exchanges] under section 6(a) of the Securities Exchange Act of 1933. Among these 24 exchanges, 17 are owned by three companies: the Intercontinental Exchange (ICE), Nasdaq,Inc.; and CBOE Global Markets, Inc.”
To put that another way, 70.8 percent of the registered exchanges are owned by just three companies – all of which are now for-profit, publicly-traded companies rather than non-profit, utility-type businesses operating in the public’s interest – the prior U.S. model for stock exchanges that built the United States’ reputation for running the most respected stock trading structure in the world.
Accentuating the fact that stock trading in the U.S. has moved from stock exchanges charged with creating a level playing field for all participants, regardless of the size of their bank account, to a concentrated cabal of dubious actors was the announcement on May 5, 2020 that the SEC had approved an application to become a stock exchange by the Members Exchange (MEMX).
Investors in MEMX include both Citadel and Virtu along with 5-count felon JPMorgan, serially-charged Citigroup, as well as Morgan Stanley, UBS, and Goldman Sachs. (The latter three were intimately involved in providing the obscene leverage that blew up the Archegos Capital Management family office hedge fund last March, generating over $10 billion in losses to global banks.) Other investors in MEMX include TD Ameritrade, Bank of America Securities, BlackRock, Charles Schwab, Fidelity Investments, FlowTraders, Jane Street, Manikay Partners, Wells Fargo, and Williams Trading.
Dark Pools owned by JPMorgan, Morgan Stanley, UBS, Goldman Sachs, and Bank of America’s Merrill Lynch have already taken substantial trading away from lit and regulated stock exchanges and moved it into their unlit and largely unregulated trading platforms known as Dark Pools.
The SEC’s rubber-stamping of this cabal to further concentrate their power over trading on Wall Street by forming a joint stock exchange is effectively endorsing a robber baron structure for stock trading in the U.S.
No congressional hearings were ever held as to whether Members Exchange represented violations of anti-trust law. It is likely instructive to know that the SEC approval for the Members Exchange came while Jay Clayton was serving as SEC Chair in the Trump administration. Clayton had previously represented 8 of the 10 largest Wall Street banks at Big Law firm Sullivan & Cromwell in the three years prior to taking his SEC seat.
After the stock market crash of 1929 and onset of the Great Depression, the U.S. Senate Banking Committee conducted three years of hearings into the self-dealing and rigged trading by the major Wall Street banks that had led to the historic economic downturn. The hearings generated front page headlines and galvanized public pressure, which forced Congress to pass the Securities Exchange Act of 1934, which created the Securities and Exchange Commission and empowered it to register, regulate and oversee brokerage firms, clearing agencies, and stock exchanges.
The 34 Act, as it’s known on Wall Street, specifically cited the national interest in explaining why stock exchanges had to be Federally regulated. The legislation makes the following critical points on how manipulated trading can negatively impact the U.S. economy:
“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.”
The financial crisis of 2008, which left millions of Americans in foreclosure and jobless and the U.S. economy in the worst shape since the Great Depression, was a direct result of failure to regulate the Wall Street cabal.
And yet, here we are 14 years later with the same cabal allowed to operate their own Dark Pools in which they trade the shares of their own Wall Street bank stocks along with thousands of other companies, and then get swift approval from the SEC to team up and run their own stock exchange.
And on top of the lax response from Congress to reform this dangerous stock trading structure, the hearing tomorrow has decided to call industry cronies to testify. There will be a witness from SIFMA, Wall Street’s trade association which has over 60 lobbyists whispering in the ear of Congress and another witness from the World Federation of Exchanges, which calls itself the “global industry group for exchanges and clearing houses.”
Another witness scheduled to testify on Wednesday is Michael S. Piwowar, who likes to highlight his credentials as a former SEC Commissioner and one-time acting Chair of the SEC but failed last year to highlight the fact that he was also being paid as a Senior Advisor to a Wall Street trading firm called GTS. Republicans are apparently enthralled with calling Piwowar to testify, despite his conflicts.
A breath of fresh air in the witness lineup is Robert J. Jackson Jr., a law professor at New York University School of Law and former SEC Commissioner. For what you can likely expect to hear from Professor Jackson on Wednesday on the litany of conflicts of interest at stock exchanges and trading platforms in the U.S., you can read the speech he delivered at George Mason University in 2018.
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