By Pam Martens and Russ Martens: December 20, 2022 ~

The Chairman of the Securities and Exchange Commission, Gary Gensler, announced in June that he was going to tackle the structure of the U.S. stock market – ostensibly to make it fairer to the little guy. His plans were released last Wednesday in a mountain of paper that even Wall Street veterans are having difficulty digesting. (See here, here, here, here, and here.)

While the overall thrust of the proposed changes appears to be to provide more transparency to order execution, the proposals fail to address key structural issues that have allowed the U.S. stock market to operate as an institutionalized wealth transfer system — moving vast sums of money from the pockets of average Americans to the richest one percent.

Both Congress and the SEC were put on notice on March 30, 2014 that the U.S. stock market is rigged. That’s the date that bestselling author and Wall Street veteran, Michael Lewis, was interviewed on 60 Minutes about the allegations in his just released book, “Flash Boys: A Wall Street Revolt.”

The interview opens with Steve Kroft asking Lewis what the headline is for his new book. Lewis responds: “The United States stock market, the most iconic market in global capitalism, is rigged.”

When asked to explain just who it is that’s rigging the stock market, Lewis states that it’s a “combination of these stock exchanges, the big Wall Street banks and high-frequency traders.”

“Flash Boys” revealed in great detail how U.S. stock exchanges are selling access to trading data that the general public does not have access to by allowing high frequency trading firms and Wall Street megabanks and their brokerage firms to co-locate their trading computers alongside the computers of the stock exchange.

These co-location computer services can cost tens of thousands of dollars a month – pricing out everybody but the billionaire hedge fund owners and the big players on Wall Street. In turn, it provides just these privileged players with the earliest access to trading data, thus delivering an unequal playing field. (See the New York Stock Exchange’s co-location price list for 2021. Prices begin on page 35.)

The New York Stock Exchange was at one time the most respected stock exchange in the world. It’s now become a pay-to-play venue for hedge funds, high frequency traders and Wall Street mega banks. In 2014 we found a Google cache of a promotional piece the NYSE had directed at high frequency traders. It boasts that it is offering a “fully managed co-location space next to NYSE Euronext’s US trading engines in the new state-of-the-art data center.” The NYSE says it is for “High frequency and proprietary trading firms, hedge funds and others who need high-speed market access for a competitive edge.”

Just how lucrative can such an edge be? On June 18, 2014, in a high frequency trading hearing convened by the Senate Banking Subcommittee on Securities, Insurance and Investment, Senator Elizabeth Warren compared what high frequency trading firm, Virtu Financial, was doing to the skimming scam in the movie Office Space. Senator Warren stated:

“For me the term high frequency trading seems wrong. You know this isn’t trading. Traders have good days and bad days. Some days they make good trades and they make lots of money and some days they have bad trades and they lose a lot of money. But high frequency traders have only good days.

“In its recent IPO filing, the high frequency trading firm, Virtu, reported that it had been trading for 1,238 days and it had made money on 1,237 of those days…The question is that high frequency trading firms aren’t making money by taking on risks. They’re making money by charging a very small fee to investors. And the question is whether they’re charging that fee in return for providing a valuable service or they’re charging that fee by just skimming a little money off the top of every trade…

“High frequency trading reminds me a little of the scam in Office Space. You know, you take just a little bit of money from every trade in the hope that no one will complain. But taking a little bit of money from zillions of trades adds up to billions of dollars in profits for these high frequency traders and billions of dollars in losses for our retirement funds and our mutual funds and everybody else in the market place. It also means a tilt in the playing field for those who don’t have the information or have the access to the speed or big enough to play in this game.”

In the Afterward that Lewis wrote for the paperback version of “Flash Boys,” released in 2015, Lewis puts a dollar figure on the cost to public pensions managed by just one money manager:

“In 2014, this giant money manager bought and sold roughly $80 billion in U.S. stocks. The teachers and firefighters and other middle-class investors whose pensions they managed were collectively paying a tax of roughly $240 million a year for the benefit of interacting with high-frequency traders in unfair markets.”

Another area that seriously undermines the credibility of U.S. markets are the Dark Pools operated by the mega banks on Wall Street. The SEC is allowing the trading units of these banks – which have been charged with colluding on prices with each other in the past – to trade each other’s stocks in the dark as well as to make thousands of dark trades each week in the stock of their very own bank. (See our report: Wall Street Banks Are Trading in Their Own Company’s Stock: How Is This Legal?)

Then there are the ginned-up derivatives cooked up by Wall Street mega banks that allowed the Archegos family office hedge fund to artificially inflate the price of stocks like ViacomCBS by providing as much as 85 percent loans on margin trades. When Archegos blew itself up with those margin loans, the stocks they had artificially inflated crashed, leaving innocent investors who had bought on the way up suffering severe losses. (See Archegos: Wall Street Was Effectively Giving 85 Percent Margin Loans on Concentrated Stock Positions – Thwarting the Fed’s Reg T and Its Own Margin Rules.) As far as we are aware, no action has been taken to outlaw those derivatives on Wall Street.

Another structural outrage is that Wall Street customers are not allowed to bring their claims against Wall Street trading firms into the sunlight of U.S. courts. Instead, the claims must go into Wall Street’s private justice system called “mandatory arbitration” or “forced arbitration” where Wall Street insiders are allowed to sit as judge and jury. Reasoned written decisions based on case law and legal precedent are not provided; discovery is limited; the media is barred from being present; there is no right to appeal the decision to a court; and the arbitrator fees charged to the plaintiff can be staggering compared to the nominal entry fee to bring a claim in court.

We could go on and on, but you get the picture.

And even with these limited structural reform proposals that Gensler has made, there is every likelihood that they will be challenged in court by the Wall Street cabal. Before Gensler could even introduce his plans, which still have to go through a public comment period, the SEC was sued in court by the high frequency trading firm Virtu Financial — because it wanted an early heads up on what the SEC was planning to do.

Related Article:

PBS Drops Another Bombshell: Wall Street Is Gobbling Up Two-Thirds of Your 401(k)