SEC has lost control of trading process
After Friday's BATS fiasco, it's no wonder average investors have lost faith in the fairness of the stock market.
Was I rude Monday when I asked a question about how BATS, the exchange company that canceled its IPO last Friday because of a glitch in its own software, helps the little guy.
I grilled Joe Ratterman, the CEO, on "Squawk on the Street," about how BATS benefits mom-and-pop investors, because I believe that high-frequency trading -- the genesis of the business of BATS -- is profoundly antithetical to individual investors' confidence in the system.
The fact that BATS, which controls more than 11% of American trading, had to cancel its own IPO because it couldn't get its own system to work, is a blow against confidence. Any system that allows its first trade to be at $16 and the next one to be at pennies is not one I want to put my life savings into.
Nor do I trust a system that causes Apple (AAPL) to drop 9% on a 100-share trade that BATS executed, something that also happened Friday. Apple is a half-a-trillion-dollar company, for heaven's sake.
I think one reason it occurred is that electronic trading is flawed. A big institution might understand these flaws and excuse them. But an individual investor just says, "Who the heck needs this nonsense?" It just reminds them of the horrendous flash crash, during which stocks went down huge in minutes because of another software glitch.
What bothers me is that everyone claims to be helping the little guy. The BATS CEO came with the usual "liquidity" blather about how his company helps the little guy. He mentioned the time-honored narrowing of spreads between prices as something his company helps bring about.
First, I think the spreads between prices were going to go down anyway because of the decision by exchanges to switch to decimal trading. Second, by bidding and then pulling bids in a lightning-fast fashion, I think BATS and similar outfits like them actually suck out the liquidity.
Third, I wouldn't be so angry if the CEO simply said, "Look, we have nothing to do with helping the little guy. We are about high-frequency institutional trading, we help those traders, not small investors. We aren't about helping the mom-and-pop investors. Not at all. We are about doing what's right for a different set of clients irrespective of the little guy."
That's fine. I get that.
Finally, the success of BATS (the company) and the failure of BATS (the trading firm) to do its IPO and trade Apple correctly are two sides of the same bad-news coin. They symbolize how the Securities and Exchange Commission has lost control of the trading process. The government has allowed regular investors to be sacrificed upon the altar of speed that is unnecessary for all but these high-frequency traders. The government doesn't even seem to care that individual investors have lost faith in the markets.
Meanwhile, investors continue to leave stocks as an asset class precisely because of a lack of confidence that the stock market even works, let alone works for them.
Our government needs to start thinking about leveling the playing field between individuals and fast-trading institutions. It needs to rethink its approach to approving every innovation regardless of the impact on individual investors. It needs to accept the mandate of helping the small guy more. Without that mandate, the moms and pops are at the mercy of the BATSes of the world.
Why don't they see that? Why does that elude them? Beats the heck out of me.
The only help the little guy gets is help being separated from his wallet.
Even if you're not in the market, the run up in commodities will get you. It's obvious so much is computer traded. Some company can post good profits but they miss expectations by a cent or two and the stock is down 10% that day.
The whole thing is out of control, and I'm deeply dismayed and concerned that the price of gas, the food on the table, the NG heating my house, is all controlled by this idiocy.
Maybe next we'll get meters locked over our faces and get charged for air, and we can put it in the NYMX for speculators to run up.
This is one of the best articles that I have read from Jim.
I do not believe that anything in the market provides "liquidity" except price changes. I can understand it for thinly traded stocks, but flash traders do not trade thinly traded stocks. So no "liquidity" is added by these flash traders. As they hold a stock for, at most, seconds they add nothing. The only thing they do is strip money out the market, and much of that money is coming from the small traders (401K, IR's, personal portfolios, etc.).
What is needed is a one cent per share trade "fee". This fee would be used by the SEC to enhance their ability to identify and prosecute fraud in the markets. The fee would also eliminate almost all flash trading. The biggest gain would be for the small investors (401K, IRA's and personal portfolios), as this would give the small investor more faith in the market.
The SEC's reason for being....in their own words is:
"The mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.
As more and more first-time investors turn to the markets to help secure their futures, pay for homes, and send children to college, our investor protection mission is more compelling than ever.
As our nation's securities exchanges mature into global for-profit competitors, there is even greater need for sound market regulation"
I do not think the SEC has ever read this......without laughing at the small investors..
The SEC needs to ask Wall street to tell it when WS make changes to the laws that govern it, so the SEC will know what to say when reporters ask about it.
Oh, you thought the SEC was in charge? The SEC couldn't be in charge of lunch.
The SEC is aware of the speed traders - much like a blind man is aware when a speeding sports car roars by.
To monitor the situation, the SEC is using horses and buggies to keep up with groups like Goldman Sachs in Ferrari's.
Then our own government throws in bushels of stimulus money almost on schedule, which makes the race for the fast cash speed up.
Until the SEC is properly funded and outfitted with better monitoring software, and until the government turns off the fuel of the money pump, the stock market will be steered by the high frequency traders.
If you, like me, are dependent on market results for your retirement, good luck! The race is on and you can't even qualify to enter.
HFT is no doubt the worst of it, but you forgot the three other issues causing a lot of problems.
1. Short selling.
2. Massive hedge fund manipulation.
3. The markets all moving in tandem.
We need to overhaul Wall Cheat so that the average family can retire. I'm sure congress is "deeply concerned" about this.
Laissez-faire .. is it any wonder that the SEC isn't doing their job when we have a segment of politics that objects to the agency and want to do away with any over-sight. Cut the funding and lay-off the all the government employees would suit the Robber Barons just fine.
This is a very good article and points out the obvious - investing and trading are two different things.
He is right the market is out of control because of greed.
in free market capitalism the few get richer at the expense of the masses, so the SEC
and all other organizations are of course controled by the controlers
YOU CAN HAVE THE FREE MARKET AND SUFFER
OR YOU CAN HAVE REGULATION AND ENFORCEMENT AND SUFFER LESS
Deregs can kill a nation.
Copyright © 2014 Microsoft. All rights reserved.
It's time for a reality check in advance of the Chinese e-commerce giant's much anticipated initial public offering.
VIDEO ON MSN MONEY
Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.
Contributors include professional investors and journalists affiliated with MSN Money.
Follow us on Twitter @topstocksmsn.