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.

By Jim Cramer Mar 27, 2012 12:16PM

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.


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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.


Jim Cramer is a co-founder of TheStreet and contributes daily market commentary to the financial news network's sites. Action Alerts PLUS, which Cramer co-manages as a charitable trust, is long AAPL.

Mar 27, 2012 12:36PM

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.

Mar 27, 2012 2:43PM

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 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..

Mar 27, 2012 3:37PM

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.

Mar 27, 2012 4:31PM
To "is this real": I LIKE your idea about a small fee for each and every trade entered into the system.  The individual investors wouldn't miss that small surcharge, but it would "kill" those flash traders with their thousands of trades per minute.  They aren't real investors anyhow, just parasites living off of the intricate rules that they have inveigled the SEC into setting (allowing?)for the markets..
Put the floor traders back where they belong and get rid of the computer trading. People have been saying this for a few years now and especially after the "Flash Crash" in May of 2011.
Mar 27, 2012 2:16PM
I totally agree with Jim.  The SEC should outlaw (or at least, regulate) high speed trading, especially by computers, sort of like wash sales are now regulated.  Require each and every trade in the same stock by the same trader to be at least one or two minutes apart, especially if the trades are almost simultaneously up and down.  There is no way that an individual person could execute those kind of trades faster than that, so evidence of such trading would be direct evidence of speculation, not stock market investing!
Mar 27, 2012 4:29PM
As I see it, the biggest problem for the american family is the loss of the 5.25% passbook savings account and the funneling of american savings and retirement savings into the crapshoot that is the equities investment market.  The stock market is for institutions and fat cats who are not putting their life savings into what amounts to a roulette wheel.  First savings accounts, then 401Ks and now they want our social security money to play with and skim their wealth off of....when is someone going to come to their senses....SEC?
Mar 27, 2012 1:32PM
I agree that the SEC cannot control trading today.  It is scary to think that the computers are doing all the trading and are programmed so alike that one mistake flows through the whole system.  I think that computer trading is out of control and that the SEC and a lot of the traders do not fully understand the system.  Lack of understanding and controls can only lead to disaster.
Mar 27, 2012 1:27PM
With the average stock now held for seconds rather than days, months or years, the trading landscape has changed entirely thanks to high frequency traders.

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.

Mar 27, 2012 4:39PM

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.    

Mar 27, 2012 1:14PM
The system is broken.  The little guy will always come in last.  This market was designed for big money.  That is all fine and good until they run into trouble and need the tax-payers to bail them out.  So, if that is the case, the market should be a level playing field for all.  Smile
Mar 27, 2012 5:24PM
The Sec hasn't lost control. They CHOOSE to not enforce the rules. They all came from the same institutions and all sleep in the same bed. How is it that everyone else can see the corruption clearly and yet no prosecutions. There should be 1000's in the last 2 yrs and they could have easily started at the top....of course any one of use could be sitting in a cell for mere jaywalking. That is what has become of this country and the rest of the world knows it....I believe that was suppose to be part of the "change" wasn't it....
Mar 27, 2012 3:17PM
Do not believe these idiots on CNBC or the rest of  Wall Street.  They make money by promoting  stocks,by the companies that pay for CNBC air time. Wall Street makes money from we consumers what Wall Street explains in their board meetings as the "fish." Fish are the sheep, the US populace, who do not have the wherewithal of the supposed "Masters of the Universe," on Wall Street. They (Wall Street) make money from charges to your 401K. It is all a scam 

The US is , well will be deeper in debt than Greece in less than two years, most of corporate America is deep in debt. The banks, lol , accrual accounting   - profits are based on accounts receivable - so all those homes behind in mortgage payments are still a positive for revenues. Gotta make sure the CEO makes their stock options. Wake up America!!  
Mar 27, 2012 4:37PM

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.

Mar 27, 2012 12:44PM


This is a very good article and points out the obvious - investing and trading are two different things.

Mar 27, 2012 5:18PM
Like Mr. Cramer I have been "in" the stock market for thirty years,  not at his level, but as a small investor. Now I have the smallest investment in the market of anytime in my life. The reason?  Volatility.  I can't send all day looking for the fast crash to make money, and I don't trust my money with anyone else.  So my question to Mr. Cramer is; as a small investor, what can I do?
He is right the market is out of control because of greed.

Mar 27, 2012 1:17PM

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

Mar 27, 2012 6:24PM
 If the SEC was in control of the financial markets they would be criminally prosecuting many of these bankers for the so-called "financial meltdown" in 2008.  As for the stock market  on any given day 6 major banks account for as much as 80% of all the stock market  trading through large scale automated trading.   It's all being massively manipulated by the banks and Bobo knows this.
Mar 27, 2012 4:41PM



Mar 27, 2012 5:26PM
Corporate Fascism.

Thank Deregulation.

Deregs can kill a nation.

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