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Once again God is being kind to me. Another subject off my needs attention list has been addressed quite capably by Pam Martens.
There were some gaping holes in the 60 Minutes expose about the stock market being rigged. The story was spun in such a way to make one think that uncontrolled innovation had created some unfortunate technical arbitrage opportunities in exchange centers outside of Manhattan, but a clever insider, funded in part by ultimate insider Einhorn, had come up with a clever technical fix. Free market triumphs, mission accomplished.
What was this, a limited hangout expose?
Never mind the front running, how about the steady nibble at the bid and ask on virtually every order placed, which NY AG Eric Schneiderman praised as 'providing liquidity.' I think that canard has been capably debunked in many places. It is like sex in college. The kind of liquidity you get you don't want, and when you need that liquidity, its not there. Why not just praise portfolio insurance to abolish risk, and party like its 1987?
And what about the bombing of quiet markets with an avalanche of orders to brazenly manipulate the price? We have indictments of American companies doing that from Europe to Japan, with the sexy title 'Dr. Evil strategy.' And it is happening like clockwork, almost every day.
And as the king of Samoan metals traders, Salelologa Dave said, 'I’ll know that real change is coming to our system when the Government allows Sixty Minutes to discuss the manipulation of the gold market."
And brother, that is the truth. We can't even get the CFTC to disclose its five year study of manipulation in the silver market.
60 Minutes Sanitizes Its Report on High Frequency Trading
By Pam Martens
April 1, 2014
Two of the chief culprits of aiding and abetting high frequency traders, the New York Stock Exchange and the Nasdaq stock exchange, failed to come under scrutiny in the much heralded 60 Minutes broadcast on how the stock market is rigged.
This past Sunday night, 60 Minutes’ Steve Kroft sat down with noted author Michael Lewis to discuss his upcoming book, “Flash Boys,” and its titillating revelations about how high frequency traders are fleecing the little guy.
Kroft says to Lewis: “What’s the headline here?” Lewis responds: “Stock market’s rigged. The United States stock market, the most iconic market in global capitalism is rigged.”
Kroft then asks Lewis to state just who it is that’s rigging the market. (This is where you need to pay close attention.) Lewis responds that it’s a “combination of these stock exchanges, the big Wall Street banks and high-frequency traders.” We never hear a word more about “the big Wall Street banks” and no hint anywhere in the program that the New York Stock Exchange and Nasdaq are involved.
60 Minutes pulls a very subtle bait and switch that most likely went unnoticed by the majority of viewers. In something akin to its own “Flash Boys” maneuver, it flashes a photo of the floor of the New York Stock Exchange as Kroft says to the public that: “Michael Lewis is not talking about the stock market that you see on television every day. That ceased to be the center of U.S. financial activity years ago, and exists today mostly as a photo op.”
That statement stands in stark contrast to the harsh reality that the New York Stock Exchange is one of the key facilitators of high frequency trading and making big bucks at it.
In this Google cache of a promotional piece aimed at high frequency traders, the New York Stock Exchange explains how 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.” Who is it for? The NYSE says it is for “High frequency and proprietary trading ?rms, hedge funds and others who need high-speed market access for a competitive edge.” More eye-popping details on how the New York Stock Exchange is arming high frequency traders in Mahwah, New Jersey against the little folks who can’t afford tens of thousands of dollars a year for a “competitive edge” are provided on its web site here. (The closer a high frequency trader’s computers are located to the New York Stock Exchange’s main computers, the faster their trades are executed.)
The Securities and Exchange Commission knows full well this is going on. Just this past December 24, the SEC filed this rule change in the Federal Register, announcing that the New York Stock Exchange was changing its pricing for some of its co-location services and computer cabinets for outside users. Like some kind of a half-off sale at Macy’s, the NYSE says it will offer: “a one-time Cabinet Upgrade fee of $9,200 when a User requests additional power allocation for its dedicated cabinet such that the Exchange must upgrade the dedicated cabinet’s capacity. A Cabinet Upgrade would be required when power allocation demands exceed 11 kWs. However, in order to incentivize Users to upgrade their dedicated cabinets, the Exchange proposes that the Cabinet Upgrade fee would be $4,600 for a User that submits a written order for a Cabinet Upgrade by January 31, 2014…”
The Federal Register notice also shines light on some pricing comparisons between what the NYSE is offering high frequency traders versus the Nasdaq stock market, writing: “The Exchange also believes that the Cabinet Upgrade fee is reasonable because it would function similar to the NASDAQ charges for comparable services. In particular, NASDAQ charges a premium initial installation fee of $7,000 for a ‘Super High Density Cabinet’ (between 10 kWs and 17.3 kWs) compared to $3,500 for other types of cabinets with less power.The Exchange charges only one flat rate for its initial cabinet fees ($5,000), regardless of the amount of power allocation.”
Congress is equally aware of what is going on. As far back as October 28, 2009, the U.S. Senate Banking committee took testimony from Larry Leibowitz, head of technology at the NYSE on the fact that it was offering co-location to outside trading firms. Neither the Flash Crash of 2010 or confidence-busting trading “glitches” since then have roused Congress and the SEC from their slumber.
Another opportunity emerges in the 60 Minutes broadcast for Kroft to call out the New York Stock Exchange or Nasdaq for their practices. As Kroft explains how this young former trader from the Royal Bank of Canada, Brad Katsuyama, figured out how high frequency traders were gaming the market and made appointments with institutional investors to share his insights, Kroft says “and some of the most famous names in the American stock market heard the pitch.” At this exact moment a photo of the exterior of the New York Stock Exchange flashes across the screen, giving the impression that the NYSE is some poor, naïve victim of a cartel of high frequency traders.
What is also preposterous about this 60 Minutes segment is that it deals exclusively with gaming the system through miles of fiber optic cable. That is so yesterday, according to the Futures Industry magazine. On January 24 of last year, the publication wrote that “High frequency traders can use wireless to connect to data sources or exchanges about 1.5 times faster than through fiber optics, enabling them to quote prices at tighter bid-ask spreads than rivals or execute trades more quickly than other firms. Such are the potential competitive advantages, however, that many projects are pursued behind a veil of silence.” (I wondered about this myself, since I used to manage large scale network builds and optimization, and remember reading about the latency advantage of microwave over fiber in a route from Chicago to New York. I was wondering how they handled rain and snow fade. - jesse)
The article noted that San Diego-based NexxCom Wireless was building a millimeter wave network between New York, London and Frankfurt and considering connections to Zurich and Milan with the potential to add Stockholm and Moscow.
Within less than 24 hours of the big splash made by the 60 Minutes broadcast, the Wall Street Journal reported that the FBI was all over the problem and had been for a year. The question, of course, is – will anyone ever acknowledge the key role being played by the New York Stock Exchange and Nasdaq.
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