What happened to the global economy and what we can do about it
with 12 comments
By Simon Johnson
The Securities and Exchange Commission (SEC) under Mary Shapiro is trying to escape a difficult legacy "“ over the past two decades, the once proud agency was effectively captured by the very Wall Street firms it was supposed to regulate.
The SEC's case against Goldman Sachs may mark a return to a more effective role; certainly bringing a case against Goldman took some guts. But it is entirely possible that the Goldman matter is a one off that lacks broader implications. And in this context the SEC's handling of concerns about "high frequency trading" (HFT) "“ following the May 6 "flash crash", when the stock market essentially shut down or rebooted for 20 minutes "“ is most disconcerting. (See yesterday's speech by Senator Ted Kaufman on this exact issue; short summary.)
Regulatory capture begins when the regulator starts to see the world only through the eyes of the regulated. Rather than taking on board views that are critical of existing arrangements, tame regulators talk only to proponents of the status quo (or people who want even more deregulation). This seems to be what is happening with regard to HFT.
HFT is a big deal "“ perhaps as much as 70 percent of all stock trades are now done by "black box" computer algorithms (i.e., no one really knows how these work), and there are major open questions whether this operates in a way that is fair for small investors. (Disclosure: in 2000-2001, I was on the SEC's Advisory Committee on Market Information; I was concerned about closely related issues, although market structure has changed a great deal over the past 10 years.)
The technical, "fact-gathering" activities of bodies like the SEC are of critical importance in both building an overall consensus "“ do we have a problem, what should we do about it "“ and also in creating the basis for regulatory action (e.g., the SEC does not even collect the data needed to understand how HFT contributed to the May 6 disaster). And anyone who has ever put together a relatively complicated discussion of this nature can attest that how you frame the issues is typically decisive, i.e., what is presented as the range of reasonable alternative views?
On Wednesday, the SEC will hold a "market structure roundtable" to discuss "high frequency trading, undisplayed liquidity, and the appropriate metrics for evaluating market structure performance." But who exactly will be at this discussion?
The names of panelists for this discussion are not yet public and probably not yet final "“ but the preliminary list is far too much slanted towards proponents of HFT (6 out of 7 seats at the table; see Senator Kaufman's speech for details), with hardly any representation of people in the markets (e.g., "buy side" mutual funds) who think HFT is potentially out of control or unfair. It looks very much like someone is setting up a love fest for HFT "“ and a boxing match with 6 tough guys against one lonely critic.
To be fair, after coming under heavy pressure from a leading member of the Senate Banking Committee over the past 48 hours, the SEC is backpedaling quickly and indicating that the panel invitations can be broadened. This is encouraging "“ perhaps the agency is finally overcoming its tin ear problem.
But nothing other than a balanced panel on June 2 would be acceptable. At the very least, the SEC needs to increase the panel to 10 people – 5 for and 5 against. And all the issues need to be on the table "“ including exactly who benefits from HFT, how much money they make in this fashion, and whether or not long-term investors (and the broader economy) really gain from such arrangements.
The SEC must understand that it has a long way to go to restore its credibility. Wednesday’s quasi-hearing is an important test and many people will be watching carefully.
Written by Simon Johnson
May 28, 2010 at 6:04 am
Posted in Commentary
Tagged with high frequency trading
You’re way behind the curve on this Simon:
“The SEC and it’s culture of regulatory capture”
http://www.deepcapture.com/the-sec-and-its-culture-of-regulatory-capture/
LarryP
May 28, 2010 at 8:28 am
Love it, LarryP.
Barbyrah
May 28, 2010 at 12:27 pm
“The money power preys on the nation in times of peace, and conspires against it in times of adversity. It is more despotic than monarchy, more insolent than autocracy, more selfish than bureaucracy. It denounces, as public enemies, all who question its methods or throw light upon its crimes.” - Abraham Lincoln
“If the American people ever allow private banks to control the issue of their money, first by inflation and then by deflation, the banks and corporations that will grow up around them, will deprive the people of their property until their children will wake up homeless on the continent their fathers conquered.” - Thomas Jefferson
“When plunder becomes a way of life for a group of men living together in society, they create for themselves in the course of time, a legal system that authorizes it and a moral code that glorifies it.” - Frederic Bastiat – (1801-1850) in Economic Sophisms
“The world is governed by very different personages from what is imagined by those who are not behind the scenes.” - Benjamin Disraeli, first Prime Minister of England
“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.” - Henry Ford
“We are on the verge of a global transformation. All we need is the right major crisis and the nations will accept the New World Order.” - David Rockefeller
“The drive of the Rockefellers and their allies is to create a one-world government combining super capitalism and communism under the same tent, all under their control…. Do I mean conspiracy? Yes I do. I am convinced there is such a plot, international in scope, generations old in planning, and incredibly evil in intent.” - Congressman Larry P. McDonald, 1976, killed in the Korean Airlines 747 that was shot down by the Soviets
“Give me control of a nation’s money and I care not who makes its laws.” - Mayer Amschel Bauer Rothschild
“If the people were to ever find out what we have done, we would be chased down the streets and lynched.” - George H W Bush
“Needless to say, the President was correct. Whatever it was he said.” - Donald Rumsfeld, February 28, 2003
“Tell a lie loud enough and long enough and people will believe it.” - Adolph Hitler
rene
May 28, 2010 at 9:04 am
Thank you.
Barbyrah
May 28, 2010 at 12:27 pm
The Libor Index is also watching the balance sheet of the euro banks to justify future increases–at least that is what the e-mail says. Senator Kaufman has always been ahead of the curve…. he joins a growing list of venerable reporters (Helen Thomas earned another star at yesterday’s meeting regarding the BP oil spill, basically telling President Obama this http://snipurl.com/wvdi0). The Libor Index is also watching the balance sheet of the euro banks to justify future increases
Beth
May 28, 2010 at 9:12 am
What do you think of the proposed rule issued on Wednesday, trying to address many of the issues the SEC currently has with detecting manipulation and gathering data?
http://sec.gov/news/press/2010/2010-86.htm
Brian Stewart
May 28, 2010 at 9:12 am
Mr. Johnson wrote:
“The Securities and Exchange Commission (SEC) under Mary Shapiro is trying to escape a difficult legacy "“ over the past two decades, the once proud agency was effectively captured by the very Wall Street firms it was supposed to regulate.”
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