Courtesy of Pam Martens.
Can This Watchdog Still Hunt?
Last month, the Securities and Exchange Commission released the second in what looks to be a never-ending, head-scratching study into whether some aspects of high frequency trading are, in fact, the equivalent of rigging the stock market and thus patently illegal under existing law. In one long paragraph, the SEC appears to emphatically say that two strategies, order anticipation and momentum ignition, are manipulative and illegal. The SEC writes:
“Directional strategies generally involve establishing a long or short position in anticipation of a price move up or down. The Concept Release requested comment on two types of directional strategies – order anticipation and momentum ignition – that ‘may pose particular problems for long-term investors’ and ‘may present serious problems in today’s market structure.’ An order anticipation strategy seeks to ascertain the existence of large buyers or sellers in the marketplace and then trade ahead of those buyers or sellers in anticipation that their large orders will move market prices (up for large buyers and down for large sellers). A momentum ignition strategy involves initiating a series of orders and trades in an attempt to ignite a rapid price move up or down. As noted in the Concept Release, any market participant that manipulates the market has engaged in conduct that already is illegal. The Concept Release focused on the issue of whether additional regulatory tools were needed to address illegal practices, as well as any other practices associated with momentum ignition strategies.”
We have italicized the following phrases in the above paragraph: “trade ahead”; “in an attempt to ignite a rapid price move up or down”; and “conduct that already is illegal.” The SEC certainly appears to be saying that it recognizes these activities to be market manipulation and illegal under the statutory framework of the Securities Exchange Act of 1934.
So why has the SEC been studying this problem for the past four years instead of charging those deploying these strategies with crimes? We can thank former SEC trial attorney, James Kidney, for answering that question: the revolving doors of the SEC have morphed it into a Federal agency “that polices the broken windows on the street level and rarely goes to the penthouse floors. On the rare occasions when Enforcement does go to the penthouse, good manners are paramount. Tough enforcement – risky enforcement – is subject to extensive negotiation and weakening.”
The SEC began its research-as-a-substitute-for-enforcement of high frequency trading on January 13, 2010 when then SEC Chair, Mary Schapiro, issued a concept release seeking public comment. As further evidence of the open-ended nature of this “research,” the public comment period was slated to close on April 21, 2010. Instead, comments were accepted throughout 2010, 2011, 2012, 2013 and as recently as this month.
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