News & Analysis
SEC to Rule All Trades All the Time
SEC proposes central database for all trading data ... As financial markets have rapidly grown in size and complexity, regulators have faced an increasingly difficult task of investigating allegations of fraud and understanding the root causes of anomalous events such as the "flash crash" of May 6. The Securities and Exchange Commission took a step Wednesday toward making that job a bit easier by proposing to unify the collection of trading data across all stock and options markets. The many exchanges and self-regulatory organizations that Wall Street has set up to monitor financial activity have different standards for keeping track of trades, which occur at lightning speed on electronic hubs located around the world. As a result, SEC Chairman Mary L. Schapiro (left) said, "stock market regulators tracking suspicious activity or reconstructing an unusual event must obtain and merge an immense volume of disparate data from a number of different markets and market participants." – Washington Post
Dominant Social Theme: In a complex world, complex solutions are necessary.
Free-Market Analysis: So it has come to this. In America, anyway, and surely in Europe too, regulatory authorities wish to be empowered to look at every click, every number, every trading strategy of ANYONE in order to detect fraud and make sure that markets are fair, open and transparent. This is the same SEC that did not bother Bernie Madoff, that did not anticipate any part of the mortgage meltdown, that idled its people so that they had nothing to do but sit around all day watching pornography.
A writer we know once spent a very long period of time writing a book about the securities industry. Part of that time was spent trying to figure out exactly what the financial regulatory entities in the United States actually did. The SEC has a large staff, yet most of what the SEC accomplishes, in our opinion, involves rote paper shuffling. A mechanized, vulcanized assembly line could perform the same function. The whole idea of the SEC seems to be to process declarations about business intentions, the more voluminous the better; it is not exactly an industrial challenge. Some work does take place within the agency's enforcement division, but this is not in any sense the SEC's primary function.
Another odd thing about the SEC in particular – and regulatory agencies in general – is that rules are seemingly made on an ad hoc basis and without economic input. The SEC – on again and off again – has employed a staff economist. But this is like saying that the US political process employs a vice president. There is a substantial question as what the individual does it, how he or she does and what impact he or she has anyway. Not much, we would suggest. Here's some more from the article:
Under the agency's proposed rule, the SEC, exchanges and self-regulatory organizations would set up a central database for consolidating all trading activity. "The information would capture each step in the life of the order, from receipt or origination, through the modification, cancellation, routing and execution of an order. Most of the information would be required to be reported in real time, as the event -- including, receipt, routing and execution -- is occurring," Schapiro said. "This information is designed to allow regulators to more easily and quickly identify potentially manipulative activity occurring across markets and through multiple accounts at multiple broker-dealers."
There is really something spooky about all this. Are we alone in feeling it? The legislative process is so corrupt and the politicians are so scared of retribution – or so we imagine – that no one apparently finds it odd that the SEC and its backers would suggest such a breathtaking regulatory invasion. The idea that it is unconstitutional does not seem to come up either. In fact, so far as we can tell, all these regulatory agencies are unconstitutional; there is no language in the Constitution that truly justifies them or their increasingly invasive behavior. Nonetheless rule-making churns on.
The rules are not rooted in any kind of market-based economics (nor could they be as they are politically motivated and not sensible to any degree), as we have discussed. But beyond this, there is simply no logic to any of the American securities regulatory structure, not that there really ever was. But it's worse now, in our opinion. A few poor people, for instance, are enmeshed every now and then in various insider trading plots, but the front-running that large Wall Street firms do every minute of every day by employing massive computer power is entirely ignored. The specialist system of the 20th century was actually a payoff, as we have written before, to bribe the uptown boys to make a merger with the NYSE. But the Big Board itself spent a good 100 years justifying the system and enshrining it with solemn regulatory encumbrances – reverently delineated by the mainstream media.
None of it means anything, in fact – or not to the average market participant. The very money stuff itself – debt-based fiat money – is seemingly guaranteed to bring the markets down hard once every decade or so, costing the middle class whatever prosperity it has temporarily gained during the interim bubble. Banks are separated into component parts and then merged, and then separated again. One administration attempts to make stock investing mandatory, and another attempts to put half of Wall Street out of business.
It is impossible to make markets "fair." Buying and selling is inherently an adversarial art. Let the buyer beware, etc. ... But regulatory authorities and their congressional enablers will continue to chant this particular tune because the powers-that-be are determined to gain a maximum amount of control over market participants. The rule-making is to become so extensive and varied that only the largest banks will eventually be able to afford to make markets or trade securities – for fear of falling afoul of one regulation or another.
Washington's regulatory agencies (as Europe's) are out of control. Rules that are being applied are merely political reactions to whatever economic bubble happens to blow up next as a result of mercantilist central banking incompetence and maliciousness. (The upcoming US "financial reform" legislation is yet another example.) The sad thing is that this mish-mosh of a system has consequences. Lives are ruined and people go to jail for contravening the slightest detail of the incomprehensible rules of one agency or another.
Conclusion: Eventually, such a system is bound to over-reach however. The idea that the SEC ought to be privy to an individual's or an institution's entire trading history at any time for any reason may be the beginning of the end – not for lawlessness but of the over-reaching. It will likely happen some time. Trees do not grow to the sky. Sooner or later there will be nothing left to regulate but the smoking ashes of what was once a free-market system of entrepreneurial capitalization.
Posted by The Gimlet Eye on 05/31/10 12:01 AM
This all reminds of of Benjamin Graham's observation that "regulations" do not stop market bubbles from repeating themselves. In other words, increased regulations do not equal the banishment of "irrational exuberance."
Graham's own words:
"It is amazing how, in a completely different atmosphere of regulation and prohibitions, Wall Street was able to duplicate [in the 1960's] so much of the excesses and errors of the 1920's."
Yes, indeed, this proposal raises many legal and ethical questions.
This all reminds me of why socialism doesn't work. Picture in your mind the symbol "infinity." There are not enough "regulators" in the Milky Way Galaxy to juggle this endless stream of information that the government is proposing to "regulate," let alone make sense of it. Therefore, one is left to conclude that the real motivation for this must lie elsewhere.
I have a better idea; offer some REAL and SUBSTANTIAL rewards to "whistleblowers" and LISTEN THEM AND PAY ATTENTION TO THEM!
The SEC definitely has the look and feel of an "instrument of plunder," as Bastiat would have put it. Where was the SEC during the Madoff/SEC scandal? Has the SEC done anything to prevent the "market cycle," economic downturns, recessions, or economic crime in general? Remarkably little, as Harry Markopolos has make painfully clear in his revelatory book, "No One Would Listen: A True Financial Thriller" (2010).
I strongly suspect that Washington's regulatory agencies are part and parcel of the cabal which deliberately creates the "market cycles" and "bubbles" so disastrous to our well being.
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Posted by Scott on 05/30/10 03:21 AM
"But regulatory authorities and their congressional enablers will continue to chant this particular tune because the powers-that-be are determined to gain a maximum amount of control over market participants."
Horsehockey. They place the blame on 'authorities' and 'congressional enablers'. The truth is that the blame lays squarely at the foot of the common Mutual Fund holder, who feels wronged by the exquisitely convoluted and 'immoral' workings of the 'free' but somehow 'manipulated' market we call the stock exchange.
It isn't regulation that is the problem here. It isn't 'congressional enablers'. It's a mass belief held by the rank and file that the world and its markets can be made 'fair' through the use of judicial force.
People too stupid to live are complaining that someone smarter than them took advantage and they went crying to mama about it. And so we are saddled with regulation brought upon us by 'parents' who are too stupid to kick us in the butt and thereby explain what being an adult is all about. It's a vicious circle of idiots leading the brain damaged.
We have done this to ourselves and we have no one else to blame for it. Don't like the market? Think it's rigged against you? GET OUT OF THE KITCHEN! Or take beating. Your choice. This stuff isn't supposed to be easy or fair. It's called evolution and it involves survival.
Reply from The Daily Bell
"It isn't regulation that is the problem here. It isn't 'congressional enablers'. It's a mass belief held by the rank and file that the world and its markets can be made 'fair' through the use of judicial force."
Hm-mm ... Let us leave America aside for the moment. Was Nazi Germany the fault of the "people?" Is North Korea? The Soviet Union. Red China? North Vietnam? Cuba?
America is certain freer than the above - but we would argue that "the people" are manipulated by fear-based promotions, dominant-social themes ... and this is the cause of their belief in "judicial force" the implementation of "fairness," etc. These are dominant social themes and a great deal of time and effort is spent on their promotion. No, it's NOT what the "people" are doing - its what their leaders are doing to them.
Posted by William3 on 05/29/10 03:58 PM
DB -- "Sooner or later there will be nothing left to regulate but the smoking ashes of what was once a free-market system of entrepreneurial capitalization."
Let the flame-out begin, and regeneration unfold.
Posted by Clayton on 05/29/10 03:12 AM
After reading this commentary, I found myself pulling out my copy of von Mises' book, "Socialism" to review his comments on Planning for Chaos. This is it. By attempting to apply a wholly inadequate method to regulate (really control) the financial markets, they will destroy the method that actually works to provide the order it currently has. So, we will have financial chaos.
Additionally, the cost advantages and efficiencies the New York markets currently have could be rapidly eroded, leading to the flight of business out of one of the last remaining profit centers in our hollowed out economy.
Von Mises called this Destructionism. It is a fitting term for the policies of the Government in DC. The Age of Obama, the Age of Wishful Thinking, the Age of Stupidity!
Posted by Gilles Trudel on 05/29/10 01:29 AM
Yes my freind it will be as Harper has said this week it will remove the banking cartels manipulations and will allow free market to reign.
Don't forget Steven harper is an economist and secondly he is a born again christian and Canada has over 4 million followers and gaining fast he is getting a very strong support and expanding his party.
He has even mentioned parting from the IMF as they can't manage financial affairs properly and they are looking into no longer having Goldman Sash as financial advisors for Canada.
It is starting to indicate that he is on the right track for free markets comparing to others losing it. I may be wrong but I think as long as Harper is in progress will be made.
The worst mistake that we could do here is electing any liberal parties as they are like Quebec so much of a copy cat and lead by the same power that be as the Obama team is, should we have a liberal coming into power then it is game over for Canada as well.
We all need alot of Luck my freind but if Dr Ron Paul could be elected in November he would make a great working partner with Harper and our 2 countries would become much more of a free market like it was once.
Good Luck to you too my friend. God Bless you all!
Posted by Leonardo Pisano on 05/28/10 05:10 PM
While some form of overseeing to ensure that trading is honest is inevitable, the current socialism and centrally-led "everything" promote regulation and overseeing control bodies - and the more the better so it seems.
A system I like would be the reverse: it involves freedom, but at the same time a very strong penalty should anyone abuses this freedom. I see legal objections, but as a leading principle I think it could work as such system puts the responsibility to the individual.
So control after the fact, and not as a preventive straight-jacket, which takes away individual freedom. This principle could be interesting for many other areas, for instance why mandatory safety testing by an independent institute instead of trusting the manufacturer that his product is safe?
If the penalty is HUGE if the product is proven unsafe, the manufacturer would take measures, which might include going to the very same test institute ... The difference of course is that the latter is no longer legally mandatory, so the institute is subject to market mechanism in terms of price, quality, etc.
Reply from The Daily Bell
We favor common law, not "government" imposed penalties.
Posted by Gilles on 05/28/10 04:28 PM
I am so happy that Canada is about to create its own SEC and set of rules. Yes they are separating from the other SEC as the uncontrollable manipulation is to do but one thing destroy the free market and Canada has spotted the spotter and will be parting very soon indeed.
This will allow honest free market thinkers to join the Canadian side or be ripped off without recourse, that is if the US Gov allows anyone to do so oh sorry if the UK Gov allows the USA citizen to participate in honest business and investing called free market.
Somehow I don't think they will. I really don't know what happend but I use to have the crazy idea that American people had pride and were in control of their lives. I sometimes wonder what ever happened to them where did they go?
Reply from The Daily Bell
Thanks for reminding us of this. You seem pleased at this regulatory consolidation, but consolidation of power is NEVER likely good when it is the government that is doing the consolidating.
In America, the founding fathers carefully dispersed power among various branches of governments and the states. It took a great Civil War to "consolidate" power at the federal level, and there are those, the Bell included, that would argue that American citizens fully lost their freedom at that time.
Here is an article summarizing the initiative. Good luck in Canada! You will need it. ...
Flaherty outlines securities watchdog plan
Finance Minister Jim Flaherty unveiled a federal government plan Wednesday to create a single Canadian securities regulator.
Finance Minister Jim Flaherty is expected to unveil a plan for a single Canadian securities regulator. (Mark Blinch/Reuters)
Under the proposed Canadian securities act, the new regulator would replace the current "balkanized" system where Canada has 13 regional regulators, Flaherty said at a news conference in Ottawa.
"[That's] 13 sets of rules and 13 sets of fees," Flaherty said.
Flaherty will bring the bill to the Commons on Wednesday, but Ottawa will also ask the Supreme Court for advice on the issue.
"We'll be asking the Supreme Court of Canada a clear question: is the next proposed Canadian securities act within the legislative authority of the Parliament of Canada?" Flaherty said.
Currently, each province and territory runs its own regulator. Two provinces " Alberta and Quebec " have vowed to fight any plan to create a single national regulator. A number of larger Quebec companies have joined with the province in opposing Ottawa's plan.
For decades, both Conservative and Liberal federal governments have tried to replace the current system.
Click to view link
Posted by Tawny on 05/28/10 01:13 PM
Can anyone be really surprised to see more control, more scrutiny of private individuals, and above all, a global currency being put forth now as the 'solution' to the 'problem'?
This whole economic 'meltdown' was engineered in order to provide plausible 'need' (justification) for centralizing power and control still further. Ordo ab chao. The Anglo-American power elites have been working to achieve their global empire for better than a century - a century littered with 'crises' demanding 'solutions' - the solutions always involving greater centralization of power and loss of individual freedoms.
These bankers/economists (at the top) know too much for any of this to have 'just sorta happened' by accident or miscalculation. I mean - really. Thrusts for global empire are not new - just read your ancient history.
The central 'problem' is capture - capture of centers of power like the regulatory agencies and governing bodies (and of course information - the MSM and schools) by a loosely bound gang of lawless trans-national banks and corporations intent on achieving global hegemony.
Check out the websites deep capture (Patrick Byrne) and the sanity check(Uudd Bagley), if you have not done so already.
Time to wake up and grow up.
Reply from The Daily Bell
Posted by F. Beard on 05/28/10 12:52 PM
"I remember when the Hunt brothers honestly cornered the silver market in the 80's and the Comex was shut down for 8 days." Dogster
With money borrowed from the government backed counterfeiting cartel?
Posted by Loren D. Waite on 05/28/10 12:03 PM
Posted by Lila Rajiva on 05/28/10 11:50 AM
Circuit breakers have been in effect since 1987. Even before that trading would stop after a sudden decline. SEC is both corrupt and incompetent and it should be disbanded.
Posted by Dogster on 05/28/10 11:47 AM
Naked short selling should be stamped out. Traders who sell short stocks they don't own do much mischief. Many people believe that precious metal prices have been suppressed with the Fed's blessing and assistance over the years by naked shorts. I remember when the Hunt brothers honestly cornered the silver market in the 80's and the Comex was shut down for 8 days. Delivery couldn't be made. Then trumped up charges were brought against the Hunts who were made to pay large fines.
No one should be free to defraud.
Posted by Bryan on 05/28/10 10:23 AM
If I were President, I would immedialtely propose a law that would create a new cabinet agency, the Dept. of Regulators. These people would regulate all the other regulators regulations, and therefore equalize the applications of regulations between those who have too many regulations those who have two few regulations, and thereby make it fair for everyone!
Simple, huh, and everybody would be happy, unless the new agency by its own authority, eliminated all regulations, as part of their duties, and about 60% of all Federal Jobs would be eliminated, solving the budget problem, too. Those without Federal jobs would be very upset, so that surely will not happen.
Posted by Puzzled on 05/28/10 10:23 AM
Let's get this straiht here! Reduce the B--- S--- to it's lowest common denominator! The SEC like The FDA/FTC write their "Laws" down in pencil, so they can be erased at will. They can, at any time, call you a liar, and they have the proof written in pencil to prove it! From there they harrase you to be able to take all your money!
Are we on the same page?
Posted by Cossack55 on 05/28/10 07:45 AM
No feedback needed, DB. Great summation, solid argument. Nuff said.
Posted by F. Beard on 05/28/10 07:43 AM
Yes, great article. Surely the solution is a truly free market where reputation would be everything to an exchange.
Competition would keep the exchanges honest and open or else they would go out of business. Every good idea can be VOLUNTARILY adopted. Why can't the government realize this? Because they are force itself? Worse yet, why can't Americans realize that morality can't be legislated and that government force should not be used to try to solve every problem?
"There is really something spooky about all this. Are we alone in feeling it? The legislative process is so corrupt and the politicians are so scared of retribution - or so we imagine - that no one apparently finds it odd that the SEC and its backers would suggest such a breathtaking regulatory invasion. " DB
Evil profits disproportionately from government enforced centralization. You should be spooked. "666" is being built before our eyes.
Posted by Freiheitjetzt on 05/28/10 06:44 AM
Beautiful! Right on! Thank you! There are no rational alternatives to the free market.