STAFF NEWS & ANALYSIS
SEC to Rule All Trades All the Time
By Staff News & Analysis - May 28, 2010

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.

After Thoughts

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.

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