Commander Warren Bashes up Jamie
You’ve got to love US Senator Elizabeth Warren for her ‘no prisoners’ attitude in her fight to protect consumers in what she sees as a failure of banks and regulators to do so.
In her latest blog on Saturday she tuck her teeth into Jamie Dimon for taking a massive pay raise (74%) following a year in which J.P. Morgan like no other bank was bombarded with multi-billion-dollar fines and settlements.
Quite rightly she argues that obviously J.P. Morgan is convinced that these fines and settlements were an extremely good deal for a bank which has been found guilty of systematically and on an unprecedented scale breaking the law.
Warren points out that this clearly indicates that regulators have been way too soft on J.P. Morgan.
She argues that one reason why regulators are currently getting away with failure and are not being held accountable is because the public has no way of finding out the nitty-gritty details of the secret settlements that banks sign. She reveals that when she questions regulators in Banking Committee hearings, they insist that they don’t need to take big banks to trial when they break the law. They stand by their claim that settlement agreements are tough enough, even though this is clearly not the case if Wall Street is celebrating with pay raises.
I think it would also help a lot if we’d have a free press that would do some investigative journalism and report critically, not just be the PR department of Wall Street. Let’s remember, the media have portrayed (on the front page and headline news) J.P. Morgan as the victim of a witch hunt with the New York Post headlining “Bank Robbery” in the sense that the U.S. government robbed J.P. Morgan by fining them way too heavily.
US Reg NMS a Joke in Reality?
If you’re interested in market structure and High Frequency Trading (HFT) and you don’t read Nanex’s blog yet, then do so. Now.
I’ve been following the blog for a couple of years now and it is one of the best sources of information about the abusive behaviour of some High Frequency Trading firms (HFTs), the failure of the regulators to regulate these firms, and the impact this has on normal investors.
In his latest blog, Eric Hunsader, the head of Nanex, criticises the subversion of a key U.S. stock market regulation, Regulation NMS (Reg NMS, the body of rules governing the U.S. stock market) once more, but with a slightly different focus (flickering quotes) and with new shocking examples.
Eric points out how Direct Edge CEO William O’Brien either has no clue about what happens in his industry despite the fact that he was heavily involved in the specific areas in question during the time of NMS implementation or – more likely – is merely pretending not to know but fully aware of what’s going on. Eric believes the rule may have been subverted in the implementation process, unknown to both the Securities and Exchange Commission and the public.
He points out that, had this key rule been implemented as written, exchanges favouring tactics employed by high frequency trading would have been at a disadvantage: they would have received a smaller share of the $500 million in exchange fees collected annually from 2.5 million subscribers to real-time stock quotes. The subversion of this key rule removed an important incentive placed by the SEC and the industry to ensure investors receive reliable stock quotes.
By way of background, quoting from Eric’s blog: “Every year, the US exchanges receive a total of approximately $500 million for providing real-time stock quotes to subscribers of the SIP (consolidated market data). The portion of this $500 million total that each exchange receives is determined by the number of trades executed and quote credits earned using a strict set of rules specified in […] Reg NMS. Quote credits are earned when an exchange’s quote is at the NBBO (National Best Bid/Offer) for at least 1 second. […] Flickering quotes [i.e. quotes that change in less than one second ] are specifically excluded from earning quote credits because they are detrimental to the market (high frequency traders use flickering quotes to probe the market or to trick other algorithms and humans).”
However, Nanex was recently alerted to a document produced by a consulting firm and which describes an elaborate set of rules, apparently created behind closed doors in an effort to make flickering quotes eligible for quote credits. Again, from Eric’s blog: “These rules involve things like changing the timestamps and prices of quotes. From these altered quotes, the ‘best’ is selected using an elaborate scheme that uses a sliding window of time, sliced into 1/10th of a second intervals. The ‘best’ of these altered quotes is called a RBBO (Revenue Best Bid/Offer), a term not used anywhere else in the industry. These altered quotes are then matched up to the RBBO for the sole purpose of awarding quote credits.”
Eric comes up with discoveries like this all the time. Like I said, read his blog, he’s good. And he’s got guts. He takes on everyone and anyone and seems to enjoy himself while doing so.
“HFT-free” Exchange to Launch 2015
Good article today in Banking Technology by Elliott Holley about a new a new Canadian stock exchange aimed at retail and long-term investors. Apparently this new trading venue is planning to go live in the first half of next year, offering a service designed to curb high-frequency trading and support capital raising.
The exchange, called “Aequitas”, is backed by several banks, brokers and asset management firms, including Barclays, BCE, CI Investments, IGM Financial, ITG Canada, OMERS Capital Markets, PSP Public Markets and RBC Dominion Securities.
Following a round of consultations with the Ontario Securities Commission, Aequitas has now made some further changes to its plans. Notably, high-frequency traders will be deterred from entering the market by a combination of trading fees and “speed bumps” designed to make their strategies uneconomic. In addition, the mechanism for identifying predatory HFTs has also been refined to catch more types of abuse, while market making will be placed under firm limits.
Sounds like something not too difficult to do and something other exchanges should look into.
S.A.C. (Such A Crime)
Excellent article by Sheelah Kolhatkar today about Stevie Cohen’s S.A.C. Capital Advisors hedge fund and about the culture of corruption at SAC. It’ll either make you laugh or sick to the stomach.
Despite the crimes committed by everybody and their dog at SAC over such a long period of time, Cohen was allowed to buy himself out of the mess for some small change when his firm agreed to pay a mere $1.2 billion to settle criminal charges that it had engaged in securities fraud.
Eight former or current SAC employees have been charged with insider trading. Six of them have pleaded guilty; one, Michael Steinberg, was convicted on Dec. 18 of insider trading in two technology stocks, and another, Mathew Martoma, is due to go on trial this coming Monday. Cohen himself was charged by the Securities and Exchange Commission in a civil case with failing to supervise his employees. They are seeking to bar him from the finance industry. SAC is transforming itself into a much smaller firm that manages only Cohen’s own money. SAC had fostered an unprecedented “culture of corporate corruption,” U.S. Attorney Preet Bharara said when the criminal charges against the company were first unveiled.
I don’t quite agree with Sheelah’s view that the government simply wasn’t able to gather enough evidence to charge Cohen criminally with insider trading. It just doesn’t sound realistic and some of the emails that were released to the public should have been sufficient to prosecute and jail Cohen. I think what really happened was that the authorities, prosecutors and the government are still not willing to use existing regulations and laws more aggressively. In some cases, this will be out of a true belief that taking bankers on more aggressively and causing uncertainty will damage the finance industry, cost jobs and hurt the economy, in many cases I believe this will probably be more a case of lack of integrity; for example, maybe you’ve got your eye on one of those advisor jobs in the finance industry that pay 50 times your current wage, or why push for more aggressive prosecution if Wall Street financed your last campaign, etc. People familiar with the investigation say the pursuit of the billionaire hedge fund founder continues, but I don’t think that anything will happen.
What the S.A.C. case shows is also that if someone manages to regularly beat the competitors (many of which will also not be playing fairly) by a massive margin, then chances are close to 100% that they’re not playing by the rules. This was a learning process for me. I remember when I started working in finance, I was completely mesmerized by those smart guys in the front office who seemed to outdo their competitors simply by the sheer power of their grey cells.
Not anymore.
Of course most people who work in finance are completely decent, sometimes even brilliant people, but as compliance officers, we need to be careful not to be too impressed by what is either success or ‘success’.