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Wall Street on Speed
The New York Times recently reported that the latest scheme--or scam--on Wall Street is something called High Frequency Trading. Very sophisticated financial firms, such as Goldman Sachs, are tipped off by the New York Stock Exchange's own computers to pending buy and sell orders. Armed with ultra sophisticated computer algorithms, the insiders anticipate the direction of the market based on what they learn about supply and demand for a given security. They can make an extra penny here and an extra penny there at the expense of us suckers, adding up to billions.
"Nearly everyone on Wall Street is wondering how hedge funds and large banks like Goldman Sachs are making so much money so soon after the financial system nearly collapsed," wrote the Times' Charles Duhigg in a front page piece that was the talk of New York and Washington. "High-frequency trading is one answer."
As debates in the blogosphere in the last couple of days have made clear, there are a couple of possibilities of what is at work here. One is that Goldman and others are literally using privileged information to make trades ahead of markets, in which case they are committing a felony. Specifically, the abuse is known as "front-running," or trading ahead of customers, and it is an explicitly illegal form of market manipulation. Front running is epidemic on Wall Street--the whole point of an investment bank trading for its own account is to take advantage of its specialized knowledge of markets--and the SEC or the Justice Department shuts down front-running when it becomes too blatant to ignore.
The other possibility is that the Goldmans of the world have found themselves a nice loophole. Tapping into the Stock Exchange's own computers and other sources of trading activity is something that anyone in theory could do, but only a few privileged insiders have the sophistication to exploit what they find. Often orders are placed, only to be cancelled. Their purpose is to figure out what the market is willing to pay, and then get in ahead of it.
But suppose that High Frequency Trading doesn't violate any law. It still is the essence of what's wrong with the recent metastasis of money markets into private game preserves for insider-traders.
Consider for a moment some first principles. The legitimate and efficient function of financial markets is to connect investors to entrepreneurs, and depositors to borrowers. There is no legitimate reason whatever for this to be done by the millisecond. At bottom, the process is pretty simple. The intermediary--the bank, savings institution, or investment bank makes its fees for making a judgment about risk and reward. How likely is the loan to be paid back? How high an interest rate should it charge? How should a new issue of securities be priced? The investor decides whether to indulge a taste for risk or for prudence.
But the hyperactive trading markets and creations of recent decades such as credit default swaps and high speed trading algorithms add nothing to the efficiency of financial markets. They add only two things--risk to the system, and the opportunity for insiders to reap windfall profits.
Therefore, whether or not Goldman's lawyers have figured out how it can engage in High Frequency Trading and stay within the law, there is a strong case that this entire brand of financial engineering should be prohibited. The whole game should be slowed down. Bona fide investors should get in line under the rule of first come, first served. Anything else should be considered illegal market manipulation. No dummy transactions. There is absolutely no gain to economic efficiency from having prices of securities change in milliseconds, and much gain to the opportunities for manipulation.
The need to restrain traders from exploiting their privileged knowledge is an old fight. During the New Deal, for example, many reformers proposed that floor specialists for investment bankers and brokerage houses simply be prohibited from trading for their own accounts. They should be there simply to execute buy and sell orders for customers. Otherwise, the conflict of interest would be overwhelming--and this was before computers. These reformers were overruled, but insider trading was explicitly prohibited (and good luck catching it.)
Now, as then, it is a mark of Wall Street's stranglehold on politics that the most sensible of remedies seem impossibly radical. One very good way to damp down the dictatorship of the traders, and raise some needed revenue along the way, would be through a punitively high transactions tax on very short term trades. Genuine investors should get favored fax treatment. Pure traders should be taxed, and very short term manipulation taxed into oblivion.
If the financial crisis has proven anything, it is that capital markets have become an insiders' game in which trading profits crowd out the legitimate business of investment. The whole business-models of the most lucrative firms on Wall Street are a menace to the rest of the economy. Until the Obama administration recognizes this most basic abuse and shuts it down, it will be more enabler than reformer
- Posted in
28 Comments so far
Show AllIs this like betting on the ship to sink on which we have booked passage? The image that I like is where the greedy bank robber is holding on to his gold bars as he sinks under the waves. It is some satisfaction, however I do believe that I am going down too. Time to build life boats.
I agree with you here but I was upset with what you said about our efforts to help the little guy and small local businesses especially credit unions. See my reply to your reply to sierra7. :(
I agree with Rich M. It is way too late for this article. The structure and crooks already have been in place for a long time, and they will continue to rob taxpayers while the Obama Administration turns its head the other way. The moorings for the upflow of wealth are firmly anchored, and the suction is at full force. I think the only way to take down the banksters is for people to take all of their money and invest in local banks or credit unions. It would then be a soothing and joyous sight to watch the big banks collapse, and Wall Street and the Obama Administration scramble. We have the power to take down the banksters. We just need to get other middle and lower class taxpayers on board and to it.
Gracchus, the working people have no money to put in banks, although for those who do I do support your idea. What needs to happen is more widespread. Stop purchasing from national corporations. That will weaken the corporations and the banks. Make due with what you have to the extent possible. Buy local if you can. Dollar devaluation is coming soon, so get ready. Isolate yourself from the Federal Government as much as possible for now, they are there to hurt you, not help you. It's too late to change the culture of corruption in Washington and Wall Street. Not enough citizens are engaged. Protect yourself and your family the best that you can. We have collapsed and are just awaiting the worst of the shock waves.
Stone,
I agree with you. The effort needs to be more widespread. I support local merchants by purchasing their goods instead of those of the big corporations. Also, I have belonged to a credit union for more than 20 years and am very happy with it. I guess I am trying to get alternative solutions out there for people to consider. But, I definitely have insulated myself in anticipation of the brewing crap storm that is coming, if it already is not here.
RichM is right. The only reform we will get from Obama is for the rich to get richer.
It's nice he and his family are having so much fun in the White House. It's looking more and more like a short term lease.
Clinton paid lip service to the left while caving in to the right. I suppose Obama is being more honest in telling us to just shut up while giving in to the right.
When the people fear their government there is tyranny,
when the government fears the people there is liberty.
~ Thomas Jefferson
"What is the frequency, Kenneth?"
Regulating markets where most of the trading is computer generated is virtually impossible, what are you going to do, unplug the perps? A better approach to this problem, as well as Thom Hartman’s article on CEO pay, is to implement a big assed tax increase on all income above $1,000,000.00 a year.
The 15% tax on capital gains is a freakin insult to every American who brings home a paycheck that has FICA withdrawn for the entire year. FICA is paid on the first $102,000.00 of income, somebody making $26,000,000.00 a year (a rather modest pay rate for a CEO) pays FICA tax for one half of one work day, the other three hundred and sixty four and a half days of the year they do not pay one penny of FICA tax.
The shift of taxing labor at a higher rate than unearned income must be reversed, the sooner the better.
"A better approach to this problem, . . . , is to implement a big assed tax increase on all income above $1,000,000.00 a year."
In addition, we could also reinstate stock-market transaction fees, allowing significant discounts for manually conducted transactions.
q
The author would do well to remind us that we the people have the power to switch to credit unions. Forget about the pols reforming the banking system. Goldman Sachs will giggle and wiggle through and around it. It's up to us to unite and take down the system by learning about credit unions and switching to them. Until then, Obama and the rest of the pols in Congress will have no shame for spoonfeeding Wall $treet at the expense of stripping Main Street to its bare bones !
duplicate
This too shall pass.
Events in the financial world are picking up speed in a way that reminds me of the soaring temperature at the heart of a dying star before its final collapse and explosion as a supernova.
Now, how are we, the people - and our species - to survive that event?
It doesn't look good for Obama, but ... what policies would he follow - if he still saw the world through the eyes of the community organizer from Chicago who was once known and trusted by many good local progressives? What would he do if he could foresee this fatal final meltdown - and knew he couldn't stop it?
Is there a ray of hope to be found in this inquiry? Is he showing that he believes that finding an opening for the people to organize and get into play in much larger numbers is more critical than any particular issue at this moment in history? If so, is he right?
Watch EFCA
If Obama lets that get thrown under the bus there goes my theory - and last hope for him.
".... They add only two things--risk to the system, and the opportunity for insiders to reap windfall profits.....Until the Obama administration recognizes this most basic abuse and shuts it down, it will be more enabler than reformer."
Have we heard anything yet from either Obama or Holder about the software that Golman Sachs uses about "the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways"?
I thought for sure that Obama would go on national television and say how "stupid" it was for Goldman Sachs to have created software that could be used to manipulate markets in unfair ways, especially in a global society of professional hackers and thieves.
Ya just can't repeat it enough:
"Frankly, they (the banksters and their Big Corp partners) own the place ('our' government.)" Senator Durbin.
Now, knowing that, does anything in this piece surprise you?
BO is in charge of 'the place': hence, he's 'owned' by said banksters and partners-in-crime.
It's up to us 99-percenters - either we protest with the only weapon we have - our money - or we shut up and keep taking it up the you-know-what. Cancel your credit cards, pull your money out of the big banks, sell all 'bad corp' stock.
What's that, America? You vote for more of the taking it up the you-know-what? Gee, how surprising...
Well at least he informed us of this new scam.
of course it's not going to happen --but in a just world -- WALL STREET ought to never exist - and since it does exist, in a just world - it ought to be entirely collapsed. all its institutional legerdemain - everything - completely erased from the planet. workers in wall street finance and banking should then be made to work just like everyone else...something that actually EARNS them a right to a single penny...
street cleaning, washing toilets, if they artistic , be a musician, a painter , a writer, whatever and suffer just like everyone else to actually earn their keep.
WALL STREET is a nest of parasited that only attracts and cultivates the worst instincts in people everywhere - including those around the globe that are called "investors".
sierra7
I would agree with almost all the commenters on this piece....but, I will add, most Americans are still blind-sided and woozey yet from this financial disaster and really have not been "hurt" enough to expect them to "change" their spending ways appreciably. That's not to say it won't given the severity of this mess....and how it is continuing to steamroll into "good" rated borrowers and continue to bring them down.
Along with the sophisticated algorithms is the fact that the closer you are to Wall St. (electronically) the faster and quicker your transactions as a trader can be executed....
I don't expect anything progressive from the Obama Admin with all the "criminals" in charge that helped precipitate this mess and the Goldman/Government revolving door and the "Washington Two-Step" danced by them and the Whoredom of our oversight committee members.
Not a pretty picture.
The more sophisticated the trading, the quicker the trades and the faster the bubbles; Just like a rat in a cage....it must go faster and faster until the whole cadge disintegrates.
The best comments, in my opinion as far as "fighting back" is to pull your money from the "big" banks and find a good solid credit union in your area; spend locally; buy ONLY WHAT YOU NEED; which could lead to another citizen revolt against maniacal consumerism and subsequent possible return to a more "states rights" position versus the Federal Government.
Both whoring parties are responsible for this mess. Don't expect either one to "reform" anything.
"For one thing, banks like Goldman Sachs and JP Morgan don't give a f*ck about little twerps who have accounts worth a few hundred dollars. Clients with accounts at GS & JPM have substantial investment portfolios. These people are overwhelmingly in favor of the status quo, & support virtually any policy that makes stocks go up. You will see zero interest among such people for "pulling your money from big banks" & putting it in credit unions, "buying locally," and all that New-Agey gibberish."
I strongly disagree here. Yes, at first the big banks will laugh at us. However, those of us who are members of local credit unions will spread the word and more people will follow suit and put the big banks to fear. I didn't say everyone would follow suit by the way and I know there are dupes who will stick with big banks for whatever reasons. But giving up like that and not trying just won't work.
"Banks like Wells Fargo and BofA, on the other hand, do depend on huge numbers of small checking accounts, to raise the money they lend out. So if it was really possible to cause huge numbers of their customers to close their accounts, and move their money to credit unions, you could pressure those 2 banking giants.
But it's not possible to get enough of their customers to do such a thing, because most people don't really understand how the banks have basically taken over the government. Since most don't understand it, they will be prefer to continue having the convenience of a BofA or Wells Fargo checking account, which they can access easily anywhere in the country."
Hold that thought. Yes, our electorate is cornfed but that doesn't mean we should just give up trying to save our friends, family, neighbors, coworkers, etc ... and not educate them out of their misery and then convince them to do the same for their others and spread the word. I was able to convince a few people to switch and I didn't even talk politics. I don't know about you but a lot of us out here are not giving up and we're moving past politics and straight to the heart of the issues.
"So unless there was an active movement that could make clear to large numbers of people why they change their behavior, & quit being customers of the giant banks, you will wind up achieving exactly nothing by flinging around happy-talk about "switching to credit unions.""
The best way active movements on this issue are possible are educating more people about the benefits of credit unions over big banks so to call this "happy talk" is mean.
"In other words, New Agey bullshit can achieve nothing. It's mainly just an excuse for not organizing, not engaging in any unpleasant confrontations, not being involved in politics, & just essentially living your own quiet little life, isolated from everyone else, & from the forces shaping society. Anyone who thinks the giant banks are scared of a few scattered New Agers switching their piddling accounts to the local credit union is kidding himself."
A few at first won't mean anything but if you don't give up, you increase your chances of winning. Just ask Gandhi, Lincoln, and Nader.
RichM, you're a smart man and I love what you write but why do you belittle the efforts of those of us trying to help push for changes for the better despite the political system in its sludge mode? Back in the Great Depression, credit unions were what helped people survive the Great Depression when the Big Banks failed and the same thing can happen again. Of course, we're not going to see change overnight but that doesn't mean giving up the fight for the better !
I don't know what you're calling BS but I've been a credit union member all along and have been well-protected from those banks you're talking about. I KID YOU NOT SIR. People may have awkward reasons for voting for who they vote for, working in the most bizarre places and professions, or for that matter investing in banks that don't benefit them even if it is convenient but that doesn't make them stupid. If you want to call us twerps for choosing to go local, then please explain YOUR plan to correct this mess and prove that it is better than what you detest.
"You're right -- you don't know what I'm calling BS. You didn't understand a single thing I wrote."
No, I understood exactly what you wrote and you're sounding like a lot of disgruntled folks on this site such nedlud and wanderer. I've met people with attitude like yours so let's not jump to conclusions that I didn't know what you wrote about.
"I have nothing against credit unions, and I have nothing against individuals switching their accounts to credit unions. "
Ok, fair enough.
"What I have something against is the notion that making personal choices like this constitutes "fighting back" against the banking giants. It doesn't. It won't affect them in the slightest."
Switching to credit unions is not just a personal choice. It can make a huge difference. You're making an extreme judgment based on the notion that everyone is dumb just because they don't follow you. It is disgraceful and totally defeating. If you're sick and tired of our side losing out, maybe it's time you learned how management and discipline in a team is done and learn to unite and respect various ideas and solutions. I would love to see GOD punish those banks but I know that it ain't how it works.
""Fighting back" has to do with organizing large-scale actions. It has to be part of a larger organized plan. It must be part of the program of a serious political movement. It can't just be a personal lifestyle choice, that a few people make as individuals."
Ok, but where do large organizations come from? As some have pointed out, they start small and they grow. What you write off as "personal lifestyle choice" is the building block when more people agree on which lifestyle choices to base their larger organizations and movements on. That is how Social Security, Medicare, Medicaid, labor unions, etc ... came about. They started in communities and eventually became massive movements. Where were you expecting large organizations to come from, the sky? As a developer and one who works with project managers, I've seen and worked with how every big thing starts out. Socialists don't laugh at little guys and their ideas.
"I don't have anything against "choosing to go local." But it's deluding oneself to think that that's how one fights a political war. And make no mistake -- this is a war. The banks have declared war on the whole US population, by buying the government and ramming through that bailout, & of course by all the shenanigans that made the bailout necessary."
Like Iraq, the banks have already won the war a long time ago. Right now, we're being occupied and are trying various ways to break out. Some work, some don't. Yes, the banks bought the god damn pols and won their bailouts even when we the people said no loud and clear. But to say that we can't do anything about it I for one refuse to believe. Going local on currency as Moondoggy and JenniferBedingfield have written countless times would force the big banks to play it clean. Going local would actually force the bigger banks to compete. That's not being deluded sir. Let's give those ideas a chance and see who turns out to be right vs wrong.
"Anyone who has read, say, Matt Taibbi's 2 Rolling Stone articles (the one on how AIG crashed the world economy, & the more recent one on Goldman Sachs) should understand that Goldman & a few of its kindred institutions have basically just plundered the whole Treasury. They're not even under investigation, let alone indictment. They've just gotten away with the greatest heist in history, scot free. In fact, they just happen to hold every single influential position on Obama's entire economic team. They're running the White House, the Fed, & the Treasury."
No doubt about it and the reason is they had money and we the sheeple made a mistake trusting these banks and now it's time to correct that mistake and one way to do it is get more people to switch to credit unions. There are other ways too and I'm open to hearing them but I am sick and tired of hearing doom and gloom from the same people who refuse to consider a variety of ideas that could help resolve this crisis. Large organizations start from the bottom on up, not top to bottom. The sooner we get together on a variety of great ideas and give them a go, the better our chances of fighting those criminals on Wall Street.
"This is the kind of thing that triggered the French Revolution. A few New Agers living in the woods, growing their own veggies, & "going local" are not going to scare these kinds of people. In fact, it HELPS them, to have some of their victims say "Let's just join credit unions and go local." Because they know that if that's the best their victims can do, they truly have nothing to be scared of."
The French Revolution was completely different and there's no chance of it happening here in this country unless we're talking about a French Revolution in reverse which has been happening for the last 30 years but without the guns. Don't you know anything about the NRA and the rightwing? We have an armed populace and yet Corporate America is still winning. If you believe in violence, let's see how many big top banks you can take down with all your firearms. Violence is not the answer to tyranny as some have pointed out on this site. Back during the French Revolution, there was unity and courage.
I don't think RichM means any harm but when it comes to our side, he is not alone. I don't think that he is used to the idea of connecting the issues and solutions even if they sound weird. The problem I see in society is the negative mentality amongst people that goes like this. They think that their efforts won't matter because everyone else will cancel them out with their dumb actions so it isn't worth doing it. RichM is correct that banks look more convenient to many and that even now people are buying into the notion that the banks have recovered and that we can once again "trust" them. It's going to be difficult to convince some that the banking crisis still exists and that we're nowhere close to being out of the woods yet. Our job will be to convince the ignorant masses out of their foolishness. BeForKids has set up a Main Street Party that could be one of the tickets towards voting out of the duopoly. Socialist and green are good too but unfortunately those two parties have had internal issues plus the voters have fallen into the media trap of hating those parties based on the takes on social issues, something the Main Street Party avoids altogether. Now where's Ted Markow when I need him? :)
Nothing new here - stealing and dealing a micro-second faster by pulling a couple cautions out of it.
Wall St gamblers won big before the crash. Many won big at the crash because they pulled a pair of big thefts - Bailout I and II. Most of them see crashes as part of a natural cycle, people who fear them as gutless, and people who pay for other people's bailouts as losers.
If the family's in the poorhouse because Papa gambles, and you want to make sure that their 2.3 kids have food to eat, clothes to wear, medical care, and books to study, you cannot bail the family out by writing Papa a fat check.
"Pure traders should be taxed, and very short term manipulation taxed into oblivion."
Of Course. Speculation is a zero sum game. No Capital is created. Short term trading is speculation.
So do this:
1) NO MORE TRADING WITH BORROWED MONEY!
2) 50% TAX on all securties sold within 6 months of purchase.
3) Graduated scale of reduced tax all the way to a PENNY tax on securities sold 5 years or more after purchase. The PENNY tax is to make sure every transaction is government tracked. When a big firm wants a bail out on some transaction that wasn't tracked, tell them to take a walk.
The effect of this would be to end speculation and margin fun and games. To show how manipulated the margin game is now, try to get a loan to buy gold or silver. They'll laugh in your face. Oh, but you can piggy back your stock purchases with more stock purchases if your stock nominal value goes up. Meanwhile, that loaned money could have been used for someone starting a business, buying some land or whatever. What Wall/war street calls the economy is really a money sucking enterprise that steals liquidity (money for investment) away from main street (the real economy). This Depression was made in Wall street; just like the last one.
P.S. Congressman Welch from Vermont has been trying to get a transaction tax into law for over a year.
I will agree with the earlier posters who stated that this article is too little too late. That said, we must now try out ways to undo the damage and stop the madness long term. I see a lot of great ideas on this thread. Unfortunately, I also see some people rudely talking down good ideas such as going local, switching from banks to credit unions, getting the tax structure in place, etc ... We must all share each others' ideas and help one another out here on Main Street if we are to defeat Wall Street.
To those of you who still want to keep ranting that idea X is puny and will never work, please reread your history books and take note that it took what looked like "puny" ideas to build larger organizations and movements that proved successful long term. We're gonna need to try out every good idea no matter how small it looks.