Posted by Karl Denninger
CNBS asks this today on-air.
I’ll give you my answer – do all of the following:
No more “line-jumping” games. If I place an order my order goes to the end of the line at a given price. For instance, if I want to buy 100 shares of IBM @ 132.50 LIMIT and there are 10,000 shares at that price already on the book, my order goes behind the other 10,000. That’s fair. But what the high-frequency trader guys will do is “load the stack” with orders they never intend to execute. I see this daily in the Globex (futures markets) with bids and offers that “magically disappear” as the price approaches the number. This is done because you can cancel an order instantly, but you must go to the back of the line when you enter one. You can never do this as a person as you’re not fast enough – but the computers are, and they do. The result is that you the investor get screwed as the computers are basically always in front of you. The fix for this technologically in the current market is simple: All orders must remain valid for some reasonable period of time – say, 30 seconds, and cannot be canceled before that time expires. This makes such a strategy instantly unprofitable and stops the “line jumping” games. To prevent future “innovations” from figuring out how to get around this (again) the law must be changed to make intentionally issuing orders not intended to execute (that is, for the purpose of misleading the market, of probing liquidity or any purpose other than to actually buy or sell) a criminal (not civil) offense carrying felony penalties.
Bar trading with government-backstopped money. This means reinstating Glass-Steagall, in short. Gamble with your own money, not the government’s and not the people’s. Period.
The primary market controls. The “flash crash” occurred in no small part because when the NYSE went into “slow mode” other venues did not have to follow and in fact brokers were allowed to “route around” a working but intentionally slowed primary venue! That’s BS and makes a mockery of NBBO, or National Best Bid and Offer – a key protection that investors have every right to rely on as it is published SEC policy and rule. Companies select the primary venue for their shares to trade and spend a lot of money to be listed there. They should set the rules, not Wall Street. If a company goes to NYSE for that listing in no small part for the specialist system, it should be honored everywhere – period – with violations not resulting in broken trades but rather the brokers required to make every investor harmed by same whole.
All instruments that are underwater must be backed with cash collateral at the end of every day, no exceptions, marked to market nightly. I don’t care if you want to claim it’s a “custom agreement” or whatever – I have to post margin every night against underwater positions and so does every other individual and small investor. To let Berkshire, Goldman, Bank of America or others “off the hook” because of “perceived” balance sheet strength is hogwash. I’ve had $100k of underwater positions but have many multiples of that in liquid net worth, yet I still have to post cash. Everyone should be equal in the market in regard to backing their bets. A big part of the “advantage” these big boys have is the ability to write essentially unlimited-size bets without recognizing the impairment in cash during any time they go underwater. That’s the check and balance on excessive position size that every individual is required to observe, and it must be so for the large corporation as well.
All markets must be exposed if the securities are either issued by a public entity or are publicly traded – no exceptions. This means exchange traded, basically, with a central counterparty, so everyone can see bid, offer, size, open interest (in the case of derivatives) and last trade in real time. Everyone must have equal access to that data stream as well. “Dark Pools” and similar games must be barred.
Prosecute wrong-doers. There have been many. Blatant and obvious insider trading on various news events, unlawful front-running, allegations of firms selling securities to customers as “good investments” while in emails claiming they’re “crap”, “trash”, “turds” and similar and more. All of these are frauds of various sorts. If I bilk the little old lady next door out of $2,000 I am prosecuted and might go to prison. These firms bilked investors out of trillions over the last 20 years and few if any of them have faced any sort of criminal or civil sanction. The public cannot trust Wall Street until the cops show up.
You want ordinary investors back in the market? Do the above.
Until that all happens Americans will (correctly) conclude that it is indeed a rigged game run by the big banks for the purpose of robbing them blind – and they’re right.