BrokeAndBroker.com GUEST BLOG
If we do not acknowledge and remember history, we are doomed to repeat it.
Here is a perfect example:
SEC CHARGES FOUR BROKERS AND DAY TRADER IN FRAUDULENT "SQUAWK BOX" SCHEME
FOR IMMEDIATE RELEASE
Washington, D.C., Aug. 15, 2005 - The Securities and Exchange Commission today charged four brokers and a day trader with cheating investors through a fraudulent scheme that used squawk boxes to eavesdrop on the confidential order flow of major brokerages so they could "trade ahead" of large orders at better prices.
The day trader, John J. Amore, is charged with paying brokers at Citigroup, Lehman Brothers and Merrill Lynch to provide live audio access to those firms' "squawk boxes" - devices that broadcast, within a securities firm, institutional orders to buy and sell large blocks of securities. Amore directed traders working for him to listen to the pirated squawk boxes and trade ahead of the institutional orders in order to profit from price movements that resulted from execution of the large customer order. The brokers charged are Ralph D. Casbarro, formerly at Citigroup Global Markets, David G. Ghysels, Jr., formerly at Lehman Brothers, Kenneth E. Mahaffy, Jr., formerly at Merrill Lynch and Citigroup, and Timothy J. O'Connell, formerly at Merrill Lynch. . .
See, the Litigation Release No. 19335, August 15, 2005 at http://www.sec.gov/litigation/litreleases/lr19335.htm
That was almost exactly 5 years ago. Today we have the exchanges selling this same sort of information to high frequency traders (HFTs). What is the difference? HFTs are getting information about orders and trades before they are posted on the consolidated tape. They are buying this information from the likes of the NYSE, and co-locating their computers in the same spot as the exchanges so that they can get a millisecond head start on the rest of the world. Isn't that like listening in? The difference? The exchanges are making money selling this information. The articles explaining what's going on have been coming out almost daily and there are studies being done to show how dangerous this situation is getting. We had a "flash crash" in May that was the canary in the coal mine - only the canary died in vain, no one was listening.
In addition, the HFTs are manipulating the markets by flooding exchanges with 5000 quotes in 1 second in order to slow down the system and sabotage their competitors. By doing this they are hoping to pick off high bids or low offers. This is like the SOES bandits of the 1980's; only now, the HFTs are protected by ridiculous regulations like REG NMS. Regulations that were meant to even the playing field are in actuality making the field more uneven. Reg NMS only protects the top of book. Did the regulators even consider the unintended consequences of NMS? Didn't they realize that the top of book would become a repository for 100 share lots? How is the public being protected by only protecting the top 100 shares?
And the absurdity of enacting NMS and then making the National Best Bid and Offer (NBBO) the bell-weather of a good trade (i.e. Best Execution) shows that the regulators do not understand the markets and underestimate the ingenuity of the dark side of our industry. If the NYSE is flooded with 5000 quotes in 1 second, what good is the NBBO? The NBBO changes every millisecond because there are 32 exchanges plus ATS' and dark pools that are all posting markets, and numerous HFTs posting quotes that are just meant to move the market. Currently, approximately 95% of all messages electronically sent to the NYSE are cancels and cancel-replaces; messages that never get, or are never meant to get, executed.
Tyler Durden, of http://www.zerohedge.com/, has been railing about this for months. In an August 18, 2010 article titled: Prima-Facie Evidence The NBBO Is Broken Explains Why Senator Kaufman Is Getting Very Angry With A Corrupt SEC at http://www.zerohedge.com/article/prima-facie-evidence-nbbo-broken-explains-why-senator-kaufman-getting-very-angry-corrupt-sec, Durden notes:
[A]n ultra-detailed analysis of the May 6 crash [by a group called Nanex] has revealed that in the seconds and minutes immediately following the initial slam in the market, the dissemination of the NBBO by the Consolidated Quote System (CQS) would at times lag real time changes in stock crosses (as disseminated by such premium products as NYSE's OpenBook) by as much as 24 seconds!
But instead of concentrating on what is ruining the basic premise of our free market system, the government, the SEC and FINRA are all concentrating on the non-issue of Fiduciary Duty. They all believe that BD's should have the same moral and ethical strictures as Investment Advisors, the same responsibilities to their clients. However, the problems that occurred in the past two years with Ponzi schemes like Madoff and Sandford, were in the IA world, not the BD world. Fiduciary Duty is a topic to be debated in lecture halls at law schools, the SEC should be looking at the real problems, the real reasons that the public is fleeing the markets, the real reasons that the institutions are sitting on the sidelines: the HFT Pirates, their cohorts at the exchanges and Reg NMS. The culprits are not the small BDs and their not filing OATS/TRACE reports on time or that they didn't have an acceptable BCP, that's all low hanging fruit. Go after the real systemic problems and the small stuff will take care of itself.
On August 5, 2010, Senator Ed Kaufman of Delaware sent a letter to SEC Chair Mary Schapiro in which he outlines the changes that should take place in the market structure to ensure that the markets continue as they were meant to be, not by stopping progress and technology, but by controlling it rather than it controlling us. I recommend your reading his 8 page attachment to that letter which outlines the changes that should be made.
David M. Sobel, Esq.
EVP / CCO
New York, New York
David M. Sobel, Esq. is currently Executive Vice President and Chief Compliance Officer of Abel/Noser Corp., a FINRA / NYSE member broker/dealer. He was previously a partner at The Goldstein Law Group, P.C. where he concentrated in the areas of broker-dealer compliance/regulation, securities litigation, including arbitration and mediation, and disciplinary/enforcement matters at the SEC, NYSE, AMEX and FINRA.
Mr. Sobel was a Floor Member of the New York Stock Exchange from 1982 through 1991 as a floor broker for both H.A. Brandt & Co. and First Options of Chicago, and President of his own NYSE member firm, Ampro Securities, Inc. After leaving the NYSE floor, he was a Senior Equity Trader/Market Maker for Trimark Securities.
Mr. Sobel has an MS from Brooklyn College and a JD from Pace University Law School where he was an Editor of the International Law Review. Since 1998 he has been a member of the FINRA Board of Arbitrators, a current member of the FINRA Small Firm Advisory Board and District 10 Committee, Board of Directors of NAIBD, and the National Society of Compliance Professionals.
Mr. Sobel has been quoted in and/or interviewed by: Compliance Reporter, Dow Jones Newswire, Complinet, Traders Magazine; Op/Risk and Compliance Magazine; Institutional Investor News, BD Week and is a frequent speaker at securities conferences for SIFMA, NSCP, NRS, NAIBD, Strategy Institute and FMW. Recent Conference topics include: Managing Risk at Small BD; Internal Audits; Supervisory Responsibilities, Social Networking and Forensic Compliance.
He is admitted to practice before the Supreme Courts of NY and CT, the US District Courts for the Southern and Eastern Districts of NY and the Second Circuit Court of Appeals. He is a member of the New York County Lawyers Association (Securities and Exchange Committee), the New York State Bar Association (Section on Alternate Dispute Resolution) and the American Bar Association (Section on Securities Litigation).
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