Yesterday, some dramatic financial news came out, and some not so dramatic. All three are tragic. The Corzine Fraud at MF Global, the BATS botched IPO, and the flash crash in Apple ($AAPL) all have similar underpinnings.
The SEC has done a terrible job regulating the public marketplace. Instead of a cohesive rule book that recognizes form, function and risk, it’s a hodgepodge of regulations and laws that when summed create economic incentives that poorly align market structure and function to the economic incentives of the broader economy.
The beginning of the end was back in the 1990's. It’s been chronicled elsewhere, but the SOES bandits turned into today’s high frequency traders. Because of structure and regulation, they are able to create an artificial edge over the rest of the marketplace. That’s why you have investment banks trading against their customers, hedge funds paying for order flow and trading against it in a dark pool and the other poor business practices that crop up almost weekly under a failed regulatory regime.
A company like BATS should be publicly listed. It offers transparency to the public. It gives the public another place to invest risk capital. The public market gives BATS access to cheaper capital so it can ramp up operations and create more competition. Instead, it will just be another HFT dark pool like its always been.
Yesterday, Apple had a flash crash. A fat finger is being blamed, but flash crashes run deeper than that. With no human intervention, we need to re-imagine how the whole market mechanism interacts with technology. In old fashioned markets, the order filler would have sent that order back to the desk. Today, it gets entered and a cascade of dominoes fall. In case you weren’t watching, some odd trading happened in the futures market as well. Crude oil ($CL_F) traded pretty wildly.
These flash crashes still happen daily, in spite of regulators efforts to fix them. They not only damage shareholders and trades, but the important thing they undermine is the general public impression of the beneficial nature of free markets. That begins to erode at the belief we have in capitalism. It’s critical for our country’s future we regulate the market place correctly. Without a transparent and level playing field, markets become anti-competitive.