How the SEC Profits from High-Frequency Trading

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"The markets are not rigged."

That's what U.S. Securities and Exchange Commission Chairwoman Mary Jo White told a House of Representatives panel on Tuesday.

She went on to say, "The U.S. markets are the strongest and most reliable in the world."

Of course she's right. The U.S. markets are the strongest and most reliable in the world.

But she's either blind or deluded if she doesn't know they are also rigged…

The SEC's Case of Cultivated "Confusion"

What prompted Chair White's defense of the markets she and the SEC are charged with regulating to ensure they are fair and transparent was a point-blank question posed by Congressman Scott Garrett, a New Jersey Republican.

Mr. Garrett, who sits on the House Financial Services Committee, was referring to Michael Lewis' explosive book, Flash Boys, and Lewis' claim that high-frequency traders have rigged the markets.

Mary Jo White is not only not deluded, but she is extremely bright.

She has a B.A. from the College of William & Mary, an M.A. in psychology, and a law degree from Columbia Law School, where she was the Writing and Research Editor of the Columbia Law Review. In March of 1993 Ms. White was appointed by President Bill Clinton as U.S. Attorney for the Southern District, which reigns over Wall Street.

In other words, she's no stranger to what insider trading really is.

She claimed that using high-speed access to exchange servers to determine market bids and offers before they are disseminated to the public, which is what high-frequency traders do to jump ahead of unsuspecting investors, doesn't actually meet the legal definition of "unlawful insider trading."

"There's some confusion about that," she said. It must have been Ms. White's law background and her tenure as a U.S. Attorney that so carefully measured her response.

What there isn't any confusion about is that the SEC has opened up an investigation into high-frequency trading. So have the FBI, the Justice Department, and the New York State's Attorney General.

The only confusion here is on the part of Ms. White. It boggles the mind to listen to the top regulator on Wall Street, of equity trading and all the stock exchanges, to say front-running public orders isn't at least some form of "insider trading."

Of course it is. The truth is the American public can't handle the truth.

The truth is that the Securities and Exchange Commission knows exactly how high-frequency traders operate, that they have unfair access to market data ahead of the public, and that they make billions of dollars a year plying their middleman, toll-taking techniques.

Mary Jo White, like her predecessors, has simply turned a blind eye to what's become of the markets. And the reason the regulators have turned a blind eye is that they have been paid to do so.

The SEC Won't Turn Off Their Money-Making Spigot

High-frequency traders pay exchanges for their order flow. That means even a start-up exchange with no business to speak of has a chance to grow into a bona-fide exchange that pays all kinds of registration and other fees to the SEC.

Exchanges want orders from brokers; their job is to match them and execute trades.

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About the Author

Shah Gilani is the Event Trading Specialist for Money Map Press. He provides specific trading recommendations in Capital Wave Forecast, where he predicts gigantic "waves" of money forming and shows you how to play them for the biggest gains. In Short-Side Fortunes, Shah shows the "little guy" how to make massive size gains – sometimes in a single day – by flipping large asset classes like stocks, bonds, commodities, ETFs and more. He also writes our most talked-about publication, Wall Street Insights & Indictments, where he reveals how Wall Street's high-stakes game is really played.

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  1. PeterW | May 2, 2014

    Best quick summary of the problem with HFT I've read – short & to the point. Only one (very) minor quibble: Mary Jo's motivation for turning a blind eye to this is less likely to be the level of SEC fee income – more likely it's her future job prospects in "The Street".

  2. fallingman | May 2, 2014

    Mary Jo White has so many conflicts of interest … reasons to pretend she doesn't know exactly what's going on … it'd take a book to catalog them all.

    But the SEC and Mary Jo aren't unique in the least. ALL "regulatory" agencies … from the CFTC to the FDA … are simply pretending to protect us, while they feather the nests of their crony insider pals. It's a gigantic con to dupe those who think that the state can safeguard the chicken coop. The truth: All they ever do and all they care to do … is enable the fox.

    By the way, it's "reigns" over Wall Street.

    • David Zeiler | May 2, 2014

      Fallingman:
      Thanks for the heads up on the spelling error. It's now fixed. And thanks for reading Money Morning!

  3. Carmen Navar | May 2, 2014

    You tell the real truth. I have lost so much money because of the lies.Now let's hear the truth so we can all make informed decisions knowing what we are getting ourselves into. Your comments give me hope that there is money to be made in the market.

    thank you

    • Mark | May 21, 2014

      Invest in a Blue Chip stock such as KO, T, PEP, K, and stop trying to trade the mkt……

  4. downtoearththinking.com | May 5, 2014

    It is all just an illusion and we really do live in a giant criminal enterprise these days . Everything in DC and most gov agencies is for sale to the highest bidder . The alphabet agencies actually enhance the criminality by turning a blind eye or selectively enforcing as they choose.

    Anybody who knows anything about economics and the default since 2007-08 knows that all the reportings and gov data are completely contrived garbage and nothing but Illusions to fool the masses and keep the Ponzi alive and well as long as possible. Nothing has been fixed or resolved, we have only dug much larger holes. The debt created can never be repaid so there will be a reset and they all know that and will say or do anything from letting the public know that part ?.

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