When these new SEC rules kick in next month, they won't just affect institutional investors - they could end up killing the markets.
- The Unintended Consequences of These New SEC Rules Could Kill the Rally - or Worse
- Shah on "Manipulating the Manipulators"
- Why the UBS Dark Pool Fine Is So Absurd
- The Truth About This "Meltdown" Indicator
- SEC Conflict of Interest? Tell Us What You Think of This One
- The Greatest Criminal Enterprise in the World
- How SEC "Revolving Doors" Protect Wall Street's Fraudsters
- Dark Pools of Liquidity Are a Big Problem for Free Markets
- How to Buy Penny Stocks
- Don't Let Mary Schapiro Tread on Your Money Market Funds!
- Dodd-Frank Isn't Legislation; It's a Comedy
- Why the Volcker Rule is a Cop-Out and a Joke
- The New Money Market Fund Rules You Could Face
- High-Frequency Trading Could Cause Another Flash Crash
- By Yanking the Teeth Out of Dodd-Frank Act Ratings Rules, SEC Blunts Hope for Real Financial Reforms
- GM's IPO Filing Reveals Challenges That Could Discourage Investors
Navi Sarao's arrest for his alleged role in 2010's "Flash Crash" is absurd in the context of the legal, perfectly sanctioned market-thwarting electronic hijinks that happen every day - with the SEC's blessing. Here's what the regulators just don't get...
The UBS dark pool fine announced last week is yet another example of the U.S. Securities and Exchange Commission dropping the ball on one of the biggest schemes staring them right in the face.
The SEC came down on UBS Group AG (NYSE: UBS) for not following the rules and regulations that make markets fair and orderly - and also for not being honest to its clients.
We talk about why you should always be in the stock market (and NOT for the same reasons Wall Street wants you in, either). That's because being in the markets allows you tap into the inevitable growth that comes from capitalism and, by implication, humanity's upside.
Lately, though, people are beginning to doubt the premise behind that Total Wealth tactic.
That's due partly to recent trading action (which is unsettling), and partly due to the hype surrounding various indicators that are almost "guaranteed" to show a looming meltdown (which is unnerving).
Right now the scary indicator making the rounds is record "total margin debt." Chances are you've probably seen the emails, too.
According to the New York Stock Exchange, investors have borrowed more than $457 billion against their brokerage accounts as of November 2014 - a new record. The social meme - the mantra, if you will - is that so much debt is unsustainable, and that it potentially undermines the entire market.
I get that... Debt is a four-letter word after all, especially when it comes to the central bankers and Wall Street fat cats. But this is different.
In fact, I'd even go so far as to chalk this up to another case of "it isn't what it seems."
Is this an SEC conflict of interest, or is it perfectly reasonable? We present to you the case of SEC top official Keith Higgins.
From the Editor: Shah Gilani is one of the few people who can show you how it really is. In this case, he's going to show you the real reason the Fed chose not to taper. If you're overly idealistic, don't read this. It will only anger you. That, of course, is why Shah's naming names today...
Ben Bernanke is the don of the greatest criminal enterprise in the world.
And yesterday his made monsters, the Five Families, lined up to kiss his ring, again.
By not "tapering" or reducing the $85 billion a month ($45 billion in Treasuries and $40 billion in agency mortgage-backed securities) the Fed is buying from banks, the Fed is saying to its hit men, "We are family, and as long as Johnny Law is coming after you, we've got your back."
The "legal and litigation costs" (that means lawyers and fines) racked up by America's Five Families since the credit crisis gently (not) ushered in the Great Recession is over $103 billion, by some estimates. That doesn't include actual losses from related activities.
The Five Families, according to the Federal Reserve, are big, very big bosses in their territories, which means America and a good part of the world.
Wall Street takes care of its own through the Securities and Exchange Commission. Capital Wave Strategist Shah Gilani reports on this sham. Read More...
by Greg Madison, Associate Editor, Money Morning
Everything runs on liquidity. Unless you know something I don't, that dollar bill in your pocket is just as likely to buy a can of Pabst Blue Ribbon today as it was yesterday, and will be tomorrow.
Or you could sell 1,000 lbs. of gold - if you have that lying around - without fear of completely scuttling the global gold market. Your bank has to have cash, liquidity, lying around somewhere in the back if it wants to stay in business.
And in many cases, it's easy to see or verify this liquidity. It helps everyone feel better about doing anything.
But there are markets where this liquidity is kept off the open exchanges, where it can be used to juice up huge deals. Or it can prevent these huge deals from having the impact that they "should" have, keeping the hands of large traders hidden.
These are the sinister-sounding dark pools of liquidity.
Dark liquidity is generated and stored in a variety of ways, most of which are possible due to the huge variety of trading venues, electronic and traditional.
With dark pools, neither the size of the order nor the entity making that order can be known until the order is completed. Rosenberg Securities Inc. estimates that fully 15% - trillions of dollars - of all trades occurring on American exchanges, every day, utilize dark pools.
Not Playing Straight Poker
And the markets, like nearly everything else, operate on the wide availability and transparency of good, reliable information. A poker game gets its lurid thrills from the partial presence of that information, or the possibility that the information could be faulty. You wouldn't want to play with all your cards face-up. You just don't know, and that's why it's fun to play poker.
But the markets, despite some inkling to the contrary, can't function with true optimum efficiency if good information isn't available to the widest possible group of participants.
It's not that a player has to have the information, but it should be available to the player if things are going to work the way they should. One is a vying, gambling game, and the other is a free market. We should be able to tell the difference.
That's why a clear understanding of how to buy penny stocks is essential before diving in to the market.
You see, behind the potential for large gains is the indisputable fact that many of today's most dynamic companies were once little more than penny issues themselves.
That means that at least a few of tomorrow's market leaders are currently lurking among stocks listed on the Over-the-Counter Bulletin Board (OTCBB) or the so-called "Pink Sheets."
Penny Stocks That Hit it BigAs proof, consider just three examples.
These are companies that have risen from true penny status to positions of prominence handing early and enduring investors almost unimaginable profits:
- Green Valley Coffee Roasters Inc. (Nasdaq: GMCR) - Thanks to four splits, 100 shares purchased in October 1998 at $4.62 a share ($462) is now 2,700 shares priced at $20.45 a share, worth $55,215. But the stock actually hit $107.99 in September 2011, making it then worth $291,573.
- Bally Technologies Inc. (NYSE: BYI) - Two splits turned 100 shares of this gaming-machine maker purchased at $1.69 a share ($169) in May 2000 into 400 shares, now priced at $45.98 and worth $18,392.
- Jos. A Bank Clothiers Inc. (Nasdaq: JOSB) - You could have purchased 100 shares of this clothing retailer in November 1999 at $2.78 a share ($278). After four splits, that position has turned into 351 shares now priced at $41.29, worth $14,492.79. At the height in May 2011 those shares were $56.05 each, worth a total of $19,673.
It doesn't include the many penny mining stocks that exploded upward with skyrocketing resource prices or "fallen angels" like Bank of America (NYSE: BAC). A complete listing of such stocks would go on for pages.
Of course, a listing of stocks that have gone from penny status - defined by the Securities and Exchange Commission (SEC) as "a very small company priced below $5.00 per share" - down to zero would be far, far longer. That's why these stocks are among the riskiest on the board.
That's the challenge for investors - avoiding the big losers in the penny stock market.
SEC chairman Mary Schapiro announced last week that she has set her sights on your money market funds.
I'm sorry, but that makes no sense at all.
Losses on money market fund investments have been trivial in the almost 40 years they have existed.
What's more, they haven't added to the tottering instability of global finance. Not one wit.
Her attempt to come down on money market funds is nothing more than crony capitalism at its most unpleasant.
The regulators, who under the Obama administration simply like regulating, are just in cahoots with the big banks, seeking to eliminate their competition.
In this case, what the banks would like to do is simply turn back the clock.
After all, in the 1960s, banks had a very easy life, because interest rates were regulated.
The old adage was "3-6-3" banking - borrow at 3%, lend at 6% and be on the golf course by 3 p.m.!
It was a good deal for the bankers but not such a good deal for those forced to lend to the banks at 3%--especially as inflation rose in the late 1960s to 4%, 5% and higher.
In fact, it was no wonder that when I first opened a U.S. bank account in 1971 that I was rewarded with a full set of bone china! Attracting savings was THAT profitable!
But all of this changed with the establishment of money market funds.
And then I called the parents of the Volcker Rule, the Dodd-Frank Act, a "joke."
Well, by the amount of comments I got back from I&I readers - right now, there are about 95,000 of you (and counting) - you'd think I was talking about something really controversial, like contraception, for heaven's sake.
Talk about passionate!
I understand that people get passionate about contraception. After all, without all that passion, we wouldn't need contraception.
But me being passionate about the birth of the Volcker Rule, which I said should never had been conceived, apparently caused a lot of to you think I crossed some moral line.
Not me! I'm not one to ever say anything controversial! And I'm certainly not the kind of guy to wade into the contraception debate.
But, if I was, I'd be a strong advocate for it.
The unwelcome birth of the Volcker Rule is a good example...
For heaven's sake! What's the big deal? After all is said and done, there is only one real problem with it (and I'll get to that in a minute)...
The 300-page draft Rule, named after its champion architect, former Federal Reserve chairman and inflation-fighting icon Paul A. Volcker, is an addition to the ever-evolving masterpiece of legislation (yes, I'm being sarcastic) known as the Dodd-Frank Act.
Now, draft SEC rulemaking and regulatory actions are first submitted to the public for "comment." The SEC collects all comment letters and posts them on their website.
Well, wouldn't you know it, this draft (some might call it "daft") Volcker Rule has caused a flurry of letter writing; letters were due to the SEC by no later than this past Monday evening.
All in all, this august (not the month) regulatory body received 241 detailed comment letters (that's a lot of comment letters) and an astounding 14,479 mostly form letters, as well.
Almost all of the form letters to the SEC, many of which were "personalized" by submitters, were strongly in favor of the Volcker Rule and called for strengthening it and not watering it down by allowing any exemptions.
How do I know that? (No, I didn't read them all.) They resulted from an e-alert campaign to activist supporters of the Americans for Financial Reform group and Public Citizens, who posted appeals on their websites.
Other notable comments in favor of the Rule, and weighing-in in more detail, came from Paul Volcker himself and Senators Carl Levin (D-MI) and Jeff Merkley (D-OR), who championed the Volcker Rule in the Dodd-Frank legislation and in their comments called the draft too "tepid."
The lengthiest comment letter in favor of the Rule (and of tightening it significantly) came in the form of a 325-page love letter from the Occupy Wall Street movement.
However, of those 241 detailed comment letters, most of them came from detractors.
Detractors like individual banks (who normally let their dogs and lobbyists do their biting) and industry groups, such as the Securities Industry and Financial Markets Association (Sifma) and the Center for Capital Markets Competitiveness at the U.S. Chamber of Commerce.
Powerhouse law firm Davis Polk was itself drafted by several banks and Sifma to help draft at least 10 letters on behalf of the cause ("cause" banks want to keep making big bonuses).
Detractors of the Volcker Rule warned of dire consequences for American capital markets, American corporations, the American economy, the world, and the universe beyond even our own little constellation, if the Rule is allowed to curtail their most coveted and conscientious shepherding of their clients' best interests.
Prop Trading, Market Making and the Volcker RuleThe Volcker Rule comes down to this:
And the next flash crash could be much worse than the one that shocked investors in May 2010.
Although the Securities and Exchange Commission (SEC) has taken some steps to prevent another flash crash caused by high-frequency trading (HFT), some experts question whether the additional disclosure and "circuit-breakers" designed to prevent big, sudden price moves will make a difference.
"Those things won't prevent another flash crash - they can't," said Money Morning Capital Waves Strategist Shah Gilani. "All they will do is soften the move."
The real issue, Gilani said, lies with the computers that execute the trades - thousands of them in milliseconds.
HFT has changed the nature of the stock market since these trades now account for between 60% and 70% of the transactions on the U.S. stock exchanges.
"You can't stop a flash crash unless you stop the computers from doing what they're programmed to do. And that's not being addressed," Gilani said. "The SEC is looking at keeping the ship from sinking, not stopping it from hitting icebergs."
HFT's heavy volume and high speed made it the prime suspect in the flash crash of 2010, when the Dow Jones Industrial Average plunged more than 600 points in five minutes, before recovering almost as quickly.
Mini Flash CrashesSince then, the frequent occurrence of mini flash crashes - when a single stock or exchange-traded fund experiences a steep and rapid drop in price that quickly reverses - have served as nagging reminders of the vulnerability of the system to such events.
"It's like seeing cracks in a dam," James J. Angel, professor at the McDonough School of Business atGeorgetown University told The New York Times. "One day, I don't know when, there will be another earthquake."
But this early attempt at reform is actually just the kickoff for a political skirmish that will pit legislators, lobbyists and other hired guns against one another on the post-financial-crisis gridiron.
These ongoing reform efforts will turn into a long affair whose outcome is far from certain.
But investors can bet on this: The millions of dollars in lobbying money that's thrown at legislators every year in an attempt to influence the regulatory rulebook will certainly influence that outcome.