Market Manipulation Is Menacing to the Middle Class

By Barry Elias | Friday, 18 Sep 2015 05:54 AM

Wealth and income inequality has risen substantially since the Great Recession, and market manipulation is making matters even worse for the middle class.

Richard Grasso, former chairman and chief executive of the New York Stock Exchange from 1995 to 2003, suggests the average person is severely disadvantaged relative to Wall Street institutions and the causes need to be thoroughly investigated and corrected.

Prompting this remark was stock trading the morning of August 24, when the Dow Jones Industrial Average tanked approximately 1,000 points within the first six minutes on news of a dire Chinese economy that may portend poorly for the world.

The large sell orders precipitated nearly 1,300 trading halts, as ETF indices were unable to execute transactions in an optimal fashion and prices fell below the underlying stocks they held. TD Ameritrade experienced volumes 10 times larger than average in the first half-hour of trading, causing severe price volatility: 30 percent for Facebook within several minutes as its price moved from $86 to $72 to $84.  (Trading is halted for five minutes when there is a price move of 5 percent or more in either direction.)

Ironically, the ETF products are marketed to middle-America so they can participate in the American dream of investing in a cost-effective and diversified manner. However, the lack of adequate trading liquidity and the capital losses that result may greatly offset the low trading cost.

Grasso believes high frequency traders receive proprietary trading information ahead of others and transaction speed trumps competition and fairness. He suggests the trading of shares on more than 60 venues makes execution at the best possible price quite difficult and costly to the little guy.

Jeffrey Sprecher, chairman and CEO of Intercontinental Exchange Inc., also says the stock market is overly complex and needs simplification.

Evidence of market rigging has been uncovered in the pricing of the gold fix, LIBOR and foreign currency exchange.

Recently, 12 banks and two institutions agreed to pay $1.87 billion to settle allegations that they manipulated the $16 trillion credit default swap market by prohibiting exchanges from placing these products on open, regulated platforms where pricing is more transparent.

The 12 banks named in the suit are Bank of America, Barclays, BNP Paribus, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JPMorgan Chase, Morgan Stanley, Royal Bank of Scotland and UBS, along with the International Swaps and Derivatives Association (ISDA) and Markit Group, a data provider.

The Los Angeles County Employees Retirement Association and several Danish pension funds claimed the banks influenced the ISDA to deny intellectual property to the exchanges, such as auction price data.

As part of the agreement, the ISDA will form a committee, comprised of banks and investors that are independent of its board of directors, to license credit derivative products to exchange-like venues.

Currently, ISDA decisions are made by its board, which until 2009 was comprised entirely of bank representatives.

Dark pools have also been under intense scrutiny lately. These venues permit stock trading with greater anonymity than on the stock market exchange, amounting to a competitive disadvantage to many.

Credit Suisse tentatively agreed to pay $85 million to New York and the federal authorities for this practice. Last month, Investment Technology, a New York Brokerage, set aside $20.3 million to settle allegations of wrongdoing.

In January, the UBS Group agreed to pay $14 million for creating an unfair playing field using dark pools. And Barclays is in negotiations with the New York State Attorney General and the Securities and Exchange Commission regarding their involvement in this area.

The middle class has been ill-served by the current financial climate. Perhaps progress is afoot.

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