Main Street & Wall Street

Reader comment on: Obama's Wall Street Flip-Flop

Submitted by J.Johnson (United States), Sep 8, 2010 14:21

I don't know what Obama meant, specifically, when he referred to Main Street and Wall Street. It seems to me that they have similarities, to the extent that some practitioners on both Streets try as hard as possible to have taxpayers subsidize them. As Fut. of Cap. has noted, Kindly Uncle Warren has his nose in multiple troughs. Indeed, it's often difficult to differentiate him from the too-big-to-fail bankers who have been feeding at the Treasury and Federal Reserve troughs. The ethanol lobby and the auto industry also come to mind, as does AIG.

If Obama also meant to include small businesses in his Main Street reference, then I think some comment is called for, namely, that the vast majority of small businesses conduct their operations in an above-board, honest and fair manner, whereas much of Wall Street has morphed into a casino, run by operators who attempt to conceal as much as possible the reality of what they are doing and how they are doing it. Consider: (a) Roughly 70% of all trades on the public stock exchanges are machine-to-machine HFT (high frequency trading) transactions, often 'front-running' (with SEC approval !!) other types of trades and based on algorythmic protocols having nothing to do with the stock itself except its price; (b) On average, 50 bid/ask quotes are transmitted to the exchanges by automated trading shops (called 'quote stuffing') for every 1 trade that is actually executed, the purpose and effect of which is to defeat the SEC regulations regarding NBBO (national best bid/offer) pricing of publicly traded stocks; (c) Every year, a higher percentage of stock trades (now estimated at over 50% of all trades) take place in 'dark markets' (which the NY Times ignorantly called 'black markets' recently) where firms such as Goldman Sachs anonymously match buyers and sellers in undisclosed stock, bond, derivatives and commodity transactions, defeating longtime policies of the government to require open trading which promotes efficient 'price discovery,' and (d) Although some banks (Goldman, Morgan) have said they will close their proprietary trading desks, most banks have not committed to this and the recently enacted fin. reg. overhaul is so full of loopholes that banks that wish to continue proprietary trading can do so indefinitely, either directly (to be eventually phased out someday, somehow, by the SEC) or indirectly via ownership of interests in hedge funds.

For skeptics who might wonder why these Wall Street practices deserve criticism, a couple of examples might help: (1) Algorithmic trading, with front-running and quote stuffing still allowed by the SEC, has turned stock trading into a casino where insiders can, and do, skim profits off the top via their superior access to pricing and volume data, purchased from the NYSE and others, fed to their computers whose co-location with the exchanges own computers give them micro-second turn around times compared to everyone else's much much longer access times, and, with their ability to do quote-stuffing and sub-penny bids/offers (which exploit a loophole in the very complacent SEC's regs.), insiders can and do manipulate non-insider pricing to their advantage. These systems have also, of course, rendered the exchanges very vulnerable to 'flash crashes' such as happened recently when HFT operators withdrew enmass in a matter of seconds. Although HFT operators justify their existence by arguing that they provide liquidity, it is now clear that they can, and will, withdraw that liquidity if they sense pricing action that upsets their preprogrammed buy/sell criteria; and (2) It is now clear (even the CFTC is in agreement) that the immense runup in crude oil prices in 2008 was caused in large part by hedge funds and commodity pools which were allowed to exceed long-standing position limits because the CFTC itself had granted their requests to be classified as 'commercials' instead of 'large specs,' effectively masking their enormous position sizes amongst the positions of actual commercials, e.g., oil companies such as Exxon, and large end users, such as the airlines. The explosion of crude oil prices put hundreds of millions of dollars of profits into the traders accounts and cost the public consumers of petroleum over a billion dollars, not to mention hastening the death of at least two auto companies and the foolish, not to mention expensive, 'cash for clunkers' debacle.

To the extent that Larry Summers or anyone else approves of, facilitates and/or profits from these sorts of activities, I would say that they deserve criticism. Summers, of course, is an especially egregious example, given his steamrollering of the repeal of Glass Steagall and silencing of CFTC Chairwoman Brooksley Born.

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