Home > finance, rant > Dissolve the SEC

Dissolve the SEC

October 6, 2012

A few days ago I wrote about the $5 million fine the SEC gave to NYSE for allowing certain customers prices before other customers. I was baffled that the fine is so low- access like that allows the customers to make outrageous profits, and it seems like the resulting fine should be more along the lines of those profits, since kickbacks are probably in terms of percentages of take. The lawyer fees from this case on both sides is much higher than $5 million, for christ’s sakes.

But now I’m even more outraged by the newest smallest fine, this time an $800,000 fine for a dark pool trading firm eBX. From the Boston.com article:

Federal securities regulators on Wednesday charged Boston-based eBX LLC, a “dark pool” securities exchange, with failing to protect confidential trading information of customers and for failing to disclose that it let an outside firm use their trading data.

The Securities and Exchange Commission said eBX, which runs the alternative trading system LeveL ATS, agreed to settle the charges and to pay an $800,000 penalty.

You know that if I can actually consider paying the fine myself, then the fine is too small. It’s along the lines of the cost of college for my kids.

Look, I don’t care what it’s for: if the SEC finds you guilty of fraud, it should threaten to put you out of business. Otherwise why should they waste their time doing it?

On the one hand, I’m outraged that these fraudulent practices are being so lightly punished. Indeed it’s worse than no punishment at all to get such a light punishment, because it establishes precedent. Now exchanges know how much it costs to let certain traders get better access to data than others, and as long as they charge sufficiently, they’ll be sure to make profit on it. Similarly dark trading pools know how much to charge third-party data vendors for their clients’ “confidential trading information.” Awesome.

On the other hand, I’m outraged at the SEC for not picking their fights better and for general incompetence. Here they are nabbing firms for real fraud, and they can’t get more than $800,000? At the same time, they’ve decided to go into high frequency trading but what that seems to mean to them is that they’ll finally collect some tick data. I’ve got some news for them: it’s gonna take more than a little bit of data to understand that world.

The SEC needs to concentrate more on not trying to keep up with the HFT’ers of the world, since it’s a lost cause, and spend more time thinking through what policy changes they’d need to actually do their job well – for example, what would they need to get Citigroup and Bank of America to admit wrongdoing when they defraud their customers? Instead of wasting their time trying to keep up with HFT quants, what would they need to institute a transaction tax, or some other policy to slow down trading? What would they need to be able to shut down firms who sell confidential client trading information?

The SEC needs to write a list of policy demands, pronto.

And if the political pressure the SEC receives to not actually get anyone in trouble is too strong for them to do their job well, they should either quit in protest or make a huge stink about being kept from completing their mission.

I get it, I’ve talked to people inside the SEC who want to do a better job but feel like they aren’t being given the power to. But I say, enough with the resigned shrugs already, this stuff is out of control! Continuing in this way is giving the public the false impression that there’s someone on the case. Well, there’s someone on the case, all right, but they aren’t being allowed to or don’t see the point of doing their work. It’s bullshit.

I say dissolve the SEC so that people will no longer have any false hopes of meaningful financial reform.

I’ve been reading Sheila Bair’s book Bull by the Horns, and it’s really good. Maybe by the end of it I’ll have changed my mind and I’ll see a place for the SEC. Maybe I’ll have hope that these things have natural cycles and the SEC will have another day in the power position, like it had in the 1980’s. But right now I’m in the part of the book where the regulators, apart from the FDIC, are taking orders directly from financial lobbyists, and it makes me completely crazy.

Categories: finance, rant
  1. mathematrucker
    October 6, 2012 at 11:46 am

    Giving the public false impressions is something even more American than apple pie.


    • October 6, 2012 at 11:58 am


      It doesn’t have to be! I still have hope.



      • Foppe
        October 7, 2012 at 7:01 am

        But doing so is the point of the exercise.. Once the institutional arrangements are in place, antisocial actions like the ones discussed — and the state will use its monopoly of force to enforce this ‘view’ — suddenly become “legal” rather than “moral” issues.


  2. Bindicap
    October 6, 2012 at 11:53 am

    This eBX case looks like exactly the thing that I want the SEC to chase down. Did you read their release or complaint?


    Click to access 34-67969.pdf

    It seems like an unnamed Service Provider is the one that benefited from the extra knowledge. I expect some follow up action related to that. I don’t have a feel at all for how this will play out for eBX or what their revenues are, but it wouldn’t surprise me if they are done after this due to clients abandoning them. (Wild guess — will have to watch.)

    The SEC was a basket case in the Harvey Pitt days, and then they had huge demands and complex situations to sort through in the last few years. I think it’s right to demand the SEC focus on market problems and bad actors, and I really don’t get the call to dissolve it. I can’t even tell how earnest you are about that, as your piece seems more like a lament than something focused on useful lessons.


    • October 6, 2012 at 11:57 am


      I am earnest. I don’t see another way for people to take the situation seriously. Also, I don’t think it’s enough for the SEC to point to the bad guys and let “the market” punish them. For one, what it really points to, as I mentioned in my post, is how expensive (or inexpensive) misbehaving is, which is an incentive for more misbehaving.



      • lew
        October 8, 2012 at 12:50 am

        I have never, I believe, seen the hard costs analysis of a zero-regulation environment == entirely market based control, vs a defrauded value * number + taxes.

        How much marginal profits could a company charge if there were a smart phone application that allowed you to judge the alignment of a particular profit with your values? The app is easy, the databases and connections difficult to obtain, incomplete, and subject to interpretation. But they would at least be out there for all to see in several competing sites, for all to judge.

        What marginal profits would be needed to keep companies honest, to keep the bad guys going broke during the inevitable corporate churn?

        I haven’t seen a good case from either side about the costs. But the recent news that the customer satisfaction for an anonymous online drug bazaar was 97% makes me think human nature is good enough most of the time for the world to scrape by without regulators. Also, the fact that they did so for 1000s of years before modern governments.


        • lew
          October 8, 2012 at 12:55 am

          sentence I forgot in the above :

          What %age “good hearted” do average humans need to be to use the app, pay pennies for goodness and simultaneously protect themselves from dishonesty and feel good about themselves in order for us to have equal-to or better protection from pollution and other forms of anti-social behavior than we currently have?


  3. None
    October 6, 2012 at 1:29 pm

    Surely the eBX fine from the SEC is irrelevant. Companies/individuals that were using them for secret trading should presumably sue them for breach of contract, and switch to a more trustworthy competitor.

    I don’t really think the whole concept of “secret trading” is something that promotes the two most important aspects of a market: honesty and integrity.


    • October 6, 2012 at 11:58 pm

      Many who bought “designed to fail” MBS and other fraudulent products haven’t switched or sued. Evidently, some of these markets have significant barriers to switching. I see very little evidence that the self-regulatory mechanisms you allude to are producing trustworthy and transparent financial firms.


  4. Martin Winslow
    October 6, 2012 at 2:00 pm

    I stumbled upon this the other day, and it may shed some light on the ineffectiveness of the SEC. The courts don’t seem to be backing them up due to the 1996 “National Securities Markets Improvement Act”, and in particular “Sec. 106. Promotion of efficiency, competition, and capital formation.” The law can be found here:

    Click to access PLAW-104publ290.pdf

    The Washington post ran a piece about opposition to Dodd-Frank where I was first made aware of this law:


    The corporate lawyer spearheading some of this is none other than Eugene Scalia, Justice Antonin Scalia’s son. Like father, like son I guess. I continue to be baffled (and dismayed) by all of this since it all just seems to portend a “Great Depression 2.0”. Let’s hope financial reforms don’t get sabotaged for too much longer…


  5. October 6, 2012 at 2:05 pm

    A transaction tax (perhaps politically impossible) would cripple HTFers without being Luddite.


  6. October 6, 2012 at 10:21 pm

    Gee, the cops are corrupt. Quick! Shut down the police department!

    This seems to be the political line of reasoning we follow where any sort of financial crimes are concerned. Since the government isn’t being effective at reining in bad behavior by large corporations, we should just cut the government down to a size where … what? Large corporations will have absolutely NO check on their bad behavior. Sure sounds like a winner to me … if you LIKE the bad corporate behavior.

    The alternative is for government to become more responsive to public interests OTHER than large corporations. But since so much of the public responds with this “fire the cops” reasoning, we’re all just collectively surrendering to the war lords who want to rule without interference from pesky ‘public sector’ weenies.


    • October 7, 2012 at 12:12 am

      Sometimes a fruit tree is so diseased that root and branch reform just can’t make it productive. In the long run, it’s better to cut down the diseased tree and plant another. I don’t see why the other can’t be planted in the public sector.


    • danip
      October 7, 2012 at 6:57 am

      What I understand of what she is saying it that arbitrariety is much worse that authoritarianism or the simple lack of rules.

      If you are in the jungle you know there are no rules and that you can’t expect anything from anyone. Many can live with it.

      If you live in a society you expect rules to be honored. Imagine you are being harassed by an invisible man who hits you and fools you whenever he feels like it. Would you be able to survive the uncertainty? I bet you would rather commit suicide than living like that.


      • mathematrucker
        October 7, 2012 at 2:04 pm

        Imagine a societal rule that provided the 1% with the not-just-intellectual luxury of experiencing life in poverty for a whole year. For good measure, toss in the additional conditions faced by someone just freed from a for-profit prison somewhere in the nation’s heartland, years after being convicted of a meaningless “crime”. Now there’s a person I’m willing to bet would jump at the first opportunity for suicide!


  7. lew
    October 7, 2012 at 2:46 pm

    Math Babe, you are technical enough to understand the difference between open, evolving, complex systems and mechanisms.

    You probably understand enough general background in Computer Science to understand that we can produce control systems for mechanisms, not complex systems, much less open, evolving, complex systems.

    Regulatory apparatuses are attempts at control systems. Banks and other markets are not mechanisms.

    Of course the SEC doesn’t work. Of course the Fed has perverse consequences relative to the stated goals. Of course all such regulatory apparatuses have perverse consequences, e.g. the educational establishment produces more people who are both illiterate and hate edudcation than any entity in human history.

    Give it up, that entire approach to dealing with econo-socio-political systems has not worked, is failing everywhere in the world. And at the same time, due to the intellectual monoculture our Intellectual Elites have fostered.


    • lew
      October 7, 2012 at 9:28 pm

      To continue that line of thought :

      I just watched a video blog post by Penn Gillette to the effect that “Liberals think they understand everything”. That is a good example of an expert using their expertise and critical thinking to illuminate the reality around them, tho Penn could drive you crazy while he does it.

      You could easily do emulate the expertise + critical thinking, rather than merely being another voice in the echo chamber.

      For instance, given a fractally-dimensioned nature, can we encompass any subsection of reality with rules? How to enforce rules in a way that minimizes side-effects?

      Given a limited and probabilistic view of the future, are there algorithms that can guide us to a desired future? What are the conditions for that and the payoffs in models with differing abilities to predict? The effects of real vs normal distriutions? (Taleb’s “Black Swan” on this.)

      There should be math behind any such thinking, and your strengths in math and writing could help me see it.

      The internet is a mechanism equally suited for echos or insight. Probably echos produce the most cross-links and hits, but serious people will notice your insights, if any, and those will be your long-term legacy.


  8. Bobito
    October 11, 2012 at 7:45 am

    When I read this – “You know that if I can actually consider paying the fine myself, then the fine is too small. It’s along the lines of the cost of college for my kids.” – referring to an 800K fine – I know that you live in a world as remote from my own as that of the banks.

    I am a university professor in Europe. With my current income I would have to work for 20+ years to make 800K.

    Actually, I can’t even make sense of the statement. Even supposing you have 4 children and send them all to Harvard, full price, I don’t see how you get to 800K.

    Please don’t misunderstand. I am not disagreeing with your point. I am simply saying that for an average person (not to say your average reader) your point is not helped by comparing with what you can pay, since for the average person 800K is an extremely large amount of money.


    • October 11, 2012 at 8:36 am

      It’s crazy but it’s true. I have three kids but if I had four, then it would cost about that; in other words, about $50K per year per kid. Note my kids aren’t going to college for between 6 and 14 years, so I’m extrapolating and ballparking, but I think I’m about right. In fact it’s already that expensive at Harvard, see this.


    • mathematrucker
      October 11, 2012 at 1:39 pm

      For the purpose of illustrating that a corporate fine for unlawful acts involving relatively large amounts of money is too small, it is entirely valid to compare said fine to the cost of sending a few kids to college.

      Speaking of which, it turns out that Harvard isn’t the only place that costs $50K/year. Dr. Raynard Kington, president of Grinnell College (in Iowa), was interviewed on public radio’s “Marketplace” the other day:


      According to the page at the above link, “Tuition, plus room and board, currently cost $50,000 per year, but many students receive financial aid.”


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