Wall Street's No Hitter

For those who think there is a "free market" represented by the DOW and other national exchanges, think again. Simply, it does not exist. High-speed computers programmed with software by the most brilliant mathematical minds alarming amounts of money can buy that track the market nanosecond by nanosecond and trigger automatic buy/sell orders, proximity to central trading floor computers and tiny details and massive data files only insiders and armies of analysts can know tilt the floor so severely in favor of the biggest and baddest boys, it's difficult for an average human being to stand upright. Yeah, we know the "flash trading" (instant computer trades) have been banned – without any penalties, by the way – and everyone knows "insider trading" is a felony (just ask Martha Stewart), but Wall Street is the master of walking the fine line and finding the loophole. Wall Street now relies on "high frequency trading" where numerous transactions, back and forth, squeeze the value out of every market movement.

On May 6^th, the Dow plunged – some say because a trader at a large bank erroneously made a trade but moved the decimal point a few notches over (from "million" to "billion") and all the "movement sensitive" computer programs kicked into automatic mode. Others point to the reactions of the Greek populace to new austerity measured required as a condition of IMF and European economic assistance; images of rioters burning cars flashed onto the screens at trading desks all over the world. These visuals, some claimed, underscored the uncertainty of any so-called "recovery" in the global economy. Maybe it was "everything." The government wants to know, to find a way to put the brakes on such precipitous volatility. The Los Angeles Times (May 12^th): "The SEC and the Commodity Futures Trading Commission are sifting through records of the 66 million trades 17 million during the most volatile hour alone [May 6^th], when the Dow Jones industrial average plummeted 700 points in just 15 minutes." They still haven't figured it out.

Representative Brad Sherman (Democrat, California) thinks a small "trading tax" would make such high frequency movement uneconomic; Republicans responded that Wall Street should not be punished for using better technology to address the marketplace. Others favor halting trading automatically (now reserved only for market changes of 10% or more), starting at the 5% level, and that is where SEC Chairperson Mary Shapiro and the various national exchanges are set to go at this time. Battles are being fought everywhere, with stiff resistance from the industry.

As legislation that would tighten regulations on financial institutions moves through the Senate, the requirement that derivatives be regulated and traded on an exchange with default coverage is still in the bill despite the stringent opposition of the Street: "Trading in derivatives is dominated by the nation's five biggest banks, JPMorgan Chase, Goldman Sachs, Bank of America, Citigroup and Wells Fargo, and by one count, the banks had enlisted a cadre of more than 130 lobbyists to help reshape the legislation." May 13^th NY Times. Trading derivatives these days is looking more and more like a cadre rich and fat spectators making side bets on the many horse races – laughing at the outcome. Folks – like New York's Attorney General, Anthony Cuomo – are asking why credit agencies were rating junky derivative bundles of subprime mortgage debt generated by major financial institutions – notably Goldman Sachs Group, Morgan Stanley, UBS AG, Citigroup, Credit Suisse, Deutsche Bank, Credit Agricole and Merrill Lynch (now a part of B of A) – as A, AA or even AAA? What exactly did these banks provide to the credit rating agencies that could possibly have generated such a favorable review? Was this the banks' fault… the rating agencies' fault… both… or – "unlikely" – none of the above?

Whatever they do, these mega-institutions seem to have the system down (or properly tilted in their favor), even as everybody else in the country has to pay for their excesses that brought the entire economy down. And that is a much, much bigger problem. Try this little observation reported in the May 11^th New York Times and see if you get any more sleep at night: "Despite the running unease in world markets, four giants of American finance managed to make money from trading every single day during the first three months of the year." Their remarkable 61-day streak is one for the record books. Perfect trading quarters on Wall Street are about as rare as perfect games in Major League Baseball. [On May 9^th], Dallas Braden of the Oakland Athletics pitched what was only the 19th perfect game in baseball history… But Bank of America, Citigroup, Goldman Sachs and JPMorgan Chase & Company produced the equivalent of four perfect games during the first quarter. Each one finished the period without losing money for even one day." Morgan Stanley missed the cut; it had four net loss days during the same period.

Think of all of the volatility in the last few months. Still believe this is a "free market"? If you do, please be aware that the hallucinogens you are consuming are probably illegal; you may be prosecuted even as larger and darker mega-forces operate "freely" in the marketplace – wreaking havoc on many occasions – and knowing that they will never face an angry prosecutor; their lobbying efforts have sanctified their villainy.

I'm Peter Dekom, and I really have no problem with folks who earn billions in profits when they really create the values that justify that level of compensation or upside.