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Wall Street Regulation: Different Day, Same Dog$hit

Posted by Larry Doyle on October 3, 2012 9:05 AM |

Despite a wealth of political bluster that Wall Street has been reformed, we awake this morning to see that very little has really changed on this front. Financial regulatory reform? Not today, folks.

The simple fact is when it comes to Wall Street regulation, investors, consumers, and the American public at large are being fed the same helping of dog$hit.

We need look no further than a meeting held just yesterday of industry executives and securities regulators to see exactly this. 

Let’s navigate as The Wall Street Journal writes, Market Complexity Cited in Snafus,

Wall Street firms and exchanges should better police each other to prevent and reduce the cost of technology gaffes, industry executives and researchers told securities regulators Tuesday.

Five years of excruciating economic anxiety. Trillions of dollars of taxpayer funded bailouts. Countless numbers of financial regulatory disasters and this is what we are being fed. The same dog$hit collectively delivered as financial self-regulation. Where is a real spokesman for the American public to look these Wall Street firms and exchanges in the eye and say, “I don’t think so, gentlemen.” I suggest we call Joe Saluzzi and Sal Arnuk at Themis Trading and lay the issues of destructive, incestuous activities regularly transpiring in our equity markets out in spades.

We see further evidence of self-regulatory dog$hit in reports that investigations of insider trading cases are escalating. The FT highlights this point this morning in writing,

FBI agents are also trying to work more closely with market regulators who often spot irregular trading through surveillance. Mr Barnacle said the FBI was seeking information from the Financial Industry Regulatory Authority, a self-policing body . . .

Do the Feds really have confidence in engaging the industry funded police at FINRA? Just two months ago I highlighted the fact that the FINRA meter maids wrote a lot of tickets but few of very real substance.

What is the simple conclusion?

Self-regulation DOES NOT work on Wall Street. To think that an industry fixated on maximizing revenues will properly police itself is ridiculous. Until that reality is addressed, acknowledged, and changed, our nation as a whole will continue to suffer from the accompanying incestuous crony capitalism that brought us to this point in the first place.

Be very careful that you do not step in the piles of poop as you navigate accordingly.

Larry Doyle

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I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.


  • Peter Scannell

    SROs have got to go!

  • Peter Scannell

    “Eugene Scalia, who is 49 years old, doesn’t argue before the Supreme Court or share in any revenue that his law firm earns as a result of Supreme Court cases, since having a financial stake in a case could lead his father to recuse himself. Justice Scalia declined to be interviewed for this article.”


    If you want to do away with undesirable regulation, just get a Supreme Court justice’s son to talk to daddy.

    The fix is still in, and mom and pop don’t have a clue!

    Another Scalia Vexes Regulators

  • LD

    To my point, I offer the following release from the SEC. I thank the reader who brought this to my attention.

    SEC Charges Boston-Based Dark Pool Operator for Failing to Protect Confidential Information


    Washington, D.C., Oct. 3, 2012 — The Securities and Exchange Commission today charged Boston-based dark pool operator eBX LLC with failing to protect the confidential trading information of its subscribers and failing to disclose to all subscribers that it allowed an outside firm to use their confidential trading information.

    Additional Materials
    SEC Order
    According to the SEC’s order instituting a settled administrative proceeding, eBX operates the alternative trading system LeveL ATS, which it calls a “dark pool” trading program. Dark pools do not display quotations to the public, meaning that investors who subscribe to a dark pool have access to potential trade opportunities that other investors using public markets do not. eBX inaccurately informed its subscribers that their flow of orders to buy or sell securities would be kept confidential and not shared outside of LeveL. eBX instead allowed an outside technology firm to use information about LeveL subscribers’ unexecuted orders for its own business purposes. The outside firm’s separate order routing business therefore received an information advantage over other LeveL subscribers because it was able to use its knowledge of their orders to make routing decisions for its own customers’ orders and increase its execution rate. eBX had insufficient safeguards and procedures to protect subscribers’ confidential trading information.

    eBX agreed to pay an $800,000 penalty to settle the charges.

    “Dark pools are dark for a reason: buyers and sellers expect confidentiality of their trading information,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “Many eBX subscribers didn’t get the benefit of that bargain – they were unaware that another order routing system was given exclusive access to trading information that it used for its own benefit.”

    According to the SEC’s order, eBX and the outside firm it hired to run LeveL signed a subscription agreement in February 2008, after which the outside firm’s separate order routing business began to use certain LeveL subscribers’ confidential trading data. In November 2008, eBX signed a new agreement with the outside firm that allowed its order routing business to remember and use all LeveL subscribers’ unexecuted order information. As a result of the agreements, the outside firm’s order routing business began to fill far more of its orders than other LeveL users did. Its order router also knew how other eBX subscribers’ orders in LeveL were priced and could use that information to determine whether to route orders to LeveL or another venue based on where it knew it might get a better price for its own customers’ orders.

    According to the SEC’s order, eBX failed to disclose in required SEC filings that it allowed LeveL subscribers’ unexecuted order information to be shared outside of LeveL.

    In addition to the $800,000 penalty, eBX was censured and ordered to cease and desist from committing or causing further violations of certain provisions of the federal securities laws regulating alternative trading systems.

  • Andrew

    The funny thing is, FINRA can’t even make a profit from their extortion!

  • LD

    My oh my. No surprise with this news. Same old, same old.

    The falling number of fraud prosecutions is striking given what many claim is a strong pattern of financial-sector misconduct in recent years, culminating in a housing crisis characterized by alleged rampant mortgage fraud and improper foreclosure, as well as the weakening of the national and global economy.

    The TRAC report, which compiles Justice Department data obtained through the Freedom of Information Act, notes that 2011’s relatively low number of financial fraud prosecutions is only the continuation of a trend spanning more than a decade.

    Every year since 1999, the number of such prosecutions has gotten smaller and smaller, the report states. This means, for example, that there were more prosecutions in any given year during the presidency of George W. Bush than in any year during the presidency of Barack Obama.

    David Burnham, a co-director of TRAC, told The Huffington Post that the fall-off in financial fraud prosecutions most likely does not reflect a fall-off in financial fraud itself.

    Federal Prosecution of Financial Frauds Falls to a 20 Year Low

  • Rick Johnson


    I have thought long and hard about a better alternative to FINRA. I believe the issue of compliance should be handled by a private firm not affiliated with FINRA, or the Insurance industry, or the registered investment adviser industry. We should have combined oversight of FINRA registered representatives, insurance agents and registered investment advisors. The problem is the disparate regulations.

    Take Financial Planning for example. There is a regulation on the books that you cannot hold yourself out as a Financial Planner unless you are a registered investment adviser representative. FINRA registered representatives wear two hats and can give Financial Planning advice and still slam people in products that are not in their best interest. They have quotas that they have to reach to keep their job. They will do or say anything to reach these quotas.

    Insurance agents routinely advise people to sell securities without a license. They also routinely call themselves Financial Planners without a license. There is a guy in my town who calls himself a VA Financial Planner because he calls on Veterans. There is no such thing as a VA Financial Planner. The truth is he is only an insurance agent.

    My thoughts are, if you are FINRA licensed, then you pay a compliance fee to this private compliance auditing firm. If you are insurance agent, then you pay a fee. If you are a registered investment adviser, then you pay a fee for compliance. If you are licensed with all three, then you would pay three fees.

    The Compliance Auditors Association would be skilled compliance examiners who know how to examine all three types of licensees. When they find a violation, then they simply report it to either FINRA, state securities regulators, state insurance regulators or the SEC. The Compliance Auditors Association would be funded entirely by the licensees and have no authority to fine anyone, nor take them to court. That would be left to the regulators. This is essentially outsourcing compliance away from the regulators for routine exams. When violations are found, then they are reported to the regulators.

    The Compliance Auditors would not have incentives to fine people. They would have no incentive to institute a witch hunt against someone. They would also be completely self sufficient and not need any taxpayer dollars. The regulators would be able to save examination costs and reap the benefits of more boots on the ground to police all three channels of financial services.

    It is not a perfect system, but I think it is an outside the box approach that would be better than the current disparate mix of regulation and rules that allows for people to be victimized.

    For what it is worth. My two cents.

  • Amen.

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