July 27, 2010
I am suprised that the SEC is still requesting comments on the issue of market structure since there have been many consturctive comments that clearly tell the SEC what the problem with the structure is ....it's unfair, unequal and unstable
Will the SEC need another May 6th to finally act to put in place the rules to address the "real" problem with the market structure ie: HFT's (High frequency traders) acting as "liquity providers" without having any obligation to provide liquity, Hedgefunds, minipulating a stock or basket of stocks utilizing many "trader" tools ie: ETF's (exchange traded funds)in combination with their own HFT co-located computers to rapid fire sell orders at a security or basket of securities as in the case when using ETF's scaring everyone out of the market causing the prices to drop even more.
These and many more practices have caused the crash of 2008 and the "flash crash" of May 6th- that started just two months, I repeat just two months, after the SEC removed the last safety device from market regulation, the "UPTIC RULE" which would slow down the ability of these market minipulators and their super computers from destroying a stock and the "regular" market participants who do not have those super computers co-located next to the exchange front running the data price streams...did I say front running, oh I thought that was illegal?
In reading the comments provided by other interested parties, it is painfully obvious that the current market system is far far too complex and dislocated. This does not need to be the case, the SEC should rewrite the rule book using the "KISS" theory..."keep it simple stupid"
We do not need a system with so many moving parts, that just begs for a malfunction.
These are some of the changes that need to be made and the sooner the better or we will have another May 6th and that I can guarantee you.
1)Every participant should have access to one stream of data coming from the exchanges all receiving it at the exact same time.
2)Regulations should be put back in place "requiring" market makers to support markets.
3) Faze out HFT's as they provide no value other than to create high volumes, but clearly not liquity since they are not "required" to provide it. The only ones benefiting from HFT is themselves.
4) Hedge Funds - the SEC should take notice that since the proliferation of hedgefunds, the market volitility has increased substantially because they have "pooled" vast amounts of trading capital, i say trading because they do not use it to "invest" as that would benefit all of us, but instead to "short" stocks or "whipsaw" the market into submission on an almost daily basis. This is not the way the market is suppose to function and the SEC of 1939 clearly saw the Hedgefunds and other shorters as the cause of the crash of 1929.
5)Foster a culture of "investing" again by limiting all the "trading tools" and co-located computers, ETF's etc and by rewarding those who will "invest" with perhaps capital gains tax breaks.
The above is the simplified list of core changes that must be made inorder to restore order to the market place and to usher out this unbridled trading mentality and usher in an investor mentality as the market was suppose to be...yes SEC that means going back to the basics, we can still use computers, but centrally controlled by responsible netural players, but back to the basics of investing in companies based on fundementals and not on news headlines or who can make the other investors "flinch" using their super computers to short the hell out of markets scaring everyone out just so they the shorters can make some money...this is gaming the system and the market and one of the sole responsibilities of the SEC is to prevent the "gaming" of the Markets and for this the SEC has failed terribly.
Why is there what the SEC has called "short termism" in the market place?
The reason is that once upon a time and I will use the following as demonstration purposes only, the market was made up of say 80% long term investors operating through mutual funds, pension funds, 401K's etc. and lets say 20% "traders" happily trading between this price range and that price range, buying at the lower range and selling at the higher...NOT necessarily shorting when they sell as is done today, but simply selling and waiting for the price to drop back to their target buy range...pretty simple right, no one got hurt, everybody won, the investor has sucurity in their investments as they had only minor fluctuations based on "fundemental" changes in their companies and traders made a fair profit trading their chosen range...nobody got hurt.
Now, however, the make up of the market has reversed, now there are 80% traders (hedgers,hfts,etf's,short funds)and only 20% "investors" because all the other investors were scared out of the market and now have their capital sitting in low interest treasuries or fixed income just waiting to be deployed once the SEC finally gets their act together and stops talking about doing something about the current market situation and actually does something positive to address what I have stated above as THIS IS THE CORE PROBLEM WE FACE.
Why has this dynamic occured?
The current state of the market is the direct result of the SEC going too far in trying to fix something that was'nt that broke. What I mean is that the SEC tried to make trading more efficient in the hope of lowering trading costs for all market participents, a worthy endevor, however, as often happens in Government, they go too far and thats what has happened and the result is all these unintended consequences. They were lobbied by the big players and exchanges to relax all the rules, take all the safeguards off put on by their predessors and they gave in to this pressure.
The simple truth is the following:
Everyone knows the old saying that the market operates on two emotions...."FEAR AND GREED" and everyone knows the stronger of the two emotions is "FEAR" and that is why the Hedge Fund short traders with their computers and algorythims succeed in executing their strategies to breed fear into the markets. The hedge shorts main argument has always been "the longs never scream when the market is going up"...well that's because when the market is going up...NOBODY GETS HURT
To fix the problem and change the market back to the more desired balance, 80% investors/ 20% traders, the SEC must put back in place all the safeguards they took off, and a good place to start is putting back the "UPTIC" RULE and start taking away all these trading tools which only foster more "short termism". Let's get back to basics of buying and selling stocks based on fundementals, analyst ratings, P/E multiples and alike. This will foster stability so that the peoples pensions, 401Ks, and other saving vehicles will be safe and secure with normal market risk, not this market "flux" we have now.
I hope the SEC acts with a lot more speed than they have so far or I guarantee the next MAY 6th melt down is just around the corner.
Thank you for taking the time to read my post