Well It’s About Time

If the government won’t put a stop to it, maybe the lawyers will?

Providence claims the exchanges, the biggest brokerage firms and a group of high-speed trading firms allowed some traders to gain access to non-public data about investors’ trades. The scheme allegedly included electronic front-running, in which high-frequency traders learned of bids and offers, made transactions at better prices and then profited from the investors that made the original orders.

Providence named as defendants 14 brokerages, 16 securities exchanges and 12 high-speed traders.

“Public investors are entitled to be treated fairly and honestly by brokers and exchanges,” Providence said in its complaint. “In addition to destroying trust in the U.S. capital markets, the misconduct alleged herein has siphoned off billions of dollars from private and public pension funds and individual retirement accounts that millions of Americans depend on.”

Exactly.

Stock trading is inherently a negative-sum game.  That is, even if you and I both are of equal skill and have equal luck, and we trade with equal information and outcomes, we both lose.  We lose because there are costs.

It is not possible for this practice to have a net positive sum.  Therefore, if someone does win someone else must lose.  And if the person who wins does so because he has access to information others do not and that access meets the definition of “front running” that’s illegal.

Further Section 9 of the Securities Exchange Act of 1934 provides that:

It shall be unlawful for any person, directly or indirectly, by the use of the mails or any means or instrumentality of interstate commerce, or of any facility of any national securities exchange, or for any member of a national securities exchange—
(1) For the purpose of creating a false or misleading appearance of active trading in any security other than a government security, or a false or misleading appearance with respect to the market for any such security,
(A) to effect any transaction in such security which involves no change in the beneficial ownership thereof, or
(B) to enter an order or orders for the purchase of such security with the knowledge that an order or orders of substantially the same size, at substantially the same time, and at substantially the same price, for the sale of any such security, has been or will be entered by or for the same or different parties, or
(C) to enter any order or orders for the sale of any such security with the knowledge that an order or orders of substantially the same size, at substantially the same time, and at substantially the same price, for the purchase of such security, has been or will be entered by or for the same or different parties.
(2) To effect, alone or with 1 or more other persons, a series of transactions in any security registered on a national securities exchange, any security not so registered, or in connection with any security-based swap or security-based swap agreement with respect to such security creating actual or apparent active trading in such security, or raising or depressing the price of such security, for the purpose of inducing the purchase or sale of such security by others.

So about those “flickering quotes”….. can someone explain to me how issuing those are not a direct violation of clause (2)?

The Market Ticker

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