We Need a New Stock Market (September 14, 2012)
We need a new stock market exchange that is a transparent, retail-trader friendly alternative to the manipulated HFT-dominated pseudo-market we now put up with.
As I noted in The Stock Market Is an "Attractive Nuisance" and Should Be Closed, the stock market now bears little resemblance to traditional markets. Today's market has as much in common with the market of the 1960s as a horse-drawn carriage has with a Formula 1 race car. Most of the trading on the market is done by computers that hold shares for perhaps 11 seconds before skimming a slice from investors who lack the high-speed data flows from the exchanges, warp-speed processing power and sophisticated algorithms.
Can the current pseudo-market be restored to a true open market? To explore this question I contacted financial reporter Scott Patterson, author of the new must-read book Dark Pools: High-Speed Traders, A.I. Bandits, and the Threat to the Global Financial System (print) (Kindle).
CHS: Your book poses this question: what can we do to restore the integrity of our stock markets?
Thank you, Scott, for explaining the realities of the market and for your feedback on what could be done to restore a transparent, open market. It sounds like traditional market heavy-weights--institutions, mutual funds and pension funds--will only regain a say by removing their participation (and liquidity) from the current stock market: exit equities and go on strike, so to speak, until the exchanges and the SEC ban high-frequency trading, outlaw front-running and restore real transparency.
If the traditional heavy-weights abandoned the market, that would leave only the HFT firms and the Federal Reserve's proxies in the market, poaching each other in an ever-tightening circle of parasitic predation.
Removing liquidity that can be skimmed would push the present market into a highly vulnerable instability. The resulting implosion would "clear the decks" for meaningful reform.
If the traditional heavy-weights foolishly continue providing the "dumb money" that's being skimmed, perhaps retail investors could start a small, limited exchange that banned HFT, front-running and all the other manipulations. Such a market could restore one of the market original purposes, raising capital for new enterprises, and enable small retail traders access to an unmanipulated market.
Here are some common-sense rules for such a "new market":
1. Every offer and bid will be left up for 15 minutes and cannot be withdrawn until 15 minutes has passed.
2. Every security--stock or option--must be held for a minimum of one hour.
3. Every trade must be placed by a human being.
4. No equivalent of the ES/E-Mini contract--the futures contract for the S&P 500--will be allowed. The E-Mini contract is the favorite tool of the Federal Reserve's proxies, the Plunge Protection Team and other offically sanctioned manipulators, as a relatively modest sum of money can buy a boatload of contracts that ramp up the market.
5. All bids, offers and trades will be transparently displayed in a form and media freely available to all traders with a standard PC and Internet connection.
6. Any violation of #3 will cause the trader and the firm he/she works for to be banned from trading on the exchange for life--one strike, you're out.
Is such a retail-trader friendly exchange possible? There would certainly be a nice profit in it, for everyone who is tired of providing liquidity for HFT firms would flee the existing exchanges in a New York minute.
Given a choice between listing on the pseudo-market or a legitimate albeit smaller
exchange (it would be a binary choice, you can only list in one or the other),
many small-cap and micro-cap companies would choose the unmanipulated
exchange once liquidity and demand reached critical mass.
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We are like passengers on the Titanic ten minutes after its fatal encounter with the iceberg: though our financial system seems unsinkable, its reliance on debt and financialization has already doomed it.
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