News Journal: Wall Street’s ‘no snitch’ rules are hurting us

Upton Sinclair’s “The Jungle.” Rachel Carson’s “Silent Spring.” Ralph Nader’s “Unsafe At Any Speed.” I don’t know if Michael Lewis’ “Flash Boys” is quite up to that kind of company, but it is beginning to look like it may be instrumental in doing what those books did – change laws that have a profound effect on American consumers.
I wrote a column about the book when it came out a couple of months ago, hoping that what it revealed about High Frequency Trading on Wall Street would move Congress and financial regulators to fix a problem I believe has damaged the credibility of our markets.
I have worried, spoken out, and written about the problem since I was appointed to the Senate in the midst of the financial meltdown of 2008-2009. I met with a lot of Wall Street insiders back then who openly admitted in private that our markets were being manipulated at the expense of individual investors. Many of them felt that they, too, were being taken, but considered it a “cost of doing business” they could pass on to investors who trusted them to make trades at the best available price.
Many were willing to explain to me how it was being done, but refused to speak out on the record, fearing what that might do to the complex web of relationships they relied on when doing business. It reminded me very much of the “no snitch” rule in some neighborhoods, where people who know about criminal activity don’t speak out because they are part of a culture that punishes anyone who helps law enforcement.
Two hearings in the Senate last week give me hope that there has been a Flash Boys-effect in the past few weeks that has led to a significant break in Wall Street’s reluctance to confront its problems with market manipulation. Carl Levin (D-MI) of the Permanent Investigations Subcommittee led the first. He opened the hearing last Tuesday by saying, “the duty of lawmakers and financial regulators is to look out for the interests of investors and the wider public. There is significant evidence that these conflicts can damage retirement savings, pension holdings and other investments on which Americans rely.”
One of the major conflicts that came to prominence with High Frequency Trading is called the “maker taker’ model used in our stock exchanges. It creates a conflict of interest for brokers who have to choose between earning rebates for themselves by giving traders a high volume of orders and finding the best price for their customers.
Levin’s position was supported by testimony from Thomas Farley, President of the New York Stock Exchange, who said, “At an industry level, we are seeking support for the elimination of maker-taker pricing and the use of rebates. Broad adoption of this policy would reduce the conflicts inherent in such pricing schema.”
On Wednesday, the Banking Committee Subcommittee on Securities, Insurance, and Investment chaired by Senator Mark Warner (D-VA) heard similar testimony. Andy Brooks, Vice President of the mutual fund powerhouse T. Rowe Price, said “We are supportive of genuine market making; however, we acknowledge that there are predatory strategies in the marketplace that have been enabled by our overly complex and fragmented trading markets…We question whether the functional roles of an exchange and a broker-dealer have become blurred over the years creating inherent conflicts of interest that may warrant regulatory action…Increased market complexity results in a lack of investor confidence. “
Jeffrey Solomon, CEO of Cowen and Co., a financial services firm, also testified, “To be clear, if we remain stagnant in our approach to equity market structure in this country, we are increasingly putting our economic growth and private sector job creation at risk.”
When Flash Boys was released in April, a number of reporters called to ask me what they should look for in Washington to see if real reform was finally going to happen. I told them to forget Washington and listen to what they are saying on Wall Street. If major players there come forward and talk about the conflicts of interest, then Washington will move.
We have now heard from some powerful voices on Wall Street. SEC Chair Mary Jo White and Commissioner Kara Stein have recently had some good things to say about what has to be done. There is a real chance that Washington will actually put in place regulations that make our financial markets more transparent and fair in both reality and perception.
Ted Kaufman is a former U.S. Senator from Delaware.