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FLASH CRASHERS, CEO(S) AND OTHER RICH PEOPLE

May 5, 2015

FLASH CRASHERS, CEO(S) AND OTHER RICH PEOPLE

You don’t have to be a CEO to be rich. You can have a rich father or uncle, you can hit the lottery, or you can even be a day trader who knows how to game the system. Let’s take a brief if occasionally light-hearted look at the asset situation in America (if any humor can be found).

Let’s start with the CEOs. I need not refer to the super superrich such as Warren Buffett or Bill Gates or Tim Cook and their exploits with Berkshire Hathaway and Microsoft and Apple, respectively. The wealth accrued and accruing to these three and others in this rarified class is beyond description and its aggregate removal into private hands and away from reinvestment into better wages and expansion of services in our marketplace is in the long run detrimental and even destructive to capitalism itself (unless “attended to” per Piketty), but many may feel they are not going to be around for the long term and want theirs now. Some observers call that enlightened self-interest and others call it greed. Given its impact on the larger society and specifically upon the nation’s economic health, I agree with the latter group’s definition.

Take, for instance, per HollywoodReporter.com, poor Facebook CEO Mark Zuckerberg, who was paid a mere $610,454 in 2014 when compared with the $15.5 million Facebook COO Sheryl Sandberg made or the $12 million paid to CFO David Wehner. However, you need not worry about seeing Zuckerberg in the food stamp line. The Facebook co-founder owns 422 million shares of the company he co-founded worth roughly $34.4 billion, which should tide him over to his next paycheck very nicely. He can afford dessert at the lunch counter.

Finally, there are the flash crashers. They make lots of money by gaming the market and range from day traders to large financial concerns. They trick the market by placing a series of orders to sell futures contracts, and then pull those orders milliseconds later. The tactic is correctly and descriptively known as “spoofing.” High-speed traders use it to inject pessimism into the market which drives down prices so such traders can buy stock on the cheap and then resell perhaps only seconds or minutes later when the market recovers after the orders are pulled.

The Economist reports that such a terrifying flash crash occurred on May 10, 2010, when a day trader in a London suburb working out of his parents’ home spoofed the market and the Dow plummeted 1,000 points in a matter of minutes, temporarily wiping out hundreds of billions of dollars in assets. It took regulators at the Commodity Futures Trading Commission almost five years to identify the culprit, which hardly boosts investors’ confidence. Observers are asking what such a story tells us about the fragility of the U.S. finance system, especially when, unlike other rogue traders, he did not have the balance sheet of a big financial institution behind him, noting further that if such a bit player can wreak this kind of havoc on the market, anybody can.

Michael Lewis in BloombergView.com and David Weidner in MarketWatch.com correctly ask and answer the questions surrounding this almost 5-year old major market disruption by an obscure English day trader, i.e., why didn’t the Chicago Mercantile Exchange (which posted the day trader’s orders) notice what was going on when posting the trader’s manipulative orders? Were the Exchange’s algorithms so easily gamed that they responded to phony sell orders by creating a crash? What’s going on?

The irony of it all is that the now arrested English day trader never really sold any stock on the day of the crash; he was just trying to trick the market, and he did a good job of it. I agree with Weidner’s observation that the real crime is not the alleged actions of a single trader, but rather that “the meek, overmatched, and sluggish” regulatory system can’t respond when things go off the rails. He further notes that “bad actors” like this English day trader are everywhere, but that “It’s the lack of good guys that is the problem.”

He is right. Wall Street banks have spent billions in lobbying against Dodd-Frank  regulations to be finalized and have even managed to have their Republican toadies amend the Act itself not so long ago to provide for the banks’ use of FDIC-insured funds once again for bailouts on their investments which may go sour. As a stand-alone bill it would never have passed, so they slipped it into a must-pass spending bill (which to me is a new low in legislative ethics). Weidner correctly nails the problem: lack of regulation. Contrary to what you hear on Fox News and by breathless anchors on TV business channels, we need more and not less regulation of financial market practices, not only for the benefit of investors but for the market’s survival itself.

Not everybody has a rich daddy like Mitt Romney or a piece of the casino and prostitution traffic like Shelden Adelson who, along with the Kochs and other dark money funders unleashed by Citizens United, are turning Republican candidates for executive and congressional offices into pandering toadies and sure votes and policies for less taxes, less regulation, but above all the continuing ability to buy votes afforded by the (democracy-deadening) holding of Citizens United. The jury is still out on whether the republic and its undergirding democracy can survive such bribery in plain view. History records none to date.

It would help the cause of democracy immeasurably if Citizens United were reversed, but that’s not our only problem in trying to save the gift of democracy willed to us by history. We need to energetically confront those who would deprive us of our most precious asset – our democracy. That takes will and we had better find and use it soon as the hour is late and the restless natives may already be sharpening their pitchforks.

The natives are beginning to understand that it is not just Citizens United which must go; it is the power structure underlying such an anti-democratic view of America and its people that must join that inane holding in the dustbin of history. Market manipulation by the greedy is just one of our problems and it cannot be ended by better regulation, but it can be slowed, so (over the objections of Wall Street banks) let’s try it while working on our other problems.  GERALD  E

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