DEDUCED RECKONING: Does your broker seek 'best possible execution' of your trade?
Gary Gensler, currently Chairman of the Securities and Exchange Commission, sees his job as that of protecting investors on a level playing field in which exchanges provide fair marketplaces for investors to buy and sell stocks, bonds, commodities, currencies, and other items. So far, that does not include cryptocurrencies. Remember, crypto is backed by nothing so its value is only what another person is willing to pay for it. This year crypto’s victims have lost trillions of dollars if they bought above $70,000 for bitcoins now trading for less than $20,000.
In an era of zero commissions for executing your stock trades, the brokerage industry has had to find other ways to generate income. One way is to promote option trading on which they charge hefty fees. Without telling you that 80% of all options expire worthless. In 2021, another such revenue stream came from the underwriting of SPACs (Special Purpose Acquisition Companies), which raised money without an ongoing business but with the promise that within a year or two it would buy an existing company. Most SPACs collapsed. Many lost most of their value. Gensler shut that market down this spring by proposing new rules regulating SPACs.
Gensler has also targeted firms like Robinhood (HOOD) and Charles Schwab (SCHW) that are paid for routing your trades to particular market makers like Virtu and Citadel Securities. In exchange, the brokers receive payment for order flows. The brokers are generating lots of editorials from the Wall Street Journal, Barron’s and Reuters, saying Gensler is overstepping his authority. Gensler believes the SEC should more clearly define a brokers’ responsibility to get you the “best possible execution” of your trade.
On Aug. 10, the DOJ won a victory in a case in the Northern District of Illinois in which a jury convicted two former JPMorgan Chase precious metals traders of fraud, attempted price manipulation and spoofing in a scheme that went on for more than eight years of unlawful trading. Spoofing involves entering offsetting trades often in very tiny price increments. They can be executed by high frequency robotic or algorithmic computer trading in rapid fire succession to distort the appearance of buy or sell interest in a stock. The clear intent is to defraud other investors.
Spoofing is highly connected with high-frequency trading such as executed by robots or computer algorithms at intervals that may be as tiny as 1 or 2 seconds. No sooner than one order is entered, it is cancelled and/or it might be instantly reentered as an opposing trade, i.e. a buy is changed rapidly to a sell faster than a human could ever take such action. The intention is to distort the picture of buy/sell volume a market maker might normally use in maintaining an orderly market unless the broker is in on the scam. For example: A trader wishes to sell 100,000 shares of a security but the market is too weak to absorb the block. His algorithm places several small buy orders to make it look like there is demand for the stock. Then the computer robot cancels them before they are ever executed. In the meanwhile, the share price has been pushed higher to facilitate his sale of the block at a higher price (or lower if he wants to buy). He then places his order at the price he has created by his fake trades.
Joan Lappin CFA has been called an “investment guru” by Business Week and a “top manager” by the Wall Street Journal. The Sarasota resident founded Gramercy Capital Management, a registered investment adviser, in 1986. Email JLappincfa@gmail.com. Follow her on twitter: @joanlappin. Her past columns appear at heraldtribune.com/business/columns.
This article originally appeared on Sarasota Herald-Tribune: JOAN LAPPIN: SEC Chairman seeks level playing field for all investors
