Wall Street Banks Obtain Market Data Ten Minutes Before Everyone Else
A news scandal shows the markets are rigged - October 3, 14
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William K. Black, author of The Best Way to Rob a Bank is to Own One, teaches economics and law at the University of Missouri Kansas City (UMKC). He was the Executive Director of the Institute for Fraud Prevention from 2005-2007. He has taught previously at the LBJ School of Public Affairs at the University of Texas at Austin and at Santa Clara University, where he was also the distinguished scholar in residence for insurance law and a visiting scholar at the Markkula Center for Applied Ethics.
Black was litigation director of the Federal Home Loan Bank Board, deputy director of the FSLIC, SVP and general counsel of the Federal Home Loan Bank of San Francisco, and senior deputy chief counsel, Office of Thrift Supervision. He was deputy director of the National Commission on Financial Institution Reform, Recovery and Enforcement.
Black developed the concept of "control fraud" frauds in which the CEO or head of state uses the entity as a "weapon." Control frauds cause greater financial losses than all other forms of property crime combined. He recently helped the World Bank develop anti-corruption initiatives and served as an expert for OFHEO in its enforcement action against Fannie Mae's former senior management.
JESSICA DESVARIEUX, TRNN PRODUCER: Welcome to The Real News Network. I'm Jessica Desvarieux in Baltimore. And welcome to this edition of The Bill Black Report. Matt Taibbi of the Rolling Stone magazine has reported that media company Thomson Reuters has been providing sensitive market information to certain financial institutions before everyone else, allowing them to front run the markets. Now joining us to discuss all this is Bill Black. Bill is an associate professor of economics and law at University of Missouri-Kansas City. And he's also a regular contributor to The Real News. Thanks for joining us, Bill.BILL BLACK, ASSOC. PROF. ECONOMICS AND LAW, UMKC: Thank you.DESVARIEUX: So, Bill, can you just explain for our viewers what exactly is front running? And can you give us a bit of background to this story?BLACK: Front running can be either that you're trading and you know that your clients are going to be buying or selling something, and you trade ahead of them to take advantage to what's going to happen to prices, or in this case you get market information before everyone else does and you get to trade in advance on that specialized information, in which case you have an enormous advantage.DESVARIEUX: And what did Thomson Reuters do?BLACK: Thomson Reuters partnered with the University of Michigan, which is where I spent seven years studying and got two of my degrees. And the University of Michigan has been famous for 50 years for its research in a particular area, and this particular subset is a survey of business confidence. And this survey of business confidence is used all over the world as one of the leading indicators of what's going to happen economically. So places like the Federal Reserve, in deciding how to move interest rates and such, look very heavily at this Michigan report. And what we know that Michigan agreed to do in its contracts with Thomson Reuters was to give certain clients who paid extra money a two-second advantage in how soon they would get that information. Now, that might not sound like much, but these are for folks who are engaged in what is known as hypervelocity trading or hyperfrequency trading. So they actually trade in under a millisecond, under a thousandth of a second. So this is like two years' worth of, you know, advanced information in terms of how fast these guys operate. That's the part we know.What Matt Taibbi's story reveals is that other people have been studying trades just before that two seconds kicks in. And what they find is an extraordinary volume of trading just before that two-second advantage would kick in. And that means one of two things is happening. One could be that somebody is leaking the number from the University of Michigan or from Thomson Reuters to somebody who is using that information to out front run the front runners. And the second thing that could be happening--and this is the one that the article says they believe is happening--is that there is a group of 16 banks that are even more--you know some pigs are more equal than others. Well, these are the hogs that are even more unequal. And they get the information potentially as much as an hour before. And the reason they would wait is, of course, things might change, so that they would wait just before the broader group of front runners who's about to operate, and they can go in and make a killing there. And we've just discussed front running, but front running isn't the only way the hyperfrequency traders operate. The recent studies from people who have been in the business say that they deliberately create congestion to block other people's trades and to deliberately send false price signals to distort the market. So this is a form of market manipulation. So it's presumably some combination of this front running and this deliberate shafting of your competitors through market congestion and false price signals that is going on. Now, when Thomson Reuters was discovered to have been selling this insider information to favored clients--this is the two-second advantage--the New York attorney general said that this is outrageous, it will, you know, harm the markets, and threatened to take action. Thomson Reuters stopped selling the information on the two-second advantage, but asserted that it had a legal right to do so.So I've done a follow-up to the University of Michigan and said, why are you still doing business with people like this who are creating a system that is designed to aid and abet people who are front running and who are manipulating the market? Well, why would a public university do these things? You know, I just sent in that request today. I certainly haven't gotten any response. But Thomson Reuters is threatening to do this again. And other entities were doing it. And so, for example, the United States government has ceased to give the press heads-up that--it used to give them a half-hour heads up on certain things, because that information was leaking into the markets, presumably, again, because somebody was bribing the reporters to get the information early, and they were trading on that information. So other groups, like the U.S. government, are cleaning up their act, and it's certainly time for Thomson Reuters and the University of Michigan to clean up their acts as well.DESVARIEUX: Okay, Bill. Just really quickly, can you name some of these favored clients and those 16 banks that you mentioned? And also, how does this affect everyday people? You mentioned market manipulation. How is this going to play into people's pensions, for example?BLACK: Well, first, we don't know who was doing it, because that's kept secret. And that's one of the problems. The rumor, as reported in that Matt Taibbi's article, is that the sweet 16 are the ultralarge financial institutions and big players in the market. Why is this apparently for the two-second advantage people were paying about $6,000 a month? Now, I don't know if that sounds large or not to viewers. It's actually--compared to how much money you can make, it's trivial. In other words, Thomson Reuters and University of Michigan not only sold their integrity; they sold it dirt cheap. So they're really moronic in what they were willing to do. What does it mean for the rest of us? Well, the rest of us aren't traders, and we shouldn't be traders. This is one of the reasons why daytraders is insane practice and you should not do it. But this high-frequency trading is now vastly bigger than the regular traders. And very bad things happen in this. Some people may remember the flash crash, which was driven in part by this. But more generally, there's a very suspicious series of activities where most of the bids that they make make no sense in terms of normal economics, and then they just get canceled immediately. And this is why market participants say they're using them to manipulate the markets by causing congestion. That will make the markets less efficient, and it will make them more vulnerable to crashes and such. So it's bad for all of us in terms of deteriorating the markets and exposing us to more crises.DESVARIEUX: Very, very interesting story. Thanks so much for joining us, Bill.BLACK: Thank you.DESVARIEUX: And thank you for joining us on The Real News Network.
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