The Stock Exchange Brothel and Regulatory Pimps

I am compelled to share a fabulous post from Wall Street on Parade that outlines the corruptible relationship and practices that lie at the core of the ongoing debate around high frequency trading.

Major props to Pam Martens for drawing further attention to the ugly reality within this incestuous relationship. Other media outlets should be so fearless in revealing the truth of the captured regulators.

The fallout from the new book, “Flash Boys” by Michael Lewis continues. Yesterday, Jonathon Trugman wrote in the New York Post that “These traders who use the HOV lane to get ahead of investors could not do their trades without the full knowledge and complicity of the New York Stock Exchange and Nasdaq.”

Trubman went on to compare the two best known stock exchanges in the U.S. to houses of ill repute, writing: “What is clearly unfair and unethical — and, frankly, ought to be outlawed — is how the exchanges have essentially taken on the role of running a high-priced, high-frequency brothel…”

While it's true that the New York Post might possibly overuse sexual analogies (on August 10, 2011 it ran a front page cover comparing the Dow Jones Industrial Average to a “hooker's drawers”), in this instance Trugman is spot on.

Not only are the New York Stock Exchange and Nasdaq allowing high frequency traders to co-locate their computers next to the main computers of the exchanges to gain a speed advantage over other customers at a monthly cost that only the very rich can afford to pay but they're now tacking on infrastructure charges that price everyone out of efficient use of the exchanges except the very top tier of trading firms.

Lewis writes in “Flash Boys” that “both Nasdaq and the New York Stock Exchange announced that they had widened the pipe that carried information between the HFT [high frequency trading] computers and each exchange's matching engine. The price for the new pipe was $40,000 a month, up from the $25,000 a month the HFT firms had been paying for the old, smaller pipe.”

By late 2011, according to Lewis, “more than two-thirds of Nasdaq's revenues derived, one way or another, from high-frequency trading firms.”

And we'll take Trugman's analogy one step further: the cops on the beat who have had their palms greased to turn a blind eye to the brothels are drinking their coffee and gobbling their donuts at the Securities and Exchange Commission.

I will include the same indictment of the cops on the beat within Wall Street's own self-regulatory organization at FINRA.

For those who care to read the entire commentary, I welcome providing the link to If the New York Stock Exchange is a “High Frequency Brother” then the SEC is its Pimp.

Larry Doyle

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The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.