So I was driving down the New York State Thruway the other day, when it occurred to me: What would happen if the Securities and Exchange Commission wrote the traffic laws?
I don't usually think about the
when I'm driving (unless I happen to be passing a train wreck), but in this instance I had good reason: The SEC has been spending a great deal of time -- agonizing, it seems -- over how to regulate something called
That's the stock market equivalent of speeding, or drunk driving, or putting your five-year-old behind the wheel. Nobody's really sure. It's a bit like cigarette smoking in the 1950s; we know that inhaling smoke is not a healthy thing, and it sort of logically seems like a reckless thing to do, but nobody has proven that it can do any harm. If you asked the tobacco industry back then, just as the SEC asked in its Jan. 13
, the answer would have been much the same: "Hell no!" Still, common sense tells you that high-frequency trading, like smoke inhalation, doesn't do very much, if any, good for anybody other than the high-speed traders, and that it can be harmful to the markets.
The risk of HFT is that it might tend to make the markets more volatile. The May 6 "flash crash" is widely credited with being caused by high-frequency traders, who use little bleeps on their computer screens to initiate massive buy and sell orders, hoping to anticipate market trends.
It's a variation on the kind of computer-driven trading that has been taking place in the markets since the days of MS-DOS. It generates billions in profits for all the major firms, especially
. Fast trading of
Proctor and Gamble
was believed to have touched off the flash crash, and
came up with a long list of firms believed to be regularly nailed by
Bank of America
I've been writing about these computer-trading types for almost two decades, and I think I have a pretty good idea of what they do. But when I think of any positive benefit that they may bring to society, the word
materializes before my eyes in big, fat letters. Yes I know, there is the old Reaganesque "trickle-down" canard, which holds that we all should rejoice when rich people get richer. I've also heard that it makes the markets "more liquid" and "more efficient." I'd find that more convincing if that wasn't what Wall Street always says about every harebrained, market-destroying scheme it has ever promoted for its own benefit, from credit default swaps on down.
As I thought through this, I stumbled on a passage in a regulatory filing on high-frequency trading by Joan Conley, corporate secretary of
OMX Group. "Speed, she said, "is not inherently unfair or harmful; it is the misuse or misapplication of speed that may harm investors or markets."
Gee, I thought to myself, can't we say the same thing about a lot of things, including fast driving?
That brings me back to my initial thought. What would the SEC do if it were running our highways? I think that we find valuable clues in our securities watchdogs' approach to HFT.
The first thing the SEC would do, if it were unleashed on our highways, would be to obtain input from everyone concerned: drivers, car manufacturers, insurance companies, emergency-room attendants, undertakers, and, in the case of drunk driving, liquor manufacturers. The SEC would ask for industry-wide comments, such as the one that it obtained from Conley, and convene a Highway Round Table, such as the one that it had on
on June 2
The SEC would do more than gather information. It would act -- by gathering still more information, focusing on what happens when cars come flying down the thoroughfare. It would create a
so that, after every auto accident, the agency could extract data to determine how fast the car was speeding, whether it was driving erratically, and perhaps it could use sensors to determine if the driver was drunk or under the age of five.
As with its approach to high-speed trading, there would be no judgmental statements like "speed kills," as they used to say in the 1960s. There would be no speed-limit signs, no state troopers hiding in the bushes. Drivers could go as fast they wish, as long as they follow the rules. Which would be easy, because there would be no rules that the drivers themselves wouldn't want, and, this being the SEC, no need to admit guilt in case of violations.
The SEC, in other words, would be functioning on our highways the way the SEC functions as a Wall Street regulator, which is to view trading practices pretty much the same way Wall Street views trading practices. (Have you ever heard a regulator say "speed kills" or anything else halfway intelligible?)
You have to admit that this approach makes sense, in an SEC kind of way. Why sure, the SEC would conclude -- after reading comments from 10 million drivers -- high-speed driving contributes something of value to society. It makes the highways more efficient, that's what it does. I'm sure a free-market economist can be found who will prove to you that rushing down the Pennsylvania Turnpike at 100 miles an hour enhances liquidity at the toll booths.
One can make a case that drunk driving provides an undeniable good by promoting liquor sales and boosting the tips of bartenders, thereby providing significant trickle-down effects. The same can be said for many other "flash" driving techniques, of which my favorites are "passing on the right" and "backing up without looking."
You can't accuse the SEC of not looking when it comes to high-frequency trading. It's staring hard at every possible point of view, so hard that by the time it comes down with a do-nothing regulation I'm sure that the public furor over HFT, to the extent that there is one, will have long since evaporated.
You know, like a puddle of transmission fluid on the highway.
Gary Weiss has covered Wall Street wrongdoing for nearly two decades. His coverage of stock fraud at BusinessWeek won many awards, and included a cover story, "The Mob on Wall Street," that exposed mob infiltration of brokerages. He uncovered the Salomon Brothers bond trading scandal, and wrote extensively on the dangers posed by hedge funds, Internet fraud and out-of-control leverage. He was a contributing editor at Cond?ast Porfolio, writing about the people most intimately involved in the financial crisis, from Timothy Geithner to Bernard Madoff. His book Born to Steal (Warner Books: 2003), described the Mafia's takeover of brokerage houses in the 1990s. Wall Street Versus America (Portfolio: 2006) was a hard-hitting account of investor rip-offs. He blogs at garyweiss.blogspot.com.