Stock Market Regulators Can't Find a Whale in a Pipeline

NEW YORK ( TheStreet) -- Who knows what complex trading strategies are currently distorting world markets?

Certainly not securities regulators.

In recent days, two front page stories in The Wall Street Journal have put the spotlight on trading operations that were unknown to the public but appear to have had an outsized impact on the markets.

On Friday , it was Bruno Iksil, a London-based JPMorgan Chase ( JPM) trader known to some market participants as "the London Whale."

According to Bloomberg, which followed up, on The Wall Street Journal,'s report, Iksil's bullish positions in credit default swaps indices have "broken" the indices, creating a disparity between the cost of credit for some companies and the way that cost was reflected in the indices.

Before most of us were able to wrap our heads around those events, The Wall Street Journal published an unrelated story Monday about a high frequency trading outfit called Pipeline Trading Systems that reached a settlement with the Securities and Exchange Commission after it was accused of misrepresenting the method it used to fill client orders.

The client wasn't you or me, but rather fund giant Fidelity Investments. Fidelity thought it was using Pipeline's technology to fill trades anonymously though a private off-exchange platform known as a "dark pool," when in fact a Pipeline affiliate called Milstream was trading ahead of Fidelity on separate venues to fill the order.

That activity that may have defeated the purpose of the dark pool. Fidelity used the dark pool to avoid having its orders move the market, but in fact its orders weren't being filled in the dark pool and so may have been completed after the market moved ahead of them.

Got that? It's amazing that regulators did. It appears one of the reasons they did was new bounties available to whistleblowers--a result of the 2010 Dodd Frank Act. The fact that Fidelity was the one getting ripped off may also have helped bring the matter to authorities' attention. You and I are unlikely to be so lucky.

Even so, according to Monday's article, Pipeline paid a mere $1 million fine and is still in business under the name Aritas. Milstream has disbanded, but one of its principals, Gordon Henderson, told the newspaper he hopes to set up a new business using many of the same Milsteam employees.

Still, this incident has to be viewed as a success for regulators. It is hard not to wonder, though, as we learn about this fly that got hung up in the SEC's net, how many bigger and faster flies do not.

As for the JPMorgan case, it isn't clear the company is doing anything wrong, even though the Volcker Rule now places limits on banks making bets with their own capital. The New York Times.' Peter Eavis argued Monday the London whale's trades exempt under Volcker.

What both incidents make clear, above all, is that we shouldn't be even slightly surprised if all the new tools given to financial regulators in the wake of the 2008 financial crisis prove ineffective in preventing the next one.

-- Written by Dan Freed in New York.

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