Jim McTague‘s latest “D.C. Current” column in Barron’s offers evidence that free-market enthusiasts are not necessarily blind to markets’ flaws. Yet McTague also highlights the problem of trusting government regulators to address market flaws cost-efficiently.
Unhappy Third Anniversary! Back on the afternoon of May 6, 2010, a 10-minute stock-market plunge known as the Flash Crash laid bare a host of scandalous secrets about our once-revered securities markets.
For one thing, the crash revealed that self-directed trading robots had transformed the markets from an efficient capital-allocation mechanism into a rigged casino, where retail investors are being scalped at the rate of one follicle at a time so that they do not notice and raise a Congress-stirring outcry. The event further demonstrated that the market had become overly complex to the point of being wildly unstable, inscrutable to the regulators, and consequently, easily exploitable by the crooks among those wielding the new whiz-bang trading technology. Three years later, I am depressed to report, we’re merely a teeny-weeny bit better off. Shoulder harnesses have been installed in the Corvair (those of you under the age of 50 should Google Ralph Nader and Unsafe at Any Speed).
The Securities and Exchange Commission last year finally purchased technology that enables it to monitor trading in individual securities. The agency got it for the bargain price of $2.5 million from a robotic trader with a social conscience. Since January for the first time ever, SEC enforcers have been enabled to discern when a robot is manipulating trades and prices. Catching the crafty crooks behind those malicious machines is something else, however. Many years will pass and many billions of dollars will be expended by the SEC before it will have the capability to link a bent trade to an individual. So when you are purchasing goodies in the securities bazaar, it’s buyer beware squared.
