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CHARLES SCHWAB: High-Frequency Trading a “Growing Cancer… Corrupting Our Capital Market System”

The following statement has been issued by The Charles Schwab Corporation

 

Schwab serves millions of investors and has been observing the development of high-frequency trading practices over the last few years with great concern. As we noted in an opinion piece in the Wall Street Journal last summer, high-frequency trading has run amok and is corrupting our capital market system by creating an unleveled playing field for individual investors and driving the wrong incentives for our commodity and equities exchanges. The primary principle behind our markets has always been that no one should carry an unfair advantage. That simple but fundamental principle is being broken.

High-frequency traders are gaming the system, reaping billions in the process and undermining investor confidence in the fairness of the markets. It’s a growing cancer and needs to be addressed.  If confidence erodes further, the fuel of our free-enterprise system, capital formation, is at risk. We can’t allow that to happen. For sure, we still believe investing in equities is a primary path to long-term wealth creation, and we believe in the long-term structural integrity of the markets to deliver that over time for individual investors, which is all the more reason to be vigilant in removing anything that creates unfair advantage or undermines investor confidence.

On March 18, New York Attorney General Eric Schneiderman announced his intention to “continue to shine a light on unseemly practices in the markets,” referring to the practices of high-frequency trading and the support they receive from other parties including the commodities and equities exchanges. He has been a consistent watchdog on this matter. We applaud his effort and encourage the SEC to raise the urgency on the issue and do all they can to stop this infection in our capital markets. Investors are being harmed, and they shouldn’t have to wait any longer.

As Michael Lewis shows in his new book Flash Boys, the high-frequency trading cancer is deep. It has become systematic and institutionalized, with the exchanges supporting it through practices such as preferential data feeds and developing multiple order types designed to benefit high-frequency traders. These traders have become the exchanges favored clients; today they generate the majority of transactions, which create market data revenue and other fees. Data last year from the Financial Information Forum showed this is no minor blip. High-frequency trading pumped out over 300,000 trade inquiries each second last year, up from just 50,000 only seven years earlier. Yet actual trade volume on the exchanges has remained relatively flat over that period. It’s an explosion of head-fake ephemeral orders – not to lock in real trades, but to skim pennies off the public markets by the billions. Trade orders from individual investors are now pawns in a bigger chess game.

The United States capital markets have been the envy of the world in creating a vibrant, stable and fair system supported by broad public participation for decades. Technology has been a central part of that positive story, especially in the last 30 years, with considerable benefit to the individual investor. But today, manipulative high-frequency trading takes advantage of these technological advances with a growing number of complex institutional order types, enabling practitioners to gain millisecond time advantages and cut ahead in line in front of traditional orders and with access to market data not available to other market participants.

High-frequency trading isn’t providing more efficient, liquid markets; it is a technological arms race designed to pick the pockets of legitimate market participants. That flies in the face of our markets’ founding principles. Historically, regulation has sought to protect investors by giving their orders priority over professional orders. In racing to accommodate and attract high-frequency trading business to their markets, the exchanges have turned this principle on its head. Through special order types, enhanced data feeds and co-location, professionals are given special access and entitlements to jump ahead of investor orders. Last year, more than 95 percent of high-frequency trader orders were cancelled, suggesting something else besides trading is at the heart of the strategy. Some high-frequency traders have claimed to be profitable on over 99 percent of their trading days. Our understanding of statistics tells us this isn’t possible without some built in advantage. Instead of leveling the playing field, the exchanges have tilted it against investors.

Here are examples of the practices that should concern us all:

  • Advantaged treatment: Growing numbers of complex order types afford preferential treatment to professional traders’ orders, most notably to jump ahead of retail limit orders.
  • Unequal access to information: Exchanges allow high-frequency traders to purchase faster data feeds with detailed information about market trading activity and the specific trading of various types of market participants. This further tilts the playing field against the individual investor, who is already at an informational disadvantage by virtue of the slower Consolidated Data Stream that brokers are required by rule to purchase or, even worse, the 15- to 20-minute-delayed quote feed they have public access to.
  • Inappropriate use of information: Professionals are mining the detailed data feeds made available to them by the exchanges to sniff out and front-run large institutions (mutual funds and pension funds), which more often than not are investing and trading on behalf of individual investors.
  • Added systems burdens, costs and distortions of rapid-fire quote activity: Ephemeral quotes, also called “quote stuffing,” that are cancelled and reposted in milliseconds distort the tape and present risk to the resiliency and integrity of critical market data and trading infrastructure.  The tremendous added costs associated with the expanded capacity and bandwidth necessary to support this added data traffic is ultimately borne in part by individual investors.

There are solutions. Today there is no restriction to pumping out millions of orders in a matter of seconds, only to reverse the majority of them. It’s the life-blood of high-frequency trading. A simple solution would be to establish cancellation fees to discourage the practice of quote stuffing. The SEC and CFTC floated the idea last year. It has great merit. Make the fees high enough and they will eliminate high-frequency trading entirely. But if the practice is simply a scam, as we believe it is, an even better solution is to simply make it illegal. And exchanges should be neutral in the market. They should stop the practice of selling preferential access or data feeds and eliminate order types that allow high-frequency traders to jump ahead of legitimate order flow. These are all simply tools for scamming individual investors.

The integrity of the markets is at the heart of our economy. High-frequency trading undermines that integrity and causes the market to lose credibility and investors to lose trust. This hurts our economy and country. It is time to treat the cancer aggressively.
 

Charles Schwab, Founder and Chairman
Walt Bettinger, President and CEO

 

Hat tip: Zero Hedge

Doug Ross @ Journal

DEMOCRATS CONTINUE TO SHRED OUR HEALTH CARE SYSTEM: Nation’s Top Hospitals Opt Out of Obamacare

Guest post by Tori Richards

The Obama administration has been claiming that insurance companies will be competing for your dollars under the Affordable Care Act, but apparently they haven’t surveyed the nation’s top hospitals.

Americans who sign up for Obamacare will be getting a big surprise if they expect to access premium health care that may have been previously covered under their personal policies. Most of the top hospitals will accept insurance from just one or two companies operating under Obamacare.

“This doesn’t surprise me,” said Gail Wilensky, Medicare director for the first Bush administration and senior fellow for Project HOPE. “There has been an incredible amount of focus on the premium cost and subsidy, and precious little focus on what you get for your money.”

Regulations driven by the Obama White House indeed have made insurance more affordable – if, like Kathleen Sebelius, you’re looking only at price. But responding to Obamacare caps on premiums, many insurers will, in turn, simply offer top-tier doctors and hospitals far less cash for services rendered.

Watchdog.org looked at the top 18 hospitals nationwide as ranked by U.S. News and World Report for 2013-2014. We contacted each hospital to determine their contracts and talked to several insurance companies, as well.

The result of our investigation: Many top hospitals are simply opting out of Obamacare.

Chances are the individual plan you purchased outside Obamacare would allow you to go to these facilities. For example, fourth-ranked Cleveland Clinic accepts dozens of insurance plans if you buy one on your own. But go through Obamacare and you have just one choice: Medical Mutual of Ohio.

And that’s not because their exchanges don’t offer options. Both Ohio and California have a dozen insurance companies on their exchanges, yet two of the states’ premier hospitals — Cleveland Clinic and Cedars-Sinai Medical Center — have only one company in their respective networks.

A few, like No. 1-rated Johns Hopkins in Maryland, are mandated under state law to accept all insurance companies. Other than that, the hospital with the largest number of insurance companies is University Hospitals Case Medical Center in Cleveland with just four. Fully 11 of the 18 hospitals had just one or two carriers.

“Many companies have selectively entered the exchanges because they are concerned that (the exchanges) will be dominated by risky, high-using populations who wanted insurance (before Obamacare) and couldn’t afford it,” said Wilsensky, who is also on the board of directors of UnitedHealth. “They are pressed to narrow their networks to stay within the premiums.”

Consumers, too, will struggle with the new system. Many exchanges don’t even list the insurance companies on their web sites. Some that do, like California, don’t provide names of doctors or hospitals.

The price differences among hospitals “can be pretty profound,” said Joe Mondy, spokesman for Cigna insurance. “When you are doing a cost comparison with doctors, you should look up the quality of the hospital as well. Hospital ‘Y’ could be great at pediatrics and not great at surgery.”

Insurers operating in the exchanges apparently are hesitant to talk about the trade-off between price and quality. Two of the nation’s largest insurers — Wellpoint and Aetna — refused to respond to a dozen calls and emails placed during the course of a week.

Wellpoint and Aetna’s decision to not educate the public on its choices doesn’t sit well with two experts.

“There is no reason to keep that quiet. It’s not going to be a good secret for very long when people want to use the plans,” Wilensky said.

“In many cases, consumers are shopping blind when it comes to what doctors and hospitals are included in their Obamacare exchange plans,” said Josh Archambault, senior fellow with the think tank Foundation for Government Accountability. “These patients will be in for a rude awakening once they need care, and get stuck with a big bill for going out-of-network without realizing it.”

All of this represents a larger problem with the Affordable Care Act, said Archambault, who has studied the law extensively.

“It reflects deeper issues in implementation,” he said. “Some hospitals and doctors don’t even know if they are in the network.”

Just look at Seattle Children’s Hospital, which ranks No. 11 on the U.S. News & World Report best pediatric hospital list. When Obamacare rolled out, the hospital found itself with just two out of seven insurance companies on Washington’s exchange. The hospital sued the state’s Office of Insurance on Oct. 4 for “failure to ensure adequate network coverage.”

“Children’s is the only pediatric hospital in King County and the preeminent provider of many pediatric specialty services in the Northwest,” a hospital news release said. “ Some of these specialized services not available elsewhere in our area or region include acute cancer care, level IV neonatal intensive care and heart, liver and intestinal transplantation.”

And for doctors in Texas, “Basically, we don’t know,” said Stephen Brotherton, president of the Texas Medical Association. “We can’t find out. At this point, it’s part of the various unknowns with the marketplace. There are ways you can be on plans and not even realize it.”

Editor’s Note: This story first appeared in U.S. News & World Report.

Contact Tori Richards at tori@watchdog.org or on twitter @newswriter2.

Doug Ross @ Journal

Report: U.S. Nuclear Fort Knox Compromised: “Multiple System Failures” and “Troubling Ineptitude”

y12Across the United States there exist numerous facilities at which nuclear fuel is manufactured and stored, including highly enriched uranium (HEU). According to experts, even someone with rudimentary skills could utilize this HEU fuel to create a nuclear weapon capable of leveling a major U.S. city.

You would think that after the destruction of the world trade center, thousands of deaths and hundreds of billions of dollars spent that the Department of Homeland Security would have made securing these facilities a top priority.

But you’d be wrong.

A new report from Harvard University underscores just how ripe with security holes and ineptitude these facilities really are. So much so that recently an 82 year-old nun and two of her cohorts compromised one of these locations with tools as simple as a pair of bolt cutters and a couple of hammers. What’s more is that the facility cited in the report is one that nuclear security experts refer to as the “Fort Knox of Highly Enriched Uranium” – the Y-12 Oak Ridge, Tennessee National Security Complex.

In the early morning hours of July 28, 2012, an 82 year-old nun and two other protesters broke into the Y-12 nuclear weapons production facility—sometimes referred to as the Fort Knox of HEU—in Oak Ridge, Tennessee. Equipped with hammers, paint, blood, and a pair of bolt cutters, they cut through four fences—three of them with intrusion detectors—setting off alarms, and traversed a 600-meter semi-wooded area until they arrived at the wall of a building housing hundreds of tons of HEU, enough for thousands of nuclear weapons. They painted blood on the walls, sang songs, and pounded on the building with their hammers, before finally being accosted by a single guard. Fortunately, they were not terrorists armed with explosives and did not mean any harm (and the building has specially designed walls that would be very difficult for terrorists to penetrate, along with extensive interior protections). But later investigations revealed a security culture failure of epic proportions, not only in the intrusion but also in the response.

How could this happen? The subsequent investigation of the incident by the Department of Energy (DOE) Inspector General revealed “multiple system failures on several levels” and “troubling displays of ineptitude” in Y-12’s security practices. For example, it turned out the site had a new intrusion detection system, which was setting off ten times as many false alarms as usual. Normally, the guard at the central alarm station could check if an alarm was caused by a real intruder using cameras along the fence—but the cameras had been broken for months. They had not been put on the priority list to be fixed, on the assumption that guards could always check out the alarms; but it appears that with so many false alarms, the guards had grown weary of investigating. For whatever reason, even a series of alarms on a path leading directly to the HEU building was not enough to prompt the guard at the central alarm station to take more serious action. The heavily armed guards inside the facility heard the hammering and thought it might be construction they had not been told about, even though it was before dawn, and did not bother to check.

In short, there was a profound breakdown in security culture—among those who tolerated an intrusion system setting off ten times as many false alarms as usual, among those who did not bother to fix the cameras, among the guards who did not react to the alarms or the hammering, and eventually in the armed response to the intrusion.

Perhaps even more troubling, prior to the intrusion, officials at DOE headquarters thought of Y-12 as one of their most secure sites, and had no idea such a serious erosion of security practices had occurred. Tom D’Agostino, then-administrator of the National Nuclear Security Administration (NNSA), warned that “this incident raises important questions about the security of Category I materials [those requiring the highest level of security] throughout the DOE complex.”

Full Report: Advancing Nuclear Security: Evaluating Progress and Setting New Goals (PDF)

The Department of Homeland Security insists that it is a necessary component of the national security apparatus.

They’ve certainly found time to weave a massive surveillance web across this country to record the digital interactions of every single American. They’ve highlighted the existence of serious threats emerging from domestic lone wolves who engage in activities such as  making cash purchases, storing emergency supplies, or purchasing bulk ammunition. And these days everyone from a guy producing his own silver coins to kids making gun gestures with their fingers is accused of engaging in terrorist activity.

But when it comes to weapons of mass destruction it seems like no one in government really cares.

This report, yet again, brings to question the purpose of all the added security measures being forced upon the American people.

If national security is such a top priority of DHS and other agencies, then why is it that our Southern border remains so porous that individuals from countries like Iran and Afghanistan, some of them with possible ties to mid-east terrorist organisations, have been nabbed over the last several years trying to make their way into the United States?

How is it that critical utility infrastructure components like water reservoirs and electrical sub stations remain susceptible to even basic attacks?

And how, in a world where terrorism and improvised weapons are the typical method of attack, can supposedly highly secured nuclear facilities be broken into by a nun with bolt cutters?

An objective observer would have to conclude that protecting the United States from terrorists of the al-Queda Jihadi influence is not at all what these initiatives are all about.

Seriously, is anyone at DHS or the rest of our federal agencies paying attention to the real threats to our national security?


SHTF Plan – When It Hits The Fan, Don’t Say We Didn’t Warn You

Larwyn’s Linx: We Trashed The Health System For A Supposed 5 Million Enrollments?

Send us tips! Bloggers: install a Larwyn’s Linx widget. Get real-time news, 24/7, at BadBlue.

Nation

We Trashed The Health System For A Supposed 5 Million Enrollments?: RWN
The San Francisco Democrats Finally Rule the Roost: Erick Erickson
Obama To Stab Backs of Military Again By Reducing Pensions 10%: CFP

Romney Shreds Obama’s Failed Leadership, White House Butthurt Ensues: JWF
Democrat Bullies Against School Choice: Betsy McCaughey
Spring Clean Government: John Stossel

Obama rewrote FOIA to suppress politically sensitive docs: Mark Tapscott
New York Protestors Burn “Assault Weapon” Registration Forms: Bob Owens
The Taste of Crow: Christian Mercenary

Economy

Report: Premiums rising faster than 8 years before Obamacare combined: DC
The UAW against democracy, free speech in Chattanooga: DC
Liesman: Dumb and Dumber: Karl Denninger

A $ 1.2 Tril Corporate Welfare State Lurks In U.S. Budget: IBD
Is there wage stagnation?: Walter Williams
Fast-food protests hit Chicago as workers target ‘wage theft’: ChiBiz

Scandal Central

Obama’s Latest De Facto Amnesty and the Push to Delegitimate Deportation: Heather Mac Donald
Guess what Obama is telling Hispanics in order to get them to sign up for Obamacare?: YoungCons
SEIU Hit With Second-Biggest Campaign Finance Fine in Michigan History: WFB

The Joke’s on Us: Cold Fury
Patriot Lawsuit Demands Money From IRS: WND
License To Wait: CA Conceal Carry Applicants Told to Wait Two Years: TR

Climate & Energy

Lawsuit Challenges Use Of Endangered Species To Stop Energy Boom: IBD
Arctic blast coming to Eastern US: coldest opening to calendar spring in at least 50 years?: WUWT
Which Gov’t Agency Is Becoming an ‘Organ to Play the Music of Karl Marx’?: Blaze

Media

ABC’s ‘Nightline’ Skipped ObamaCare for 123 Days, Gossips Over ‘Bootleg Butt Injections’: NB
The End of Obama’s Presidency? : Keith Koffler
Obama Hasn’t Changed Since Columbia University: Blaze

World

Is Hillary Clinton on the Missing Malaysian Airlines 777?: Erick Erickson
Top Russian laughs at US sanctions, calls Obama a ‘prankster’: BPR
Russia formally moves to swallow Crimea: USA Today

Snowden Marks Russia’s Aggression by Disclosing Another American Intel Operation : PJM
Boeing Believes Flight MH370 Is In Taliban Territory in Pakistan: Sara Noble
What if MH370 was (mistakenly or purposely) shot down?: Aviationist

Obama Retracts Jewish Identity of Israel: Leo Rennert
Did Russian Intelligence Promote Obama from Lieutenant to Colonel?: Oleg Atbashian
The Brand New, And Shocking, Third Largest Foreign Holder Of US Treasurys: ZH

Sci-Tech (courtesy BadBlue Tech News)

Target Breach: Where The Weak Points Were: Dave Kearns
Sharing what’s up our sleeve: Android coming to wearables: Official Android
A Closer Look at the Cisco-Google Alliance: NoJitter

Cornucopia

“Obama wants people to quit bashing his jeans”: Protein Wisdom
Of Friendly Lawsuits and Potemkin Protests: Ed Driscoll
MH370: Hiding in Plain Sight?: Winter Soldier

Image: Chris Floyd: Car Trouble: Tarnished Icons and Imaginary Friends
Today’s Larwyn’s Linx sponsored by: FreePAC Kentucky – April 5th, 2014

QOTD: “Sanctions and modest help to the Syrian rebels have failed to halt the slaughter; if anything, the killing worsened as negotiations dragged on. The White House was taken by surprise by Vladimir Putin’s decisions to invade Crimea, but also by China’s increasingly assertive declaration of exclusive rights to airspace and barren islands. Neither the economic pressure nor the cyberattacks that forced Iran to reconsider its approach have prevented North Korea’s stealthy revitalization of its nuclear and missile programs. In short, America’s adversaries are testing the limits of America’s post-Iraq, post-Afghanistan moment.” —New York Times

Bonus QOTD: “As if Bracket Week wasn’t a natural distraction as is, now Quicken Loans has decided to offer a billion dollars — well, a half billion up front, or a bunch of millions every year thereafter — for a perfect bracket.

The odds of you picking a perfect bracket are roughly one in 9 quintillion, and no, I’m not making that up. As David Sarno puts it, “If all 317 million people in the U.S. filled out a bracket at random, you could run the contest for 290 million years, and there’d still be a 99 percent chance that no one had ever won.” Then again, if you just end up with one of the twenty most accurate brackets in the Quicken Loan contest, you get $ 100,000, and that’s not bad.” —Jim Geraghty

Doug Ross @ Journal