good afternoon welcome to capital account i'm lauren lyster here in washington d.c. these are your headlines for tuesday november twentieth two thousand and twelve music european exchange commission is expanding and in force in the probe intensifying scrutiny of the exchanges the f.c.c. is looking more closely reportedly and how they develop new products communicate with investors and provide incentives to trade this is all according to the wall street journal and part stems from a probe order types a number of which benefit high frequency traders sounder air can say there is here to help us read through this and speaking of high frequency trading australia is clamping down australian media outlets report federal officials announced changes

to market rules including mandatory kill switches for algorithmic trading to avoid you know us style flash crash down under our other countries ahead of the new was small discussed and navigating the post-election economy i moderated a panel on the issue take a look behind me malden economics featuring john malden bloomberg search for yammer own pimco c.e.o. mohamed el larry and barry ritholtz and more we'll play some highlights from the sideline and let's get to today's capital account. take a look at this according to the wall street journal today in this article federal securities regulators are stepping up oversight of stock exchanges as they scramble

to catch up to trading advantages that some say have developed for sophisticated clients at the expense of ordinary investors now i bet you can guess who those sophisticated clients with an alleged advantage are their high frequency traders and the f.c.c. scrutiny has increased in part the wall street journal piece says because of its findings from a probe into some order types benefiting high frequency traders now the concern is that exchanges might have given some firms more information about how their systems operate giving them an edge now the s.e.c. probe into order types was fueled by a complaint in two thousand and eleven from a former wall street trader turned was full blower he said a c m d c interview in september that he kept banging his head against a particular trading strategy take a listen. this class of each of the strategy high frequency trading you have is predatory it is disruptive to markets and it's actually unbeatable without a regulatory change. it's kind of in

a bad place my career and i my reputation was at risk and i said well i'm going down i guess i'll go down for the right reason. all right so here in studio is a market watcher wasn't speaking out because he's in a bad place in his career but he gathers and observe the whole market data and he can help us decipher the real issues here with high frequency trading he is founder of next and we're so happy to have you in studio eric thank you so much for being on the show today you're welcome thanks for having me you know well first let's start out because that whistle blower that kind of launched this this probe into the issue with orders he in that sound bite you just heard he was kind of saying as to why he did this he said you know my career wasn't going so well so i thought i should go out you know the right way so that might make people wonder why he's doing this but you were saying that you know i mean you think he's pretty credible i had dinner with him a blitter holds house their invitation he's a real standup guy real facts fact. and the interview is i

think it was one of his first on screen ok and i think you know he fell over so so you know. so you think that he is credible even though. it might raise. ok so then in terms of the f.c.c. expanding its probe what i thought was an interesting line it was pointed out to me in this article was that regulators are playing catch up do you think that is insulting to average investors that they're playing catch up over some of these practices that of exchanges that may favor high frequency traders. would be something where you're a year behind when you're four years behind or more when people have been saying this and i think we need a different word ok with that word. that word. sums it up but i'm sure ok i'll choose my own adventure ok so one of these predatory practices that supplier is talking about is what's called queue jumping let's play it for our audience what what he describes that to be. it allows

a sophisticated trader to. actually answer you know typical institutional traders primarily rest on the order book happens during the price move so what i argue is that this is a corruption of price time priority rules on the exchanges so is that queue jumping is that something that's widely understood to be going on and do you think that the exchanges know that it's going on and they think that's ok or is there an opinion on if the exchanges are to blame i tell you a lot of places that i've talked to people who have traded for many many years and professionals are pretty surprised that some of these order types weren't aware of them and are surprised to see that there are these different advantages and if you go on like direct edges website they have all their different order types and they have footnotes on footnotes and it's a labyrinth and so they can create they can take to different order types that look

the nine using to buy a new museum together all of a sudden allow them to do something that wasn't straightforward and probably would have been rubber stamped by the f.c.c. in the first place ok so so using these creative methods do you think that high frequency trading firms do have an advantage based on different order types that are available yes from everything that i've read knowing him he's a very credible person yes i believe i believe ok so then let's talk more about this aspect of the exchanges too because we have seen a fine for the new york stock exchange there was an in for some action. from the f.c.c. the action was because they said the new york stock exchange was sending data to the proprietary feed faster than the consolidated feed you say though according to your data that this is going on more prevalently than just with the new york stock exchange so can you tell us what to what extent and what evidence you have about sure it happens with all the exchanges and the as it happens with all the exchanges

deceiving. knows about this because the two thousand turn we told them and they came back to us well we can see it is going to be a little slower because it has been you know a bunch of gobbledygook that it was in fact based so they were aware of this and even some of the literature from the exchanges if you want to go to a trade show you would hear the direct feeds will give you a speed advantage. so it's actually marketed that way as giving a speed advantage credit ok so then why have we only seen a fight against the new york stock exchange if that's the case i don't know ok is that something you think that there should be more important actions i believe we will see more of them i would be shocked if we do ok because you say this is going on more widespread and this is against the rules clearly clearly ok it gives an advantage to high frequency traders absolutely because they can exploit what they were going to trade and they'll jump ahead and do you see that go on when you're watching markets on your screens absolutely and we've heard from from from people

who trade whenever their order goes in and it's like we got a real lot of sucker on the line and everything changes ok ok and then what about another enforcement action that we saw regulators find holder brothers which is another h.s.t. for him and they were fined for a manipulative activity known as cross market layering right ok you say this is more widespread so what is cost market layering and how much is it going on putting in quotes to lure other algorithms into buying high and selling loans and when we first saw some of these patterns we couldn't believe what we later learned from holder brothers this is what was going on that algorithms would be stupid to buy one in so low within seconds and yet that is the case and the whole incident not only was a clear example of things that we have seen exactly what the wording of the regulator said the reason this is barack is because you cannot put in quotes that you have no

intention. executing and putting quotes in there to cause others to believe there's activity in the stock or that interest in the stock is illegal and i'm thinking to myself ok. if you're going to enforce who's going to be trading tomorrow because wall street closed i mean it's like saying that we're going to crack down on jaywalking and everybody jaywalking is going to go to jail and it's. wait ok so you're saying that the rule that the holder brothers broke that they were fined for by the f.c.c. you're saying that everybody is doing it i'm saying that it is widespread among high frequency traders only i'm saying every five seconds that occurs every trading day ok but only this is only what i have already make and i haven't seen it because the frequency of orders being placed in canceled could only be done by a machine ok wow seventeen thousand changes a second which i don't think i'm. ok so if they were fined for this and i know

before you've said that the rules are on the books they just need to be enforced is that the case for these these firms that they just need to be enforced or do we need more more or new regulations or the f.c.c. said that was the best thing about the holder brothers and the i'm going to be fine . clarify what. it was exactly the things that we've been preaching for a long time and it really those events. we saw significant changes in the marketplace after those events over what kind of changes one particular order type orders used to be used not for its intended purpose and it's pretty technical but we would see certain patterns before that we don't see later ok so basically less of this manipulative activity because the enforcement actions send a message yes ok and how many markets do you see because there are dark pools and

other areas that you might not be seeing what's going on we don't put out what their quotes are and if you're trading against a dark pool you put in your interest i want to buy this at this price and you either get executed or not and you don't know there are no prices in the pool other than if you execute so nobody can nobody nobody knows about those but in terms of the markers that you watch which are the transparent ones. you're saying that you've seen a decline in this manipulative activity absolutely ok so do we need more regulations because some people are going for that just don't stop the whole dobro this is a good first store opening through ok let me let me play you a because i recently interviewed the f.t.c. commissioner bart chilton who has been outspoken saying that we need more regulations for high frequency trading he's calling for a number of things he's calling for kill switches he's calling for these firms to register those are just a couple things he's calling for of course the actions by the second as opposed to by the day when i kind of push back about enforcement don't we just need to enforce

more what's on the books he kind of said you know there might be this perception that there's a lot of wrongdoing because these algos can create volatility and maybe people and traders and market participants don't like this but it's not illegal so that's why i'm calling for more regulation and here he is continuing let's play a bit. i'm not suggesting that there haven't been a shift to moves that have gotten around certain laws and i don't know of any specifically i see a lot of people that complain about it but when i look at what the law is and what's been done there's nothing that we've come up so far that we've talked about publicly although i will say that for the future. so what is your reaction to this he's saying that there isn't all this wrong doing going on we need more regulations on the books essentially because right now these things that people think are illegal aren't they're just annoying what about older brothers not have been fined . so i'm so i'm saying what happened in older brothers we have hundreds of examples hundreds. of this exact right now and we're not specifically looking for it and i

know if we specifically look for it we would find thousands upon thousands so you're saying what. tells me that regulars go through this stuff that it's weird with a fine tooth comb and they're catching this stuff you're saying they're not well i know for a fact that certain agencies have asked the regulators to look at some specific examples that we've sent in there and the regulator comes back and says we can't find these trades what's the sequence number and i'm not making this up ok why is that concerning for anybody that may not understand because i have. been talking about baseball not knowing with. or or or completions in football it's just basic there's only time produce size condition sequence number for every trade so there's five things ok if you don't know what one of those is which is the

one to directly match the trade that you don't know what you're talking about never either never looked at margins. ok or you're breaking up stories oh all right well we don't know which it is but we will certainly talk more about regulators and what kind of skills and knowledge they have after the break much more their state or founder of mannix in a moment and still ahead i moderated a panel on the post-election economy will play some highlights from the sidelines with john malden richie m. around barry had the first closing market numbers.

the breaking news. here is mitt romney trying to figure out the name of that thing that we americans call a dollar. i'm sorry i'm just a guy who cares an awful lot like you sorry arthel you know what kind of sales but i don't want to give us a good feature a day on the ball that chris. can still be so focused that.

you know for you to distract us from what you and i should care about because there are profit driven industry that sells us sensationalistic garbage because of breaking news i'm having martin and we're going to break that. for the books. all right we are talking to eric seder founder of mannix who literally watches markets down to the nanosecond and sees all of the manipulative behavior going on by high frequency trading firms or at least some of it look that's from an x. that's kind of the evolution of high frequency trading sped up so before the break we're really focused on the u.s. now the u.s. you say is behind you say it's not even it's insulting that it's behind it is so

far behind it i don't even know what to call it australia just unveiled new rules for algo trading and for dark pools and they include mandatory kill switches. they want to avoid a flash crash like the u.s. had two thousand and ten meanwhile the u.s. is still catching up from the flash crash in years later but what about this proposal for like a kill switch because we've heard him call for that in the u.s. in the s.e.c. call for that is that something we should have or are there unintended consequences that would make it bad well first of all that's networking want to warn the fact that we don't have them in the first place is is that the whole topic why would you mean you don't know how to turn somebody off really ok the second thing is trading happened so fast now i mean we see events where a big stock played games and will go two percent back in two seconds so you can sort of set it back in two seconds seconds and wow and this is not an isolated case i would say every day there's a couple of these big cap stocks and if you're looking at

a one minute charge it just looks like a bad price to it but then when you dig inside you see wow there were seven hundred troops in there one of. their own and it's very secure to see that because one day they were all just going to go at once and you know one that we're going to break in and we're going to have a flash crash except this time i have to come up with a new name because it will happen in about five seconds i'm not really sure what it kills are just going to do and also there's the issue was what if there's a glitch with the kill switch i mean it's like adding another layer of complexity onto already very complex systems so who am i wrong who's going to have the book and what if you go for coffee he ok ok so that so you're. not a fan of the kill switch australia nonetheless it is moving forward with those plans which brings me to this issue of where the u.s. stands relative to other countries because i know you speak with officials everywhere you talk to the bank you talk to officials in the u.k. you said you talk to australian officials i know you talk to u.s. officials so is the u.s. behind other countries and how far behind well one of the differences is though

that we have a very fragmented market and they don't and they're kind of so high frequency traders are finding that the low hanging fruit is gone here and so they're going over there trying to you know you need to have more multiple exchanges you need to be fragmented so that we can play this arbitrage ok wait tell me more about that so what is the what is the role of having multiple exchanges in the u.s. in terms of high frequency trading advantage and lots of the games are because you have multiple places pricing the same instrument which means the systems are not running perfectly there is arbitrage opportunity and how often do the systems run perfectly never ok so there's always a do anything short opens and after it closes ok. so there's all these abilities to exploit that but why is the low hanging fruit picked in the us because well first of all regulators are waking up in the cold are brothers and they hit the n.y.s.e. so now the game the cat's out of the bag. leaders are waking up in our there's at least a sense that. things may change in they might start finding more people for this

there's also the fact that there's going to be it's a winner take all model because of scaling there's going to be really one high frequency eight hundred pound gorilla involved and all the other ones are going to be trying to bring in cause trouble to get into the space so they're seeing the other markets are only have one exchange their list or second exchange going on we have all those you know how to exploit those different pricing differences ok and my message always to the. other countries is. do we do you know this was a big mistake did they take you more seriously are they more sophisticated in their knowledge of this than the u.s. regulators are we so we tend to well we actually just provide a lot of facts and so they have you can actually see our work in mr holding from the treasury in the u.k. you can see our work in. economic reports they use our data because we provide

facts and this is sachs that's not colored one way or the other ok here in the united states our facts are somehow wrong so you say that regulators in the u.s. respond differently to these facts then regulars in other countries yes why do you think that is i don't know but it's i have heard directly from major. news outfits that the that the exchange or the regulator or both have said. we don't believe me and it's the same and that's fine you don't have to believe it but. if you don't believe that you know the sky is blue. and it is blue i don't know what's the next step how do you argue with that is what you're saying these are objective facts this is just a view of the market yes from the technical level broken down to

a very short time span right there was one specific example were an exchange outage for seventeen seconds and there's this big dispute. this shouldn't be an argument just the data in the seventeen seconds. you know you can make fools out of us. we've put a. word for anybody you can find it in that point in time and nobody's taken up until the day when you live all right well there you go and ultimatum there before we go there is this. article about this adultery is crazy interesting complaint. against as. see that reads like penthouse forum meets the insider maids keystone cops according to. account what's your reaction to this you know racial fear out yes in fact if you go through if you skip the count he has a link to the direct complaint yeah and that complaint results in new york times bestseller if you get through the lurid details in the first third of it you will

start to find that the c.s. is infested with. morally challenging. events and it gets down to mary shapiro as well and there are i think it starts around section one ninety two memory and there is specifically the name of her as being the recipient of complaints saying not being true to somebody in congress i believe her location say ok if i'm reading oh right allegedly some juicy stuff in there so everybody's now going to go read that after a few minutes we have a few more minutes or so but that is all what they're considered thank you so much for being honest founder of mannix.

let's wrap up with loose change first idea to major here but let me recap because i moderated a panel on navigating the post-election economy put on by modern economics john miles and bloomberg. l.a. area and barry ritholtz gary shilling and others were all involved but here are some highlights i got to catch from the sidelines just to give you some some great tips so i asked john malden chairman of malden economics why not go off of the fiscal cliff is deficit reduction in fact according to folks like this a video taken as to what he said. we in fact want to reduce the deficit if we want to get it done and we have a surplus the real issue is how fast do we want to do that and the answer is not very fast got seven kids i don't want to see unemployment rate should have been

more among the twenty and thirty somethings it's difficult enough yeah i mean we just have to go slow and steady we can't do it all at once we can't not do it we're going to have to eat our broccoli we're going to have to eat our vegetables but you know let's do it not trying to wolf it down not trying to you know push into this. or feed it to the dog we have to slowly and surely work our way. way back to fiscal sanity all right so there's has taken them bloomberg economists richie and ron had a really interesting anecdote about what he hears from small business owners all over the country because he speaks to chambers of commerce and rotary clubs all over take a listen to what they tell him. but out of a five hundred audience it's fifty people coming up and saying hey you're spot on because i have a negative first. of the economy but they're coming back saying hey you're spot on

so i'm saying hey do you you hire you when you're investing expanding your businesses and they'll say no on and the fourth generation owner of one hundred year old business on the third generation owner of a seventy five year old family business and i'm closing doors after christmas because. so small businesses shattering their doors everywhere is what he's hearing now so you can catch that whole panel if you like it molds in economics go check it out there meanwhile the fiscal cliff was in my panel it is everywhere today ben bernanke used comments urging congress to take swift action on it made headlines tim geithner to the list at goldman sachs c.e.o. labor lloyd blankfein to the list. you agree with me on bridgeman we want to just eliminate the debt ceiling oh absolutely. we propose that well you know this is only something only congress can stall congress put on it so their job is to make

the country function not to it's not a winning game it's a get a long game. so everyone talking about the political wrangling treasury secretary wall street c.e.o.'s but what gets lost in all of this hubbub over the fiscal cliff is some other news items like the fact that the treasury released friday night that wall street will receive a loophole they lobbied for that exempts foreign exchange swaps from dogs for a demitra we have thirty seconds but come on friday night not a lot of time to report on it huge loophole for wall street i think overall there are things i wonder how much of this is just one big show the media outlets need something to run with so the elections are over now they need to really harp on the fiscal cliff because they need to fill air time these guys are the lenders well they're you know they're the producers of but debt or the securities are so they need uncle sam to pay as they want to get rid of that ceiling because that's how we put our money we put it on loan to the government so that's what gets all the play wall street get these loopholes they want and don't have any pushback that's all we

have time for though you can go push back because we're going to leave it there but thank you so much for watching be sure to come back tomorrow in the meantime you know you can follow me on twitter lauren lyster go like our facebook page watch us on you tube or hulu and have a great night. you know sometimes you see a story and it seems so you think you understand it and then you glimpse something else you hear or see some other part of it and realize that everything you thought you. are is a big. news

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