The Derivative Project

Flash Crash Update and Background Information for Senator Levin’s Hearing

Flash Crash Update and Background Information for Senator Levin’s Hearing

Flash Crash Update and Background Information for Senator Levin’s Hearing

Senator Carl Levin will hold a hearing on June 17th to examine the impact of conflicts on consumer confidence. “The panel will focus on how brokers balance the obligation to give customers best execution against services they provide for other brokers and trading venues”, according to the statement.

We reported here (May 31, 2014) on consumer confidence killer Number One: When there is severe market volatility the retail investor is shut out and simply is blocked from trading. That is number one on the list for Senator Levin to address.

Recommendation Number One for Senator Levin’s June 17, 2014 Hearing on “Conflicts of Interest Investor Loss of Confidence and High Speed Trading in US Stock Markets”

The standard line in every brokerage agreement, whether it is at Charles Schwab, Betterment or Wealthfornt, is they have no responsibility for giving retail investors access to markets, if technology fails. This language must be changed in every brokerage agreement to reflect the world today as it is all about technology. This language must become mandatory in every brokerage agreement today: “The retail retirement investor has a right to file claims in any instance when they have been shut out of markets as a result of high frequency trading, dark pools, technological failures or any act of God.” Note: We are specifying “retail retirement investor”. There is a new urgency and category in the markets today that was not the case in the past. Over $4.9 trillion dollars of American’s retirement assets are in IRA’s and another $4.3 trillion in defined contribution plans.

The safety of American’s retirement assets, which reflects the future growth of our economy and the middle class, cannot be comprised in any instance. The retail retirement investor must be placed in a class of its own. After all, the new world now clearly reflects financial services firms taking the size of this market to trade for their benefit and create new profit models, which are not being examined with the necessary depth by either the Department of Labor, SEC or Congress.

Thus any claim of losses for technological failures, by a retail retirement investor, will be treated in a new category. The claim will not be heard by FINRA, but will be heard by a new body at the CFTC, that will rule on behalf of retail investors for any claim for losses based on technological break downs.

Recommendation Number Two for Senator Levin’s June 17, 2014 Hearing

We cannot verify the accuracy of this June 12, 2014 report by Nanex LLC, but we urge the new head of the CFTC to investigate this report for Senator Levin’s committee to see if there was bona fide regulatory capture, in preparing the May 6, 2010 Flash Crash report. Based on our direct dealings with FINRA, the SEC and Congress on issues that impact retail investors this article is probably very accurate. Regulatory capture and financial services firms lobbying efforts have had the greatest destructive influence on consumer confidence in all capital markets today.

There can be no “consumer confidence” if this regulatory capture, depicted in this report, June 2014: “Reexamining the Role of HFT in the May 6, 2010 Flash Crash” is accurate, as it states:

“What stood out the most, was what seemed like a concerted effort to portray High Frequency Trading (HFT) in the best possible light. The contrast is greatest between the first and last committee meetings. We wonder if Gensler’s private dinner meeting with top HFT influenced the 05-Nov-2010 meeting, just 4 days later.”

To boost consumer confidence we need the facts and a complete analysis of why the SEC and CFTC report conflict with this Nanex report. We also want to know what happened with leveraged closed end funds (such as HYV) and leveraged ETFS, prior to the HFT trading and S&P mini sales, prior to 2:30 PM on May 6, 2010. We want a new process for the retail retirement investor to seek redress when they have lost funds, due to HFT, dark pools or any technological breakdown at any brokerage firm or market force.

Our third recommendation for Senator Levin, that focuses on consumer confidence and HFT, dark pools and ETF’s and the role of the new “robo advisors” will be forthcoming.