Friday, April 25, 2014

Rhetoric of Populism vs. Traders and Technicians

On April 18, 2014, the city of Providence, R.I., added to the growing list of lawsuits against exchanges, brokers, and HFT specialists. This demonstrates the power of narrative. The Lewis book, Flash Boys: A Wall Street Revolt, contains nothing new, no breaking story or previously unpublished information. But, Lewis' ability to tell a story and tell it well compels politicians to respond.

Remember, state attorneys general run for office; public officials remain politicians, not mere lawyers. As the media and voting public demand action, the financial industry faces growing pressures. This happened with tech stocks (how VC were taxed), the home lending industry, and now HFT. Laws pass on emotion, seldom offering good solutions to perceived problems. The lawsuits relating to HFT will culminate in regulatory changes, if not outright wins in court.

http://www.reuters.com/article/2014/04/18/highspeed-classaction-idUSL2N0NA0XC20140418
(Reuters) - Dozens of the largest U.S. stock exchanges, brokerages and high-frequency trading firms were hit with a class action lawsuit by the capital of the state of Rhode Island, accusing them of manipulating the U.S. securities markets.
http://money.cnn.com/2014/04/16/investing/high-speed-subpoenas/
New York Attorney General Eric Schneiderman's office has been investigating high-frequency traders for several months. Schneiderman has personally spoken out about the issues, including penning a commentary in the New York Daily News about HFT on April 3.
http://www.bloomberg.com/news/2014-04-13/cme-gave-high-frequency-traders-peek-at-market-lawsuit-claims.html
Tamara De Silva, said that while the lawsuit wasn’t inspired by the Lewis book, her clients “felt vindicated” by it. De Silva, who didn’t cite any specific instances or evidence of two-tiered access in the complaint, is seeking class-action, or group status, on behalf of all users of real-time futures market data from those exchanges from 2007 until the present.
The power of rhetoric, the power of stories over data... and what you need to master in business or public service.

Having worked in banking compliance for several years, I caution my students against assuming these issues apply to others, not the technical teams. Investigators seize computers, source code, databases, and other technical properties first, not last. The technical teams answer questions first, and tend to be first released by firms under investigation. General Motors started releasing mid- and high-level managers last week to placate politicians regarding the ignition switch problems and their bankruptcy filing. Bankruptcy, a financial device, becomes "fraud" if you file in part to avoid legal liability. GM blames their "financial team" for some choices, now, since those choices were based on risk analysis.

Learn to tell your stories, I advise students interested in technical aspects of finance. Tell the narratives of what you do, in a compelling manner. People distrust complexity, and politicians exploit that distrust.
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