No one has worked harder to try and inform people of important issues facing investors than Jim Sinclair. On his blog site Jim notes a recent lawsuit filed against the Chicago Board of Trade alleging a high volume of illegal "wash trades" in the US futures markets. Below are Jim's comments, then a few key paragraphs from the article, followed by our concluding comment.
First Jim's comment on the article (here is direct link to the article):
Jim Sinclair’s Commentary
A wash trade is a false price because it occurs with the buyer and seller as one and the same party or two financially related parties.
Who is to say that the huge paper gold shares at the open in the US are not wash sales? There is no risk in a wash sale. You can artificially force the price in any direction you wish with wash sales. Wash sales are illegal under present rules and regulations.
Now a few key paragraphs from the article:
Since March 30 of this year when bestselling author, Michael Lewis, appeared on 60 Minutes to explain the findings of his latest book, Flash Boys, as “stock market’s rigged,” America has been learning some very uncomfortable truths about the tilted playing field against the public stock investor.
Since March 30 of this year when bestselling author, Michael Lewis, appeared on 60 Minutes to explain the findings of his latest book, Flash Boys, as “stock market’s rigged,” America has been learning some very uncomfortable truths about the tilted playing field against the public stock investor.
Throughout this time, no one has been more adamant than Terrence (Terry) Duffy, the Executive Chairman and President of the CME Group, which operates the largest futures exchange in the world in Chicago, that the charges made by Lewis about the stock market have nothing to do with his market. The futures markets are pristine, according to testimony Duffy gave before the U.S. Senate Agriculture Committee on May 13.
On Tuesday of this week, Duffy’s credibility and the honesty of the futures exchanges he runs came into serious question when lawyers for three traders filed a Second Amended Complaint in Federal Court against Duffy, the Chicago Mercantile Exchange, the Chicago Board of Trade and other individuals involved in leadership roles at the CME Group.
The conduct alleged in the lawsuit, backed by very specific examples, reads more like an organized crime rap sheet than the conduct of what is thought by the public to be a highly regulated futures exchange in the U.S.
The most stunning allegation in the lawsuit is that an estimated 50 percent of all trading on the Chicago Mercantile Exchange is derived from illegal wash trades.
The lawsuit says Duffy and his management team are tolerating wash trades “because they comprise by some estimates fifty percent of the Exchange Defendants’ total trading volume and also because HFT transactions account for up to thirty percent of the CME Group’s revenue.”
The complaint explains that the ability to continuously enter orders and get trade confirmations “of the price at which these orders are filled, before the rest of the public even knows about the executed trades,” empowers high frequency traders with “a massive informational and time advantage in discerning actual price, market direction and order flow before anyone else.”
By providing just a select group of market participants and high frequency traders with this “sneak peek” advantage, says the complaint, the defendants engaged in a “fraud on the marketplace.”
The Justice Department and FBI have opened investigations into high frequency trading. Let’s hope that includes both stock and futures exchanges.
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My added comment: Filing a lawsuit does not prove guilt or innocence. That is determined in the courts so time will tell how this turns out. The point we want to make from this is that things like this are why the public is losing trust in the system. And why those in charge of the system need to work hard to build public trust. If too many people decide the system is corrupt or failing, it can lead to the "trigger event" that Jim Rickards mentions so often. The final snowflake that triggers the avalanche.
So far those in charge of managing the current monetary system have done a near miraculous job of holding it all together and preventing a trigger event leading to systemic collapse. You really realize this even more when you follow all this news to prepare for blog articles and see how many difficult issues are out there to manage. It has been a great learning experience.
While it is not possible to know the future, we hope wise decisions will be made to avoid another global systemic crisis. That will surely be a lose-lose scenerio where those using the system (we the people) and those running the system will both lose. What we hope for are creative solutions to problems that lead to win-win. A system where the people have the maximum freedom possible and that is financially stable. Where the people can once again have trust and confidence in their leaders and their currencies. We see hope for the win-win even as we know the lose-lose is always out there and cannot be ignored. We live in historic times.
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