March 1, 2010
To whom It may concern,
I am an individual investor and day trader who has been involved in trading the market for over 20 years now. During this time I have seen many changes in the markets and the ways in which they are traded. I believe the questions the SEC is seeking feedback on are quite frankly – self evident. The truth is that the market has become a high frequency casino, where fundamentals no longer matter. All one has to do is turn on any Financial News Channel on television to learn that Investment is no longer part of the game – it is all about trading. While this may not be worrisome to some, it is highly worrisome to anyone looking to the future of our markets. Our markets are no longer Free nor are they Fair The small investor who is actually interested in investing his or her money based on rational assessment of company fundamentals, value and true price discovery is quite frankly out of luck. While I understand that the SEC as well as many others do not want to see the stock market correct, I am convinced that in the Long Run, honest and open markets which reflect economic reality are the only true viable market that will survive the test of time. All other attempts to ensure the market only goes higher will fail in the end, as each intervention requires larger more intrusive measures and results in each new bubble being bigger than the last and each bursting of the bubble become more dangerous to our overall economy and our nation as a whole. I am glad that the SEC is FINALLY looking into a few of the practices that have destroyed our markets.
Market Quality Metrics
What are the best metrics for assessing market quality for long-term investors and have these metrics improved or worsened in recent years?
A cursory look at price, volume, P/E ratios answers this question. There IS NO market under the market. The Average Investor has long sense recognized that this market is a rigged game designed to enrich a select few. I think the issue you are looking at, if acted upon, could go a long way to correcting some of the issue that have caused the average investor to withdraw from the market. In addition, I might add that reinstating some sort of international accounting standard would be beneficial along with doing more to hold the rating agencies accountable. The idea that business are allowed to basically mark to fantasy is little more than condoning fraud. Investors have no way of truly knowing the value of the company or their assets unless they are forced to mark to market. I know this is not a popular idea among institutions, but when viewed though the eyes on the average investor it is imminently reasonable. An asset is only worth what someone is willing to pay you for it, not some cooked up number you assign to it. Additionally, rating agencies should be held accountable when they assign ratings to companies which they know full well do not reflect the overall quality of the companys debt or earnings. Generally speaking the overall metrics used for assessing market quality have Worsened Dramatically in the years I have been involved in the markets and have done so almost exponentially in recent years.
Fairness of Market Structure
Is the current highly automated, high-speed market structure fundamentally fair for investors?
Absolutely NOT Program Trading now accounts for an estimated 70 – 80% of all volume on the NYSE. Again, you need to decide whether you want a market of Traders or a market of Investors. Although I am a trader and have been one for many years, the truth is I do NOTHING to contribute to the economy other than spend the money I make. The problem in all honesty is simple, the money I make comes at the expense of those who work for a living and do not have time to sit in front of a computer screen all day watching the market tick for tick. The further truth is that the Average Investor has not increased their wealth over the past decade if they have been in stocks employing a buy and hold strategy. The SP is trading at basically the same level it was in 1998. I believe computerized trading has had much to do with this. Stocks no longer reflect underlying value of a company, they are now driven by Technical Trading which is totally indifferent to economic reality or underlying value.
High Frequency Trading
What types of strategies are used by the proprietary trading firms loosely referred to as high frequency traders, and are these strategies beneficial or harmful for other investors?
Is the overall use of any harmful strategies by proprietary firms sufficiently widespread that the Commission should consider a regulatory initiative in this area?
I obviously do not know what types of strategies proprietary trading firms use in their HFT trading, they are tightly held secrets. I see no Real Benefit to the system when a firm is allowed to trade in and out of the market in less than a second. I will say this however, any practice which allows forms to place servers on the exchanges and front run individual investors orders should definitely be not only regulated, it should be ban altogether.
Do co-location services (which enable exchange customers to potentially route trades faster by placing their computer servers in close proximity to an exchange's computer system) give proprietary trading firms an unfair advantage?
If so, should the proprietary firms that use these services be subject to any specific trading obligations?
I think there is little question that the practice of co – location of servers gives proprietary trading firms an unfair advantage. Honestly, I do not know how this is not considered insider trading. When a firm can intercept an order, turn around and front run that order, trade in and out of the market in less than a second at no risk and profit from that activity – then the market is seriously in need of reform. The It provides Liquidity argument is total nonsense. The stock market existed for many years without HFT and liquidity was never an issue with the exception of a couple of occasions. We have yet to experience a real test of these HFT programs under extremely stressful conditions, but I have a feeling it is not going to be pretty when these programs get caught in a negative feedback loop. The practice of HFT and being allowed to have servers which intercept orders and front run them is in my opinion nothing more than being allowed to legally steal money from 401Ks and Pension Fund investors and should be made illegal IMMEDIATELY
Has the trading volume of undisplayed trading centers (such as dark pools) reached a sufficiently significant level that it has detracted from the quality of public price discovery?
If more individual investor orders were routed to public markets, would it promote quote competition in the public markets, lead to narrower spreads, and ultimately improve order execution quality for individual investors beyond current levels?
Are a significant number of individual investor orders executed in dark pools and, if so, what is the execution quality for these orders?
This is a matter of basic fairness and transparency. Of course all investors should have access to the same pools of liquidity and information. The real reason these dark pools are desired by proprietary trading firm is so they can conduct their HFT programs without regulation. You know it and so does anyone else that has spent more than 10 minutes playing the market. The argument used that Large Investors wanting to buy 1 million shares of a stock with a small float and displaying their orders would compromise the secrecy of what they are doing is total B.S. The truth is that the average investor can purchase virtually any size order through traditional exchanges and have no problems nor will they cause price dislocations. It seems self evident that if you have dark pools that are non transparent that by definition they are not subject to the same regulations and rules as the rest of the investing public since nobody including the SEC knows what is going on within these dark pools. That in and of itself should be enough to prompt the SEC to make these dark pools illegal.
Candidly, the issues listed here for public comment seem to me to be no brainers. Clearly all of these issues and practices are used to the advantage of institutions and their proprietary trading operations. I guess at the end of the day, the SEC needs to ask itself what is more important to the integrity of our market and their long term overall health – investors who are actually wanting to place their money in companies as Investors or firms like Goldman Sachs or J.P. Morgan who want to flip in and out of pieces of paper within a seconds time and steal the money of those potential investors. The SEC needs to get serious about their regulations because I can tell you, the general public and small investor has by and large already left the market and without REAL REFORM to regain their trust and confidence, they will not be coming back.
Randall M. Woith