KUDLOW ON GOLDMAN
“All Major Trading Firms” Do It!
By Wayne Jett © August 3, 2009
What is a reasonable person to think nowadays?
The price of crude oil doubled during the first seven months of 2008 while inventories were rising. Economies worldwide crumbled last August under the crushing cost of energy, after Congress heard experts testify in May and June that crude oil would not have risen above $45 per barrel without influence of unmonitored trading crude oil futures and derivatives Congress permits.
Goldman Sachs is reputedly the biggest player in trading crude oil futures and derivatives. Major media showed no interest in reporting the role Goldman played, if any, in driving the price of crude oil from $45 to $147 per barrel, although the price aberration cost middle class Americans millions of jobs and hundreds of billions of dollars.
On July 5, the world learned from Reuters’ Mathew Goldstein that Goldman Sachs uses secret software on super-fast computers to conduct high-frequency trades, and that this software is capable of manipulating stock prices worldwide (if used by unscrupulous people, of course). An average investor immediately asks: what information would give Goldman an advantage over all other traders if Goldman reacts to it very rapidly?
One answer is actual, real-time trade orders to buy or sell shares. If Goldman knows that information before it hits the executing trader’s desk, Goldman could front-run the order by acting within micro-seconds. Since front-running of customer orders has been treated as deceitful, fraudulent and a violation of federal securities laws, Goldman Sachs seemed at the time to be caught potentially in a highly compromised position.
Advent of “Flash Orders”
Suddenly investors heard a newly coined term: “flash orders.” Oh yes, flash orders are well known (since July 5) subscription services offered to large trading institutions (like Goldman Sachs). A subscriber receives “flash” (ultra-high-speed) communications of buy-sell orders as they flow from customer reps to traders. Only computers are fast enough to read these communications and respond quickly enough to make a profit ahead of the orders. In other words, flash orders appear to enable front-running of customer orders precisely of the nature feared when news of Goldman Sachs’ “secret codes” became public on July 5.
One might ask what “flash orders” have to do with whether front-running customer orders is illegal. The answer is "nuance," as they might say in Manhattan, Boston or Washington, D.C. Wall Street quickly coined a new term, “flash order,” and describes it as a subscription service. This implies qualified professionals of the financial sector are familiar with it, it is a common practice, and thus it is legal. By this stroke of genius and an assist of media reporting, Goldman Sachs evades the brink of criminal scandal and emerges again as merely smarter and faster than all others in the financial world.
Schumer Engages SEC
A long-time admirer of Goldman Sachs is Senator Charles Schumer of New York, who often carries political water for Wall Street heavyweights, including short-side hedge funds which played roles in bringing down prominent financial institutions during the past two years. Recognizing“flash orders” as a political grass fire, Schumer last week sent a letter to SEC chair Mary Schapiro in which he declared “This kind of unfair access seriously compromises the integrity of our markets and creates a two-tiered system where a privileged group of insiders receives preferential treatment, depriving others of a fair price for their transactions." (Emphasis added.)
Notice that, by describing front-running of trade orders as merely “unfair,” not illegal, Schumer tacitly lets Goldman off the hook for any violation of existing prohibitions of manipulative or deceitful practices. By Schumer’s approach, one might conclude that federal securities laws presently prohibit nothing at all, but the SEC is available to consider taking action in the future if a particular practice appears unfair.
SEC/Media Shield Fraud
Believe it or not, that is true. As previously detailed, Congress gives the SEC complete discretion to ignore any securities fraud it chooses. Even when the SEC finds fraud in securities practices or transactions, the agency has discretion to close the file and forget it, simply as a favor to the violator. This is reason enough for Wall Street players to be very generous to SEC officials, both while those officials are at the agency and when they come looking for jobs.
Major media have approximately the same relationship with Wall Street as does the SEC. As unofficial watchdogs of public interests, major media, both electronic and print, allow themselves broad discretion to disregard deceitful, fraudulent conduct even when they find it. Since 2007, media discretion to disregard fraud in financial markets surely must have been used as extensively as during any other period in American history. Most Americans have yet to hear any mainstream media outlet describe fraudulent trading practices in U. S. financial markets, which have been central causes of the continuing economic and fiscal crises.
Kudlow Email Exchange
This brings to the fore a disappointing though unsurprising personal experience which followed publication of Goldman Sachs Scandal & Cover-Up on June 30. That evening, I heard Lawrence Kudlow state on his CNBC cable television show that he was “sick and tired” of Leftist wing-nuts criticizing Goldman Sachs for being successful and profitable. I sent Mr. Kudlow an email linking my report, and an exchange occurred as follows:
I tuned in briefly today because a friend asked me to listen to your interview on cap-and-trade. As that concluded, you expressed disgust about wing-nuts from the Left who criticize Goldman Sachs.
As it happens, I published remarks about Goldman Sachs' high frequency trading software earlier today, as linked above. I don't come to my conclusions from the Left. I supported Barry Goldwater's nomination against Nelson Rockefeller in 1964 and would do so again.
Fraudulent trading practices are poisonous to capitalism and to the free market. That poison was and is at the heart of the U. S. stock market collapse, the credit market seizure and the global economic recession. The rape of the middle class must stop.
KUDLOW: There is not one whit of evidence that Goldman's models were engaged in front-running. Nor do you cite any in your piece. Just innuendo and shoddy reporting on your part. No proof whatsoever. In fact you use "may" and "might" as though they were facts. You wouldn't pass the smell test in any newsroom I know of, including the one I work for. Show me proof, not slander, please. You are guilty of exactly the sort of left-wing populism rant against success that I described on the show last night.
JETT: Of course I do not have proof of front-running by Goldman's trading software because I do not have the power of subpoena or an investigative staff, which is restricted to the discretion of the SEC. The facts that (1) Goldman's programs must read data that is worthy of action, (2) the worthy data used by Goldman must be acted upon within micro-seconds to be valuable, (3) Goldman's programs can be used to manipulate financial markets, and (4) Goldman was using its programs to make millions daily from the markets, are all evidence that the data used by Goldman's programs may be actual buy and sell orders on their way into trading exchanges. In my opinion, that is sufficient evidence to warrant full investigation.
Since you are in the business of calling names, what do you call a financial commentator who ignores such evidence of significant market fraud, failing even to make investors aware of it, while praising the potential perpetrator and cheer-leading ordinary investors to stay in the market? Surely not a free market capitalist or a patriot.
KUDLOW: As I said, there is no evidence. All major trading firms use these techniques. There is no there there.
Please note that, since this email exchange occurred last Thursday night and Friday morning, public discussions of “flash order” practices and Senator Schumer’s letter to the SEC appear to confirm that trading firms have, indeed, been front-running actual trade orders at some U. S. exchanges. But, even while Schumer hastens to concede unfairness in pricing of investor transactions, Kudlow insists “there is no evidence” of front-running and “[a]ll major firms use these techniques.”
What is a reasonable person to think about the relations of major media and Wall Street elite vis-a-vis middle class investors?
Middle Class Alliance
In America 2009, allies and friends are not always found where you hope to find them. Liberals and conservatives of the middle class – meaning those of every income level who work for a living – share a common interest in achieving justice in financial markets and economic policy. Presently, based upon clearly observable facts, neither liberals nor conservatives in the middle class are being treated justly because powerful financial predators have captured vital organs of government and mainstream media.
Some rank-and-file members of both political parties know this, but leadership stands in the way of confronting Wall Street. Financial fraud is a very significant prong of the current, multi-faceted elitist attack on the well-being and prosperity of the middle class. Cap-and-trade legislation would seize authority over prices and uses of all energy used by the middle class. Nationalization of health care would deprive the middle class of freedom to make its health care choices according to individual means.
Laws passed in the Thirties allegedly to protect middle class investor interests have proved entirely illusory. New laws rammed through Congress now by the same elitist influence would prove even more damaging to ideals for which our forebears have fought and died. Somehow, those willing to stand up for freedom – who recognize institutionalized robbery of the middle class by financial elites as a sophisticated form of slavery – must find a way to come together in a powerful way. ~