Do Regulators Encourage Market Manipulation?

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The latest episode of stock market cheating by high-frequency traders (HFT) has set in, yet unanswered questions remain. Do regulators like the Securities and Exchange Commission (SEC) encourage market manipulation?

Manipulation refers to the dishonest activity by individuals or institutions who try to game the price of a stock (NYSEARCA:IVV) or a certain market for their own financial gain. Wall Street (NYSEARCA:IAI), in its constant pledge to innovate, has introduced various versions of manipulation, like pumping and dumping, bear raiding, and painting the tape. There's no sense in naming specific manipulators or their ghastly deeds, because tomorrow's generation of gypsters will no doubt surpass them.

Sadly, it appears the SEC hasn't been setting a very good example for Wall Street ( GS ) when it comes to obeying its own rules on stock market manipulation (NasdaqGM:QQQ).

In my book Gents with No Cents: A Closer Look at Wall Street, its Customers, Financial Regulators, and the Media , I wrote:

"The Securities Exchange Act of 1934 Section 9 strictly prohibits all securities manipulation. There are no ifs, ands, or buts about the application of this rule, and even the least seasoned Wall Streeter knows it. Nobody is above the law, allegedly.  Yet it has come to the author's belated attention that the very police force that invented this rule is in violation.

Are not regulators who ban legitimate short selling, for whatever reasons, breaking their own rules by creating a rigged one-way market with artificially inflated prices? If that's not the definition of market manipulation, what is? And what can be said about similar efforts like Operation Twist or the mysterious existence of the Plunge Protection Team?  Why do securities rules apply to everyone but the police? How can a "free market" without underhanded interference really be free, if it isn't free? Are the police really police?  Who's policing the police?"

SEC Scarecrows
Clearly, the SEC isn't just unable to enforce its own rules, but live by them too.

Furthermore, the shocking revelation in Michael Lewis' book Flash Boys that the SEC deliberately protected the unlawful interests of Wall Street HFT firms ahead of the investing public's interests shows an epic pattern of failure by the cops.  When the SEC told Brad Katsuyama to get out of the way of HFT firms, it sided with stock market cheaters. This one example alone, and there are many others, is damning proof that regulators have in fact encouraged market manipulation.

Is it any wonder why I liken Wall Street's regulators to ineffective scarecrows? (See cartoon above)  Despite all the tough talk of maintaining a fair and orderly market,  the crows always get their way.

The ETF Profit Strategy Newsletter uses technical and fundamental analysis along with market history and common sense to keep investors on the right side of the market. We cover major asset classes like stocks (NYSEARCA:IWB), bonds, commodities, and currencies.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , ETFs

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