Mafia-like Market Abuse?

You think we have it bad here in the States, with regard to a broken market structure? You gotst to check out what’s up in Europe nowadays. Michelle Price writes in a late Wall Street Journal article yesterday:

European exchanges have voiced concerns that regulators are unable to monitor and detect what they have described as professionalised “mafia-like” market abuse. The Federation of European Securities Exchanges said the fragmentation of trading across multiple venues had “made it possible that potential abuses may be occurring which may not necessarily be evident to any single venue”. It added: “The method of effective detection of market abuse must be urgently addressed.”

The WSJ goes on to reveal how last month, German authorities started investigating an “international ring alleged to have operated manipulative trading strategies on the Deutche Borse owned Frankfurt Stock Exchange. Michael Zollweg, the FSE’s head of trading surveillance told reporters that the incident was an example of how manipulative trading has evolved into an industry with “mafia-like” international structures.

Whoa. You know what that reminds me of? Do you remember the manipulative SOES Bandits of the 1990’s, and how they would manipulate stocks? Do you know what they evolved into? Yessirree! They are now your friendly neighborhood HFT market making firms. But I digress. Back to Europe and the mob.

Just as 2007’s REG NMS has done such a swell job in fragmenting our markets in order to “let a thousand flowers bloom”, so has Europe’s MIFID (Markets in Financial Instruments Directive) succeeded in fragmenting their markets. And they have no consolidated tape. They are dealing with the same fragmentation/HFT issues that we are here, with similar surveillance issues. Each of the trading venues in Europe are responsible for the surveillance of malfeasance on their own systems only. And according to Brian Taylor, ex-CFO & CTO at UK exchange Plus Markets:

“No regulator monitors orders, order books or real-time order book replays, so they cannot see any activity that is creating market abuse across venues. The probability of fair and orderly markets being maintained and investor protection being enforced must be minimal.”

So in Europe, as in the United States, we have market structures, technology, and participants who have evolved light years faster than the regulators who are supposed to police the system. No wonder why all the major HFT CEO’s continue to claim that “bad apples” should be dealt with as they are found; they know that the regulators are not equipped to find the apples.

Forgive the mini-rant in this morning’s note. It’s just very hard for us at Themis to turn down the opportunity to feature a market structure related article that uses the word “mafia”.

Happy Spring!