With the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) in the United States on July 21, 2010, the market-banking meltdown of 2008 appeared to have reached the final stage in the typical crisis-reform cycle.
When such disasters occur, nations historically move from outrage to proposals for reform to legislation. Each disaster bequeaths its own “regulatory legacy” (Haines and Sutton 2003), and each new legislative response is hailed as “the” definitive, once-and-for-all solution. Thus, each of the corporate meltdowns in the recent past—the Great Depression of the 1930s, the now-forgotten collapse of the savings and loans in the 1980s (Calavita, Pontell, and Tillman 1997), the collapse of the technology stock bubble in 2001–2002—has motivated “get tough” rhetoric and law. And since stock market crashes and fraud are a regularly recurring phenomenon, opportunities to intervene and “get it right” are lamentably frequent (Banks 2004; Garnaut 2009; Geisst 2004; Reinhart and Rogoff 2009).
During periods of crisis, statutes that were deregulated or ignored during boom times are revived; the budgets and formal powers of relevant regulatory agencies are increased; and the neoliberal antiregulation rhetoric that has dominated the developed world for the last 30 years (particularly the English-speaking democracies) declines in intensity.
But as the media spotlight shifts onto the next crisis, a regulatory status quo ante returns. Regulatory agency budgets once again come under siege, and antigovernment rhetoric and policies increase (Snider 2009).
Throughout each reform period, the omnipresent army of business “enablers”—tax lawyers, accountants, and investment advisors—are kept busy figuring out new ways to evade, avoid, or nullify each new set of regulations (Braithwaite 2005; McBarnet 2004). Their “innovations” proliferate unchecked until the next wave of financial meltdowns occurs and the cycle begins once more (Rosoff, Pontell, and Tillman 2004). The result is that regulators find themselves responsible for enforcing an ever-more complex mass of obscure and often contradictory statutes, provisions, and instructions that provide income for the stable of lawyers who are retained to find loopholes for their deep-pocketed employers and produce mystification for almost everyone else.1
Some pundits say, however, that because the 2008 crisis was truly global in its scope and effects, a number of new forces have been set in motion. They argue that it really will be different this time. The financial scandals involving prestigious Wall Street corporations (such as Bear Stearns, Lehman Brothers, Merrill Lynch, and Goldman Sachs), once-reputable financiers (Bernard Madoff and R. Allen Stanford), leading banks (such as Bank of America and Citibank), and prominent mortgage lenders (such as Countrywide) affected not just the United States but the world—triggering a global recession with massive job losses and bank collapses in the United Kingdom, the European Union (particularly Iceland, Portugal, Greece, Ireland, and Spain), and Asia. Many international leaders called for ambitious international measures to prevent such a crisis from recurring (Ojo 2009; Stuckler and Basu 2009).
There are other reasons to hope that out-of-control financial capitalism will finally be brought to heel this time around. New technologies, such as increasingly sophisticated tools that make it possible to track trades and institute systems of panoptic surveillance, including 24-hour video-audio cameras, have been employed for decades against traditional kinds of theft. These same tools could be effective weapons against corporate criminality as well: They make it technically feasible for regulators and investors to render all types of stock market transactions visible, the first step in accountability. Moreover, the pressure on both regulators and traders to “get tough” comes from a variety of sources. Activist investors’ groups regularly employ the capabilities of the web to pressure financial institutions on everything from excessive management salaries and bonuses to corporate lack of transparency. Groups such as Democracy Watch (http://www.dwatch.ca/) publicize suspicious transactions and try to name and shame unethical behavior.
Under pressure from environmental groups and labor unions, many CEOs have committed their institutions to “best practices” in the fields of ethics, the environment, and corporate social responsibility (Roberts 2003; Shamir 2008). Moreover, at the sociocultural level, there is deep public anger at the role that corporate and political elites played in causing or failing to prevent the 2008 collapse and at the fact that the perpetrators have not been punished for the social harm they caused. The punitive culture promoted by neoliberal regimes (Garland 2001) in the form of longer jail sentences, welfare cutbacks, and mandatory minimum sentences has intensified the pressure on politicians to take harsh measures against corporate criminals and fraud.
These factors are helping to shape how financial capitalism will be conceptualized, regulated, and controlled in the years to come. While recognizing that it is impossible to predict the “success” of the latest set of regulations, this essay focuses on the new technologies that have transformed stock market governance and their potential use as regulatory tools. It considers what technological resources can be deployed by agencies tasked with regulating financial crime, particularly stock market fraud, and how technology interacts with the political, cultural, and economic (dis)advantages of regulatory agencies.
In the first section I trace this process, its implications, and effects before going on to examine the 2008 crisis and the reforms it provoked. The second section explores the technologies employed by dominant economic actors, specifically Wall Street banks and traders, and how these technologies are used to both maximize profits and resist regulation. It also explores the resources—technological, political, cultural, and economic—that the targets of regulation employ to defeat, deflect, or evade the regulatory gaze.
Technological Resources of the Regulators
To set the stage, we must first examine the business of trading itself and how it has changed over the last 20 years. To borrow a marketing slogan from advertisers, “this is not your grandfather’s stock exchange.” Equity trading markets have transformed from geo graphically fixed institutions dependent on face-to-face interactions and paper records into global 24/7 digital and electronically mediated transnational marketplaces. Stock exchanges themselves, originally self-regulating entities established by trading partners to raise capital and facilitate nation-building, have been “demutualized,” that is, turned into for-profit corporations competing with new players and venues for listings and the fees they generate (Jackson and Gadinis 2007).
Stock market fraud, a variant of corporate crime that is defined as “illegal acts committed by legitimate formal organizations aimed at furthering the interests of the organization and the individuals involved,” has also gone digital (Snider 1993, 15). Demutualization maximizes the potential conflict of interest between the regulatory obligations and the economic interests of the stock exchange, since exchanges, as self-regulating entities, are the first line of defense against stock market fraud. These developments magnify the potential for financial traders to wreak immense financial and social harm and greatly increase the number and geo graphical spread of primary and secondary victims (Braithwaite 1989; Coleman 1989; Pearce and Tombs 1998; Shapiro 1984, 1990).
It might seem that the digitization of trading systems would have opened up a vast new terrain for regulators, giving them the ability to prevent, track, monitor, and punish a range of stock market fraud at a level that was never possible in the past. With the evolution from paper record keeping to digitized financial flows on vast electronic networks, tracking and monitoring became possible via the digital traces left by every market transaction. The digital revolution, however, was designed and driven by commercial entities to enhance their interests, not those of regulators, small-retail investors, or the police. Efficiencies of time and scale were its objectives.
Thus, it is not surprising that although “a marked proliferation in the use of information technologies and computer programs to monitor, scan and surveil” (Williams 2009, 461) has occurred, the surveillance deployed against dominant economic actors and firms (such as Wall Street traders and the wheeler-dealers of major banks) remains minimal and nonintrusive.
This is particularly obvious when contrasted with the intensive measures routinely used against the embezzling retail clerk or burglar, who steals only a tiny fraction compared with the larceny of corporate titans, and does so with minimal long-term effects on the larger society (Ball and Wilson 2000; Deetz 1992; Sewell 1998; Sewell and Wilkinson 1992; Snider 2003; U.S. Congress Office of Technology Assessment 1987). No surveillance cameras have been installed in executive boardrooms; nor have police, forensic accountants, or regulatory officials been empowered to routinely use “panoptic” surveillance or digitally mine the online activities of CEOs.
Nevertheless, systems of automated, real-time monitoring of trades and trading patterns began appearing in the 1990s. They are now widespread. The first two systems appear to have been the Advanced Detection System, in the United States, and Surveillance of Market Activity, in Australia, which is based on the Stock Watch system used by the New York Stock Exchange (Brown and Goldschmidt 1996; Kirkland et al. 1999). The Financial Industry Regulation Authority (FINRA) is the primary (and largest) independent regulator with jurisdiction over all securities firms doing business in the United States. Created through the consolidation of NASD and the New York Stock Exchange (NYSE), FINRA is tasked with protecting investors and ensuring market integrity through “effective and efficient regulation and complementary compliance and technology-based services” (NYSE 2010). It performs market regulation under contract for the NASDAQ Stock Market, the American Stock Exchange, and the International Securities Exchange. It is also responsible for registering and educating traders and securities firms; enforcing its own rules as well as federal securities laws; educating the investing public; reporting on trades; and administering the nation’s largest dispute resolution forum for investors and registered firms (FINRA 2010).
Electronic systems typically use data on “normal” trading volumes and share price fluctuation to catch “abnormal” trades. In the United States, market surveillance divisions often work closely with FINRA and with the SEC, the primary regulatory agency in this sector, in developing and managing their surveillance systems. “Minor” breaches are handled by the exchanges’ enforcement units. “Major” cases may (or may not) be referred to the SEC. Recently, FINRA has taken over handling market oversight functions for the NYSE, including providing market surveillance and enforcement.
The effectiveness of electronic monitoring depends on a number of economic and political factors. To keep up with the speed at which trades are made, regulators use surveillance software—programs designed to generate alerts for anomalies—either developed within stock exchanges or, if contracted out, by surveillance software companies. Considering that there are millions of trades in every 24-hour period—average daily share volume on the NYSE increased 181 percent between 2005 and 2009 and the average time to complete an electronic trade dropped to 650 microseconds (Lavin 2010)—this is a formidable task.
The number of alerts issued depends on where the bar is set between the “normal” and “abnormal.” Though executed by programmers, high-level executives make this judgment call. Set the bar too high, and the number of alerts issued per day will be astronomical. Set it too low, and thousands of problematic transactions will escape notice. Furthermore, system integrity is affected by a number of factors, such as budget and staff numbers, staff abilities (education and training), the limits set by the official mandate of the monitoring agency, its jurisdictional responsibilities and constraints, and its relative place in regulatory and political power structures within the nation-state. Overall this makes such programs very crude indeed (Williams 2009).
Before the 2008 crisis, video surveillance of traders was virtually nonexistent. The most notable exception was initiated by the SEC in 2006. An SEC investigation identified twenty NYSE traders who, from 1990 to 2003, engaged in “unlawful proprietary trading” through acts of “interpositioning” and “trading ahead” that resulted in more than $158 million in harm to its clients. Because the SEC considered the “parameters and procedures” of the NYSE and its automated surveillance system “too broad,” it ordered specialist traders to install audio and video equipment to capture “all floor trading activity” and all activity and interaction “occurring at that specialist’s post and panel.” The surveillance had to be linked to NYSE’s audit trail system, which provided time-sequenced records of all orders arriving at each specialist’s trading post that were then stored for a minimum of 2 years. The NYSE was also ordered to retain a regulatory auditor until 2011, to introduce “enhancements” to the NYSE’s referral process and to improve the training of its regulatory staff. Finally, the NYSE’s chief regulatory officer had to certify annually that the NYSE was in compliance with the SEC’s order (Anderson 2005; SEC 2005). However, the program ended in July 2009, 2 years earlier than scheduled. The official rationale, contained in an order issued by the SEC, was that the NYSE needed “greater flexibility in determining the appropriate regulatory usage of its audio-visual surveillance technology.” The targets of regulation, declared the NYSE, could decide for themselves how to “maximize the potential benefit to the NYSE’s surveillance, examination, and enforcement process” (SEC 2009).
After the 2008 crisis, the SEC responded to widespread condemnation of its failure to prevent the collapse of the banking system or to investigate the egregious abuses that caused it (particularly Madoff’s decades-long Ponzi scheme) by forming an office with enhanced surveillance capabilities specializing in large-scale market abuses (the Market Abuse Unit). This Philadelphia-based unit is charged with investigating “complex” frauds, such as “organized” insider trading. It is believed to use surveillance techniques to delve into the backgrounds of certain traders. The system can cross-reference information about where traders went to business school and where they used to work with information about their trading activities. In detecting common relationships and associations, the unit hopes to find patterns of trader behavior across securities that will help it detect trades involving improper access to information (Goldstein 2010; Kaparti et al. 2010).
Legislative Reforms: The Dodd-Frank Act
The 2008 crisis has generated renewed, even frenzied, activity on the U.S. regulatory and surveillance front. Passage of the Dodd-Frank Act was one of the most important responses. The new act, a long and complex document, is intended to reassure investors—and governments around the world—that the American financial system is sound, transparent, and accountable. It also hopes to persuade major corporations to replace the ruinous short-term vision characteristic of their activities with a long-term perspective on their financial health. The act strengthens shareholders’ rights by providing them with the ability to reclaim through legal action executive compensation that was based on inaccurate financial statements (Dodd-Frank Act 2010).
American taxpayers, it is promised, will no longer be on the hook to bail out financial firms that are deemed too big to fail. The Volcker Rule restores a section of the 1933 Glass-Steagall Act that was repealed in 1999 by the Gramm-Leach-Bliley Act (Gramm 1999). This rule prohibits banks, their affiliates, and holding companies from engaging in proprietary trading and bans investment in or sponsorship of hedge funds and private equity funds. It also limits relationships with hedge funds and private equity funds and requires “large, complex financial companies to periodically submit plans for their rapid and orderly shutdown should the company go under” (Committee on Financial Services 2010). Moreover, before any emergency loan is approved, the company must demonstrate that it has sufficient collateral to repay the Federal Reserve should the need arise. Brokers and advisors will be subjected to a greater fiduciary duty to act in the best interest of clients. The assets underlying mortgage-backed and municipal securities must be disclosed (Dodd-Frank Act 2010).
The act also streamlined bank supervision so that there will be “clear lines of responsibility among bank regulators” (Dodd-Frank Act 2010; U.S. Senate Committee on Banking, Housing and Urban Affairs 2010, 5). In light of the derivative-caused financial crisis, the Dodd-Frank Act calls for increased transparency and accountability for over-the-counter derivatives. The securitization process, which was a main factor in the development of the banking crisis, comes under tighter supervision. The SEC is also required to examine ratings organizations at least once a year and make its key findings public. Furthermore, banks are expected to ensure that compliance officers not only pass the proper qualifying exams but regularly update their skills. Most important of all, the act forbids the conflicts of interest that allowed ratings agencies to rate funds for clients upon whom they were financially dependent (Dodd-Frank Act 2010).
As noted above, the SEC has been sharply criticized as ineffective. In response to this criticism, the act outlines a series of reforms to the agency, including a requirement that it be self-funded. It also mandates rewards for whistle-blowers. The SEC was ordered as well to tighten its internal controls and management system.
To ensure that such a crisis will never happen again, the act establishes two new agencies, the Consumer Financial Protection Bureau (CFPB) and the Financial Stability Oversight Council (FSOC). The CFPB, to be staffed by experts in consumer protection, financial services, community development, fair lending, and consumer financial products, has been given investigative and enforcement powers, such as the ability to subpoena records and compel witness testimony, and is required to produce annual reports.
Nevertheless, the CFPB’s future effectiveness is questionable. First, it has no authority over many of the worst offenders, such as the larger banks, automobile dealers, and real estate brokers (“Times Topics: Bureau of Consumer Financial Protection” 2010). Second, the appointment of Elizabeth Warren, a strong consumer advocate, as the agency’s director was so strongly opposed by Republicans in Congress that on July 18, 2011, President Obama announced his intent to appoint Richard Cordray, a former attorney general of Ohio. In January 2012; the president gave Corday a recess appointment that was challenged by the Republicans on the grounds that the appointment is unconstitutional because the Senate was not “technically” in recess. This is hardly an auspicious beginning.
Third, the legislation is dangerously incomplete. For example, the act does not spell out how mortgages will be overseen by the CFPB. Indeed, almost every detail of its day-to-day operation will be left to the regulatory staff (still unhired when this was written) to work out. And as discussed below, this “working out” will occur out of the public view, even as the process is maximally exposed to lobbyist pressure.
The FSOC is aimed at preventing the kinds of financial dealings that caused the bankruptcy of so many investment banks. A Data Center and Research and Analysis Center will make information about the banks’ market positions and transactions widely available. The council will also be expected to disseminate the results of its data-collection activities to financial regulatory agencies in an accessible standardized form. At the same time, it must report changes in system-wide risk levels and patterns. Other mandated activities include investigating disruptions in the financial markets, providing advice relating policies to systemic risk, and pursuing research to support and improve regulation (Dodd-Frank Act 2010, 68–78).
These represent an ambitious set of objectives, but with few details on how such an organization would work and whether any private or government body would be compelled to act on their recommendations, its overall potential is unknown.
And that’s the trouble. The Dodd-Frank Act at present is little more than a “black box.” Although one of its primary purposes is to reform the agencies that failed to prevent the 2008 crisis, these same regulators were given formative influence over it. Federal agencies will have to decide the details of at least 243 financial rules (Lichtblau 2010; Morgenson 2010b). Under the act, the SEC alone is responsible for developing ninety-five rules on topics such as trading in derivatives, standards for credit rating agencies, and the disclosure of executive bonuses. The CFTC will develop sixty-one rules, the Federal Reserve has fifty-four, and the two new agencies developed by the act—the FSOC and the CFPB—have eighty rules to establish between them (Lichtblau 2010).
Leaving the regulators to turn the broad mandates of the act into legally binding and enforceable rules of operation is seen as necessary because regulators are the designated, undeniable “experts” in each regulatory arena. However, this rationale overlooks the equally undeniable fact that the rules that make enforcement possible or easy for regulators will typically be very different from those that would be required to rein in dominant financial actors.
Regulators do not shape rules in a vacuum. Since the bill was signed into law, major agencies have been faced with scores of lobbyists (nearly 150 of them former regulators), all of them keen to “help” the regulators shape the rules in the directions most favorable to the corporations they represent. According to the Center for Responsive Politics, total spending by lobbyists continues to be high. Although there was a slight decrease reported during the first three quarters of 2010 (Center for Responsive Politics 2010b), a total of $3.49 billion was spent on lobbying in 2009. The largest amounts were invested by the U.S. Chamber of Commerce, which spent $144.4 million in 2009 and more than $651 million in the preceding 12 years. Over the same period, the number of registered lobbyists has fluctuated, peaking in 2007 at 14,777 lobbyists and slowly declining to 11,916 in 2010.2
Former members of Congress, as well as former White House staff, are often recruited by various lobbying firms to look out for the interests of major corporations. Their connections and expertise are considered key to generating results for their employers—and they are paid accordingly, in the range of $300,000 to $600,000 a year. In 2007, following a series of lobbying scandals, new congressional rules for the lobbying of Congress banned ex-members from employment in lobbying firms until a year after leaving office. But even this short “cooling-off” period was circumvented when many former lawmakers worked as consultants or advisors until they became full-time lobbyists when the year was done. In 2009, the Center for Responsive Politics identified 129 former members of Congress as active lobbyists (Center for Responsive Politics 2010a).
The SEC’s May 2010 proposal will be a good test of the commission’s—and the federal government’s—commitment to financial reform. This proposal suggests a series of rules tightening up “Regulation AB,” the 2004 rule specifying the information that issuers of asset-backed securities—including the disastrous mortgage securities pools—must provide to investors. The “enablers” of Wall Street had been able to circumvent Regulation AB by issuing one omnibus disclosure statement, then hiding the details of a number of mortgage pools underneath. If rating agencies gave the initial “shelf registration” a top rating, it rendered invisible the possibly dodgy mortgages hidden under its umbrella in subsequent mortgage pools. The SEC proposal aimed to close this loophole by requiring issuers to provide detailed data on all the assets covered by the initial disclosure. And it increases transparency by requiring issuers to provide computer access to the day-by-day performance of their funds (Morgenson 2010a). The SEC solicited “comments” from its “stakeholders” from May to August 2010. Will the proposal emerge intact, and will the SEC be able to follow through when the armies of lobbyists—with their impressive links to key senators and members of Congress—have finished their work?3
Technological Resources of the Regulated
In a world with fully digitized trading, where electronic stock surveillance networks have largely supplanted the trading floor, the largest financial actors—in the United States, primarily Wall Street firms—are constantly “innovating,” looking for new ways to secure advantages over other traders and investors (and regulators). Smart Routers, combined with algorithms, increase the speed at which trades can be made: through constant, real-time monitoring of market metrics, feedback from market activity, and historic research, they assess price, current and historical liquidity, speed, and stability in order to determine where an order should be placed. In the quest to maximize profits, the firms with the deepest pockets are best positioned to purchase the latest, fastest trading software and the human capital needed to program it. Wall Street firms pay millions of dollars to recruit and retain those equipped to develop the “magical” algorithms that lay the billion-dollar eggs.
Indeed, a recent lawsuit reveals that over the last 7 years, the two top programmers at one firm, Citadel Investment Group, collected tens of millions of dollars in salary and bonuses (Berenson 2009).
In a business where time really does mean money, having the fastest, most complex algorithms provides a huge competitive advantage, since firms can make millions in microseconds from high-volume trades. Thus, each strives to complete its trades, reap the profits, and move on before another firm’s algorithms can detect and exploit the same patterns in the market. Some have even gone so far as to co-locate their hardware, that is, to physically locate their hardware closer to the exchanges to decrease the amount of time it takes for trade signals to travel to and from them (Gehm 2010).
High Frequency Trading (HFT) takes algorithmic trading one step further. It combines real-time market data, giving privileged access to pricing information, with particular algorithms that allows traders to buy and sell so quickly and in such quantities that while they may make only pennies per trade, the aggregated profits are huge.4 Powerful computers, looking for “statistical patterns and pricing anomalies,” allow investors to execute millions of orders per second and instantly spot trends within various stock exchanges. This lets the surveillance algorithm probe for the maximum and minimum price a seller or buyer would accept for any given share. Then, in less than a millisecond, automated HFT programs issue millions of buy or sell orders. These “flash orders” happen so quickly that human investors are completely unaware they have occurred. Analysts estimate that such transactions accounted for $21 billion in profits in 2008 alone (the amounts are expected to quintuple in the coming year) and account for over 70 percent of all stock market trading today (Duhigg 2009; Kaufman 2009).
“Market timing” is yet another variant. It occurs when fund managers take advantage of different closing hours or price discrepancies between markets in different parts of the world by quickly buying and selling fund shares. This is often done with mutual funds, the investment vehicle of choice for the small retail investor, unbeknownst to the shopkeepers and pensioners whose savings are tied up in it. Market timing is legal but only when all shareholders have equal opportunities to benefit from it. This is apparently not the case: The benefits of such trades are typically available only to favored insiders with massive portfolios, such as professional money managers and hedge fund executives.
This strategy has also been employed against mutual and pension fund managers, by traders attempting to discover the algorithms they employ, figure out the next big stock purchase they will make, and “front-run” them by scooping up that stock at a lower price and selling it back to the fund at a higher one. As a former NASDAQ vice president put it, these “high frequency bandits” “pump up volume statistics, front-run investor orders, increase transaction costs, and hurt real liquidity” (Lavin 2010, 22; Urstadt 2010).
These algorithmically enabled devices create a two-tiered financial market—one for insiders with access to sophisticated, expensive, up-to-the-minute computers and programmers and another for the average investor whose orders are completed merely as an “afterthought” (Kaufman 2009). High-frequency traders “essentially bully slower investors into giving up profits, and then disappear before anyone even knows they were there” (Duhigg 2009). More serious consequences occur when automated HFT triggers new financial disasters (Salkever 2009) with attendant social harm to smaller and weaker sectors, institutions, and countries. With algorithmic trading constantly increasing the size, speed, and number of trades, and with so many funds traded simultaneously, the speed of trading can become too fast for the computerized system to handle—resulting in both a system and a market crash. As Bernard Donefer notes: “the speed of these equations and their ability to reach so many markets simultaneously could turn even a minor coding error into a spiralling disaster” (Lavin 2010, 22).
The infamous Black Monday, October 18, 1987, when billions of dollars disappeared in the blink of an eye and stocks plunged 22 percent, was an early manifestation of the dangers of automated trading. Automatic market shutdowns were put in place at that time, but on May 6, 2009, an automated cascading effect associated with HFT algorithms caused the Dow Jones to plunge precipitously once again, shaking investor confidence worldwide (Doering and Rampton 2010).
Dark pools are another technologically enabled practice. Here, bundles of shares that allow the largest institutions to trade almost exclusively with one another are put together or “bundled,” both to conceal large volume trades from the open market and to temper rapid swings in share prices. These technological applications help trading firms block the regulators’ gaze. The absence of visibility and transparency means these markets operate in what are being called dark pools.
But those designed as “truly dark” prevent information leakages by denying entry of orders that are seeking information to trade on, thus allowing “trajectory crossing,” an event that gives two opposite algorithmic orders an average price throughout their overlapping time period. “By delivering average pricing over an interval, trajectory crossing helps prevent negative selection and opportunity costs that can occur in gray pools” (Morgan Stanley 2010).5 Dark pools have expanded from 1.5 percent to 12 percent of all market trades in under 5 years and they too are expected to expand exponentially (Kaufman 2009).
Conclusion
The social harm that an out-of-control financial system can visit upon the world was dramatically illustrated in the 2008 crisis. What potential controls can national governments and international law exert? Where are regulators in the United States, home of financial capitalism and still its dominant economic player? Two short answers: They are worried and out-matched, technologically unable to keep up; and they are fiscally unable to compete (Ministry of Finance 2010).
It is recognized, even amongst themselves, that regulators do not possess the resources to keep up with the financial institutions they regulate. The SEC was seeking a budget increase from $1.119 billion to $1.26 billion for 2011, along with the power to fund itself rather than rely on funding from the Treasury. Yet its requests were making little headway with legislators who believe the SEC should not be “rewarded” with more powers after having demonstrated its inability to prevent the financial crisis (Goldfarb 2010). The SEC has created a Division of Risk, Strategy, and Financial Innovation, a division it hopes will develop a high-tech tagging system able to monitor and track algorithmic trades (Lavin 2010). But access to the technological advances that are (re-)structuring the vast field of finance capital accumulation is wildly disproportionate.
Can any government agency pay programmers the million-dollar salaries they now enjoy? The chair of the SEC, by comparison, earns $158,500 a year, while SEC employees’ salaries average $135,099 per year, ranging from $22,000 for clerk assistants to $222,000 for securities compliance examiners, economists, lawyers, accountants, and IT management (glassdoor.com; jobnob.com; usajobs.gov).
Can any agency upgrade its technology on a monthly or daily basis? Obviously not. Agencies that attempt to control the behavior of the financial sector, the most privileged actors in the world, have been and are still funded minimally and reluctantly. The definition of “adequate” funding varies by time and nation. Regulatory budgets have increased over time, but salaries and resources have never come close to those paid by the industry they regulate (which is, of course, why the “revolving door” tends to revolve in only one direction). While every technology is biased by its embedded defaults and assumptions, and no one yet knows the vulnerabilities of algorithmic trading, the potential for controlling it in ways that reflect a general public interest appear small. The algorithms of HFT are specifically designed to serve the institutional agendas of financial insiders, players with the institutional and cultural resources to benefit from them.
The main beneficiaries in this instance are the powerful Wall Street institutions that specialize in the highly secretive and sought-after HFT algorithmic codes. One such firm is Goldman Sachs—and, not coincidentally, it is among those who are lobbying against government oversight of HFT (Doering and Rampton 2010).
For those who would like to prevent the next crisis, or at least lessen its impact, the weakness of regulatory agencies vis-à-vis the world’s most powerful economic actors is discouraging. The potential for international bodies to rein in the engines of financial capitalism is unknown. Thus it is tempting to conclude, along with U.S. Senator Ted Kaufman (D-Del), that “the stock markets have … become so highly fragmented that they are … beyond the scope of effective surveillance” (Kaufman 2009).
Notes
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