05-01-2010, 06:18 PM
THE ISSUE IS GLASS-STEAGALL
http://www.larouchepub.com/other/editori...agall.html
Back in 1932-33, the famous prosecutor Ferdinand Pecora both stunned and aroused the American people, with his hearings into the gory details of the fraud and corruption of Wall Street banking institutions. With the light of "pitiless publicity" focussed on arrogant bastards such as J.P. Morgan and Thomas Lamont, President Franklin Roosevelt was able to ram through the raft of banking regulation, led by the Glass-Steagall Act, which kept the U.S. banking system functioning for the next 50 years.
It's no surprise that many people are today comparing the relentless prosecution by Pecora, with the drive by the senior Senator from Michigan, Carl Levin, to get to the bottom of the criminality of Wall Street institutions such as Goldman Sachs, in creating the current financial breakdown crisis. Levin is systematically building his case against Goldman for its ripoffs of its clients, but it is crystal clear to everyone that the abuses he is discussing, riddle the deregulated financial system as a whole.
While it would be satisfying, and just, for individuals like Goldman Sachs CEO Lloyd "I'm doing God's work" Blankfein to go to jail for their crimes, the larger issue is whether Congress will finally get the guts to junk the system that created this mess, and go back to the Roosevelt regime which worked so well.
One major problem arises immediately: While Pecora had the blessing of FDR, Senator Levin has a President whose philosophy is the very antithesis of FDR's, the philosophy that the way to prosperity of Main Street leads through Wall Street. The American people see through such sophisms, but so far, the Congress has submitted shamelessly to a President who is owned lock, stock, and barrel by the British and their Wall Street tools (including Goldman Sachs).
One conclusion is inescapable, and that is that President Obama must be gotten out of office, by impeachment or resignation.
The next step is that the Administration, and the Congress, move immediately to put the financial system in order through a Glass-Steagall reform, of the form that Lyndon LaRouche has repeatedly outlined. Let us repeat the principles again:
First, there must be a sorting out of legitimate debt (related to the requirements of the physical economy's functioning), as against the hundreds of trillions of dollars in casino betting debts. The latter claims should be deemed illegitimate, and sent into the deep freeze, if not cancelled outright.
Second, the Glass-Steagall rule separating the operations of commercial banking (linked to the physical economy) from investment banking (speculation), must be put into effect, with protections from the Federal government reserved for transactions of the first type.
Third, the U.S. government must get together with the other three most powerful nation-states—Russia, China, and India—to cast off the entire British globalized financial system, and establish joint Glass Steagall-style rules for cooperation among them, including fixed currency exchange rates, and arrangements for long-term, low-interest investments in infrastructure development, in order to start a real industrial recovery. Nervous Nellies who have, up until now, been afraid to acknowledge that LaRouche's Glass-Steagall approach is right, are finally beginning to speak up. Now we have to take it the next step: Impeach Obama and ram through Glass-Steagall now.
GOLDMAN SACHS DEBACLE RAISES OVERDUE QUESTIONS ABOUT BRIC
Rachel Douglas and Dennis Small
http://www.larouchepub.com/other/2010/37..._bric.html
April 23—Current revelations about lurid, but typical, fraud on the part of investment bank Goldman Sachs, which stands accused of betting against the very derivatives it had marketed, are beginning to have potentially healthy repercussions in Russia and other parts of the world.
On April 19, the Russian-language official site of the Shanghai Cooperation Organization (SCO; it groups China, Russia, and Central Asian nations, with other Eurasian countries having observer status), published an article titled "It was economists who thought up the BRIC, as their own quartet." The "economists" involved were identified, in the body of the article, as officials of Goldman Sachs.
BRIC stands for Brazil-Russia-India-China, but Lyndon LaRouche has pressed the point: The "B" in BRIC is really for "British," because the Brazilian banking system is dominated by the Spanish Banco Santander, which is fused with the Royal Bank of Scotland as an integral component of the Rothschild-created Inter-Alpha Group. The function of Brazil within BRIC has been to divert the agenda onto slight modifications of a global financial system which in reality is utterly bankrupt, while boosting its own prowess in the speculative "carry trade" as exemplary of so-called emerging market growth. Russian officials nurturing fantasies about a huge pool of foreign capital just waiting to be invested in their country, such as those at the Moscow stock exchange who openly advertise Russia's own attractiveness for players in the carry trade, are supposed to take this bait and emulate Brazil in becoming a hub of international financial operations, within a doomed system.
Thus, the BRIC runs counter to the potential of an alliance of the four great powers—Russia, the U.S.A., China, and India—to initiate the replacement of the bankrupt British financial empire with a sovereign nation-based credit system for real economic development, which LaRouche has proposed as the sine qua non for averting a Dark Age.
Indeed, journalist Olga Kharolets wrote on the SCO's Infoshos.ru site, "For there to be a summit of the BRIC [in June 2009], all it took was for the airplane of the President of Brazil to land in Yekaterinburg." There was already a summit taking place there among the leading Eurasian nations Russia, China, and India at that time. Brazil was tacked on, a result for which Goldman Sachs had been lobbying over several years.
Infoshos.ru said that the very appearance of the BRIC on the world scene resulted from "a curious intrigue," for this was "the only alliance in the world, whose name emerged before the organization itself did." Kharolets quoted Brazilian Foreign Minister Celso Amorim, who boasted that the BRIC "existed first in the minds of analysts, and then turned into practical reality."
The Russian author then named the name: "It is believed that the father of the term 'BRIC' was Goldman Sachs analyst Jim O'Neill," in 2001.
'Markets,' Not Nations
O'Neill's role in promoting the creation of the BRIC, in fact, is no secret. Even Prime Minister of India Manmohan Singh, quoted by The Hindu during the mid-April BRIC summit in Brazil, noted that the project was an idea from Goldman Sachs, but "We are now trying to give it some shape, flesh it out." In 2007, still before the BRIC had been officially constituted, O'Neill put out a 272-page book on the need for it to exist. Goldman Sachs devotes a page on its website to "the BRICs," as it has dubbed these nations, featuring some 20 reports on the BRIC and videos in which O'Neill introduces himself, in his thick English accent: "I am Jim O'Neill. I am head of Global Economic Research for Goldman Sachs, and I am the creator of the acronym BRIC."
O'Neill, who hails from Manchester, England, joined Goldman Sachs in 1995 after stints at Bank of America, Marine Midland, and Swiss Bank Corporation. He has also positioned himself on the board of the U.K.-Indian Business Council, where he sits alongside Sir Evelyn Rothschild and other City of London figures.
Such functionaries of the London-centered financial oligarchy love to posture as visionaries of an era dominated by "emerging markets": not developing nations, but expressly—"markets." It is the old Venetian technique of making the victim think he is doing something bold and new, while in reality he is being manipulated and prevented from doing what would truly be in his own interest. Another notorious case is the hyperactive advocacy of "multiple reserve currencies" in state finances, on the part of Ashmore Investments, a London-based outfit which got its start in "emerging market debt trading" during the Mexico debt crisis on 1982. ("London Pushes Big Powers To Dump the Dollar," EIR, June 9, 2009.)
Still, it is striking, what scant attention Russian observers have paid to the the scandalous Goldman Sachs origin of the BRIC configuration, which is promoted heavily within Russia as representing a way for its members to be independent of the U.S. and European economies and finance. After all, Goldman Sachs is not exactly unknown in Russia, especially in connection with the looting of the Russian economy under the Yegor Gaidar-Anatoli Chubais government during the 1990s.
In his 1998 book Genocide (English edition, EIR, 1999), Russian Academician Sergei Glazyev gave some details, referring to the crash of the pyramid of Russian short-term government bonds (GKO) in the Summer of 1998. "As soon as the first signs appeared of an irreversible approaching crash, the firm of Goldman Sachs, which is close to the U.S. Treasury, secured the assistance of Mr. Chubais in organizing the conversion of its clients' devalued GKO ... into dollar-denominated Russian government bonds worth approximately $4 billion, which were subsequently exempted from the forced restructuring." At the time, the U.S. Treasury official dealing with Russia was Goldman Sachs man Larry Summers, who today heads Barack Obama's National Economic Council.
Chronology of Paternity
Not only did Goldman Sachs operatives create the term BRIC in 2001, but they fostered the establishment of the diplomatic grouping as such, and began to deploy it actively and heavily in direct opposition to Lyndon LaRouche's early 2007 proposal for a Four Power alliance to bring the world out of the economic breakdown crisis, which exploded, as LaRouche forecast it would, in mid-2007.
The contrast could not be clearer. LaRouche's designation of the Four Powers is based on their real stature. China and India have the largest populations and among the oldest cultures on the planet, while Russia and the United States are transcontinental nations, each with a history of acting independently as a global power, amplified in the U.S. case by our unique republican tradition. Key to joint action by the Four Powers are a U.S. resumption of its historical orientation toward a community of principle among sovereign nations, and the emergence of cooperation among Russia, China, and India as what former Russian Prime Minister Yevgeni Privakov named a "strategic triangle" in Eurasia. What unites the BRIC, on the other hand, is that Goldman Sachs identified its members as four markets where international speculators could make money.
Because of the thorough infection of the Brazilian economy by the Inter-Alpha Group, and its carry-trade fixation, the involvement of Brazil with the R-I-C strategic triangle countries is perfectly designed to disrupt the latter, and their potential joint action with the United States. At first, BRIC ministerial and summit meetings were held in conjunction with R-I-C meetings, but at the latest BRIC summit, this month, there was not even a separate triangular conference among the Eurasian powers.
Not only the acronym, but the entire concept and organization of the BRIC as a grouping came from Goldman Sachs and O'Neill, as did its policy direction, including the discussion of establishing regional currencies and/or replacing the dollar with a new international reserve currency. Its deeper policy origins go back to the 1971 creation of the Inter-Alpha Group by the British Empire's Rothschilds, including the establishment of the outrageously "profitable" Brazilian carry trade.
Consider the following brief chronology of the critical 2007-08 period:
March 7, 2007: LaRouche delivered an international webcast, in which he first publicly proposed the idea of a Four Power alliance of the United States, Russia, India, and China to destroy and replace the British Empire's dying system.
May 15, 2007: Visiting Moscow as an honored foreign guest at the celebration of Prof. Stanislav Menshikov's 80th birthday, LaRouche addressed the economic division of the Russian Academy of Sciences. Noting then-President Vladimir Putin's repeated invocation of the legacy of Franklin Roosevelt, LaRouche told them that the United States must approach Russia, India, and China with a Rooseveltian agenda for economic cooperation, subsequently bringing in smaller nations. LaRouche also set forth the Four Powers idea in Russian TV and Internet interviews.
July 25, 2007: LaRouche presented a webcast, forecasting the imminent explosion of the international financial crisis, which in fact followed only days later.
Nov. 23, 2007: Goldman Sachs's Jim O'Neill issued his book, The BRICs and Beyond.
March 10-11, 2008: BRIC held its first formal meeting as an organization, at the vice ministerial level, in Rio de Janeiro.
May 14, 2008: Yekaterinburg, Russia hosted a meeting of the foreign ministers of Russia, China, and India, which LaRouche welcomed as the emergence of what he had long anticipated—the strategic triangle as a Eurasian alliance, determined to defeat the attacks by the British Empire on its member nations. Tacked on was a separate meeting between these three representatives and their Brazilian counterpart.
July 9, 2008: BRIC heads of state and government met on the sidelines of the G-8 summit in Hokkaido, Japan.
September 2008: BRIC foreign ministers met in New York City.
Nov. 7, 2008: BRIC finance ministers met in São Paulo.
Over the course of 2008-09, as the battle over LaRouche's policy proposals was raging internationally, Goldman Sachs issued five additional studies on the BRIC, packed with their London-designed policy proposals, crafted to counter LaRouche's Four Powers plan.
To that same end, and in that time frame, two international conferences were held which prominently featured European and Brazilian renegades from the LaRouche movement, at which the BRIC policy-line was promoted, with special efforts to make it attractive to Russian participants. The first of these was held in Modena, Italy in July 2008; the second in Parana, Brazil in December 2008.
Baiting the Hook
The Goldman Sachs contraband of trying to jam Brazil into an existing strategic Russia-India-China relationship has pivoted on one central issue: the creation of the Brazilian carry trade by the London-run Inter-Alpha group of banks, in particular through the activities of its Spanish-based asset, Banco Santander (see "The 'Banco Santander Syndrome': City of London's Sucker Game," EIR, Feb. 19, 2010; and "London's Brazil Carry Trade: Smoke, Mirrors—and Genocide," EIR, March 5, 2010).
Going back to the early 1990s, London and Wall Street made Brazil a destination of substantial international speculative capital flows, coming from financial predators borrowing cheaply—first in Japan, today in the Eurozone and the U.S.—and placing those funds in highly lucrative Brazilian government treasury bonds, which pay the highest real interest rate in the world, and additionally offer the predators huge exchange-rate advantages. As Goldman Sachs put it in its December 2006 study, "The 'B' in BRICs: Unlocking Brazil's Growth Potential:"
[Brazil] will be an important destination for fixed income and equity inflows, given the high carry trade, the embedded growth option for equities and the reassurance of stable macro policies and sound external credit fundamentals.
The platform for the later carry trade was established by the 1994 Real Plan of the incoming Fernando Henrique Cardoso government, which set up a one-to-one parity between the real, the Brazilian currency, and the U.S. dollar, and began to issue Brazilian treasury bonds denominated in dollars, the infamous NTN-D series, which had first appeared in 1991. These bonds then grew dramatically in the 2000-02 period of the Cardoso Administration, rising to constitute 45% of total public debt by 2002, the year Luis Inácio Lula da Silva took office as President. EIR warned about this at the time, writing in its Oct. 18, 2002 issue:
Brazil, under pressure from the IMF and 'the markets,' began to issue domestic bonds denominated in dollars. This foolishness really took off over the last two years, in order to 'attract' foreign investors who were worried that a devaluation would catch them holding real-denominated bonds. So the proportion of Brazil's bonds that is dollarized has grown to over 45% today. That means that every time the real is devalued vis-à-vis the dollar, the government debt automatically rises—without borrowing a single additional penny....
Speculators have also driven up the interest rate they are demanding the Brazilian government pay on its new bonds.... Brazil must now pay 25% interest rates, or higher, on any new bonds it issues. But about 40% of its old bonds are also linked to market interest rates, which means that they too rise along with the 'country' risk and other usurious charlatanry.
In sum, 45% of Brazil's 700 billion real government debt is dollarized. Another 40% is interest-linked.
With such attractive looting conditions, Brazil became a prize destination of the international carry trade, and is prominently so today under Santander/Inter-Alpha group supervision.
The Goldman Sachs maneuvers in Russia in the Summer of 1998, involving the conversion of a portion of the GKO bonds into dollar-denominated instruments, took advantage of the Russian government's frantic fundraising efforts in the weeks before the Aug. 17, 1998 collapse of the GKO pyramid, when GKO yields were in triple digits. The scheme didn't have a chance to take hold at that time, only because the bubble popped, and the subsequent Primakov and Putin governments attempted to steer clear of such operations.
And then there is the classic case of the Mexico debt blowout of December 1994, triggered by the issuance of precisely such dollar-denominated public bonds—the first time that such a "globalization" measure was foisted on a developing country.
Under pressure of its international creditors—including the Fidelity Group and Goldman Sachs—the Mexican government of Carlos Salinas de Gortari carried out a gigantic switch out of peso-denominated Cetes bonds, and into dollar-denominated Tesobono bonds, beginning in April-May 2004. This "switcheo," as it came to be known in Mexico, created some $30 billion in additional foreign obligations within months. This led to the total blowout of the Mexican system in December, encouraged by a London and Wall Street-orchestrated run on the country.
Goldman Sachs played a leading role in this looting operation as well, first investing heavily in short-term dollar-denominated Mexican bonds during 1994; then participating in the organized run on the country; and finally ensuring that these bonds were fully repaid by the Mexican government, out of funds received from the 1995 "bailout" package arranged by the U.S. government and others.
At the time, EIR's Jan. 27 1995 issue covered the explosion of the Mexican debt bomb and how it would spread elsewhere, and even warned that Brazil had embarked on a similarly insane policy with its NTN-D's:
So far, the Cardoso government has pledged its allegiance to maintaining the speculative cancer. And they have already worsened matters by meeting bankers' demands to issue what are effectively dollar-denominate treasury bills, known as NTN-Ds. This is exactly what Mexico did beginning in the Spring of 1994 with their Tesobonos, which have now blown up in their faces.
As more and more of Goldman Sachs's corrupt dealings are revealed, the question will naturally be asked in Russia, China, and India: Was the BRIC invented as a way to loot us ... again?
GOLDMAN's COMPUTERISED FRONT RUNNING AND FINANCIAL FRAUD
How a Computer Program Designed to Save the Free Market Turned Into a Monster Ellen Brown
Global Research, April 23, 2010
While the SEC is busy investigating Goldman Sachs, it might want to
look into another Goldman-dominated fraud: computerized front running
using high-frequency trading programs. Market commentators are fond of talking about “free market capitalism,” but according to Wall Street commentator Max Keiser, it is no more. It has morphed into what his TV co-host Stacy Herbert calls “rigged market capitalism”: all markets today are subject to manipulation for private gain. Keiser isn’t just speculating about this. He claims to have invented one of the most widely used programs for doing the rigging. Not that that’s what he meant to invent. His patented program was designed to take the manipulation out of markets. It would do this by matching buyers with sellers automatically, eliminating “front running” – brokers buying or selling ahead of large orders coming in from their clients. The computer program was intended to remove the conflict of interest that exists when brokers who match buyers with sellers are also selling from their own accounts. But the program fell into the wrong hands and became the prototype for automated trading programs that actually facilitate front running.
Also called High Frequency Trading (HFT) or “black box trading,”
automated program trading uses high-speed computers governed by
complex algorithms (instructions to the computer) to analyze data and
transact orders in massive quantities at very high speeds. Like the
poker player peeking in a mirror to see his opponent’s cards, HFT
allows the program trader to peek at major incoming orders and jump in
front of them to skim profits off the top. Note that these large
institutional orders are our money -- our pension funds, mutual funds,
and 401Ks.
When “market making” (matching buyers with sellers) was done strictly
by human brokers on the floor of the stock exchange, manipulations and
front running were considered an acceptable (if morally dubious) price
to pay for continuously “liquid” markets. But front running by
computer, using complex trading programs, is an entirely different
species of fraud. A minor flaw in the system has morphed into a
monster. Keiser maintains that computerized front running with HFT
has become the principal business of Wall Street and the primary force
driving most of the volume on exchanges, contributing not only to a
large portion of trading profits but to the manipulation of markets
for economic and political ends.
The “Virtual Specialist”: the Prototype for High Frequency Trading
Until recently, most market making was done by brokers called
“specialists,” those people you see on the floor of the New York Stock
Exchange haggling over the price of stocks. The job of the specialist
originated over a century ago, when the need was recognized for a
system for continuous trading. That meant trading even when there was
no “real” buyer or seller waiting to take the other side of the
trade. The specialist is a broker who deals in a specific stock and remains
at one location on the floor holding an inventory of it. He posts the
“bid” and “ask” prices, manages “limit” orders, executes trades, and
is responsible for managing the uninterrupted flow of orders. If
there is a large shift in demand on the “buy” side or the “sell” side,
the specialist steps in and sells or buys out of his own inventory to
meet the demand, until the gap has narrowed. This gives him an opportunity to trade for himself, using his inside knowledge to book a profit. That practice is frowned on by the Securities Exchange Commission (SEC), but it has never been seriously regulated, because it has been considered necessary to keep markets “liquid.”
Keiser’s “Virtual Specialist Technology” (VST) was developed for the
Hollywood Stock Exchange (HSX), a web-based, multiplayer simulation in
which players use virtual money to buy and sell “shares” of actors,
directors, upcoming films, and film-related options. The program
determines the true market price automatically, by comparing “bids”
with “asks” and weighting the proportion of each. Keiser and HSX co-
founder Michael Burns applied for a patent for a “computer-implemented
securities trading system with a virtual specialist function” in 1996,
and U.S. patent no. 5960176 was awarded in 1999.
But things went awry after the dot.com crash, when Keiser’s company
HSX Holdings sold the VST patent to investment firm Cantor Fitzgerald,
over his objection. Cantor Fitzgerald then put the part of the
program that would have eliminated front-running on ice, just as drug
companies buy up competing patents in order to take them off the
market. Instead of preventing front-running, the program was altered
so that it actually enhanced that fraudulent practice. Keiser (who is
now based in Europe) notes that this sort of patent abuse is illegal
under European Intellectual Property law.
Meanwhile, the design of the VST program remained on display at the
patent office, giving other inventors ideas. To get a patent,
applicants must list “prior art” and then prove that their patent is
an improvement in some way. The listing for Keiser’s patent shows
that it has been referenced by 132 others involving automated program
trading or HFT.
HFT has quickly come to dominate the exchanges. High frequency
trading firms now account for 73% of all U.S. equity trades, although
they represent only 2% of the approximately 20,000 firms in
operation.
In 1998, the SEC allowed online electronic communication networks, or
alternative trading systems, to become full-fledged stock exchanges.
Alternative trading systems (ATS) are computer-automated order-
matching systems that offer exchange-like trading opportunities at
lower costs but are often subject to lower disclosure requirements and
different trading rules. Computer systems automatically match buy and
sell orders that were themselves submitted through computers. Market
making that was once done with a “specialist’s book” -- something that
could be examined and audited -- is now done by an unseen, unaudited
“black box.” For over a century, the stock market was a real market, with
live traders hotly bidding against each other on the floor of the
exchange. In only a decade, floor trading has been eliminated in all
but the largest exchanges, such as the New York Stock Exchange (NYSE);
and even in those markets, it now co-exists with electronic
trading. Alternative trading systems allow just about any sizable trader to
place orders directly in the market, rather than routing them through
investment dealers on the NYSE. They also allow any sizable trader
with a sophisticated HFT program to front run trades.
Flash Trades: How the Game Is Rigged
An integral component of computerized front running is a dubious
practice called “flash trades.” Flash orders are permitted by a
regulatory loophole that allows exchanges to show orders to some
traders ahead of others for a fee. At one time, the NYSE allowed
specialists to benefit from an advance look at incoming orders; but it
has now replaced that practice with a “level playing field” policy
that gives all investors equal access to all price quotes. Some ATSs,
however, which are hotly competing with the established exchanges for
business, have adopted the use of flash trades to pull trading
business away from the exchanges. An incoming order is revealed (or
flashed) to a trader for a fraction of a second before being sent to
the national market system. If the trader can match the best bid or
offer in the system, he can then pick up that order before the rest of
the market sees it.
The flash peek reveals the trade coming in but not the limit price –
the maximum price at which the buyer or seller is willing to trade.
This is what the HFT program figures out, and it is what gives the
high-frequency trader the same sort of inside information available to
the traditional market maker: he now gets to peek at the other
player’s cards. That means high-frequency traders can do more than
just skim hefty profits from other investors. They can actually
manipulate markets.
How this is done was explained by Karl Denninger in an insightful post
on Seeking Alpha in July 2009: “Let’s say that there is a buyer willing to
buy 100,000 shares of BRCM with a limit price of $26.40. That is, the buyer
will accept any price up to $26.40. But the market at this particular moment
in time is at $26.10, or thirty cents lower.
“So the computers, having detected via their ‘flash orders’ (which
ought to be illegal) that there is a desire for Broadcom shares, start
to issue tiny (typically 100 share lots) ‘immediate or cancel’ orders
- IOCs - to sell at $26.20. If that order is ‘eaten’ the computer
then issues an order at $26.25, then $26.30, then $26.35, then
$26.40. When it tries $26.45 it gets no bite and the order is
immediately canceled. “Now the flush of supply comes at, big coincidence,
$26.39, and the claim is made that the market has become ‘more efficient.’
“Nonsense; there was no ‘real seller’ at any of these prices! This pattern of
offering was intended to do one and only one thing -- manipulate the market
by discovering what is supposed to be a hidden piece of information -- the
other side’s limit price!
“With normal order queues and flows the person with the limit order
would see the offer at $26.20 and might drop his limit. But the
computers are so fast that unless you own one of the same speed you
have no chance to do this -- your order is immediately ‘raped’ at the
full limit price! . . . [Y]ou got screwed for 29 cents per share which
was quite literally stolen by the HFT firms that probed your book
before you could detect the activity, determined your maximum price,
and then sold to you as close to your maximum price as was possible.”
The ostensible justification for high-frequency programs is that they
“improve liquidity,” but Denninger says, “Hogwash. They have turned
the market into a rigged game where institutional orders (that’s you,
Mr. and Mrs. Joe Public, when you buy or sell mutual funds!) are
routinely screwed for the benefit of a few major international banks.”
In fact, high-frequency traders may be removing liquidity from the
market. So argues John Daly in the U.K. Globe and Mail, citing Thomas
Caldwell, CEO of Caldwell Securities Ltd.:
“Large institutional investors know that if they start trying to push
through a large block of shares at a certain price – even if the block
is broken into many small trades on several ATSs and markets -- they
can trigger a flood of high-frequency orders that immediately move
market prices to the institution’s disadvantage. . . . That’s why
institutions have flocked to so-called dark pools operated by ATSs
such as Instinet, and individual dealers like Goldman Sachs. The
pools allow traders to offer prices without publicly revealing their
identities and tipping their hand.”
Because these large, dark pools are opaque to other investors and to
regulators, they inhibit the free and fair trade that depends on open
and transparent auction markets to work.
The Notorious Market-Rigging Ringleader, Goldman Sachs
Tyler Durden, writing on Zero Hedge, notes that the HFT game is
dominated by Goldman Sachs, which he calls “a hedge fund in all but
FDIC backing.” Goldman was an investment bank until the fall of 2008,
when it became a commercial bank overnight in order to capitalize on
federal bailout benefits, including virtually interest-free money from
the Fed that it can use to speculate on the opaque ATS exchanges where
markets are manipulated and controlled. Unlike the NYSE, which is open
only from 10 am to 4 pm EST daily, ATSs trade around the clock; and they
are particularly busy when the NYSE is closed, when stocks are thinly
traded and easily manipulated. Tyler Durden writes:
“[A]s the market keeps going up day in and day out, regardless of the
deteriorating economic conditions, it is just these HFT’s that
determine the overall market direction, usually without fundamental or
technical reason. And based on a few lines of code, retail investors
get suckered into a rising market that has nothing to do with green
shoots or some Chinese firms buying a few hundred extra Intel servers:
HFTs are merely perpetuating the same ponzi market mythology last seen
in the Madoff case, but on a massively larger scale.”
HFT rigging helps explain how Goldman Sachs earned at least $100
million per day from its trading division, day after day, on 116 out
of 194 trading days through the end of September 2009. It’s like
taking candy from a baby, when you can see the other players’ cards.
Reviving the Free Market
So what can be done to restore free and fair markets? A step in the
right direction would be to prohibit flash trades. The SEC is
proposing such rules, but they haven’t been effected yet.
Another proposed check on HFT is a Tobin tax – a very small tax on
every financial trade. Proposals for the tax range from .005% to 1%,
so small that it would hardly be felt by legitimate “buy and hold”
investors, but high enough to kill HFT, which skims a very tiny profit
from a huge number of trades. That is what proponents contend, but
a tiny tax might not actually be enough to kill HFT. Consider Denninger’s
example, in which the high-frequency trader was making not just a few
pennies but a full 29 cents per trade and had an opportunity to make
this sum on 99,500 shares (100,000 shares less 5 100-lot trades at lesser sums).
That’s a $28,855 profit on a $2.63 million trade, not bad for a few
milliseconds of work. Imposing a .1% Tobin tax on the $2.63 million would
reduce the profit to $26,225, but that’s still a nice return for a trade that takes
less time than blinking. The ideal solution would fix the problem at its source --
the price- setting mechanism itself. Keiser says this could be done by banning
HFT and installing his VST computer program in its original design in all the
exchanges. The true market price would then be established automatically,
foreclosing both human and electronic manipulation. He notes that the
shareholders of his former firm have a good claim for voiding out the sale
to Cantor Fitzgerald and retrieving the program, since the deal was never
consummated and the investors in HSX Holdings have never received a
penny for the sale.
There is just one problem with their legal claim: the paperwork
proving it was shipped to Cantor Fitzgerald’s offices in the World
Trade Center several months before September 2001. Like free market
capitalism itself, it seems, the evidence has gone up in smoke.
Ellen Brown developed her research skills as an attorney practicing
civil litigation in Los Angeles. In Web of Debt, her latest of eleven
books, she turns those skills to an analysis of the Federal Reserve
and “the money trust.” She shows how this private cartel has usurped
the power to create money from the people themselves, and how we the
people can get it back.
GET THE PASSENGERS OFF THE BOAT YOU CANNOT BAIL THIS THING OUT
http://www.larouchepub.com/pr_lar/2010/l...tdown.html
Panic spread across international financial markets as the Eurozone debt crisis escalated yesterday and today, with Spain joining Greece and Portugal on the list of countries whose sovereign debt has been downgraded by Standard & Poors, and some analysts asking the question, is Italy next?
When you add up the demanded bailouts of the bank creditors of these countries, Lyndon LaRouche commented today, you are talking about something in the range of $1 trillion dollars. If you consider the insane derivatives built on top of this quicksand—in typical Goldman Sachs style—you are in the range of a quarter quadrillion dollars, or higher. "You cannot bail this thing out," LaRouche asserted. You have to get the passengers off the boat, not try to bail out the Titanic—and hopefully there will be enough boats to do that.
The British Empire's media outlets and experts, looking at this situation, are urging an exactly contrary policy to LaRouche's: a second TARP-style mega-bailout. Barclays Capital economist Piero Ghezzi is cited in today's New York Times saying that, in order to satisfy "the markets"—i.e., the predator financial institutions that created the problem in the first place—"the number would be huge. Ninety billion euros for Greece, 40 billion for Portugal and 350 billion for Spain—now we are talking real money." The Times article then calls for a TARP-style bailout of Europe to be launched:
What a growing number of investors suggest is really needed is a 'shock and awe' figure... something similar to the Bush administration's decision to provide $700 billion to shore up America's financial institutions in the peak of the 2008 crisis.
Bloomberg.com concurred:
Europe may need to come up with a plan equivalent to the $700 billion Troubled Asset Relief Program deployed by the U.S. after the collapse of Lehman Brothers Holdings Inc.
The head of the notoriously anti-science Organization for Economic Co-operation and Development (OECD), Angel Gurria—in Berlin to survey the damage along with the top dogs of the International Monetary System, the World Bank, the European Central Bank, and the International Labor Organization—was openly hysterical:
It's not a question of the danger of contagion. Contagion has already happened. This is like Ebola. When you realize you have it, you have to cut your leg off in order to survive.
Prescribing self-dismemberment to a nation is coherent with the OECD's anti-nation state goals. The OECD is an international organisation which advises governments on how to tackle the economic, social and governance challenges of a globalized economy, in a way that won't challenge the British monetary system.
http://www.larouchepub.com/other/editori...agall.html
Back in 1932-33, the famous prosecutor Ferdinand Pecora both stunned and aroused the American people, with his hearings into the gory details of the fraud and corruption of Wall Street banking institutions. With the light of "pitiless publicity" focussed on arrogant bastards such as J.P. Morgan and Thomas Lamont, President Franklin Roosevelt was able to ram through the raft of banking regulation, led by the Glass-Steagall Act, which kept the U.S. banking system functioning for the next 50 years.
It's no surprise that many people are today comparing the relentless prosecution by Pecora, with the drive by the senior Senator from Michigan, Carl Levin, to get to the bottom of the criminality of Wall Street institutions such as Goldman Sachs, in creating the current financial breakdown crisis. Levin is systematically building his case against Goldman for its ripoffs of its clients, but it is crystal clear to everyone that the abuses he is discussing, riddle the deregulated financial system as a whole.
While it would be satisfying, and just, for individuals like Goldman Sachs CEO Lloyd "I'm doing God's work" Blankfein to go to jail for their crimes, the larger issue is whether Congress will finally get the guts to junk the system that created this mess, and go back to the Roosevelt regime which worked so well.
One major problem arises immediately: While Pecora had the blessing of FDR, Senator Levin has a President whose philosophy is the very antithesis of FDR's, the philosophy that the way to prosperity of Main Street leads through Wall Street. The American people see through such sophisms, but so far, the Congress has submitted shamelessly to a President who is owned lock, stock, and barrel by the British and their Wall Street tools (including Goldman Sachs).
One conclusion is inescapable, and that is that President Obama must be gotten out of office, by impeachment or resignation.
The next step is that the Administration, and the Congress, move immediately to put the financial system in order through a Glass-Steagall reform, of the form that Lyndon LaRouche has repeatedly outlined. Let us repeat the principles again:
First, there must be a sorting out of legitimate debt (related to the requirements of the physical economy's functioning), as against the hundreds of trillions of dollars in casino betting debts. The latter claims should be deemed illegitimate, and sent into the deep freeze, if not cancelled outright.
Second, the Glass-Steagall rule separating the operations of commercial banking (linked to the physical economy) from investment banking (speculation), must be put into effect, with protections from the Federal government reserved for transactions of the first type.
Third, the U.S. government must get together with the other three most powerful nation-states—Russia, China, and India—to cast off the entire British globalized financial system, and establish joint Glass Steagall-style rules for cooperation among them, including fixed currency exchange rates, and arrangements for long-term, low-interest investments in infrastructure development, in order to start a real industrial recovery. Nervous Nellies who have, up until now, been afraid to acknowledge that LaRouche's Glass-Steagall approach is right, are finally beginning to speak up. Now we have to take it the next step: Impeach Obama and ram through Glass-Steagall now.
GOLDMAN SACHS DEBACLE RAISES OVERDUE QUESTIONS ABOUT BRIC
Rachel Douglas and Dennis Small
http://www.larouchepub.com/other/2010/37..._bric.html
April 23—Current revelations about lurid, but typical, fraud on the part of investment bank Goldman Sachs, which stands accused of betting against the very derivatives it had marketed, are beginning to have potentially healthy repercussions in Russia and other parts of the world.
On April 19, the Russian-language official site of the Shanghai Cooperation Organization (SCO; it groups China, Russia, and Central Asian nations, with other Eurasian countries having observer status), published an article titled "It was economists who thought up the BRIC, as their own quartet." The "economists" involved were identified, in the body of the article, as officials of Goldman Sachs.
BRIC stands for Brazil-Russia-India-China, but Lyndon LaRouche has pressed the point: The "B" in BRIC is really for "British," because the Brazilian banking system is dominated by the Spanish Banco Santander, which is fused with the Royal Bank of Scotland as an integral component of the Rothschild-created Inter-Alpha Group. The function of Brazil within BRIC has been to divert the agenda onto slight modifications of a global financial system which in reality is utterly bankrupt, while boosting its own prowess in the speculative "carry trade" as exemplary of so-called emerging market growth. Russian officials nurturing fantasies about a huge pool of foreign capital just waiting to be invested in their country, such as those at the Moscow stock exchange who openly advertise Russia's own attractiveness for players in the carry trade, are supposed to take this bait and emulate Brazil in becoming a hub of international financial operations, within a doomed system.
Thus, the BRIC runs counter to the potential of an alliance of the four great powers—Russia, the U.S.A., China, and India—to initiate the replacement of the bankrupt British financial empire with a sovereign nation-based credit system for real economic development, which LaRouche has proposed as the sine qua non for averting a Dark Age.
Indeed, journalist Olga Kharolets wrote on the SCO's Infoshos.ru site, "For there to be a summit of the BRIC [in June 2009], all it took was for the airplane of the President of Brazil to land in Yekaterinburg." There was already a summit taking place there among the leading Eurasian nations Russia, China, and India at that time. Brazil was tacked on, a result for which Goldman Sachs had been lobbying over several years.
Infoshos.ru said that the very appearance of the BRIC on the world scene resulted from "a curious intrigue," for this was "the only alliance in the world, whose name emerged before the organization itself did." Kharolets quoted Brazilian Foreign Minister Celso Amorim, who boasted that the BRIC "existed first in the minds of analysts, and then turned into practical reality."
The Russian author then named the name: "It is believed that the father of the term 'BRIC' was Goldman Sachs analyst Jim O'Neill," in 2001.
'Markets,' Not Nations
O'Neill's role in promoting the creation of the BRIC, in fact, is no secret. Even Prime Minister of India Manmohan Singh, quoted by The Hindu during the mid-April BRIC summit in Brazil, noted that the project was an idea from Goldman Sachs, but "We are now trying to give it some shape, flesh it out." In 2007, still before the BRIC had been officially constituted, O'Neill put out a 272-page book on the need for it to exist. Goldman Sachs devotes a page on its website to "the BRICs," as it has dubbed these nations, featuring some 20 reports on the BRIC and videos in which O'Neill introduces himself, in his thick English accent: "I am Jim O'Neill. I am head of Global Economic Research for Goldman Sachs, and I am the creator of the acronym BRIC."
O'Neill, who hails from Manchester, England, joined Goldman Sachs in 1995 after stints at Bank of America, Marine Midland, and Swiss Bank Corporation. He has also positioned himself on the board of the U.K.-Indian Business Council, where he sits alongside Sir Evelyn Rothschild and other City of London figures.
Such functionaries of the London-centered financial oligarchy love to posture as visionaries of an era dominated by "emerging markets": not developing nations, but expressly—"markets." It is the old Venetian technique of making the victim think he is doing something bold and new, while in reality he is being manipulated and prevented from doing what would truly be in his own interest. Another notorious case is the hyperactive advocacy of "multiple reserve currencies" in state finances, on the part of Ashmore Investments, a London-based outfit which got its start in "emerging market debt trading" during the Mexico debt crisis on 1982. ("London Pushes Big Powers To Dump the Dollar," EIR, June 9, 2009.)
Still, it is striking, what scant attention Russian observers have paid to the the scandalous Goldman Sachs origin of the BRIC configuration, which is promoted heavily within Russia as representing a way for its members to be independent of the U.S. and European economies and finance. After all, Goldman Sachs is not exactly unknown in Russia, especially in connection with the looting of the Russian economy under the Yegor Gaidar-Anatoli Chubais government during the 1990s.
In his 1998 book Genocide (English edition, EIR, 1999), Russian Academician Sergei Glazyev gave some details, referring to the crash of the pyramid of Russian short-term government bonds (GKO) in the Summer of 1998. "As soon as the first signs appeared of an irreversible approaching crash, the firm of Goldman Sachs, which is close to the U.S. Treasury, secured the assistance of Mr. Chubais in organizing the conversion of its clients' devalued GKO ... into dollar-denominated Russian government bonds worth approximately $4 billion, which were subsequently exempted from the forced restructuring." At the time, the U.S. Treasury official dealing with Russia was Goldman Sachs man Larry Summers, who today heads Barack Obama's National Economic Council.
Chronology of Paternity
Not only did Goldman Sachs operatives create the term BRIC in 2001, but they fostered the establishment of the diplomatic grouping as such, and began to deploy it actively and heavily in direct opposition to Lyndon LaRouche's early 2007 proposal for a Four Power alliance to bring the world out of the economic breakdown crisis, which exploded, as LaRouche forecast it would, in mid-2007.
The contrast could not be clearer. LaRouche's designation of the Four Powers is based on their real stature. China and India have the largest populations and among the oldest cultures on the planet, while Russia and the United States are transcontinental nations, each with a history of acting independently as a global power, amplified in the U.S. case by our unique republican tradition. Key to joint action by the Four Powers are a U.S. resumption of its historical orientation toward a community of principle among sovereign nations, and the emergence of cooperation among Russia, China, and India as what former Russian Prime Minister Yevgeni Privakov named a "strategic triangle" in Eurasia. What unites the BRIC, on the other hand, is that Goldman Sachs identified its members as four markets where international speculators could make money.
Because of the thorough infection of the Brazilian economy by the Inter-Alpha Group, and its carry-trade fixation, the involvement of Brazil with the R-I-C strategic triangle countries is perfectly designed to disrupt the latter, and their potential joint action with the United States. At first, BRIC ministerial and summit meetings were held in conjunction with R-I-C meetings, but at the latest BRIC summit, this month, there was not even a separate triangular conference among the Eurasian powers.
Not only the acronym, but the entire concept and organization of the BRIC as a grouping came from Goldman Sachs and O'Neill, as did its policy direction, including the discussion of establishing regional currencies and/or replacing the dollar with a new international reserve currency. Its deeper policy origins go back to the 1971 creation of the Inter-Alpha Group by the British Empire's Rothschilds, including the establishment of the outrageously "profitable" Brazilian carry trade.
Consider the following brief chronology of the critical 2007-08 period:
March 7, 2007: LaRouche delivered an international webcast, in which he first publicly proposed the idea of a Four Power alliance of the United States, Russia, India, and China to destroy and replace the British Empire's dying system.
May 15, 2007: Visiting Moscow as an honored foreign guest at the celebration of Prof. Stanislav Menshikov's 80th birthday, LaRouche addressed the economic division of the Russian Academy of Sciences. Noting then-President Vladimir Putin's repeated invocation of the legacy of Franklin Roosevelt, LaRouche told them that the United States must approach Russia, India, and China with a Rooseveltian agenda for economic cooperation, subsequently bringing in smaller nations. LaRouche also set forth the Four Powers idea in Russian TV and Internet interviews.
July 25, 2007: LaRouche presented a webcast, forecasting the imminent explosion of the international financial crisis, which in fact followed only days later.
Nov. 23, 2007: Goldman Sachs's Jim O'Neill issued his book, The BRICs and Beyond.
March 10-11, 2008: BRIC held its first formal meeting as an organization, at the vice ministerial level, in Rio de Janeiro.
May 14, 2008: Yekaterinburg, Russia hosted a meeting of the foreign ministers of Russia, China, and India, which LaRouche welcomed as the emergence of what he had long anticipated—the strategic triangle as a Eurasian alliance, determined to defeat the attacks by the British Empire on its member nations. Tacked on was a separate meeting between these three representatives and their Brazilian counterpart.
July 9, 2008: BRIC heads of state and government met on the sidelines of the G-8 summit in Hokkaido, Japan.
September 2008: BRIC foreign ministers met in New York City.
Nov. 7, 2008: BRIC finance ministers met in São Paulo.
Over the course of 2008-09, as the battle over LaRouche's policy proposals was raging internationally, Goldman Sachs issued five additional studies on the BRIC, packed with their London-designed policy proposals, crafted to counter LaRouche's Four Powers plan.
To that same end, and in that time frame, two international conferences were held which prominently featured European and Brazilian renegades from the LaRouche movement, at which the BRIC policy-line was promoted, with special efforts to make it attractive to Russian participants. The first of these was held in Modena, Italy in July 2008; the second in Parana, Brazil in December 2008.
Baiting the Hook
The Goldman Sachs contraband of trying to jam Brazil into an existing strategic Russia-India-China relationship has pivoted on one central issue: the creation of the Brazilian carry trade by the London-run Inter-Alpha group of banks, in particular through the activities of its Spanish-based asset, Banco Santander (see "The 'Banco Santander Syndrome': City of London's Sucker Game," EIR, Feb. 19, 2010; and "London's Brazil Carry Trade: Smoke, Mirrors—and Genocide," EIR, March 5, 2010).
Going back to the early 1990s, London and Wall Street made Brazil a destination of substantial international speculative capital flows, coming from financial predators borrowing cheaply—first in Japan, today in the Eurozone and the U.S.—and placing those funds in highly lucrative Brazilian government treasury bonds, which pay the highest real interest rate in the world, and additionally offer the predators huge exchange-rate advantages. As Goldman Sachs put it in its December 2006 study, "The 'B' in BRICs: Unlocking Brazil's Growth Potential:"
[Brazil] will be an important destination for fixed income and equity inflows, given the high carry trade, the embedded growth option for equities and the reassurance of stable macro policies and sound external credit fundamentals.
The platform for the later carry trade was established by the 1994 Real Plan of the incoming Fernando Henrique Cardoso government, which set up a one-to-one parity between the real, the Brazilian currency, and the U.S. dollar, and began to issue Brazilian treasury bonds denominated in dollars, the infamous NTN-D series, which had first appeared in 1991. These bonds then grew dramatically in the 2000-02 period of the Cardoso Administration, rising to constitute 45% of total public debt by 2002, the year Luis Inácio Lula da Silva took office as President. EIR warned about this at the time, writing in its Oct. 18, 2002 issue:
Brazil, under pressure from the IMF and 'the markets,' began to issue domestic bonds denominated in dollars. This foolishness really took off over the last two years, in order to 'attract' foreign investors who were worried that a devaluation would catch them holding real-denominated bonds. So the proportion of Brazil's bonds that is dollarized has grown to over 45% today. That means that every time the real is devalued vis-à-vis the dollar, the government debt automatically rises—without borrowing a single additional penny....
Speculators have also driven up the interest rate they are demanding the Brazilian government pay on its new bonds.... Brazil must now pay 25% interest rates, or higher, on any new bonds it issues. But about 40% of its old bonds are also linked to market interest rates, which means that they too rise along with the 'country' risk and other usurious charlatanry.
In sum, 45% of Brazil's 700 billion real government debt is dollarized. Another 40% is interest-linked.
With such attractive looting conditions, Brazil became a prize destination of the international carry trade, and is prominently so today under Santander/Inter-Alpha group supervision.
The Goldman Sachs maneuvers in Russia in the Summer of 1998, involving the conversion of a portion of the GKO bonds into dollar-denominated instruments, took advantage of the Russian government's frantic fundraising efforts in the weeks before the Aug. 17, 1998 collapse of the GKO pyramid, when GKO yields were in triple digits. The scheme didn't have a chance to take hold at that time, only because the bubble popped, and the subsequent Primakov and Putin governments attempted to steer clear of such operations.
And then there is the classic case of the Mexico debt blowout of December 1994, triggered by the issuance of precisely such dollar-denominated public bonds—the first time that such a "globalization" measure was foisted on a developing country.
Under pressure of its international creditors—including the Fidelity Group and Goldman Sachs—the Mexican government of Carlos Salinas de Gortari carried out a gigantic switch out of peso-denominated Cetes bonds, and into dollar-denominated Tesobono bonds, beginning in April-May 2004. This "switcheo," as it came to be known in Mexico, created some $30 billion in additional foreign obligations within months. This led to the total blowout of the Mexican system in December, encouraged by a London and Wall Street-orchestrated run on the country.
Goldman Sachs played a leading role in this looting operation as well, first investing heavily in short-term dollar-denominated Mexican bonds during 1994; then participating in the organized run on the country; and finally ensuring that these bonds were fully repaid by the Mexican government, out of funds received from the 1995 "bailout" package arranged by the U.S. government and others.
At the time, EIR's Jan. 27 1995 issue covered the explosion of the Mexican debt bomb and how it would spread elsewhere, and even warned that Brazil had embarked on a similarly insane policy with its NTN-D's:
So far, the Cardoso government has pledged its allegiance to maintaining the speculative cancer. And they have already worsened matters by meeting bankers' demands to issue what are effectively dollar-denominate treasury bills, known as NTN-Ds. This is exactly what Mexico did beginning in the Spring of 1994 with their Tesobonos, which have now blown up in their faces.
As more and more of Goldman Sachs's corrupt dealings are revealed, the question will naturally be asked in Russia, China, and India: Was the BRIC invented as a way to loot us ... again?
GOLDMAN's COMPUTERISED FRONT RUNNING AND FINANCIAL FRAUD
How a Computer Program Designed to Save the Free Market Turned Into a Monster Ellen Brown
Global Research, April 23, 2010
While the SEC is busy investigating Goldman Sachs, it might want to
look into another Goldman-dominated fraud: computerized front running
using high-frequency trading programs. Market commentators are fond of talking about “free market capitalism,” but according to Wall Street commentator Max Keiser, it is no more. It has morphed into what his TV co-host Stacy Herbert calls “rigged market capitalism”: all markets today are subject to manipulation for private gain. Keiser isn’t just speculating about this. He claims to have invented one of the most widely used programs for doing the rigging. Not that that’s what he meant to invent. His patented program was designed to take the manipulation out of markets. It would do this by matching buyers with sellers automatically, eliminating “front running” – brokers buying or selling ahead of large orders coming in from their clients. The computer program was intended to remove the conflict of interest that exists when brokers who match buyers with sellers are also selling from their own accounts. But the program fell into the wrong hands and became the prototype for automated trading programs that actually facilitate front running.
Also called High Frequency Trading (HFT) or “black box trading,”
automated program trading uses high-speed computers governed by
complex algorithms (instructions to the computer) to analyze data and
transact orders in massive quantities at very high speeds. Like the
poker player peeking in a mirror to see his opponent’s cards, HFT
allows the program trader to peek at major incoming orders and jump in
front of them to skim profits off the top. Note that these large
institutional orders are our money -- our pension funds, mutual funds,
and 401Ks.
When “market making” (matching buyers with sellers) was done strictly
by human brokers on the floor of the stock exchange, manipulations and
front running were considered an acceptable (if morally dubious) price
to pay for continuously “liquid” markets. But front running by
computer, using complex trading programs, is an entirely different
species of fraud. A minor flaw in the system has morphed into a
monster. Keiser maintains that computerized front running with HFT
has become the principal business of Wall Street and the primary force
driving most of the volume on exchanges, contributing not only to a
large portion of trading profits but to the manipulation of markets
for economic and political ends.
The “Virtual Specialist”: the Prototype for High Frequency Trading
Until recently, most market making was done by brokers called
“specialists,” those people you see on the floor of the New York Stock
Exchange haggling over the price of stocks. The job of the specialist
originated over a century ago, when the need was recognized for a
system for continuous trading. That meant trading even when there was
no “real” buyer or seller waiting to take the other side of the
trade. The specialist is a broker who deals in a specific stock and remains
at one location on the floor holding an inventory of it. He posts the
“bid” and “ask” prices, manages “limit” orders, executes trades, and
is responsible for managing the uninterrupted flow of orders. If
there is a large shift in demand on the “buy” side or the “sell” side,
the specialist steps in and sells or buys out of his own inventory to
meet the demand, until the gap has narrowed. This gives him an opportunity to trade for himself, using his inside knowledge to book a profit. That practice is frowned on by the Securities Exchange Commission (SEC), but it has never been seriously regulated, because it has been considered necessary to keep markets “liquid.”
Keiser’s “Virtual Specialist Technology” (VST) was developed for the
Hollywood Stock Exchange (HSX), a web-based, multiplayer simulation in
which players use virtual money to buy and sell “shares” of actors,
directors, upcoming films, and film-related options. The program
determines the true market price automatically, by comparing “bids”
with “asks” and weighting the proportion of each. Keiser and HSX co-
founder Michael Burns applied for a patent for a “computer-implemented
securities trading system with a virtual specialist function” in 1996,
and U.S. patent no. 5960176 was awarded in 1999.
But things went awry after the dot.com crash, when Keiser’s company
HSX Holdings sold the VST patent to investment firm Cantor Fitzgerald,
over his objection. Cantor Fitzgerald then put the part of the
program that would have eliminated front-running on ice, just as drug
companies buy up competing patents in order to take them off the
market. Instead of preventing front-running, the program was altered
so that it actually enhanced that fraudulent practice. Keiser (who is
now based in Europe) notes that this sort of patent abuse is illegal
under European Intellectual Property law.
Meanwhile, the design of the VST program remained on display at the
patent office, giving other inventors ideas. To get a patent,
applicants must list “prior art” and then prove that their patent is
an improvement in some way. The listing for Keiser’s patent shows
that it has been referenced by 132 others involving automated program
trading or HFT.
HFT has quickly come to dominate the exchanges. High frequency
trading firms now account for 73% of all U.S. equity trades, although
they represent only 2% of the approximately 20,000 firms in
operation.
In 1998, the SEC allowed online electronic communication networks, or
alternative trading systems, to become full-fledged stock exchanges.
Alternative trading systems (ATS) are computer-automated order-
matching systems that offer exchange-like trading opportunities at
lower costs but are often subject to lower disclosure requirements and
different trading rules. Computer systems automatically match buy and
sell orders that were themselves submitted through computers. Market
making that was once done with a “specialist’s book” -- something that
could be examined and audited -- is now done by an unseen, unaudited
“black box.” For over a century, the stock market was a real market, with
live traders hotly bidding against each other on the floor of the
exchange. In only a decade, floor trading has been eliminated in all
but the largest exchanges, such as the New York Stock Exchange (NYSE);
and even in those markets, it now co-exists with electronic
trading. Alternative trading systems allow just about any sizable trader to
place orders directly in the market, rather than routing them through
investment dealers on the NYSE. They also allow any sizable trader
with a sophisticated HFT program to front run trades.
Flash Trades: How the Game Is Rigged
An integral component of computerized front running is a dubious
practice called “flash trades.” Flash orders are permitted by a
regulatory loophole that allows exchanges to show orders to some
traders ahead of others for a fee. At one time, the NYSE allowed
specialists to benefit from an advance look at incoming orders; but it
has now replaced that practice with a “level playing field” policy
that gives all investors equal access to all price quotes. Some ATSs,
however, which are hotly competing with the established exchanges for
business, have adopted the use of flash trades to pull trading
business away from the exchanges. An incoming order is revealed (or
flashed) to a trader for a fraction of a second before being sent to
the national market system. If the trader can match the best bid or
offer in the system, he can then pick up that order before the rest of
the market sees it.
The flash peek reveals the trade coming in but not the limit price –
the maximum price at which the buyer or seller is willing to trade.
This is what the HFT program figures out, and it is what gives the
high-frequency trader the same sort of inside information available to
the traditional market maker: he now gets to peek at the other
player’s cards. That means high-frequency traders can do more than
just skim hefty profits from other investors. They can actually
manipulate markets.
How this is done was explained by Karl Denninger in an insightful post
on Seeking Alpha in July 2009: “Let’s say that there is a buyer willing to
buy 100,000 shares of BRCM with a limit price of $26.40. That is, the buyer
will accept any price up to $26.40. But the market at this particular moment
in time is at $26.10, or thirty cents lower.
“So the computers, having detected via their ‘flash orders’ (which
ought to be illegal) that there is a desire for Broadcom shares, start
to issue tiny (typically 100 share lots) ‘immediate or cancel’ orders
- IOCs - to sell at $26.20. If that order is ‘eaten’ the computer
then issues an order at $26.25, then $26.30, then $26.35, then
$26.40. When it tries $26.45 it gets no bite and the order is
immediately canceled. “Now the flush of supply comes at, big coincidence,
$26.39, and the claim is made that the market has become ‘more efficient.’
“Nonsense; there was no ‘real seller’ at any of these prices! This pattern of
offering was intended to do one and only one thing -- manipulate the market
by discovering what is supposed to be a hidden piece of information -- the
other side’s limit price!
“With normal order queues and flows the person with the limit order
would see the offer at $26.20 and might drop his limit. But the
computers are so fast that unless you own one of the same speed you
have no chance to do this -- your order is immediately ‘raped’ at the
full limit price! . . . [Y]ou got screwed for 29 cents per share which
was quite literally stolen by the HFT firms that probed your book
before you could detect the activity, determined your maximum price,
and then sold to you as close to your maximum price as was possible.”
The ostensible justification for high-frequency programs is that they
“improve liquidity,” but Denninger says, “Hogwash. They have turned
the market into a rigged game where institutional orders (that’s you,
Mr. and Mrs. Joe Public, when you buy or sell mutual funds!) are
routinely screwed for the benefit of a few major international banks.”
In fact, high-frequency traders may be removing liquidity from the
market. So argues John Daly in the U.K. Globe and Mail, citing Thomas
Caldwell, CEO of Caldwell Securities Ltd.:
“Large institutional investors know that if they start trying to push
through a large block of shares at a certain price – even if the block
is broken into many small trades on several ATSs and markets -- they
can trigger a flood of high-frequency orders that immediately move
market prices to the institution’s disadvantage. . . . That’s why
institutions have flocked to so-called dark pools operated by ATSs
such as Instinet, and individual dealers like Goldman Sachs. The
pools allow traders to offer prices without publicly revealing their
identities and tipping their hand.”
Because these large, dark pools are opaque to other investors and to
regulators, they inhibit the free and fair trade that depends on open
and transparent auction markets to work.
The Notorious Market-Rigging Ringleader, Goldman Sachs
Tyler Durden, writing on Zero Hedge, notes that the HFT game is
dominated by Goldman Sachs, which he calls “a hedge fund in all but
FDIC backing.” Goldman was an investment bank until the fall of 2008,
when it became a commercial bank overnight in order to capitalize on
federal bailout benefits, including virtually interest-free money from
the Fed that it can use to speculate on the opaque ATS exchanges where
markets are manipulated and controlled. Unlike the NYSE, which is open
only from 10 am to 4 pm EST daily, ATSs trade around the clock; and they
are particularly busy when the NYSE is closed, when stocks are thinly
traded and easily manipulated. Tyler Durden writes:
“[A]s the market keeps going up day in and day out, regardless of the
deteriorating economic conditions, it is just these HFT’s that
determine the overall market direction, usually without fundamental or
technical reason. And based on a few lines of code, retail investors
get suckered into a rising market that has nothing to do with green
shoots or some Chinese firms buying a few hundred extra Intel servers:
HFTs are merely perpetuating the same ponzi market mythology last seen
in the Madoff case, but on a massively larger scale.”
HFT rigging helps explain how Goldman Sachs earned at least $100
million per day from its trading division, day after day, on 116 out
of 194 trading days through the end of September 2009. It’s like
taking candy from a baby, when you can see the other players’ cards.
Reviving the Free Market
So what can be done to restore free and fair markets? A step in the
right direction would be to prohibit flash trades. The SEC is
proposing such rules, but they haven’t been effected yet.
Another proposed check on HFT is a Tobin tax – a very small tax on
every financial trade. Proposals for the tax range from .005% to 1%,
so small that it would hardly be felt by legitimate “buy and hold”
investors, but high enough to kill HFT, which skims a very tiny profit
from a huge number of trades. That is what proponents contend, but
a tiny tax might not actually be enough to kill HFT. Consider Denninger’s
example, in which the high-frequency trader was making not just a few
pennies but a full 29 cents per trade and had an opportunity to make
this sum on 99,500 shares (100,000 shares less 5 100-lot trades at lesser sums).
That’s a $28,855 profit on a $2.63 million trade, not bad for a few
milliseconds of work. Imposing a .1% Tobin tax on the $2.63 million would
reduce the profit to $26,225, but that’s still a nice return for a trade that takes
less time than blinking. The ideal solution would fix the problem at its source --
the price- setting mechanism itself. Keiser says this could be done by banning
HFT and installing his VST computer program in its original design in all the
exchanges. The true market price would then be established automatically,
foreclosing both human and electronic manipulation. He notes that the
shareholders of his former firm have a good claim for voiding out the sale
to Cantor Fitzgerald and retrieving the program, since the deal was never
consummated and the investors in HSX Holdings have never received a
penny for the sale.
There is just one problem with their legal claim: the paperwork
proving it was shipped to Cantor Fitzgerald’s offices in the World
Trade Center several months before September 2001. Like free market
capitalism itself, it seems, the evidence has gone up in smoke.
Ellen Brown developed her research skills as an attorney practicing
civil litigation in Los Angeles. In Web of Debt, her latest of eleven
books, she turns those skills to an analysis of the Federal Reserve
and “the money trust.” She shows how this private cartel has usurped
the power to create money from the people themselves, and how we the
people can get it back.
GET THE PASSENGERS OFF THE BOAT YOU CANNOT BAIL THIS THING OUT
http://www.larouchepub.com/pr_lar/2010/l...tdown.html
Panic spread across international financial markets as the Eurozone debt crisis escalated yesterday and today, with Spain joining Greece and Portugal on the list of countries whose sovereign debt has been downgraded by Standard & Poors, and some analysts asking the question, is Italy next?
When you add up the demanded bailouts of the bank creditors of these countries, Lyndon LaRouche commented today, you are talking about something in the range of $1 trillion dollars. If you consider the insane derivatives built on top of this quicksand—in typical Goldman Sachs style—you are in the range of a quarter quadrillion dollars, or higher. "You cannot bail this thing out," LaRouche asserted. You have to get the passengers off the boat, not try to bail out the Titanic—and hopefully there will be enough boats to do that.
The British Empire's media outlets and experts, looking at this situation, are urging an exactly contrary policy to LaRouche's: a second TARP-style mega-bailout. Barclays Capital economist Piero Ghezzi is cited in today's New York Times saying that, in order to satisfy "the markets"—i.e., the predator financial institutions that created the problem in the first place—"the number would be huge. Ninety billion euros for Greece, 40 billion for Portugal and 350 billion for Spain—now we are talking real money." The Times article then calls for a TARP-style bailout of Europe to be launched:
What a growing number of investors suggest is really needed is a 'shock and awe' figure... something similar to the Bush administration's decision to provide $700 billion to shore up America's financial institutions in the peak of the 2008 crisis.
Bloomberg.com concurred:
Europe may need to come up with a plan equivalent to the $700 billion Troubled Asset Relief Program deployed by the U.S. after the collapse of Lehman Brothers Holdings Inc.
The head of the notoriously anti-science Organization for Economic Co-operation and Development (OECD), Angel Gurria—in Berlin to survey the damage along with the top dogs of the International Monetary System, the World Bank, the European Central Bank, and the International Labor Organization—was openly hysterical:
It's not a question of the danger of contagion. Contagion has already happened. This is like Ebola. When you realize you have it, you have to cut your leg off in order to survive.
Prescribing self-dismemberment to a nation is coherent with the OECD's anti-nation state goals. The OECD is an international organisation which advises governments on how to tackle the economic, social and governance challenges of a globalized economy, in a way that won't challenge the British monetary system.