By Dennis Kelleher, Co-founder, President and CEO of Better Markets
I recently participated in my first-ever Ask Me Anything on Reddit (r/GME) in late March. The response was terrific so I thought it would be helpful to do a brief recap of my answers to many of your questions. This second blog post addresses questions on order routing, dark pools, short selling, among other topics. You can read the first blog post here for answers to questions about Citadel, lack of regulatory oversight, new leadership, among other topics.
Thanks to all of you who asked me such good questions — I only wish I could have answered them all!
Leaglese asked: Do you believe order routing, especially with it being incentivized by payment for order flow, via dark pools has any impact on the fair public share price of stocks?
My answer: PFOF totally distorts the order routing process and screws retail investors/buy side while harming transparent public markets. It should be banned along with the other secret payments that create undisclosed conflicts of interest and are not in the best interests of investors. Plus, so called “price improvement” based on the NBBO is misleading if not a fraud. We spelled this out in my written testimony here. Read the Reddit comments.
Another Leaglese question: What is your opinion on dark pools generally?
My answer: Frankly, anything called “dark pool” should be a red flag for not only lack of transparency, but also lack of oversight and accountability. It’s just asking for trouble. Rather than allowing alternative trading venues, the SEC simply must focus on making our public, transparent markets robust and fair. That’s where there’s greatest investor protection and oversight, which reduces predatory conduct. That’s not to say our public markets are perfect; they are not, but they are way better than the conflict- ridden dark markets. Read the Reddit comments.
Leaglese also asked: How easy is it for market makers to “reset” their failure to deliver obligations and in what ways can they do this?
My answer: The FTD in this is inexplicable based on the public information, but it has all the hallmarks of abusive behavior and hopefully this is part of the SEC investigation, which they said they would publicly report on when done. As I noted in my written testimony, we also believe the SEC should review Reg SHO and its other rules and ensure that there are appropriate sanctions for violations, especially for those who repeatedly and perhaps strategically fail to deliver. And, as we have stated repeatedly, those actions must be against individuals and not just companies, otherwise they will keep doing it and letting the firms pay the fines. Read the Reddit comments.
idontdislikeoranges asked: Do you have an opinion on the real SI of the stock vs reported and how can we improve transparency in the markets?
My answer: Shorting needs much greater transparency. We have called for more transparency as to (1) timing/frequency, i.e., weekly if not more often; (2) everyone doing it regardless of form, i.e., not just hedge funds; and (3) all products used to short, i.e., synthetic exposure. The markets and market participants should know a lot more a lot faster to level the playing field. Read the Reddit comments.
jsmar18 asked a couple of questions: (1) What’s your opinion on hidden orders and how HFT traders benefit from them to manipulate prices? (2) What’s your opinion on exchanges offering order types that retail cannot access and how this perpetuates inequality within the stock market disenfranchising retail investors?
My answer: The concentrated trading largely through 7 HFTs allows those firms to extract multiple forms of special privileges, all of which distort the markets and hurt retail investors. HFT has created rigged markets for the purpose of wealth extraction, which is enabled due to fragmented, dark markets with little regulation. If the SEC took its responsibility to protect investors and markets, it would have ended this long ago. Unfortunately, apart from lacking the courage to do it, the SEC doesn’t even have the tools to monitor the markets today. They don’t know half of what the HFTs and Citadels of the world know. That’s why they must complete the CAT ASAP and start going after predatory behavior like preferential data access and other unfair privileges, including stopping the approval of special-order types that serve no purpose other than market manipulation and entrenching HFTs.
jimbobicus asked: One narrative that has been seen is how Reddit retail investors are colluding and breaking the laws while we see what appears to be blatant disregard for those same laws as well as others by these accusers. Do you think that Retail investors are breaking the law and is there a functional mechanism to expose and stop not only citadel but others from engaging in these activities?
My answer: You’re right about what frequently appears to be collusion and manipulation. This again gets back to, frankly, really bad regulators. For years now, the SEC, DOJ and other regulators/prosecutors have simply failed to enforce the law without fear or favor. They are mostly former and future white-collar defense lawyers who not surprisingly don’t go after their past and future corporate clients. Even when they do, they almost always only fine the company and let the officers and executives who pocket literally hundreds of millions of dollars get off. That has to change before our markets get cleaned up and retail investors and the buy side generally gets protected.
This report we did on the Wall Street crime spree might interest you.
Owl-Exterminator asked: My question regards the obfuscation of data when it comes to short interest. In your view, how conceivable/possible is it for entities to hide the truth of short interest/their short positions in a given stock? How feasible would it be (if one had little regard for the law) for entities with large short positions to report far smaller ones?
My answer: For 10 years, the SEC has failed to stand up a reporting regime for equity derivatives where, undoubtedly, many funds have taken short positions that are not disclosed to the broader market. We have repeatedly called for much greater disclosure of short interest regardless of form or firm.
Komplexikon asked: My question is simple, could they ever be held accountable for their illegal shorting and everything else?
My answer: YES! If we had courage and leadership at the SEC and DOJ who were really willing to go after the rich, powerful, politically connected firms and executives. Hopefully, we’ll see some of that in the coming years. We keep pushing for this, but Congress has to push as well, which is why … YOU contacting your House and Senate representatives is so important. They all respond to public pressure and people power can have an impact, but people must use their power to counterbalance the influence of Wall Street and its many allies. Read the Reddit comments.