Senator Schumer apparently believes this is an unfair practice, and I agree.

July 24 (Bloomberg) -- Senator Charles Schumer asked the U.S. Securities and Exchange Commission to ban flash orders, saying the transactions give high-speed traders an unfair advantage over other investors.

Nasdaq OMX Group Inc., Bats Exchange Inc. and Direct Edge Holdings Inc. hold these orders for milliseconds, giving their customers the opportunity to gauge demand before traders on other exchanges get the chance to bid, Schumer said in a letter to SEC Chairman Mary Schapiro. Brian Fallon, a spokesman at Schumers office, confirmed the authenticity of the letter.

Flash orders allow certain members of these exchanges to obtain access to order flow information before that information is made available to the public, Schumer wrote. That allows those members to use rapid trading programs to trade ahead of those orders and profit from advanced knowledge of buying and selling activity, he added.

The senator said that if the SEC doesnt prohibit flash orders, he will introduce legislation that would.

This is my view:

1. Getting a look at orders before someone else does is commonly called "cheating".  The National Market System (NMS) was supposed to prevent that; this was the so-called "innovation" of Nasdaq, remember?  No specialists, no balancing of orders to open a stock, all done by computer.  Equality of access.  Up until it became profitable to make some people more equal.  The intent of a public stock exchange is to insure equality of access to information so that the markets are orderly, not rigged.
2. Using flash order information (or anything else) to front-run is illegal.  In all of its forms, this is an extremely serious matter and it must be stopped.
3. To the extent that these HFT systems are in fact using flash (or other) traffic to get in front of orders and advantage themselves they are dramatically increasing the violence of market moves.  A stock trading at $20 that has a bid come in with a limit of $20.10 would normally fill (assuming sufficient depth) at $20; this does not materially move the market.  But if a HFT system "sees" that order, steps in front of it and buys up all the shares at $20 and then re-sells them to the customer at $20.04 (one penny better than the next best offer at $20.05) it has caused the current "last" price to move where it otherwise would not. Multiply this by millions of shares an hour and the impact on price moves could be tremendous.  While I understand that many people like the move of the last two weeks in the market, the fact remains that what goes up can also come down with equal violence.
4. HFT systems that front-run are able to garner risk-free profits.  This is in fact the reason such a practice is banned - their "risk-free" profit is your guaranteed loss.  Remember, the markets are in fact a negative-sum game (due to trading costs) - if there is a "risk-free" opportunity out there it can only exist because someone else is guaranteed a screwing.

I call upon The SEC to conduct a full and public investigation of the HFT systems in use today, along with immediately banning the "flash" traffic in accordance with Senator Schumer's request.  I specifically want to know:

1. Have any of these HFT systems been using flash traffic (or any other mechanism) to "step in front" of a flashed order?
2. What part did these systems play in the October and March meltdowns, along with the ramp job of the last two weeks?  Specifically, were they stepping in front of orders in these cases, thereby dramatically amplifying market moves while skimming off their pennies?

Public and fair markets demand transparency.  All users must obtain access to order flow at the same time, without exception, and attempts to "step in front of the line" must be met with both civil and criminal sanction for market manipulation.

I can think of three relatively-minor changes that would leave those who are using HFT legitimately unharmed but would destroy most of the ability to cheat.  These are:

1. Eliminate the 'flash order' entirely.  All market participants must get order and flow information at the same time - no exceptions.
2. Force all orders (e.g. IOC, etc) to be valid for a reasonable minimum period that allows human response.  1 second would meet this criteria; it would destroy the ability of the "robots" to use abusive order patterns without preventing the legitimate use of "immediate or cancel" orders.  The time selected must be greater than the average human reaction time plus round-trip network transit time within the nation; visual recognition time for young adults averages a bit over 200 milliseconds (0.2 seconds) exclusive of the response (e.g. a mouse click) and round-trip transit time on high-speed circuits cross-country (corner-to-corner) is approximately 100ms.  Thus the minimum acceptable time is in the neighborhood of 500ms assuming no intervening computer computational delays (e.g. brokerage servers, etc); doubling this to provide for a margin (not all people are 20 years old, there are typically multiple computers between the exchange and end user, charting or display software requires time to post the event on the screen, etc) seems reasonable.
3. Define as "front running" by law any scheme or practice that exposes or discovers orders to any select group of players before the market as a whole, irrespective of how.  The unfortunate reality is that there is no mechanism available to prevent computers from exploiting asymmetric information; ergo, you must define the provision or discovery and use of any such asymmetric information in the public markets as a criminal offense.  Penalties should include treble forfeiture of all profits gained from such an abuse and a permanent ban on all access to the securities business as well as prison time.

"Arms races" are inherently negative-sum games; the only winning party is the guy who is selling the weapons.  In this case the losers are the public and institutions who are attempting to invest or trade in the equities markets.

It is time to put a stop to this part of The Bezzle.

Health care "reform" is the current hot-button, with the Obama administration now talking about a "public" health-insurance system to "keep the system honest."

Uh huh.

Look folks, you want to know why we have the health cost problems we have?  I'll lay it out for you - in a way you can't refute or argue with:

1. There are no published prices.  In no other line of work is it legal to do this.  Nowhere.  You can't sell someone a hot dog and tell them after they eat it what it just cost them.  You can't hire a lawyer and have him tell you "I'll tell you what this will cost when we're done."  You can't hire an electrician and have him tell you "I'll make up a bill when I'm done."  In every line of work except health care, this is illegal.  There are even laws for "major" consumer work (e.g. contracting, auto repair, etc) where they must give you a binding written estimate before beginning work! 
2. Robinson-Patman makes it illegal to discriminate against like kind purchasers of goods in pricing decisions when the effect of doing so is to lessen competition.  While it does not apply to services, it darn well should.  Whether you are paying privately, you have private insurance or you're a Medicare patient if you need to have a breast reconstructed due to cancer the complexity of the procedure does not change.  Yet it is a fact that the privately-billed amounts for uninsured ("rack rate") patients are often ten times or more that billed to insurers or Medicare.  Try charging a cash purchaser 10x more for a TV than someone who finances that TV on your in-house credit facility and you would be shut down and thrown in jail.

#1 and #2 exist because of explicit efforts by the "health care" industry to exempt themselves from the laws that every other merchant of every other good and service in the United States must adhere to.

To put this bluntly the medical industry has intentionally put forward a system by which it can screw you with impunity, obtaining exemptions from the laws that cover every other area of commerce, thereby effectively forcing you to buy overpriced services you do not want to purchase lest an unexpected life event literally wipe you out.

This is an extortion racket and absolutely none of the proposals being put forward have done a thing to address any of it.

If we want to fix the health care pricing problem we can do so.  It isn't very difficult.  Here's the prescription:

1. All health care providers must publish a price list for the procedures and services they offer and the patient must be presented, when possible, with that information before services are performed or goods (e.g. medication) supplied, consenting to the charge in each case.  All normal anti-trust provisions with regards to collusion between providers apply.  If a physician doesn't like "flat-rate" billing they're free to publish a per-hour fee much like an attorney.
2. No physician or group may discriminate based on the form of any external payment.  If they want to internally finance procedure(s), that's fine - they can charge interest or discount for that, or whatever.  But for anyone who pays via any other means (including the government) money is money - the price may not change based on the source of payment.
3. No event caused by your presence in a medical facility or the actions of an employee there can come with cost to you.  It is absolutely common for people to be billed for treatment of MRSA infections acquired in the hospital!  That is equivalent to a mechanic that through incompetence or even malice cuts a wiring harness in your car while it is on the rack having the oil changed and then tries to charge you to fix what he broke!

Now clearly #1 doesn't work so well when you're unconscious due to a heart attack or just wrecking your car.  But setting your broken leg or performing a cardiac procedure is something that's done for people who aren't incapacitated too, so guess what - the price is already published and thus the charge known.

This prevents the common practice of hospitals gouging private payers, it exposes prices and brings competition to pricing, and allows the free market to work.  It ends the preference for "insurance" on routine procedures.

Next up, if you want to sell "insurance" in a market you must sell it to all persons in that market, defined as an area of at least one US State.  You may discriminate in your pricing only based on age and gender - nothing else.  If you sell that "insurance" product to any person you must sell to all persons within that state at the same price, and you must publish all your plans and offering prices.

"Insurance" products that are not true insurance products may not discriminate on reimbursement dependent on where the service is performed.  The practice of requiring "in network" doctors or even hospitals lest you get "rejected" must end.  In addition pre-qualification for any bona-fide non-elective procedure must be absolutely barred as a matter of law.

Finally, all providers of "insurance" must sell a true insurance product.  Common HMO/PPO plans are not insurance - they are pre-paid medical care.  Insurance is the purchase of a contract to cover damage caused by an unexpected event.  Everyone needs health care of some form.  Those who want to sell "pre-paid health plans" may do so, but they must also offer true insurance (e.g. covering ONLY hospitalization and related events, etc.)

These changes instantly destroy the connection between health "insurance" and employment.  If you leave your job you have the absolute right to keep your health plan by continuing to pay for it.  If you don't like your health plan or move out of the state you can buy any plan offered to anyone in your state, at your choice, for the same price they pay.

All mandates to provide specific services and products under "insurance" are federally preempted.  Women should be able to choose a health plan that does not include abortion (and/or pre-natal!) services, for example, if they would never use either.  Some women (e.g. those who have chosen to have a tubal ligation!) can't use these services, yet they often wind up paying for them in their premiums.  Men should be able to choose a plan that does not cover things like Viagra - or, if they choose, perhaps they do want "ED" coverage.

If the health lobby won't cut out the nonsense and work for this sort of change to the system then I am forced to advocate for full nationalization of the entire health system, effectively placing everyone under Medicare.  This will lead to forced rationing due to cost but that's happening already, and such a forced system will put a stop to the discriminatory practices of insurers, physicians, hospitals and others in the medical field who commonly bill private parties ten times what health "insurance" plans or Medicare pay for the very same procedure, while playing "let's deny coverage any time we think we can get away with it."

It is my opinion that we should be treating those in the health-insurance lobby, including hospitals, physicians and health-insurance providers, as co-conspirators in a racketeering scheme that effectively trades on the fear of disease and imminent bankruptcy to bamboozle and screw the population, while waving around their "hippocratic oath" - something better described as the "hypocritic oath."

The Government never ceases to amaze me...

BankUnited, a newly chartered federal savings bank, acquired the banking operations, including all of the nonbrokered deposits, of BankUnited, FSB, Coral Gables, Florida, in a transaction facilitated by the Federal Deposit Insurance Corporation (FDIC). As a result of this transaction, BankUnited, FSB, offices and branches will be operated as BankUnited offices and branches.

For those who don't follow The Market Ticker closely (or who are new to it and the forum) Tickerforum and Market Ticker readers know that I and many others made a very nice profit shorting these guys some time back; we identified this bank, among others, as ones that were absolutely going to be zeros.

Of course there's nothing particularly wrong with business failure - except when regulatory agencies ignore their mandate and let it cost the taxpayers billions.  Like this time.

The FDIC facilitated the transaction with John Kanas and a consortium of investors after BankUnited, FSB, was closed today by the Office of Thrift Supervision, which appointed the FDIC as receiver. The FDIC estimates that the cost to its Deposit Insurance Fund will be $4.9 billion. BankUnited's acquisition of all the deposits and assets of BankUnited, FSB was the "least costly" resolution for the DIF compared to alternatives.

Sure, it was "least-costly" now.  But PCA, "Prompt Corrective Action", is supposed to prevent a bank from getting here.  And further, if the FDIC had done its damn job, along with the OTS, there would have been no loss, since according to the basic principles of sound banking if you never allow unsecured lending to exceed excess capital, there can never be a loss to the taxpayer or insurance fund!

Speaking of the OTS....

May 21 (Bloomberg) -- The Office of Thrift Supervision authorized inappropriate backdating of capital by six institutions, including IndyMac Bancorp Inc., that led to misleading financial reporting, the U.S. Treasury inspector general said in a report.

I'll call it what it is, instead of playing word-games.

This is fraud.

Period.

"Misleading" financial reports?  That's fraud.

"Back-dating of capital"?  That's fraud.

And the OTS did more than just look the other way - this government agency is accused of directly conspiring to defraud depositors, shareholders and taxpayers:

Oversight failures were very serious and included a senior deputy director in August instructing a lender to backdate and a regional director authorizing revised accounting, according to the report today. OTS left unchanged revisions at three unidentified thrifts. Republican Senator Charles Grassley said the actions were completely unacceptable and a congressional subcommittee planned an investigation.

Its alarming that such high-level OTS officials were not only aware of two revisions in capital reports, but directed or authorized the backdating, Susan Barron, audit director in the Office of Inspector General, said in the report that didnt identify five of the six lenders. IndyMacs August revision on capital helped the lender avoid OTS restrictions.

And, I might add, those scams cost the taxpayer essentially the entire contents of the FDIC's insurance fund.

That's right - the FDIC has no money.

Now I'm quite sure Congress will pony up more - of your and my money - to cover up the fraud rather than effort clawing back the assets of every single person involved both in the OTS and the banks that were participants in these schemes.

Oh, and OTS' response?

The agency is committed to continuing to improve and strengthen its processes based on lessons learned from its internal review and the Office of Inspector General, Acting Director John Bowman wrote May 18 to the inspector general. OTS gave detailed guidance and communication to employees and lenders regarding proper recognition and reporting of capital contributions.

How about indictments and prosecutions instead?

I have repeatedly said that this scandal is 100 times worse than Watergate, which was about political intrigue and burglary - not to steal money, but political secrets.

This is about stealing hundreds of billions of dollars from you, me, your children, grandchildren, and those not yet born, then covering it all up instead of locking up those responsible and clawing back every nickel of the guilty's assets.

STOP THE LOOTING AND START PROSECUTING!

Disclosure: Short the FDIC and OTS, long boiled rope.

How about those used car buyers (as victims)?

"SACRAMENTO, Calif. (AP) -- The national wave of auto dealership closures has come crashing down on thousands of people who are on the hook for used-car loans that dealers were supposed to absolve."

Isn't that nice?  You trade in your car on a new one, and a month later the lender on your original note comes after you!  Why?  Because the dealer, who contractually was obligated to pay off your note, didn't.  He pocketed the money (literally!) and then went out of business.

This isn't an ordinary contract dispute, it is outright fraud.  You were given paperwork showing that the lien was to be satisfied and your transferred your title to the dealer - you gave him the vehicle and he gave you both a new car with a loan and a representation that your previous vehicle's lien was being discharged.

The "soft underbelly" of this whole scheme is that frequently dealers have apparently not been immediately paying off these liens, but rather waiting for things like the manufacturer holdback to come to them.  In the meantime they spent the money, and if they fold ahead of those "promises" you are the one who takes it on the chin.

This is yet another example of "The Bezzle" in our financial system - that is, the underlying fraud and embezzlement that has permeated every corner of our financial and social systems.  The nasty part of "The Bezzle" is that it almost always has an element of cost-shifting involved in it - we have seen, for example, banks about to fold (like IndyMac) start offering crazy-rich CD rates into the market, cost-shifting the interest expanse onto others (specifically, the FDIC!)  Not every piece of "The Bezzle" is a crime, but all parts of it raise costs for those who do the right thing and punish them, as all are a "skimming" operation in one form or another.

But back to the car dealer - you'd think that when you traded in your car the next day satisfaction of your old loan would be transferred out to the lender who held that note by that dealer.  You'd be wrong - those dealers have sat on these notes for days, or in some cases a month or more.  If they go bankrupt you are the loser because your contract is with the dealer; the lender has every right to hold you accountable when the note isn't paid, and does.

Note that this is distinct from Real Estate transactions where by law when closing takes place escrow has closed and money has changed hands.  The deal is over.  This is NOT necessarily true in the automobile world - it should be, but its NOT.  The States, which have the responsibility to insure that the regulated businesses they govern act in an ethical and legal manner, have done little or nothing to do stop this because "times were fat" and heh, we don't want to actually demand that dealers remit the next business day on traded vehicles - even though they could have, and prevented this from happening.  Everyone "won" if the dealers got to play fast and loose with the money for a few days - or weeks - pretending there was no risk in doing so.

Does it end there?  Oh hell no.  How about this one?

"The dozen banks now receiving the biggest rescue packages, totaling more than $150 billion, requested visas for more than 21,800 foreign workers over the past six years for positions that included senior vice presidents, corporate lawyers, junior investment analysts and human resources specialists. The average annual salary for those jobs was $90,721, nearly twice the median income for all American households."

Nice.  So these banks have laid off 50,000 Americans, but at the same time they have asked to bring in nearly 22,000 foreigners and give them jobs, with a median salary of almost $91,000, nearly twice the median income for Americans as a whole.

And we're supposed to sit still for $350 billion in corporate welfare while these firms fire 50,000 Americans and try to give half the jobs to foreigners on H1B visas?

Next let us turn our attention to THE STATES that have been screaming about their budget shortfalls.  I wonder if we might find something troubling in there:

Don't let anyone tell you the American dream has faded. the truth is the U.S. is still minting lots of millionaires. Glenn Goss is one of them.

Goss retired four years ago, at 42, from a $90,000 job as a police commander in Delray Beach, Fla. He immediately began drawing a $65,000 annual pension that is guaranteed for life, is indexed to keep up with inflation and comes with full health benefits.

Goss promptly took a new job as police chief in nearby Highland Beach. One big lure: the benefits.

Given that the average man his age will live to 78, Goss is already worth nearly $2 million, based on the present value of his vested retirement benefits. Looked at another way, he is a $2 million liability to Florida taxpayers."

A little double-dipping here?  And The States want the federal government (that's you and I) to bail them out?  Like hell!  I live in Florida and this sort of thing makes me want to puke.  A $2 million dollar pension at age 42?  From the state?

This is ridiculous and it is pervasive.  Public-sector employees make more than private-sector and their pension benefits are outrageous - and unaffordable. 

This nation was founded on the premise that your hard work brought you success.  That you did not have the right to transfer the costs of your actions onto other people.  That you (whether "you" was a person, a company, or a state) had to bear the price of its decisions, both when they went well and led to profit, and when they went poorly and led to loss.

We have violated this basic premise with increasing abandon over the last twenty years and now, with the check on the table, it is discovered that the money simply isn't there to keep all these promises we made without regard to the expense and cover up all the fraud that has pervaded our financial and consumer markets.

When President Obama says that the economy will get worse before it gets better, he's not kidding - until and unless "The Bezzle" is forced out into the open and greatly abated in our system - whether it expresses itself as a criminal act or just one of simple outrageous hubris.

The Fed has claimed that this is a "liquidity crisis."

Really Ben? Then perhaps you can explain this?

Note that this is an intentional drain of "slosh", or liquidity, from the banking system. $125 billion in the last four days drained?

You wouldn't be trying to intentionally cause a bank failure or two to bolster your call for the $700 billion "bailout" plan, or perhaps intentionally lock the short-term credit markets, would you Ben?

If the market has a liquidity crisis, why would you be intentionally draining reserves from the banking system? Don't you think you ought to explain that to Congress?