As long as the markets are firm who really cares whether they might be rigged, right?

That seems to be the mentality of those who would prefer not to have meaningful transparency and accompanying truths revealed on scandalous practices (if not very real corruption) at the core of our equity markets and financial regulatory oversight.

The fact that the SEC imposed a fine of $4.5mm yesterday on the NYSE and related parties for a failure to uphold or impose rules that would maintain fair markets is a meaningful event. That said, a token fine of this sort leads to far more questions than answers. Let’s navigate and review the fine and then pose questions and comments. Forbes offers this review: 

According to the SEC’s charges, the NYSE and its affiliated its exchanges “repeatedly engaged in business practices that either violated exchange rules or required a rule when the exchanges had none in effect.”

Sound like everything is on the up and up? Maybe not?

Violations occurred between 2008 and 2012, the SEC said, and include misconduct like: using an error account at Archipelago to assume and trade out of securities positions without a rule that permitted such transactions; the provision of co-location services to customers on disparate contractual terms without an exchange rule in place; the operation of a block trading platform (New York Block Exchange, launched in 2009 with the goal of maximizing liquidity access and improving the execution of block trades, the NYSE said at the time) that did not comply with NYSE/SEC rules for a period of time; and the distribution of an automated feed of closing order imbalance information to NYSE floor brokers at an earlier time than was specified in NYSE’s rules.

First some questions.

1. How is it that violations of this sort can go on for such a protracted period? Where was the regulatory oversight from FINRA and the SEC itself?

2. If the SEC found these violations to have occurred at the NYSE, what about the other exchanges including the Nasdaq, BATS, and Direct Exchange? Are we to think that these exchanges did not also provide co-location services on disparate terms?

3. Is a $4.5mm fine meaningfully impactful to change behaviors and practices? Recall that the SEC imposed a $5mm fine on the NYSE in 2012 for, as Forbes states, “allowing a head start on trading information.” What good did that fine do?

Now some comments.

1. A fine of $4.5mm is, as stated in my book, “akin to a slap on the back from an accomplice as opposed to a kick in the pants from a real cop.”

2. The comfort level of those running the NYSE and these related entities that would allow them to engage in the practices exposed by this fine stems from the incestuous, corrosive, and corruptible dynamic explicitly detailed in Chapter 7 of my book. In those pages, I lay out the serious allegations and accompanying evidence as to how the NASD (National Association of Securities Dealers) and the regulatory arm of the NYSE jointly conspired with the NYSE to misappropriate funds of between $180 and $380 million from the NASD’s smaller and medium sized member firms. That sort of fraudulent transaction is just the foundation that would lead to an exchange such as the NYSE operating in an underhanded fashion.

3. I strongly believe the SEC, Mary Jo White, and her predecessor Mary Schapiro (hell, Chris Cox and most other SEC Chairs of the last 20 years as well) have failed to protect investors and the public interest. A fine of $4.5mm is further evidence of that.

4. Regrettably, the media as well have also failed to uphold their mandate to pursue and expose the truth so as to protect the public interest.

I strongly believe the abysmal level of trust and confidence held by the American public in these institutions (SEC, NYSE, media) is justified.

Navigate accordingly.

Larry Doyle