SEC (Securities and Exchange Commission): slashing the fat

Authored by: David Stockman

The SEC is an exceedingly top-heavy agency with staff of 4,500 absorbing upwards of $1.1 billion per year in compensation expense, which figure computes to an average cost of $255,000 per head. It is also an egregious Nanny State meddler in an industry---the stock, bond and related markets of Wall Street---that hardly needs the helping hand of the state to function.

In fact, the basic SEC function---mandated financial disclosure---generates an endless tsunami of filings that are basically superficial, proforma, mechanical, ritualistic, minimally informative and lawyered ten-ways-to-Sunday. Consequently, real investors in today's $100 trillion+ Wall Street casino spend lavishly from their own pockets to dig for supplemental business and financial information that can actually make a difference with respect to the prospects and performance of registered companies.

Stated differently, the Wall Street casino is not some kind of latter-day nursery school where the boys and girls operating there need SEC nannies to proof their readers and workbooks. With tens of trillions at stake, investors and traders would get the financial and operational information they need. Failing that, uncooperative or crooked issuers would readily find a torrent of (short) sell orders at the posts were their securities are traded.

SEC efforts to specify and enforce accounting standards are even more of a joke. Virtually all Wall Street stock analysts construct elaborate non-GAAP accounting statements (Generally Accepted Accounting Principles) for the companies they cover and recommend, even as the SEC nannies and gumshoes require companies which mention or discuss these analyst-based non-GAAP versions of their financial results to provide elaborate bridges back to GAAP. So what's the point of spending hundreds of millions per year enforcing GAAP accounting standards when the daily financial vocabulary of Wall Street traders and analysts amounts to a systematic GAAP work-around?

Then comes the foolishness of the SEC's massive market monitoring and enforcement efforts with respect to essentially undefinable and mostly pointless insider trading cases. The very predicate of insider trading laws---that each and every investor should have access to exactly the same information at the same moment in time---is an inherent insult to the basic nature of financial trading markets, where the opposite principle actually pertains. To wit, investors who develop an "edge" are rewarded with superior returns, which is how the market incentivizes and compensates for the search for information and insights that make trading more efficient and productive.

The truth is, insider trading laws amount to a version of flat-earth economics. Besides, the trading moves of a big hedge fund are far more impactful to stock prices than some undisclosed financial tidbit from a company CFO. Yet the latter is per se illegal while your "insider" knowledge of trading activity by the big swinging hedge fund operating next door to your own trading floor is completely legal so long as it was not obtained through "a breach of duty or trust".  Whatever that means.

The argument that without SEC nannies the trading markets would be corrupted by illicitly obtained "inside" information is a relic of what politicians in the early 1930s didn't understand about the real reasons for the 1929 crash (the Fed caused it). But in today's world of instantly and infinitely available information and massive financial incentives to scour the landscape for market moving data, "inside information" amounts to a Snapchat equivalent. Its half-life is too short to make a difference to investors over any measurable investment horizon.

The same goes for the SEC's prosecution of "market manipulation".  The fact is, there are currently more than 8,000 hedge funds, which collectively manage $2.8 trillion of assets---with much of the latter coursing through the trading desks of a tiny number of "prime brokers" (Goldman, Morgan Stanley, JP Morgan etc.) on a 24/7 basis. These arrangements are fully legal but inherently result in market moving surges or plunges whenever the big boys all lean in a common direction. By happenstance, of course!

The inherent irregular and sometimes herky-jerky movement of trading markets in response to information and investment flows generated by the hedge fund mob, in fact, is just economics 101. By comparison, the SEC's market manipulation targets amount to chasing the ghosts of what sharp-edged traders did in a more primitive time way back in the 1920s. In today's technology-enabled trading world none of these alleged marketplace sins would actually have more than a momentary impact and, in any event, would breed countermanding schemes similar to the manner in which some traders today buy excessively shorted stocks to trigger a covering rally. That is to say, today's markets root out cheaters and short-cutters far faster than could any passel of overpaid GS-16s at the SEC.

In short, the Trading Nannies at the SEC are not needed to prevent any of the five types of "market manipulation" pursued by the agency. Today's information, communications and technology rich Wall Street markets, where trillions are at stake every minute and hour, are always and everywhere on the alert for so-called abuses of these types. They don't need the SEC to tell them when marketplace miscreants are pumping, dumping, spoofing, wash trading, churning or lying. It quickly becomes obvious to other traders who are paid to stay alert.

  • Pump and Dump Schemes: Inflating the price of a stock through false or misleading information, then selling it at the inflated price.
  • Spoofing: Placing fake orders to create a false impression of supply or demand, influencing other market participants.
  • Wash Trading: Simultaneously buying and selling the same security to create the illusion of increased trading volume.
  • Churning: Excessive trading by a broker in a client's account to generate commissions without regard for the client's investment objectives.
  • False Statements and Rumors: Spreading false information to manipulate stock prices.

At the end of the day, the SEC should be retired to the museum of 1930s mythologies. Yet it is probably so deeply embedded in the warp and woof of the financial markets---especially with respect to routine reporting in 10Qs, 10Ks, offering prospectuses etc.---as to make its complete abolition impractical. Still, it is involved in so much unadulterated Nanny State nonsense and tom foolery that its massive staff and payroll could be easily cut in half.

That would reduce the Federal headcount by 2,250 bureaucrats and upwards of $575 million of annual expense. The fact is, the SEC modus operandi itself is an exercise in government-conducted fraud, waste and abuse because its Nanny State regime doesn't make investing on Wall Street any safer--- just more expensive and cumbersome. So if 50% of that kind of "fat" can't be cut, there is not much hope of achieving the much more difficult savings from downsizing the muscle or cutting the bone in the rest of the Federal budget.

This article was printed from TradingSig.com

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