"We risk becoming the best informed society that has ever died of ignorance"
- Rubén Blades

"You can't make up anything anymore. The world itself is a satire. All you're doing is recording it"
- Art Buchwald

"It's getting exciting now, two and one-half. Think of everything we've accomplished, man. Out these windows, we will view the collapse of financial history. One step closer to economic equilibrium"
- Tyler Durden

"It is your corrupt we claim. It is your evil that will be sought by us. With every breath, we shall hunt them down."
- Boondock Saints

Saturday, April 7, 2012

Phantom Regulators And The Appearance Of Due Diligence

Regulators are pulling the wool over the sheep's eyes.  In an effort to have an appearance of regulation, the CFTC has enabled Corzine to run off with $1.6 BN in client funds while actively cleaning up the "political futures" contracts.  This whole process reminds me the scene in Syriana where Bennett Holiday was used to promote an impression of due diligence in an effort to mask any corruption claims.  Why would the CFTC find it so critical to clamp down on Political Futures contracts in the wake of the Crude Oil Complex breakdown from February 13, 2012.  Alert market participants are correct to question this behavior as the CFTC continues to lose its credibility while inTrade has managed to be CC's go to source during Presidential Debates.  I just find it amazing that the CFTC would seek to clean up Political Futures contracts, which no real 401(k) owns (let alone a broad majority of the American public), while enabling a form of trading not yet fully understood to run wild through the commodity/equity and soon to be FX markets.  

All we've heard for months is gas prices this and gas prices that, crude oil this and crude oil that, reflecting our very real NEED for oil.  Clearly the oil markets and the CFTC involvement as a regulator is more important than political futures contracts on the inTrade exchange.  However; most American's like to have "opinions" on things and tell us what they "think" (not what they can prove or what they "know") therefore the ease of producing the appearance of due diligence becomes easier once outlets likes CNBC run articles such as the one below.  

Furthermore, the prevalence of automated trading and computer driven exchange participation has gone way beyond financial markets, to the point that even inTrade has to make clear that fronting running will be restricted.  Some participants on the exchange have complained that automated strategies using computers would adjust their orders when a human entered their order.  Once trader states on an inTrade forum "I've played around a bit testing this script, and it appears that it is designed such that it will automatically front bids/offers with its own order for a decreasing number of shares. For example, I'll place a bid, and it will place a bid a two cents above mine for 8 shares. I'll place another bid above its, and it will place another bid one cent above mine for 4 shares. I'll place a third bid, and it will place a third bid, this time for 2 shares." (h/t @Kateshon for the forum link).

Exchange Rule 7.3.5 states (emphasis is CC's):
Orders may be permitted via automated order entry practices with prior agreement with the Exchange and by using the Exchanges application programmable interface (API). The Exchange reserves the right to prohibit automated order entry, and/or to prohibit small-automated orders (9 lots or less) immediately ahead of non-automated orders.
Clearly our market dynamics across many, many different "assets" has expanded to the point the regulators have lost all control.  By the time the SEC and CFTC get caught up to understanding how to regulate the "new" markets, the ones driven by processing and speed in place of fundamentals, our automated friends will be on to their next project. 

The big problem with all of this is that the manipulators are traders.  Trading is a lifestyle.  The SEC and CFTC do not and can not trade (conflicts of interest) and this puts them at a serious disadvantage.  The complexity of today's Broken Markets appears to be too much for lawyers and Bart Chilton.  Chilton even mentioned on 10/26/2012 that Quote Stuffing was a focus for what he called "fraudulent influences" on Silver prices.  Good thing Quote Stuffing was banned right (sarcasm)?  Now they just need to enforce it.

All the above highlight why I see the CFTC's Political Futures contracts restriction to be nothing more than the appearance of due diligence.

From CNBC:
They might be fun to take part in at the office, but “death pools,” or bets on political races — including the possibility of assassinations — won’t be allowed by the Commodities Futures Trading Commission, Commissioner Bart Chilton told CNBC Monday.

Chilton said “political futures contracts” will be disapproved by the agency during its next meeting later Monday. These contracts are based on the election of the president of the United States, and members of the House of Representatives and Senate.

"The Dodd-Frank law says we shouldn’t be doing any contracts that involve gaming or event-based contracts that are not in the public’s interest. So things like acts of terrorism or assassination, a celebrity death pool, or something like that…aren’t in the public’s interest," Chilton said.

These contracts currently trade on a number of markets, including Intrade. Chilton gave the creators of these contracts kudos for creativity, but he’d rather not give “the bold, federal flavor of regulation” to them, he said.
The CFTC has “a lot of serious things to be worrying about when it comes to Dodd-Frank and we need to keep our eye on the ball,” Chilton said.

He wouldn’t comment on the ongoing examination of Laurie Ferber, general counsel of MF Global, and efforts to claw back the more than $700 million in client funds that found their way to the company’s U.K. office. 

He would only say that “our investigators are neck-deep in the investigation.”