
Dissolve the SEC - cs702
http://mathbabe.org/2012/10/06/dissolve-the-sec/
======
btilly
This article comes from the assumption that the goal of the SEC is to stop the
industry from doing Bad Things.

That is wrong. The goal of the SEC is to provide a veneer of regulation while
ensuring current members that they will have a profitable future in the
financial industry.

If you get rid of the SEC and replace it with something, this does not
improve. Either you wind up with nobody watching these companies - and hence
not even a pretense of regulation - or else you will recreate the incentives
that lead to the SEC being broken in the way that it currently is.

Regulatory capture is an intrinsically hard problem. Anything you do about it
is bound to fail in time. However what is most likely to work in my opinion is
for someone else - for instance the FBI, to investigate current and past
members of the SEC for evidence of corruption. Then have a high profile
lawsuit.

Once jail time is added to the list of incentives for people in the SEC, we
might see more meaningful enforcement from them.

~~~
specialist
> Regulatory capture is an intrinsically hard problem.

What's beginning to bug me about regulatory capture is that it's a two party
system: subject and observer. Seems to frail.

The brilliance of the US constitution is the balance of power between
executive, legislative, and judicial. Over the long term, it seems to be
largely self-correcting. Or at least correctable.

That the players are fighting each other is the only thing that's keeps
everyone honest. There's some cliche about mutual distrust guaranteeing trust
in a system

For all the belly aching about over bearing government and onerous regulation,
it seems to me the regulators are way too cozy with the entities they
regulate. In general.

Oh well. I haven't been able to imagine a system other than subject and
observer. So I can't imagine a persistent system resistant to regulatory
capture.

Maybe there's some novel market-based solutions which build in the right
incentives. Kind of like the capitation model for healthcare, which rewards
wellness (vs the USA's current fee-for-service model which rewards treating
disease.).

Or maybe one of those self-managed collectives, like the managed fisheries of
the north east, who's mission is to prevent the tragedy of the commons
(destroying a common resource).

~~~
chii
i dont believe the three prongs of the gov't really ensures that none is doing
"sus" things. I think its just that judges are help up as people with
integrity and societal pressure forces them to behave, where as the SEC
regulators are less well known, and the average joe won't really have a clue
as to how he/she is being fucked over (indirectly of course).

What you need is a incentivization system in which the players are rewarded
properly for the tasks that benefit the whole. May be one way is to have the
pay bonus of SEC directly related to the amount of fines/corruption/bad
behaviour that exists in the corporations they regulate. I m not sure if this
will work, as the real cause of the problem is that those with financial power
can translate it into political power.

~~~
specialist
I'm totally onboard with aligning incentives with desired (societal) outcomes.

------
jpdoctor
> _I get it, I’ve talked to people inside the SEC who want to do a better job
> but feel like they aren’t being given the power to._

She has a nice rant, but completely missed the point: The SEC is made of
people, all of whom are in finance, and most of whom would like a high-paying
job on wall-street.

The term "regulatory capture" needs to appear in there somewhere.

~~~
chii
I think the root of the problem isn't that SEC can be captured - all industry
regulators can be captured, if given enough funds.

The root of the problem is that the financial industry has so much money -
money that may not represent real value, and thus, force ripple thru out the
rest of the world when some group decides to take huge, but externalized
risks. The problem is that this single industry is responsible for too much
money generation. If a player in a game has too much power, the power to
change the rules will eventually appear. and no amount of regulation can fix
that. I m unsure what can actually fix it, other than setting laws such that
money cannot be used to make money. Then, this problem will disappear (but so
will the livelyhood of many people who currently depend on this).

------
shawnee_
_On the one hand, I’m outraged that these fraudulent practices are being so
lightly punished._

I wonder if the author of the article actually understands what the SEC fined
this "dark pool exchange" firm for doing.

 _Dark pools are a growing part of the trading world and are legal but they do
not disclose the identity of buyers and sellers. Quotes on securities are not
displayed to the public, as they are with major mainstream stock exchanges
like the New York Stock Exchange. Participants in dark pools have access to
trades that other investors in public exchanges do not_

The SEC fine was for "allowing" a dark pool to be not-so-dark. She seems to be
arguing that the fine should be higher, which would mean firms would have an
incentive to go "darker".

Dark pools are bad for markets. Allowing a select few (the wealthiest select
few? why are they pooling in the dark?) to "collude" and thus have significant
impact on the price of a security can hurt the ability of other investors to
extract their fair value. Why is the general public being excluded from these
trades that affect the FMV (Fair Market Value), and more importantly, does
this pooling actually hurt FMV?

Maybe dark pools should be illegal. In which case a small fine here makes
sense.

But what probably happened is that when this dark pool firm leaked the
identities / trades of some of its insiders, those insiders freaked out. And
now these dark pool exchange firms have been poked in the direction to "stay
dark".

So where are the incentives to make dark trading more light? Can we invent
some?

The SEC could reward firms that make colluding dark-pool firms more
transparent. I'm sure there's something in the mission statement of the SEC
(<http://www.sec.gov/about/whatwedo.shtml>) that would justify the need for
fairness to aid in potential linkage of insider trading of securities that for
whatever reason aren't public.

[edited for typos and content]

~~~
niggler
Dark pools are bad for the exchange operators of public exchanges (like NYSE
and NASDAQ) but it's far from obvious that they are bad for the financial
industry.

There are certain advantages: for example, even now, all it takes is $50-100K
to whip the price of certain public companies like Alcoa (AA), a Dow 30
component. I have rocked the boat many times, and the fact that most small
traders can do the same doesn't bode well for the markets. The dark pools do
allow for large transactions without affecting the price too much, keeping
some sense of order (as vacuous as that sounds).

It's important in these discussions to understand that the various companies
take sides based on their desired outcome. Other effects like insider trading
are far more disconcerting than the issues claimed in this case.

~~~
beagle3
> The dark pools do allow for large transactions without affecting the price
> too much, keeping some sense of order (as vacuous as that sounds).

Another way to read your statement: "The dark pools allow the inherently
unstable and fragile market to appear more robust than it is". Which, I think,
is a bad thing for society. Because a fragile market will break, sooner or
later, and it's better if the fragility is visible so that players can
actually evaluate their risks.

------
guelo
Congress has continually cut the SEC's budget at the request of Wall Street.
Wall Street has bought off their cops just as much as the Mexican drug cartels
have bought off their cops. The only difference is that in Mexico the
population understands what's going on, here people don't understand it and
probably wouldn't care if they did.

------
biesnecker
I read the headline and immediately thought "but that's the only conference
where they play real football!" <sigh>

------
AJ007
Sometimes when a government agency settles with a low fine, its a case they
know is on shaky grounds. Defendant thinks they can win but also knows how
much it will cost. Usually more than the fine.

If something is so serious that the company should be put out of business for
doing it, then it needs to involve more than a rule a government regulatory
agency wrote themselves. Especially when the government agency is composed of
individuals eager for private sector work after they "retire."

------
steve8918
I agree with the author, but I don't think that dissolving the SEC will solve
the problem of the SEC. The SEC is corrupt, but no one cares enough to fix it.

I think the way to do it is to create an new exchange whose primary focus is
to create a level playing field for all participants. This means that things
are done fairly, and people won't game the system. Anyone who games the system
will be forbidden from trading on it. This also means that they will enforce
their own rules at a stricter level than what the SEC would regulate at.

If investors are truly concerned about fairness in the system, then
eventually, an exchange like this could get enough liquidity to compete
against NYSE and NASDAQ.

If you read "Dark Pools" by Scott Patterson, he describes how Island was
created by a lone hacker, Josh Levine, and he completely disrupted the
industry. Maybe there's room for another disruption, along the lines of
fairness.

------
TinyBig
Don't dissolve the SEC because it gives people false hope - dissolve it
because it is the poster child for regulatory capture. The top regulators do
not hand down big fines because the SEC is a revolving door and the regulators
don't want to muck up their post-government careers. It is so utterly corrupt
the only solution is to demolish it and replace it with a new enforcement body
with some teeth.

~~~
msrpotus
What's the solution? Another body that will then be corrupted by Wall Street?

------
intended
The SEC has been demoralized, and defunded for a long time. While people argue
regulatory capture, its only a small part.

There are other things most people don't know about the street habits and
saves - sort of like the hidden rules of your favorite language.

Firstly - The SEC is also working to improve. In 2009 they got their new head
of enforcement Robert Khuzami - <http://en.wikipedia.org/wiki/Robert_Khuzami>

Read his wikipedia page, and his case history, this is the kind of person who
you _Want_ fighting for you.

\--------------

Secondly Rituals: Most industries over time identify patterns and streamline
them, but for outsiders they would be arcane. Mathbabe, the ex finance girl
who decided to leave finance for something, should already know this.

For the rest of us:

The SEC has x resources - so they pick and choose cases that they know they
have a bullet proof case for.

AS a result, when its announced that the SEC is investigating you, most Wall
Street firms know that they are in trouble. (OTOH most normal people would
think its just an investigation, not the announcement of a verdict )

At this point, all firms know they have a call to make - Fight it out, or
cave.

* Almost Everyone goes to the negotiating table.

The thing most firms want is to plea bargain, and then get a statement where
they accept whatever fine they have to accept, while never having to publicly
admit to wrong doing.

Thats the ritual

\------

In 2010, there was 1 firm which decided it had the stones to go against the
grain - Goldman Sachs.

It was hilarious - the disparaging comments here are praise compared to what
Fox news and GS churned out.

The SEC is clueless and dumb, filled with people who couldn't make it in
finance. The SEC is a lap dog of the Govt. etc etc.

IIRC the CEO even went on record expressing his confidence on having the case
thrown out.

The SEC won and GS paid the largest fine (in the SEC's history AFAIK) of $550
million.

The next day the news papers were crowing about how the fine is only a blip on
the radar a days fluctuation on the stock market.

The guy who prosecuted the case, the head of the SEC

\----

Also please note the author of the article is reading a book and has recently
reached the section which discusses regulatory capture, and is particualrly
incensed by it.

------
javert
Hey, please get that gun out of my face!

If you don't like the way an exchange plays, make your own exchange that has
better rules and that operates transparently, or patronize one that does.

Besides being morally wrong (this is supposed to be a free country),
regulation harms innovation, results in winner-picking, and results in
regulatory capture. Nothing good can come of it.

~~~
rayiner
Societies need to be regulated. When Moses came down with the commandment:
"thou shalt not steal" that was regulation. That was a restriction on what
otherwise free people could do in organized society. That was a regulation
that involved a "gun in your face."

I'll start taking libertarians seriously when they can come up with anything
more than strained and ad-hoc distinctions between regulations pertaining to
property and other sorts of regulations.

~~~
javert
_I'll start taking libertarians seriously_

FWIW, I'm not a libertarian.

 _more than strained and ad-hoc distinctions between regulations pertaining to
property and other sorts of regulations_

If you believe each person should work to achieve their own happiness and has
no duty to sacrifice for others, then it follows that the role of government
should _only_ be to protect citizens from the initiation of physical force.
That's the fundamental principle that is relevant to our discussion--not
something to do with property. (Granted, some libertarians would argue,
incorrectly, that property is fundamental.) For a full explanation, see
"Objectivism: The Philosophy of Ayn Rand" by Leonard Peikoff.

~~~
rayiner
> If you believe each person should work to achieve their own happiness and
> has no duty to sacrifice for others, then it follows that the role of
> government should only be to protect citizens from the initiation of
> physical force.

I don't see how you get from "no duty to others" to "government should protect
citizens from initiation of physical force." It doesn't logically follow in
any way. It's an arbitrary bit of line drawing. If people have no duty to
others, why may they not use physical force to achieve their own happiness?
This is after all the state of nature. The wolf owes no duty to the deer, and
no government restrains him in his use of force to achieve his happiness.

Taking physical force off the table is inconsistent with the idea that people
have no duty to others. For a great many people, physical force is their
competitive advantage. They were born big and strong. They would rule the
world instead of the bankers and the politicians if it were not for the
government restraining them. Yet the government does restrain them, and that
often relegates them to the lowest rungs of society. Imposing that restraint
on them is certainly imposing on them a duty. It forces them to sacrifice for
the rest of society.

~~~
javert
_It doesn't logically follow in any way. It's an arbitrary bit of line
drawing._

Actually, given what I said, you're right to say that.

When I said "If X, then it follows that Y," I left off the fact that not only
X, but also X->Y, relies on a vast amount of _inductive generalization_ from
the facts of reality (including facts about human beings, value pursuit,
etc.). Although I put it in the form of a deductive statement, the argument is
not actually deductive.

I think the examples you gave are extremely relevant, good examples, that are
based in reality and need to be dealt with (and can be). Of course, we're not
going to induct an entire philosophical system in the comments of HN.

I would urge you to check out the book I referenced earlier. If you put enough
effort into it, you will find that a rational philosophy (including
metaphysics, epistemology, ethics, and politics) not only can be discovered,
but has been.

~~~
lmm
You end up with a self-consistent philosophy, but there are plenty of those
around. It's not objectively any better than e.g. modern utilitarianism, and
the moral positions that result align poorly with most people's moral
intuitions.

~~~
javert
_You end up with a self-consistent philosophy_

Wow, people's view of Ayn Rand is really getting better :).

 _but there are plenty of those around._

Plenty of those around? I disagree. Even if you're willing to make liberties
for what we count as a philosophical system, there are actually only a few
options at most. For example, existentialism, Marxism, Kantianism (not even
sure I'd count that), various religions (which are really just a primitive
kind of philosophy).

Historically, there are three highly unique philosophical "giants." Basically
every other philosopher falls into one of these three camps. They are:
Aristotle, Plato, and Kant. Aristotle was the this-worldly, holding that
knowledge is induced from reality. Plato was other-worldly, holding that
knowledge comes about through revelation from a higher realm. Kant was anti-
worldly, holding that actual knowledge is impossible.

Rand is the only modern, system-building philosopher who is heavily
Aristotelian. Thus, she deserves a serious look from people who are curious as
to whether an objective philosophy is possible.

 _It's not objectively any better than e.g. modern utilitarianism_

Utilitarianism is just an ethical doctrine (not a philosophy). Nit picks
aside: there are various justifications for it, all of which fall short,
because they tell you to sacrifice yourself.

I've never seen a supporter of this position who thinks that the is-ought gap
can be bridged, so as far as I'm aware, in any justification of
utilitarianism, ethics is _just a game_ , anyway. So yes, people will say
"modern utilitarianism is objectively as good as any solution," _since no
ethical sytems is any "better" than any other_. But what if that's not the
case? Common sense and history would suggest that some ethical systems are
much better than others.

 _and the moral positions that result align poorly with most people's moral
intuitions._

Given humanity's history, any moral system that aligns well with people's
intuitions is probably a bloody and destructive one, and so people should be
keeping a lookout for something fundamentally different.

Intuitions are just non-explicit ideas that people have been raised with; they
don't count towards establishing truth or goodness.

