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Dissolve the SEC (mathbabe.org)
42 points by cs702 1694 days ago | hide | past | web | 35 comments | favorite

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.

> 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).

What makes you think that the US Constitution is working as planned without regulatory capture?

The purpose of the Constitution is to provide for a working federal government, but to limit the scope and power of that government as much as possible. But does it seem to you that the scope of the government has actually been limited as intended?

The problem is that all three branches gain when you increase the scope and power of government. Therefore there is a small but consistent error on the side of expanding the government among all three groups. The result is a government that is far larger than anything that the Founders envisioned. Individually we may or may not think that this is a good change, but there is no question that it is not as intended by the original Constitution.

The place that you can see this most clearly is in the http://en.wikipedia.org/wiki/Commerce_Clause. This gives Congress the power To regulate Commerce with foreign Nations, and among the several States, and with the Indian tribes.

Until the 1930s, this was interpreted as written. If an act of commerce didn't involve Indian tribes, multiple states, or foreign governments, then Congress couldn't justify laws about it under the Commerce Clause. Then FDR wanted to pass the New Deal. The courts struck down key provisions. FDR threatened to appoint pliant judges until he got what he wanted. A key vote switched, FDR got the decision he wanted, and the Commerce Clause began to expand to cover any activity that might possibly, some day, affect interstate commerce. No matter how tangentially.

We went from, "If it doesn't cross a boundary, Congress can't say anything" to "Even if you, your business, your employees, and most of your likely customers all exist in one state, Congress can still pass regulations about who you can hire." (Yes, I like the Civil Rights Act. I'm just saying that it would not be constitutional under the Constitution as understood by Thomas Jefferson.)

From the first strong-arming of the Supreme Court to the next decision where the Commerce Clause was not upheld to cover whatever Congress asked for it to cover took 60 years. (The Court finally hit its limit with an attempt to regulate the possession of handguns in the neighborhood of a school.) Every expansive decision increased the scope of what the President could ask for, Congress could pass, and the potential impact of the corresponding cases that the Supreme Court had to judge.

Working as planned? I wouldn't know. I'm not talking about the pathology of the USA govt. What I'm trying to do is talk about systems more resistant to regulatory capture.

What marvels me is the three-way fight. It just seems much more self-balancing. And great things happen when people have to hash things out.

Back when I was a product manager, I structured the team to mimic the balance of powers. (That particular company was engineering dominated, which got fairly pathological.)

Marketing was in charge of price and scope.

Engineering was in charge of cost and schedule.

QA was in charge of testing and shipping.

Give and take. Creative tension.

The outcome was brilliant. After a storming period, the team settled into a tempo and always made our dates and sales numbers.

I don't know if setting up a three-way fight is a repeatable organizational structure. But it's the best idea I've come across to date. The only other idea I have is increased transparency.

(PS- All big decision were made democratically, with various kinds of voting systems. eg Go/NoGo was roman evaluation, triage was risk management style, etc.)

No matter how many powers balance, if humans are able to move from government to private sector, regulatory capture will happen. How can a system prevent that?

Great question. I don't know. Public v private is a two-way fight. On my product team, I gave QA a seat at the table, creating a three-way fight.

Since I don't have any original notions of my own, I'm watching out for ideas, experiments, alternatives, supplements to public v private.

The only notion I've got is public v private v citizen. By citizen, I roughly mean open government, transparency, accountability. I've been VERY politically involved. In my spare time, I'm trying to make tools to better empower future citizen activists. Maybe level the playing field a bit.

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.

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

To be clear, are you proposing the SEC be incentivized to imprison innocents to boost conviction rates, or be incentivized to ignore criminals to surpress corruption rates?

The Nefarious People(TM) involved pay very large amounts to avoid the perp walk, perhaps we should take advantage of that?

Let it be known that the public flogging has never gone out of style.

Instead of replacing the SEC, why have it at all? What service do they provide that I so badly need?

> 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.

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).

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]

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.

> 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.

Dark pools are not limited to the "select few". More or less anyone can use a dark pool - Interactive Brokers, for example, lets you access several. I don't know if they still do, but at one time both ETrade and Ameritrade ran a dark pool for their customers. (They call it internal matching, but it's basically the same thing.)

OK, maybe clarification is needed. Dark pools benefit the select few more than they benefit the small-time traders. Theoretically the small-time traders can't have significant (enough) impact on the price of a security. But those "select few" who control the bulk of the pool get to throw their weight around without any of the scrutiny that comes with public trading on the public market.

Also, dark pools make it much easier for insiders to do insider trading, whether at volume or not.

How does submitting anonymized orders to a darkpool help insider trading relative to submitting anonymized orders to a public matching engine?

You are correct that dark pools (in principal) benefit institutional investors over predatory HFT's and retail investors, by making it easier to move big blocks without immediate price impact.

Inside traders who submit large blocks via darkpool reduce their chances of getting caught. If enough insiders collude and decide to anonymously, but simultaneously act on a certain company via darkpool trading, the chances of getting caught are further reduced. (Mapping patterns among public info is presumably much easier than mapping patterns among cloaked private info).

What is interesting and kind of baffling is that this fine was waged at all, in light (cough) of the supposed goal of the SEC to "strengthen regulation of dark pools" proposed back in 2009:


I would be willing to bet that dark pool trading, which tripled in volume between 2002 - 2009 has probably 10Xed between 2002 and 2012, and might even be one of the underlying causes of the much hyped meltdown of the markets right around that time.

My question is how are the chances of getting caught reduced?

With an exchange, the world sees "BUY 100@$23.12." Some time later they see "TRADE 100@$23.12." With a darkpool, the public only sees the trade, not the quote.

How does seeing the quote make it easier to detect insider trading? Note that on a dark pool or exchange, the SEC gets to see all the data.

I would be willing to bet that dark pool trading...and might even be one of the underlying causes of the much hyped meltdown of the [mortgage] markets right around that time.

I'd take your bet. The meltdown of the markets occurred primarily as a result of OTC bond-like products, which are sold by salesmen picking up the telephone.

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.

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

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."

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.

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.

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

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.

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.

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.

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.

> 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.

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.

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.

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.

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