News late yesterday that the FBI is investigating high frequency trading operations for potential securities violations including insider trading sent a shock wave through the industry.

As well it should.

All too much evidence from respected industry insiders over the last 5 years has painted a picture of massive front running via HFT disguised as providing liquidity. Front running and collusion are supposed to be illegal practices.

To think that these conspiratorial behaviors are the work of a few rogue traders or computer programmers is ludicrous. Yet I remain very suspect that we will be fed a diet of just such nonsense as an indication that the Feds are going to clean this practice up.

Why am I so suspect? A number of reasons including: 

1. the now for-profit equity exchanges themselves along with the major Wall Street banks are the key pillars and participants behind the development of the HFT platforms.

2. the Feds are all too familiar with a program of targeting selected industry lightweights for insider trading violations while allowing institutional frauds within practices such as HFT to be dealt with kid gloves and fines that amount to little more than a cost of doing business.

3. Let’s not forget that the administration sold the American public a bill of goods in stating that the DOJ would hold those engaged in fraud within the mortgage industry to proper account. How did those investigations play out? Just a few weeks ago, the DOJ’s own Inspector General exposed that investigation as little more than a token effort replete with a host of lies. (DOJ Lies, Lies, and Damn Lies re: Mortgage Fraud; March 14, 2014)

How convenient for the FBI to come out with word of this investigation into HFT on the same day as the release of Michael Lewis’ book and a day after Lewis said the market was rigged. Additionally, the fact that the FBI states that it is working in concert with the CFTC, SEC, and FINRA in this investigation should be a cause of very real concern.

The real problem that needs to be meaningfully exposed is that these very regulators are captured and serve at the behest of the industry rather than upholding their mandate to protect the public interest. Those who do not think so should read my book. I define our financial regulators, especially those at FINRA, as little more than meter maids. On page 104 of my book, noted securities attorney Richard Greenfield stated,

“Both agencies (SEC and FINRA) were effectively Keystone Cops . . . they were running around in circles and didn’t know what they were doing. I would have expected more from the SEC, which has a bigger budget and far greater competence than the NASD or what is now known as FINRA, where the mindset has never been on major league enforcement. It has always been on relatively picayune broker-dealer violations and even then the violations were very much more technical in nature than they were real. The ‘Big Boys’ always seem to get away with murder.”

In light of all that we have learned over the last 5 plus years is there any doubt that Greenfield is spot on in his assessment of our financial regulators?

Where is our modern day Ferdinand Pecora to hold the bankers, regulators, and pols that have promoted and profited from institutional frauds such as HFT to proper account?

Navigate accordingly.

Larry Doyle