The Securities and Exchange Commission has been inundated with complaints about Wall Street banks and hedge funds reporting astonishing streaks of profitable trading days. The trading firms are producing sizable gains with highly improbable regularity. Virtu Financial, for example, reported that it had only lost money on one trading day over a six-year period. Similar outlandish profits are routinely reported by Wall Street banks. The SEC, which is responsible for ensuring the integrity of our financial markets, decided to turn the matter over to its enforcement division for investigation.
The investigation was assigned to three crack enforcers, who are known within the organization as the three stooges, for their uncanny knack of being always wrong, but never in doubt. To protect their real identities, we will refer to the intrepid threesome as See No Evil, Hear No Evil, and Speak No Evil.
Let’s listen to their conversation on the subject:
See No Evil: “The SEC has been receiving numerous complaints from angry market participants and observers regarding the trading activities of certain Wall Street firms. They say it is statistically impossible for high frequency traders to rack up so many winning days in a row, unless they are cheating or manipulating the market. The Commissioners have asked us to look into the matter.”
Hear No Evil: “Yes, I am familiar with the allegations. I have read the quarterly reports of the trading firms, which state that enormous profits are generated by their proprietary trading desks. The reports indicate that high frequency algorithmic traders make profits every single trading day or almost every single trading day. Needless to say, the trading firms are quite proud of their accomplishment.”
Speak No Evil: “The firms attribute the remarkable results to their talented traders whose superior market acumen and sophisticated computer software give them an edge over other market participants.”
See No Evil: “That sounds reasonable to me. These firms hire the best and brightest individuals so it should come as no surprise that they would be successful in what they do.”
Hear No Evil: “That’s right. You would expect them to come out ahead most of time. The fact that it happens every single day is irrelevant. It would be surprising if they lost money over the course of a trading session. No one expects a professional baseball team to lose to a Junior Varsity baseball team.”
Speak No Evil: “No one is surprised when thousands of commercial airline flights take off and land every single day without incident. It’s expected. The only time anyone takes notice is when a plane crashes, which thankfully is very seldom. The reason for this successful safety record is because airlines are run by professionals, who know what they are doing. Why wouldn’t the same principle apply to Wall Street traders, whose sole mission is to produce profits through savvy market transactions?”
See No Evil: “That’s a great analogy!”
Hear No Evil. “Therefore, it is quite feasible to score hundreds of consecutive profitable trading days. But, for those who are uninformed or jealous, it is considered highly suspect and improbable. In fact, they say it is mathematically inconceivable. They contend that the traders have to be cheating. There is no other way to explain the phenomenal results, as far as they are concerned.”
Speak No Evil: “Unfortunately, the naysayers attract a lot of attention. The skeptics want to impugn the integrity of professional traders by making wild accusations that they must be bilking honest investors. So, now we are being tasked by our superiors to investigate whether there is any validity to the charges of misconduct by the traders.”
See No Evil: “The problem is we cannot subpoena proprietary information from firms without probable cause. No judge is going to approve a search warrant and allow us to seize proprietary trading algorithms from any business just because some troublemakers think they must be cheating.”
Hear No Evil: “That’s like a casino asking the district attorney to arrest a player after he ran the tables and cashed in his chips for a big payout. The casino managers can suspect the player cheated all they want, but, without any solid evidence, no prosecutor in the land would file charges.”
Speak No Evil: “So, how are we going to investigate the matter at hand?”
See No Evil: “The way we always do.”
Hear No Evil: “We’ll confer with our friends at the hedge funds and banks and ask them to explain how they are able to pull it off. They are much better equipped to answer that question then we are. After all, that’s what they do for a living. Their integrity is beyond reproach.”
Speak No Evil: “And they are much more convincing and eloquent on the subject than we will ever be.”
See No Evil: “After we make our round of inquiries, we’ll prepare our report and submit it to the Commission. It goes without saying that a streak of profitable trading days is not evidence of wrongdoing. More likely, it is the result of superior trading skills. Indeed, it would be surprising if traders of that caliber managed to lose money on any given day.”
Hear No Evil: “I wish we could save everyone a lot of time and simply tell the Commissioners verbally that there is no problem. The complaints are obviously without merit. It’s a pain in the ass to put a report together when the results are a foregone conclusion.”
Speak No Evil: “Job security dictates that we go through the motions. Fortunately, we have performed numerous investigations in the past on the same subject. So we can draw from those reports, as necessary, when we do this one. Basically, after we interview a few firms and gather some new information, our report will be another one of our patented cut-and-paste jobs, the type of work at which we excel.”
See No Evil: “Fine, we’ll do what we have to do. But, right now we have a farewell party to attend.”
Hear No Evil: “Our colleague, No Can Do, is leaving the SEC. He’s going to work for one of the big Wall Street firms, where he’ll be making serious money for a change.”
Speak No Evil: “If things break our way, we’ll be right behind him. It’s never wise to bite the hand that feeds you.”
It was in this manner that the three stooges rose to the occasion and put the thorny issue to bed. Investors can rest easy because the SEC is on the job protecting them from the depredations of sharpies, who think they can win against all odds.
– LV