Seemingly overnight in late March, 2014, Michael Lewis
managed to pierce the public’s strangely high threshold of awareness of societal systemic moral-lapses with "news" of a moral cancer already well-established in the New York stock market system. The well-known financial author did so through the narrative of a moral leader who had managed to expose the problem from the inside. As appealing as such a figure is on account of the self-sacrifice involved, this case raises the question of whether we as a society are best served by relying on moral leaders to bring the sordid antics of elites behind dark windows to light.
In prominent interviews on
CBS’s 60 Minutes and PBS’s The Charlie Rose Show, Lewis made galvanizing headlines by claiming that
the stock market was rigged in favor of Wall Street insiders able to pay steep
fees to use the electronic “super-highway” built and maintained by
high-frequency-trading firms. Jumping on the bandwagon, Eric Schneiderman, the
NY Attorney General, suggested that such trading may be illegal where it uses
speed in order to gain an unfair advantage over other participants in the
market. Although his investigation had been ongoing for more than a year, the
fortuitous timing of his announcement struck Lewis as suspicious, in that more
was to it than met the public’s eye. Not
to be left out of the spotlight, the US Attorney General—Eric Holder—raised the
possibility days later in Congressional testimony that high-frequency trading
might violate federal insider-trader law.
In his interviews, Lewis suggested that Schneiderman (and
presumably Holder) had felt they could come out publically against the trading
because some major Wall Street interests had tacitly given him the nod, no
longer on the high-frequency “bandwagon.” Goldman Sachs had recently invested
in the IEX exchange, whose “speed bumps” maintained a “level playing field.” A
$9 billion hedge fund was losing $300 million a year to high-frequency traders.[1]
Those traders explicitly wrote institutional clients of investment banks
(including Sachs) out of the loop. At least one high-frequency-trading firm
limited investment banks’ use of the super-quick fiber-optic line to their own
proprietary trading (i.e., the banks’ brokerage client accounts were excluded).[2] Goldman Sachs’ bankers had no problem with
the restriction, in spite of their avowed claim that their bank was a
market-maker.[3]
Like other banks, Sachs used “black pools” instead of
routing client trades on the wider market, so “investors had to take it on
faith that [the bank] had acted in their interests in spite of the obvious
financial incentive not to.”[4]
That the bank had been selling subprime-mortgage bonds to even its best clients
even while shorting the same “crap” held (long) on its own (proprietary,
non-counterparty use) books suggests an organizational tendency all too
comfortable with exploiting conflicts of interest at the expense of the bank’s
own clients.
So why then did Goldman Sachs invest in the IEX exchange?
According to Lewis, the bank went to great lengths to keep Sergey Alexnikov, an
ex-employee who stole the bank’s high-frequency-trading code, from being
released on bail.[5] Yet
by April 2014, discussions in the bank had come down in favor of efforts to
wean the market off of the relatively risky high-speed trading. Lewis suggests
that with Goldman Sachs’ reputational capital running low, the public would
blame the bank for continued market volatility such as flash crashes and
outages at exchanges and view the bank as behind and the opaqueness that
blanketed the high-frequency-trading segment. Plus, Lewis maintains, the best
at Goldman Sachs had realized that they were the best at high-frequency trading.
Accordingly, switching to an alternative was in the bank’s strategic
competitive interest.
Lest the general public feel reassured that the narrow
financial interests of some disenfranchised hedge-funds and an already
ethically-compromised bank on Wall Street can always be counted on to protect
the public interest (the public weal) encouraging or at least not discouraging the opportunism
of governmental authorities, I submit that the public interest is not as
protected as the public supposes. Indeed, societal recognition even of the shaky
edifice of presumed protection may be lacking—at least until the thing comes
crashing down thanks to some brave insider willing to turn the thing inside out, thus rendering it transparent to the rest of us. Why should it take such a
dramatic trigger for the public to take notice? Must a moral leader rise to the occasion for the trigger to go off?
Even though the public awoke in seemingly utter
amazement and immediately started
debating whether “beating slower trades to the punch”—essentially seeing that
someone is placing an order to buy the one remaining hotel room listed at only
$68 on Travelocity and snagging the room first in order to sell it to the
person at $74—is inherently unfair, I submit that the public’s retarded
recognition of a societal problem (and subsequent over-reaction as the media
all-of-a-sudden obsesses on it) is itself
a massive problem, particularly in a representative democracy (i.e.,
Government by the people). That the
general public must be hit squarely on the head before a societal problem is
even seen on a societal level suggests that tremendous breaches in
accountability are possible, even inevitable, in an extended republic. In other
words, wieldy institutional hives and their aggrandizing creatures can easily
take advantage of the slack in the people’s attention.
Over at CNBC, Jim Crammer initially seemed underwhelmed, yet
came around to openly marvel at the bizarre nature of the all-of-a-suddenness
as if the market had only recently been rigged. He first pointed out that
day-trading (as distinct from buying and holding a portfolio of diversified
stocks over the long term) is not the way for individual investors to make “big
money” in the market anyway. As though offering a mere footnote, he lamented
that the novel traders had been so secretive about what they were doing. On the
morning in which Holder’s statement was broadcast, Crammer was still in his
“what’s all the fuss about” mindset. High-frequency
trading had been around for years. Why
now, all of a sudden, is everyone taking notice? Crammer seemed to view the
watershed as artificial, or at least bizarre. The fact that Michael Lewis had a
book to sell was not lost on the neo-realist capitalist at CNBC.
Was Michael Lewis a Moses figure, or Nietzsche’s
Zarathustra, descending from a mountain to destroy the false idols or raise all
boats with the surfeit of generosity that only a wealthy person can manage?
Lewis, who had penned The Great Short
to proffer an explanation of the 2008 Financial Crisis, had a financial
interest in hyping the story by proclaiming that the market is rigged, for he
was selling his just-released book on the topic, Flash Boys. Admittedly, the title sounds a bit like Flash Gordon
meeting the Lost Boys. We, the general public, are the lost boys and girls.
Even though The New York Times had
published excellent reports and analyses of the high-frequency trading whose
foundations were being laid as early as 20008—even as foreclosures from liars’
loans almost caused the US financial system to collapse amid a “credit
freeze”—it took an interview on 60
Minutes to “blow the cover” of the stealth flash boys.
Actually, as Lewis willingly admits, the credit properly
goes to Brad Katsuyama, who left a high-paying job at the Royal Bank of Canada
to fix the problem by proffering an alternative, the IEX exchange. Lewis argues
that Katsyama recognized that “(t)he deep problem with the system was a kind of
moral inertia. So long as it served the narrow self-interests of
everyone inside it, no one on the inside would ever seek to change it, no
matter how corrupt or sinister it became.”[6]
Brad Katsuyama at his IEX exchange. A moral leader who got very practical in restoring the public's faith in Wall Street. Can we as a society afford to rely on such individuals to fix our problems?
(Image Source: Stefan Ruiz at NYT)
Being on the inside, in a rather unique
position by having learned just how the rigged equity market works, Katsuyama
believed that the moral inertia would continue unless he acted on the duty he
felt to fix the problem that had harmed many, even among the unknowing
financial elite, to the narrow benefit of a relative few.[7] So he set about creating an exchange as a transparent “level playing field” complete
with financial incentives capable of restoring the credibility of the financial
system in the greater society. With the
mutual funds and pension funds burned by the ultra-exclusivist high-frequency traders
as powerful backers, Katsyama sought to restore an equitable and stable
infrastructure for the New York stock market. After Lewis managed to galvanize
the public’s attention on the highly suspect preferential peaks that
high-frequency traders had constructed and profited from as though oligarchs, it
is easy to assume that a moral leader of Katsuyama’s fortitude would eventually
rise and save Wall Street from itself.
Similarly, Frank Snowden had been an insider whose role in
making abuses in the NSA transparent can be reckoned as an instance of moral
leadership that few people were in a position (and felt moral inclination) to
accomplish. Although former US President Jimmy Carter acknowledged that Snowden
had broken the law and should be prosecuted, the elder statesman added, “but I
think it’s good for Americans to know the kinds of things that have been
revealed by him and others, and that is that since 9/11, we’ve gone too far in
intrusion on the privacy that Americans ought to enjoy as a right of
citizenship.”[8] With
Snowden’s leaks and Obama’s subsequent proposals to restrict the NSA’s access
to phone records part of the public lexicon, it is tempting to believe in the inevitability
of both the increased transparency and the governmental attention to reform.
Yet the NSA was able to over-reach for years without any
insider willing to accept the personal sacrifices necessary to let the rest of
us in on what had become the status quo in batch-data collection. Similarly,
Katsuyama himself had noticed pricing irregularities strangely dependent on his
buy and sell orders as early as 2008—six years
before Lewis came along and flooded the problem with transparency on the
societal stage.
Is accountability in a republic retarded at best? Insiders who have managed to accrue enough power can stave off even the eventual "outing" by a moral leader. Just as Lewis was opening the public door on the rigged market, the US Senate Intelligence Committee voted to declassify part of a report on the CIA's use of "interrogation methods" since the attack in 2001 at the World Trade Center in New York. According to Sen. Dianne Feinstein, the report "exposes the brutality that stands in stark contrast to our values as a nation."[9] That such a tale would come almost thirteen years after the attack gives us some indication of how long the public can be kept from knowing even of practices "in stark contrast to" the public's own core values as a people.
Simply put, relying
on moral leaders to make the People aware of systemic ethical lapses going on behind closed doors is severely sub-optimal both in terms of severing the largess to a few at the expense of the many and fixing the systemic problems themselves. This is not to say that such leaders are not heroic, only that republic is ill-served in relying on them to keep the People apprised of what the insiders are up to and fix the problems. We the People, as well as the representatives we elect, are more properly the agents of self-governance, including in the policing of the back rooms in which dangerously powerful interests lie pretty much unfettered from the light of day.
[1]
Michael Lewis, Flash Boys: A Wall Street
Revolt, p. 77.
[7] 60 Minutes, March 30, 2014. In terms of
ethical theory, Katsuyama’s decision is based on consequentialism generally and
utilitarianism (greatest good for the greatest number being the most ethical)
in particular.
