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Does Stock Crash Reveal Markets Are Rigged Against Small Investors?

Posted  August 31, 2015

By Tim McCormack and Wayne Lamprey

The precipitous drop in the stock market on Monday, August 24, was particularly hard on small investors.  The Washington Post reports:

“Millions of these Main Street investors were locked out during the crucial hour when the worst hit, just as markets opened Monday. Popular trading platforms run by TD Ameritrade, Scottrade and others ran slow or not at all as panic grabbed hold. It took just six minutes for the Dow Jones industrial average to suffer its biggest drop in history. And these investors could only watch.

“‘It makes me wonder if a guy like me has a fair chance or not,’ said Israel Hernandez, a lawyer in Casa Grande, Ariz., who could not log onto his online broker.

“In a blink, mayhem descended. Strange glitches emerged. Stocks fell like rocks, only to shoot back up minutes later. Exchanges spit out the wrong prices for widely held funds.”

It is not yet clear why this happened: was this truly an accident or something more sinister.  According to the Washington Post, some contend the problem was just a byproduct of technical glitches due to the complexity of the systems involved.  However, others question whether “exchanges offer a fair playing field.”  They note that while small investors “were locked out, some Wall Street players boasted of making huge profits amid the chaos.”

This brings to mind Michael Lewis’ book Flash Boys, where he recounted numerous ways computerized trading platforms and structures have been tweaked and rigged to give an unfair advantage to high frequency traders and other market insiders.  As recounted by Lewis, some firms operating private exchanges referred to as “dark pools” sold, and some traders bought, access to market data that gave them a decisive and highly profitable edge over other investors.  At the same time, as alleged in the lawsuit filed by New York Attorney General Eric Schneiderman against Barclays PLC, the firms operating the dark pools assured their clients a benefit of using the private exchange was that it would be free of these “predatory” practices.

Unfortunately, given the complexity of the modern markets, it can be difficult for government regulators to figure out why an event like the mini-crash this week occurred, or even to become aware of ongoing abuses like those described by Lewis in Flash Boys.  Oftentimes the only and best way for the truth to come out is for an insider to step forward and blow the whistle.

Insiders who know what is happening often do not know who they can trust to fix the problem or even to whom they should report suspicious activity.  The primary, and often the best, way to report violations of the securities laws is through the Securities and Exchange Commission’s (SEC) whistleblower program, created by the Dodd-Frank financial reform law.  This program allows individuals to report fraud anonymously, and provides a financial incentive (up to 30% of any money recovered).  Schemes that violate the securities laws, also often involve tax violations and other damages to government entities, giving rise to additional avenues to report and share in resulting fines or recoveries, such as the False Claims Act or the IRS Whistleblower program.

Tagged in: Securities Fraud,