On June 14, 2014, the U.S. Senate Investigations Committee
held a hearing on “High-Speed Stock Transactions and Insider Trading.” The
issue at hand concerned the payments that wholesale brokers and exchanges make
to brokers for going through the brokers and exchanges, respectively. An
academic study had found that the broker or exchange that pays the most is not
typically the most efficient, and thus in the best interest of the investor.
Essentially, the payments give rise to a conflict of interest for the retail
broker, who is supposed to put the client’s financial interest first, before
his or her own. Is greater disclosure, such as Sen. Levin suggested, sufficient? I contend that a conflict of interest that is inherently unethical warrants removal rather than countervailing measures.
Investors assume that exchanges such as the New York Stock Exchange are not tilting the game-board. Empirical evidence indicates that this assumption does not hold up. (Image Source: Reuters)
The full essay is at Institutional Conflicts of Interest, available in print and as an ebook at Amazon.
