Former New York City Mayor and perhaps the region’s biggest champion Michael Bloomberg made an amazing statement recently.

Bloomberg system not rigged

“Too many events where people are breaking the law”

In an interview on CNBC, the former New York City mayor and Wall Street innovator spoke with candor about high frequency trading and the general “criminal issues” on Wall Street.  “I think there are too many events that have taken place where people were breaking the law,” he said.  “People were not looking out for their customers best interests.”

Bloomberg was interviewed on CNBC by Andrew Ross Sorkin, a man who has perhaps seen somewhat of a view on the inside of the Wall Street to Washington DC influence train when he wrote the book “Too Big To Fail.” The exchange was somewhat odd.  Not odd because CNBC is a competitor of Bloomberg; it was odd because CNBC anchors have on air denied the existence of big bank crime.  Yet here was probably among the most connected of Wall Street insiders not sugar coating the truth on CNBC air.

Denying Wall Street crime exists is an absurd statement to anyone who has seen the inside of the financial services sausage factory that literally runs Washington DC and has tremendous influence over the media. If glossing over the truth shows disrespect, as some attempts to gloss over Wall Street crime does, then Bloomberg wins huge honesty points for coming out with the truth.  It means so much more from someone who as deeply inside the fabric of the financial industry to discuss the troubling issue openly.

After defining the problem he then touched on the solution while pointing to a small group of people who are responsible.

While there may be crime on Wall Street, “in aggregate, people who work on Wall Street are as good as anywhere else,” and then he went on to point out the benefit and need for Wall Street in society.

After touching the third rail of Wall Street crime, Bloomberg then continued the candor addressing the impact of what is a highly demonized topic behind the scenes: Fed stimulative policy that has been accused of being welfare for the large banks.

Bloomberg unsure about Fed stimulus

“The effect of the Federal Reserve Bank pumping a lot of money into the system… I don’t know whether it has created a lot of jobs,” he said, quickly adding: “It’s probably added some (jobs) but not a dramatic number.”

Speaking to the apparent general consensus in the hedge fund community, Bloomberg confirmed the obvious.  “What quantitative easing has done is inflate asset prices,” he said, then quickly moved to bring the middle class into the same boat as the top 1%.  “Assets are held by the average person, through their pension fund, or the wealthy because they have the money to own assets.  That has exacerbated the rich poor, top 20% bottom 20% the gap.”  Straight talk in plain English coming from a Wall Street insider!

As Bloomberg made a pitch focusing on “equal opportunities” as opposed to “equal outcomes,” the questioner Sorkin was looking to scratch up the baseball just a bit to throw in a knuckleball.

System isn’t ‘rigged’- Bloomberg defends HFT

Sorkin questions Bloomberg on high frequency trading

bloomberg sorkin looks small

“One of the things Bloomberg LP did so well was bring transparency to the market,” Sorkin stated, setting up the hook to address perhaps the most obvious flaw in the current HFT structure. “What do you thing about the debate surrounding high frequency trading and the argument Michael Lewis has made that the system is ‘rigged?’”

If a regulatory structure were to allow a market to be “rigged,” one method to accomplish this task would be not to publish the rules of the exchange.  A further yellow flag to fraud might be receiving payment for order flow but not clearly disclosing such an arrangement.  To those familiar with regulatory market structure principles, not publishing market rules, along with allowing conditional fake bids and offers to be displayed on a screen, might be considered damaging to market structure.  But these real issues are seldom discussed, and this aspect of the interview droned along.

Here Bloomberg sidesteps the real issues and addresses the headline.  “The system isn’t rigged,” he responded. “There will always be abuses.  Somebody could be hacking into the computer system right now.”  Outside addressing the NSA, computer pirates from around the world poise a serious threat to national security and have demonstrated they can hack through exchanges that spend billions each year on security.  Further, HFT being used as an economic weapon to crash markets have had a hearing in regulatory and national security conversations, yet this wasn’t addressed.

Trades at lowest cost in a lifetime, but Tabb asks: is that all good?

Electronic markets have lowered transaction costs to the lowest point in history.  It is this path the HFT lobby likes to drive home.  But what they don’t say is since the markets have gone electronic there have been more market crashes and disruptions than at any point in history.  The problem is many of the mini-flash crashes are in fact mislabeled as “fat finger,” so the public doesn’t really know the truth.  Bloomberg didn’t address this issue, but towed the party line when it came to HFT.

After mentioning how transactions costs were down to mere fractions of pennies, he assumed this is a benefit to the investor, as is commonly the case.  The real question that no one really wants to discuss is: are lower transactions costs the best for markets?  This was a topic that researcher Larry Tabb discussed with ValueWalk.  He made the practical and academic argument that when transactions are cheap, investors get out quickly.  Taken to the next step, look at the number of crashes since electronics were popularized, which have gone up as transaction costs have dropped. This argument doesn’t see the light of day.  This is likely due to the fact it leads the discussion of the government taking a small tax on transactions as do the exchanges and HFT giants.  This is the real radioactive topic in the HFT debate that doesn’t get a hearing.