America’s top financial markets regulator, the Securities and Exchange Commission (SEC), is finally catching up with high-frequency traders and operators of private “dark pool” trading venues. Well, sort of.
In a speech to Wall Street’s finest this week, SEC chair Mary Jo White proposed much closer scrutiny of super-fast algorithmic traders and of the “dark” private exchanges that account for a huge chunk of daily trading. But the “Flash Boys”, as they are called in Michael Lewis’ new book, will hardly be quaking in their shiny designer shoes. To coin a phrase, the music is still playing, so the Flash Boys will continue to dance until the headmistress clips their ears.
White’s proposals are smart and sensible, but they are way more than a day late and a dollar short. It shouldn’t take a Michael Lewis book to bring the sheriffs into town.
Her plans essentially would bring more of the activities of the Flash Boys under regulatory scrutiny — at the moment, a lot of the securities trading in the United States, especially the opaque stuff away from official exchanges, is not required to be registered with regulators. And they wonder why they have a problem. So it is a no-brainer to bring more of the Flash Boys on to the radar screen of the SEC and other regulators. The only question is: how long will it take those regulators to approve and implement White’s proposals?
White certainly made the right noises to the investing public when she addressed Wall Street. “The SEC should not roll back the technology clock or prohibit algorithmic trading, but we are assessing the extent to which specific elements of the computer-driven trading environment may be working against investors rather than for them,” she started.
Then came the meat and drink. “I have asked the SEC staff to prepare two recommendations for the commission: the first, a rule to clarify the status of unregistered active proprietary traders to subject them to our rules as dealers … second, a rule eliminating an exception from FINRA (Financial Industry Regulatory Authority) membership requirements for dealers that trade in off-exchange venues. Dealer registration and FINRA membership should significantly strengthen regulatory oversight over active proprietary trading firms and the strategies they use.” Yes it would. But when?
White saved her harshest words for the murky “dark pools” where big investors can trade large blocks of securities without revealing their hand to those on the other side of the trade that would give the other side an advantage.
“Dark venues lack transparency in other important respects,” said White. “Although the trades of dark venues are reported in real time, the identity of participants in the dark venue is not disclosed to the public. And dark venues generally only provide limited information about how they operate…
“Transparency has long been a hallmark of the US securities markets, and I am concerned by the lack of it in these dark venues. Transparency is one of the primary tools used by investors to protect their own interests, yet investors know very little about many trading venues that handle their orders. We must continue to examine whether dark trading volume is approaching a level that risks seriously undermining the quality of price discovery provided by lit venues.”
Full marks to White for shining the light on Wall Street’s darkest arts. It is now up to her SEC colleagues to quickly bring her proposals to life.
Are British firms just pawns in a US tax-avoidance game?
Are more and more British and mainland European companies to become mere takeover pawns in a giant chess game of tax avoidance by huge American corporations?
It appears that US corporate mergers and acquisitions decisions are increasingly being motivated by American companies’ offshore tax policies. Pfizer, the US Viagra drug giant, made no secret of its wish to move its tax domicile to lower-tax Britain had it been successful in its recent bid for AstraZeneca.
News wire reports this week speculated that if US company Medtronic joined the bidding for London-based Smith & Nephew, it too might move its tax domicile out of the United States.
Much lower corporate tax regimes in Britain and some mainland European countries are a major attraction for many companies in America, where taxes are much higher. Google has told regulators it keeps a huge chunk of its cash outside of the US so it can deploy up to $30bn (£18.75bn) for possible acquisitions.
Google makes roughly half its revenue outside of America and, like many companies in the United States, it keeps a lot of its “foreign” earnings abroad to avoid paying US taxes. So it is not just acquisitions that motivate US firms to keep their money abroad - if they bring the money home, they’d take a huge tax hit.
US non-financial companies alone had an estimated $947bn (£591bn), or 58 per cent of their collective cash, stashed overseas to avoid tax at the end of 2013, according to Moody’s. That’s up from $840bn in 2012.
“The high amount reflects the negative tax consequences of permanently repatriating money to the US, and the domestic use of cash for dividends, share buybacks and the majority of acquisitions,” said Moody’s Richard Lane.
Technology firms appear to be the most cash-rich, and they go to great lengths to preserve that cash, even if it means keeping it abroad for very long periods.
“Among sectors, technology continues to hold the most cash and has extended its lead,” said Lane. “The technology sector held $638bn, or 39 per cent, of total corporate cash at the end of last year, followed by healthcare/pharmaceuticals, consumer products and energy.”
Apple, Microsoft, Google and Verizon were among the most cash-rich companies. Together with Pfizer, they had $404bn, or 25 per cent, of America’s non-financial company corporate cash at the end of 2013.
As long as corporate tax rates in the United States remain much higher than the UK and certain other countries, big American companies will keep their cash abroad and look to put the money to work. That could mean AstraZeneca will not be the last British company to be a target for American firms with money to burn.