I’ve been telling readers for nearly 20 years that the stock market has been rigged.
That’s true — you can look it up. But what’s also true is that the rigging had been going on long before I realized it.
Before the quibblers surface, let me concede that there have always been cheaters in the stock market. It’s human nature to try to take advantage of someone else. Today’s controversy about high-frequency trading crooks only adds a technological twist to an age-old story.
Stock-market rigging, however, took a major step toward acceptability on Oct. 27, 1989. That’s when a guy named Robert Heller proposed that the Federal Reserve should rig stocks.
Heller wasn’t just some joker off the street. Before he proposed in a speech and then in an op-ed piece in the Wall Street Journal that “the stock market is certainly not too big for the Fed to handle,” Heller was a governor on the Federal Reserve Board.
The Fed, Heller proposed, “could support the stock market directly by buying market averages in the futures market, thus stabilizing the market as a whole.”
Here’s some historical context: The stock market crashed in 1987 and suffered a mini-disaster right before Heller made his suggestion. Before the ’87 meltdown, most newspapers weren’t even allowed to use the word “crash” for fear that it would create a panic.
By 1989, the word was everywhere, and Wall Street and Washington were petrified. President Reagan was so afraid, in fact, that he signed Executive Order 12631 to create the Working Group on Financial Markets.
Ostensibly, the group was supposed to be nothing more than a task force to talk about stock-market troubles. The group “shall consult, as appropriate, with representatives of the various exchanges, clearinghouses, self-regulatory bodies and with major market participants to determine private-sector solutions wherever possible,” according to its founding documents.
By the mid-90s, when I started writing about this, the working group had been nicknamed the Plunge Protection Team, and suspicions were that it was doing more with “market participants” than just consulting.
Who’s to say, for instance, that the Fed never called one of the big brokerage firms and suggested that it would be nice if it bought some stock? A relatively small amount of money would do the trick, while the gratitude of Washington would be immeasurable.
There was another part of Heller’s 1989 op-ed piece that was very important: “The Fed’s stock-market role ought not to be very ambitious. It should seek only to maintain the functioning of the markets — not to prop up the Dow Jones or New York Stock Exchange averages at a particular level.”
In other words, the government’s rigging should be for the good of the country. The stock market should be free and fair; it just shouldn’t be permitted to go into another tailspin like it did in ’87.
There are many problems with a rigged stock market. The most important is that investors need to trust that they are investing at fair prices in companies because the firms are worthy, not because someone is propping up its stock.
A manipulated market gives the rigger a huge advantage over everyone else, not to mention leverage over Washington, which never wants to see stock prices decline.
Rigged markets also don’t stay rigged forever. Eventually the smart money gets out, and high-frequency trading means the smarties can retreat in a hurry.
Market rigging isn’t just one of those slippery slopes. It’s like a car with bald tires trying to exit an icy ramp on the George Washington Bridge. There is no way to stop once you get going, and someone is going to get hurt.
What Heller suggested, in fact, has been going on almost constantly. Wall Street pros have learned to game the market.
They buy futures contracts in the wee hours of the morning to have an impact on the New York opening. They also purchase at the end of the month to improve their performance and at the conclusion of the quarter for the same reason; during option expiration weeks; and right before the Fed does its near-daily infusion of liquidity into the banking system.
Sure, Heller’s motives were purer. But if everyone is doing it, who do you single out for prosecution? And if the fines don’t exceed the profits (and they don’t), why would the manipulators care if they are caught?
Heller’s ultimate goal of controlling the stock market wasn’t a whole lot different from what high-frequency traders are doing today and what I believe the US Treasury did during the 2008 crisis.
But somebody big someday will decide that he wants out. And with today’s fast trading the momentum could shift very quickly from buying to selling.
Will the Plunge Protection Team be able to stop the financial bloodshed? Will friendly firms on Wall Street do their pals in Washington a favor and jump headlong in front of a plunging market? And should the government interfere?
I’m with Heller on this one. The Fed can’t allow the market to collapse because that gives too much power to would-be financial terrorists both domestic and foreign.
But the rescue effort should not be ambitious. It should be a nip and tuck rather than a full-fledged market lift.