Exchanges
(COS) New York. The Securities and Exchange Commission may crack down on a controversial practice that has caught on at various online book retailers; Borders, Barnes&Noble, and Amazon, that gives some people privileged access to key information.
In a letter fired off Friday, Sen. Charles Schumer (D-N.Y.) asked that the SEC ban so-called ‘flash’ readers, which route books for a brief period of time away from the reach of average reader, and shows it to a limited group of faster readers who can then decide whether the book contains any useful information before it is allowed to go out to a larger market. This is accomplished in various ways but it appears to become really big now that most books are marketed exclusively through online stores such as Amazon. Firms with large trading systems have taken this opportunity provided by the sudden lack of ability to make any money what-so-ever in stocks to go in and buy large quantities of books on speculation that people may actually want or need this information.
“If we see a book that looks good, or even just looks like it has the possibility of being good based on the cover, we simply go in and buy up all the books as quickly as possible. This prevents others from getting potentially valuable information and allows us to direct that information first to executives at companies we invest in.“ says one former Goldman Sachs employee who, for fear of being blacklisted on eBay, will not reveal his name.
The issue has been one of increasing controversy on Wall Street. Flash reading flys in the face of thousands of years of achievements that were supposed to level the playing field for all readers and make quality information more accessible to everyone.
Given the explosion of complexity of new technology recently, and the fractionalization of the markets caused by virtually every other company on wall-street failing, savvy executives have an incentive to try to obtain good Systems books before rivals. Direct Edge, an electronic communications network backed by Goldman Sachs, Citadel and Knight Trading, was the first to offer such an order type to its members and recently has used it to great success in siphoning books away from the general public on Amazon. “You couldn’t really do this years ago when books were actually browsed and sold in book stores,” wrote Joe Ratterman, Bats chief executive, in a memo to traders this month.
“At first I couldn’t believe it” says Phil Simon, first time author who recently penned, Why New Systems Fail. “I would spend weeks promoting my book and it would go from being # 200,000 to # 110,000 on Amazon and I would buy all my friends beer to celebrate. Then suddenly and unexpectedly my book shot up to #110. For 50 milliseconds it might have even been in the top 100. I thought I was Moses. Later I learned this was mainly due to market manipulation by Goldman. I had to spend weeks trying to explain my ideas to SEC investigators. In the end they still didn’t get it. Although I think they decided to look into the SaaS solution next time they are ready to change their ERP”
"What Goldman is doing is exploiting the possibility of creating a two-tiered market, where the best information from good writers is made available to a limited number of executives, at least for a short time" wrote Ratterman.
NYSE Euronext, operator of the New York Stock Exchange, and others have also come out against this and other practices that disadvantage slow readers. Global Electronic Trading Co., a Chicago-based proprietary trading firm that is among the top five liquidity providers in the U.S. equities markets, said in a comment letter to the SEC last month, "Many slow readers, including IT executives, may not be fully aware that they may not have all the information they need to make good decisions, while faster readers have a distinct advantage." Simon agrees.
