Michael Lewis, Flash Boys and Some Observations: Distinguishing the Apples from the Oranges

I watched the presentation on 60 Minutes about Flash Boys, the new book by Michael Lewis. Lewis also wrote a relatively detailed piece in the NYT.  I've got a copy of the book on order and presumably will have additional comments once digested. In the meantime, I thought I would offer a few observations.

Discussions of high frequency trading ("HTF") often involve an apples to oranges problem that sometimes makes the area difficult to follow. To some degree, HFT involves the use of technology to gain small but profitable advantages in the market. HFT is able to do so through the use of technology. As the discussion of IEX shows, the advantages of this technology can be reduced through other technological advances such as the institution of a speed bump. Thus, the market evolves and participants respond.

Those are the apples. The oranges are where HFT is based upon advance access to information before it is disseminated to the entire market.  On example of advance access occurred when newsfeeds were distributed directly to HFT traders before the information was available to the public.  This practice has ended as a resutl of pressure from the NY Attorney Generals Office. Eric Schneiderman, the NY AG, explained in a speech: 

  • What we learned was, these major services were selling subscriptions directly to high-frequency traders, who were seeing the information a split second earlier than investors relying on services like Bloomberg and Dow Jones – and that was enough, again, for them to move the markets.  So, after discussion with our office’s Investor Protection Bureau, again, to their credit, Business Wire stepped up and changed its policies to stop selling direct subscriptions to high-frequency traders. 

Yet this shut down only one source of information provided to traders before it reached the market. The stock exchanges sell proprietary data feeds to traders who obtain the information at the same time it is given to the securities information processors (SIP) for dissemination over the consolidated tape. Because the information takes a brief period of time to be consolidated and distributed through the SIP, those receiving the feed directly from the stock exchanges essentially get an advance peak at the direction of the market.  

The response by IEX addresses the apples. It does not address the oranges associated with advance disclosure.  To the extent there is an "unfairness" in the market, it comes from the ability to trade not because of genuine risk taking or the development of technology that facilitates profit making on information disclosed to the entire market, but because one can buy the information before anyone else learns about it.

The market seems able to handle the apples. The oranges look to require a regulatory response.   


Call-for-Papers: National Business Law Scholars Conference

The National Business Law Scholars Conference (NBLSC), formerly known as the Midwest Corporate Legal Scholars Conference, will be held on Wednesday, June 27th and Thursday, June 28th at University of Cincinnati College of Law in Cincinnati, Ohio.  This is the third annual meeting of the NBLSC, which has been renamed this year to reflect its national scope and the widely varied interests of its participants.  We welcome all on-topic submissions and will attempt to provide the opportunity for everyone to actively participate.  We will also attempt to assign a commentator for each paper presented.  Junior scholars are especially encouraged participate, and we will hold a special “how-to” panel for prospective business law scholars discussing the job market and transitioning into the legal academy. 

To submit a presentation, email Professor Eric C. Chaffee at echaffee1@udayton.edu with an abstract or paper by April 15, 2012.  Please title the email “NBLSC Submission – {Name}”.  If you would like to attend, but not present, email Professor Chaffee with an email entitled “NBLSC Attendance”.  Please specify in your email whether you are willing to serve as a commentator or moderator.  A conference schedule will be circulated in early June.

Conference Organizers:

Barbara Black
Eric C. Chaffee
Steven M. Davidoff


Spring Meeting: Corporate Governance Round Table - Parts Three & Four: Independent Compensation Consultants & Directors and Splitting the Roles of Chairman & CEO

The panel consolidated their last two discussions as the time drew to a close. First, was a brief conversation regarding Independent Compensation Consultants and Independent Directors. Although this topic does not have the same momentum as other Dodd-Frank provisions, there were still a number of opinions in the room. The conversation centered on the inability to adequately define “independent” across different standards such as NYSE Rules, NASD Rules, and now under Dodd-Frank.  Many commentators stated that expectations of who remains independent under all the rules are on their way to an absurd and impractical extreme. This discussion concluded with the understanding that it is extremely difficult to get a corporation to voluntarily initiate this type of change.

The panel concluded with a discussion of splitting the Chairman and CEO positions. This conversation was quite common throughout the Conference. The discussion began with this question: What creates an effective CEO/Chairman relationship? The group came to a consensus that corporations must avoid dueling executives and roles must be clearly defined and implemented This led top a conclusion in favor of the splitting the roles based on the idea that the title should mean something.

One panelist broke this argument down as follows. Since the CEO works for the Board of Directors, and the Chairman is the head of the Board, how can the CEO logically run the group for whom he or she works? This leads to an inherent conflict, as the individual being monitored is in charge of the group doing the monitoring.  Although seemingly difficult to argue with, this point was met with conflicting commentary. The concerns mainly focus on the confusion within the company, and within management brought by splitting the roles.

Although the two sides on this issue share some common ground, both seem to have a firm grasp of their own positions which will make this issue an interesting one to follow going in the future.

Thank you again to everyone who followed our coverage of the 2011 ABA Business Law Section’s Spring Meeting from Boston, MA.


Spring Meeting: Corporate Governance Round Table - Part Two: Proxy Access

After beginning the discussion with Say-on-Pay, the panel turned its attention to Proxy Access. After a brief summary of the 3 percent for 3 years (“3-3 Rule”), and an overview of the D.C. Circuit argument, the panel posed three primary issues. First, will Proxy Access continue to exist as proposed?  Next, is there a better alternative to the 3-3 Rule such as proxy reimbursement for successful or even nearly successful campaigns. The final alternative is keeping shareholders completely removed from the process.

Proponents of proxy access stated that it would only be used in extreme circumstances. Further, panelists discussed the importance of allowing investors to have influence within the Board and a forum for their ideas. However, other panelists did not see this as the correct vehicle for investors to have that voice. The panel continued by stating that many state laws previously allowed for 10% shareholders to call a special meeting, but that the 3-3 Rule creates problems due to its lack of definition of a sufficient interest.

The panel concluded the discussion on this issue in agreement that the main issue here is who pays. This led to further discussion of a Proxy Reimbursement plan. Also, it led to some speculation regarding the SEC’s next step if the Circuit decision goes against them.


Spring Meeting: Corporate Governance Round Table – Part One: Say-on-Pay

The following three posts will summarize Friday’s Corporate Governance Roundtable. Before beginning the series, Todd and I would like to personally thank everyone from the ABA Business Law Section and the University of Denver Sturm College of Law, especially the SBA, Professor Jay Brown, and Armin Sarabi, who made this trip possible.

The topic of Say-on-Pay led the discussion as it is being voted on by nearly every major corporation this year.  The panel began by discussing the positives brought on by Say-on-Pay. The first of which is requiring clear and well-described pay packages to receive a positive vote.  A member of the panel also voiced the position that Say-on-Pay allows for a much better outlet for pay concerns than what previously existed.  However, all did not share these views.  One overwhelming concern was that a compensation discussion between shareholders and the board should be a dialogue, not a mandated vote.  One panelist clearly articulated that because Say-on-Pay is statutory it is resented.  In the past, corporations have been willing to adopt different “best practices,” albeit on their own schedule, such as majority voting, but not because they were mandated.  He believes Say-on-Pay was not given the same opportunity.

The conversation on Say-on-Pay continued with the question of whether it is really even a big deal? Is this authority really any different from the power of a withhold vote? This led to reference to pending Australian legislation where, if more than a 25% withhold vote exists on Say on Pay for two consecutive years, it triggers a Spill Vote (to remove the entire Board) within 90 days. I am sure our readers can imagine the varying reactions this mention received. 

Finally, the discussion concluded with a very poignant point. In an opinion against Say-on-Pay, one panelist mentioned that the entire corporate system is based on the primary foundation of shareholder elections and management managing. Shareholders have the power to either re-elect or replace those Directors they feel are not adequately representing them. However, in his view Say-on-Pay is not an avenue to tell the Board that they are not representing the shareholder’s best interest but is a question of their judgment in managing.  Further, this panelist believed that if the system allows this type of micromanaging, it could be anyone’s guess what shareholders next Say will be on.