GO
Loading...

The market has always been rigged: Ron Insana

"I'm shocked, SHOCKED to find that gambling is going on in here!"

One of the most memorable movie lines in Hollywood history (Claude Rains as Captain Renault in "Casablanca" — watch the YouTube clip) is once again appropriate to describe the casino-like atmosphere on Wall Street that has everyone shocked about the latest allegations of abuses in the stock market.

Michael Lewis, in his new book, "Flash Boys" says that with the advent of high-frequency trading, the stock market is "rigged" in favor of a few players on Wall Street, who profit from front-running and other manipulative market practices that, once again, disadvantage the little guy.

Claude Rains in Casablanca
Michael Ochs Archives | Moviepix | Getty Images
Claude Rains in Casablanca

Let me be blunt. In one way, or another, some aspect of the financial markets has always been rigged. And while the abuses described in "Flash Boys" are NEWS, they are not NEW!

Read MoreWatch the fight that stopped trading on the NYSE

These types of abuses, manipulations and potentially corrupt practices, are as old as Wall Street, itself.

By now everyone reading this column is, more or less, familiar with the book, an instant best-seller no doubt, and HFT … the practice of using powerful, ultra-high speed computers to make tons of money by, effectively, trading faster and "smarter" than anyone else in the marketplace, from sophisticated money managers to the average investor.

The advantages involve being able to "co-locate" your computer next to the exchange's computer, giving it an almost osmotic ability to suss out order flow and jump ahead of others wishing to trade. (The exchange, by the way, charges hefty co-location fees and, itself, profits from the practice.) Other practices include "flash orders," "blinking," and the like, which are effectively phony orders that allow some HFT players to fool people into thinking the market is going one way, draw them in, and then trade against them. The former, if done by a human, is called "front-running," the latter, called "painting the tape," both of which are illegal, unless a computer does it.

But in many ways, high-frequency trading is not new, nor are the many market manipulations that have disadvantaged the little guy, ever since stocks and bonds were first traded on Wall Street in the late 1700s.

Indeed, the formation of the New York Stock & Exchange, as the NYSE was originally called, came about because a former U.S. Treasury official, in the spring of 1792, tried to corner the market in certain securities.

Using borrowed money from anyone who was willing to lend it to him, William Duer, speculated aggressively in the market, his attempted cornering of a specific issue failed spectacularly and nearly bankrupted Wall Street and many common merchants of Main Street. There was a market panic, Duer's lenders, from wealthy individuals to butchers, bakers and candlestick makers tried to hunt him down. He threw himself in debtor's prison to avoid an unpleasant tarring and feathering.

Those brokers who survived the panic of 1792, got together under a buttonwood tree on Wall Street and, as Art Cashin relayed the story to me many years ago, conspired to fix market prices to prevent another panic from happening again. Thus was the "official" start of stock trading in the United States.

Read MoreNYSE floor trader blasts high-frequency trading

Front-running was reputed to have occurred after the Great San Francisco Earthquake of 1906. In what may be an apocryphal tale, one eyewitness to the quake, a big-time investor, was reputed to have told an assistant to call in news of the quake to a reporter, but only AFTER he shorted stocks on Wall Street, some 3,000 miles away.

He was not able only able to trade ahead of the news, he was the source of the news itself, or so they say.

Now that's what I call front-running!

Insider trading, painting the tape and bear raids were common forms of market manipulation in the "Roaring 20s" bull market.

Wall Street was rife with abuses in the 1970s and 80s, with market makers clipping investors on a routine basis, while the merger mania of the 80's was loaded with bad actors who routinely traded on inside information unavailable to the investing public.

Read MoreWe knew someone was stealing from us: ex-Galleon trader

Names like Boesky, Levine and Milken became synonymous with a new gilded age. Whereas today's abuses are reside in a much more shadowy world where computers, and not compatriots, are alleged to be rigging the marketplace.

There have always been market manipulations, technological advances and unfair advantages, like insider trading, that have emerged faster than regulators were capable of beating back. All of them, in one form or another, were unfair to average investors, and even to some professionals, but, in the main, have not prevented investors from making money in the market, if they were investing for the long-term and not simply speculating.

Indeed, technology, alone, has always given professionals an unfair advantage in executing stock trades more quickly than the little guy, sometimes without being illegal.

The advent of the ticker tape and the telephone gave professional investors a distinct advantage over average investors, in their day. So did the telegraph in the years that preceded those innovations.

Most certainly, technology and speed have always been a friend to professional traders and investors, more so than to the investing public. The real issue, though, in my estimation, is whether or not the market's structure is being adversely affected by some, but not all, of the players in the HFT arena. Some may very well be cheating in a manner already described.

Read MoreHigh-frequency traders can't front-run anyone: co-founder of HFT firm

Regulators, despite warnings that many of us made when HFT first started, are again, woefully, behind the curve. Because of Michael's book, they are now scrambling to play catch up. They appear shocked that gambling is going in one remote, but important, corner of Rick's place. Without diminishing the importance of the story, or the need for corrective action, I'm still shocked that anyone can actually BE shocked that gambling, yes gambling, once again, is going on here.

If regulators are serious about addressing the problem, they should look to the past for answers. The simple way to slow down the abuses that come from high-frequency trading is to trade old school. Trade in nickel, rather than sub-penny, increments. That'll slow down the black boxes and give the rest of us a more even playing field and tilt the roulette wheel back in our direction.

Ron Insana is a CNBC and MSNBC contributor and the author of four books on Wall Street. He also delivers a daily podcast, "Insana Insights," and a long-form weekly version, both available on iTunes and at roninsana.com. Follow him on Twitter @rinsana.

Read MoreRead more: Here's what the SEC needs to do now: ex-SEC chief economist

Symbol
Price
 
Change
%Change
S&P 500
---