In Sprecher We Trust. Hopefully.

Jeffrey Sprecher built a better mousetrap. But a mousetrap big enough to catch a whale? Apparently so.

Jeffrey Sprecher built a better mousetrap. But a mousetrap big enough to catch a whale? Apparently so. Sprecher is the founder and president of the Intercontinental Exchange (ICE) based in Atlanta. For all practical purposes he is the poster-boy of electronic trading and the man responsible for the meteoric rise of commodities trading. He’s also about to become the owner of the New York Stock Exchange. Do I have your attention yet?

In little more than a decade the commodities market has gone from $10 billion– a speck on the trading horizon – to more than half a trillion dollars. Nathaniel Popper’s front-page story in the business section of the New York Times today pulls the veil back on Sprecher the man and describes how he grew a little-known southern exchange into a juggernaut capable of purchasing the vaunted New York Stock Exchange. As Popper himself writes, “It sounds preposterous.”

That’s because it is.

Popper’s piece brings forward a story that few people know. Most have no idea that trading exchanges are even for-profit businesses. And while he does a worthy job demystifying the business of exchanges he overlooks the planet-sized regulatory loopholes that allowed Sprecher to convert a small energy futures trading exchange into a global Franken-exchange that is buying the biggest, most well known exchange on Earth.

Sprecher was even a bridesmaid recently when he nearly scuttled a merger between the Chicago Board of Trade (CBOT) and the Chicago Mercantile Exchange by coming in with a higher bid for the CBOT. The Chicago trading establishment was so freaked out by Sprecher’s surprise bid that they put their legendary differences aside and came to a deal faster than might otherwise have occurred had he not been breathing down everyone’s neck.

Though he was unsuccessful in his last minute bid, Sprecher moved deftly like a great white shark through the rocky financial seas in search of his next prey. Never sleeping, always moving, forever hungry.

To call Sprecher an opportunist would be technically accurate but cheap and intellectually dishonest. He understood the inevitability of electronic trading and the superior potential it held. If the Bloomberg terminal revolution was in providing information quickly and precisely then the Sprecher ICE revolution was in giving traders (and the houses they worked for) the ability to act upon information in the same fashion. My criticism of Sprecher – and Popper for that matter – is the way in which the story of the ICE has come to be told and accepted.

Missing from the brief history of the ICE are the loopholes that gave it life and the ability to flourish beyond imagination. It was the oft-spoken of – but rarely understood – “Enron Loophole” that gave corporations the legal right to trade energy futures even if the corporation itself was in the business of energy. This is the simplest way to convey its net result. The second loophole (and more meaningful for the ICE) was a maneuver by the Bush administration that granted the ICE foreign status as an exchange despite being based in Atlanta. This initiated a massive shift of trading dollars, and influx of new ones, onto the ICE for one reason: this singular move placed the ICE outside the purview of U.S. regulators at the Commodities Futures and Trading Commission (CFTC). Essentially, corporations could now trade energy futures electronically through the ICE without oversight or disclosure.

Sprecher has often stated that one of the great benefits of electronic trading is its inherent transparency. Theoretically, performing trades between parties on a screen reduces the likelihood of transactions being rigged. In some ways he’s right. We are unlikely to witness an old school “corner” where one party dupes all others into trading with it until it controls the vast majority, or position, of the item being traded. Electronic trading moves too quickly and there are too many players involved. But speed does not imply market transparency and openness.

Moreover, the mere fact that the founding investors of the ICE are some of the world’s largest investment banks and oil companies (Morgan Stanley, Goldman Sachs and BP) speaks to how little transparency there truly is. The fact that some of these banks (Morgan Stanley in particular) own and control oil companies and oil companies operate trading desks outside U.S. jurisdiction demonstrates how little need there is for small-time corners. Why pull off a two-bit corner when you have already cornered the entire marketplace?

Now, as Sprecher prepares to close on this historic transaction, investors, citizens and the government are about to be one step further removed from any realistic shot at transparency and oversight.

This in no way takes away from Sprecher’s genius as a businessman. It simply illustrates how willfully ignorant we are to the business of Wall Street and therefore how frightfully far away we are from properly regulating it. Everything Sprecher has done is legal and ethical; to the extent there is an ethos on Wall Street. Where all of this hits home for the consumer is at places like the gas pump and supermarket. The most important and direct relationship most of us have to Jeff Sprecher’s mousetrap is the high cost of the gas we pump and food we consume. Banks and oil companies have a vested interest in Sprecher’s success and in increasing their own revenues. Both are perfectly, mutually aligned. So far they have been able to grow profits with alacrity, free from federal oversight and bolstered by our collective ignorance of the process.

We’ve all been caught in Jeffrey Sprecher’s mousetrap. Now the question is will he “catch and release” or dispose of us in search of his next conquest. I hope he’s as nice and down-to-earth as Popper suggests.

 

Image: From 2008 Long Island Press cover story explaining the rise of the ICE and how Morgan Stanley became one of the largest oil companies in the world. For more on this story view the video below:

 

$4 Per Gallon: Beating The Oil Drum

America and oil. Perfect together.

Americans are being warned about $4 gasoline at the pumps as an impending and potentially persistent reality. In actuality we’re really being sold on this proposition by the same people who are obfuscating the facts behind what is essentially a looming consumer economic crisis. The triumvirate of the federal government, oil companies and major financial institutions are at the core of disseminating information about, and controlling the pricing of, oil and the varying distillates it produces. I use the term “triumvirate” loosely as it presupposes a separation among the three entities when it has become increasingly apparent they are fused into a singular, inseparable juggernaut where players move freely through revolving doors interconnected through a labyrinth of commissions and exchanges that empty into the special bureau of greed and codependence.

Listen closely to what it is we’re being sold. We’re being fed a barrage of reports about two major drivers of oil prices: demand and unrest. The latter refers to the remarkable and unrelenting spread of democratic uprisings in the Middle East and Northern Africa. While the situations in Egypt and Tunisia had little immediate impact on oil prices because they are marginal players in the energy field, Libya and Bahrain have had a dramatic effect on oil prices because they are fundamentally oil-based economies. (Bahrain, by the way, is half the length and width of Long Island.)

Yet not only does the United States maintain a military base in Bahrain where demonstrations have been organized and peaceful after a shock of initial bloodshed, but Libya produces surprisingly little oil considering the ripple effect the burgeoning civil war is causing. Moreover, the war is being funded by the continuance of oil production operations, which neither side can afford to sabotage to the point of paralysis. The upshot there is that of the 2 percent of global oil production Libya claims, most of it will continue to flow. That being said, suppose for a minute it is halted completely. How could losing temporary access to 2 percent of global production account for a 33 percent increase in pricing? It doesn’t, which leads us to the demand question.

The purported rise in global demand is being attributed to the growth in demand from developing economies and the global economic recovery. Yet in real GDP terms and with respect to indicators such as manufacturing, shipping, job creation – in short, anything that isn’t the Dow Jones Industrial Average – the global economy is still limping toward pre-recession, pre-housing bubble crash levels when oil hovered around $70 per barrel. And even at this level, several commodities experts and economists theorized that as much as 40 percent of the $70/barrel figure was pegged to speculation in the financial markets and not market forces such as supply and demand.

In regards to new demand from developing nations, new areas of production in Canada and Africa as well as deep-sea, offshore drilling are keeping pace with demand as evidenced by the sustained levels of reserves around the globe. Even the Obama administration, which has stated that tapping our own strategic oil reserves is a viable option to increase supply and suppress oil prices, admits in the same breath that supply isn’t the issue. This is hocus-pocus to distract us all from what the actual issue is. For clarity on the real reason behind the spike in oil prices, one need look no further than the mini-oil crisis in the summer of 2008 and the federal government’s response in the months, and now years, that followed.

CLICK HERE TO READ THE LONG ISLAND PRESS COVER STORY ABOUT THE OIL SCANDAL OF 2008

When the price of a barrel of crude oil topped $145 in 2008, rampant speculation was ultimately blamed for the anomaly but only after the major banks and trading institutions could no longer blame increasing demand with a straight face. They simply pushed that line too hard to keep up the ruse. If ever there was even a question about the role of speculation and the government’s willingness to cover for the big banks, all was answered in my mind by the U.S. government response, or lack thereof.

Federal regulators made a big fuss over the creation of more stringent regulation on the commodities exchanges by moving oil trading from opaque over the counter (OTC) exchanges to more “legitimate” exchanges with greater transparency. Or so we were told. The big winner in this move: The Intercontinental Exchange, or the ICE. The ICE is aptly named because any attempt to investigate this exchange ends up cold. Here’s where it gets interesting and perfectly illustrates the symbiotic relationship between the federal government and big banking.

The most helpful context I can place this explanation in is to stress the point that the ICE is a business. It was established for the purpose of providing an efficient electronic trading infrastructure for energy commodities. Trading energy futures before the Atlanta-based ICE was established was confusing, inefficient and antiquated. But the ICE was a small operation until then-President George W. Bush granted it status as a foreign exchange because it purchased a trading desk in London even though the entire trading infrastructure was based in Atlanta. Foreign exchanges aren’t subject to the same oversight as domestic ones. So even though the Commodities Futures Trading Commission (CFTC) interacts with and governs some of the procedures at the ICE, no one can actually see who is doing the trading. This one small regulatory change put the ICE on the map and set the groundwork for one of the greatest, yet most obscure, con jobs ever pulled on the American people.

I call it a con job because the ICE falsely professes to be a bastion of transparency, going so far as to describe itself as “an alternative to the previously fragmented and opaque markets.” So let’s be transparent about this supposed transparency the ICE purportedly affords. It has nothing to do with the ability to witness transactions or those who are doing them, but to simplify the transaction process. It’s the equivalent of your bank offering online banking for your checking account. It’s fast and easy but doesn’t mean your neighbor can see you doing it.

Now consider who is doing the trading. Are you? My guess is no.

The only ones with the financial strength to risk betting on oil futures that would also benefit from anonymity are financial institutions and oil companies themselves. And that’s precisely what they’re doing. Now that you’re armed with an understanding of the fundamentals behind the commodities market, take a gander at the incestuous family tree of oil trading. Once you follow the money you’ll never again question why prices at the pump are so high.

• The ICE is a public, for-profit business traded on the New York Stock Exchange that takes in almost one billion dollars in transaction fees from commodities trading and has performed better than all other major exchanges in recent years.

• The founders of the ICE are Morgan Stanley, Goldman Sachs and British Petroleum (now BP)

• Morgan Stanley is not only a financial institution. If you add up their direct holdings in the oil business, they would be one of the world’s biggest oil companies.

• Gary Gensler, chairman of the CFTC, is a former Goldman Sachs partner

• Jeffrey Sprecher, chairman and CEO of the ICE, is on the CFTC Energy and Environmental Markets Advisory Committee alongside representatives from JP Morgan, Morgan Stanley, Goldman Sachs and Merrill Lynch

The takeaway: The government has cleared the way for banks and oil companies (sometimes one in the same) to determine the price of oil by investing large sums of money no one can see on a trading exchange they own and direct.

If you follow this logic, dig this scenario. (Or “digg” it if you’re reading this online – thanks in advance for the plug). Instead of cracking down on this legalized price-fixing and collusion scheme, the government rewarded everyone involved. In 2009 it granted the ICE the ability to trade credit default swaps (remember those?) in order to provide “more transparency” to these troubled investment vehicles by moving them from OTC exchanges. Sound familiar? The ICE got this part of their exchange up and running in 2010 ahead of schedule.

With the regulatory wind of the White House at their backs and a gullible public duped by propaganda about unrest in the Middle East being responsible for the spike in oil prices, Wall Street is having its way with us all.

In case you were wondering what their take on this sorry state of affairs is, Morgan Stanley analysts David Greenlaw and Ted Wieseman offer the following sentiment: “Of course, the increase in oil prices transfers income (and wealth) to oil producers, and the effect on global growth will depend on how the producers spend their windfall.” A rhetorical question if ever there was one; after all, when’s the last time ExxonMobil cut you a check? 

So the next time you’re gritting your teeth at the pump and cursing the day you walked into the SUV dealership, you’ll know who’s really taking your money. Unfortunately, you’ll also realize that there’s not a damn thing you can do about it. 

CLICK HERE TO READ JED MOREY’S RESPONSE TO THE BP OIL SPILL AND OUR OIL ADDICTION