NYSE, Securities and Exchange Commission, Securities Law, Social Media, Social Networking Websites, Technology

SEC’s Netflix Probe Is No Blockbuster

Last week, Netflix announced that it received a Wells notice from the SEC. Apparently, while the SEC was cruising Facebook (what else is there to do while neglecting to investigate Wall Street?), someone noticed Netflix CEO Reed Hastings posting that Netflix had surpassed one billion hours of streaming old episodes of Facts of Life to shut ins.

The SEC staff thinks Hastings disclosed material information in this Facebook post, possibly violating Reg FD, the 2000 regulation that put a stop to companies giving an advantage to small subsets of investors by disclosing material information between blowing rails of coke off strippers.

But Facebook isn’t a seedy strip club full of free drugs and prostitutes (read: Christian Mingle). Reed Hastings has over 200,000 “fans,” many of whom are analysts and reporters. In pursuing enforcement without exercising a little discretion, the SEC ignores these facts.

Netflix is arguing that the disclosure was not material and that most investors knew that the CEO’s Facebook page is recognized as an avenue for public disclosure.

Regardless of the specific resolution of this matter, this is one more reminder that the SEC is woefully behind when it comes to adapting to technological developments. Like, oh I don’t know, HFT perhaps?

I’m not saying that social media disclosures don’t need regulation, but why start by dragging a company through the expense and inconvenience of enforcement under an obviously outdated rule? Just make a new rule! That said, given their track record I’m sure the Commissioners would draft a rule making social media disclosures proper but only if issued on Friendster.

“I’m sorry Dave, I can’t cancel those transactions.”

Take the case of High-Frequency Trading, or HFT. HFT uses computer algorithms to trade massive amounts of stock with split-second speed to take advantage of small movements in the market. These financial SkyNets now account for almost half the volume on a given day.

How fast are these machines? Well, they broke Einstein. At least according to the time-stamping procedure set up by the SEC, HFT machines were trading 190 milliseconds into the future. Maybe the time warp is a glitch, but the machines really have reached the point where the speed of light is too slow. Many HFT firms are paying top dollar to move their machines to data centers run by the exchanges themselves because having the computer PHYSICALLY ON SITE garners a few-millisecond advantage over another computer with a speed of light connection to the data.

Rule of thumb for the SEC: when companies are paying the exchange to get light speed advantages over their competition, it’s worth taking a look at.

The problem arises when two algorithms get in a pissing contest and the moves of one program trigger a counter-move by another leading to a death spiral. Think of the trope of defeating an evil computer by asking a philosophical or paradoxical question, like, “Why is Gangnam Style popular?,” or, “Can God make an Adam Sandler movie so bad that even he can’t sit through it?,” and then watching smoke billow out as it repeats “does not compute.” This is basically what happened in the “flash crash” of May 2010 where the market tanked by 1000 points and then earned it back within minutes.

PICTURED: SEC Headquarters

But that was a couple years ago… I’m sure there’s an answer by now. Well, in explaining why there is no answer yet, the chair of the SEC recently said the agency is “hard-pressed to keep up with the financial industry, especially where technology is involved.” Oh good…

But instead of hunkering down to deal with computers programmed to trigger financial armageddon, the SEC is considering an enforcement action against Netflix for using Facebook. They may as well target public utilities for predatory pricing to kill the whaling market. What, have they got something against clean burning lamp oil?

Joe Patrice is the author of Recess Appointment, a blog about political rhetoric, and he’ll be dropping in occasionally to write about the intersection of law and politics. To answer the question that you’re probably about to ask, he got his J.D. at NYU and spent ten years working at a Biglaw firm and a white-collar defense boutique. His favorite word is sesquipedalian.

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