I believe in financial reform. Let’s lose synthetic CDOs, credit default swaps, and other Weapons of Money Destruction. Let’s cut the leverage and focus on systemic risks to our economic order. But let’s be smart.
In the wake of last Thursday, it appears our government is tackling too many issues at the same time. The only thing we know for certain is there will be unintended consequences—especially when we have no idea how changes on one front will interact with changes on another.
Derivatives are a good example. Yesterday, The New York Times reported:
The financial legislation proposed by the Obama administration and passed by the House would require most derivatives to trade on public exchanges, in the belief that a transparent marketplace will be safer and cheaper. The scope of the exchange trading requirement has been the focus of the debate for months.
Sounds reasonable if exchanges make derivatives more transparent. Get those puppies out in the open.
But wait. Some pundits blame the exchanges for last Thursday’s 1,000-point slide. The New York Stock Exchange slowed its computer-trading, and humans took over. Meanwhile, other centers executed computer trades at lightning-fast speeds. Different standards operating at cross purposes.
We think.
The problem might be the investment style known as “high-speed trading.” But we can’t rule out fat fingers. The New York Times describes the difficulty in finding answers as follows:
As trading has been dispersed among a dozen electronic exchanges, the S.E.C. and other market regulators have maintained no centralized database of stock trades, order sizes or prices. That has made it more difficult for regulators to piece together what exactly happened on Thursday.
Connecting the dots isn’t pretty. It looks like proposed legislation will push derivatives, which often employ 100:1 leverage, onto exchanges that operate according to different standards where nobody (read SEC) is watching all the moving pieces.
Yikes. How are we better off?
Derivatives are only one issue. Other items on the reform agenda include: systemic risk and the thing we call “too big to fail;” proprietary trading desks at banks; ethical standards for our dealmakers; and you name it. So many different pieces.
The pending financial reform reminds me of a high-school science experiment where there are no constants. Where too many inputs are variable. Where no one knows what will crawl out of the regulatory petri dish. Wouldn’t it make more sense to focus on one core issue—like getting our exchanges right—before taking massive action across multiple fronts?
The New York Times describes my novels as “money porn,” “a red-hot franchise,” and “glittery thrillers about fiscal malfeasance.” Through fiction I explore the dark side of money and the motivations of those who have it, want more, and will steamroll anybody who gets in their way.
It’s not the exchanges that are the problem. Regulated derivatives are okay-CFTC regulated. It’s on the SEC side. Fragmented markets lead to melt downs.
End dark pools, end payment for order flow, end internalization of orders.
changing the structure of the market will help it more than all the band aids that are being proposed.
Jeff, first and foremost, I like your blog and added it to Acrimoney’s blogroll.
The problem with regulation is that it can’t keep pace with market innovation. All the trading centers other than NYSE and NASDAQ—ECNs, dark pools, whatever form they take—rose in part to cut trading costs.
Why, for example, do you need an exchange if you can cross an order on your own books and report it?
My problem is with uneven regulation—the innovators, the new guys on the block typically face fewer rules. Or different rules. Isn’t that what happened last Thursday.
I’d love to see you spell out your thoughts in more detail on these issues.
Best,
Norb
Hello, great read. I just now found your site and I’m already a fan. 😛
Thanks, Dish. Glad you enjoyed.
All the best,
Norb
Hello,Superb blog post dude! i’m Fed up with using RSS feeds and do you use twitter?so i can follow you there:D.
PS:Do you thought about putting video to your blog posts to keep the people more entertained?I think it works., Margarite Saborido
Thanks for the ideas, Margarite.
Here’s my address on Twitter: http://twitter.com/NorbVonnegut
Best,
Norb
Thank you for your enlightening post. I think of the first car purchase I ever did. It is similar to investments in many ways. You don’t know if the next year’s model will be improved but I bought it any way.Just like the stock market, hard to say where affairs will be headed, so you need to take some chance. Looking forward to additional posts. Best