Tuesday, July 28, 2009

Asset Class Conundrum

The aftermath of the credit crisis is beginning to look like an asset class bloodbath. First the overuse of credit derivatives - and the dearth of related risk management - caught the attention of regulators worldwide when they took down some banking giants. Volumes plummeted initially but are beginning to revive now that clearing is less problematic. Then oil speculators are called on the carpet by the US Congress and the CFTC for spiking crude oil prices up close to $150 last year. Other commodities are also in the regulators' firing line. Equities markets have attracted some wholly unwanted SEC and political attention due to several issues: huge volumes trading in dark pools, the proliferation of high frequency trading and now 'flash' orders. High frequency trading represents between 40-70% of daily volume in US markets, depending upon source, and could be artificially inflating trading volumes. Now there are reports that currency trading volumes have dropped by almost 25% in the UK and the US (Asia held up slightly better, falling only about 20%). Icap's EBS electronic trading platform saw its trading volumes fall by more than a third in the second quarter. According to Bloomberg, a 'plunge in risk appetite' drove away hedge funds and speculators. If the risk appetite for fixed income, equities, commodities and FX have all dropped off, and naked short selling is now off the menu, what is going to appeal to traders next? Carbon?

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