Thursday, August 27, 2009
Be Careful What You Ask For
The call for better regulatory oversight in financial markets rose to a cacophony after the sub-prime crisis and credit derivatives blowup, but I thought that it had been dying down of late. I was wrong. Senator Ted Kaufman from Delaware has charged the SEC to investigate seven practices: flash orders, high frequency trading, co-locating servers near exchanges, direct market sponsored access, liquidity rebates, dark pools, and retail order flow. Everyone in this business knows that Regulation NMS, although it was designed to level the playing field, actually benefited those with good technology. Investment banks, agency brokers, ECNs, ATSs and exchanges (finally) are all making 'new' money thanks to the new market structure. Kaufman and his fellow politicians probably do not fully understand the mechanics of the markets they are trying to regulate, which is one reason they are so suspicious. The industry and the general media have done a terrible job of educating and informing the regulators and other interested parties as the market has evolved. Only the specialist trade press (FT, Financial News, Securities Industry News, Traders, DWT, Wall Street & Technology) have covered these aspects of the business in depth. All have been warning of defects and loopholes in the new market structure that enable some fairly sharp practices. But sharp practices are what financial markets are all about. I would hate to see draconian rules coming down from above - it might signal the death knell of dozens of brokers and technology providers. Those asking for better regulation might wish they had never asked. And, keeping in mind that Delaware is the state that allows dodgy corporations to register there to avoid paying state corporate taxes and getting nailed with huge lawsuits, Kaufman may just be the pot calling the kettle black.