Wednesday, January 27, 2010

One Down - Maybe - While Another Issue Looms

The mood on Capitol Hill is pretty sour towards banks and insurance companies that trade on their own account, with good cause. Tim Geithner today finally voiced something I have wondered about since I moved here - that American insurance companies have no national oversight. I imagine that is because when they started they were all in Nebraska or Connecticut and the federal government thought these states could manage them well enough. Wrong. AIG has been playing away for years, and it is unbelievable to me that it didn't get caught by someone - anyone. Some of its forays into energy trading were world renowned - and not because they made money. A national regulator would have had some idea what AIG was up to, I would hope. (Although the SEC and CFTC have not exactly been proactive before or during this crisis.) There is now a move afoot by the House and the Senate to create a national insurance office, but these bills do not go so far as to create a regulator. The National Association of Insurance Commissioners has gone further and has proposed federal legislation of its own that would establish a National Insurance Supervisory Commission (NISC), to be created by the states under federal law, to establish and enforce uniform standards across state lines, according to law firm Wiley Rein LLP. So,perhaps after years of state-by-state 'oversight' insurance companies will have to learn to toe the line.
In the meantime, financial markets players are opening a new can of worms for regulators to get their heads around. Exchanges and high frequency trading firms are lobbying hard to be allowed to trade in sub-penny increments on equities. The markets have barely absorbed the impact of penny increments, which enabled automated and high frequency trading. And the regulators have yet to get to grips with HFT and algorithmic trading. Allowing sub-penny increments is folly at this stage. Joe Saluzzi, as always, said it best and he believes it will force more order flow into dark pools (something else the regulators have yet to figure out). Themis Trading's Saluzzi said: "HFT players want sub-penny pricing, not because the extra sub-penny executions would pad their margins, but rather because the sub penny pricing will allow HFT shops more ways to step in front of traditional institutional hedge and mutual fund orders." Ouch.

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