Thursday, September 30, 2010

On Regulation and Real Estate

Goldman Sachs is preparing another temper tantrum over regulation, this time it is threatening to quit Europe if the region comes down too heavily, according to today's FT. 
The bank has already thrown some toys out of the pram in the U.S., leaking that it wants to spin off its prop trading arm well in advance of any Volcker Rule taking effect. (Although why anyone would pay GS for the privilege is beyond me, just hire the traders away!) Now CEO Lloyd Blankfein is predicting gloomily that mismatched regulation between the U.S., EU and other regions will cause banks to move. GS already booked some extra space in Zurich, but perhaps that is too close to Basel. The last thing GS wants is to have to responsibly manage its leverage.
Zurich is the next stop for many banks on the regulation underground. Escaping to Switzerland for tax purposes started a few years back and the trend has grown exponentially in the past two years as regulation in the EU looms. The U.K. is losing hedge funds and bank trading arms in droves. Geneva, arguably the most civilized and pleasant of Swiss banking centers, is overflowing with foreigners. The International School apparently has a long waiting list for entrants. Good rental accommodation is like gold dust, my sources tell me. Many bankers are leaving their families back home while they stay in hotels and try to find reasonable houses or flats to rent. And the rental rates are going through the roof.
If real estate speculation is your game (it is mine, although not on this scale), then Zurich and perhaps Zug and Basel might be good places to buy rental property. Singapore might be next.
However, it is my opinion that no one can escape the long arm of the regulators. Having a base in a lightly regulated country may help to avoid excessive taxation and perhaps even some capital requirement constraints for now. But when you go to do business in the U.S. and the U.K. or Europe, which you will, you might have your hand bitten off. I'd stick to real estate.

Monday, September 27, 2010

SEC Tries to CONTROL High Frequency Trading KAOS

In the 1960's American sitcom Get Smart there were two opposing agencies - CONTROL and KAOS. At CONTROL you had The Chief, Maxwell Smart (Agent 86) and Agent 99 as the good guys. KAOS was the bad guys of course.
In today's seemingly perplexing world of electronic trading The Chief appears to be played by U.S. Senator Charles Schumer. The well-meaning but hapless Maxwell Smart is played by U.S. Securities and Exchange Commission Chairman Mary Schapiro. (The SEC staff can take turns as Agent 99.) KAOS is represented by high frequency and algorithmic trading.
The Chief (Schumer) made a strong suggestion (order) to regulators to get a grip on KAOS, by looking into slowing down some high-speed trading at times of market stress and investigating manipulative strategies including quote stuffing.
Agent 86 (Schapiro) got on the case and the investigation is underway ( One telling statement by Schapiro this week alluded to the algos that automate execution when she said that regulators need to decide whether they "are subject to appropriate rules and controls."
"An out-of-control algorithm not only can cause serious losses to the firm that uses it, it can also cause severe trading disruptions that harm market stability and shake investor confidence," Schapiro said in the statement. She added that the SEC will review market fragmentation and the role of dark pools of liquidity that fall outside the traditional market structure.
“High-frequency trading firms are subject to very little in the way of obligations,” Schapiro said at an event held by the Security Traders Association in Washington. “We will consider carefully whether these firms should be subject to an appropriate regulatory structure governing key aspects of their market behavior, including quoting and trading strategies.”
The SEC may also need to peer a little more closely into the market structure that preceded all of these issues. A third of TabbFORUM readers polled said that the Securities and Exchange Commission had something to do with the May 6 flash crash: 31% of respondents to the poll blamed the crash on Reg NMS. (Still, 29% said it was “something else." Cue Siegfried - the Vice President in charge of Public Relations and Terror at KAOS).
All of this investigating is good news, as long as moderation is the byword for resolution. If indeed your opinion is that HFT and algos are run by a shady KAOS-style cartel on Wall Street then the more controls the better. It is my opinion that KAOS-as-HFT is a figment of non-financial industry scaremongers, and that a lighter touch is needed.
CONTROL can best come out on top if it deploys the proper tools: pre-trade risk management and controls, real-time risk management, real-time market monitoring and surveillance. All of these will help to stop KAOS in its tracks before it has the chance to throw another bomb into the room (flash crash...get it?).

Thursday, September 23, 2010

Right Conspiracy Theory, Wrong Conspiracy

So I was right that the timing of the SEC's announcement that it was investigating Goldman Sachs for fraud in April was too convenient. I said at the time that the case was politically motivated due to the impending financial regulation bill vote. And it seems I was right about the timing, but wrong as to the real reason. Reuters reported that an SEC inspector called the timing of the SEC's case against Goldman Sachs suspicious, suggesting that the SEC used it to divert attention from some bad PR. A report that sharply criticized its probe into accused Ponzi schemer Allen Stanford was about to be released, and the SEC seemingly hastened to get the Goldman Sachs news out. According to Reuters: "The SEC filed civil fraud charges against Goldman in mid-April, the same day it released a watchdog report accusing the agency of mishandling an investigation into Stanford's alleged $7 billion Ponzi scheme."
We all know that the SEC has been late to the market monitoring game, and that many innocent investors have suffered as a consequence. Maybe the agency really did not have the power to stop fraudulent behavior in the past. So when I read today that Chairman Mary Schapiro is taking a hard look at high frequency trading, algorithmic order execution and dark pools I have to wonder why we keep hearing that litany. And why nothing has yet been achieved.
From Bloomberg today: "Robert Khuzami, the U.S. Securities and Exchange Commission’s top enforcement official, said the agency is gearing up to use new powers from recent legislation to crack down on Wall Street after being faulted for not pursuing executives’ misconduct." Let me know how that works out for 'ya Bob?