Howard Davies is a former Chair of the UK Financial Services Authority and former Deputy Governor of the Bank of England. He writes:Paris, France - The United States is widely recognised as possessing the deepest, most liquid, and most efficient capital markets in the world. The US financial system supports efficient capital allocation, economic development, and job creation...
Might such ease and efficiency not also fuel market instability, and serve the interests of intermediaries rather than their clients? Phrases like "sand in the machine" and "grit in the oyster", which were pejorative in the prelapsarian days of 2006, are now used to support regulatory or fiscal changes that may slow down trading and reduce its volume.
The Volcker rule (named for former Federal Reserve Chairman Paul Volcker) provoked similar arguments. Critics have complained that it would reduce liquidity in important markets, such as those for non-US sovereign debt.
Defending his creation, Volcker harks back to a simpler time for the financial system, and refers to "overly liquid, speculation-prone securities markets". His message is clear: he is not concerned about lower trading volumes.Turnover in US financial markets rose four-fold in the decade before the crisis. Did the real economy benefit? Haldane cites a striking statistic:
in 1945, the average investor held the average US share for four years. By 2000, the average holding period had fallen to eight months; by 2008, it was two months.There appears to be a link between this precipitous drop in the average duration of stock holdings and the phenomenon of the so-called "ownerless corporation", whereby shareholders have little incentive to impose discipline on management. That absence of accountability, in turn, has contributed to the vertiginous rise in senior executives' compensation and, in financial firms, to a shift away from shareholder returns and towards large payouts to insiders.
...Haldane's main concern is with the stability of markets, particularly the threats posed by high-frequency trading (HFT).
He points out that HFT already accounts for half of total turnover in some debt and foreign-exchange markets, and that it is dominant in US equity markets, accounting for more than one-third of daily trading, up from less than one-fifth in 2005.Indeed,
HFT firms talk of a "race to zero", the point at which trading takes place at close to the speed of light. Should we welcome this trend? Will light-speed trading deliver us to free-market Nirvana?The evidence is mixed. It would seem that bid-offer spreads are falling, which we might regard as positive.
But volatility has risen, as has cross-market contagion. Instability in one market carries over into others.As for liquidity, while on the surface it looks deeper, the joint report on the Flash Crash prepared by the US Securities and Exchange Commission and the US Commodity Futures Trading Commission shows that HFT traders scaled back liquidity sharply, thereby exacerbating the problem.
The liquidity that they apparently offer proved unreliable under stress - that is, when it is most needed.http://www.aljazeera.com/indepth/opinion/2012/02/20122298191265484.htmlThat financial firms would use innovation to enrich themselves and not society is shocking - just shocking! - who could imagine such a thing??!!
