Is a Scalping Ban Next on the Regulators Agenda?
The BBC reports this morning that Lord Myners, the UK "City minister" and former head of fund manager Gartmore, has his doubts about the development of high-frequency trading (or HFT for short). He told the BBC that:
I have been increasingly troubled that we seem to find ourselves in a situation in which shares are to be bought and sold rather than being part of an ownership relationship between investor and a company. The danger is that nobody really seems to think of themselves as owners.
It has gone too far, it has now lost its supporting function for the provision of capital to business and has become a game to be played.
Lord Myners seems to be echoing the thoughts of Mary Schapiro, Chairman of the US Securities and Exchange Commission. Last week Ms. Schapiro addressed the SIFMA Annual Conference in New York on the topic of "The Road to Investor Confidence". She mentioned a whole raft of issues the SEC were looking at as they:
Refocus on our core mission of protecting investors. That was our mission 75 years ago when we were founded and it's still our mission today.
On the specific topic of high frequency trading the SEC chairman had this to say:
I believe we need a deeper understanding of the strategies and activities of high frequency traders and the potential impact on our markets and investors of so many transactions occurring so quickly. And we need to consider whether there are additional legislative authorities needed to address new types of market professionals whose activities may not be sufficiently regulated.
Possibly the SEC will settle for just a ban on VPSes instead? It seems the SEC are also seeking public comment on:
Co-location — the process where exchanges allow some broker-dealers to place their servers in close proximity to the matching engine of the exchange. This could result in significant advantages, at least for certain traders for whom speed is of the essence.
Not content with that Ms. Schapiro also had this to say on the thorny issue of "OTC Derivatives":
Another area where gaps have been perpetuated for far too long is in the OTC derivatives arena. These products, which were largely excluded from the regulatory framework in 2000, have grown enormously in recent years. In addition to being a less regulated and opaque alternative to the regulated markets, they can increase substantially the risks in — and to — the financial system.
I thought the economics textbooks said that speculators and arbitrageurs were necessary components of efficient price discovery. It looks like the regulators want to rewrite those textbooks. According to Lord Myners:
Investment bankers said HFT was good for investors as it "drives down the cost of capital"
whereas he thinks that:
The fact that people can own shares for nano-seconds seems completely divorced from the concept of a joint stock company and distributed share ownership. The danger is that companies become the playthings of speculators.
If we assume for the moment that "nano-seconds" is merely poetic licence, I guess we will all just have to wait with bated breath until we discover how our lords and masters choose to define "high-frequency trading" as they valiantly protect us from those voracious investment bankers.
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