October 10, 2011

High-speed trades regulation: U.S. vs Europe

I think even a lot of Wall Street types agree that modern high-speed computerized trading is as much bane as boon to the financial sector. (Of course, they usually have selfish reasons for doing so; the more people recognize that computers are doing more and more trading, and the more and more they think of these computers in terms of beasties akin to Jeopardy-winning "Watson" and not home PCs, they'll say, WTF do I pay for Wall Streed advice for?)

The New York Times details some of the issues and problems involved:

Regulators are playing catch-up. In the United States and Europe, they have recently fined traders for using computers to gain advantage over slower investors by illegally manipulating prices, and they suspect other market abuse could be going on. ...

Perhaps regulators’ biggest worry is over the unknown dynamics of the computerized stock market world that the firms are part of — and the risk that at any moment it could spin out of control. ...

When British regulators noticed strange price movements in a range of shares on the London Stock Exchange, they tracked them to a Canadian firm issuing thousands of computerized orders allegedly designed to mislead other investors. 

In August, regulators fined the firm, Swift Trade, £8 million, or $13.1 million, for a technique called layering. ...

In the United States, the Financial Industry Regulatory Authority last year fined Trillium Brokerage Services, a New York firm, and some of its employees $2.3 million for layering. 

Even the traders’ authorized activities are coming under fire, especially their tendency to shoot off thousands of orders a second and suddenly cancel many. Long-term investors like pension funds complain that the practice makes their trading harder.
So, we need more regulation, right? The story notes that an international regulatory body will make suggestions soon. It added that European, Canadian and even American officials are considering using fees to regulate volume, or like AT&T on cell phones, charge extra for higher volumes.

But, what's missing in the U.S.? This:
One of the most controversial actions has been the European Commission’s recent proposal for a financial transaction tax on speculators, which would hit high-frequency firms and curtail volumes. The proposed tax would apply to all trades in stocks, bonds and derivatives, and may face stiff opposition from European governments. Many such firms are based in Britain or the Netherlands, and authorities fear a loss of business.
As long as either the current crop of Democrats, like Dear Leader, or any Republicans of note with the possible exception of longer-shot-than-Jon-Huntsman candidate Buddy Roemer, have control of the wheels of power, this will never even come up on the U.S. radar screen. And, British and Dutch authorities will use exactly that as part of their fear-mongering within the EC/EU.

However, even the Europeans are missing the boat if commodities futures aren't part of what gets a financial tax. When oil hit $147/bbl in 2008, guesstimates were that $20-25 of that price, at least, was purely speculators' froth.

The real goal should go beyond reigning in high-speed trades to reigning in trade that is unproductive even by the loose standards of "productive" in the modern financial world.

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