Regulators should play to their strengths

By Felix Salmon
August 23, 2009
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The first thing that regulators do isn’t regulate: the first thing that regulators do is try to maximize their own power. Then, and only then, do they even think about using that power. Item:

The Securities and Exchange Commission says it is taking a close look at flash quotes, high-frequency trading and other dark corners of the stock markets.

But by many accounts, the agency is outmatched by the traders and market venues with technology that is remaking the trading world.

The agency lacks its own traders with knowledge about cutting-edge strategies and how the markets operate. It long ago ceded the daily surveillance of trading to self-regulatory organizations, like NYSE Regulation and the Financial Industry Regulatory Authority. And it takes a lawyerly approach to regulation and rule making that rarely employs deep analyses of real trading data.

The SEC has enough of a mountain to climb just trying to be effective at the stuff it already does: this kind of mission creep helps no one. It makes a certain amount of conceptual sense that the SEC should be regulating trading strategies, but it doesn’t make practical sense — not unless and until the SEC has proven that it’s more competent than this.

In the mean time, who best to keep an eye on high-frequency trading and the suchlike? Well, the CFTC might be one place to start, especially since in an ideal world the SEC and CFTC would be merged into one entity, and also since at least as much high-frequency trading goes on in commodities and derivatives markets as goes on in stock and bond markets. A bit more cooperation between the two would do no one any harm.

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13 comments so far

Felix Salmon Watch August 23rd: Salmon continues to believe that anonymous writing at The Economist is fine, but is somehow unacceptable at Zero Hedge. How does he reconcile these seemingly contradictory beliefs? No one knows…

Posted by GaryD | Report as abusive

Felix Salmon was forced to grab his pom-pons and write up the latest zio-prop film–this one a total farce, by Tarantino.

Posted by Tom Lowe | Report as abusive

Dear Felix, I should not be posting a comment here but due to some important matter & i can’t turn to anybody that i can trust, i have turn to me.
I got an “appointment letter” from Chevron Nigeria Limited thro’ their so-called recruiting “Skye Consultant” from UK.
I have to furnish the so-called “Immigration Lawyer” with some document & to purchase “Expatriate Traveller Insurance Policy” from my own pocket for USD2500.
Felix, pls help me clarify. My name is James Simon from Malaysia & attach you the email & application from Skye consultant. I trust you to help check & verify the truth about this employment. Thank you & regards.
James Simon.

Below is the email.
Congratulations you have been found suitable for the position to serve in Chevron Nigeria Limited. You are expected to resume site by 28th September 2009. You are also expected within two weeks to have rounded up all immigration matters with the accredited immigration consultant in Nigeria (you are not to pay for the services of the immigration consultant, as this has already been taken care of by your employers)

This will enable us to have enough time to provide the necessary documents (expatriate quota and cable visa) needed by the Nigerian Embassy, so that you can be invited officially for visa.

Upon completion of the immigration process with the immigration consultant funds will then be made available to enable you take care of your flight ticket and other miscellaneous expenses after we have confirmed the approval of your workers /residential permit.

Attached is the letter of appointment as you are requested to put down your signature on it and send a copy to us and the immigration attorney along with other necessary requirements which include a copy of your international passport.

You will be in contact with the Nigerian Immigration lawyer as soon as possible.

Best regards,

Mr. Larry Davies

Posted by James Simon | Report as abusive

Does anybody exist at any level of government who will impose even a modicum of discipline on the markets?

“keep an eye on high frequency trading…”

For the sake of what? I’m so embarrassed for us all. It has already been explained to us in fifth-grade terms how high frequency trading front-runs the market and defrauds the economy of billions, or tens of billions, annually.

Felix, why aren’t you more like Matt Taibbi? Where is the outrage? You managed to take down Ben Stein, a lightweight and a minor figure in the grand scheme of things. Meanwhile, our entire markets are a cesspool and nobody has the cojones to really fight when it comes to the important stuff. It is very sophisticated-seeming to maintain a cool analytical detachment when the sanest response to all of what we’ve seen would be anger.

I mostly limit the amount that I am personally defrauded through HFT by holding for years at a stretch, moving relatively minor sums of money around, and staying far away from all mutual funds (which we now see underperform the market in part because they are easy targets of HFT fraud, and their high turnovers don’t help at all). But the harm that this and many other practices do to trust will be long-lasting indeed.

Posted by Dan | Report as abusive

The SEC is probably as fine a place as any for investigating the fraud that is much of high frequency trading. Sending highly-placed managers at firms like Goldman to prison for securities fraud on the basis of front-running trades would probably do a lot of good in terms of restoring a belief in fairness of the markets. One of the most shocking things at this time is the utter dearth of prosecutions. Madoff had to essentially send himself to prison when nobody else would take on that responsibility.

Posted by Dan | Report as abusive

Financial experts have traditionally held that equities belong in a portfolio because, despite involving greater risk than cash or bonds, when held over the long term they offer higher return potential. However, that conventional wisdom has come under fire since the double whammy of the dot-com crash and the credit crunch. If you’re wondering whether it’s time to revisit the amount you’ve allocated to stocks, understanding both sides of the argument can help you make a more informed decision.

Risk exists

Monday comments are significant

Posted by dvictr | Report as abusive

I\’m confused. It seems like you\’re a) criticizing the SEC (perhaps fairly) for not doing enough, and then b)criticizing them for trying to do more.

That, combined with some irrelevant cheap shot about amassing power (Well, yeah, they\’re regulators; it\’s their job to have power. If they don\’t have any power, they\’re not regulators, they\’re cheerleaders). I mean, if you\’re saying they\’re going too far in this case, say that. Don\’t resort to name-calling.

[If I didn\'t respect most of your writing, I might end by saying something along the lines of how I understand, as name-calling probably leads to more controversy, more readers, and therefore more power for the journalist. And of course you journalists always first amass power and only then think about informing... But instead I\'ll assume it\'s just a bad day on your part]

Posted by Quercus | Report as abusive

Its very intresting and Informative stuff. Women finds it difficult to manage their cost, save $1 a day and you can see the difference it makes

Posted by Wealth Women Debts | Report as abusive

I like your post. No matter what amount of debt a person has, willingness to retire is the first step

Posted by Michelle Boudreau | Report as abusive

It’s really amazing. Debt can be rescued by reducing expenses not by increase income

Foreclosure properties are in high demand as the lenders are in troble and there are many tax foreclosure properties available

Posted by Tax Foreclosure | Report as abusive
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