DealZone

High-frequency trading: useless and manipulative?

Floor tradersThe explosion of interest in high-frequency trading has started to drag new faces to sometimes staid industry conferences. Traders who for years worked on algorithms and computer codes behind the scenes are stepping into the spotlight. They’re appearing on more and more panel discussions, feeling the need to defend their practice against the slings and arrows of politicians and regulators.

So far, they’ve managed to mix exasperation with good humor. The head of one high-frequency trading shop, speaking on a panel this week, said that if you believe everything you read in newspapers you might think the practice is “an unfair, highly profitable and socially useless trading strategy implemented by highly secretive and unregulated traders using superfast computers to compete with retail investors, manipulate markets and front run flash orders causing volatility in the financial markets and creating systemic risk.”

He argued that a more accurate definition of high-frequency trading would be, “a wide variety of highly competitive, low margin trading strategies implemented by professional market intermediaries who have invested heavily in technology that have the effect of making the markets more efficient by enhancing liquidity and transparent price discovery to the benefit of investors.”

The case for an uber-regulator

FDIC chief Sheila Bair banged the gavel loudly this week with her op-ed piece in the New York Times railing against calls for a single regulatory body to oversee the many complex and disjointed elements of the financial marketplace. It seemed a bit odd. Even before Obama backed Ben Bernanke for another run at the helm of the Fed, it didn’t seem that anybody was seriously pushing for the creation of such a mighty organ of government. White House moves to streamline banking regulation – which Bair supports – are probably at the root of concerns about overconsolidation.

The White House wants a more streamlined approach to financial regulation and has called for one national bank supervisor through the merging of the Office of the Comptroller of the Currency and the Office of Thrift Supervision. State bank supervision would be left to both the Federal Deposit Insurance Corp and the Federal Reserve.

The debate encouraged fierce fief defense efforts at all regulators involved, and can be seen playing out elsewhere in the halls of power. Today and tomorrow, the two main U.S. agencies regulating securities and futures markets, the SEC and CFTC, try to kiss and make up after a long turf war about who gets to oversee what.

Deals du Jour

New European regulations made headlines on Tuesday as the former chief executive of Man Group hit out at proposed changes to hedge fund rules and the first details of new European bank regulations emerged.

Other stories to make the newspapers include:

* Bondholders to Northern Rock, the UK bank rescued by the state, are being repaid ahead of the British government due to a contract breach in 2008, the Guardian reported.

* London Residential Opportunities, a new residential property fund, is looking to raise 50 million pounds ($81.16 million) in equity ahead of floating on the London Stock Exchange later this year, according to the Daily Telegraph.

from Funds Hub:

…Or maybe not

Yesterday I optimistically predicted hedge funds would learn a lot more about their regulatory fate as the G20 drew to a close.

rtxdj6oThat wasn't exactly incorrect -- the industry did find out for example that regulation and oversight will be extended to "systemically important hedge funds".

But, as with many political statements, the devil is in the detail -- or in this case, the lack of it.

from Funds Hub:

Best of British

There has been no shortage of calls from continental European leaders such as Angela Merkel and Nicolas Sarkozy for regulation of the hedge fund industry to limit potential systemic risks to the global financial system.

rtxd6kuBut it's little surprise that some executives in London, where the vast majority of European hedge funds are actually based, have privately suggested the calls stem from motives rather more mixed than simply wanting better regulation.

These, they say, can be anything from these leaders wanting to hide their own political problems, to them feeling some ownership because many hedge fund investors are based in continental Europe, to a simple feeling jealousy of an industry that in Europe at least is mostly British.

from Funds Hub:

Blowin’ in the wind

rtr22twuThe timing of the Alternative Investment Management Association's hedge fund disclosure initiative indicates just how strong the winds of change are blowing in hedge fund land.

Coming just a day after ECB President Jean-Claude Trichet called the credit crisis "a loud and clear call" for extending hedge fund regulation, the move shows the hedge fund industry feels it must be more active in deciding the future shape of regulation.

The move, which will include regular -- probably quarterly -- disclosure of systemically significant holdings and risk exposure to national regulators, goes further than that suggested at last month's Treasury Select Committee by Marshall Wace chairman and Hedge Fund Standards Board trustee Paul Marshall, who had proposed aggregating data through prime brokers.

from Funds Hub:

A loud and clear call

rtr1y8m4It may not have been a massive surprise, but ECB President Jean-Claude Trichet had an unwelcome message for hedge fund managers today.

The current crisis is, apparently, "a loud and clear call" to roll out regulation to all important market players, "notably hedge funds and credit rating agencies".

For those hedge fund managers who felt, perhaps with a degree of justification, that their industry had been relatively blameless in precipitating the current crisis, that call may have been somewhat quieter and more muffled.

Newt Gingrich weighs in on financial regulation and Obama’s stimulus

Former House Speaker Newt Gingrich spoke with Reuters reporter John McCrank at an inauguration event at the Canadian Embassy in Washington. Gingrich discusses whether the financial system needs more regulation and how long it will take for the economy to recover: “It’s like having a big tummy-ache and long a stretch of indigestion.”

He also weighs in on Obama’s stimulus plan: “Ironically he ran on change you can count on and his stimulus is basically Bush plus.”