OBASHI Think

See things clearly

Strike!...Everybody Out!

 

It’s hard to imagine a group of people less likely to go on strike than the floor traders at the Chicago Mercantile Exchange.  But, a few weeks ago, brokers in the Eurodollar options pit did just that.

 

They were protesting because they were unable to participate in the pricing of ‘block trades’ in Eurodollar futures, believing the system is ‘not fair’.

 

The traders’ particular gripe, revolved around trading being done in private, away from the pit, or via computers.  What I find interesting about the walkout was that,

“The floor brokers are upset because they didn’t get to participate in the trade. But it was more than that. The walkout is also about transparency. After these big Eurodollar trades were matched, the block trading participant was able to come to the floor and presumably hedge its position, before the block trade was publicly printed to the tape. So while the rest of the market was still in the dark, a customer or trading firm was able to take advantage of liquidity on the floor...”

We certainly live in interesting times, when hard-headed financial traders are complaining about transparency, and going on strike.

 

Other stakeholders in the finance industry are also seeking greater transparency.

 

Andrew Haldane, of the Bank of England, sees the need for a ‘common language’ in finance.  During the recent financial crisis,

“...unforeseen risks swamped undermanned risk systems...Many banks lacked adequate information on the risk of their counterparties, much less their counterparties’ counterparties.  The whole credit chain was immersed in fog...” [pdf, p1]

The Financial Stability Board, made up of European national regulators and central bankers, is ‘calling for more transparency and greater levels of control over the growing shadow banking sector’.  The EU’s financial services commissioner says it is critical regulators obtain a “complete overview” of shadow banking, which accounts for at least 25% of the total financial system.

“We must be in a position to identify who owns what along the financing chains linked to these practices...And we must improve the transparency, supervision and security of these practices for all players on the market, wherever they may be situated along the securities lending chain.”

Meanwhile, equity traders Sal Arnuk and Joseph Saluzzi, authors of the forthcoming book, ‘Broken Markets’, describe the equity market as being, ‘non-transparent’, ‘fragmented’, and ‘not being properly supervised’.  They relate how,

“With over 50 market centers, there are so many points of information leakage in the...equity market that is nearly impossible for the regulators to police them all...

 

Material, non-public information is being disseminated ahead of time to a subset of the market creating a high tech, insider trading ring...”

Financial institutions are really data refineries.  They try to make a profit by moving their product [money / data] around the financial markets. 

 

So it surely it makes sense for all stakeholders to have clarity on how that data flows through the people, process and technology of the financial system.

 

As has been said here before

“Since the Industrial Revolution, understanding flow has been vital for business, economy and society. History has shown that if you understand flow you understand how your business works. And if you can clearly demonstrate that understanding you can create trust. And where there is trust people are more likely to do business.”

Will a lack of transparency lead to a loss of trust in finance?

 

Chris Skinner, of the Financial Services Club Blog, wrote an interesting piece this week, “Facebook’s IPO makes Wall Street redundant”, where he mulls over the possibility that, by using technology,

“Silicon Valley wants to rip the banking system apart.  Not by disintermediating it, but by making it completely redundant.”

An established tech investor is quoted as saying,

“I look at Wall Street as broken, from the point of view of Silicon Valley.”

To which Skinner adds,

“...Wall Street isn’t just broken from the view of Silicon Valley, but it’s broken from the view of many: regulators, governments, corporations, society, academia and more...

 

Will this mean the destruction of the old world and the creation of a new?

 

Possibly and, even if it does not, it will mean a severe test of the mettle of the old world as they grapple with the new...”

The 2nd anniversary of the 2010 ‘flash crash’ is almost upon us. 

 

While I think it will be a long while before ‘the old world’ is replaced by ‘Economy 2.0’, given the lack of transparency in finance, perhaps it isn't surprising that, to quote Arnuk and Saluzzi,

“More than $250 billion in long term equity funds has retreated from the markets since May 6th, 2010 – despite a slow but steady improvement in the [US] economy and a stock market that has nearly doubled since the 2009 lows. It isn’t that these investors don’t have confidence in the economy. They don’t have confidence in our markets.”

 

 

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