U.S. regulators and Wall Street critics want new rules on high-speed trading in response to industry complaints about liquidity in financial markets.
The support for increased regulation of electronic trading is effectively a pre-emptive move against banks pushing for deregulation on the grounds that a system-wide lack of liquidity could cause panics.
“What we would like to see from the regulators is movement on this agenda of addressing possible market instability that may come out of electronic trading practices,” Americans for Financial Reform policy director Marcus Stanley said on a press call Monday. “We haven’t really seen much movement.”
Stanley, whose group presses for strong supervision of finance, joined other advocates in suggesting that bond markets are safe and that recent episodes of volatility in financial markets are the product of high-speed trading, not a systemic lack of liquidity.
“The bond markets actually look pretty healthy,” Stanley said, citing above-average corporate bond issuance and low spreads.
Top financial executives, such as JPMorgan Chase CEO Jamie Dimon and Blackstone head Steve Schwarzman, have warned this year that new rules imposed by regulators in response to the financial crisis have caused banks to hoard liquid assets, leaving a shortage for the rest of the market.
The fear is that it is increasingly difficult to sell large quantities of an asset without changing the price. With it harder for banks to match buyers and sellers predictably, the odds of a panic rise.
Some in the industry have point to Oct. 15, 2014, when Treasury yields swung wildly in a few minutes, as an example of a lack of liquidity.
Two regulators downplayed those worries Monday, suggesting that high-speed trading instead was to blame for that and similar instances. High-speed trading algorithms might interact with each other or with other traders to cause rapid fluctuations in markets, regardless of whether there’s an underlying lack of available securities.
Federal Reserve Governor Jerome Powell suggested that the new liquidity and capital rules for banks were worthwhile even if they made it more costly for banks to make markets in Treasury securities. Speaking with Powell Monday, Treasury counselor Antonio Weiss also suggested new standards for high-frequency traders and added data collection on Treasury markets.
Wall Street reformers suggested Monday that regulators should avoid any calls to roll back regulations on the basis of protecting liquidity, suggesting that the focus should be on electronic trading, which has become more prevalent in recent years.
“While I applaud the public-spiritedness of Wall Street’s argument, the evidence indicates that if anything, liquidity in the corporate bond market has improved since the passage of Dodd-Frank,” Jonathan Tiemann, founder of Tiemann Investment Advisors, wrote in slides on the topic published Monday.
“This debate about bond market liquidity … it’s a looking-backward kind of debate,” said John Parsons, a financial economist at the Massachusetts Institute of Technology, on the reform advocates’ call Monday.
Banks’ liquidity capabilities, he said, are “exactly the wrong thing to be focusing on.” Instead, electronic communication and trading is the “new world going forward,” and regulators should focus there.
Such rules, if they were to be proposed, may come from the Securities and Exchange Commission rather than from bank regulators at the Federal Reserve or Treasury.
Regulators, he said, are “behind the ball” on regulating high-speed trading.
Speaking on Fox Business Monday, former Federal Deposit Insurance Corporation Chairwoman Sheila Bair rejected claims that capital and liquidity rules were a potential source of panic.
“I think there is a narrative now that some in the industry are pushing that regulation itself is going to create system instability. I think they’re doing that – they’re talking their own book,” Bair said. “They want these rules loosened so that they can take more risk and make more money the way they were doing prior to the crisis.”
