"CFTC, SEC Officials Clash Over Source of Thinner Trading Activity"
From The Hill:
Federal regulators' lack of research into waning market liquidity is getting frustrating, J. Christopher Giancarlo, a commissioner at the Commodity Future Trading Commission, said.
Giancarlo,
speaking on an Oct. 12 panel discussion at Georgetown University’s
McDonough Business School, made his criticisms just a few days after the
most recent “flash crash” in which the British pound dropped 6 percent
against the U.S. dollar
“I'm disappointed, quite frankly, with the role of the Financial
Stability Oversight Council in not providing a more thorough analysis of
trading liquidity in markets,” Giancarlo said.
In the wake of 2008’s
financial crisis, regulators placed a premium on increasing the level
of capital on banks’ balance sheets by a significant margin. Giancarlo
argued that post-recession mindset has contributed, along with the
dramatic increase in algorithmic trading, the rise in market price
volatility.
“We’re not asking the opposite side of that [balance
sheet capital] question, and that is not how much capital to take out of
markets, but how much capital needs to stay in markets to provide
healthy trading environments and to avoid incidents like we had last
Friday with the flash crash and a dozen other flash crashes over the
last seven years,” Giancarlo said.
Non-dealer liquidity.
Additionally,
Giancarlo said he fears the type of liquidity being provided in markets
as more and more dealer capital is being pulled out.
“The dealer is the one who holds inventory for clients and will move in markets to take advantage of price anomalies,” he said.
Non-dealer financial firms are entering markets at an increasing rate and altering the nature of liquidity, Giancarlo said.
“I’m
very concerned about the different nature of liquidity provision being
provided by proprietary trading firms that have a different objective in
markets and, therefore, when you go into times of thinner liquidity, a
sudden change by an algorithm can trigger a chain reaction,” he said.
Barriers to entry.
Steve Luparello,
director of the Securities and Exchange Commission’s Division of
Trading and Markets, joined Giancarlo on stage and asked him how he
could be sure that altering the approach of regulators to focus more on
market liquidity relative to individual capital requirements would
result in return to liquidity provision by dealers.
“I think one
of the potential reasons [why they wouldn’t return] may be because of
technology and because I think there’s less of a barrier to entry than
there used to be,” Luparello said. “At least in the equity
markets…before [the] Dodd-Frank [Act], before changes in capital
expectations, you just saw the market get more democratized because of
technology and it became harder to be as profitable than has been [the
case] historically.”...MORE