Wednesday, April 22, 2015

FIRE !!!! (J.K.....)

Guy walks in to the shadows of a crowded movie theatre. Yells "FIRE!!!!!". People scramble to exit. Some get trampled and hurt. It's ugly.  A few skeptics remain (for the movie's still running).  Of course, there's no fire. But people are prudently herd-oriented by nature so react viscerally.  The guy emerges from the shadows, and coolly takes a prime seat - perhaps his objective all along?  Some return to recoup their sunk cost, discover the predictable ending, or just watch Clooney, Pitt et. al. remove his shirt one more time. Sure, the guy runs the risk that he will be discovered as the causation of the chaos and mayhem. Sure, one of the larger and more muscular of the "victims" might punch him in the nose or break his leg(s). Or theatre management, might call the police, whether for civic purpose or liability containment. Others have employed the ruse successfully to obtain prime seats, with similar consequence. And despite its occasional reporting in the press, patrons, out of self-preservation, still react with the same visceral flight response. Sometimes they act in concert as two FIRE!!-Criers!! are more credible than one.  

But somehow, in electronic financial markets, such ruses, ploys, and games, are discounted by apologists - be they HiFTers, libertarians  (despite prevailing laws and regulations) and the recent arrest of the alleged perp accused of initiating the cascade. Why should one think it decidedly unacceptable in civic life, but somehow victimless, harmless and tolerable in financial markets?  I think there is some hypocrisy about.The beauty of electronic exchanges is that there is there is a record and audit trail that easily permits measurement and enforcement of acceptable behaviour as defined by the rules. Egregious behaviour (spoofing, layering, etc) should be glaringly apparent and is easily discoverable by the even the most amateur of data tinkerers. Canadian SEDAR requires blue-sky disclosure of MF time and sales (something the US should emulate for MFs and HFs). The failure of exchanges themselves to investigate and exorcise the demons (or facilitate availability of the entire package of participant-specific quote-level data to all investigators) leads one to imagine that commercial conflicts are rife (as if we needed further evidence. 

That exchanges themselves, and industry organizations have ignored/are ignoring this is perhaps not surprising. However the most striking [risk-management] issue - whether at the exchange, clearing-house, or executing broker or clearing broker level is the apparent total untethering of what a modestly-capitalised west-london punter can firmly enter and display on one of the most visible and largest exchanges in the world from the resources of that same modestly-capitalized punter can muster to make good the entry of orders for purchase, or sale of the leveraged positions, let alone the underlying magnitude of these positions. One wonders whether markets would have been similarly effected if participant-level disclosure indicating that  Navinder Singh Sarao's modest account was touting these bids/offers or merely some indicator that the posted buyer/seller had no chance of fulfilling commitments.