High-frequency trading

Treasury Round II: The Capital Markets Report

Earlier this month, the U.S. Treasury published the second of four planned reports designed to implement the core principles for regulating the U.S. financial system announced in President Trump’s February 2017 Executive Order. This report focuses on capital markets. We wrote about the first report—regarding depository institutions—in June (see here). Future reports are slated to address “the asset management and insurance industries, and retail and institutional investment products and vehicles” and “nonbank financial institutions, financial technology, and financial innovation.”

A central motivation for all this work is to review the extensive regulatory reforms enacted in the aftermath of the 2007-09 financial crisis. President Trump’s stated principles provide an attractive basis for evaluating the effectiveness of Dodd-Frank in making the financial system both more cost-effective and safer. Where have the reforms gone too far? Where have they not gone far enough?

Much of the capital markets report focuses on ways to reduce the regulatory burden, and many of the proposals—which address issues ranging from initial public offerings (IPOs) to securitizations to financial market utilities (FMUs)—could improve market function. However, while they would involve a large number of changes—most of which can be implemented without new legislation (see table)—none of the 100-plus recommendations seem terribly dramatic, nor are they likely to have much impact on the goal of promoting economic growth.

Our overall reaction is that Treasury’s predispositions—which were more clearly evident in the earlier report—encourage doubts. To us, the numerous proposals look lopsided in favor of providing “regulatory relief” even where systemic concerns may persist....

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Clinton versus Trump on Financial Regulation

Will the U.S. Presidential election have an impact on financial regulation? The answer depends on who becomes President, the priorities of the winner, and the inclinations of the Congress. That said, we thought it would be useful to examine what the candidates say they will do. To summarize, we find Republican nominee Trump’s call to “dismantle Dodd-Frank” deeply troubling. By comparison, our differences with Democratic nominee Clinton are relatively minor.

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Financial transactions taxes: FTT?

If you put “FTT” into a search engine, the top results are for “Failure to Thrive.”  Proponents of a financial transactions tax should find this disturbing. We find it amusing, but apt.

The idea of taxing the purchase and sale of certain securities has been around for a long time. The British first imposed a stamp duty on secondary market purchases of equity in 1694 – a tax that remains in force today. In 1936, Keynes proposed the imposition of a wider tax with an eye toward reducing volatility. In 1972, following the collapse of the Bretton Woods fixed-exchange-rate system, Nobelist James Tobin famously recommended a tax on currency trading as a kind of capital control that would provide central banks greater discretion in controlling their interest rates and exchange rates. As of 1991, Campbell and Froot list 20 jurisdictions with some form of securities transactions tax. With the move by 11 European Union countries to impose one as of January 1, 2016, the number of countries with an FTT will soon exceed 40...

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Bond market liquidity: should we be worried?

Equities are the stars, they are the financial instruments in the headlines. But it is bonds that are the cast and crew. They do the day-to-day work behind the scenes. And, as with any tradable asset, the confidence that prices are fair and that you can sell what you buy is essential.

So, when knowledgeable people express concerns that regulatory changes are causing bond markets to malfunction (see, for example, here), it leads us to ask some tough questions. Are these markets somehow impaired? Is enhanced financial regulation to blame? Is this creating risks to the financial system as a whole...? 

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