At a time when markets have clearly been thrown
off balance by the unprecedented volatility, we would like to offer four simple
but innovative suggestions to restore consistency and transparency to markets:
1. The sole
shareholders in the market should be the central banks:
The central role played by
markets and the need to rate financial instruments in order to improve
transparency lead us to the conclusion that markets should not be attached to the
private sector but rather to the central banks, so that the sole issues at
stake are transaction transparency and the development of trading centres
that are independent of the market players themselves. Such a solution would enable the transactions carried out to be
monitored and controlled. The case of NYSE Euronext, which is
moving its data centre to London
2. A ban on high-frequency
trading
While the number of transactions
never ceases to climb, the statistics are somewhat shocking for investors like
us: high-frequency transactions account for 70% of market liquidity, and over 90%
of orders are cancelled! In the good old days, the virtually systematic
cancellation of orders at times of market inertia was branded as stock price manipulation … All stock
exchange veterans have recollections of colleagues condemned or prosecuted for relatively
minor offences compared to the volatility generated by modern transactions,
which are governed by a sophisticated mathematical model in which human beings
play little part; not to mention errors that have led to the temporary interruption
of trading as orders ran out of control.... The results generated by
high-frequency trading in the few banks that possess the requisite intellectual
and technological infrastructure clearly reveal a degree of distortion and
imbalance which must swiftly be eliminated by means of a ban on this type of
practice, highly damaging to liquidity in a market where companies are looking
for long-term investors.
3. A ban on securities
lending
While companies complain that they no longer
know who their investors are, as they have lent their securities to other
investors, how many investors actually know whether their securities have been
lent? The lack of transparency on the part of custodians has never been
questioned by the banks – not surprisingly! The multitude of complex,
sophisticated products is mainly based on the lending of securities and this
practice can lead to market manipulation. A total ban on securities lending
would have the benefit of curtailing the proliferation of complex products that
no team is really able to control in the long run and would restore long-lost
legitimacy to equity investment.
4. A ban on “credit
default swaps”
Nowadays, CDSs are hedging instruments only in
name … and they create off-balance sheet positions in respect of which few
bankers and insurers are aware of the underlying risks …(Ask a banker or
insurer the size of their off-balance sheet commitments and the methods used to
value them - you will be astonished at the replies we obtained!). However, as
these products generate comfortable short-term revenues for the teams that
create them, few banks have the courage to stop this practice, which serves to
compensate for losses incurred elsewhere.
As long-term
investors, we need to call for urgent changes to be made – what are we waiting
for?
We are
convinced of the urgent need for investors to create a real grass-roots lobby
to compel regulators, central bankers and policymakers to pluck up the courage
to take the few measures that many investors and bankers are calling for at
their own initiative in order to restore dignity to the financial and banking
sectors and confidence to investors.
Olivier de Guerre
PhiTrust Active Investors
Investor and Shareholder
