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
in order to encourage high-frequency trading, shows that its primary concern is
to increase trading volumes, and thus revenues, so as to maximise operating
profits, whereas it should be focusing on transaction security and transparency.
The regulators would surely make a stronger impact in terms of transparency,
transaction security etc. if the markets were placed under the authority of the
central banks and if all transactions had to be concluded here. 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