Since there's been so much activity in the market lately, we've been wondering how it might impact regulators. Here are some thoughts from a friend of RFG, former Commodity Futures Trading Commissioner Bart Chilton, the author of Ponzimonium: How Scam Artists Are Ripping Off America and a Senior Policy Advisor at the global law firm DLA Piper.
Here’s what we know, this is a record-setting period in markets for a number of reasons. On Monday, a huge early Dow Jones Industrial Average rout of over 1,000 points (a 6.6% loss at the nadir)—the worst drop since October of 2008—was followed by whiplash momentum trading near the close which erased a good portion of the losses. The Dow closed down nearly 600 points. Days before, crude oil plummeted south of $40 a barrel on the New York Mercantile Exchange for the first time in six and a half years. Then, this week boasted the largest two-day oil rally since 2009. Oil seemed emblematic of much of the commodity sector from other energy products to metals to agricultural commodities—most are down and many such markets are volatile. While the stock market rebounded some in subsequent days, there is no question that volatility remains a major concern. So, what’s one to make of all the volatility and market meltdowns?
It leads a former regulator like me to ask: Are markets morphing in ways we anticipate and are existing rules and regulations appropriate, and is there a greater indication about what policymakers should, or should not, do?
First, on other rules and regulations: While regulations seem like a bad thing to many who talk about the unfair “regulatory burden” of Dodd-Frank (the Wall Street Reform and Consumer Protection Act of 2010), there is no question that markets are on a safer footing than prior to the 2008 economic collapse. That’s, in large part, because of regulation. Financial institutions (like "too big to fail" banks) are less systemically important to the economy; over-the-counter trading with zippo oversight is now regulated; numerous rules place investors and consumers first when it comes to regulatory concerns; and in the meantime, since these are global markets, many foreign regulators are taking Dodd-Frank as their own prototype, which is principally noteworthy, given inter-related global markets. Regulations have been, by and large, positive in my judgment.
At the same time, perhaps there is a bit more to be done. For example, circuit breakers which were examined in the wake of the May 6, 2010 Flash Crash should again be scrutinized in light of the violent market moves of recent days. On the equities side, it seems Exchange Traded Funds (ETFs) where circuit breaker pauses are initiated with a market move of five percent in a 15 minute period, should be harmonized with single name stocks which have a ten percent trigger, to avoid market arbitrage and collateral confusion. Similarly, while circuit breakers in the equities world are more similarly harmonized with the commodities than they were prior to 2010, there can be greater, more seamless, coordination. This is particularly true for failsafe trading pauses during the opening and closing of sessions where market moves can be exacerbated. Moreover, trading venue circuit breaker policies and triggers that have been activated should be transparent for all to see. This would add confidence to investors/markets which would breed greater liquidity and therefore better, and less volatile, price discovery.
Finally, does the market volatility in the last days (in equites and commodities) say anything serious of significance about progress on the US economy, and should that factor into a Federal Reserve interest rate increase? Some Fed officials delink the two: economic data is paramount and market moves shouldn’t distract from monetary policy decisions. Others, like me, take a more straddled position. US economic progress is less than we would all desire and perilously close to stagnating. While there will always be one factor or another to provide the economic Chicken Littles with data to argue against a rate hike, what we don’t want to do is slow the economic recovery by moving too soon. What that means for me is that market volatility does, and should, play a factor in looking at all of the economic data (much of it, thankfully, which is positive). Prior to the Fed’s meeting in September, even more timely data will exist and a fulsome judgment can be made. However, discounting market volatility as, at least, a factor in such determinations would be a mistake.
Most people like the idea of free markets. Let supply and demand fundamentals set price discovery. While that’s fine in concept, there are clearly certain regulatory and policy determinations that need to examine, and take into consideration, the recent volatility and market meltdowns to ensure a full-on data driven approach to charting the future.