HFT: Poachers turned gamekeepers
Wednesday 11 January 2012 - by Steve Grob
Interesting to read the venerable Leo Melamed's open letter in the FT this week on HFT and regulators.
The minute you interfere in any ecosystem and try to protect one species or another you invariably invoke the law of unintended consequences.
This is especially true in financial markets that are going through a rapid period of evolution driven by a technology-inspired natural selection process. The tendency then is to try and adjust for these consequences with yet more regulation and so the vicious cycle continues.
This is confirmed by the fact that it was the regulators themselves that inadvertently fuelled the HFT boom by breaking up the national (natural?) monopolies of stock exchanges in the first place.
We begin 2012 much as we left 2011 with fear, uncertainty and doubt being the prevailing sentiments, so maybe regulators on both sides of the Atlantic should take a second look at their groaning inboxes.
Perhaps a return to lighter touch regulation is the lesser of two evils. Why not let the natural evolution of financial markets play itself out?
Of course, there will be individual winners and losers but the overall ecosystem will emerge stronger to the benefit of everybody who is either directly or indirectly affected by capital markets.
The alternative will be ever-growing mountains of retrospective regulation that will be arbitraged, hidden behind or simply never understood.
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Will markets in 2012 have a tougher time than 2011?