Hillary Clinton’s Wall Street problem: She’s still going too easy on the banksters

[portlander23]

Hillary Clinton’s Wall Street problem: She’s still going too easy on the banksters
WALLACE TURBEVILLE, DEMOS
Salon

The High Frequency Trading (HFT) provision would put a cap on market order cancellations, a practice often used by traders who employ super computers and sophisticated software to trade at speeds that are unimaginably small. It targets tactics where HFT traders place large numbers of orders to buy or sell, leaving the impression among others in the market that prices are going to move up or down imminently. The other market participants react like a herd to position themselves for the anticipated market move. The HFT traders then cancel the orders and take advantage of the herd activity that they have incited, in essence making the herd back track through them. Secretary Clinton suggests that this makes markets less stable. It does so on the margin, but the instability primarily affects short term volatility. Her tax proposal is mostly about penalizing an unfair practice.

This should not be confused with a true financial transaction tax (FTT), a measure proposed by presidential rival Bernie Sanders and many strong advocates of Wall Street reform. It would impose a small tax on all transactions, not orders that never become transactions. The FTT (together with other market reforms) would be an important curb on the “quarterly capitalism” that Secretary Clinton has properly cited as a drag on economic growth and contributor to income and wealth inequality. Quarterly capitalism is caused by short-termism of corporate management and shareholders driven by the dominance of the trading culture that fetishizes short swing share price changes. The FTT would slow down transactions and curb excessive market churning by speculators, while also raising substantial revenues. The order cancelation tax would not raise any where close to the same level of revenue since it would effectively stop the practice of tactical mass order cancelation. In addition, the HFT tactic addressed by the cancellation tax, while important, is just one element of excessive trading activity. Moreover, it is trading that happens so quickly that it is imperceptible by shareholding investors and management. It is indeed parasitic and costs the economy money, but it is not a cause of quarterly capitalism.

However, true reform of the Volcker Rule would also close off another loophole. There is an exception for banks acting as a “market maker,” a business line that allows markets to function in an orderly fashion. The Volcker Rule was interpreted to allow banks to execute swaps that are one-off contracts for customers. The point is that there is no market for such swaps and their embedded risk is often very difficult to assess and can balloon to very high levels. That is just the problem that brought down AIG and triggered a bailout of $185 billion. The obvious and important thing to do is simply to require that “market making” for a swap means that there is a real and discernable market for the swap. Only if there is a market that can provide a reasonable reference for evaluating risk can regulators know what could go wrong. That is why Congress allowed the “market making” exception in the first place.

In short, going after bad behavior will make the markets work better and controlling bank risk makes us safer, but truly bold policy would confront the core connection between the financial sector and the continuing problems of the real economy.

Related:

Robert Scheer: Go Ahead, Back Hillary Clinton and Forget All About Her Record

Robert Reich: The Big Banks Need to Be Broken Up

Paula Dwyer: Clinton's plan on Wall Street protects husband's legacy

Sirota and Perez: Hillary Clinton's Wall Street Policy Being Shaped By Two Bankers

Yahoo Politics: Hillary Clinton doesn’t support revival of Glass-Steagall Act

Clinton: Cooperation, not speeches, is needed to regulate Wall Street

[Thinkingabout]

1. Is this the reason Wall Street is upset with Hillary?