global agenda 88.
(photo credit: )
The ‘foreclosure-gate’ scandal, discussed here last week, rumbles steadily on,
with new revelations emerging daily. Yet the full extent of this mess is quite
We can be certain that it will not be a minor matter, since the
big banks are estimating their potential losses in the tens of billions of
Obviously, no one believes this line. Rather, the operating
assumption is that the true loss figures will prove to be many times higher – in
other words, this ‘Return of Sub-prime Mortgage Mess’ horror movie will follow
the same story line as its hugely successful predecessor and move from
‘contained’ to ‘out-of-control’ to totally disastrous. But no one knows just how
big the losses might be and whether they do indeed, as many independent analysts
claim, represent another systemic crisis.
The fact that no one believes
what the banks – or the government, for that matter – say in the most official
and public way, is the nub of the whole issue. As discussed repeatedly in this
column, the essence of the mega-crisis that is still unfolding is the collapse
of confidence on the part of the general public in the financial system and the
governmental system that supposedly oversees it.
I have also noted that
one of the most important manifestations of this crisis of confidence is the way
in which stock markets are behaving. This has little to do with the way prices
on those markets are moving – which is what most people associate stock markets
with – but rather how the markets themselves are functioning or, more correctly,
In that context, it is more than useful to bring to the
attention of the wider public an extraordinary speech made last week at the
annual general assembly of World Federation of Exchanges.
The speaker is
not a regulator or even an exchange official, but rather the chairman and CEO of
Interactive Brokers Group, a leading global firm engaged in brokerage and market
making on more than 100 exchanges. Thomas Peterffy’s concerns about exchanges
are therefore neither theoretical nor altruistic.
He actually understands
that his own and his firm’s well-being in anything beyond the short-term demands
that the markets function properly.
He begins by comparing the old days –
say, 15-20 years ago – when “all the transactions had to take place on
centralized exchanges with basic rules of fair trade”, so that “customers could
be reasonably sure there was a limit to the amount for which their brokers could
However, “we cannot make that claim today” – because the
move from physical to electronic exchanges and the accompanying ‘robotisation’
of trading has led to fragmentation (there are many competing exchanges and
brokers can route customer’s orders to any of them), whilst large firms with
massive computing power can create distortions in the trading of individual
securities or in entire markets. The result: “what we have today is a complete
Peterffy gets to the heart of the problem, under the heading “The
Crisis of Trust”: “It is not so much that the public does not trust their
brokers. They do not trust the markets, the exchanges and the regulators either.
And why should they, given our showing in the past few years?…I must confess to
you that I was an ardent proponent of bringing technology to trading and
brokerage. Unfortunately, I only saw the good sides…I did not see the forces of
fragmentation and the opportunity for people to use technology to keep to the
letter but avoid the spirit of the rules – creating the current
“It is vitally important that we bring an end to this crisis of
trust before it spreads any further; that we bring back order, fair dealing and
trust in the marketplace.”
Peterffy sensibly begins that effort by
identifying “the root of the problem” which he correctly defines as, “as always,
shortsighted greed on the part of the brokers”.
That is the root of the
problem on markets, where brokers are key players. In the banks, the root of the
problem is shortsighted greed on the part of the bankers. And so on for
insurance, pension-fund management and every other area of the financial
services industry. And this poisonous root is allowed to spread by the absence
of a regulatory framework both empowered and motivated to enforce rules that
constrain the very human tendency to short-sighted greed.
The good news
is that the crisis is now so severe that insiders like Peterffy feel they have
no choice but to talk about it in public and demand tough solutions that they
know will be opposed by their own peers and colleagues. But Peterffy is a
representative of the private sector, whereas the public sector, all the way up
to the most senior level, is still engaged in a vain effort to persuade the
public that a) all is well, and b) whatever isn’t can be made so by pursuing the
policies currently in force.
Then they wonder why no-one believes them
and are shocked to find that confidence in them keeps ebbing to new