So-called 'tipping points' can go forward -- or backward. That's the hope, and the warning, from Martin Wheatley, chief executive at Hong Kong's Securities and Futures Commission.
He spoke yesterday at a conference on equities trading whose theme was the tipping point, the point at which a momentum for change becomes unstoppable.
Wheatley notes that in Asia, the industry's brokers, buy-side traders and technology vendors all hope the tipping point is towards the brave new world of electronic trading and increased volume and liquidity.
But especially in light of the May 6 trading fiasco in New York, which saw high-frequency trading algorithms combine to create brief but huge losses, Wheatley warns that tipping points can point backward.
In this case, he says there is a risk that instead of getting a new universe of alternative trading venues, high-frequency trading and algos, Asia could move to a more highly regulated structure, one that protects the status quo.
He says he has no opinion on whether more electronic trading and alternative venues is good or bad, but he recognises that these are things that the majority of market participants desire.
Is Asia at a tipping point when it comes to trading? Wheatley says these moments are only recognisable in hindsight. Years from now, we may look back and say the August 2007 quant meltdown was the beginning of the end. Or the Lehman Brothers collapse and the AIG bailout. Or the Senate debates on regulation in the United States. Or the Greece rescue.
It's too soon to tell. For example, it appears that the European Union rescue package for Greece has prevented a tipping point of all sovereign debt being treated as toxic. Or it may have merely delayed such a disaster.
Although he does not label it as such, perhaps if Wheatley's remarks suggest what he views as a regulatory tipping point, it is the November 2008 G20 summit in London. Then and since, governments pledged to fight economic depression by "whatever it takes".
This is a frightening attitude, for it implies potentially dramatic changes to our financial structure, and assumes an understanding of the underlying problems. Many governments' knee-jerk response to short sellers in late 2008 only served to squeeze liquidity and paralyse the convertible bond market, notes Wheatley (who resisted such moves in Hong Kong).
Global regulators are working on new rules for credit rating agencies, licensing hedge funds, the possible break-up of banking activities (such as under the US proposed Volcker Rule) and the standardising of OTC derivatives by listing them.
All of these reforms, while worthy, come with likely side effects that are not yet understood.
Specifically to Asia, the region appears to be moving towards more efficient trading platforms and alternative markets, and the adoption of smart-order routing, Fix messaging and so on. On the surface, this appears to copy events in America and Europe, by introducing new trading strategies to Asian markets; encouraging the fragmentation of liquidity, and thereby making price discovery more complex; and slashing execution costs.
That is certainly what many market participants hope is now happening. But regulators are concerned about fragmentation, issues of fair access, and systemic risks. The New York Stock Exchange trading debacle of May 6 will only stiffen resistance to breaking up Asian stock exchanges' monopolies on trading.
Wheatley says regulators must avoid knee-jerk responses, but instead enable firms to innovate and compete, so long as this supports the process of price formation and the allocation of capital. They will all be watching developments in Australia, Japan and Singapore, as local stock exchanges begin to face their first real taste of competition in trading.