The Uncertainty That Matters Quantitative Strategists – the Drag on the Market Joseph J

Total Page:16

File Type:pdf, Size:1020Kb

The Uncertainty That Matters Quantitative Strategists – the Drag on the Market Joseph J Quantitative Desk Strategies April 17, 2013 The uncertainty that matters Quantitative strategists – the drag on the market Joseph J. Mezrich [email protected] ° What is measurable and what matters are not always the same – uncertainty over economic 1-212-310-4241 policy is currently more relevant than market volatility (VIX) in setting the equity market’s level. ° Economic policy uncertainty – as measured using the three-component index proposed by Yasushi Ishikawa Baker, Bloom and Davis (2013) – does not equate to market volatility, a common indicator of [email protected] uncertainty. The former is high at present and the latter is low. Except in the March 2009-May 1-212-310-4106 2010 period, economic policy uncertainty has closely tracked the long-term earnings growth priced in equities. Instinet, LLC ° The economic policy uncertainty index today is far higher than before 2007, indicating 1095 Avenue of the Americas New York, N.Y. 10036 substantial economic policy uncertainty exists, pushing down implied long-term earnings growth in equities to around 0.2%. This is in sharp contrast with the 11% implied growth at the 2007 market peak. We conclude the market would move substantially higher on the back of improved implied earnings growth if economic policy uncertainty declined – we estimate the S&P 500 could rise 12% to 1740 if implied long-term earnings growth rose to only 3% on reduced uncertainty. Earnings growth implied in equities closely reflects economic uncertainty Implied earnings growth in equities and economic policy uncertanity 15 -20 14 Prior high 13 of S&P 500 12 This market commentary is a 11 30 Index Uncertanity Policy Economic general discussion, and not a 10 9 recommendation for any 8 particular customer to take or 7 80 refrain from taking any action 6 with respect to any securities or 5 4 Average earnings growth in S&P500 130 strategies discussed therein. 3 since World War II ( 7.1% ) See last page for important 2 disclaimer information. 1 0 180 -1 You have received this material -2 because you are an -3 institutional investor that has -4 230 expressed interest in receiving (%) growth earnings long-term Implied -5 Implied long-term earnings growth in S&P 500 -6 Quantitative Desk Commentary -7 Economic policy uncertainty index provided by Instinet, LLC. If -8 280 you have received this in error, please alert the sender to be Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 May-05 May-06 May-07 May-08 May-09 May-10 May-11 May-12 immediately removed from the May-13 distribution list. Note: Shows the implied long-term earnings growth (LTG) of the S&P 500 (dark blue line) and US economic policy uncertainty index (reversed, light blue line). Implied LTG (from FY1 to FY5) is derived by inputting the expected equity risk premium in Duke University’s CFO survey (4.0% in March 2013 survey), based on a residual income model. Last data points are as of 17 April 2013 for implied earnings growth and 31 March 2013 for economic uncertainty index. Source: Instinet, Graham and Harvey (2012), http://www.policyuncertainty.com/, I/B/E/S, S&P, Compustat, IDC. HIGH-TOUCHTRADING | ALGORITHMICTRADING | FRONT-ENDTECHNOLOGY | LIQUIDITYSOURCING | TRANSACTIONANALYSIS | COMMISSIONMANAGEMENT | INDEPENDENTRESEARCH The uncertainty that matters – the drag on the market What is measurable and what There is an old joke about the fellow who lost his keys in the street one night. He looked for them under a matters are not always the lamp post, not because they were lost there, but because that was the only place there was light. same – uncertainty over Similarly, there is often confusion between what you can measure and what matters. Volatility is often economic policy is currently taken as the indicator of market uncertainty, but the uncertainty that matters may not be reflected in more relevant than the VIX in measures such as the VIX. The point of this report is to highlight the role of economic policy uncertainty setting the equity market’s as directly related to how the market prices itself. Lately we find economic policy uncertainty is more level relevant than the VIX in setting the equity market’s level. The S&P 500 broke into record territory this month, recently dropping below the October 2007 record. The S&P 500 is now pricing Whether the market will continue higher after the current pause depends to a great extent on what the 0.2% annualized earnings market is pricing for future earnings growth. Our analysis indicates the market is pricing a very subdued growth over the next five 0.2% annualized earnings growth over the next five years. That is in sharp contrast to the 11% growth years, well below 11% at the priced at the 2007 market peak, which was well above the average historical growth of 7% delivered by 2007 market peak and the S&P 500 companies since World War II. At the October 2007 peak the market was expensive in terms of historical average of 7%, likely the growth that was being priced. Currently, with the market above the 2007 peak, the market looks because economic policy cheap based on the growth that is being priced. Economic policy uncertainty is likely depressing growth uncertainty is depressing expectations. That conclusion is based on a comparison between our estimate of the market’s implied growth expectations earnings growth and uncertainty as measured by the economic policy uncertainty index recently introduced by Baker, Bloom and Davis (2013). Economic policy uncertainty – Economic uncertainty, as measured by this index, is based on three components: one measuring as measured by the economic newspaper coverage of policy-related economic uncertainty by counting the mention of policy uncertainty policy uncertainty index in ten popular newspapers, the second measuring the number of federal tax code provisions set to expire (Baker, Bloom and Davis, in future years, and the third measuring disagreement among economic forecasters as a proxy for 2013) – does not necessarily uncertainty. According this index, economic policy uncertainty is not reflected in market volatility. That is equate to equity market seen in Exhibit 1, which plots the history of the economic policy uncertainty index and the VIX. The index volatility (VIX): the former is of economic policy uncertainty has been very high since 2009, whereas the VIX has collapsed. In high at present and the latter contrast to the VIX, the relationship between economic policy uncertainty and the market’s implied is low (Exhibit 1) earnings growth is striking. That is seen in Exhibit 2. 1. Equity market volatility is low, but economic uncertainty is still high Economic policy uncertainty and equity market volatility 60 300 Lehman Bankruptcy Debt Ceiling Dispute: Euro Debt 50 WorldCom 250 index Uncertainty Policy Economic Russian Crisis; Scandal LTCM 2010 Fiscal Asian financial Gulf War II Midterm Cliff 40 crisis 9/11 Elections 200 Gulf War I Clinton Large interest Election rate cuts 30 150 VIX 20 100 10 50 VIX Economic Policy Uncertainty index 0 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Note: Shows US economic policy uncertainty index (monthly) and VIX index (implied volatility of one-month S&P 500 index option). Period of analysis is from January 1990 through March 2013. Source: Instinet, http://www.policyuncertainty.com/. 2 The method we use to The implied long-term earnings growth priced in the S&P 500 is a measure of the cash market’s calculate the implied long- sentiment. If we assume the current level of the S&P 500 is the market’s estimate of the discounted term earnings growth in the present value of future earnings, then given analysts’ consensus expectations of earnings over the next S&P 500 (see Appendix for two fiscal years and an estimate of the expected equity risk premium, we can calculate the market’s detail) implied long-term earnings growth. For this analysis, we aggregate I/B/E/S consensus FY1 and FY2 analyst earnings forecasts for stocks in the S&P 500 and use the Duke University CFO survey for the expected equity risk premium. The discount rate is taken as the 10-year Treasury yield plus the Duke University CFO survey estimate of the expected equity risk premium (for details, see Appendix). Except in the March 2009- The history of implied long-term earnings growth in the S&P 500 is shown as the dark blue line in Exhibit May 2010 period, the 2. The red horizontal line on the left in Exhibit 2 is the average experienced earnings growth since World economic policy uncertainty War II, about 7%. The market’s implied earnings growth tended to price this historical level of about 7% index has closely tracked until the Lehman bankruptcy, but has been gyrating since the crisis erupted as it hunts for equilibrium. As implied long-term earnings Exhibit 2 shows, the implied earnings growth has gone negative, recovered, and gone negative a number growth in an inverse of times over the past four years. The S&P 500 implied earnings growth is now slightly positive, but well relationship – implied long- below the 3% earnings growth indicated by the horizontal red line on the right of Exhibit 2 – a level that term earnings growth is now has been touched a few times since 2009. The index on economic policy uncertainty has tightly tracked only 0.2% (Exhibit 2) .
Recommended publications
  • Did Spillovers from Europe Indeed Contribute to the 2010 U.S. Flash Crash?
    No. 622 / January 2019 Did Spillovers From Europe Indeed Contribute to the 2010 U.S. Flash Crash? David-Jan Jansen Did Spillovers From Europe Indeed Contribute to the 2010 U.S. Flash Crash? David-Jan Jansen * * Views expressed are those of the authors and do not necessarily reflect official positions of De Nederlandsche Bank. De Nederlandsche Bank NV Working Paper No. 622 P.O. Box 98 1000 AB AMSTERDAM January 2019 The Netherlands Did Spillovers From Europe Indeed Contribute to the 2010 U.S. Flash Crash?* David-Jan Jansen a a De Nederlandsche Bank, Amsterdam, The Netherlands This version: January 2019 Abstract Using intraday data, we study spillovers from European stock markets to the U.S. in the hours before the flash crash on 6 May 2010. Many commentators have pointed to negative market sentiment and high volatility during the European trading session before the Flash Crash. However, based on a range of vector autoregressive models, we find no robust evidence that spillovers increased at that time. On the contrary, spillovers on 6 May were mostly smaller than in the preceding days, during which there was great uncertainty surrounding the Greek sovereign debt crisis. The absence of evidence for spillovers underscores the difficulties in understanding the nature of flash events in financial markets. Keywords: flash crash, spillovers, financial stability, connectedness. JEL classifications: G15, N22, N24. * This paper benefitted from discussions with Sweder van Wijnbergen as well as from research assistance by Jack Bekooij. Any errors and omissions remain my responsibility. Views expressed in the paper do not necessarily coincide with those of de Nederlandsche Bank or the Eurosystem.
    [Show full text]
  • Cracks in the Pipeline 2
    MEDIA CONTACT: Lauren Strayer | [email protected] 212-389-1413 FINANCIAL PIPELINE .o rg Series CRACKS IN THE PIPELINE 2 HIGH FREQUENCY TRADING by: Wallace C. Turbeville his is the second of a series of articles, that increase the inefficiency of Capital Intermediation and entitled “The Financial Pipeline Series”, its cost. The increased volumes in the traded markets are examining the underlying validity of the largely a result of high-speed, computer driven trading assertion that regulation of the financial by large banks and smaller specialized firms. This article markets reduces their efficiency. These illustrates how this type of trading (along with other activ- articles assert that the value of the finan- ities discussed in subsequent articles) extracts value from cial markets is often mis-measured. The the Capital Intermediation process rendering it less efficient. efficiency of the market in intermediat- It also describes how the value extracted is a driver of even ing flows between capital investors and more increased volume creating a dangerous and powerful capital users (like manufacturing and service businesses, feedback loop. individuals and governments) is the proper measure. Unreg- Tying increased trading volume to inefficiencies runs ulated markets are found to be chronically inefficient using counter to a fundamental tenet of industry opponents to Tthis standard. This costs the economy enormous amounts financial reform. They assert that burdens on trading will each year. In addition, the inefficiencies create stresses to the reduce volumes and thereby impair the efficient functioning system that make systemic crises inevitable. Only prudent of the markets. regulation that moderates trading behavior can reduce these The industry’s position that increased volume reduces inefficiencies.
    [Show full text]
  • The Future of Computer Trading in Financial Markets an International Perspective
    The Future of Computer Trading in Financial Markets An International Perspective FINAL PROJECT REPORT This Report should be cited as: Foresight: The Future of Computer Trading in Financial Markets (2012) Final Project Report The Government Office for Science, London The Future of Computer Trading in Financial Markets An International Perspective This Report is intended for: Policy makers, legislators, regulators and a wide range of professionals and researchers whose interest relate to computer trading within financial markets. This Report focuses on computer trading from an international perspective, and is not limited to one particular market. Foreword Well functioning financial markets are vital for everyone. They support businesses and growth across the world. They provide important services for investors, from large pension funds to the smallest investors. And they can even affect the long-term security of entire countries. Financial markets are evolving ever faster through interacting forces such as globalisation, changes in geopolitics, competition, evolving regulation and demographic shifts. However, the development of new technology is arguably driving the fastest changes. Technological developments are undoubtedly fuelling many new products and services, and are contributing to the dynamism of financial markets. In particular, high frequency computer-based trading (HFT) has grown in recent years to represent about 30% of equity trading in the UK and possible over 60% in the USA. HFT has many proponents. Its roll-out is contributing to fundamental shifts in market structures being seen across the world and, in turn, these are significantly affecting the fortunes of many market participants. But the relentless rise of HFT and algorithmic trading (AT) has also attracted considerable controversy and opposition.
    [Show full text]
  • Ai: Understanding and Harnessing the Potential Wireless & Digital Services Ai: Understanding and Harnessing the Potential White Paper
    AI: UNDERSTANDING AND HARNESSING THE POTENTIAL WIRELESS & DIGITAL SERVICES AI: UNDERSTANDING AND HARNESSING THE POTENTIAL WHITE PAPER CONTENTS INTRODUCTION ..............................................................................................................................................................................02 1. THE PRODUCTIVITY CONUNDRUM: WILL AI HELP US BREAK INTO A NEW CYCLE? ...........................................................05 1.1 Global productivity growth is faltering ...................................................................................................... 05 1.2 AI has the potential to drive productivity improvements and hence economic growth .................................... 06 2. AI FUTURES ........................................................................................................................................................................11 2.1 Replacing the smartphone with a ubiquitous voice assistant ....................................................................... 11 2.2 Your AI powered personal digital assistant ............................................................................................... 12 2.3 Is AI the missing piece for a truly smart city? ........................................................................................... 14 2.4 City of the future ................................................................................................................................... 16 2.5 Giving medics more time to care ............................................................................................................
    [Show full text]
  • Circuit Breakers and New Market Structure Realities
    Circuit Breakers and New Market Structure Realities China’s dramatic and short-lived But there are questions about whether regulators have been able to keep up with today’s high-speed markets, with one experience with market circuit trader likening them to police on bicycles trying to catch breakers at the start of the New Year Ferraris.1 Regulators themselves have admitted as much. Testifying before the US Senate Committee on Banking after has revived debate about whether the Flash Crash of 2010, former SEC Chairwoman Mary such market interventions do more Schapiro said: “One of the challenges that we face in recreating the events of May 6 is the reality that the technologies used for harm than good, as regulators and market oversight and surveillance have not kept pace with the market participants around the world technology and trading patterns of the rapidly evolving and expanding securities markets.”2 continue to grapple with new market In response, a growing number of equity and equity-related structure realities and the law of markets (e.g., futures and listed options) around the world have introduced circuit breakers in the form of stock-specific and unintended consequences. market-wide trading halts as well as price limit bands in order to stabilize markets when, as the SEC has said, “severe market While many developments in modern equity markets have price declines reach levels that may exhaust market liquidity.”3 benefited investors in the form of greater efficiency and lower The 10 largest (by value traded) equity markets around the costs, they have also led to highly complex and fragmented world have already implemented or are planning to introduce markets.
    [Show full text]
  • Circuit Breakers, Volatility, and the US Equity Markets
    Circuit Breakers, Trading Collars, and Volatility Transmission Across Markets: Evidence from NYSE Rule 80A Michael A. Goldstein* Babson College Current version: April 7, 2015 * Donald P. Babson Professor of Finance, Babson College, Finance Department, 231 Forest Street, Babson Park, MA 02457-0310; Phone: (781) 239-4402; Fax: (781) 239-5004; E-mail: [email protected] The author would like to thank Mark Ventimiglia, formerly of the International and Research Division of the New York Stock Exchange, for providing the data for this study and Alejandro Latorre, formerly of the Capital Markets Function of the Federal Reserve Bank of New York for excellent research assistance. Additional thanks go to Robert Van Ness (the editor), Joan Evans, James Mahoney, and participants at the Second Joint Central Bank Research Conference on Risk Measurement and Systematic Risk in Tokyo, Japan. Much of this analysis was completed when the author was the Visiting Economist at the New York Stock Exchange. The views expressed in this paper do not necessarily reflect those of the New York Stock Exchange. An early version of this paper was entitled “Circuit Breakers, Volatility, and the U.S. Equity Markets: Evidence from NYSE Rule 80A.” Circuit Breakers, Trading Collars, and Volatility Transmission Across Markets: Evidence from NYSE Rule 80A Abstract The New York Stock Exchange’s Rule 80A attempted to de-link the futures and equity markets by limiting index arbitrage trades in the same direction as the last trade to reduce stock market volatility. Rule 80A leads to a small but statistically significant decline in intraday U.S. equity market volatility.
    [Show full text]
  • High Frequency Trading and Hard Information
    Finance and Economics Discussion Series Divisions of Research & Statistics and Monetary Affairs Federal Reserve Board, Washington, D.C. Machines vs. Machines: High Frequency Trading and Hard Information Yesol Huh 2014-33 NOTE: Staff working papers in the Finance and Economics Discussion Series (FEDS) are preliminary materials circulated to stimulate discussion and critical comment. The analysis and conclusions set forth are those of the authors and do not indicate concurrence by other members of the research staff or the Board of Governors. References in publications to the Finance and Economics Discussion Series (other than acknowledgement) should be cleared with the author(s) to protect the tentative character of these papers. Machines vs. Machines: High Frequency Trading and Hard Information Yesol Huh∗ Federal Reserve Board First draft: November 2012 This version: March 2014 Abstract In today's markets where high frequency traders (HFTs) both provide and take liquidity, what influ- ences HFTs' liquidity provision? I argue that information asymmetry induced by liquidity-taking HFTs' use of machine-readable information is important. Applying a novel statistical approach to measure HFT activity and using a natural experiment of index inclusion, I show that liquidity-providing HFTs supply less liquidity to stocks that suffer more from this information asymmetry problem. Moreover, when markets are volatile, this information asymmetry problem becomes more severe, and HFTs supply less liquidity. I discuss implications for market-making activity in times of market stress and for HFT regulations. ∗I would like to thank Stefan Nagel, Arthur Korteweg, and Paul Pfleiderer for their feedback and discussions on this paper. I would also like to thank Shai Bernstein, Darrell Duffie, Sebastian Infante, Heather Tookes, Clara Vega, and the seminar participants at the Stanford GSB, Federal Reserve Board, Vanderbilt University, and University of Rochester for helpful suggestions, and NASDAQ for providing the limit order book data.
    [Show full text]
  • Examining the Efficiency, Stability, and Integrity of the U.S
    S. HRG. 111–922 EXAMINING THE EFFICIENCY, STABILITY, AND INTEGRITY OF THE U.S. CAPITAL MARKETS JOINT HEARING BEFORE THE SUBCOMMITTEE ON SECURITIES, INSURANCE, AND INVESTMENT OF THE COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS UNITED STATES SENATE AND THE PERMANENT SUBCOMMITTEE ON INVESTIGATIONS OF THE COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS UNITED STATES SENATE ONE HUNDRED ELEVENTH CONGRESS SECOND SESSION ON EXAMINING THE EFFICIENCY, STABILITY, AND INTEGRITY OF THE U.S. CAPITAL MARKETS DECEMBER 8, 2010 Printed for the use of the Committee on Banking, Housing, and Urban Affairs ( Available at: http://www.fdsys.gov/ U.S. GOVERNMENT PRINTING OFFICE 65–272 PDF WASHINGTON : 2011 For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800 Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001 COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS CHRISTOPHER J. DODD, Connecticut, Chairman TIM JOHNSON, South Dakota RICHARD C. SHELBY, Alabama JACK REED, Rhode Island ROBERT F. BENNETT, Utah CHARLES E. SCHUMER, New York JIM BUNNING, Kentucky EVAN BAYH, Indiana MIKE CRAPO, Idaho ROBERT MENENDEZ, New Jersey BOB CORKER, Tennessee DANIEL K. AKAKA, Hawaii JIM DEMINT, South Carolina SHERROD BROWN, Ohio DAVID VITTER, Louisiana JON TESTER, Montana MIKE JOHANNS, Nebraska HERB KOHL, Wisconsin KAY BAILEY HUTCHISON, Texas MARK R. WARNER, Virginia JUDD GREGG, New Hampshire JEFF MERKLEY, Oregon MICHAEL F. BENNET, Colorado EDWARD SILVERMAN, Staff Director WILLIAM D. DUHNKE, Republican Staff Director DAWN RATLIFF, Chief Clerk WILLIAM FIELDS, Hearing Clerk SHELVIN SIMMONS, IT Director JIM CROWELL, Editor SUBCOMMITTEE ON SECURITIES, INSURANCE, AND INVESTMENT JACK REED, Rhode Island, Chairman JIM BUNNING, Kentucky, Ranking Republican Member TIM JOHNSON, South Dakota JUDD GREGG, New Hampshire CHARLES E.
    [Show full text]
  • Artemis Capital Q12012 – Volatility at World's
    Volatility at World's End Deflation, Hyperinflation and the Alchemy of Risk Note: The following research paper is an excerpt from the First Quarter 2012 Letter to Investors from Artemis Capital Management LLC published on March 30, 2012. Artemis Capital Management, LLC | Volatility at World's End: Deflation, Hyperinflation and the Alchemy of Risk Page 2 520 Broadway, Suite 350 Santa Monica, CA 90401 (310) 496-4526 phone (310) 496-4527 fax www.artemiscm.com [email protected] Volatility at World's End: Deflation, Hyperinflation and the Alchemy of Risk Imagine the world economy as an armada of ships passing through a narrow and dangerous strait leading to the sea of prosperity. Navigating the channel is treacherous for to err too far to one side and your ship plunges off the waterfall of deflation but too close to the other and it burns in the hellfire of inflation. The global fleet is tethered by chains of trade and investment so if one ship veers perilously off course it pulls the others with it. Our only salvation is to hoist our economic sails and harness the winds of innovation and productivity. It is said that de-leveraging is a perilous journey and beneath these dark waters are many a sunken economy of lore. Print too little money and we cascade off the waterfall like the Great Depression of the 1930s... print too much and we burn like the Weimar Republic Germany in the 1920s... fail to harness the trade winds and we sink like Japan in the 1990s. On cold nights when the moon is full you can watch these ghost ships making their journey back to hell..
    [Show full text]
  • Speculation and Sovereign Debt – an Insidious Interaction
    Speculation and Sovereign Debt – An Insidious Interaction Gerald Epstein 1 and Pierre Habbard 2 October 2011 Table of contents INTRODUCTION ........................................................................................................................................................2 THE RISE OF FINANCIAL SPECULATION ....................................................................................................................3 NEW FORMS OF FINANCIAL SPECULATION POST -CRISIS ..........................................................................................10 THE SOVEREIGN BOND MARKETS ...........................................................................................................................15 WHAT REGULATORY POLICY RESPONSE ?...............................................................................................................18 CONCLUDING REMARKS AND RECOMMENDATIONS ................................................................................................23 REFERENCES .........................................................................................................................................................26 1 Professor of Economics, University of Massachusetts & Co-director, Political Economy Research Institute (PERI). 2 Senior policy advisor, Trade Union Advisory Committee to the OECD. www.ituc-csi.org & www.tuac.org 1/28 Introduction Four years after the financial crisis and near financial collapse of 2008, the world economy again faces the prospect of a deepening economic
    [Show full text]
  • Paradigm Shifts & Unintended Consequences
    FIU Law Review Volume 8 Number 1 Article 15 Fall 2012 Paradigm Shifts & Unintended Consequences: The Death of the Specialist, the Rise of High Frequency Trading, & the Problem of Duty-Free Liquidity in Equity Markets Jennifer Victoria Christine Dean Follow this and additional works at: https://ecollections.law.fiu.edu/lawreview Part of the Other Law Commons Online ISSN: 2643-7759 Recommended Citation Jennifer V. Dean, Paradigm Shifts & Unintended Consequences: The Death of the Specialist, the Rise of High Frequency Trading, & the Problem of Duty-Free Liquidity in Equity Markets, 8 FIU L. Rev. 217 (2012). DOI: https://dx.doi.org/10.25148/lawrev.8.1.15 This Article is brought to you for free and open access by eCollections. It has been accepted for inclusion in FIU Law Review by an authorized editor of eCollections. For more information, please contact [email protected]. Paradigm Shifts & Unintended Consequences: The Death of the Specialist, the Rise of High Frequency Trading, & the Problem of Duty-Free Liquidity in Equity Markets Jennifer Victoria Christine Dean* I. INTRODUCTION Every business day, hundreds of thousands of people turn on their televisions to watch CNBC.1 Millions more tune in to listen to Bloomberg radio.2 Thousands of men and women get home from work and open brokerage statements received in the day’s mail. These people have one thing in common: they want to know what is happening with the money. The stock market is more than just a place where people buy and sell stocks; the health of the stock market (more specifically the health of the stock marketplace) is both an indi- cator of, and a substantial factor in, the health of the worldwide econ- omy.3 The stock market is more than just some abstraction on the news; it is to financial capitalism what the circulatory system is to the * Jennifer Victoria Christine Dean, J.D., Florida International University College of Law, 2012; B.A., New York University, Gallatin School of Individualized Study, 2002; M.N.M., Florida Atlantic University, 2009.
    [Show full text]
  • SYSTEMIC RISK: WHAT RESEARCH TELLS US and WHAT WE NEED to FIND out Systemic Risk Centre
    Systemic Risk Centre SYSTEMIC RISK: WHAT RESEARCH TELLS US AND WHAT WE NEED TO FIND OUT Systemic Risk Centre Published by Systemic Risk Centre The London School of Economics and Political Science Houghton Street London WC2A 2AE All rights reserved. Requests for permission to reproduce the articles should be sent to the editor at the above address. The support of the Economic and Social © Systemic Risk Centre 2015 Research Council (ESRC) in funding the Designed by DesignRaphael Ltd SRC is gratefully acknowledged Illustrations pgs 9/11/20/26/28 by Judith Allan [grant number ES/K002309/1]. 1 SystemicSystemic RiskRisk CentreCentre Key messages The global financial crisis Policy responses The autumn of 2008 was not the first time that the world Laws, rules and regulations drawn up ostensibly to bolster has faced systemic risk. The threat and, at times, its financial stability and limit the build-up of risk can often realisation have been present ever since the first financial become a channel for amplification mechanisms that system was created and they are an inevitable part of any have precisely the opposite effect. This occurs when market-based economy. multiple rules have inconsistent objectives and interact in unpredicted ways. Often these perverse consequences The challenge for can remain hidden until it is too late, and this can occur policy-makers in particular when policies are drafted hastily in response Society faces a difficult dilemma when it comes to to a crisis. systemic risk. We want financial institutions to participate in economic activity and that means taking risk. We also want Financial engineering financial institutions to be safe.
    [Show full text]