The Gateway to Algorithmic and Automated Trading

Dodd Frankly

Published in Automated Trader Magazine Issue 28 Q1 2013

Language matters. When people start talking about putting customers first or fighting for level playing fields, should you be worried? Everyone, it seems, is talking their books.

Dodd Frankly

Like many of you, we spend a lot of time at industry events, where market participants regularly sound off about all that is wrong about the world.

We have little doubt that the majority of these people are speaking from the heart. Many are talking about their livelihoods, after all. But that also means they are talking their books.

Often, a tell-tale sign of when an industry representative is doing this is when you hear the person talking about putting "customers first". There is no end to the buzzwords and stock phrases, some of which even appear to be mutually exclusive. Can you have a "level playing field" while arguing against a "one-size-fits-all" approach?

Far be it from Peek Ahead to accuse anyone of speaking disingenuously. Rather, we think it's a bit like a quant whose work suffers from sample bias. It probably happens unwittingly.

We had the pleasure of discovering a rare exception to the rule recently when listening to a roundtable discussion at the Commodity Futures Trading Commission (CFTC).

"I'm indeed self-interested and my comments should be viewed through that lens," said Thomas Farley, a senior vice president at IntercontinentalExchange. Of course, without missing a beat, he quickly added: "as should many of my colleagues here on this panel".

The ICE executive was talking about a passionate debate about CFTC rules for swaps and futures, particularly in the sensitive area of margins, which you can read about at www.fa5t.net/1fu. Farley's admission, in fact, came just after he had wrapped himself in a cloak of civic duty, as he too had spoken about what customers want.

The question is: whose customers? As the head of trading for AXA IM, Christophe Roupie, says in these pages, "It's impossible to come up with a rule that will be accepted by all."

The solution, Roupie argues, is calibration. But that, of course, raises fresh issues. If one size doesn't fit all, how do you decide the cut-off levels? Yes, there's always stress-testing and data-grounding. But they require painstaking work and regulators are impatient - they already feel that they're playing catch-up.

So we're living through a period that can probably best be described as the 'suck-it-and-see' era of regulatory reform.

The issue that vexed Farley was one of the remaining big Dodd-Frank decisions still to be taken by the CFTC. Another one, which we're unlikely to hear about for a few more months, concerns cross-border rules for swaps trading.

There are also plenty of people who have been complaining about the CFTC's proposals for requiring certain overseas activity to meet Dodd-Frank requirements. But there is a crucial difference. Not all of the complaints are subject to the self-serving bias that so many industry figures display. You see, a lot of these complaints are coming from fellow regulators.