Business people and investors will remember Thursday, May 6, 2010 for years to come. The Dow plummeted intraday nearly 1000 points amid fears that Greece would default on its debt. The sudden free-fall sparked chaos in the markets for currencies, commodities and Treasury bonds. Initially thought to be a human error - fat fingers making a trade – the cause is still elusive. Getting to the truth is harder than ever these days.
The president offered a standard response: Regulators are evaluating the situation closely “with a concern for protecting investors and preventing this from happening again.” But how and when can he achieve these implicit promises?
In a fragmented trading world, computer systems dominate and no single entity is capable of seeing the big picture. Historically, regulators have a poor record of preempting problems. They can only fix what they understand, and practically speaking, judgments are often colored by politics. And when it comes to the legislative branch, the latest round of hearings revealed little evidence that the financial specialists in Congress are active listeners seeking the truth.
Zubi Diamond, author of Wizards on Wall Street, says the historic plunge was “due to computerized hedge fund short selling” that is currently not regulated. Hedge funds can manipulate prices through mass short selling, because there is no uptick rule, no circuit breakers and no trading curbs. He strongly asserts that the current financial reform bill will do nothing to solve this problem.
As reported in Accuracy in Media, Diamond says: “No one will come on TV to tell the truth.” Instead, representatives for the hedge fund short sellers, who operate as the Managed Funds Associations (MFA), “go on TV and provide false explanations of what happened.”
Practical solutions come only with accurate information from those closest to the situation. Regulators and legislators find it hard to get to the heart of the problems without earnest help and input from those inside the industry. The task to “prevent” abuses and manipulation becomes even harder as government continues its politically charged crusade against Wall Street.
For all concerned in Washington, consider the market plunge a wake up call. Taking the right course of action and making the right changes need to outweigh political ambition.
The world is increasingly complex, interconnected, and technology driven. The pace of business, of governing, of shaping the future needs to accelerate. It’s time to raise the standards of performance for federal departments, agencies, and our elected leaders.
A new, modern government must be customer-sensitive, strategic in its view, synchronized and in full command of the people’s business. As long as the federal system is tied up in silos, layers and reams of paper, the government will be relegated to a role of blame and clean-up. Without a real leadership mindset, Washington will fail to create the environment that prevents systemic problems, crises, and failure.
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Update: On May 14, The Financial Times reported that the regulators “have not kept pace with technological advances that allow automated trades measured in nanoseconds.” The SEC must “fight technology with technology.” They also need to change the rules to require high-frequency traders to “fulfill the role of market makers” and remain in the markets at all times.
Clearly, the SEC needed a market crash to address these problems. Can government prevent the next crisis from happening, or will it always be playing catch-up?
