The Volcker Rule + High Speed Trading + Fed Rate Hikes = Extreme Market Volatility
- It is time to Kill the Volcker Rule
The Volcker Rule, named after Hussein Obama aide and former Fed Chairman Paul Volcker, was 1 of Washington’s most significant, and controversial, responses to the Y 2008 financial crisis.
It prohibits banks from using their own money to make speculative trades on markets, and restricted them from investing in hedge funds and private-equity firms.
Wall Street has long argued that the rule is unnecessarily complex, almost impossible to adhere to and prevents banks from executing trades on behalf of clients.
Partly in response to those concerns, the Fed and other regulators are working on an overhaul of the Volcker Rule.
In the past 10 years, high-frequency trading morphed from an obscure market-structure issue to a highly charged debate over whether traders armed with computer algorithms were exacerbating volatility.
When regulators have sought to boost oversight, they have faced intense push-back from industry.
After calling for a crackdown on aggressive high-frequency trading in Y 2014, former SEC Chairwoman Mary Jo White conceded before leaving office in Y 2016 that a fix had proved difficult. Wall Street’s Key regulator still has noy passed a significant rule to curb the practice.
One reason the SEC has done little to rein in the practice is that it is concerned that making any changes to modern, electronic markets will cause more harm than good.
US Treasury Mnuchin says that FSOC also would “probably” look into the potential risk posed by the $1.3-B market for leveraged loans that often backs mergers and acquisitions of highly-indebted companies.
Secretary Mnuchin said he does not “have the same concern at the moment” about the market, which have been the subject of warnings from the Fed and the Office of the Comptroller of the Currency.
“I have heard a lot of people express that concern. I don’t have the same concern at the moment, but having said that it is an area that given people have expressed concern we will probably want to take a look at,” he said.
While regulatory officials had already acknowledged that leveraged lending has been the subject of low-level discussions at FSOC, there has been little public evidence that the market poses an immediate threat to the financial system.
Stocks rose during the 1st year of The Trump Administration on historic corporate tax cuts, low unemployment and deregulation. In Y 2018 markets have pared their gains.
Echoing comments made by President Trump, White House trade adviser Peter Navarro Monday blamed recent market volatility on the Fed’s rate increases.
Equity investors have suffered from whiplash as traders debate the fast-shifting narratives on interest rates and US -China trade.
So far, there have been 6 days this Quarter when stocks completely reversed an intra-day move of at least 1%, the most since Y 2011, when Standard & Poor’s downgraded the US sovereign debt rating.