MARKET-DERIVED FINANCE: WHY SPEED KILLS

Instant news is dangerous without analysis

The gentleman above said this morning that he didn’t rule out further asset purchases to help sort out the UK economic mess. This is what the currency market did as a result:

This is one example of what I wrote yesterday about the Yo-Yo effect in international markets. In one sense of course it’s a market responding to new information. In another, it’s an incredibly badly informed (and dumb) currency trader who wouldn’t have expected King to say this. And on another hand again, it may have been Merv the Swerve being a very naughty boy and tossing that remark into the mix because he wants to retain a cheap Pound for exports.

The point is, tomorrow Mr King (or George Osborne, or Mrs Queen) will make some other cross between an observation and a prediction, and the markets will knee-jerk in another direction. In the vast majority of cases, they shouldn’t be doing this. Their underlying experience – along with proprietary and published information – and common sense should be guiding them. But the sad truth is that on most topics involving most markets, Bourse traders are frighteningly ignorant and, well, not very bright. (I make this observation having run a public company)

When ‘news’ is being confused with analysis – and if you have humpty-dumpties working at screens, twittering on mobiles while watching live streams and Mervyn King on the telly – this sort of roller-coaster is what happens. People in the City love all this, because it makes an otherwise tedious job stimulating, and because most of what happens in the Square Mile is to do with prepubescent short-trousered boys engaging in pissing contests.

Speed of information is not an unalloyed blessing: it makes a silly system positively dangerous. And speed of transmission of deals through dark liquidity pools turns that system into criminal temptation….in a business culture where most people don’t need much persuading.

There is much reform talk in the air at the moment. Until Bourse financing is cleaned up (and allowed a far lower share of the finance raised for business) this will remain what it is right now: so much talk. My hope is that LibDem presence in the new Government will raise awareness of this need. We shall see.

Hint: if you’re looking for The Next Big Scandal in the Bourse sector, look no further than multivariate high-speed liquidity trading.