- REUTERS/Russell Boyce
- Mark Yallop, of the FICC Markets Standards Board and the Bank of England’s Prudential Regulation Committee, talked to Business Insider about the risks facing financial markets. He said the electronification of markets and the fragmentation of global regulation are the two biggest threats to trust in global markets. FMSB is working on a set of global standards to address conduct problems revealed in wholesale fixed income markets after the 2008 financial crisis.
LONDON – The two biggest threats to trust in international markets are the fragmentation of global regulation and the electronification of markets, according to a senior adviser to the Bank of England.
Speaking to Business Insider, Mark Yallop, an external member of the BoE’s Prudential Regulation Committee and Chairman of the FICC Markets Standards Board (FMSB), said an increasingly inward-looking approach from global regulators and the unintended consequences of technology could have negative implications in the long-term, although stressed he was not predicting a “catastrophe, crash type event.”
The electronification of markets
The electronification of markets, said Yallop, “does not eliminate market abuse and misconduct.” Although the increasing use of technology in trading is not a bad thing in itself, he said, “you can’t do it without some safeguards.”
According to Yallop, the electronic trading of fixed income markets is a particular concern.
A move towards the greater use of technology in this area of the market increased substantially after the financial crisis, he said, in a drive to increase transparency and minimise risk.
But in the late noughties, he said, “it was known” that equity markets had been trading electronically for years, and had suffered “all sorts of conduct abuses.”
“Anybody who’d thought for more than a minute” could have seen that moving to electronic trading was not a catch-all solution, he said, and would solve one problem while creating others.
It is only now, said Yallop, that people are “really coming round to a level of concern about the unintended consequences of the electronification of fixed income markets.”
Such problems include new opportunities for market manipulation, such as electronic spoofing – when traders trick the market into thinking there is more demand to buy or sell than there actually is – or the creation of unfair advantages for certain traders, particularly when speed is an advantage.
Speaking earlier this month at Bloomberg’s London Buyside Week, Yallop also highlighted electronic “dark pools,” in which selected participants trade outside the glare of public “lit” markets, which can be to the disadvantage of some market users.
According to FMSB CEO Gerry Harvey, electronification often simply means that problems move from one group of people to another: some “really bad guys,” he said, have developed technologies to “beat the system” designed to prevent misconduct. “We’ve had technology in the markets for years,” he said, and it does not “code out” the problem.
The fragmentation of regulators
According to Yallop, another significant threat to global financial markets is an increasingly inward-looking approach being taken by global regulators.
“We are now without doubt in a period when international regulatory cooperation is less intense than it was [six or seven years ago],” said Yallop. What we are seeing now, he said, is the “fragmentation of the global regulatory landscape.”
Since markets are global, he said, a focus on local issues is “risky from a market outcomes point of view.” Lessons are not being learned consistently around the world, he said, because “they tend to get trapped within a particular jurisdiction.”
After the financial crisis, said Yallop, law makers and regulators took different approaches, and at different speeds, to addressing concerns about market regulation. Although for a time there was a “broad consensus” that regulation needed to be internationally coordinated to some degree, regulators around the world are increasingly prioritizing “their own domestic agenda,” he said.
This creates a situation where market participants are able to “arbitrage the rules between jurisdiction A and jurisdiction B,” said Yallop, which “creates a slide back towards the world that we thought we were leaving behind.”
Yallop stressed that misconduct in financial markets is not only the product of the wrong behaviour of individuals, but also attributable to cultural and environmental factors and a lack of clear rules. To address the conduct issues revealed after the financial crisis, FMSB is currently working with banks, investors and other stake-holders to develop a set of global standards for market conduct, to fill what they see as a “conduct void.”
As one market practitioner told him recently, says Harvey, conduct is “like being in fog: I’m surrounded by it, it’s cold and wet, I can’t see my way through it and when I put my hand out to grab it, it disappears.”