The arrest last week of Navinder Sarao for his alleged involvement in the Flash Crash rekindled questions about regulators’ ability to keep up with the technological tools deployed by modern market participants. Many people wondered… How come it took 5 years for authorities to catch Sarao?
But the story about the relationship between technology and financial regulation is not entirely one-sided. During the “Digitizing Wall Street: How Technology Is Changing the Future of Finance” at the 2015 Milken Institute Global Conference this week in Beverly Hills, panelists examined the ways technology and regulation can sometimes feed off of each other.
“Regulators’ challenge is that technological innovation happens extremely quickly. So the pace of change and development in the markets is faster than regulators can keep up with,” explained NASDAQ President Adena Friedman.
However, Darryl White, the CEO of BMO Capital Markets, countered that sometimes it is the kinds of regulatory reform that banks despise the most that end up creating data that makes the banks better. “Regulations aimed at improving systemic risk have had a positive side-effect of creating a wealth of data,” White said. “The ability to mine that data leads to important conversations about improved performance for banks.” This likely isn’t the kind of “unintended consequences” banks like to lament when discussing new regulations.
White added that technology is often the answer to challenges presented by regulatory reforms. “Technology is helping eliminate some of the costs brought on by regulation that have decreased banks’ return on equity,” White explained.
Broadridge President and CEO Rich Daly acknowledged that regulation is only going to get more complex, not less complex. But Daly also added that technology can ease some of the “generic costs” associated with processes like clearing and settlement.
Speaking of settlement cycles, Friedman commented on the BlockChain technology most associated with Bitcoin and the role it could one day play in other aspects of banking. Regulators have tried to address concerns about counterparty risk, but Friedman explained that a technology like BlockChain “allows a better understanding of counterparty risk and could be used, theoretically, to create an electronic cash market.”
Circling back to how technology could help regulators improve their performance, BMO’s White highlighted the recent scandals linked to FX markets. “The misdeeds in the FX market were not technology based, but there is likely a technology solution. Those problems were cultural,” White said. “Technology might not be able to prevent such problems until there is a cultural fix in place, but technology can definitely play a role in detecting such misdeeds.”
In the end, there will always be ways technology helps market participants race ahead of regulators. But every now and then, technology can also be used to help regulators improve their performance and optimize the way banks navigate regulatory reform.