All Articles Finance Modern Money While You Were Working - January 30

While You Were Working – January 30

Sarao strikes back, the downside of short-selling bans, monetary policy and commodity prices, and #MeToo comes for finance

4 min read

Modern Money

Navinder Sarao

The Sarao Strikes Back! (Justin Tallis/AFP/Getty Images)

Well, well, well … Look who is helping the Feds

Yesterday’s news of US regulators filing spoofing charges against three big European banks and a host of other individuals comes with a new little wrinkle. A key person aiding the investigation is none other than Navinder Sarao.

Sarao is the person US regulators want everyone to believe caused the Flash Crash back in 2010, however no one ever believed Sarao was solely responsible for the crash. So now he has rolled over on some of the contacts who helped him do the deeds he did – before and after the crash.

My favorite nugget of the story is how one of the individuals charged yesterday, Jitesh Thakkar of Edge Financial Technologies, served on the CFTC’s technology advisory committee from 2012 to 2014. So according to the charges, the guy advising the CFTC on technology in the markets was using technology to cheat the markets – at the same time!.

LEIs for cryptocurrencies

Bank of England Governor Mark Carney doesn’t like the anonymous nature of many cryptocurrency transactions. If only the cryptocurrency markets would adopt legal entity identifiers so as to unmask the the people behind each and every transaction. After all, LEIs have worked so well in other financial markets.

Can innovating to cut costs be a bad thing?

It might just be me, but the tone of this Bloomberg piece about the newly-announced health care venture involving JPMorgan, Berkshire Hathaway Amazon seems to strike a troubling tone. It reads as though people should be worried that, should the venture prove successful, it might make it difficult for the Federal Reserve to accurately gauge inflation.

At issue is the Personal Consumption Expenditure inflation index the Fed uses and the fact that health costs make up 22% of the gauge. So if the joint venture succeeds in keeping health care costs down, then a goal of 2% inflation might be slower in materializing.

You gotta love how the tone of the article implies keeping the costs down is a problem; especially when it comes to something like much-lamented health care costs.

The unsurprising downside of short-selling bans

Researchers at the European Systemic Risk Board took a look at the short-selling bans that were put in place in reaction to the subprime crisis and the euro-area crisis. I can’t say their findings were all that surprising:

“Contrary to the regulators’ intentions, financial institutions whose stocks were banned experienced greater increases in the probability of default and volatility than unbanned ones, and these increases were larger for more vulnerable financial institutions.”

Banning the short-selling of shares in individual institutions sends out a giant red flare to everyone that said institution might not have the best risk management protocols in place. Just because the ban is eventually lifted, that doesn’t mean the risk management problems have been fixed.

Monetary policy and commodity prices

When weighing the cause of fluctuations in commodity prices, identifying whether the cause of the fluctuation is movement in supply or demand is critical. This paper from the Bank for International Settlements delves into what happens when domestic policymakers get it wrong:

“The conventional wisdom approach of responding to global commodity price swings (as external supply shocks when they are truly global demand shocks) results in an excessive procyclicality of global inflation, output and commodity prices. In light of recent empirical studies documenting a significant role of global demand in driving commodity prices, we conclude that the systematic misdiagnoses inherent in the conventional wisdom applied at the country level have contributed to destabilising procyclicality at the global level.”

That means even if policymakers in one country are spot-on in their diagnoses of the causes of commodity price swings, they still have to deal with the aftermath of their counterparts in other countries getting it wrong. Great.

First a Big Mac Index; now a Weed Index

I am old enough to remember a time when a map like this being published by Bloomberg would have been inconceivable.

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