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OpenMarket: J. Caleb Johnson

  • FSOC Misunderstands Leverage, Threatens Risk Management

    April 27, 2016

    The Financial Stability Oversight Council recently released its “Update on Review of Asset Management Products and Activities,” in which it questions “how certain asset management products and activities could pose potential risks to U.S. financial stability.”



    One aspect of the report focuses on hedge funds’ use of leverage, and the purported increase in risk associated with an increase in leverage:



    The relationship between a hedge fund’s level of leverage and risk, and whether that risk may have financial stability implications, is highly complex. Leverage is not a perfect proxy for risk, but there is ample evidence that the use of leverage, in combination with other factors, can...

  • New Study Estimates around $70 billion in Financial Regulatory Costs

    July 31, 2014

    Complying with regulations is part of the cost of doing business. For bigger businesses that can absorb those costs (or rather, pass them on to the consumer), it means armies of compliance officers and hefty fees. But for smaller businesses, like community banks, the costs can be so great that it means ceasing operation.



    Typically, this scenario works to the larger institutions’ advantage, as they are better placed to handle regulatory compliance costs than are their smaller competitors. But large financial institutions are also subject to certain regulations to which smaller banks are not. The Wall Street Journal cites a new study that estimates the cost to these larger banks of complying with these regulations at roughly $70 billion.



    Some of these costs...

  • Is High-Frequency Trading a Form of Front-Running?

    April 4, 2014
    On 60 Minutes, Michael Lewis accused high-frequency traders of front-running. Apparently it’s become necessary to remind critics of high-frequency trading of the definition of “front-running.”

    Front-running  - n. “The practice by market makers of dealing on advance information provided by their brokers and investment analysts, before their clients have been given the information.”  -- Oxford English Dictionary

    There is room for reasonable debate about the merits of HFT. And there is room for multiple exchanges catering to multiple types of investors.  But one thing critics should be wary of is distorting the terms of debate. Many, if not most, HFT firms are ”prop...
  • Is the Stock Market Really Rigged?

    April 2, 2014
    Everyone seems to be jumping into the debate about high-frequency trading, now that Michael Lewis is peddling his new book, Flash Boys.

    Lewis contends that the stock market is rigged, and that the culprit is high-frequency traders. But not everyone agrees that they are to blame, or that the stock market is even rigged to begin with.

    Cliff Asness, founder of AQR capital, suggests that high-frequency traders have in fact made trading cheaper for hedge funds. And this, in turn, benefits clients, such as pension funds or university endowments:
    What is good for us is lower trading costs because it translates into better investment performance and happier clients, which makes...
  • The Wrong Way to Regulate High-Frequency Trading

    March 20, 2014
    Last week, Maryland State Senator Delores Kelley said, “[T]he general public is not smart enough to know when they’re about to be fleeced.” She was referring to Uber, but her sentiments are nearly universal among regulators. Yesterday, Scott Patterson in The Wall Street Journal continued his series on high-frequency traders and the supposed threats they pose to the markets. He writes:
    Regulators are concerned that less-savvy or less-influential investors aren't aware of the benefits and advantages that exchanges are providing to certain clients, making it difficult for them to compete fairly…

    Substitute...
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