It pays to be cynical about our government. I think that liberals used to be generally more cynical about government and corporations than conservatives. But today, I see the opposite being true-with government.
To give you some background. The New York City big banks hate the Chicago exchanges. The CBOE started back in 1973, and NYC couldn’t figure out how to steal the business and bring it back to NYC where they thought it belonged. What did they do? They set up competing exchages. They failed. So, they set up a revolving door between Wall Street and Washington DC. The put their people in the SEC. The rewrote the rules. Now option trading is done everywhere in a fragmented marketplace. NYC banks rip off their customers in dark pools and arbitrage any left over risk off on the CBOE.
This is how they operate in all OTC markets.
The futures market is a lot different than the equity market. First, different regulator (CFTC). Second, because futures had such a nefarious past with market corners etc, it has a far different structure and regulations. In 1972, when financial futures were first traded in Chicago-it was critical for the markets to have a good regulatory structure that gave them validity. So, they didn’t have fungibility. They didn’t have all the crazy practices off exchange that are allowed in the SEC world. The retail customer got the same shot the big institution did. The bid/ask spread was pure. Markets were not fragmented. Exchanges competed like hell for business. The winner got the entire market.
Big institutions hate this. They can’t play their games. So, they are slowly trying to turn the CFTC into the SEC. They are using the Department of Justice. They are trying to buy congressman and Senators via lobbying cash. Ironically, Obama is deaf to the Chicago exchanges, and is in the back pocket of the NY banks. They tell him to jump, and he asks “How High?”. Bush was not much better by the way.
In 2008, the DOJ released a letter that caused the CME to lose 140 bucks in value overnight. That person then took the CEO job of Wachovia. Hmmmmm.
Yesterday, the head of the CFTC Gary Gensler-former Goldman employee, ruled against the CME in a fungibility case versus the ELX. ELX is a new rival exchange put up by the banks. It is purely there to try and get fungibility. It has nothing to do with fees. Banks want to hide their volume and rip off their customers in dark pools of futures, just like they do in SEC regulated equities and options.
I hate to go Glen Beck on all this and connect dots to conspiracy theories-but if the shoe fits.
It is interesting that Gensler was the appointee. Previous appointees have not been big NYC bankers. They have been bureaucrats (Brooksley Born), industry people not from NY Banks (James Newsome) Gensler came in with an agenda. He is implenting it.
So, what’s the harm? The harm is a fragmented marketplace. The government gets a cheaper price for it’s debt when there is a deep liquid market. Fragmentation will force the government to pay a slightly higher price to auction its debt. This costs taxpayers more money.
Secondly, businesses are hurt. Bank loans are figured off govt rates. Higher govt. rates mean higher costs of capital for business. This raises prices and hurts GDP.
Third, Pension and mutual funds will have to deal with a wider bid ask spread to enter and exit markets. They will pass this cost on to their investors.
Fourth, Hedge funds that are not part of the cartel will be at a disadvantage. The market will be less efficient and competitive.
Fragmented markets help no one. They raise costs. If CME were to lose the market fair and square, fine. Or, if two competing exchanges battled for a market, and one exchange bested the other (as in the case of CME vs LIFFE back in the 1980’s for Eurodollars, or CME vs CBOT for Gold in the 1970’s) then that is great too.
But to totally slant the competition, to direct a winner and loser as Gensler has done is pitiful. It’s crony capitalism at its finest. America was not founded on crony capitalism. But it’s the kind of capitalism that agents of the government(regardless of party affiliation) play best.
UPDATE: Brooksley Born was not a career bureaucrat. She was an attorneyBrooksley Born – Wikipedia, the free encyclopedia. Attorneys just seem like Bureaucrats to me!