The liquidity genie

Following on from the warnings to the contrary from the UK Foresight publication (see previous blog Some things in life are bad…), we have had a reaffirmation (if one was needed) last Friday from the plenary vote that the European Parliament is going to proceed to target speculation and high frequency trading through their new rules and regulations.

The magic of the “Liquidity Genie” is at the heart of Foresight Project’s report and has long been right, left and centre of this whole hurry-skurry.

Nobody knows for sure who the “Liquidity Genie” is or where it comes from. We all know that we like it and although nobody can measure it, we know what it is when we see it. Sometimes the Genie is around and cheers the markets, then occasionally and all of a sudden the Genie vanishes into thin air and we are plummeted into the dark abyss and asset pricing failure ensues.

The big debate is of course about what measures or approach creates or destroys liquidity. Without liquidity we get wider price spreads and more plate tectonic price adjustments that create the opening for the appearance of the menace of the markets – Violent Volatility.

The irony is that the fast traders and speculators welcome the villainous volatility. There is no point having all this liquidity if the markets are flat or barely moving. The speculators want the markets whipping.

And what of the perceived #1 arch enemy of HFT? – MEP Markus Ferber and his “Shadow Rapporteurs” have restated their aim to destroy speculators as they don’t like the way they colloquially helter-skelter the markets and they don’t much believe in the value of their liquidity.

The problem for the EU politicians is that HFT is the “Liquidity Genie” and HFTs love volatility too. So if these rules come in, while there may not be a bright future for HFT market making, there should be plenty of opportunity for volatility and for very fast computerised speculators and arbitrageurs. Precisely the ones that the EU politicians don’t seem to like much. Looks like a promising future for the fast robots.

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