The Times, They are a-Changin'
If you look at the world today, lots of it looks pretty chaotic. Violent insurgency is changing the face of the Middle East, making a mockery of the Sykes-Picot borders that have existed since the end of the Ottoman Empire. Sub-Saharan Africa looks ominously as though it may be heading in the same direction. There was an Arab Spring; there are pro-democracy protests in Hong Kong. Even in our more settled, democratic parts of the world signs of a desire to change the status quo are growing. Nationalist groupings are becoming more vociferous; the Catalans, whom the Spanish government assure will not get an independence referendum; the Scots, who in the end chose a (they hope) much modified version of the status quo; the two halves of Italy, the Walloons and the Flemings – the list goes on. And then there are the more ‘national’ nationalists, rather than the fragmenting ones. In that category would come the anti-EU parties – the AfD, the Front National, and, of course, in the UK, UKIP. In the US, the Tea Party don’t like the status quo – obviously, they don’t like the Democrats, but they don’t really like the traditional Republican party much, either.
The Year of Revolutions
Those are probably enough examples to illustrate the point; but there is an interesting historical parallel. In 1848 (“The Year of Revolutions”), Europe was swept by a wave of popular discontent, even rebellion, ultimately culminating in some quite significant structural changes in states and governments. Some of those changes lasted, some didn’t. The French Second Republic, for example, lasted about four years before Louis Napoleon turned it into the second Napoleonic empire. Now this isn’t a history lesson, and I’m not going to go into great detail about 1848, but the one thing I would point out is the role of changing technology. One of the main causes of unrest was the changes brought about by industrialisation and the growth of urban populations. In other words, the effect on peoples’ lives – what they could and couldn’t do, how their interaction with each other was changed – was a major factor in leading to demands for societal change.
Does that sound familiar? Because I’m sure that we’re experiencing something similar. This time, it’s not the advent of heavy industry urbanising a previously largely rural population, it’s the increased communication and interaction brought about by electronic technology (and most significantly the internet) which makes far more voices audible. Look at Twitter and its effect on electioneering; on a far more gruesome level, look at the social media stuff put out by terrorist and insurgent groups. And the effect of the ability of all these disparate voices to make themselves heard is to create a far less homogenous society. The way all these voices can find other like-minded ones (however small and specialised their interest) is what causes the fragmentation into myriad groups, all of whom are able to make themselves heard in a way that was previously simply not available. Just as in 1848, changes to the way society fits together causes changed expectations. And like 1848, I guess some will last, and some won’t. This isn’t, by the way, intended as praise or condemnation of those changes. They happen; we don’t (largely) have the luxury of choosing to like them or not. None of this bodes well, incidentally, for supporters of ever greater centralised state power.
That’s enough historical and societal contextualistion; does this stuff have any relevance to the financial services industry? Actually, it probably does. The traditional model of broker/trader operating on a centralised exchange is – seemingly – on the way out; look at the proliferation of Dark Pools which are shifting liquidity from long-established exchanges to semi-hidden, proprietary trading groups. Think of how order-routing through electronic systems enables exchanges effectively to usurp the market-making role. And instead of trades being passed through brokers, now those who want to make them can have direct access to ‘the market’. That’s the same as all the multitude voices able to be heard individually. It’s a similar pattern; easy access to information, the ability for investors to handle their own trades directly, these are the forces that electronic communication has released to change the landscape of financial trading. Rather than seeing discrete centres handling their own portion of business, we’re faced with a far more diffuse picture.
So what do the regulators do? Well, one thing which was apparent in the crisis of 2007/08, was that this very diffusion of activity made their job much harder. Their ability to see what was happening in markets was severely comprised because trading took place in unconventional venues. If you want to watch what is happening to the equity market, it’s a lot easier if you only need to keep an eye on the London, New York, Tokyo, Frankfurt etc stock exchanges; if you have also to be aware of activity in an uncertain number of dark pools as well, and watch micro-and milli-second HF trades, the task becomes immeasurably more difficult.
Look Back? Or Forward?
One part of the attempt to counter this problem, and ensure the same issues don’t arise again, comes in the shape of MiFID II, or will do when it is brought into force in a couple of years time. I’m not going into it in detail, but one item that caught my interest was the intention to concentrate trades back on official exchanges, largely by requiring a separation of those who run the exchange and those who risk their own capital on it (in other words, to prevent a bank from setting up its own exchange to run its own trading through – the intended solution to the issue of dark pools). Well, good luck to them with that; I can’t help feeling that they are (again) aiming to cure the problem that happened last time, rather than thinking of the next one. I don’t have a solution; but most change of this profound sort is irreversible. The clamour from all the voices will only increase, and simply trying to step backwards is difficult.
A couple of years after 1848, it looked as though not a lot had changed, as the reactionary forces clamped down; within the next few decades, though, an awful lot of what the revolutionaries wanted arrived, built on the foundations began in that year.