- Financial regulation has again risen to the top of the news heap.
- The only notable regulatory action has been scaling back mark-to-market accounting rules—a good thing—and making permanent last fall's naked short-selling ban.
- Beyond these two issues, the rest of the regulatory clap trap remains just that—much debate, little action. We suspect the US's financial regulatory system will likely get more convoluted and costly in the near term, not less.
- Flexibility is the greatest hallmark of capitalism, and broader markets will adapt and move forward.
The statutory sun shines unusually brightly after bear markets—call it cyclical political warming. And firmly in its orbit right now, basking in those harsh rays? Short-sellers, speculators, systemic risk regulation, consumer protection, and advanced trading technology.
So far the only notable regulatory action has been scaling back mark-to-market accounting rules—a good thing—and making permanent last fall's naked short-selling ban. Short-sellers are often vilified during and after bear markets. It's hard to accept anyone should profit while others are in pain. Of course, we conveniently forget that during bull markets the situation is reversed—short-sellers feel the pain while those going long are loving life. By and large, short-selling is beneficial, providing liquidity and more efficient pricing in markets. Further, the ban on naked short-selling hasn't had much broad negative market impact to date, and so its extension shouldn't either.
Beyond these two issues, the rest of the regulatory clap trap remains just that—much debate, little action. Should the Fed be given regulatory oversight of all firms big enough to pose systemic risk? Will a centralized "consumer protection" agency help or hinder those it intends to protect? What role do speculators play in oil prices? How much compensation is too much? Does advanced trading technology give undue advantage to those using it?
What conclusions will politicians come to? Too early to know, but we suspect the US's financial regulatory system will likely get more convoluted and costly in the near term, not less. Bank pay packages will probably draw federal ire for a while yet, though what makes the feds the best arbiters in this case is beyond us. New financial consumer protection regulation may raise business and consumer costs, but no more dramatically than other recently onerous regulatory reactions, like Sarbanes-Oxley. And while oil "speculators" may have the power to move commodities prices a bit in the very short term, generally, they provide increased price transparency and decreased volatility. (It's a sign of the political times when the feds completely reverse course ("spin") on a report released just last summer.)
Last, but not least, the feds are examining advanced electronic trading—alleging it gives unfair advantage to certain traders. Granted, algorithmic trading isn't yet perfect, but overall it appears to increase market efficiency and liquidity while decreasing trading costs. Those benefits aren't limited to large institutions—many "small" mutual fund investors or those using professional money managers trade stocks algorithmically without ever realizing it.
Above all, it should be noted the debate's volume is par for the course—the more politicians think folks want them to do something, the louder they chatter. But not everything hitting the headlines will come to pass. And while some new regulation may hinder particular sectors (like Financials), other changes, like looser mark-to-market rules, may actually help. Flexibility is the greatest hallmark of capitalism, and broader markets will adapt and move forward. As the economy and markets recover and political pressure eases, today's statutory sun will set.