Investing not betting

It is only natural for market participants to develop their most profitable activities, regardless of the bigger picture. Markets need institutional and regulatory incentives to ensure that, as well as profits, they deliver the social and economic benefits of cost-effective resource allocation and financial stability.

Ever-increasing competition between trading venues has shown its limitations. Trading venues, clearing houses and central securities depositories have a public utility role to play; fostering transparent and fair trading, limiting counterparty and systemic risk, securing transactions and acting as a 'securities notary'. Such role should not be overshadowed by the sole objective of making profits, or internalized as an ancillary service by large investment firms.

Liquidity is the ability for a market participant to buy and sell with minimum market impact. Very differently, volume is a measure of the number and monetary value of transactions effectively realised regardless of the price impact of those transactions.

HFT creates volume but not liquidity. It is either built on trend-following strategies that generate volume but take away liquidity, as evidenced by their market impact, or on so-called 'liquidity-making' strategies that collect liquidity rebates but in reality provide no liquidity, because the limited depth and milliseconds' duration of their quotes denies proper investors the chance to transact for significant amounts when needed. HFT threatens market fairness, order and integrity.

Financial products linked to commodities are proven to raise commodity prices to artificially high levels, harming consumers everywhere and the poorest most of all. They also hamper the normal functioning of commodity derivative markets so that natural buyers and sellers of commodities cannot hedge their exposures as effectively.

Protection of investors and employees go hand-in-hand Inducements paid to distributors of financial products create conflicts of interest that endanger the quality of advice given to retail investors. In similar fashion, sales targets can incentivise the sale of inappropriate instruments to customers and prevent employees from properly fulfilling their advisory role.

The rise of dark and OTC trading reflects a growing lack of confidence in markets, caused largely by a surge in HFT and insufficiently restrictive waivers on transparency rules.