. 2020. Gregory Scopino. Cambridge University Press.
Derivatives trading technology has exploded in sophistication because the Great Financial Crisis, because of algorithms and electronic execution. The open futures market is a distant memory, but whether we now have a regulatory environment that may effectively take care of an algorithm-driven execution world will not be clear. Technological improvements are increasingly impacting trading behavior, however the pandemic-related market crisis of March 2020 was a wake-up call about liquidity and market issues, and the regulations traders must follow to acquire and supply liquidity. In a crisis, the interplay of technology, rules and regulations could leave investors within the lurch who need liquidity to reduce their costs of coping with an adversarial market environment.
In, Gregory Scopino, associate professor of law at Georgetown University and special counsel to the Market Participants Division of the Commodity Futures Trading Commission, seeks to grasp this vital intersection between regulation and execution technology.
Artificial intelligence (AI) has advanced automated trading systems, called “algo bots,” to the purpose where programs can react faster than any human trader and find relationships that the ground trader or market maker can only imagine. examines and discusses the implications of this rapid electronic execution environment for market regulation. For those unfamiliar with the history and context of many issues surrounding futures and derivatives regulation, the primary half of this book is introduction and covers the important thing questions of what a futures market is and the way it ought to be regulated.
Futures regulation is different from securities regulation because it has different goals and focuses. clearly explains a regulatory system that is stuffed with arcane pondering that may conflict between regulators and global jurisdictions. Derivatives regulation of swap markets is even newer, so rules and case law are limited, somewhat opaque and contradictory. Regulatory clarity is particularly needed with fintech developments resembling cryptocurrencies.
Scopino’s descriptions function a foundation for more complex topics of algo trading and regulatory oversight, that are covered within the second half of the book. Today’s regulation can’t be separated from the laws and precedents of the past. Technology may advance markets, however it is constrained by the legal environment. Nevertheless, the regulatory environment must adapt to the changing technology that allows transactions in our largest markets.
Critical legal issues resembling fraud, manipulation, ‘spoofing’ and market integrity related to advanced execution technology are covered intimately. These issues are of great public interest within the context of ‘flash crashes’ (i.e., extreme, short-term price declines resulting from dwindling liquidity). Traders conduct price discovery and procure liquidity information from the market microstructure. The order book provides vital information in regards to the intentions of market participants, yet by placing after which canceling orders, an automatic trading system can create the looks of liquidity and market demand that don’t exist. Rapidly adding and removing orders will be considered each fraud and manipulation, destroying the integrity of core market functions.
Seemingly easy problems can result in regulatory complexity. Fraud and manipulation are based on traders’ intent, but can an algo bot that issues orders during a market downturn based on an AI response function or feedback loop have harmful legal intent? The writer offers some answers and an answer that involves regulating the algo bots as a category of market participants no different from floor traders. He also suggests the necessity for market disruption funds and insurance-like solutions for flash crashes.
offers a highly detailed journey through the history of futures and derivatives market regulation, from market definitions to how precedent influences current pondering on electronic market regulation. However, financial professionals focused on market mechanisms and the impact of regulation on their bottom line when executing orders could also be dissatisfied by the highly technical writing style, paying homage to a law journal article. Scopino does job of creating this work accessible through clear prose and good examples, but he clearly has a legal audience in mind together with his book. This comes on the expense of practitioners who want to grasp how order execution services could adapt to the regulatory environment and potentially increase liquidity.
At over 470 pages, this work might have been shortened and focused on the long run of regulation to create a more compelling story for a wider audience. It could be more impactful if it attempted to attach the legal issues with the growing research on market microstructure and focused on the interface between law and economics. While Scopino touches on many vital topics, asset managers would likely like more vision on how regulation can shape the long run of execution and forestall market collapses.
Execution technology is an arms race by which those in search of to realize a market advantage compete with those in search of to reduce execution costs. The actions of 1 group that achieves a technological advantage provoke a response from the opposite group. This conflict over differing trading objectives determines trends in liquidity and transaction costs. The resulting benefits can’t be realized when market integrity is challenged or market crashes occur.
Markets are public goods, places where price discovery occurs through the transmission of order information. Regulation must due to this fact transcend competition and make sure the integrity of price information and sufficient liquidity in a crisis. From my perspective as a market practitioner and economist, Scopino’s legal focus, while well presented, misses the chance to advance views on market structure and potentially influence readers and regulatory pondering in a direction that anticipates and addresses potential execution problems in a world of fragile liquidity.
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