Given the massive ignorance, not just of you’re average Joe (Sorry I think that’s now ‘Joe Six-pack’) but of experts, I think we should be particularly on the lookout for ‘no-brainer’ reforms. Simple things that we can do than generate gains and for which it’s very difficult to imagine substantial costs. For a long time I’ve thought that so much resources in the financial sector go into trying to get the scoop on others – trying to beat other investors to the punch to buy or sell assets before the news spreads to others that it’s a major source of inefficiency. If so there’s something that one could do fairly simply. One could only trade every now and again, say for a couple of weeks every three months on a stock exchange and require all listing firms to have a high degree of information out in the marketplace before markets opened.
A bit radical? Well yes, I wouldn’t try the experiment in quite such a bold way. I expect such a change would generate far more gains than losses, but I can’t prove it. And it’s undoubtedly the case that markets being open 24/7 enable various risk management strategies that may be important for the real economy. But one might move in this direction more incrementally in two ways that I think would produce far more gains than losses.
- Where there’s evidence of insider trading – for instance where there are major and unexplained movements in the share-price in directions which are understood after some company announcement, a firm should be put onto a regime in which their shares are not traded in some substantial period before any major announcement that can be anticipated – like results.
- The race for priority has escalated to such a ridiculous degree that a huge number of hedge funds and trading houses have moved important IT facilities as physically close to exchanges as possible. The incentives driving this wasteful race for priority could be dealt with, with minimal downsides it seems to me with staggered randomised priority. Buyers and sellers would send in orders as they do now. But they would go into one minute batches. Thus whether your order arrived in the first or the last second of a one minute segment of time, it would go into the pool of buyers and sellers in a random order for that minute (one might delay it by a minute also just so there are no remaining benefits from relocating your IT to slightly improve your chances every now and then of ‘making the cut’ into an earlier minute block.) Thus every minute the system would spew out matches and generate pricing information as it does now. So you get rid of some rising costs, and it’s hard to believe that you wouldn’t have all the benefits of trading that we enjoy today.
Postscript: It is in the interests of the exchanges themselves to bring about PSR (That’s Periodic Staggered Randomisation for the uninitiated) as explained in this subsequent post.