In the year 2010, ground-breaking legislation was passed by Congress that would curb transgressions that helped cause the 2008 financial crisis. Also in 2010, mid-term elections changed the balance of the U.S. Congress, giving Republicans a majority in the House with Democrats retaining a majority, barely, in the Senate. Thus the financial reform bill is targeted by the new House majority, who promises to rip it apart.
It seemed 2010 was that kind of year: Two steps forward, one step back, and sometimes even two steps back. An easy example is that legislators, who swore to control spending and reduce the deficit, voted to continue the Bush tax cuts, as well as extend unemployment benefits.
But here I want to highlight what I believe were some of the top stories that impacted the trading community. Some of these are expanded upon in our Tops and Bottoms of 2010 (see page 52) by Managing Editor Daniel P. Collins and Assistant Editor Michael McFarlin.
1) Peloponnesian War: It really wasn’t Athens vs. Sparta, but perhaps overspending by Greece would have been curtailed with Spartan leadership. Instead, Greece needed a European bailout to the tune of billions of euros, and Europe began down its own bailout road, not for banks, but for countries.
2) Financial reform: Finally, Congress took aim to correct Wall Street’s ways. Perhaps the most important rule: OTC products would need to be cleared at a designated clearinghouse. The futures exchanges went through some hand wringing (members worried their world would be rocked by unknown risk factors from the OTC side), but overall welcomed the news, especially as it meant more business. But still to be worked out are the details on who can clear these products — i.e., who has the deepest pockets — causing some rancor in the futures commission merchant world.
3) Forex leverage: At last, at last, free at last was the retail forex world that feared regulators would cut their ability to leverage trades. Although 10:1 was threatened, the Commodity Futures Trading Commission decided on 50:1. Grousing did ensue, especially from those hoping to maintain the 100:1 level, but dealing with the known seemed more important than the actual leveraged amount.
4) Greenspan legacy sapped: Alan Greenspan, who has been credited with the roaring markets of the 1990s was berated by Congress in testimony on his missing of the subprime problem. Greenspan replied: "I was right 70% of the time, but I was wrong 30% of the time." That’s like many traders, but it’s all about the leverage.
5) Goldman Sachs limited?: Is there anything more to say? For a firm that likes to stay under the radar, it was in the headlines almost daily. Yet the most shocking headline was: "Goldman loses $100 m on three separate days."
6) Traders fade the market: People typically think traders are a libertarian set that despise regulation or any curtailing of free market style. However, in a speech at the Chicago Fed, Citadel’s Ken Griffin expounded on the need for regulation of OTC dealers and the move to centrally clear trades, and hedge fund manager Paul Tudor Jones upset many a broker at a CME meeting in Florida when he called on regulators to reinstate and narrow daily price limits on contracts.
7) Flash crash prescience: On Jan. 26, 2010, the Financial Times ran a story with the headline: "Computer-driven trading boom raises meltdown fears." On May 7, the day after the so-called Flash Crash: "Trading goes wild on Wall St." On August 23, the headline was: "Brokers face fines over ‘flash crash’ role" along with the subhead "High-frequency traders come under spotlight." No crystal ball needed there.