Michael Stumm: Renegade Engineer

August 31, 2011 07:00 PM
Unabridged Q&A

FM: Is the problem with regulation that it gets political? That they are reacting to short-term political pressure?

MS: I think so. There are a couple of things that are going on. Number one, we had this financial crisis at the end of 2008. The public got hurt, the government got hurt, etc. [It] is natural for everyone to say, 'We need a solution.' The easy solution is to say, 'If only this had been tightly regulated this would not have occurred.' I doubt that because these things also happen in regulated markets, but it is a natural response and so it doesn't come as a surprise. As a result, a lot of the regulators become more aggressive. The danger is, are they going to overdo it so that they actually hurt the markets. Sarbanes Oxley is legislation that tried to fix a problem and in my view completely overdid it and hurt a lot of companies, especially smaller ones. It is important to have a balanced view. The pendulum has swung to where it is as a reaction to the financial crisis. The question is: 'Is that pendulum at the end and will it go back toward the middle, or is it still in the middle and has a long way to go?' I don't know the answer to that. I hope it is not in the middle because if you overdo it and don't do it right it hurts more than it helps.

FM: Your career has been focused on providing retail traders the same benefits afforded the big players like the banks. We are in the midst of a three-year debate over regulation and arguably have not taken significant steps beyond the status quo. What prescriptions would you apply? How would deal with OTC markets and capital requirements?

MS: My particular view on this and where a lot can be prevented is to open up forced transparency. If you have a rule in place that [says] every transaction that gets executed from a broker, a bank, etc., has to be published on their website, that would allow the media to go over that data and draw conclusions about a particular broker and compare brokers based on the data. It allows economic institutions at universities to go over all that data and number crunch those things to find out: Are there red flags, is there something going on? Then the markets would be much more self [regulated]. Force everyone to publish it. Going back to the forex markets, every forex broker in the United States now has to upload every transaction to the regulators and they go over that every day. On the surface that is a good thing, but unfortunately this is a very heavy- weight regulation. It is costing the regulators a tremendous amount of money, so they have to raise fees; now it is getting more expensive to trade. It costs nothing for every broker like ourselves or our competitors to simply once a day publish a page with every signal transaction that gets executed. Don't disclose the client but say: 'Eurodollar, this is the ticket size, this is the price they got, this is the time stamp associated with it.' Then anybody can go over it, including the clients themselves to see 'Am I being treated fairly? Is something going wrong?' I believe if Goldman Sachs and many of these other institutions – Citi and UBS – were forced to publish on a website some of the things they were trading and people had seen the sizes in which they were getting into positions, the academics certainly and probably the press would have raised red flags way before and the crisis potentially could have been averted. That would be a very simple regulatory rule that would cost almost nothing and would provide tremendous advantages.

I don't understand what the capital requirements are of banks and my skeptical view is that banks are so large that they can publish in their financial statements pretty much what want to and you don't get much transparency. But certainly for forex brokers, the capital requirements today are adequate and they have been raised over the last couple of years, and I thought that was correct and they now have reached a level where they are adequate. But the number-one prescription for everybody should be full transparency. Every transaction should be published, maybe even semi-real-time, on the web so you have full disclosure on everything. That will help a lot.

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About the Author

Editor-in-Chief of Modern Trader, Daniel Collins is a 25-year veteran of the futures industry having worked on the trading floors of both the Chicago Board of Trade and Chicago Mercantile Exchange.