Compliance

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Dr. John Bates
Dr. John Bates
Commentary
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Predictions Come True as Regulators Swoop

While two out of the five capital markets predictions from July have already come true, let's hope that all five don't actually happen.

When I made five capital markets predictions back in July, I had no idea that two of them would hurtle toward their conclusions within the space of a couple of weeks. But I had broken with the traditional end-of-year capital markets predictions because some things were looking quite imminent -- which, it seems, they were.

My prediction that a price fixing scandal would hit the precious metals market came to bear when an investor filed suit in the US late July against Deutsche Bank, HSBC, and Bank of Nova Scotia for trying to rig the price of silver.  

I said before that any market where human beings contribute to the pricing is subject to manipulation. Precious metals tend to be niche, opaque markets where prices are "fixed" during the day by a panel of banks, leaving gold and silver prices terribly exposed.

Luckily the existing daily silver fix, which is set over the phone by a small group of banks, will be replaced on August 15 by a new auction-based electronic system provided jointly by CME Group and Thomson Reuters. And, it seems, not a day too soon.

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The second prediction, which also seems to be racing towards its conclusion, was that many dark pools will evaporate under the heat of recent scandals, and the rest will merge. At the time, Barclays’ dark pool was already under investigation by New York Attorney General Eric Schneiderman, and volumes have since plummeted by almost 50%.

Shortly thereafter, UBS, Credit Suisse, and Deutsche Bank were drawn into dark pool probes by regulators and authorities on both sides of the Atlantic.

As the Securities and Exchange Authority and European regulators join the New York AG, the predatory high-frequency trading sharks in dark pools appear to be heading for the exit. Liquidity is already suffering, and soon there will some major consolidation of dark pools. Many will simply close.

My remaining predictions -- that algorithmic terrorists will infiltrate a hedge fund; the SEC’s Mary Jo White’s 13-step program will sober up the market; and a hedge fund will manage $100 billion in assets with only one employee -- may take a little longer to percolate. However, one really hopes that two of those don’t come true. I’m sure you can guess which ones!

Dr. John Bates is a Member of the Group Executive Board and Chief Technology Officer at Software AG, responsible for Intelligent Business Operations and Big Data strategies. Until July 2013, John was Executive Vice President and Corporate Chief Technology Officer at Progress ... View Full Bio
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Greg MacSweeney
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Greg MacSweeney,
User Rank: Author
9/4/2014 | 6:34:57 AM
Re: Dark Pools
Yes, if the markets are hacked, we will be wishing for the days of the small by comparison Target and Home Depot breaches. Investors will be scared away, liquidity will vanish, and markets will be devastated. Algorithmic terrorism, or a hack, would destrot any remaining investor confidence. Cyber security is near the top of the SECs priority list, for sure.
Byurcan
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Byurcan,
User Rank: Author
9/3/2014 | 2:15:12 PM
Re: Dark Pools
Let's hope this dark thing doesn't come to pass then...
IvySchmerken
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IvySchmerken,
User Rank: Author
9/3/2014 | 2:02:51 PM
Re: Dark Pools
That would be everyone's worst nightmare, and I agree, CNN and CNBC would readily adopt the term. But seriously, algorithms are used to trade in and out of dark pools as welll as exchanges which are all interlinked. So any type of infiltration by a rogue algorithm could be extremely dangerous. This would make the Home Depot or Target theft of credit card data look tame.
Byurcan
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Byurcan,
User Rank: Author
9/3/2014 | 8:49:12 AM
Re: Dark Pools
The idea of algoithmic terrorists seems like a very real one to me, I can see this prediciton coming true. And then of course the NYT, CNN and other media immediately oversuing the buzzphrase "algoithmic terrorists" to death.
Becca L
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Becca L,
User Rank: Author
8/30/2014 | 7:22:31 PM
Re: 1 ominous prediction
John, you know you can't stop now, right? You're on a roll and I'm very curious what you have to predict next. Besides, who doesn't love the satisfaction of a well-earned "I told you so"
NJ_trader
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NJ_trader,
User Rank: Moderator
8/27/2014 | 8:09:42 AM
1 ominous prediction
Well done. However, the prediction about a terrorist organization is not a fun one to think about.

In fact, regulators are increasingly worried about hackers destabilizing the financial markets. We all hope it doesn't come true.
Greg MacSweeney
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Greg MacSweeney,
User Rank: Author
8/27/2014 | 8:07:10 AM
2 down, 3 to go
Congrats! I think Mary Jo White's program is already starting to sober up the market, so you that one may also come true by year end.

The infiltration of a hedge fund by a rogue group is a little more scary (for everyone), so I hope you are wrong on that one.

Any preseason football predictions?
Becca L
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Becca L,
User Rank: Author
8/25/2014 | 2:23:43 PM
Re: Dark Pools
Well done!It's amazing how quickly your dark pool predictions came to be.

I can see how you're remaining three predictions could unfold within the next year. I won't be the least bit surprised when a hedge fund run by a single individual reports $100 billion–it's a crazy world we live in!

As a sidenote, do you have any good stock predictions?... :-)
Jonathan_Camhi
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Jonathan_Camhi,
User Rank: Author
8/19/2014 | 2:06:44 PM
Dark Pools
Nice job on your Dark Pools prediction. It was only a matter of time before some regulator figured out that there was plenty of work for them to do there. Not too surprised that the NYS AG was out in front on it either.
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