01:30 PM
Dr. John Bates
Dr. John Bates

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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