A Nice Exchange for Niche Reforms
By Mark Griffith
There is a huge appetite among Britain’s public for reforming financial trading, and that demand hasn’t shown any sign of going away since 2008. However, reforming an existing set of intricate financial products is a daunting prospect.
Instead of another Big Bang, what London needs now is what Britain used to do best – piecemeal reform. Novel institutions to try out practical ideas. As established exchanges are loath to lose turnover to rival markets if they get something wrong, this means something even more modest.
A new exchange in a niche product currently tricky to hedge – set up with modest goals, modest targets, low costs, and modest ambitions. Most of all, it should not be a glittering new symbol of the Square Mile’s international profile, not a Gherkin or a Shard. It should be something affordable and useful to a physical industry whose firms would like to hedge their risk. Small, simple – even old-fashioned.
Here’s a commodity that needs a derivative: helium. Vital for super-cooled magnets and some cutting-edge lab research (liquid nitrogen, hydrogen, oxygen – no other cryogenic gas replaces helium). Yet it’s also scarce and expensive to extract.
Helium is just a random commodity here in search of an exchange. It could be mixed-housing coupons, it could be rare-earth metals, it could be helium. The bonus is what unusual rules a deliberately small, new exchange could test. It could have timed and staggered trades at intervals to defeat high-speed trading software. It could have volume limits and open-interest limits to defeat dark pools and walls of hot money from outside the industry it exists to serve. Instead of being 24-hour and online, when predators can lurk in thin volumes to attack and trigger orders, it could meet a couple of times a week, in European office hours. It could be an old-style price fix: 5 or 6 brokers each Wednesday. Just because many products like helium are big enough to need a hedging market doesn’t mean they benefit from something the size of NYMEX pushing their industry around for them. A lot of mathematical finance stresses the value of depth, liquidity, and smooth price discovery, but a lot of mathematical finance (before and after the famous Black-and-Scholes hedge-fund collapse) has turned out very wrong.
It could even be – whisper it quietly – some chairs round a table in a room.
Mark Griffith is co-editor of the ‘Collateral Damage’ collection of essays about the economic crisis, with articles by Niall Ferguson, Joseph Stiglitz, and 25 others.