INVESTMENT/NOT BORN YESTERDAY

More confusion for the many, more secrecy for the few

Last Wednesday afternoon New York time, former Federal Treasury guru Alan Greenspan was interviewed and gave some forthright views. He was, he opined, 'amazed' at how well the US economy had held up thus far, but pointed out that there was far worse to come. The seventeen 'protected' small-fry mortgage companies were 'an accident waiting to happen', and the two failed banks in the sector 'will have to be nationalised'.

Within an hour the Dow dropped a hundred points, and the FTSE's rally stalled the next day – to be followed by a resumption of the downward trend.

There has always been an obvious correlation between 'news' (you have to put the word in commas these days) and stock markets, but the very speed of the transmission of opinion, events and other information in 2008 means that traders of all shapes and sizes have become obsessed with every fall, failure and fart on the planet.

In a Bull market, the background level of medium-term confidence dilutes the effect of technology speeding up (and thus exaggerating) the knee-jerk; in a Bear market - and whatever Darling or Benanke say, we've been in one for at least six months - it exaggerates the significance of almost everything.

On the other hand, a major market shift having occurred - recent oil price rises being the contemporary example - the speed and complexity of reaction by the big (usually Hedge) funds results in there being confusion, followed by panic - followed by a lengthy post mortem as to who and what caused the tectonic change.

Hold those thoughts.

Without getting too technical here, the London Stock Exchange (LSE) is responding to market pressures on a number of dimensions. The main one (its own domination of trading in many areas) is being countered by cooperating with some of those trying to break it. Its Lehman Deal (which broke late June) to create an alternative 'trading platform' is part of this, and the LSE's cooperation at a lower level with Turquoise (a nine-bank consortium) is another.

While the LSE's shareholders (just for a change) want the institution to up profits, users want precisely the opposite. They want speed and better-value efficiencies (which these trading platforms should deliver) and they want the increasingly computer/algorithmic trading systems (lots of little instantaneous bits to you and me) available as part of the package. This last is primarily for Hedge Funds, the secretive folks who require 'dark liquidity pools' where anonymity stops sectors pa nicking if they do something big and sudden.

The attempt to even out the effects of Hedge Fund interventions should be welcomed by everyone. But on a broader canvas, the bottom line is that two developments are running side by side (and at astonishing speed) in a way which will revolutionise stock trading globally. Reaction to news information will get even faster, and what's going on below the surface will become less and less obvious or public.

bottom line is that two developments are running side by side (and at astonishing speed) in a way which will revolutionise stock trading globally. Reaction to news information will get even faster, and what's going on below the surface will become less and less obvious or public.

This will make both reflection and regulation far less practical, and - the double whammy - make massive, self-centred manipulation more feasible. And lest anyone doubt the scale I'm talking about, Hedge Funds account for at least 50% of all market trades today.

There are important principles here. Bourses for the common good or for the greedy? To feed commerce or play games with it? To support the private citizen's pension or enrich the already mega-wealthy? Given that no more than 0.2% of private investors worldwide can take advantage of Hedge Funds - or need such ultra-fast trades - this combination of technology and secrecy bodes ill for both caring governments and hard-up investors.

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