Recent US Monetary Policy Decisions
In 2017, the decision to raise the base interest rate per annum was adopted by the Federal Reserve System of the United States of America. It testifies to the continuation of the Fed’s policy targeting the tightening of monetary policy, in spite of growing concerns about weak inflation (Miller). In this connection, the focus on inflation is one of the most significant decisions that can be made paying attention to a set of opinions and studies performed by the Fed.
In general, a more characteristic trend of the Fed’s decision to lower interest rates allows the Federal Treasury to keep from collapse and even build up the pyramid of American debts. Speaking about the Fed, it is important to understand that it is a symbiotic body by its nature. Its decisions also ensure the unity of business and the state; not of any business, but of a major financial one, which has long become global (Miller). Such a review takes into account not only the potential benefits of raising the target level of inflation but also the potential difficulties that may be associated with it. The risks for economic forecasts remain generally balanced in the medium term, but the committee closely follows the dynamics of inflation. At present, the committee plans to begin the implementation of the program to normalize the balance sheet this year, considering that the economy will develop as expected.
The strategy of the recent decisions of the Fed is called by analysts as pragmatic madness. On the one hand, it effectively mitigates the consequences of the crisis; on the other hand, it prints dollars and buys bonds, thereby inflating its balance (Monetary Policy). This threatens the fact that in the event of an imminent rise in interest rates in the near future, there will be a devaluation of the huge volume of bonds that the Fed bought. In turn, it may lead to serious losses and even paralysis of the system of Federal Reserve banks, at least, by the absence of dividend payments and the restructuring of the Fed. It played a significant role in mitigating the crisis in the United States. Thus, unemployment fell from a peak of 10 to 7.5 percent (Monetary Policy). The volume of lending in commercial banks is growing, and, most importantly, inflation rates have fallen.
The US national debt is one more issue associated with the Fed’s decisions. News on this topic will have more impact on the movement of quotations. It is possible to offer one of the options – reducing costs or raising the limit of borrowing. Reducing costs will cause a negative impact on the markets, and raising the ceiling of the national debt will call into question the current credit rating of America. There is a need to develop a balanced compromise solution, over which American politicians will have to work hard.
Problems and Regulation of High Frequency Trading
In connection with the rapid development of technologies used in the activities of the financial market, the problem of assessing the influence of High Frequency Trading (HFT) becomes of great importance. This problem is especially relevant to countries with a well-developed financial market. At present, many questions about the existence of certain causal relationships between the trading activity of HFT and the emergence of non-standard situations remain controversial (Korsmo 591). The main technological innovation in the sphere of organized securities trading was the active replacement of the human factor. Professionals working in real time compose the key source for making trading decisions tend to be replaced by pre-designed strategies – algorithms that significantly changed the conditions and characteristics of the market.
To prevent the possible negative impact of algorithmic systems on the market infrastructure, exchanges and regulators attempt to control certain trading robots. The technological risks associated with an increase in the flow of applications from algorithmic systems, most of which do not lead to actual transactions, cause special fears. As restrictive measures, some exchanges introduce additional commissions. Thus, since June 2009, the market of FORTS urgent instruments for trading robots that are connected directly to the stock exchange operates restrictions on the number of transactions for one trading day (Goldstein et al. 182). Namely, it charges an additional commission fee to regulate the market and address the mentioned problem.
Despite the significant risks of the stock market functioning created by algorithmic trading systems, there are no trading algorithms at the moment to restrict the activity of HFT. However, the situation with increasing the share of trading robots has already attracted the attention of the experts since some operations of robots on the issuance and withdrawal of applications may fall under the law on the manipulation of the market transactions.
Many regulators such as the US Securities and Exchange Commission, the British Financial Services Authority, and so on raise the issue of limiting the operation of trading algorithms. In the US, the Commodity Futures Trading Commission issued a fine to Panther Energy Trading in the amount of 2.8 million dollars for the misleading bidders on the real supply-demand ratio by high-frequency display. In this case, it is possible to note an intentional yet unauthorized introduction of programs designed to buy and sell securities of certain issuers that consciously distort the market situation with their demand and supply. It is important to stress that this causes legitimate fears of traditional traders, including large investors, who are concerned about the fact that exchange trade loses one of its main advantages – transparency. In turn, this results in the outflow of a part of strategic investors from those that constantly trade on the exchange market.
Problems and Regulation of Dark Pools
Dark pools allow making deals in conditions of almost complete anonymity, leaving unknown participants, transaction price, its volume, and the very fact of the deal. The regulation of dark pools may be performed in one of three ways. The first way occurs when a deal is made by many small companies, hiding the intentions of a large one (Foley and Putniņš 460). In terms of the second way, a broker organizes a special anonymous platform; and the third strategy implies that the exchange allows providing anonymous transactions.
As a rule, in a traditional open market, large transaction conciliation requires dividing it into a series of small ones, executing them consistently – this is how the “Iceberg” application works (Mishkin 155). Dark pools allow making a deal without resorting to such tricks. Similar sites operate according to the same rules as there are an order price and priority on the time of issue, but price and a participant of the transaction are not specified. An application is issued, and if there is a counter-claim satisfying the conditions. A transaction is made, and it is impossible to say what proportion of the exposed volume is covered by its results. Therefore, one cannot make an assumption as to which direction a large volume is exposed.
However, along with advantages, dark pools also have their own drawbacks. One of the main problems is the ever-increasing volume of operations with dark pools, which can lead to a decrease in the average daily trading volume at the main sites. Consequently, the abovementioned situation may lead to a decrease in their liquidity. In this case, a growing number of investors would want to transfer their trades to dark pools, which will negatively affect the open market and exacerbate the main problems associated with them (Pasquale 2090). Another problem is the inadequate regulation of this market, so there are opportunities for trade with the use of insider information. The data in the dark pools do not affect the transparent markets until the moment of the transaction. This generates a price difference for the same shares, which gives a wide range of opportunities for arbitration transactions.
One more problem is associated with the fact that investors cannot evaluate whether the order is performed at the best price or not. This trend is especially pronounced if a broker has made a deal in his or her own system that is not seen by other dealers and the Securities and Exchange Commission. This is because the dark pools allow observing the price of execution of the order only after the transaction is completed. Such an issue is relevant for the selling side as well, which can provoke fraudulent behavior of a broker and additional costs for both sellers and buyers.
Works Cited
Foley, Sean, and Tālis J. Putniņš. “Should We be Afraid of the Dark? Dark trading and Market Quality.” Journal of Financial Economics, vol. 122, no. 3, 2016, pp. 456-481.
Goldstein, Michael A. et al. “Computerized and High‐Frequency Trading.” Financial Review, vol. 49, no. 2, 2014, pp. 177-202.
Korsmo, Charles R. “High-Frequency Trading: A Regulatory Strategy.” University of Richmond Law Review, vol. 48, no. 2, 2014, pp. 523-608.
Miller, Rich. Yellen Doubles Down on Bet Hot Job Market Stokes Inflation.Bloomberg. 2017, Web.
Mishkin, Frederic S. The Economics of Money, Banking, and Financial Markets. 11th ed. Pearson, 2015.
Monetary Policy. Board of Governors of the Federal Reserve System, 2018, Web.
Pasquale, Frank. “Law’s Acceleration of Finance: Redefining the Problem of High-Frequency Trading.” Cardozo Law Review, vol. 36, 2015, pp. 2085-2127.