Events last week have asked the market a serious question . Do our regulators have the respect or trading knowledge to understand market making from manipulation ?
Currently under "the Volcker rule " they are able to name traders as "guilty" with little or no real evidence ; the probe into Lloyds banks gilt traders activity is a good example on how regulation has halted liquidity . In their desperate quest to find
manipulation they have provided the catalyst of liquidity drying up !
Exchanges need market makers to provide volume and liquidity to their numerous contracts and they pay handsomely for this privilege ; these monies provide a cushion for market makers losses when contracts become fast and volatile ; however it does appear
that a few market makers now refuse to accept losses and perhaps the role of market making needs addressing ?
The problem is our regulators appear to have no idea how to separate manipulation from market making and have placed them in the same jar ; real time supervision would of solved this issue . Market making and providing a two way market is currently a
brave and challenging career as your positions are nearly almost immediately offside especially in these current trading conditions ; however in quieter markets the advantages are beneficial , market makers have to accept that by accepting the carrot it will
occasionally be nibbled and hence why exchanges pay them so much !
Regulators need to understand and quickly that without market makers there may be no manipulation BUT there will also be no market in which to trade and their current handling of the UK gilt market has severely drained the contract of liquidity . Do we
have a cure ? Perhaps real time regulation would help and tagged traders especially market makers ; even an independent committee who oversee the choice of market makers at exchanges ?
LASTLY my view on MIFID2 is that market makers will be exempt from any charges of manipulation or market abuse as they are providing a service ! This could be very dangerous in the wrong hands and a very stupid decision as it will put them both in the
same jar !