A critique by the EDHEC Risk Institute alerted me to a fascinating paper published by the European-based organisation Finance Watch.
The 67-page Finance Watch report, titled 'Investing not betting: making financial markets serve society', takes a crack at all the current controversial issues - high frequency trading, dark pools, commodity speculation etc.
And while the Finance Watch membership is skewed to what might be described as politically left - unions, academics and so on - it also includes former financial market practitioners.
The report is a technically detailed look at how financial markets operate, and includes some memorable terms used by high frequency traders to describe strategies including: spoofing; smoking; painting the tape; momentum ignition, and; quote stuffing.
As well, the study provides a big picture view of the cost of finance as measured by the "sum of all profits and wages paid to financial intermediaries" compared to GDP from 1870 to 2010.
The research, carried out by a New York University academic, Thomas Phillipon, found the "cost of intermediation" grew from 2 per cent to 6 per cent over 1870 to 1930.
"It shrinks to less than 4% in 1950, grows slowly to 5% in 1980, and then increases rapidly to almost 9% in 2010," the report says. "The pattern remains the same if finance is measured as a share of services, and if net financial exports are excluded."
This at a time when advances in IT should have reduced the cost of financial intermediation, the study says.
According to Phillipson, in the absence of yet unproven efficiency gains, the increasing cost of financial intermediation "would represent an annual misallocation of about $280 billions, which appears to come from the large trading volume that investors perform."
Finance Watch offer a 10-point reform agenda:
• Financial markets should serve the real economy and society as a whole;
• Financial markets will not fulfill their core function without regulation;
• The utility role of market structures has suffered under the drive for venue competition;
• Investing is fundamentally different from betting;
• Liquidity should not be confused with volume;
• High-Frequency trading damages liquidity;
• Excessive commodity speculation raises prices artificially and damages the market for real buyers and sellers;
• Dark trading below 'large-in-size' is detrimental to fairness and price formation;
• Most derivatives should be traded on [European regulated] existing trading venue categories;
• Protection of investors and employees go hand-in-hand.
The last point concerns financial advice, both the third-party and in-house versions.
"Inducements paid to distributors of financial products create conflicts of interest that endanger the quality of advice given to retail investors," Finance Watch says. "In similar fashion, sales targets can incentivize the sale of inappropriate instruments to customers and prevent employees from properly fulfilling their advisory role."
In its rebuttal paper called 'Who sank the boat?', EDHEC actually take aim at only one of the Finance Watch complaints, namely commodity futures trading.
"While agreeing that Finance Watch's concern with food and oil price spikes is fully justified, EDHEC-Risk Institute is concerned that Finance Watch's proposals in restricting speculation fall somewhere in the continuum of being a placebo to actually being harmful to the goals to which they aspire," the non left-leaning EDHEC says.By David Chaplin