Ever since the so-called “flash crash” on May 6, policymakers have fretted about the state of equity markets. So have investors. But is it possible this focus on equity markets is missing a trick? Could the flash crash reveal a problem that goes beyond high- frequency traders?
For Paul Tudor Jones, the hedge fund manager, the answer is yes. This week, he delivered a passionate speech to a CME conference in Florida that argued that the crucial problem bedevilling all markets these days was a lack of price limits, in effect, rules that stop trading when prices have moved too far. He implored regulators to impose these limits, not just for equities and futures (where some exchanges, such as the CME, already impose limits), but for all securities traded on exchanges, including options and derivatives. “I cannot tell you how many thousands of times I have traded on information that 24 hours later proved to be at least partially inaccurate or irrelevant,” he told the CME conference, adding that “relatively severe price limits” would force “all participants to take a more deliberate approach to external shocks that can only be accurately assessed with more time to gather information”.
It is a bold – if not contrarian – thing for a hedge fund veteran to say, particularly one who has earned billions by playing the (free-ish) markets. As Tudor Jones himself observed, most financial operators consider price limits to be anathema to modern free markets.