Financial Markets Suffering from Lack of Trust

The financial services industry is suffering from a lack of trust, according to speakers at the SAP Financial Services Forum which is being held in New York.

The public does not trust the banks, the banks and the regulators don't trust each other and, as a result, the public doesn't trust regulators or have confidence that lawmakers will give regulators the laws and tools they need, said Shiela Bair, the former chairperson of the Federal Deposit Insurance Corporation (FDIC) and keynote speaker at the SAP Forum.

"If you want to restore confidence in the banking industry, you need to restore confidence in the regulators," Bair said. "If the public thinks you have weak regulators, or that regulators can get pushed around, you can't restore trust."

The subject of a lack of trust was the theme of other speakers, including Joseph Saluzzi, partner, co-founder and co-head of equity trading at Themis Trading, an institutional agency brokerage firm specializing in equities.

"When a market loses trust and confidence, it is very hard to regain that confidence," Saluzzi said in his presentation that was titled after his recently published book, Broken Markets.

"My clients are mutual funds and hedge funds," Saluzzi added. "The market is no longer seen to be transparent and fair. As a result trading volumes are plummeting," adding that the market now usually trades about six billion shares a day whereas just a few years ago it regularly traded approximately nine billion shares per day.

Saluzzi, who publicly questions the value of high frequency trading and is an outspoken critic of the current market structure, also outlined how HFT and the exceedingly complex market structure is turning off investors and hurting the reason why the markets exist -- to generate capital. "Buying and selling stocks is basically very simple," he said. Today, however, the equities markets in the U.S. are exceedingly complex, with numerous exchanges and intermediaries.

"Why does the industry need such a complicated model to do a very simple thing?" Saluzzi asked. And just like any industry or operation, the added complexity allows for the system to be gamed. "The more complex a system is, the easier it is to take advantage of the market."

Bair also spoke about how complex markets and complex financial products are hurting investors and market confidence. "It is in the long term interest of the market to get the regulation done and in place," she said. Until Dodd Frank is finally implemented, investors and the public will not begin to trust the banking industry, which is detrimental to the marketplace. "It's now four years later and only 30 percent of the Dodd Frank rules have been finalized."

Likewise, complex financial products which are not well understood by regulators, the public and even by the banks that are using them, need to have more transparency, Bair said. The products, such as credit default swaps which played such a large part in the financial crisis, are not well understood and can create the appearance of spreading risk. In fact, the entire idea about CDSs seems suspect to Bair. Bair likened CDSs to buying fire insurance on your neighbor's property. "You can't buy fire protection on your neighbor's house because that would give you incentive to burn their house down," she said. Greg MacSweeney is editorial director of InformationWeek Financial Services, whose brands include Wall Street & Technology, Bank Systems & Technology, Advanced Trading, and Insurance & Technology. View Full Bio