CFA Conference: Bradley, Hambrecht and Niederauer

This session features Harold Bradley, the CIO of the Kauffman Foundation, Bill Hambrecht, founder, Chairman and CEO of W.R. Hambrecht + Co., and Duncan Niederauer, CEO of NYSE Euronext.  It is moderated by Francesco Guerrera of The Wall Street Journal.  It is entitled Challenging Industry Norms: Has Innovation Helped or Hurt the Integrity of the Markets?

My session notes follow.  As always, these are at-the-time notes.  I make no guaranty as to their accuracy or completeness.

Bradley

  • Much of what we call “innovation” is dealer bookmaking (Wall Street uses access to help themselves to the detriment of individuals).
  • Risk — people “need to borrow more to make the same.”
  • Lower costs aren’t harmful to the purchaser; question — why do we really need so many intermediaries.
  • Proprietary trading causes many of the problems.
  • JOBS Act — new jobs come from new companies; the idea is to open the pathway.
  • Sarbanes came from Enron, but current small companies don’t have that level of complexity (supporting JOBS Act).

Hambrecht

  • Rulemakers should get back to the basics — what went wrong?
  • Great advantages in innovation; most problems in trading.
  • With more efficient markets and tighter spreads, incentive to leverage is huge (and that’s a problem).
  • Is the playing field level? Much more so now, especially for retail.
  • Problem — fear of crisis (3 “hundred year floods” in last ten years); shaken confidence in banking and markets — it will last a while.
  • transparency is always a good thing.
  • Negative consequence of crisis — consolidation, moving banks from small offerings; JOBS Act should help that.
  • Sarbanes is a psychological barrier, so 5-year exemption via JOBS Act is helpful.
  • Tech companies went public not due to a capital need, but due to a liquidity need by employees.
  • Doesn’t work with bulge-bracket firms now because they insist on discretionary allocations.

Niederauer

  • Innovation generally is good, but the consequences aren’t always good; we need to recalibrate.
  • Tighter spreads are a big incentive to work “in the dark.”
  • Benefits of transparency and tighter spreads increase velocity (which has risks).
  • As markets get “darker,” benefits of innovation tend to wane.
  • We will continue to have a big crisis every 5-7 years.
  • Retail clients are uneasy due to market velocity — but if you are an investor and not a day-trader, why should you care?
  • Regulators can’t put a “firehouse” in front of every house — the goal is to respond quickly and well.
  • Today — transparency leads to a free-rider problem.
  • Buy-side/sell-side/exchanges — each constituent has its own issues; buy-side will become more active.
  • JOBS Act — goal is helping 100-150 firms a year; these are the job-creators; not designed to hide stuff from investors.
  • Let’s move from identifying issues to solving problems.

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