this is a correct but silly argument: imho today we must strive for stability and not predominantly for efficiency!!

Why did Prime Brokers place more onerous leverage restrictions on their HF clients than the lending/trading arms of these same institutions place on their counterparties?

Just a thought, but is it not because all PB positions are “on balance-sheet” whereas exposures to counterparties are more often than not “off-balance sheet”, i.e. their effective leverage is lower for “on” than “off”.

This is odder when one considers that the PB relationship is far more favourable to the PB (who legally can more or less puke any client whenever they want) than external exposure to counterparties say versus one’s swaps desk.

Isn’t it because

Why did Prime Brokers place more onerous leverage restrictions on their HF clients than the lending/trading arms of these same institutions place on their counterparties?

I don’t have an answer, but methinks finding one is important.

The U.S. Government has evolved, and I’d argue its for the worse. Its less stable, and at this point, quite harmful to other coexisting things (itself included).

In natural evolution, I’d agree, however, evolution of markets, governments, etc isn’t exactly so; there’s far too much intervention for nature to run its course and whiddle-out the weak.

(thanks for all the links, BTW)

A 0.5% tax (stamp duty) giving $3bn per day to the UK treasury might be an irresistible proposition to any UK Chancellor, let alone politically popular with the majority of voters.

No wonder Brown, Sarkozy and Merkel are all for it. Note that Sarkozy has 3 of his countrymen in key financial positions now too.

Maybe they’ll call it temporary – like income tax:-)

But agreement is boring. Cordial antagonism is much more interesting. Let me expound on each of your points in turn:

1 — you’re probably right. But people use any excuse these days to bash active investing. I’m pretty sensitive to it.
2 — most spec squeezes out little scalps. Sometimes not even 1% gains. You gotta have leverage or it’s not worth the candle. Tolerance of spec tends to mean turning a blind eye to leverage. But again, leverage by itself is value neutral, not necessarily a Bad Thing. Companies showing operational leverage are the stocks I most look for in upturns like this, the ones I will make most money on. Leverage is bad in comination with illiquidity; when there’s no chance of undoing it if it goes wrong. That’s what blew us up.
3 — i don’t think there are many virtues to HFT, and I have never heard anyone say there is. But there are loads of people saying its Bad. And I think that’s probably unfair.
4 — things that have evolved tend to be more stable and lasting, and less harmful to other, coexisting things, than things that have been designed. That’s all. That doesn’t mean evolved situations can’t suddenly lead to disequilibria and extinctions

I would like to think my points were more nuanced, though I understand it’s easier to counter the simple version. I also do not pretend to know how big the financial sector should or shouldn’t be, though I will note that the market rarely does either – witness the extreme winnowing in Japan during the Lost Decade, where 8 out of 10 stockbrokers, and perhaps five out of 10 city bankers lost their jobs.

Here is how I would tersely put my points:

1. The primary focus of OTHER PEOPLE’s outrage has been the compensation issue rather than active investing.

2. I am agnostic and tolerant about spec, but Leveraged Spec is of dubious value at best, and systemically dangerous at worst.

3. I remain suspicious and doubtful about the hyperbolic virtues of HFT. A world with less intermediation has to be economically better than a world with more intermediation.

4. I am also dubious about faith that Market-Darwinism always leading to best outcomes. Just because something evolved doesn’t make it better.

First, I’ll grant you that leverage was the poison. And the distinction between spec and investor is not useful in the context. I’ll also violently agree that easy money was the ultimate culprit, itself with root cause in both Asian policy and American thereof. Further unfettered by regulation, it facilitated leveraged investor borrowing short to lend illiquid long – whether levering dedicated bank capital or HFs limited partners’ equity – which is always an accident waiting to happen – even more so when the collateral has vaulted substantially in price. Ditto for carry trades, equity or commodity investments – anything where a contra move in price would cause one to be forced to sell position to make position.

So we’d probably agree that good policy the world-over (along with World Peace and helping victims of famine and leprosy) would be the best elixir. However this has proven objectively difficult. But just because we can’t cure the disease, doesn’t mean we shouldn’t treat the symptoms. And the curse of too much liquidity spawns many symptoms – many treatable to allow the hypothetical patient to live so that – hopefully – one day we might address the root cause. Tangential to this is technology and globaization vaulting ahead of regulation, market organization, and full comprehension of the consequences.

One the problems (as you rightly highlight in questioning my distinctions) when trying to treat the symptoms – of both liquidity, and probable malignant market evolution is that it is a slippery slope, which poses difficulties for diagnosing and rectifying. An analogy, might be one I see daily: in France police use radar deemed necessary for the public safety, and as such radar detectors are illegal. But GPS purveyors are permitted to disseminate the location of fixed radars, and radio stations broadcast the location of mobile speed traps, useful work-around to the law-breaker. Where is the line? But the difficulty in drawing it, doesn;t mean the fixed radars are wasted, since they are typically placed in caution zones, and therefore have the desired effect of slowing traffic and preserving public safety. Of course public safety would be enhanced by prudence and complete adherence to laws, but there is clearly a continuum, and the same almost certainly holds for finance and systemic integrity in the Public’s Interest. Sure it would be best if bankers and leverage providers were inherently counter-cyclical, and if participants didn’t attempt to game every loop-hole. But they don’t, so an activist central bank and treasury BEFORE the fact to protect the Public Interest on the line as the lender/maker-maker of last resort, and to as much as possible lay out and enforce the limits has to be better (though by no means perfect) than laissez-faire – an approach that needs a stronger political constitution than the polity possesses in order to be viable.

To me, most forms of HFT are not benign but a novel approach to gaming a structure not yet evolved enough to cope, to the detriment of major constituents. The slippery slope exists here too, but I remain unconvinced as to any non-parochial virtues their activity represents – including the amplification of the prevailing trend hypothesis.

Oh, lord