The school for rogue traders

TAMING wrongdoing in the financial system is akin to the fairground favourite Whac-A-Mole. Regulators deal with one problem and up pops another.

Post the financial crisis, the banks effectively have been hammered down in the Anglo-Saxon democracies (if not in the dysfunctional eurozone), but no sooner than this has happened new problems pop up.

The big assumption is that the next crash, fuelled by QE- driven cheap credit, will occur in the shadowy world of hedge funds, private equity and off-radar entities we don’t even know about. We had a glimpse of this phenomena this week with the ‘Hound of Hounslow’.

It is implausible to think that however smart and computer savvy Navinder Singh Sarao may be that he was the sole originator of the ‘flash crash’ on Wall Street in 2010.

If it turns out, however, that he was able to play a role this demonstrates, as has been the case down the ages, that regulators more often than not are fighting the last war.

As far as one can tell, and so far the Financial Conduct Authority has been remarkably silent on the Hounslow trader, the ‘ trading arcades’ of which Sarao is a graduate have not been a source of intense regulatory scrutiny.

Sarao sharpened his trading skills on highly technical and computerised commodity futures and equity markets at a firm called Futex, which, like the Hound, also operates far away from the glistening trading towers of Canary Wharf.

The break-up of open, pit-based trading on London exchanges such as Liffe and the International Petroleum Exchange led to the thousands of dealers spreading out far and wide as the astrophysicists and engineers replaced them before computer screens.

At their peak it is estimated that there were up to 400 ‘ trading arcades’ manned by refugees from the City, and at their height they may have accounted for up to 40pc of the volume of trades, although over time the volumes have reduced dramatically.

Nevertheless, as was the case with off-balance sheet special purpose vehicles (SPVs) that exploded during the 2008 financial crash, the trading warehouses and their potential for doing mischief to the financial system have been largely hidden and unsupervised.

One of the useful things for the mavericks and refugees from open outcry trading is the way that regulators organise themselves.

This was a point addressed by no less a figure that the former chairman of the Federal Reserve Paul Volcker in the last week, still going strong at the age of 87.

He and a group of other wise men argued that there have been 25 attempts since the Second World War to clear up America’s regulatory shambles and all have failed. He identified two key problems. The Fed (the same could be said for the Bank of England) was now doing too much and needed to focus on monetary policy and setting broad financial regulations to be enforced by others. And the Securities and Exchange Commission (the SEC) and the Commodity Futures Trading Commission should be merged.

The spread of electronic markets and the rise of index and futures trading essentially means that the distinctions between these regulators has blurred.

It seems that Sarao, who fre - quently traded on the Chicago Mercantile Exchange (CME), but was allegedly responsible for knocking the Dow Jones equity markets for 1,000 points, may have been aware of the opportunities for regulatory arbitrage.

What is remarkable about all of this is that the authorities endlessly produce documents, such as the Bank of England’s Financial Stability Report, providing warnings of the next hurricane to blow us all over, be it loan-to-value ratios in housing or the perils of junk bond investing.

But more often than not, it is the googly bowled at the system, by an unknown player, which wreaks the most havoc.

Blocked pipeline

HAVING skilfully seen off the tax driven menace of Pfizer last year, Astra-Zeneca has still to show its mettle. The loss of income from blockbuster tummy cure Nexium is currently being repaired by cashing in on some of its joint deals with smaller companies. The real value is deeply buried in AZ’s pipeline of compounds that includes a new family of cancer-fighting drugs. If these start to come to fruition then the shares could quickly steam ahead of Pfizer’s £55 bid. Investors will need to show patience.

Emir’s palaces

QATAR will have paid a whopping price, estimated at £1.5bn, for 64pc stake in Corion which owns the favoured hotel of monarchs, Claridge’s, as well as the equally elegant Connaught and Berkeley hotels in central London.

Not a piece of real estate comes up for sale in the capital without the Emir Sheikh Hamad bin Khalifa Al Thani placing his towel on the deckchair.

How all this plays with the Qatar’s eclectic friends in Gaza and among Syrian-based Jihadists is unclear.