Tuesday, August 24, 2010

Market Failure by Regulation

Steve Connor in the NZHerald.co.nz reports on a bit of American regulation that is destroying the market for helium:
It is the second-lightest element in the Universe, has the lowest boiling-point of any gas and is commonly used through the world to inflate party balloons.

But helium is also a non-renewable resource and the world's reserves of the precious gas are about to run out, a shortage that is likely to have far-reaching repercussions.

Scientists have warned that the world's most commonly used inert gas is being depleted at an astonishing rate because of a law passed in the United States in 1996 which has effectively made helium too cheap to recycle.
We're all familiar with helium balloons; however, this noble gas has less frivolous applications in medicine and science. For instance, it's used to cool MRI machines. The reason that helium has become scarce is government regulation:
"In 1996, the US Congress decided to sell off the strategic reserve and the consequence was that the market was swelled with cheap helium because its price was not determined by the market. The motivation was to sell it all by 2015," Professor Richardson said.
But this is not the only regulation induced market failure in the news today. The Wall Street Journal's Dennis Berman examines the regulatory underpinnings of the recent stock market:
The May 6 "flash crash" was the culmination of 35 years of relentless stock-market reform, much of it rightly making the markets cheaper and faster, largely free from the 20th-century market makers who feasted on huge trading spreads and occasional chicanery.

Yet somehow we have wound up right where we began: with a market that many perceive as tainted and prone to gaming by a cadre of insiders. Only this time, instead of wielding the biggest, baddest berth on the New York Stock Exchange floor, they are wielding the biggest, baddest computers.

When BlackRock Inc. surveyed 380 financial advisers earlier this summer about the flash crash, their perceptions said it all: The mayhem had been primarily caused by an "overreliance on computer systems and some types of high frequency trading" strategies that roam the market en masse, looking to pick off pennies of profit.


Behind these changes, beginning in 1975, was a zeal to liberate the individual investor from the clutches of the archaic market makers who made a good living taking "eighths"—12.5 cents—for every share bought and sold.

The government later found Nasdaq dealers were even more gluttonous than first imagined. And by the time the last big market reforms were issued in 2005, the intent was to "give investors, particularly retail investors, greater confidence that they will be treated fairly," the SEC said at the time.

As spreads squeezed from eighths to pennies, a new batch of electronic-trading networks blinked into action. Volume trading was the only way to make money.


H.C. said...
This comment has been removed by the author.
H.C. said...

I FB'ed this one.

H.C. said...

And Busch thought stocks were a good gamble (oops, excuse me, investment of some kind? What is a 401K?) for retirement funds.
I almost .... in my pants when I first heard that.