You can tell that the end of the year is nigh when discussions on Wall Street and the City turn to bonuses. Bonus time in 2012 looks to be pretty disappointing given the year the banks and hedge funds have had, but bonuses are not the only things that will see dramatic change.
The year 2011 in capital markets was a roller coaster of market volatility, high frequency trading, rogue traders and hit-or-miss regulations. We would love to think that the year 2012 in cap markets will be a smoother, more serene one.
This, however, seems unlikely given the continuing lack of adequate risk management and market monitoring practices, the gloomy economic climate and continuing public backlash against financial markets.
Here are nine capital markets predictions for 2012:
1. Billion Dollar Blunder: At least one financial institution will take a billion dollar (or more) hit when a rogue algorithm goes wild. The algo will go into an infinite loop, taking on an irreversible and un-hedged position, which cannot be shut down. Losses will challenge those by human rogue traders, which banks and financial institutions will prevent from happening next year.
2. Occupy HFT: The public, government and regulators will start the "Occupy HFT" movement -- a popular uprising against the ultimate elite of those making money in this climate. Despite immense financial industry pressure, regulators in both the U.S. and the EU will be panicked by investor and political disapproval of HFT and will rein it in with draconian rules and controls.
3. SEFs Spur Splash Crash: Swaps execution facilities (SEFs) will revolutionize OTC derivatives trading, enabling them to be traded electronically. This, in turn, will lead to increased risk of a cross-asset class swaps "splash crash" which will confound regulators, who have little understanding of these markets.
4. Global Regulation Rocks. Countries will finally realize that regulatory harmonization is a good thing and that individual self-interest is not. Banks and financial services firms will realize that they need to think like regulators, taking control of internal surveillance and compliance before regulators make them do it.
5. RICs Get Smarter. The RICs in BRICs are getting smart order routing and gearing up for an increase in algorithmic trading. This, coupled with looser regulations, will begin to attract regulatory arbitrageurs and Volcker Rule escapees.
6. The Wild East. The West's supremacy in financial markets will further decline as new trading regulations - the Volcker Rule in the U.S. and MiFID in Europe - create a surge of regulatory arbitrage favoring more lightly regulated geographies such as Russia and China. Wall Street and the City of London will lose human and financial capital as a result.
7. Financial Terrorism. An exchange or trading destination will be hacked by financial terrorists intent on manipulating markets for political gain. This will lead exchanges and ECNs to add more stringent monitoring and surveillance capabilities.
8. Head in the Clouds. Explosive growth in foreign exchange trading and SEFs means that participating firms will require complex hosted solutions. Even the smallest FX broker needs aggregation and pricing services which require a big technology footprint. SEFs present new challenges as swaps markets attract algorithms and require surveillance.
9. Crime & Punishment. Regulators are cracking down hard on financial fraud and market manipulation and they will bring in some big fish in 2012. Prosecutions and punishments will increase in size and in impact.
There you have it - nine predictions for capital markets in 2012. What are your thoughts on these predictions, and have we missed any? Comment below, or tell us on Twitter at @DrJohnBates or @ProgressSW.
Follow John Bates on Twitter: www.twitter.com/drjohnbates