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How Do You Save the Capital Markets?

Kennedy Looks to Lead Market Revamp

Kevin Kennedy is my new hero.

The senior vice president and head of equity options, on stage at the Options Industry Conference last week, spoke about taking the lead on a new initiative to change the existing financial and regulatory structure for financial markets. And he urged the other exchange executives from the other four major options markets to join him.

In today’s political environment, it takes courage for someone to stand up and say they want to fix the financial markets so they stay the envy of world capital markets.  And there is much to fix – from products priced in pennies and those that should not be, to the fragmentation of the markets, to the way auctions work, to how various market participants interact with the markets and with what capital requirements.

Of course, Kennedy is not alone. The yeoman’s work on dealing with Washington has been done for many years by exchange leaders such as Bill Brodsky, Sandy Frucher, Terry Duffy, Charlie Carey and before them Chicago political workhorses like Tom Donovan, Leo Melamed and Jack Sandner. Today, exchanges and clearinghouses, not to mention large institutions are represented in DC as well.

But with Kennedy holding the baton now on behalf of the securities world – primarily in options, he is doing the right thing at the right time. It appears the new administration and perhaps regulatory agencies are more receptive to cooperation than they have been since the launch of Dodd-Frank, now almost seven years ago.

The enormity of the task is also appreciated. Pulling together competing exchanges along with competing firms and potentially competing regulators in a polarized political structure is like George Clooney goin’ fishing in The Perfect Storm. The question is whether he can pull the crew together and get the boat over the tidal wave at end.

I think Kennedy would agree the financial marketplace, especially in securities, doesn’t need a wrecking ball, but rather some strategic adjustments that are doable and will have a cumulative positive effect on the markets –greater liquidity, better incentives for participants and overall, healthier markets.

This column isn’t about how and what should be done, but why. It is, in large part, a matter of technology. The pace and scope of technology is changing the way we do everything, especially in markets. Technology has brought tighter markets and a generally better experience for customers. This has come at the expense of many of the firms who help facilitate those trades by taking on risk. The reward is simply not there for many of them.  Such is the nature of industries, but something will need to be done to incentivize more firms to grease the wheels of markets.

So we’re at an interesting cross section of history and technology. The technology can help provide the vehicle for the solutions that the industry and regulatory agencies create. And as such, those fixes could make the US capital markets far stronger and robust than they are today. The ripple on effect could be a country that creates more wealth, more innovation and more inspiration than any competing economy.

Can Kennedy & Associates do it? It’s arguably the best chance the market has had in some time.

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About Author

Kharouf is CEO of John J. Lothian & Co. and editor-in-chief of John Lothian News (JLN). He edits the John Lothian Newsletter, MarketsWiki and MarketsReformWiki.