Ben Bernanke To Join Citadel Investment Group

April 17, 2015 0 Comments

This man is truly a wonder. He’s been retired from his position as Chairman of the Federal Reserve for a little over a year. Naturally, like all of the other former Fed Chairman, aside from all of their speaking gigs, one would think they would simply fade away into obscurity. Instead, he joined Twitter and accumulated a ton of followers, he started his own blog where he discuss Economics, Finance and Baseball (Similar to mine, except I talk about film), and he is getting all of these job offers.

Most notably, Helicopter Ben is going to offer his global economic and financial analysis to Citadel’s investment committees. He’s also going to meet with hedge fund’s and global investors around the world, according to the New York Times, anyway.

Keep in mind, he isn’t quitting his fellowship at the Brookings Institution. He is also receiving an annual salary at Citadel, but he isn’t going to have a stake in the $25 billion dollar hedge fund and as far as I know he isn’t going to receive a bonus for his performance.

Also, Bernanke has mentioned that he has received offers from plenty of banks, but has turned them all down. The notion of the “revolving door” is why he decided to join with Citadel. Considering that Citadel is a hedge fund company and not a bank of any kind, he wouldn’t have a chance to lobby for legislation in his favor. Truly a champion of the free market…

Ben Bernanke: I wanted to avoid the appearance of a conflict of interest. I ruled out any firm that was regulated by the Federal Reserve.

Although, it is very interesting. Ben Bernanke was chairman of the Federal Reserve from 2006 to 2014. This means he was under the reigns during the Housing Bubble. The same housing bubble Ben Bernanke completely missed, by the way.

It’s not necessarily a terrible thing Bernanke missed the financial crisis. Most people missed the housing bubble, although the housing bubble should have been painfully obvious. But given the role of the Federal Reserve and Ben’s role at the Federal Reserve, it’s relatively unclear how helpful he will be at Citadel, or whether his credibility is going to change the things are done at the fund.

Citadel is also a high frequency trader (HFT) hedge fund, which is basically a computer trading platform that uses powerful computers to conduct a large number of orders at lighting fast speeds. HFTs use algorithms (which I won’t explain because not even I understand it) to analysis different types of markets and execute orders based on different market conditions. Naturally, the traders with the faster execution speeds will be more profitable in the marketplace than traders who are slower at executing (part of the reason why the trading platform you use matters).

Simon Potter, Executive Vice President at the Federal Reserve Bank of New York gave a speech about how this new trading strategy has introduced a new level of risk in our financial markets, most notable and susceptible, the U.S. Treasury Market.

Electronic trading, including automated and high-frequency trading, has likely had a number of benefits. For one, technological advances have supported market efficiency by increasing the pace at which price discovery is disseminated across financial markets. It may also have reduced transaction costs, both through the economies of scale that large technology investments produce, and perhaps through the maintenance of narrow bid-offer spreads that automated market-making arguably makes more likely. For example, automated market-making might allow an investor to instantaneously transact in a security at a visible price, with the market maker then able to immediately offset the risk by automatically hedging the exposure.

Electronic and automated trading has also introduced risks to the Treasury market, as it has with other markets. For example, in the case of automated or high-frequency trading, firms must have sufficient internal controls to handle erroneous data and prevent malfunctioning algorithms. Considering that automated trading firms may hold limited amounts of capital given their minimal levels of net long or short exposure, some firms may be particularly vulnerable in the event of such an error. We have already seen some of these risks manifest themselves in foreign exchange and equity markets, where electronic trading is even more common. Further study is required to understand the particular nature of such risks in the Treasury market and the implications that may exist for other institutions, particularly since many automated trading firms are not direct netting members of FICC.

Automated trading has also raised questions on issues related to fairness and market behavior. For example, there is likely some dispersion across firms with respect to the speed at which they can transact, which in turn could lead to dispersion in the quality of execution that market makers and end-investors are able to achieve. This is an important topic for examination and reflection, but it is also worth remembering that a varied level of technological access has long been a feature of competitive financial markets. For example, when the telegraph appeared in the first half of the nineteenth century, traders without immediate access cried foul when early users began leveraging the technology to minimize the time between trade decisions and execution.

Electronic and algorithmic trading also has the potential to facilitate trading practices that are not helpful to market liquidity. For example, submitting a quote with the intent to cancel it before any reasonable probability of execution is detrimental to the quality of market liquidity and to the integrity of the market. Even if such acts are not intentionally misleading, they can still result in a false sense of market liquidity.

Finally, firms employing high volume automated trading strategies could harm market liquidity if they do not manage those strategies carefully, particularly given the significant share of market activity they represent.

He may have big issues concerning the revolving door. Will he turn a blind eye towards HFT? One can only guess. He has been very influential in his role at the Fed, but I doubt his person opinions are going to change. People do tend to change, whether they move from Washington to Wall Street, Private Sector to Public Sector, something always manages to change.

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