...as we enjoy great advantages from the inventions of others,
we should be glad of an opportunity to serve others by any invention of ours;
and this we should do so Freely and Generously

Posted September 18th, 2008 at 3:42 pm by Trent

Invention: Governmental Liquidity Taker

Type: Organizational Convention

Summary: The trillion dollar hedge fund industry is moving towards systematic trading, predominately focused on short-term, high frequency trading strategies known as “statistical arbitrage.”  The only good that these firms provide is liquidity and efficiency to electronic markets, which is an atleast 10s-of-billion dollar industry if not higher.  These services should be provided by a 1st or 2nd party governmental entity.

Explanation: In order to provide liquidity and efficiency to the markets while refocusing financial markets on investing in commercial interests and not taking advantage of market discrepencies the government should take two steps.  One) A goverment liquidity taker, run by the federal reserve, should be created.  This firm will establish zero-risk, high frequency trading strategies both providing liquidity and efficiency while taking the alpha generated by the strategies and putting it back in the fed to either be retained or re-issued.  Two) The government should move to put limits on holding periods so that other firms can not compete in the high frequency trading space.  As little as a few second holding period should suffice in giving the governmental entity enough of an advantage such that only legitimate trading activity will be profitable.

Utility: The markets remain liquid and efficient while arbitrage generated funds are returned to the federal reserve for re-issueance or for building up the strength of the dollar benefiting the US financial system on the hold.

Tags: Organizational Convention

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