Don't Cry For HFT, Argentina

It's the second time in 15 years that the South American country has defaulted on its government debt interest payments, though this time—and surely adding insult to its recent heartbreaking loss in the World Cup final—the causes are tied to the ruling of a US federal judge thousands of miles away and the insistence of a small group of hedge funds led by Elliott Management's NLM Capital unit, rather than prudential policy or macroeconomics.

When reading the details of the country's latest financial tumult, I was reminded of a conversation I recently had with a colleague who covers hedge funds at Risk, BST's sister magazine, during which we discussed distressed debt restructuring, such as that in question with Argentina.

Our conclusion was simple: sometimes, having a clever strategy isn't as important as having dogged legal representation.

Increasingly, it seems, the latter is actually the former.

The most amazing thing about this isn't the relatively tiny amount of money in question—only about $1.5 billion in bonds are in dispute, though the outcome of the legal questions surrounding them could put billions more into play.

It's not just the grievance that worries; it's the feeling that the entire process has been hijacked.

Instead, it's the way the situation could completely recast the rights of creditors, relative to those of the sovereign entities issuing the bonds. Some argue its consequences are already made obvious in the revised legal mechanisms tied to newly-issued debt.

Of course, more than a decade of legal uncertainty—to say nothing of the potential future pain for ordinary Argentinians—will do that. And worse of all: whether the default status lingers or not, all of this undermines what would otherwise have been a fairly elegant, exchange-based, and broadly-agreed solution to the original 2001 event. It's discouraging, to say the least.

Self-Made Messes
Then again, elegance doesn't always spell effectiveness when it comes to navigating a mess of one's own making, especially if the optimal outcome or new rule turns on the cooperation of market players that are incented to do otherwise.

Indeed, a second mess can often be born out of the solution to the first.

This quandary will ring familiar to anyone who has followed the years-long discussion over certain markets now trading at unfathomable speeds—a debate which, in a new phase, has now pulled in at least three major sell sides' internal dark pools for investigation. Why? Because their mis-marketing to clients is provable, and potentially illegal.

But much like NLM, the high-frequency trading firms, themselves, aren't in for that fate—even if both are becoming known in the popular imagination as 'vultures'.

In the vast majority of cases, HFT shops have done nothing wrong under current regulation, despite some of their trading practices being ethically debatable. With a few exceptions, their pockets aren't as deep as investment banks either, making them lesser targets for an investigation ending in settlement or punitive fines. (Though somehow this doesn't stop them from influencing regulators and lawmakers).

The sound and fury in each situation is about more than the perceived predation involved; it's also about getting the fix done right—or rather the inability to do so because of a handful of actors' legal high-ground, a dash of remarkable obstinance, and in Argentina's case, a flimsy Latin "parri pasu" clause that was very unusually interpreted by an activist judge. 

It's not just the grievance that worries; it's the feeling that the entire process has been hijacked.

And while the HFT debate shouldn't require a decade to resolve itself, the potential for missteps and knock-on effects—as with the Argentine debt—are myriad, and equally problematic if not handled right.

I'm not sure one will find Latin in the middle of any legal decision or enforcement on an HFT matter, but given the trading style's technicality, it might as well as be. Let's just hope, and make sure, that a massive precedent for HFT doesn't hinge on a legal nuance so broadly interpretable.

Because we know this much: the stubborness isn't going away.