The Year of Regulation

Now that the first week of the New Year is behind us and things are beginning to return to normal in the office, I feel comfortable with officially dubbing 2011 as the "Year of Regulation."

As the industry races to implement the changes required by the Dodd-Frank Act, I have to admit that regulations born of crisis always make me nervous. When people are in crisis mode, the decisions aren't always the best.

It's not a flattering comparison, but the current market structure reminds me of Robert McNamara's defense on how the US executed the Vietnam War as presented in Errol Morris' 2003 documentary The Fog of War: Eleven Lessons from the Life of Robert S. McNamara. Essentially each conventional conflict presents its own learning curve, or fog of war. However in an era of nuclear arms where decisions have to be considered and made in minutes rather days, weeks or months, they're often not the optimal ones, explained the former US Secretary of Defense.

Now that the global markets are far more tightly linked and decisions in them are regularly made in microseconds, regulators find themselves in a similar situation. As the markets speed up, so will the regulatory processes need to keep up with faster markets. Knowing that regulators tend be reactive to market conditions, they're most likely going dealing from one crisis to another.

First there was the credit crisis of 2008 and then the flash crash of 2010. Although the flash crash didn't have the same impact as the credit implosion, it demonstrated one of the weaknesses of the equities market structure. Industry-wide circuit breakers are just a quick fix to the problem, but substantive fixes won't occur until Dodd-Frank is off the plate.

Until these issues are addressed, the industry can expect a bumpy ride for the next few years.