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Uptick rule could curb quant fund risk-Man Group CEO

Date: Tuesday, January 24, 2012
Author: Laurence Fletcher, Reuters

The head of Man Group , the world's biggest listed hedge fund manager, is backing the reintroduction of the so-called 'uptick rule' to reduce the risk of a market crash prompted by lightning-fast computer traders.

Peter Clarke told a conference on Monday that the U.S. rule, which only allowed short-selling -- bets on a share price falling -- if the last sale price of a stock was higher than the previous price, could help stop some rapid-fire computer hedge funds fuelling market falls.

His comments come after quantitative hedge funds were twice involved in market sell-offs during the financial crisis. In the summer of 2007 a number of quantitative hedge funds suffered heavy losses after being caught in a vicious circle of selling.

And the U.S. Securities and Exchange Commission (SEC) partly blamed the 2010 "flash crash", when the Dow Jones index fell nearly 1,000 points before bouncing back in a matter of minutes, on high-frequency trading firms, which can make tens of thousands of ultra-fast trades a day.

"From a personal perspective, reintroducing the uptick rule, for example ... would not be a particularly bad thing," Clarke told the London School of Economics Alternative Investments Conference on Monday.

"You can only short when the previous trade was an uptick, which would stop some of the ... quant strategies from becoming systemic in certain markets over the short term."

First adopted after the 1929 market crash, the uptick rule was abolished in 2007 after the SEC concluded it was no longer effective in modern markets, although some commentators have since called for it to be reintroduced to curb the effects of short-selling.

Clarke also said that high-frequency traders, whose strategies include making markets for other investors, did not contribute to overall market liquidity -- one of their key defences adopted by the controversial sector.

High frequency trading accounted for 56 percent of U.S. and 36 percent of European equity volume in 2010, according to TABB Group.

"There's a big debate -- are they providing liquidity or are they taking liquidity? My personal view is they're not really providing any liquidity because they don't take positions over the end of the day," he said.

However, he added: "The solution to this ultimately is to have tonnes of market participants... People trying to participate in the trade in nanoseconds, people who have got 30-year time horizons, people who don't care about liquidity, people who care passionately about liquidity...

"As soon as you start excluding a short seller or a margin seller or a levered player or a faster player then you start to destabilise things."

The SEC is currently considering obliging high-frequency firms to make markets in all trading conditions.

Man Group's flagship fund is one of the world's biggest computer-driven hedge funds -- the $21 billion AHL -- although its strategy is to follow market trends rather than trade tiny discrepancies in stock prices or make markets for other investors.