ETFs Reshaped Ahead of Regulation
As negative sentiment against Wall Street snowballs and a new trading scandal takes shape, it is important to look back to 1986 and reflect on what’s changed and what hasn’t. While traders at the Galleon Group began unwinding positions in stocks like eBay(EBAY), Apple(AAPL) and OSI Pharmaceuticals (OSIP) in the wake of Raj Rajaratnam’s arrest, the filming of “Wall Street 2″ in lower Manhattan is cause for investor deja vu.
Consider the following news flash:
“All across the U.S., investors were raging at the discovery that Wall Street high rollers had been ripping off millions of dollars by trading on knowledge not available to the general public. That sweeping form of sophisticated fraud did not merely touch the pocketbooks of professional stock-market players. The illicit profits came from taking unfair advantage of price movements in a broad range of stocks. That meant, in the end, that the speculators had pilfered from funds that countless thousands of ordinary investors had contributed to the market, in the form of their own stock purchases or investments in pension and mutual funds that in turn had bought securities.”
With President Obama chastising Wall Street, public rage over bonus payouts and insider trading arrests, this commentary seems to hit the mark. But this article excerpt is from the Dec. 1, 1986, edition of Time magazine in the wake of Ivan Boesky’s arrest.
Boesky, the inspiration for fictional banker Gordon Gekko in the original Wall Street film, was arrested in the 1986 insider investing trading sting that rocked the financial world. Also subpoenaed in the process were Carl Icahn, Boyd Jefferies and Michael Milken.
Successful trading operations are still at the heart of institutional profits. Recent earnings reports from JPMorgan Chase (JPM) and Goldman Sachs (GS) reveal that trading desks have been central to the recovery of big banks. Information is still the most valuable commodity.
Still raging, 23 years later, is the war on “speculators,” whom the current administration is targeting with derivative market reform. In 1986, the speculators under fire were of the leveraged buyout variety.
While Obama may be critical of certain firms resisting reforms of the derivatives market, members of the exchange-traded fund industry already have begun to reshape funds ahead of regulation. Managers of the United States Natural Gas (UNG) ETF have begun selling to-be-regulated futures contracts and buying swaps. PowerShares has restructured its popular DB Commodity(DBC) ETF to own fewer to-be-regulated oil futures, instead opting for foreign traded Brent oil contracts.
These significant changes underscore the effect that even the talk of regulatory change has on financial instruments.
Wall Street has experienced a type of demystification in recent years and the enormous growth of the ETF industry is a symptom of the shift. Instead of relying on mutual fund managers to pick strategies, investors want to be where the rubber hits the road, and are increasingly choosing transparent ETF funds.
If history has anything to teach us it is that greed will corrupt some investors along the way. We are entering a new era of accountability for both companies and individuals. Let’s learn from history as the latest saga unfolds.
