I am a marketmaker, you are a trader, he is a price manipulator. Everywhere, investors bemoan the decline in liquidity; even US Treasuries, the world’s most liquid market, is less deep than it was. On bad days such as we have seen this week, it can be almost impossible to trade many securities at other than fire sale prices.

Coincidentally, this week also saw yet another probe by the Financial Conduct Authority, this one into whether a trader at Lloyds Bank manipulated the UK gilts market. The bank is helping the financial police with their enquiries, but the trader is now back at work, indicating Lloyds’ view of his behaviour. The gilts market is smaller than that for US Treasuries, but it is wide and deep. Manipulating it is a formidable challenge.

Any trader who tried to push prices out of line would quickly find others rushing in to take advantage. Moreover, trying to buy cheaply and sell dearly is what traders are paid to do. Making a two-way market is not easy when you have no idea whether the next deal will turn you a profit or merely make your position worse.

Markets, even the most liquid ones, are not smoothly-flowing streams, but are lumpy and unpredictable. Without marketmakers prepared to take the lumps, there is no market. With the authorities demanding more and more capital backing for institutions that are prepared to risk market-making, and keen to jump on anyone suspected of “manipulation”, small wonder that liquidity is drying up.

Shooting the lights out

Slightly belated congratulations to the the Rt Hon Edward Jonathan Davey, who received a New Year knighthood for services to the dirty diesel generation industry. As Ed Davey himself admitted, this is not a service he was trying to encourage when he was energy secretary in the coalition government. He got himself into such a tangle that the dirty diesels are stopping the construction of the (relatively) clean gas-powered stations needed should the weather ever have the temerity to turn cold.

The diesels had a bit of a run on a mild day last November, when four power stations had to be shut down unexpectedly, wiping out the grid’s margin of supply over demand and forcing heavy users to call on the dirty stand-bys. A cold February day with little wind would mean that the diesels, er, clean up.

This regime is only one of Sir Edward’s triumphs. The political momentum which is making the construction of Hinkley Point, that financial nuclear bomb, appear inevitable regardless of cost, is mostly his doing (though it’s still not too late to abandon the £25bn project). This power station is costing the equivalent of $150 a barrel oil, or more if the inevitable cost over-runs fall on the taxpayer.

Yet that looks like a bargain when compared to the cost of the proposed Cardiff Bay barrage. Like Hinkley Point, it would need 35 years of public subsidy to persuade private sector investors to start building. Hinkley Point requires a  £92.50 per megawatt hour guarantee, but the barrage wants £168 to make the sums add up, or around four times today’s wholesale price for electricity.

Finally, the programme to force “smart meters” into every home is in trouble even before it gets properly under way. This is supposed by its promoters to save £17bn because we’ll be able to see how much electricity we are using, but the only certainty is its £11bn cost, and fresh proposals from the European Union may send that bill much higher.

It may be unfair to lay all these blunders at Davey’s door, but he was in charge at the time, and more than anyone else he made the decisions which promise to make British electricity among the most expensive in the world. Quite a knight, then.

Father Christmas has left the building

Remember the Santa rally? How long ago it seems, those few days before Christmas when your fund manager massaged his 2015 numbers by topping up on his favourite stocks to raise the value of the whole portfolio. If it helped him to qualify for a performance bonus, well that’s just a lucky coincidence.

This is my FT column from Saturday

 

 

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