This article, co-written by Joe Pimbley and PF2 director Gene Phillips, was published in the Commercial Law Quarterly. The paper focuses on the court's ruling in the seminal Myer class action, and in particular issues with the court's assumptions as to how markets operate, how efficiency can be tested or shown, and the reliability of the technical evidence — specifically event study evidence — provided to the court.
This article focuses on risk-damages, and in particular the distinguishing of the risk-based component (which risk may yet to have occurred) from other components that might together form damages. As shown in the article, litigators and courts often look too narrowly to the tangible consequences of alleged misconduct, even early in the litigation, rather than the immediate risk-based exposures resulting from the misconduct alleged.
Research | On Testifying Experts and their Misuse of Models
This article, co-written by Ron Bewley and PF2 director Gene Phillips, was published in the Commercial Law Quarterly. It describes thematic challenges scientific experts face when building models; pressures and biases they face; regular shortcomings found in their approach to modeling; and, sometimes, experts' over-reliance on the outputs they derive from the modeling process.
This research paper examines flaws in the implementation of the correlated binomial, and suggests improvements that overcome the existing shortcomings. (Journal of Structured Finance, by subscription)
Research | Royal Commission into Banking Misconduct
We discuss the recommendations of the Royal Commission into Banking in Australia, and its admirable restraint in avoiding the temptation to call for more regulation: the 2,300 page U.S. Dodd-Frank Act and its progeny have amply demonstrated the perils of that approach. We identify elements of the banking and advisory market that pose challenges in implementing the positive changes called for in the Commission’s Report, and potential solutions. We offer three favoured candidates for overcoming anticipated resistance to implementation: learning from the technology giants; creating a meaningful enforcement program; and building a regulatory measurement system that enables a broader spectrum of clients to better assess and compare providers’ performance.
(Law and Financial Markets Review, by subscription)
This article analyses the London High Court's ruling in a matter entitled Lloyd v. Google, which concerns data markets and online privacy concerns. We have provided a market-based, economic perspective in our commentary.
Update: The Court of Appeal reversed the High Court's ruling (Oct. 2019)
Research | Correction Mechanisms Shall Set Us Free
This research piece looks at elements of our financial architecture that seek to reduce the likelihood of a financial downturn, but once it occurs, unintentionally exacerbate it rather than alleviating it. The paper considers both conflicts of interest in the provision of oversight services and structural and contractual concerns that prompt further selling into an already inhospitable market.
(Journal of Structured Finance, by subscription)
This paper tackles the thorny question of whether credit ratings should be entitled to the highest level of protection under the First Amendment, or only a lower level of protection as commercial speech. The answer for structured finance ratings, we conclude, may be different from the answer for corporate ratings.
(Journal of Structured Finance, by subscription)
Research | Through Thick and Thin, and Changing Data
This piece examines the powerful influence of prior predictions and estimates on corporate disclosure. We explore the innate psychological pressure on executives to meet (or beat) targets, and how these pressures can culminate in problematic decision-making, especially when economic conditions deteriorate in a way that threatens what may already be optimistic projections.
BV–VPIN: Measuring the impact of order flow toxicity and liquidity on international equity markets. High levels of order flow toxicity can culminate in market makers providing liquidity at a loss or in the suboptimal execution of trades. From a regulatory perspective, high levels of toxicity can be harmful to overall market liquidity and precede precipitous drops in asset prices. The authors acknowledge the resources and technical support provided by the research team at PF2.
Submission | Australian Law Reform Commission (ALRC)
The ALRC sought submissions regarding its proposals to (1) allow law firms to enter contingency arrangements, and (2) regulate litigation funders. Our submission concentrated on the market dynamics in a competitive funding market, and recommended ways in which the proposed regulation of funders can be more effective.
GARP Risk Intelligence Publication. "Today, the CBOE’s Volatility Index is prone to inadvertent and deliberate errors. But there are steps we can take to improve the index’s accuracy and curtail its susceptibility to miscues and falsifications."
Primer | Raise High The Price: An Investigation of Pricing Investigations
Our piece explores the issues at hand. In so doing, we briefly describe the capacity and motivation for adjusting or steering the prices of financial products, and then provide timely examples of cases in which the approaches taken by firms are either being scrutinized or have been found to be in violation of acceptable standards and practices.
Primer | Spoofing: Now You See It ... Now You Don't
Financial markets regulations in the U.S. seek to prohibit market activities or transactions that cause false or fictitious prices to be reported as if they truly reflected market levels. Spoofing is one area of market activity that recently garnered the attention of regulatory and supervisory authorities. The highest-profile of the enforcement actions was taken earlier this year, with the CFTC fining Citigroup $25 million for spoofing in the U.S. Treasury Futures market.
Research | An Examination of Post-Crisis Financial Markets Litigation
This paper details the themes among financial markets cases brought concerning post-crisis issues, including benchmark cases, valuation concerns, trade execution, allocation and fee investigations, and disputes involving other trading and sales practices.
The piece summarizes the core areas of investigation into misconduct in the currency markets. We describe investigations and litigation across various forms of ForEx trading, spanning benchmark manipulation, collusion to widen bid/offer spreads, front-running, stop-loss triggering, backing away from quotes, and suboptimal execution.