Former SEC Chairman David Ruder Voices His Concerns On Hedge Fund Groupthink And HFT

It is only fitting that on the 22nd anniversary of Black Monday, the commentator is none other than the Chairman of the SEC at the time, David Ruder. While Ruder provides perspectives on what is presumed pervasive insider trading as it relates to Galleon and otherwise, such as the ability by the SEC to use wiretaps when doing an investigation in concert with the US Attorney's office, the real critical message from Ruder is the systemic risk associated with hedge fund groputhink, or a massive position held by numerous hedge funds that turns out to be wrong, best seen it in the basis trade blow up, the Volkswagen short squeeze and the Citigroup exchange offer.

What I would be concerned about would be a hedge fund or a group of hedge funds engaging in strategies which might have a systemic effect on the market. We had that in the LTCM situation some years ago, not in the current crisis, but I have always thought we need protection against that kind of activity.

And this caveat on comparing today with 22 years ago:

There was tremendous market panic at that time...I for one t think we don't really know what would happen in the next downturn: we have High Frequency Trading, Flash Trading, ECNs and all kinds of activities in the markets which are not really known and are fairly incomprehensible.

Yet all the proponents of HFT of course will claim that, contrary to the former SEC Chairman's warnings, that all is under control.