Last week, the Harvard Business Review blog presented some Harvard faculty responses to the newly signed Dodd-Frank financial reform bill. The Business School Professors’ sentiments range from the “cautious optimism” of Robert Steven Kaplan to Robert C. Pozen’s assertion that the act “misses the main cause of the crisis,” which was Fannie Mae/Freddie Mac, in his opinion. And while David A. Moss believes that the bill takes important steps to rein in “too big to fail” banks, Clayton S. Rose says that “little has been done” to defuse the systemic risks of such institutions.
None of the Professors focus on what Joseph Fuller, co-founder of Monitor Group, has called “The Terminator” of modern financial markets: computer-based modeling and trading programs. In a 2009 piece in The American Scholar, Mr. Fuller argues that the work of “quants” worsened the financial crisis. He also describes regulatory steps that could help dampen the volatility produced by automated trading programs.
Neither the Dodd-Frank Act nor Harvard’s Professors assign high importance to quant-driven volatility, but Mr. Fuller’s argument suggests that they should. Automated models drive hair-trigger, lockstep responses to market signals. “The Terminator” has also discouraged the sort of qualitative historical analysis that many investors, including those who consider environmental, social and governance (ESG) factors, believe is the key to long-term value creation.