High Frequency Trading, or Not a Double Rainbow

Meet the new trading floor.

While we have been focusing a lot on the Presidential race around here recently - we too get caught up in the sheer volume of reportage of the campaign and equate that with importance - this is a story that is actually relevant to all of us on a daily basis.  All of us that interact with the financial system, that is.  So, unless you are living off-the-grind in a barter based commune in the woods, you might want to pay attention to something called high-frequency trading (hft), or algorithmic trading.


The animated gif below is a daily history of algorithmic trading activity from the past five years provided the analysis firm Nanex.  Take note of how crazy this plot gets starting in about 2010.  We first noticed that something was amiss when we saw articles in the NYT and Reuters back in August [The chart below originally came from this article, but it was taken down.  This article in Technology Review about high frequency trading (HFT) has it archived. -ed.] reporting that Knight Capital Group experienced nearly fatal losses when their high-frequency algorithms went wonky for 30 minutes.



We were reminded of the issues with high-frequency trading this morning when we heard this story on NPR's Morning Edition.  There is apparently some hand-wringing in the halls of Congress over the Knight Capital incident and the glitches that caused a delay in the Facebook IPO.  Like it's a double rainbow we have to ask ourselves about the data and the above chart, "what can it mean?"  If algorithmic trading is an innovation that gives the inventor an creative advantage, then that's what the whole capitalism game is all about.  That's true even if incompetent or unprepared firms make a hash of their algorithms and suffer self-harm, as in the case of Knight, or as presciently imagined by Kurt Vonnegut in his novel Hocus Pocus.  But, if this is little more than a way to game the system and sidestep the letter or intent of SEC regulations, then Congress should absolutely be doing its job to find out and prevent it.

We all know painfully well how the fallout from cavalier regard for risk and volatility on a systematic scale always comes around to bite "normal people".

Big Business Is Here to Save the Day, or The New Mythology

I'm desperately wracking my brain right now to remember whom to attribute this quote:

Americans mistrust government more than Europeans even though we [Americans] have arguably had better governments than they have. And we trust companies more than Europeans even though we have arguably had worse companies.

I'm going to attribute it to Jeff Jarvis of the CUNY School of Journalism, but it looks like the original idea might have come from someone else.

In this corner...

And, in this corner...

Anyhoo, on to the real point of this post:

Does anyone else find it more than a little ironic that this notion is unquestioningly accepted today: business experience is an asset for a candidate for public office?  Or, we could flip that and say that candidates without business experience are particularly singled out for ridicule.  Stop me if you have heard this campaign mantra before. "As a small-business owner, I know how to run [insert level of government office] and create jobs in this economy."  Or this one.  "My opponent has no experience running a business, and has no idea what it means to create jobs."

Really?

It's as though we have all agreed to forget these names: Enron, WorldCom, Tyco International, Standard Oil, AT&T (the original incarnation, as well as its current), Lehman Brothers, the list is virtually endless.  They all had leadership that did damn-fine-work destroying shareholder equity while eliminating jobs by the gross.  I'm sure, positive in fact, that each of them had an exec or two with ambitions to run for public office, not to mention how much weight these guys threw around on KSt.

There is a fundamental difference between running a for-profit enterprise and a (likely) heavily in debt State.  I'm reminded of the Washington Post op-ed by Mann and Ornstein that I linked to in this post.  The government is not a enterprise that must be profitable and be sure to balance its budget annually, which is the knee-jerk reaction of most businessman-cum-candidate.  ("I could never run my business spending like Washington does.")  In times of private sector contraction, it is frequently suicidal for governments to pull back on spending in response to shrinking revenue.  Just ask every cash-strapped state Governor with a constitutionally mandated balanced budget.  I would agree with anyone who says that a government should try to stay within a rational spending plan over a span of many years, but treating the public trust as an accounting exercise is foolish.

Moreover, the same analysis needed to asses the business case for an new enterprise would surely veto any number of essential government services and agencies that are required to make a stable state.  Cost vs. benefit analysis is inadequate to decide the merits of many critical infrastructure and publicly beneficial investments.  The strictly Objectivist view that seems to be spewing out of any of the new wave of Conservatives and Tea-Baggers is no way to ensure that people have a wealth of societally beneficial assets like National Parks, breathable air, potable water, investment in basic science and R&D, transit infrastructure...the list is endless.  Not to mention the host of private enterprise that is heavily (or solely...looking at you military-industrial complex) reliant on government contracts to stay in business.

Over the years I've personally worked with some pretty smart executives that would likely make very effective public servants (it's likely to their personal credit, and not a little ironic, that these are likely the last people who would profess to run for office), but I've also worked for some really s#!*ty a$&-holes who would make incredibly disastrous political leaders.

Just think about the terminology for a minute, "public servant" and "business leader."  Which one describes someone who is looking out for the common good?  Which one describes the self-interested individual who makes decisions based on profit?

As should not surprise you, dear reader, the business world is made up of jerks, and smart people, and nice people, and hard workers, and lazy f^&kers, and...all of which are pretty evenly dispersed.  Just like everywhere else.  So, the next time someone say some like the above quotes, stop and consider your coworkers over the years.  Who among them would be worthy of your vote for Senator, let alone dog catcher?

The Myth of the Self-Made Man, or the False Tyranny of Circumstance

[In continuation of our discussion of VP choices, finance, the economy and job creation, the social safety net, and the larger mission of government.] 

If you listen to the noise coming out of the presidential campaigns - or more precisely the "unaffiliated" shills peopling super-PACs and cable news editorial staffs -  long enough, you might be fooled into believing one of two things (or both?) that aren't true about our country.

One side wants you to believe that we live in a perfect meritocracy where, through hard work and pluck alone, simply anyone can bootstrap himself (or herself) out of the middle class and take a seat at the Great Table of Unlimited Wealth.  Right next to Donald Trump and his merry band of alpha-males.  These folks seem to quake in constant fear that mean old socialists will storm jackbooted into their penthouses and force them back down into the grey, feckless mass of the middle class, forever forced to take public handouts that rob them of their self-esteem and pride.  Or, you know, actually make them pay taxes or something.

The other side wants you to believe that plutocrats have successfully perpetrated a silent coup d'eta of our government to cement a neo-feudal class structure where no man (or woman) is capable freeing himself (or herself) from the shackles of the circumstance of his (or her) birth.  These folks seem to see Dickensian villains - ever poised to send each of us to debtor's prison, or the poor house, or the orphanage - pulling the puppet strings of industry and government to guarantee that individual effort is funneled solely into corporate profits.  Or, whatever it was that Noam Chomsky and George Orwell were really afraid of.

Neither of those narratives is remotely true.  As with just about anything you can think of, the truth is more nuanced and complicated than an overly-reductive campfire tale.  As citizens of the United States of America, we fortunately live somewhere near the exact midpoint between these two dystopian hellscapes.  The issue that necessarily gets lost in the FUD, is how close we are to that midpoint.  (For more on this subject go read this excellent article in The Economist, which is similar to this old DI post.)  That is something I will call the Societal Cohesion Equilibrium Point (SCEP).

Without getting too esoteric on you, dear reader, we can think of the SCEP as the point where regulation, liberty, and socioeconomic mobility are tuned just right to create the perfectly level playing field for everyone.  Success would then be a function of ingenuity and hard work, while circumstance could unfairly hinder no one.  People are not advantaged nor disadvantaged based on demography.  Yes, this is what you might call a total f&#king fairy tale.  There aren't enough social scientists in the universe nor precise econometrics to even design a thought experiment to find SCEP.  But, I think we all could agree that it is out there, and it's pursuit is the real job of government.

Back to reality.  The dynamic systems that make up a society of 300-odd million people (let alone the interaction of micro and macrocultures on a global scale) are so chaotic and complex that luck and randomness and circumstance will always play a role in success and failure.  Conversely, despite that infallible truth, hard work and personal responsibility are essential virtues to stack the deck in one's favor.  Those, therefore, that sit on a mountain of wealth and conclude they are uniquely touched by the gods are just as misguided as those that blame their station in life on the hands of an unfair society.

So, when it comes to objectively deciding whom to vote for this Fall, try to ask yourself which guy's aim is to get us closer to the SCEP.  Try to listen to the arguments and read between the lines, because a certain vice-presidential nominee's budget proposal is more about tearing down current institutions and replacing them with some Ayn Rand inspired libertarian pipe dream.  The other guys are more interested in making those institutions bettter.  Just remember this is not a fight between neo-feudalism and.arch-socialism.

We will never achieve a truly level playing field, but if we all close our eyes and believe hard enough...

The Quadrennial World $port Activity, or A Two Week Party for Shoe Companies?

[This post is inspired by years of reading the excellent, trenchant The Sports Economist blog.  We can't recommend this blog more highly if you are at all interested in the business of sports.  Go there now and search for Olympics related posts to find some of the best thinking about the financial and economic impact of major events on the host.  And by the way, we aren't economists and we don't play one on TV, so don't get fussy if our reasoning is askew on this topic.  Just leave a comment and explain where our logic is off.   We enjoy watching the Olympic Games, because we love sport.  There is no fiction that matches the dramatic reality of most any athletic competition.  We wonder, however, if we would enjoy the games any less if they weren't as extravagant, and less of a drain on the host's economy.  We suspect not. -ed.]

If you are at all paying attention, you will inevitably hear about the vast sums host countries spend preparing for the Olympic Games - building new sport venues, beefing up public transit, etc.  This is almost always at taxpayer expense.  In fact, the decision to award a particular country an edition of the Games is often swayed heavily by the extent to which that country will dip into the public coffers.  If you might recall the coverage surrounding the final vote of the International Olympic Committee in 2005 to award the 2012  games to London over the putative favorite Paris.  There was wide speculation that Paris' plan to minimize their investment in new venues by erecting mostly temporary facilities was a factor that ultimately pushed the decision in favor of the British and their promises to spend on a massive scale.  Something about ensuring the "legacy" left by the games on London.  A more perfect example of the principle in economics known as "the winners curse" we have never seen, not to mention the big disruption to the normal enterprise that occurs on a daily basis in London.

No trunk or big ears, but this is what a white elephant looks like

Let's show them what they've won.  Here is what London, and the British taxpayer, is going to "own" on August 13, 2012: lots of big white elephants dotting the  London skyline.  Yes, London, that's even after having the honor of being the most over budget and expensive games in history.  [Even the broadcast rights fees go back to the IOC, meaning that the state-supported BBC is paying to cover the events commercial-free.  Not that we're complaining.  We've been watching web streams of BBC's coverage, and been loving it.  No #NBCFail for us. -ed.]  Not convinced?  Just ask Montreal, Athens, and even Beijing how awesome it to have massively expensive, empty stadiums that take decades to pay off.  Maybe Greece would rather not have the extra billions tacked onto their national debt from the 2004 Games right about now?

It should be noted that Beijing is the exception that proves the rule.  Only a country with that much trade-surplus cash on hand could afford to throw a pile of money down the Olympics hole.

It should read, "Good luck paying for it."

There is something else that occurs to us about the Olympics, though.  This is a unique time for most of the athletes.  For a few days every four years, their largely ignored sport gets a ton of media and public attention focused on it.  That attention can lead to vast riches for those players who are particularly successful (Mr. Phelps, Mr. Bolt, et. al.), particularly photogenic (Ms. Solo, and nearly any beach volleyball player), or extremely media savvy (Tyler Clary).  It also occurs to us that the companies that make all the shoes, apparel, and various other bits of the athletes' kits seem to always report windfall profits in an Olympic year. Go check out some of the financials on participating companies.  Not mentioning any names but there have to be many smiling faces around Beaverton, OR and Herzogenaurach, Germany these days.

All of this leads us to wonder aloud whether all of the money sunk into Olympic preparation, and the hype that it engenders, acts as some kind of Keynesian stimulus for endorsed athletes and shoe companies.  It's likely the worst, least efficient stimulus imaginable, but it looks like at least somebody is being enriched by the Games.  It's just not the taxpayers of the UK footing the bill, nor the fans paying to watch in person, nor the hapless schmucks in the USA forced to watch nightly coverage on NBC.

A Tempest in a Deep Fryer, or Don't Fall for Misdirection

I was trying to just let the noise fade into the background, when this nonsense invaded my personal space at work where I do my deepest thinking about anything other than sad, bigoted old white men...

 ...maybe you, dear reader, are somehow expecting me to wade into the maelstrom that has exploded over the comments of a grease-pusher.  Not gonna do it.

Of course, I could point out that we shouldn't be surprised that there are still, to this day, people that hold hateful, discriminatory ideas about groups of people that they have never met in the name of one religion or another.  Or, I could point out that the histrionics, righteous indignation, and the let's-freak-out-the-squares stunts being pulled by the aggrieved parties are not going to change anyone's minds.  I could even make an appeal to people's sense of good citizenship and scold everyone for not following the Golden Rule.  Something like, "Please refrain from saying unkind things about others, especially those who don't affect you in the least and are just trying to be treated like everyone else."  It'd be just wasted bandwidth.

You see, this is all just a carefully orchestrated stunt to distract us from something else.  Falling for political sleight-of-hand is something we too often fail to avoid.  And apparently, going on cable news and saying monstrously bigoted things is good for business.  Something about all publicity being good publicity.  I won't further that cause.  Not gonna do it.

Hey! Look, It's Technorati; or Naked Self-Promotion

This little blog is now on Technorati, and we have some "Authority" now.  So, that means you have to listen to what we say.  Well, since we currently only rank 31,220th (Hey, but we're #1161 in US politics, though.), maybe you don't.  Anyway, there we are stop by and say hi if you are in their neighborhood.

Technorati - Distasteful Inelegance

Listening to Smart People Again, or YOU Are a Job Creator

In the post about the healthcare decision, I mentioned in passing that if people aren't spending most of their income on healthcare they can go out and consume more stuff.  That reminded me of a notion that Nick Hanauer puts forth in his talk at last spring's TED Conference.

Actually, that's not fully accurate.  I was first reminded by simultaneous posts on Google+ by two really smart people that I follow.  First, my old pal, music critic Danny Johnson (go encircle him now, especially if you like to read about opera), posted a link to an excellent piece in GQ by one of my favorite journos, Jon Ronson.  It is a great portrait of income disparity in our country.  (Go read it now.  I'll wait.)  Hanauer is one interview subject in the piece and he essentially lays out the skeleton for his TED Talk thesis.  So, his idea was doubly on my radar when Tim O'Reilly (go encircle Tim on Google+ now, especially if you like to read about the notion of government as a platform, a.k.a. Government 2.0) posted Hanauer's TED video.

Nick nicely weaves to together some threads that have been loose in my head for a while now.  The idea that we need to keep taxes low on the rich has always seemed foolish to me.  We are a consumer driven economy now more than ever.  So, if we remove many of the impediments to consumer spending, there will be more consumption and more jobs.  One way to free up more disposable income for the middle class is to remove the burden of healthcare from the millions of uninsured Americans, and a fair way to pay for that investment in job growth is to go back to the Clinton Era tax rates.  Quit whining rich guys, you are only paying capital gains tax anyway...and that is a topic for another post.

Now, I don't think it is very wise to go back to the punitive tax rates of the 60's and 70's either, but when the top earners complain about taxes being too high I want to laugh, or cry, or puke, or all three simultaneously.  That the Elephant-based party is so enamored of the fallacy that low taxes create jobs is just another reason to question their grasp on reality. Wait, no, they have a firm grasp on the very real checkbooks in their wealthy donor's pockets.  The Grover Norquist tax-pledge is doing just as much to raise the national debt as is Medicare.

Did an Acorn Just Hit Me on the Head?, or Further Evidence That No One Can Afford to Deny Climate Change

As some of my audience may already know, my main gig is in the Sports Industrial Complex¹, and as such I get a weekly email newsletter called Sporting Goods Intelligence with reporting² on general business interest from around the industry.  Normally, it is filled with the type of dry profit and revenue data that could put even the most ardent econ-geek to sleep in no time.  Occasionally, there will be something juicy, like a CEO getting ousted by his³ board, or accounting irregularities causing massive restatements of P&L.  But, usually I just skim it for the general mood and hit the <Del> key after sixty seconds.

Remember, Remember the 15th of September, or Why Frontline is Truly Must-See-TV

[We now bring you a companion piece to this post]

So, I finally got around to watching the fourth part of the Frontline program chronicling the events, people, politics and culture surrounding the 2008 financial meltdown.  You remember the part from my post about Occupy Wall Street where I said, "If you're not outraged, you're not paying attention," don't you?  If you watch this video - or better yet go to the PBS website and watch all four parts - and don't want to punch an ATM, then I worry about you.  Also, think about what your vote for Congressman, Senator, and President really means to the regulatory environment in this country and where that leaves your 401(k).  Who is watching the hen house?

Watch Money, Power and Wall Street: Part Four on PBS. See more from FRONTLINE.

Earnest, But Ultimately Misguided

I too was taken up in the Occupy Wall Street phenomenon when it was a nascent movement. Yes, they had - and still do have - a solid point that needed making and they largely made it well. The financial sector had become a cancer on our society with a bunch of empty suits pushing zeroes around on a balance sheet and extracting fees. There is no value to the economy being created by CDO's, CDS's, and synthetic versions of same. The public should be outraged at what transpired in the financial collapse. It's the old axiom, "If you are not outraged, you are not paying attention."

(Moreover, the criticism of Occupiers not having a coherent message was off base. OWS was a true mass popular movement organized around a single guiding principle, so there was bound to be a lot of different voices speaking up for the group.)

Despite my general agreement...

...I think the OWS movement is largely misguided. While we need to reign in the reckless gambling and exclusionary tactics on Wall Street, but there is a growing mistrust and vilification of finance and capitalism (with a small "c") that is troubling. Historically, a big reason the United States has been such a successful nation by many measures, has been the ease by which we can raise capital to start new ventures, enhance our national welfare, and grow our wealth.

(An aside: If you think it's just a coincidence that the US has dropped from first to tenth in per capita wealth since Wall Street drove our economy off the cliff, then I have some land in Florida I can sell you.) 

Finance, especially as "regular people" are more entrenched in the system through credit purchasing and retirement saving, needs strong, fair, sensible regulation to ensure a level playing field for all comers. But, in demonizing all financial institutions with a broad brush the general public is creating an atmosphere that is more distrusting of the very economic engine that makes us great.

I look at my own life's status, and I can clearly see where the (smart) use of finance has greatly raised my and my family's standard of living. There is no conceivable way that I would posses the education, assets, and piece-of-mind without the application of financial leverage at key times.

We can see this dangerous game playing out in the Presidential campaign, as well as in other less obvious, but ultimately more harmful ways. Exhibit A would be the median age of the typical OWS member.