Speed Freak$: Wall Street’s Fast & Furious MOTUs
Every day there is a new reminder that the only thing thing that changed on Wall Street as a result of the financial meltdown is that the "too big to fail" entities got bigger through consolidation and they now have all of the taxpayer’s wealth instead of just most of it. Booyah for progress.
From the New York Times, here is today’s installment of hyper-greed:
It is the hot new thing on Wall Street, a way for a handful of traders to master the stock market, peek at investors’ orders and, critics say, even subtly manipulate share prices.
It is called high-frequency trading — and it is suddenly one of the most talked-about and mysterious forces in the markets.
Powerful computers, some housed right next to the machines that drive marketplaces like the New York Stock Exchange, enable high-frequency traders to transmit millions of orders at lightning speed and, their detractors contend, reap billions at everyone else’s expense.
These systems are so fast they can outsmart or outrun other investors, humans and computers alike. And after growing in the shadows for years, they are generating lots of talk.
Nearly everyone on Wall Street is wondering how hedge funds and large banks like Goldman Sachs are making so much money so soon after the financial system nearly collapsed. High-frequency trading is one answer.
Kevin Drum has more on this. So does Masaccio.
I guess that is how Goldman Sachs is set to pay out mega-billions in bonuses to the very narcissistic pricks who took us down the economic sinkhole to start with. All while their fellow Masters Of The Universe crank up the same big shitpile that led to the crash.
The cliche is to say our economy is built on a house of cards. Not sure that is right anymore; a house of cards would at least have, you know, cards. Heck air may be too substantive, we are down to Goldman Sachs’ electrons and vapor.
Bastards. They’ve not only been charging their clients transaction and other fees, but they skim off the top and drive up prices.
These guys need to be put out to pasture. The only good thing about this is that they were paying down their TARP take.
What I want to know is why there have been no prosecutions yet? You know this had to be going on while Paulson was BMOC, too.
“The only good thing about this is that they were paying down their TARP take”
I disagree. The secondary value of the TARP funding — the main value to USG regulatory agencies, since the money part of the TARP was used, if used at all, to buy more chips to stay in the banksters’ game — was for one or more of the regulatory agencies to gain insider, or at least favored-investor, status, to act as duct tape in substituting for all the regulatory tools removed since 1980 — none of which to date have been brought back or replaced in any way that makes any difference.
Recall reports that Paulsen had to cajole some and threaten other bankster CEOs to take the TARP funds — being the CEOs of operations which were caught with their pants down in flagrant delicto on one or more major ongoing scams at that time, and otherwise CEOs who were completely delusional, had given up, or were more concerned about their liability and liberty if their own investors found out how the latter had been put at risk or defrauded or both — usually both.
A large number, most for sure but I suspect it was an overwhelming majority, of such operations went into some strategy of doing little more than what Uriah Heep would do, acting what they think an old-fashioned depository would do, bowing and scraping to their assigned federal minder, at first not but eventually and increasingly the federal deposit insurance agency, crossing fingers, praying, a lot of targetted p.r. and otherwise lobbying Congress and whoever they came find to lobby in the administration over maintaining the fairy tale shown on their balance sheets.
A far lesser number, the biggest – Goldman Sachs, the most mysteriously solvent – based on foreign depository or sovereign funds backing, a few that still retain some credibility among da playahs because their exposure is buried downstream in treasury notes and bonds and other government-backed debt instruments, are able to and in any event are in fact playing the ‘fresh money’ game that poker players are very familiar with: a new victim comes to table with a sack of cash and its like a feeding frenzy at the latest lion kill.
In this case, the ‘fresh money’, the latest BUBBLE, is in fact the TARP itself, amplified by whatever da playahs can make out of their particular criminal enterprise being Too Big To Fail [There’s still some value in that b.s., thanks to Larry and New Timmeh being empowered by
RickObama to keep the tables open.].To all da playahs, the TARP funds are just something that has to be paid, like a licence; the cost of doing business. If they had to pay it back tomorrow, if they were ALLOWED to, they would, because having the funds on the books makes them vulnerable to a number of risks from the federal government, among them being that one morning Obama might wake up to find his mind altered by mixing Stiglitz with a Krugman chaser and send in investigators on a mission.
The market is a zero sum game – for every winner there is a loser of an equal amount.
This ‘innovation’ in combination with the rules changes has essentially given Goldman et al the ability to skim profit from trading activity without risk.
Tax trading profit from these activities at a 105% tax rate. See how fast it stops.
You don’t need a confiscatory profits tax to cut this stuff way down. All you need is a transaction tax of a few percentage points. The tax rate could be established on a descending scale based on the length of time a security is held, the calculation of which would be done on a LIFO basis. The transaction tax approach would be a disincentive to churn trading.
Anyone remember how they suspended trading in the wake of 9-11…but only for small-fry investors?
It is very, very difficult to imagine any purpose of “capital-allocation efficiency” that is served by allowing microsecond response time servers to make money at the expense of millisecond response time servers.
No kidding. I am not sure what the remedy is. Maybe make all trade signals go into a pool that trades as one every five minutes or something. I am not even close to having the requisite knowledge of the system to really comment, but there is an answer to stop this if anybody has the balls to implement it in the face of the MOTUs.
This is more a policy problem than a technical one. These guys are paying a fee to see trades 30 milliseconds before everybody else. Granted, you have to have a lot of technical advantages profit from that policy, but the scam wouldn’t be possible if they played by the same rules as everybody else.
I don’t buy that this is just a ‘loophole’. Somebody knew exactly how much of a head start they’d need to pull this off. 30 milliseconds is a small enough window that you immediately disadvantage anybody outside of Wall Street. Try this crap from Los Angeles and network lag time will eliminate your advantage.
Take it to the bank.
Actually as I noted in my post, the Goldman Sachs computers are located on site with the exchange computers. I bet they aren’t running Power Macs, either.
“I bet they aren’t running
Power MacsTRS-80’s or Ataris, either.”Fixed it for ya.
Fantastic post, bmaz. Absolutely, positively a-w-e-s-o-m-e.
My primary interests relate to environment-health, but in order to address those things, I’ve had to get up to speed on a fair amount of economics. (Completely dysfunctional pricing lies at the core of a lot of bad, dangerous economic activity that ‘externalizes’ the costs of polluting, but I’ll leave at that for now.)**
If finance is ‘making money out of money’ (via interest, fees, lending), then this is hyper-finance, in the sense that it’s making money out of computer code at light-speed. One tiny mistake quickly distorts the whole system very rapidly; the errors get magnified really fast.
From masaccio’s post:
Now, suppose that I’m a hedgie: I make my millions off the ‘hedge’ , which is the difference between what I paid (or gambled, since I only put down $1 to ‘hedge’ that the price of peas is going to be selling at $30 next month when my ‘buy’ option comes due).
I’ve now created a **huge** incentive to make damn sure that price of peas is going to be$30 next month, so that I can clean up at 1:30 odds.
In other words, I didn’t just pay $1 for $30. I’m a FUND; I’m an ‘aggregator’ using borrowed money, or depositor’s money, or someone else’s money to gamble that this will pay off. And really, how many times can I afford to lose at this level of risk? Not many.
So I am actually paying about $1,000,000 on a gamble that I’ll make $30,000,000. This is closer to what in biology is called ‘exponential growth,’ and the only places that I know of it occurring are with destructive organisms like viruses and deadly bacteria.
Think of it the risk of your kid having meningitis: if you don’t get that child to the hospital quickly, they window of time within which the medicine will be able to whomp out that deadly bacteria is actually quite short. Eventually, the bacteria dies only when it has so completely eaten up the organism that it has consumed it’s own host.
I think that — from an economic perspective — that’s what we’re seeing.
It’s enabled by technology.
But just because you have a technology doesn’t mean you use it recklessly, nor hand it over to people who abuse it.
Our government was not set up to deal with anything like this: we have basically a setup (altered by wars, by BushCheney) that in terms of its regulatory structure sure looks like it is about 4 generations behind what’s happening.
It sure looks to me like the kind of process that has occurred with medicines may be occurring in finance: you get a drug developed to knock out earaches. All the pediatricians proscribe it, all the kids take it, and then the ‘bug’ gets used to that drug — so now, it’s ‘bug candy’ and the bug loves it.
So then, another drug is developed… give it 18 months and it turns into a variant of ‘bug candy’ while the virus adapts to it.
Same with the markets: someone writes an algorithm that spots a commodity or a share price .005 cents under their ‘decision point’, and given enough volume, they hit ‘buy!’ and on a huge volume that turns into money. But they’re not producing a single thing — not a hub cap, not a nail, not a toothpick — other than computer code and market manipulation.
However, it looks like if you plot this out over time, the boom-bust cycles become ever more rapid, ever more erratic.
To change metaphors — to hydrology.
People know that when it rains and all the region has been paved, you get flooding. There isn’t enough natural vegetation to absorb the water, and all the ’spongy wetlands’ have been destroyed so you don’t have any reserve to absorb the water.
When you multiply that process over cumulative area, from one small watershed up to larger and larger ones, then what you have is a huge system. So suppose you have all these tiny companies that each, individually, could have tolerated some losses, but now they’re all tied together so if something bad happens, you’ll have a system collapse.
One of the interesting characteristics that kicks in is that as you ‘go up scale’ (linking all the watersheds into a system without enough absorption reservoir), as the flood grows, the dynamics within the system become increasingly erratic. (IIRC, there’s a ratio that works out to around 4.669 that comes up again, and again, and again in examples of system collapse).
Again, reading masaccio’s earlier posts from last fall, he reference the Black-Scholes formulas. Where do they come from? Heat flows (a subfield of engineering). Why? Because as liquids alter their temperatures, they behave differently — think of how fast warm honey drips, as opposed to cooled honey which is a sluggard. If you plot what happens within those ‘flows’ you get a ton of datapoints. You can’t calculate those fast enough without a supercomputer, and that’s partly why supercomputing was developed — in order to create better, more accurate models.
Now, with hydrology, if a river system starts flooding it builds up a TON of energy. A huge amount of energy, and all that energy has to go somewhere, and it always takes ‘the path of least resistance’. But inside those surging, writhing enormously racing volumes of water, there are sub-flows, and odd dynamics that only come into being at certain volumes, and get more erratic at certain speeds.
At that point (and I think that 4.669 has something to do with it, but I forget the specifics), you can’t predict what will happen. There is so much counter-stress inside that volume of ‘flow’, and so many different temperatures and sub-streams colliding and beating against each other that you have lost your predictive capacity.
So, first you have a dynamic that — like viruses and medicines — Goldman Sachs, or JP Morgan develop an algorithm for their supercomputers. Someone else, a competitor, develops an even finer one; at that point, it’s as if you have a predator-prey competition. But the money involved makes the risks, and the willingness to gamble and to manipulate, absolutely huge.
Then, as that system builds up bigger, and bigger and bigger new factors and stressors that are totally unpredictable enter the system. So all the arrogant sons of bitches who thought they could predict, can’t.
Meanwhile, Congress (except for Dorgan, and Levin, and a couple others) has its head up its collective ass. And Geithner? Bernanke? Nice guys, but they don’t seem to know jack shit about either predator-prey dynamics, nor about large scale, flood hydrology.
Long comment, but something to think about.
A lot of this stuff is actually — I’m convinced! — not as complicated as the Voodoo Masters on Wall Street want us to think it is. Numbers often intimidate people. Congress needs to insist that these clowns come in and walk through a few algorithms; it’ll make clear that a lot of these people don’t actually know what they’re doing, and their activities are damaging socially constructive economic activities.
Think of them as large, destructive, economic floods, followed by plagues of locusts, malaria, and cholera. Because from a purely economic perspective, that’s really what they are.
And it all distorts prices so that the links between polluters and treating pollution are completely hidden; polluters aren’t even known, let alone held accountable.
If Congress were competent, it would have stopped this kind of hedging and margin calling back last Sept 20th with an emergency measure, or at the very least had a bill ready for Obama to sign the minute that he took office.
————-
** I will, however, point out that the one person I’ve seen articulate these linkages better than any other single economist or financier is George Soros. His writing about ‘externalities’ is some of the best stuff that I’ve encountered.
Last fall, masaccio started writing at FLD on the TARP bailout. He mentioned Black-Scholes. Turns out that if you try and ferret out what’s inside many of the algorithms used in Wall Street, inside those beggars is a variant of Black-Scholes.
Why?
Because at least some on Wall Street conceptualize ‘markets’ as ‘rivers of money’.
The talk about ‘hot’ markets’ and ‘cold’ markets.
If you think about huge volumes of money as ‘flows’, then it makes sense that you put formulas that originated in engineering, to study how liquids (metals, plastics, etc) flow at different temperatures.
So much for ‘rational’ markets.
If more people went, ‘WTF?!!’ we’d expose this silliness faster.
Back in grade school didn’t we call this taking cuts.
As for the attempted privitization of Social Security – you can now readily see what they intended to do with it. They were going to use it to prop up the house of cards economy. The money-from-thin-air that Goldman’s Treasury Agent, Paulson, demanded be pumped into the ponzi scheme would have come from the heist of Social Security – or at least whatever financial mechanisms would have been created to imply the appearance of said “funds,” which of course, do not actually exist.
Plunger,I was inquiring about you just yesterday.
For all you do,this one’s for you.
From none other than George Carlin:
The real owners are the big wealthy business interests that control things and make all the important decisions. Forget the politicians, they’re an irrelevancy.
The politicians are put there to give you the idea that you have freedom of choice. You don’t. You have no choice. You have owners. They own you. They own everything.
They own all the important land. They own and control the corporations. They’ve long since bought and paid for the Senate, the Congress, the statehouses, the city halls.
They’ve got the judges in their back pockets. And they own all the big media companies, so that they control just about all of the news and information you hear. They’ve got you by the balls.
They spend billions of dollars every year lobbying – lobbying to get what they want. Well, we know what they want; they want more for themselves and less for everybody else,”
“But I’ll tell you what they don’t want, they don’t want a population of citizens capable of critical thinking. They don’t want well-informed, well-educated people capable of critical thinking. They’re not interested in that. That doesn’t help them. That’s against their interests.
They don’t want people who are smart enough to sit around the kitchen table and figure out how badly they’re getting fucked by a system that threw them overboard 30 fucking years ago. You know what they want? Obedient workers – people who are just smart enough to run the machines and do the paperwork but just dumb enough to passively accept all these increasingly shittier jobs with the lower pay, the longer hours, reduced benefits, the end of overtime and the vanishing pension that disappears the minute you go to collect it. And, now, they’re coming for your Social Security.
They want your fucking retirement money. They want it back, so they can give it to their criminal friends on Wall Street. And you know something? They’ll get it. They’ll get it all, sooner or later, because they own this fucking place. It’s a big club, and you ain’t in it. You and I are not in the big club.”
-George Carlin
I want to know when Obama will use the stick of the carrot and stick approach.
When Main Street individual investors stop investing. When folks stop adjusting the funds in their 401(k). When small corporations decide to keep their cash locally without the risk that a search for more, more, more brings. Wall Street will look around and they will only be trading with themselves.
Stacked games, like Ponzi schemes collapse, and frontrunning trades is the same sort of heavy hand on the market that a Ponzi scheme is. It’s playing the rubes as suckers once again.
Say when does that half-assed/half-elephant “Peccora” commission begin its work. I have an item for their examination.
Customers’ Yachts!
And it shall ever be, but with bigger yachts after every deregulation fad.
Funny how my favorite metaphor of “lethal parasitism” continues to be dismayingly appropriate and accurate.
BigMed is a parasite on the people of America, these scoundrels are like giant blood-sucking ticks on the economy…
Your term brings a different description to mind — a favorite of international aid groups regarding some of the governments they worked with: Predatory Kleptocracy.
First they blew through our Treasury in order to blow Iraq to smithereens. Corporations that make all the war-stuff benefited handsomely. Corporations (KBR, Halliburton) that follow the war machine around much like the camp followers of old benefited handsomely. And now, US investors are invited to make big profits off rebuilding and rehabilitating what our bombs and guns destroyed.
War as Big Gig.
PM invites U.S. investors to come to Iraq
July 24, 2009 – 06:13:47
BAGHDAD /” Aswat al-Iraq: Iraqi Prime Minister Nouri al-Maliki on Friday invited members of the American Chamber of Commerce to move their investments to Iraq, noting the country boasts an environment proper for investment.
‘“The Iraqi government has managed to impose security and stability after the U.S. forces withdrew,” Maliki said during a meeting with Chamber members.
“He said that his government has proposed a new legislation to be endorsed by parliament next fall with the objective of ameliorating investment opportunities.
‘“Everything in Iraq needs re-building and rehabilitation, which prompted us to launch a series of steps to ease the red-tape in the country,” he noted.”
Link.
And then there was Sergey, who made all this newsworthy.
For some, valuable trade codes well worth stealing
Tue Jul 7, 2009
By Nick Carey – Analysis
CHICAGO (Reuters) -”In the world of automated trading, fortunes are made in less than the blink of an eye.
“That wealth is generated on computer systems that can handle greater trading volumes at ever increasing speeds. These platforms often rely on algorithms — a sequence of instructions used for calculation and data processing — that can spot unseen opportunities in the market and give their users a huge advantage measured in milliseconds.
“For banks such as Goldman Sachs Group Inc (GS.N), the codes are worth a fortune and this value also make them a tempting target for thieves — as appears to have happened with Sergey Aleynikov, a former computer programer at Goldman arrested by the U.S. Federal Bureau of Investigation last Friday.
. . .
‘”Goldman in particular has had a “great last few months” thanks to a trading model that has enabled it to “take the right risk at the right time,” Easthope added.”
Link.
This is front-running, plain and simple. It’s illegal. The “high frequency trading” tag is gloss with gilding. No SEC, no Treasury Department, no Federal Reserve Bank will stop it because the rich kids run the government and no one will stop them.
Bmaz “I guess that is how Goldman Sachs is set to pay out mega-billions in bonuses to the very narcissistic pricks who took us down the economic sinkhole to start with. All while their fellow Masters Of The Universe crank up the same big shitpile that led to the crash.”
greedlock indeed. Amazing how these “narcissistic pricks” have pulled this off. Just keep remembering that Former Secretary of the Treasury Paulson saying that the efforts to block executive compensation ‘would not hold water” Hell no those efforts held gold for the fat cats
Hold up a corner drugstore…prison time
Hold up the American taxpayers for billions…. pleasure time
I always heard that you could steal more with a briefcase than you can with a gun….
This has been floating around for a couple of weeks. This is what Max Keiser was talking about in the youtube Elliot linked to last Sat
http://seminal.firedoglake.com/diary/6435
Barry Ritholz links to articles on it. This is an interesting quote
http://www.ritholtz.com/blog/2…..ading-day/
BTW the code is out there on the intertnets … don’t know if it’s the code
Your bringing up the Special Liquidity Provider is an important point. There have been some totally anomalous last few minutes to trading sessions where the market as suddenly spiked and this has been tied to Goldman computers playing games via the SLP.
I remember hearing, some time back, that the real (competent and sane) Wall Street investment groups didn’t want Social Security privatized – that it’s so big that there’s no way the market could handle it without going under from the size alone, never mind all the decisions that would need making.
Bmaz, I visit your site everyday and enjoy reading your articles. I’ve posted many times and even had a squable of two regarding conspiracies. However this article surfaces anger which relates well to what is happening. The vision of what Wall Street is doing fits well and should.
Please accept that I’m 60 and while in a family for more than 26 years they joined a huge criminal system that involves the Big Banks. Goldman Sachs and the others are all part of who they dealt with involving criminal activities. During my years of being in this family I was privied to many experiences involving ciminal activities. I was even invited to join but turned it down as I have strict values.
However in the early 90’s they opened up to the rest of the family although many of us were being told many things more than a decade earlier.
What we are involved in is a Preplanned White House Coup. The family talked often about the failed Coup attempt that happened in 1933 as well as others. Also, I met other family members such as the DuPonts who are part of it also.
Although watching this unfold is personally hurtful since I knew about it for a long time, I can assure you that what is happening isn’t being done un-noticed. Eventually I expect this all to eventually come to a complete stop. I’m not allowed to discuss details but wanted to reassure you that eventually this is going to end.
Marty Didier
Northbrook, IL
High speed trading, and front-running are two of the logical consequences of monopolistic ”bigger and faster is better” mantra. Individual investors quickly learn that selling a loser loses less if you sell at the top of the slide rather than at the bottom– and the difference is in reaction time. The faster you can react to market conditions, the better you’ll do.
Of course, speed relies on gathering information quickly, and making quick decisions, and that is something computers are great at. But computers have to be told what information to look for, and what to do with it. That, apparently, is were models like Black-Scholes formulas come in. And that’s why the renegade nerd with the briefcase full of formulas was such a hot issue a week or so ago.
I suspect that Larry Summers and Timothy Geithner argue that Bigger is Better because market managers in other countries like China, Japan, Russia, Singapore, Hong Kong, etc. are all trying to game the same system. If we broke up Goldman-Sachs and JP Morgan Chase, would we be at a disadvantage against the those other market hawks? I’m sure that’s what the big domes over at those two giants are saying.
There are powerful financial forces at work here that repealing Glass-Steagall, and allowing credit default swaps to be unregulated, unleashed. It may be impossible to put that genie back in the bottle. But I hope the new Pecora commission will be up to the task. We need a team of people that (unlike Summers and Geithner) are not shills for Goldman Sachs, but who know what’s happening, to diagnose this mess and help us rewrite the laws and regulations needed to protect ourselves from runaway gaming of our resources by free-wheeling financial pirates. Not only economists like Stiglitz, Galbreath and Krugman, but also Elizabeth Warren of the Congressional Oversight Panel (she’s one appointment that Harry Reid did right!), and Sheila Bair, head of the FDIC.
Bob in HI
Bob, great comment — every bit of it.
I dislike being a pessimist too much of the time; it’s not generally productive and cynicism can be paralyzing.
But this is so deeply systemic and the ‘incentives’ are so phenomenally skewed… well, I’m with Nassim Talib when he said, “Nothing in nature is too big to fail.” I’m pessimistic that the Pecora-like Commission can act in time, and concerned that the info reported at TPM on the ability of the GOP co-chair to constrain the commission may well be true.
Time matters in things like this; I simply don’t see government acting quickly enough. Meanwhile, the bad info in the system continues to jitter erratically as people inflate, chase, and seek to cream profits not off the value of creating wealth, but of creating bubbles.
By feeding bad info through the system at ever increasing velocities and volumes.
You describe a chaotic system, which will, at some point, “fail”.
I could be wrong but from what I have seen of the makeup of the new Pecora commission it will be a bust. Brooksley Born is the only creditable member of it.
For about three seconds after it was announced that there would be hearings, I had a faint glimmer of hope. That sentiment quickly dissipated, however. This crap is going to end up looking like business as usual, I’m afraid. The only thing we can do is dun Congress every minute of every day while those hearings are in progress, call them out on every ounce of bullshit – which will be a formidable task, obviously.
O/T: Happy Birthday Jane.
I had hopes for the commission until I read Cynthia Kouril’s (sp?) post about it and she confirmed who the chairman was going to be.
Not to bad mouth him but, I have a friend who used to work in the California Treasurers Office and he pointed out a few things that many people, including me, didn’t know. It’s kind of a rant to begin with, but once you get down below where he begins to explain the details, you get an idea about why he’s dismayed
Internet engineering analysts have a saying, “Architecture is destiny.” If the technical architecture of the trading system has a vulnerability to front-running, and no law nor regulation nor enforcement policy prevents it, then you can bet that someone will figure out how to leverage that vulnerability as GS has. One possible solution would be to replace the vulnerable architecture with a new one that enforces equal opportunity for all traders, and is also reasonably believed to be free of other vulnerabilities with the potential for similar cheating in the future. That shouldn’t be prohibitively difficult to do.
Less importantly: Taking an open source approach to the software or purposes of auditing (not for the usual reasons of code maintenance via community, since that could be a source of more vulnerability rather than less) might be a help here, as more trained eyes would have the chance to spot and report any problems.
bmaz, from the Kevin Drum article about the young Russian who allegedly stole the Goldman Sachs HFT code:
If you click on over to GRIT-tv and find the Matt Taibbi interview from a week or two ago, note his morbid scoffing when he points out that since GS is so flipped out about having their ’secret code’ stolen, isn’t it kind of weird that basically they’re flat-out admitting to insider trading?
Doh.
That’s not ‘competitive advantage.’
That’s theft.
But who at DoJ would be brave enough to make that charging decision?
Hi-Freq trading, as computerized automatic trading, recently has graduated to SLP …a “relatively new NYSE program called Supplemental Liquidity Providers. The NYSE started the program to attract liquidity to the exchange.”
Automatic algorithmic trading done at near-zero signal speed [latency] can beat [front-run] others with mere low-latency E.g., data infeed from incomplete. in-progress order transactions from low-latency trading platforms can be processed to order-completion with lower-latency…automatically…so that “front-running” is not knowable and thus never happened to any human’s knowledge. Front-running? I’m shocked! Shocked, I tell you!
Front-running is only 1 type of “insider” transactions. “Insider”-based actions are impossible to monitor, much less stop…if you and a trusted partner are only mildly clever…and I recall many floor/broker traders in the 1960’s who were easily bright enough to thrive at it…and did…and were not bothered by a max 6-month trading suspension if they were caught…after at least 1 warning…and after their first $100k in-pocket [1960’s!].
BTW, to blow any confusion, an “insider trader” is anyone who obtains information and can trade on it before [most]others can act. You can get the info from any credible source, in or out of the company or subject involved. [Andrew Carnegie made his first bundle when his boss, superintendent of a railroad, decided to buy the first sleeping-cars from Pullman, and was told to buy some stock.]
Modernly, insider-activity is discouraged and kept very quiet to enable the game of the few to steal from the many. The mis-educated makers of that game use public-relations/control-the-field type of handling to keep it going.
Insider-trading is a “sort of gambling in ‘clever strokes’ which constitutes the very essence of theft, swindling and all sorts of similar anti-social deeds.” [PKropotkin]
The two main issues are the rebate programs between the 3rd party HFT provider and the exchanges and the “sniffing” algorithms. This is where policy action by the SEC should occur. The HFT argument is that they are providing liquidity (price discovery).
This is an issue that should really draw the ire of institutional investors, and maybe it is. For any small retail traders or homegamers the only effect is that the price is driven up a few cents on your 100 block share than what you “should” be paying for it.
The most possibly damaging aspect is that the HFT traders are making up 70% of NYSE volume. I believe that HFT is a driver of this bear market rally. The short interest has fallen off a cliff. What does that mean? There will be no shorts left to put a floor in the market when the inevitable fall back to earth (traders catch up with the deteriorating economic fundamentals) occurs.
The more I read about Wall Street business “practices”, the more they sound like the Ferengi from “Star Trek”.
10th Rule of Acquisition – “Greed is eternal.” Well, we certainly have that don’t we?
48th Rule of Acquisition – “The bigger the smile, the sharper the knife.” Remember how the bankers all smiled and said they were going to behave? Yeah, the big firms are back to the old ways of handing out fat bonuses and sticking it to the folks who bailed them out in the first place.
Good call on the Ferengi!
This sounds like something that’s been around for a while. Unfortunately, nothing so far has been done to re-introduce the regulations that would discourage this type of activity. Simply a return of regulations that prevailed before the abolition of Glass-Steagle would very likely do that. The government (which includes the Fed) has so far not even intimated such a return. All it’s done is redeem the toxic assets which on the dubious electronic markets where they traded had no value whatsoever.
After introducing of regulation to banking, separating commercial banks from investment houses (or chambers of horrors), the investment banks who’ve violated their fiduciary responsibility as primary dealers with Treasury should lose the privilege, especially Goldman Sachs who seem to run the Treasury at this point. Reform of the Fed should be a high priority as well.
give credit where credit is due.
they are playing the system that allows them to make billions in commissions and bonuses.
a capitalist system must fail
capitalists even believe in making billions off the sick and needy.
hows that for a country that sells itself as christian
christianity died on the cross.
a deregulated system just fails faster
wash is feeding wall street free money
you see america capitalism creates a society of haves and have nots.
it is now have not time in america for most.
if it was not for borrowed money and printed money the have not stage would have started years ago.
we americans are living on borrowed time and money
and all we can do is blame and blame and blame others.
while we line up to vote for politicans that love capitalism and reagan economics.
reagan was a pure genius to sell his brand of capitalism to america. and get elected twice for doing it.
we are a republic they are a refection of us. ouch.
americans worship at the altar of capitalism while it takes them down the drain.
“Advocates of capitalism are very apt to appeal to the sacred principles of liberty which are embodied in one maxim: the fortunate must not be restrained in the exercise of tyranny over the unfortunate” Bertrand Russell.
the Golden Calf addiction
Previously, when I heard the word ‘innovation’, I would think avant-garde, cutting edge, creativity & silly me, improvement. Now I just feel queasy.
I should point out that about 70% of Goldman’s profits this quarter came from its commodities trading. It has been a major force behind jacking up the price of oil, and so gasoline, despite high inventories and negative economic growth.
As others have noted, what Goldman is doing looks a lot like the illegal practice of frontrunning, just doing it with computers and in milliseconds. Goldman has also been acting as an oversized hedge fund trading for itself and not an agent of others. Because of the high volumes it can push around prices when and how it wants and controls markets like the S&P. I have said before Goldman’s profits do not come from wealth creation or adding efficiency to markets. They represent the siphoning off of wealth, often from hard pressed slow movers like pension funds. Under such circumstances, it is simply madness and an abdication of fudiciary responsibility for these players to participate in any market where Goldman operates and has a large stake.
The only way this is going to stop (or slow down, at least) is to start jailing these scumbags – real prison time in maximum security, ass-rape hotels. Anything less and we’re whistling in the wind….
They are mobsters — plain and simple.
What kills me is that everyone here has bought into the republican sales job 100%. Haven’t you noticed that republicans are driving this rage against the stock market. The reason why… the madder you get the more likely you are to become divided and do nothing, not knowing what to do. Yesterday in the Washington post I found this amazing quote from a BLUE DOG who admits he’s really republican. Link to whole article below.
Party leaders have told the Blue Dogs and other Democrats that Obama’s success is important to the party winning competitive House seats next year. But some Blue Dogs say that they are comfortable with separating from Obama on key issues.
“After the election, [Obama] was more popular, but people are coming home” to the Republicans, said Rep. Bart Gordon (D-Tenn.), a Blue Dog on the energy committee who is joining Ross’s opposition. “On health care, there has been a perception things are too partisan and moving too fast. People in my district want me to be independent.”
The most important thing we can do is stick together and get real progressive Democrats in power in 2010. We have a chance to screw them for years… all it takes is that vote in 2010. Full article link below.
http://www.washingtonpost.com/…..id=topnews
That NYT article is amazing.
1. Here’s a quote:
Who the heck is talking? Tyler Durden at Zerohedge. That’s who. I at least link to Durden. Where the hell is the acknowledgment of Durden in the NYT. There isn’t even a link in the NYT. EW is exactly right. Bloggers link. MSM doesn’t. That’s why it was such a big deal when she was acknowledged for uncovering the waterboarding number. Maybe it’s time for a journalist ethics conference.
2. Durden reports that the computers that GS and the other HTF traders use are co-located with the exchanges. That crucial detail isn’t in the NYT. This isn’t a game for them, it is a business organized to cheat the rest of us.
Goldman et al have been using taxpayer funds to game the markets and drive up the prices on commodities, HURTING the man in the street instead of helping the real economy. Boycott the stock market – let the crooks play with themselves!
It looks like Kevin Drum noticed the co-location issue. Why didn’t Charles Duhigg in the NYT?
Even the guy from Newsweek isn’t happy.
Michael Hirsh
The Monster of Wall Street Lives
Markets are recovering. But the systemic risk problem that nearly ate New York is still out there.
Jul 24, 2009
“Goldman Sachs and JPMorgan Chase have reported huge profits, the Dow has made it past 9000, and Barack Obama has moved on to health care. The horror show seems to be over. But as in one of those clichéd Hollywood endings, the monster in this story isn’t really dead, even if most people think he is. Lost amid all the premature self-congratulation is the fact that the deepest underlying problem that caused the financial disaster is not being solved.
“The problem: how to control and keep tabs on the market activities of giant firms that cause such a disruption to the system they can’t be allowed to fail. Put simply, six months into the Obama administration there is as yet no coherent proposal for solving this issue, and serious differences remain between Tim Geithner’s Treasury and Ben Bernanke’s Fed
. . .
“All this helps. But it may be a triumph of hope over experience that Wall Street will decide to get smaller when competing against other global giants, just because of the extra cost of doing business. And it is similarly wishful thinking to believe that the hazy job of systemic-risk regulator that no one seems to want–however it ends up being structured–is going to decide that a future AIG shouldn’t get into a certain kind of credit default swap, or that a JPMorgan Chase can’t develop some new kind of collateralized debt obligation. The administration and the Fed have ignored more fundamental calls for change. For example, they have swatted aside a proposal by former Federal Reserve chairman Paul Volcker, the head of Obama’s Economic Recovery Board, to bar commercial banks that enjoy federal guarantees from proprietary trading of risky instruments like derivatives. For the most part, the current measures will make it easier to clean up after the next mess. But they won’t prevent another mess from happening.”
Link.
NYSE is supposed to regulate itself in part. Providing ( or even allowing) an unfair advantage to one trader should cause complaints by other traders. There are some regulations designed in the recent past to reduce insider trading, regulation FD for example. I wonder how much the NYSE administrators are getting paid. SEC executive Grasso was fired following Enron etc, albeit he was making $170 million or so if my memory is correct – without taking much risk himself. In my opinion, he was getting paid to look the other way. I have to think this is criminal. Most people that I discuss it with think that Martha Stewart deserved jail time for trading on inside info. So why not these folks. People also understand skimming pennies by using software; frequently mentioned in Auditing courses in Accounting programs. Other stock exchanges should also be complaing and filing suit unless they are also corrupt.
I meant NYSE executive Grasso.
Some years ago a broker I knew was complaining about ‘SOES Bandits’. Is this a similar practice?
Book Salon up at the Mothership with Eric Patashnik’s Reforms at Risk: What Happens After Major Policy Changes Are Enacted hosted by Steven Teles
Wall Street Greed on speed=acceptable
Main Street Health care reform before recess=fuggedaaboutit!
At nearly the age of 60, considering what I have both seen and experienced over the last six months alone, I have no doubt why Obama surrounded himself with the very same insiders that have brought this financial meltdown to our doorstep.
It has become obvious that what is good for the people is not necessarily good for the power establishment. As a perfect example, look at health care. As far as I am concerned, there is only one answer. Whatever they come up with, make it mandatory that every congressmen and senator must also accept this plan for themselves while giving up their current government coverage. If it’s good enough for us, then it should be good enough for them.
As far as the greed on Wall Street is concerned, the people can talk truth to power. Come next April 15th, tell the government to go to hell. You’ll not receive one penny more from your serfs until you come clean and tell us where all of the billions we’re on the hook for went.
One honest man up against all the O-jerks.
The war being waged on the TARP watchdog’s independence
Glenn Greenwald
SUNDAY JULY 26, 2009 08:27 EDT
“Neil Barofsky, the chief watchdog over the $700 billion TARP bank bailout program, is one of those rare creatures in Washington: he takes very seriously his responsibilities of independent oversight and accountability. A career prosecutor, Barofsky is a life-long Democrat who donated money to Obama’s presidential campaign. But ever since he was appointed to head the oversight office created by Congress when it enacted TARP – an office designed to ensure transparency and accountability at the Treasury Department and in the banking industry — he has repeatedly clashed with Obama’s Treasury officials over their lack of transparency in how the trillions of dollars in TARP-related funds are being sent to and used by the banking industry. So seriously does Barofsky take his oversight duties that, as a Washington Post profile noted in March, “he refuses to eat with senior administration officials in the [Treasury] building’s executive dining room to maintain his independence.”
“Barofksy’s clashes with administration officials have intensified of late. Last week, he issued a report documenting that the actual amount of taxpayer money theoretically put at risk in the bank bailout — once Federal Reserve, FDIC and other programs are counted — is $23.7 trillion, not the widely cited figure of $700 billion, a report that prompted attacks from the White House
and Treasury on his credibility.”
Link.
Sergay!
NYT “Blows Cover Off Trading Scam.” Schumer Flips On Wall St.
by bobswern
Sat Jul 25, 2009 at 12:18:57 PM PDT
“Finally!
“It’s been just over three weeks since the July 3rd arrest of former Goldman Sachs IT executive Sergey Aleynikov inadvertently blew the lid off the intricacies of exactly how those great vampire squids on Wall Street manage (no past tense here) to suck Main Street dry.
(Actually, come to think of it, that didn’t take long at all.)”
Link.
More.
CNBC Spikes Story on Goldman Sachs
by JohnPeebles
July 26, 2009 at 08:38:38
“For example, the New York Times held back on the NSA surveillance story for an entire year. There’s not being in a hurry, then there’s just plain sitting on a story ’til it dies. In the meantime I’d heard all kinds of explanations for the size of Goldman’s profits, not a one of course explaining the company’s use of High Frequency Trading software nor its fugitive executive, Sergei Aleynikov.
“The New York Times did provide a nibble on the quant flushing game in an Op-Ed by Michael Osinki last week, on Friday, titled “Steal This Code.” The article largely downplays Aleynikov’s theft of the proprietary trading software. Osinki does express his surprise at the scale of the FBI’s reaction.
“Presented not as a news item but simple opinion, the op-ed doesn’t mention the possibility that a large portion of GS’ huge profit may have come from quantitative trading, software programs that conduct high-frequency automated transactions a millisecond before they’re executed on the exchange. Nor is any mention made of the threat that exposing HFT trading on such a vast scale posed to Goldman, or the credibility of US-based exchanges.”
Link.