Bloomberg Quote of the Day: “Honesty is the best policy – when there is money in it.” – Mark Twain
TB’s Quote of the Day: “The June employment report suggest that the alleged ‘green
Shoots’ are mostly yellow weeds tghat may eventually turn into brown manure.” – Nouriel Roubini…Amen!!! TB
It is unsual to see a story in Barron’s that dovetails into a piece by John Mauldin written the same day. It is on high frequency trading and the first was cited in Alan Abelson’s column about Sergey Aleynikov, the former Goldman Sachs (why does that name keep coming up again and again???), employee who stole their software codes to algorithmic trading that is so fast that servers have to be housed at the exchanges…this is referred to as ‘high frequency’ trading and involves thousands…perhaps hundreds of thousands of trades in a single session and there are others playing it besides Goldman…think of it as insider trading without the guilt…or feeling guilty because it isn’t illegal. The second, a white paper, Toxic Equity Trading Order Flow on Wall Street by Sal L. Arnuk and Joseph Saluzzi is an in depth study of how it works and why it must be stopped.
As noted above Goldie isn’t the only one doing it but why is it that their name is associated with every scam out there these days…or has it been business as usual? Oh, and then there was the demise of Dick Grasso as head of the NYSE…you do remember that? Who replaced him? John Thain whose expertise was in electronic trading whiz from Goldman Sachs! What was the first thing that Thain did? Emphasize electronic trading by buying ETN platform Archipelago and then scrapping the 30 second rule. A rule where a bid or offer must remain posted for 30 seconds. Due to the speed of trading that is a lifetime but now as the two authors of the study say, we need a 1 second rule. That would wipe out most of the manipulation as the big boys cannot ‘probe’ with a bid or offer that is out there for an entire second.
But what is the big deal about this ‘stuff’? It is that on a series of small trades of 100 to 500 shares they can drive the price to levels they can make big money on…the 1,000 share or more orders…and they can do that by hitting the program traders…many of which are hedge funds or pension funds. Also, they are given ‘rebates’ of ¼ cent a share to promote electronic trading so they can buy and sell at the same price and still make ½ cent…that is a huge advantage and when you couple it with the absence of an uptick rule (a meaningful uptick rule of 10 cents, not a miserable penny might have prevented the demise of the big brokers or at least allowed them to die in an orderly manner), they have a huge advantage. This is costing those you care about…mutual funds, etc. to pay 3 to 5 cents more per share. So you can see why Goldman was so upset about their software codes being ‘stolen’…they were shocked and they and their supporters want this type of activity arrested. In the Abelson article he says Goldman is the ‘receptacle’ for all blame on Wall Street despite a study by Blackstone (BX) who found no conclusive evidence of this. When BX went public while Goldman wasn’t a lead manager Lehman was along with Citi, Merrill, Morgan Stanley, Credit Suisse and Deutsche…Goldman was a Sr. Co-Manager…it is highly unlikely that Blackie would want to cross Goldie when the number of underwriters has been drastically reduced.
TB is not in favor of more regulation but he sure would like to see a level playing field and when on the NYSE 40% or more of the daily volume is BofA and Citi – just two stocks something is dreadfully wrong. But in today’s world the NYSE is only about half of total trading the rest being on platforms. Trade recaps on Bloomberg sow total volumes but they only distort the actual volume by the amount of the algo trades. Thus a large institution might think there is sufficient liquidity to support their volume in a stock only to find out it is a multiple of what the actual volume is so that if they have to exit they will get crushed…those are the guys with your money remember. Goldman isn’t the only one with these algo trades…Jim Simon’s Renaissance funds more or less invented the practice and quite successfully but even they have had their lumps as they have to constantly revise the program to avoid being overrun by the others…In 2008, TB believes he said is performance would only have been about 60% of what he did if they had not ‘tweaked’ their programs.
You decide.
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Hope you all had a fun and relaxing weekend. TB finished off his funeral week with a weeding at the same country club where the reception after the funeral was held. A bit overwhelming a contrast, right?
Will someone just admit Michael Jackson is dead and get on with it? Another week another tribute…by his hometown this time. After all according to Alan Abelson, L.A. spent $1.4 million in crowd control…$1.1 million in police overtime when they expected a crowd of 250,000 which he says turned out to be more like 1,000. His musical and entertainment contributions aside is he what Americans or people of color want to hail? Some role model for today’s youth…and we wonder whey there is so much urban crime.
May you all have a great week!
TB
Trader Bill thinks it is clear to anyone reading these missives that they are merely commentaries…as he sees it…and do not necessarily reflect the views of anyone other than his own. Information is gathered from sources he has found reliable, but no guarantees of accuracy are implied. These are merely observations of events in the marketplace offering in an attempt to offer a non-mainstream viewpoint. Hope you find it useful. Copyright TBD Capital LLC, © July 13, 2009.
