Posts tagged finance
High-Speed Traders Profit at Expense of Ordinary Investors, a Study Says
The chief economist at the Commodity Futures Trading Commission, Andrei Kirilenko, reports in a coming study that high-frequency traders make an average profit of as much as $5.05 each time they go up against small traders buying and selling one of the most widely used financial contracts. …
Mr. Kirilenko’s work stands in contrast to several statements from government officials who have expressed uncertainty about whether high-speed traders are earning profits at the expense of ordinary investors.
The Financial Industry Regulatory Authority turns five years old today. Here’s what it’s done:
- brought 6,291 disciplinary actions
- levied $254.1 million in fines
- ordered nearly $54.5 million in restitution to harmed investors
- expelled 99 firms (1,647 individuals) from the securities industry
Is this enough? Someone knowledgeable tell me what to think.
“If regulation is not the answer, then how can corporations and society prevent fraud in the future? Fastow said we can begin by understanding that structured finance is like steroids: a little can cure many illnesses, but a lot can destroy your organs.
Its use needs to be limited, and investments in firms that use structured vehicles without a clear business reason should be avoided. Mark-to-market accounting can lead to more transparent financial statements but, if abused, can put a company in a hole that it can’t climb out of. The market must value transparency. Companies with the fairest disclosures must be rewarded, not placed at a disadvantage as is now the case. Finally, executives must ask whether a transaction is consistent with the principle and not just the rules. Are they doing it for window dressing or for valid business purposes?”
— Former Enron CFO Andy Fastow reflects on the importance of following principles and not just rules - “If the Auditors Sign Off, Does That Make It Okay?”
When I came to Wall Street in 1954, investment banking was a profession, one that financed the building of this country’s industrial capacity and infrastructure. We financed pipelines that brought cheap natural gas to the households of New England. We financed the development of new drugs, which are now the mainstay of today’s health care. We financed inexpensive restaurants that made eating out affordable for families and do-it-yourself home stores that enabled people to improve their quality of life. We financed the earliest personal computers, which ultimately led to the Internet Age. All of this fit within a framework of activities that didn’t threaten this country’s finances, much less the world’s.
But year by year the industry’s emphasis moved away from this purpose and toward financial innovation for financial profit’s sake. According to the Federal Reserve’s Flow of Funds data, from 1980 to 1982, the financial sector accounted for an average 12.8 percent of U.S. total corporate profits. By 2005 to 2007, the three-year average was 23.8 percent.
Tell Us How You Feel About Stocks
Trending sentiment definitely has an impact on the market. But don’t confuse cause and effect. Stocial CEO Fahad Kamr guesstimates that about a quarter million Twitter users tweet about the market on a regular basis. That sounds like a lot, but is still only a sliver of the overall number of traders and investors in the market–and that’s not the institutional sliver that controls the lion’s share of volume and most influences sentiment. Except on that rare occasion when some tweeper broadcasts a piece of inside information, tweet volume doesn’t wag stock volume; and tweets may or may not accurately reflect market action. But they can report events before traditional media can.
Spitting irony of the day: UBS, the firm which recently disclosed a spectacular $2b loss on the books of a single trader, today pulled out of the global banking conference in Toronto known as SIBOS.
An operations executive from the firm was scheduled to give a presentation on settlement risk management. But one trader at the firm allegedly used his knowledge of UBS’s back-office operations to fake trades over the course of several years. Adequate settlement risk management policies would have easily uncovered the fraud.
New York Times:
“Regulators at the Securities and Exchange Commission have been looking at changes in the markets and automated trading strategies in connection with volatility. The market is no longer based on one single exchange but is fractured across four big exchanges and several smaller forums. High-frequency traders, using powerful computers to trade at exceptionally high speeds, now account for up to 60 percent of daily turnover.” [Market Swings Are Becoming New Standard]
Securities Technology Monitor:
“According to the Liquidnet Institutional Voice Survey, more than two-thirds of traders at leading asset management firms around the world are concerned about the impact of high frequency trading (HFT) on the equities market.
“At the top five global institutions, 73% of the traders said they regarded high frequency trading as a high-priority market-structure issue, according to Liquidnet.
“The firms polled collectively manage equity assets of more than $13 trillion. Liquidnet’s customer base includes 630 institutional asset management firms.” [3/4 of Institutions Concerned About High-Frequency Trading]
So, neither regulators nor large institutions particularly like the technology that now dominates the financial markets. I suppose that’s worth noting.
The Transnational Super Network
If a bit of network theory will help buttress your arguments about how powerful transnational corporations run our lives, a recent paper exploring the interrelationships between them is a good place to start.
In “The Network of Global Corporate Control,” a team of Swiss economists tease out global ownership structures and “network” influence of the world’s most influential companies. That is, they find which organization is connected to which other organization, and what the ownership and influence structure is between them.
What they find is that a core group of 787 corporations controls 80% of this super-elite network, and a tightly-knit “super-entity” of 147 companies controls 40% of the network’s transnational corporations.
Not surprisingly is the presence of financial institutions in the network. Also not surprising, the implications such a tight network has on global financial stability.
It is known that financial institutions establish financial contracts, such as lending or credit derivatives, with several other institutions. This allows them to diversify risk, but, at the same time, it also exposes them to contagion. Unfortunately, information on these contracts is usually not disclosed due to strategic reasons. However, in various countries, the existence of such financial ties is correlated with the existence of ownership relations. Thus, in the hypothesis that the structure of the ownership network is a good proxy for that of the financial network, this implies that the global financial network is also very intricate. Recent works have shown that when a financial network is very densely connected it is prone to systemic risk. Indeed, while in good times the network is seemingly robust, in bad times firms go into distress simultaneously. This knife-edge property was witnessed during the recent financial turmoil.
The study (PDF).
I originally wanted to fly it over Washington, D.C., but learned that you can’t do that. So I chose Wall Street instead, but didn’t specifically intend it to fly over S&P. I’m just a mother from St. Louis who feels the only reason we got downgraded was people in politics.
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A blog by Andrew Graham, a ghostwriter and media adviser in New York City. Don't take it too seriously.
GMail: andrewgraham.nyc
