Thursday, December 31, 2009

The Greedy Market Hypothesis

The past two years have proved an unbelievable market roller-coaster ride for investors, traders and sovereign governments. The financial markets, which were rocked to their very core by scandal and crime, have become a favorite topic of conversation among the least likely people. Economists are treated like rock stars, filing auditoriums and juggling visits to CNBC, Bloomberg and MSNBC. Their opinions are sought after then dissected, and often dismissed if they don't give the right (positive) answer. The Efficient Market Hypothesis has been questioned and criticized. After all, how can markets be efficient if they tumble by 50% seemingly overnight? Was it efficiency that wiped out pensioners' savings and turned hundreds of thousands of homes into a liability to be walked away from? Market bubbles are not efficient are they? Yes and no. A theory has been proposed by Dr. Andrew Lo of MIT's Sloan School of Management, called Adaptive Market Hypothesis. He uses neuroscience and psychology to help explain why markets do what they do. Essentially his theory is that the origin of all financial bubbles and busts are fear and greed. I agree wholeheartedly. And I propose a simpler theory that one can use to explain to non-finance types how markets work. There are clever people (let's call them hedge funds and investment banks), and there are stupid people (let's call them us). Both sets of people are greedy. The clever people want to make more money for their employers so that they get a bigger bonus and buy more stuff. The stupid people just want to have more stuff and prefer not to have to work too hard for it. So the stupid people invest their money in markets that the clever people manage. The clever ones rake a fee off the top, then invest our money in things that we will never in a million years understand. Then the other clever clogs trade the same things, because if X bank is making money on it then Y bank will too! They make money (hopefully) by all trading the same things. Sometimes they trade them fast using their computers(high frequency trading). Sometimes they trade them slowly over the counter. They buy them and they sell them and then do it all over again the next day. Everyone is happy. Dr. Lo says that prosperity is like a anesthetic to the brain: “a drug-induced stupor that causes us to take risks that we know we should avoid.” Then - bang! The risks come home to roost, so to speak. The stupid people suddenly realize that they have too many loans for SUVs and ATVs and plastic crap for Xmas that they can't pay off. The clever people can't spin their way out of the trading tangle they invented. Panic sets in, markets crash. Governments get blamed. So governments dig deep and find gazillions (most overused word of 2009?) which they give to the clever people interest free. The clever people say: "Wow! Look at all this dosh. I can spin this and make gazillions more! Whooppee!" And they do. But wait. The stupid people are still living in debt, maybe have lost their homes, and don't have any jobs. How is that Adaptive or Efficient?
Again, to simplify - if the clever people get on with making money it will eventually filter down to the stupid people again. Businesses will get loans, companies will be bought out or merged. Banks will hire again. More bankers will buy more stuff and manufacturers will have to make more stuff. Then manufacturers will have to hire more people. Who will be able to buy more stuff. Do you get the picture? I call it the Greedy Market Hypothesis. Maybe 2010 won't be so bad after all.

Monday, December 21, 2009

Taxing Transactions a Terrible Idea

The Wall Street Journal must be desperate for stories this week. Today it ran an article that raises the specter of a tax on financial transactions proposed by the forthright Congressman Peter Defazio. This is a terrible idea, as I said when I first wrote about this in March for Financial News. I'm not sure why it is rearing its ugly head this week, unless the WSJ has the inside track on some progress on the proposal. Led by Congressman Peter DeFazio, eight US senators submitted proposed legislation to the House Ways and Means Committee proposing a 0.25 percent transaction tax on buying or selling stocks, futures and options. The proposed bill, known as H.R. 1068 or "Let Wall Street pay for Wall Street's bailout Act of 2009", was put forth on February 13th and is seeing fierce opposition from exchanges, trade associations and electronic communications networks alike. As I said in March, the bill could increase volatility, decrease liquidity, and decrease efficiency. The proposed quarter percentage tax, or 25 basis points, would be applied to the value of every transaction. If the average stock price is $20 per share, it would add 5 cents per share to both sides of the transaction. High frequency traders would be hardest hit as they operate on very thin margins, and comprise nearly 70% of daily volume.
This could be a stealth move, designed to make Main Street happy because it will think that only Wall Street will pay, one that could lead to the demise of HFT. The truth of the matter is that Wall Street will be able to figure out how to get the 10 cents back, Main Street traders (that's you and me) will not. Once again the government is trying to interfere in something of which it has no knowledge. It is a dangerous game.

Friday, December 18, 2009

London Bankers to Have a Holly Jolly

As I (and many others) have predicted, there are already moves afoot to make sure that London-based bankers have a holly jolly Christmas. According to the Financial Times, Deutsche Bank decided to 'share the pain' and spread the UK supertax among staff globally. I can just hear cries of despair coming from Frankfurt, Zurich and Singapore. Apparently some US banks are also considering this, cue howls of outrage from Wall Street. In a separate move, as reported by the Guardian, a group of top UK banks are trying to convince the UK Treasury to take a $2bn payment from them instead. Clearly there is a lot of money floating around as the result of clever traders making the most of low-interest capital supplied by our governments and us taxpayers. Well done boys, take those bonuses and spend them on expensive new cars or kitchens (feel free to support my uncle's upscale custom kitchen business, too:!). But make sure you save enough to pay any niggling extras on your health insurance bills. If Obama cannot force through some kind of national insurance company regulation at the very least, then we will all continue to be rogered senseless by the rising costs. A friend just got the best quote possible for health insurance (he is freelance too) - $1,000 per month. I know people who would be thrilled to MAKE $1,000 per month, never mind spend it on lining the pockets of fat cat insurance companies. I have never understood why these companies (which, along with drug companies, make up nearly 40% of GDP in the US) have been regulated on a state-by-state basis. Robber barons, the lot of them. I hope they get a nasty surprise in their Xmas stockings - a big, ugly national regulator.

Tuesday, December 15, 2009

He Who Cannot be Bothered

Not enough has been made of the fact that three mega-bank CEOs could not be bothered to get to a meeting called by President Obama in Washington, D.C. yesterday. Lloyd Blankfein (Goldman Sachs), John Mack (Morgan Stanley) and Richard Parsons (Citi CEO Vikram Pandit was already not bothered so he was sending the chairman) called in delayed because their commercial flight was fogged in. A frequent traveler myself, I know how frustrating this can be. But surely with all of their money and resources they could have found another way to travel? There is a train - the Acela Express. There are limos - it is only 227 miles says Wikipedia. And despite the vitriol it might have inspired in the chattering classes, there are private planes that can be chartered at a moment's notice. But wait. Why didn't they tag along with (J.P. Morgan's) Jamie Dimon on the corporate jet? Poor old Jamie had to face the music alone (OK, with 9 other CEOs).
One of the things I learned in my (mediocre state university) business college was that you have to behave responsibly in order to get and keep a job. That came as useful advice when, for example, I had an early morning meeting or conference in Madrid or Oslo. I would go there - gasp - the night before. The company paid for the hotel room to make sure that I arrived on time and fresh. Imagine that. And last time I checked there were hotels in Washington, D.C. Plus I believe despite the credit crisis Citi, Goldman's and Morgan Stanley executives still have expense accounts. In my opinion there is just no excuse for not making that meeting. It makes the three CEO's look disorganized, or arrogant. Or both.

Monday, December 14, 2009

The Millennium Starts with a Bang

Almost exactly ten years ago I was sitting at my desk at Risk Waters off of Piccadilly Circus and marveling at all of the Millennium bug hype. As editor of two newsletters it was my responsibility to winkle out just what technology and market data companies were afraid might go wrong on January 1st, 2000. And to write sensational (well, for technology anyway) stories about these potential technological time bombs. Reuters was one of my best sources, it had an actual "Millennium bunker" set up inside its data center on the Thames. There its technology gurus sat and analyzed their systems, on the alert for any glitches. Product marketing staff and even corporate communications had to do shifts around D-Day. I thought it was hilarious. There were Millennium parties where bankers and techies and geeks would sit and drink and wait for their shifts at various "bunkers" around the City of London. We all know what happened on January 1st, 2000. Nothing. Zip. Nada. Now it seems that the Millennium bug was more subtle that we had thought. It wormed its way into electronic trading systems and algorithms and bankers' minds, creating the desire to trade more, make more money, invent more complex derivatives. The Dot Com boom and bust whetted the bankers' appetites for more and better technology. High frequency trading was a glint in some geek's eye by then. The speed at which the technology for lightning fast trading evolved was staggering. We went from a place where a couple of all-electronic exchanges which were considered somehow lesser beings (Nasdaq, Eurex) to a place where every exchange in the world desired to emulate them. As soon as was technologically possible the banks had dumped all of their 'vanilla' trading onto algorithms. Then ECNs came into the picture and they needed to route orders more intelligently. Cue the new smart order routing algos. Then they thought, 'hey, if I can spin a gazillion trades of XYZ company when it is being hyped, I can make a trillionth of a penny on each round turn. That adds up!' And voila - high frequency trading was invented. Then all of the new derivatives (credit default swaps), all of the bad ideas (sub-prime mortgages), and all of the greedy bankers (you know who you are) did what the Millennium bug never did. They imploded. They almost took the global economy to meltdown stage. Those bunkers might have come in handy after all.

Friday, December 11, 2009

Toothless, Toothless, Tooo-ooothless

Hum along to the Neil Young song "Helpless". I'm referring to the latest version of regulation from the dingbats that call themselves our leaders in Washington, D.C. As feared (by me), so-called 'commercial' end users of derivatives will not have to toe the OTC clearing/transparency line. In theory I can agree with this, as they of course have to hedge commodities and currency exposures. In practice it is clear that none of the regulators, and in particular the CFTC, has got a clue what the difference is between 'commercial' and 'speculative trader'. If the CFTC and the government think that Cargill (one of the examples that I keep seeing) is a commercial hedger only, then they are smoking something not quite legal. Cargill is one of the biggest speculative traders out there. It is also a privately held company so much of its business is just that - private. The bill is so watered down and full of loopholes and double-talk that I find it hard to believe that even one of the politicians on Capitol Hill truly understands what he or she is reading. The bottom line is that the powers-that-be on Wall Street gave the government a good, old-fashioned rogering - probably threatening direct financial consequences if regulation was too strict. Given that anywhere from 12-14% of US GDP reputedly comes from financial services, it would take a brave politician indeed to truly stand against them.
Although some of the things that slid through, such as not requiring foreign exchange trades to be cleared, make sense. FX markets work perfectly well without getting exchanges involved. I also support limiting bank ownership of clearing platforms. I never understood how the 'fox guarding the henhouse' situation was allowed to begin with.

Wednesday, December 9, 2009

UK Stings Bankers with 50% Bonus Tax

As if UK Prime Minister Gordon Brown wasn't unpopular enough, his government has added insult to injury by stinging UK bankers with an extra 10% tax on their bonuses. For one year only (thus far) City high rollers will have to pay 50% tax on their bonuses. The government is also adding taxation to employer pension contributions. The UK Finance Minister (unbelievably) thinks that this will deter banks from paying out-sized bonuses (and contributing to 'wealthy' people's pensions) for a year where profits were fueled by government bailout money. I can see his point, but he obviously does not know the beast. Traders will threaten to walk if their employers don't make up the difference in bonus. This has happened before. There are already teams of accountants and lawyers working with City types to try and find ways to prevent City boys from 'suffering' unduly.
If the employers cave in to traders demands, it means that the bonus pots increase and the actual amount that employees get will also increase. This erodes shareholder value, and is the exact opposite of what the much-deluded Labour government is trying to achieve. Otherwise it means that employers will simply defer bonuses until next year - paying only a small percentage this year and staggering the rest over the next couple of years.
I can see that the Labour party's ludicrous solution will appeal to the unemployed or blue collar workers in the UK. Those on the dole that sit around all day shouting at the telly will cheer. But the UK middle and upper classes will not. It took a long time for paychecks in London to equate even remotely with competitor cities such as New York or Geneva. Watch out for mass emigration.

Tuesday, December 8, 2009

Obama Scores with EPA Coup

The timely usage of the EPA to help control carbon emissions was an absolute coup for President Obama and his team. After all, why wait for Congress and the Senate to agree on something that almost none of them understands? Plus the pressure on politicians from industry must be enormous, making it difficult for even the most environmentally correct to vote for change. Industry in the US is notoriously paranoid about having to clean up its emissions. So much so that George W. Bush actually took steps to weaken the Clean Air Act in 2005, so that coal-burning power plants (in particular) did not have to comply with lowering emissions. (He went against his own father, who had strengthened the EPA's mandate in 1990 to fight acid rain.) According to SourceWatch, in 2004 US coal-fired power plants produced 35.8% of total US CO2 emissions, and 8.0% of total world CO2 emissions. To put this in perspective, U.S. coal-fired power plants produced more CO2 in 2004 than was emitted by all sources in all of Africa, South America, and Central America combined, said SourceWatch.
The EPA option has been waiting on the sidelines since 2007 when the Supreme Court ruled that the EPA violated the Clean Air Act by not including greenhouse gas emissions. Obama's coup was to wait and take the EPA route just before the Copenhagen summit on climate change, where the US was destined to look like a giant polluting chump. I have my doubts that the EPA can effect immediate change, after all it took 23 years for it to phase out lead in gasoline due to pressure from Big Oil and Big Car. But it got there in the end. Obama's challenge now is to ensure the EPA remains a viable, well-funded and - above all - powerful organization.

Tuesday, December 1, 2009

What Defines Socially Useful?

A bit of a bunfight has broken out in London about whether the City (read investment bankers) is socially useless or not. Lord Adair Turner, head of the FSA, said that some types of financial innovation are socially useless, according to Financial News. Michael Spencer, chairman of uber-broker ICAP begged to differ. He said he was "genuinely offended" that Lord Turner would say such a thing, then blamed the Labour party for allowing the financial crisis to happen. The City of London has not changed much under Labour, nor has the regulatory system in the UK, so that was a bit self-serving (Spencer is treasurer of the Conservative party). Spencer also spoke out against Lord Turner’s recommendation of a Tobin Tax on financial transactions. Here, I agree with him. A tax on transactions will only force more players out of London. Switzerland is already gaining the lion's share of hedge funds that are moving out.
The City has its uses, the biggest of which is that it generates huge amounts of corporate and income taxes to spread all around the country. As for financial innovation, I am going to wade in here and say that I think most financial 'innovation' comes from US banks - certainly most of the credit derivatives that helped cause the crisis were invented here. The innovation of such products cannot be called 'socially useful' unless you define it as 'money spinning'. The obfuscation and complexity that they add to the system are not in any other way useful.

Monday, November 30, 2009

Why I Hate Black Friday

I hate Black Friday. Black Friday is the most ridiculous excuse for bad behavior and reckless spending I have ever heard of. But when your economy relies so heavily on consumer spending, I guess the troops have to rally the spenders. Analytics firm ComScore says Americans spent 3% more this year on Black Friday. Reuters says they spent significantly less than last year. The stock market waits with bated breath to see who was right, hoping passionately that spending was up. Because that tricky Dubai situation really dampened everyone's spirits on Black Friday. Still, it didn't stop idiots from queuing up two days before Black Friday, camping out in the rain and the cold to be first in line when the doors opened. Some people went so far as to actually miss Thanksgiving dinner because they were waiting in line at Wal-Mart. Last year a store worker was trampled to death by desperate Wal-Mart shoppers. I'm going to go out on a limb here and say that there is something seriously wrong with people who spend all of their Thanksgiving holiday queuing up for and fighting over bargains at retail stores. Yes, OK, you save 25% or 50% or 75% on flat screen TVs. Maybe you couldn't afford one without the discount. But the question is - if you have to queue up for two days to 'save' money, maybe you really shouldn't be spending it at all. One woman who was interviewed on TV on Friday said that she had lost her job and that buying food was becoming a real issue. She said this as she queued up at a store to buy crap for Xmas. She can't afford food, but she can afford to buy crap as long as it is on sale. TV stations, advertisers and retailers have teamed up to tempt shopping-addicted Americans to do the Patriotic thing and buy stuff to support the economy. Maybe it works, but it isn't pretty.

Friday, November 27, 2009

Black Thanksgiving

Today, known as Black Friday in America, may go down in history as Black Thanksgiving instead. Some are already dubbing it Black Swan Friday. Yesterday, as the US sat down to turkey and interminable American football games, Dubai imploded. Dubai World, the government-run bubble machine, cannot pay its $60bn debts. It built islands in the ocean, hotels, office buildings, residential palaces - most of which are either unfinished or unoccupied. The fact that it is probably close to bankruptcy comes as no surprise to anyone pays the slightest bit of attention to part of the world. The words "well" and "duh" spring to mind.
But at least we don't have to worry about unemployed Middle Easterners jumping aboard ships and sneaking into US ports courtesy of Dubai World. Because DW also owns DP World, the marine terminal operator that bought 22 major ports in the US. British port and ferry firm P&O sold its leases to manage the ports - including New York, New Jersey, Philadelphia, Baltimore, New Orleans, and Miami - to DPW in 2006. Congress freaked when it found out, citing national security. Then President George Bush tried to veto any blocking of the deal because - well heck, Dubai is our friend. In the meantime DPW sold the ports to the less-than-saintly AIG. What a palaver, eh? But imagine if DPW was bankrupt and still owned some of the most important ports in the US.

Wednesday, November 25, 2009

Helping the 'Lost Generation'

The young adult children of baby boomers, the so-called echo-boomers, are going to suffer the most from the current recession and will also suffer the longest. The Financial Times calls them the 'new lost generation, ' the Associated Press uses 'boomerang kids'.
Whatever they are called, young adults aged between 18 and 29 are in trouble. Jobs are scarce and older Americans are holding on to the ones they have longer. Among 16 to 24 year olds, less than half are currently employed, according to an article by the AP. The FT put unemployment among 20 to 24 year olds in the US at 15.6% last month and for 16 to 19 year-olds it hit 27.6%.
Things are so bad that after college, instead of heading to the big city and their own apartments, they are headed right back home to Mom and Dad. A study released by the Pew Research Center shows that the number of young adults living alone has declined to levels not seen since the recessions of 1982 and 2001. About 20 million people between 18 and 34 live at home with their parents - almost 30% of that age group, said the study.
So what can be done to help the 'lost generation' while it sits in its collective bedroom and applies for job after job? Further education is always an alternative, but it is expensive. And we could end up with a hugely over-educated set of echo-boomers with no actual job skills. Learning a trade is another. But most American trade schools are only offering 'degree programs' where the kids waste a disproportionate amount of time on so-called 'core' courses such as basic math, English and psychology.
Perhaps the answer lies in our business community. Businesses have cut staff to the bone since the credit crisis, and few are looking to hire anytime soon. Why not hire some of the boomerang kids to learn some real job skills? If businesses offered internships - even unpaid - they might just find that their young employees are just what they need going forward. If more young adults could go out to work every day and learn how to interact in a business setting, they would have some much-needed experience upon which to one day base a career. Perhaps the financial services industry could set aside a little bit of money from the bonus pool and start such a program. It would be ground-breaking.

Monday, November 23, 2009

All the News that Fits the Search Engine

I may be one of the few people around the world(the ones that care that is)that was not surprised to see that News Corp is hooking up with Microsoft. When I was at Dow Jones Telerate in the late 1990's there was a rumor flying around that Microsoft was one of the interested buyers for the Dow Jones market data arm. As it happened Bridge Information Systems got DJT for a steal, then demolished it. But when Reuters was struggling and offering itself around the market nearly a decade later the Microsoft rumor again surfaced. But Thomson got the prize that time. After both sales the market data industry sighed with relief and smugly told itself that a technology company couldn't possibly understand the market data business, nor would a Microsoft add any value to the content world. That was then. Even when Reuters sold to Thomson Corp Microsoft did not have a viable search facility. Google was kicking it arse. Now Microsoft has spent gazillions on its Bing search engine and it needs an edge to chip away at Google's market share. Finally technology meets news content. Many have lamented the demise of the printed newspaper, knowing there is still a need for quality journalism out there. But MSFT having exclusive access to News Corp content should only be the beginning. If Bing were the only place I could search for New York times, Wall Street Journal, Financial Times, Thomson Reuters, Bloomberg and Economist articles then Bing it would be for me. MSFT could take control over searches for the financial services industry first then move on to a more generic audience. That is a business model Reuters and Telerate would have killed for.

Friday, November 20, 2009

Let the Mud Flinging Begin

It is no secret that the economy is in a tailspin that is likely to last another year or so, despite what the perky-jerkies at CNBC tell us. Statistics can be tweaked and cherry-picked to highlight the good stuff easily enough (we journalists are great at that), but many people are beginning to look underneath the headlines for the truth. So when Republican senators blamed US Treasury Secretary Timothy Geithner for the mess the country is in and called for his resignation, it was clear that there was a hidden agenda. This is it: Get the American people riled up about losing their jobs and their homes and blame the current administration loudly and often. Then get Sarah Palin to write a book and go on a 'book tour' where she gets 'unfairly' criticized by the lefty loony press and praised to the heavens by Fox News. Then get the UK's Daily Mail to run an hysterical story about floating storage for oil - telling readers that it is the fault of these 'sharks' in the oil business that petrol prices are rising (thereby removing the blame from an economic recovery being the reason). Then cherry-pick all of the worst economic statistics and depress even CNBC. Then head into the 2010 elections with every center-right or right-winged person in America that uses Glenn Beck as their primary news source prepped to vote. Goodbye Democratic majority. Mr. Geithner showed yesterday that he has grown a pair. Now he has to explain to the people just how well his policies are working. Because - to be honest - it is rather difficult to see.

Tuesday, November 17, 2009

Recipe for a Bubble

I used to hate Bubble and Squeak when it was served at my oh-so-mediocre high school cafeteria (both were mediocre in case you were wondering - the school and the cafeteria). The joke then was that inside the Bubble and Squeak was baked a mouse - hence the 'squeak' part.
Today's bubbles - the stock and commodities markets - may be showing signs of a squeak but the media (school lunch ladies)and the Fed (the school principal) are serving up the bubble regardless. Yesterday's lovely surprise squeaker was Meredith Whitney who told a stunned Maria Bartiromo on CNBC that she hadn't been so bearish in a year, then predicted a 'double dip' recession (see my blog dated 05/08/09). The CNBC talking heads spent an hour disputing Meredith and spouting spurious crap to support their uneducated (and unasked for) opinions. Then Fed chairman Ben Bernanke reassured the world that this was no bubble, duly followed by Donald Kohn (vice chairman)and Janet Yellen (San Francisco Fed). The words 'protesting' and 'too much' spring to mind. UBS' head of floor ops Art Cashin popped up on CNBC this morning and said something similar. CNBC might have to jump off of its perma-bull and smell the manure soon.

Monday, November 16, 2009

Crimbo Takes Center Stage

The holidays/Christmas/Hannukkah/Kwanzaa - or Crimbo as the Brits call it - is taking center stage early this year. As the economy crumbles around us and real unemployment probably tops 20%, retailers are desperate for us to start spending. In London the Xmas lights on Oxford Street and Regent Street were already up and lit last weekend. Last Sunday Oxford Street was so full of shoppers that you had to walk in the street. Here at the Cambridge Galleria yesterday I heard Xmas music in all the stores, and saw people walking out of Best Buy with mountains of boxes. The retail spending figures will be eagerly awaited by retailers and investors alike. If they are indeed up from last year, the stock market will no doubt rally in celebration. It seems you cannot dampen those Crimbo spirits. But wait. Goldman Sachs has canceled its Xmas party - again. The embattled bank apparently thought that throwing a glitzy bash might just enrage those taxpayers that bailed it out of last year's mess. And it might also remind them that Goldman Sachs employees are girding themselves for a bumper bonus season. They will have a Holly Jolly regardless of growing unemployment lines elsewhere. At the same time in a display of utter idiocy RBS applied for a liquor license (from 7am) and a permit to hold karaoke parties in its London offices, according to the Telegraph. This came only days after the bank took another 33bn pounds in bailout money from the UK government. I can see its probable logic in holding in-house Xmas parties - so no one could see that the bank was frittering away taxpayer money. But RBS was rumbled before it could party down. Crimbo parties or not, neither bank has learned anything from the economic crisis they helped to cause. That is called wasting a good crisis.

Tuesday, November 10, 2009

The X Factor

I leave London today just as I am getting to know it again through the local media. It takes about a week to get the hang of what each politically-oriented newspaper is trying to say. The bottom line appears to be that the UK is falling apart. Confidence in the government is very low. Binge drinking and the 'dumbing down' of young Britons remain on the rise. The Daily Mail's Quentin Lett is blaming feminist Germaine Greer for today's lager-swilling, sexually active females (never mind that the UK's drinking culture has been ingrained since before Ms. Greer left Cambridge). Some people on TV this morning blame Simon Cowell  for bringing down the tone of British entertainment and sounding the death knell for television everywhere. He voted to let the public decide on who would win the X Factor, another Pop Idol/Britain's Got Talent clone. The public decided that a pair of moronic, spiky-haired twins from Ireland would win. I guess the government has taken as much blame as is possible for the mess the country is in so Simon Cowell is the next best person on the list. One wonders about the quality of education these days when the quiz on GMTV is Q) What do you pour ontop of Christmas pudding? Possible answers: Tea, brandy or milk. The prize is 25,000 pounds. And I may only be a token Brit but everyone knows you don't pour tea or milk on top of Christmas pudding. Perhaps the quiz is meant for 3 year olds so that their parents can afford to send them to university. Then they can learn to spell better than Gordon Brown, who is under fire for getting a few words spelt wrong in a letter of condolence to a fallen soldier's parents.

Saturday, November 7, 2009

Property Lust Follows Bust

I mentioned two days ago that I was amazed by the continuing high property prices in central London. Last night I picked up a copy of the London Lite newspaper - a tube station giveaway - and there was a small article in there confirming my suspicions. The paper says "Home prices up 1,300 (pounds) a day" in Chelsea, Kensington and Notting Hill. This is said to be due to an "extraordinary autumn revival fuelled by hopes of bumper City bonuses". Downstairs from my rented flat (in Kensington) is an estate agent - the cheapest flat in the window is a 'light-filled studio" for 425,000 pounds. Not that I was even considering a pied-a-terre in London, but Holy Cow. My son tells me that Paris prices have barely moved during the crisis - up or down. And now with Sarkozy's government cracking down on financial markets' bonuses, they are unlikely to be bidding up property there in a London-like fashion. So, while I am not a great fan of reigning in bonuses, there is a very human element to doing so. If bonuses are not on the 'too big to flinch at ridiculous prices for flats' side then people don't pay ridiculous prices. This keeps the property market accessible to others who simply want to live in a city centre near work. Commuting two hours each way has become almost the norm in London among younger people. Affordable homes are so far away and yet jobs remain in the centre. This is the opposite of urban planning.

Friday, November 6, 2009

The Cheese Stands Alone

The UK has changed little since I lived here, but Euro-scepticism does seem to have solidified. The UK has never been particularly keen on being part of Europe (witness pounds, not euros) and people today seem to consider the adoption of the Lisbon treaty a stealth bomb maneuver.Wannabe UK Prime Minister David Cameron is raising some European ire with his Conservative party platform to take back power from the EU. The French have called the move "pathetic" and say that the UK is "autistic" in its obsession with taking back power. I have no real problem with Europe or the EU in principle, but I cannot imagine that the EU has a chance to be a world power rivalling the US unless Britain is a part of it. 
The movement toward autonomy is not surprising given the state of the economy here. Many blame immigration (just as they do in the US). It is true that Britain's crazy asylum laws bring in far more immigrants than can be dealt with - or afforded. Others blame the Labour party for failing to reform pretty much everything. Gordon Brown is deeply unpopular. One of my friends, a peace-loving person normally, hates him so much that she mentioned performing acts of a disturbingly violent nature if he were to come into her personal space. I just watched him on TV blathering on about Afghanistan and muust admit that he is probably the most boring politician Britain has had since John Major. But I can't quite figure out why he is so hated, apart from the economy.
The City seems pretty unchanged, if a bit quieter than it used to be. The shops (including Boodles and de Beers at the Royal Exchange) and restaurants are still busy. Bonuses are said to be rising again, so I expect that central London property prices have just about bottomed out. Plus ca change, really.

Thursday, November 5, 2009

Greetings from London

I arrived in London yesterday for my first visit in three years (apart from an overnight stay due to a delayed flight). The sun is (uncharacteristically) shining , making it more pleasant to walk around and see how the place has weathered the recession. People are extremely cautious about spending money, or commiting to it, a PR friend tells me. She says they prefer to wait until the Labour party is sent to Coventry for another 17 years after the next election. Exactly what difference the Tory party or a coalition Tory/Lib Dem government will make to companies is unclear. Presumably they will roll back some of the proposed taxes that will make the City untenable as a place to work and do business. Like 1979, when I first moved to London, the shops are the first evidence of recession. Every third shopfront in the Kensington/Notting Hill/Chiswick route I took yesterday is boarded up. There is a lot of construction in residential areas, however. Perhaps City bonuses were not as bad as the media made them out and City boys bought in-town digs at the lows of the property market. I say 'lows' with a deal of sarcasm. A two-bed, two bath flat in Notting Hill - my old neighborhood - is still going to cost you upwards of 800,000 pounds (around $1.3 million US).
The strangest thing I saw yesterday was the one-year new Westfield shopping mall. It is the largest shopping mall in Europe and I cannot even describe how big it is. It is plunked down smack in the middle of grotty Shepherd's Bush, right behind the tube station and it looms over like a gleaming giant spaceship. Inside are all of the most exclusive British and Italian designers plus a few American shops - the Timberland shopfront looks like they transported a whole Canadian forest to build it. There are champagne bars and comfy seats with wireless connections and sparkly Xmas displays that stretch to 100 foot ceilings. De Beers has a diamond shop (imagine your significant other saying 'I want to marry you, fancy going to Shepard's Bush to pick out a ring?'), and there is the biggest Marks & Spencer's I have ever seen. The whole thing looks like a nouveau-riche Russian's dream come true. And it was busy. On a Wednesday afternoon. My friend tells me that the parking garage is full on any given weekend day. I can only imagine that it is the new gathering place for the unemployed. There were dozens of people using their laptops in the comfy seating areas - looking for jobs perhaps? The climate-controlled space means that you can escape the cold and rain (it is clouding over again right now) and do some web-surfing and people watching at the same time.Very odd indeed give the economic climate.
I'm off to the City now to see a friend and employer of my freelance services. I'm curious what I will find there.

Wednesday, October 28, 2009

An Exercise in Frustration

I was preparing a comment on today's Congressional panel on dark pools and HFT etc. when I noticed an article on Reuters saying that Goldman Sachs had sent a memo on the subject to the SEC. The memo was "posted on the SEC website", said Reuters. As a diligent reporter I followed up and went to the SEC's website where I then tried to locate said memo. A frustrating hour later I had no more information than I would have had if I'd stood in the street and shouted "What is in the Goldman Sachs memo?" to passersby. With all the banging on the regulators are doing about transparency, the SEC's own website is the most egregious example of opacity I have ever seen. It is an impenetrable collection of officious-looking government documents and EDGAR filings (always a riveting read). To even find a press contact a journalist has to know exactly what the SEC calls the press office (Office of Public Affairs) and where to find the phone number (under contacts, not to be seen anywhere in press releases or news which is customary on websites). A phone call ensued to ask Public Affairs where to find said memo. He was not surprised that I was having trouble and kindly walked me through it. Six clicks later and still not obvious, there it was - at the bottom of another internal memo. It would have been easier to cadge the information from Reuters or Zerohedge (which had it first, I believe). So, Ms. Schapiro, when you next opine about transparency, maybe you should look inward. Information is key when trying to catch criminals and control clever bankers. And if anyone has to mine the information out of the SEC website, the criminals will be laughing all the way to the Cayman Islands before anyone knew they existed. (The memo, BTW, looks like a presentation I saw at Goldman's about a year ago - slightly doctored with its own 'recommendations' for the SEC. Surprise, surprise it favors the status quo for HFT and dark pools. But the banks is down at least on naked sponsored access (DMA), which it thinks could pose systemic risks.)

Friday, October 23, 2009

My Favorite Things

The front page of today's Financial Times was so full of alliteration that it inspired me to write a song. Feel free to sing along to the tune of "My Favorite Things" from the Sound of Music:
           Benchmarks on bonuses,
                 New rules on risk-taking,
           Demolishing dark pools
                 and banning book-baking,
           Snitches and wiretaps a prison cell brings,
                  These are a few of my favorite things.
           When the Fed bites,
                  when Feebies sting,
           When you're dealing bad....
                  It pays to remember my favorite things
            And reel in the greed a tad.........


Thursday, October 22, 2009

Dark Puddles

The SEC has finally cracked down on dark pools, limiting the amount of trading that can be kept quiet to 0.25 percent of a company's shares, from the 5 percent previously. This is a good first step. It means that traded prices have to be made public sooner. There have been calls for greater transparency for dark pools since their beginnings. Some of the largest pools are owned by investment banks where they began as internalization engines. While this saves millions in brokerage and exchange fees for the banks and their customers, it also means that no one else can play. Some of the banks have allowed other dark pools to integrate with their own. Last year Morgan Stanley signed bilateral deals with Goldman Sachs and UBS to do just that. But access remains limited to a few chosen partners. Broker-owned dark pools and crossing engines have been struggling for years to get the banks to cooperate and allow mutual access. To add murkiness on top of opacity, volumes in dark poolshave been reported in two different ways. The sellside pools often double-count the trade, whereas the independents usually count a trade once. Some pools allow trades of any size, some insist that a client do blocks of 70,000 shares or more. The disparity between, and secrecy from, many dark pool operators has kick-started the SEC's new campaign for transparency. The new chairman of the SEC, Mary Schapiro, seems to be doing what Gary Gensler's CFTC cannot - kicking ass. The SEC is not cowering from the task because the US exchanges or banks might lose business. And they might - Europe is gearing up its post-MiFID markets with several dark pools of its own. And quality volume in a sector can already be found in European pool, satifying an investor's every desire even if it isn't in a US listing. Maybe what it takes is a woman. When a woman is confronted by whiny little boys who want to keep potentially dangerous toys, she usually tells them to shut up and find some other toy to play with.  That the boys - investors, banks, etc. - may have to go overseas to find these toys is neither here nor there. She just doesn't want them doing it on her watch and in her patch.

Wednesday, October 21, 2009

CFTC Gets Cold Feet

Just when I thought I couldn't be any more disappointed in the weak-minded, lily-livered bodies that we call US 'regulators' I saw an article in the Financial Times this morning that made me want to scream. It appears that the CFTC is going to wimp out of trying to impose position limits on commodities, particularly oil. It is afraid that the US will lose business to other centers if it does. This is probably true. the UK is ready and waiting for more traffic through ICE, and the Dubai Merc is poised to take advantage of any US outflows. But the fact remains that the huge positions taken by non-oil entities in 2008 contributed to a massive oil price bubble. CFTC Commissioner Bart Chilton said as recently as July that the CFTC was not going to "minimize the role that speculators are playing." Now he is dancing around the subject stating that the regulator would "set the bar high" regading limits. Michael Dunn recommends offering "generous" limits. Jill Sommers prefers to err on the high side as well, but I get the feeling she is really focused on OTC issues. Only chairman Gary Gensler seems to be holding firm on the limits idea. It is new commissioner and unknown quantity Scott O'Malia who holds the wild card in my opinion. O'Malia was originally nominated by big-oil, big-car GW Bush and somehow slipped by President Obama's due diligence team. O'Malia was a hard-line lobbyist against environmental measures and for electricity deregulation. Unbelievably he worked for the now-bankrupt electricity company Mirant, which contributed greatly to the spectacular electricity meltdown (also involving Enron) in California in 2000-2001. After the crisis, CA attorney general Bill Lockyer, said that Mirant was "one of the worst offenders during the Energy Crisis. They told grid operators generating units were down when they weren't. They created bogus grid congestion, then received premium payments to relieve it. To avoid in-state price caps, they created the illusion of importing energy from out of state." O'Malia said at his confirmation hearing that this experience opened his eyes to the consequences of inadequate regulation. Let us hope so. I will be watching you Mr. O'Malia.

Friday, October 16, 2009

Beware the Bad News Bears

It is freaky Friday at the end of the a very strange week where bad news bears have been roaring about unemployment, foreclosures, and government debt while the Dow Jones Industrial Average touched 10,000. I say 'touched' because the DJIA has been dancing around 10,000 for a few days and when it did come near the magical number it pulled away like a finger touching a hot iron. It finally closed above 10,000 yesterday and the baseball caps trumpeting Dow 10,000 were flying around the NYSE trading floor. Icap's analyst Walter Zimmerman gave them the "Golden Pom-Pom Award" for for shameless displays of economic or financial cheerleading with no corresponding bullish technical indications.Themis' Joe Saluzzi tried to talk ebullient CNBC anchors down off of their high and failed. Meanwhile JP Morgan and Goldman Sachs are raking in the dosh thanks to interest-free credit from the Fed. Those banks with more exposure to the real world, i.e. mortgages and credit cards, are bleeding money in the third quarter. The housing market is not recovering, just the opposite. We must not forget that it was the housing market that toppled this house of cards. We went from dot com bubble to the housing bubble to the commodities bubble and now the stock market bubble. All led by a Federal government (whatever the party) who cannot bear to give the American public bad news. But the bad news bears are beginning to overwhelm even the cheerleaders at CNBC. Zimmerman warns that this rally to 10,000 is: "giving bearish RSI divergence sell signals on both daily and weekly charts". If oil prices continue their path back to $100 it may once again be the straw that breaks the bubble's back. I think I'll stick to bricks and mortar. Albeit without Chinese drywall (the next problem for the housing market).

Tuesday, October 13, 2009

Be back soon

I am knee-deep in a project that is taking all of my time. Blog will be restored next week!

Friday, October 9, 2009

Wretched Excess Filters Through to the Dollar

The weak US dollar does not come as a surprise to anyone who trades FX or watches the economic barometers that have been flagging trouble for a few years. The wretched excesses of the consumer, aided and securitized by the banks and nurtured by successive US governments are finally coming home to roost. George Soros said at the World Economic Forum that this is "basically the end of a 60-year period of continuing credit expansion based on the dollar as the world's reserve currency."
For a while there a perky (some say too perky) stock market was the placebo. But when the dollar started creeping lower again reality hit. The gigantic budget deficit, the US Treasury printing money, and a general slowdown in FX trading are all contributing to the lack of support. (Data from six of the world's FX committees showed average daily FX turnover down nearly 25% from Apr 2008 to Apr 2009, according to Profit & Loss Magazine.) Secret meetings among oil-producing and consuming nations to try and figure out a new reserve currency have been widely reported. The almighty dollar's dominance is under threat. But I have a trick that anyone is welcome to use in trading or hedging the dollar. With alarming regularity the dollar seems to hit its yearly lows when I am abroad. I had the deeply unpleasant experience of paying $1.80 for a euro in April 2008 in Paris (the print was at about $1.60 at the time). I am planning a trip to London early in November, so expect the dollar to be hammered down further at that point. Only to rebound when I am back in the USA.
BTW, I was way off on Phibro. It went to Occidental in the end, which is a good fit - E&P meets trading and speculation. Oxy only paid a bit more than 1X net earnings for Phibro, which I found odd. But as a source pointed out Phibro owns nothing but bums on seats. And brains, hopefully. Maybe Andy Hall is having the staff unpack?

Thursday, October 8, 2009

The Duh Factor

Call me gobsmacked. The SEC has just now called for access to real-time data for OTC swaps and derivatives. The SEC said that the absence of this data "hampered its efforts to investigate potential fraud and market manipulation in OTC derivatives markets" during last year's crisis, according to Securities Industry News. Big Duh. There has been a massive gap in coverage for OTC derivatives for quite some time. Services such as Markit and Reuters were trying to close some of the gap by offering derived or calculated prices, but so many instruments were customized and one-offs that it would be impossible to get data on them. One of the ways to get better access to OTC prices and deals would be to automate them and send them through a clearing house. This was going to be one of the major foundations of new post-crisis regulation. But wait... Barney Frank, the chairman of the U.S. House of Representatives Financial Services Committee said Wednesday he does not expect Congress will require all end-users of OTC derivatives to use central clearinghouses. He said that anyone using derivatives for 'risk management' purposes should be exempt. This means no one WON'T be exempt. CFTC Chairman Gary Gensler told reporters after Wednesday's hearing: “As just about all swaps could be defined as being used for risk management purposes, we’re concerned that unintentionally the category of ‘major swap participant’ could have been narrowed so significantly, or even to a null set." Banks 1, US Government 0.  The pressure from the banks' lobbyists must have been more than Mr. Frank could handle. If anyone was in any doubt who really runs this country, doubt no more.

Wednesday, October 7, 2009

Prophesizing Phibro's Future

The Financial Times today clinches what many industry-watchers have foreseen: that Citi is trying to sell its oil-trading unit Phibro. It is no surprise given the clamor that arose when CEO Andy Hall's pay packet was revealed. Although a $100m bonus seems ludicrous to most people, it seems Hall deserves it. Phibro has made Citi around $2bn in profits over the last five years, using little of the bank's cash for leverage. Trading and hedging physical oil is not for the faint-hearted, nor for the inexperienced - especially in the oil price climate we have witnessed over the past two years. Hall has not lost money in over 15 years, sources tell me, which is pretty good going in any business. So, after reading some of the blogs on Hall and talking to my favorite oil biz source, here are my predictions. 1.) Trafigura or Glencore will buy Phibro. They have stacks of cash, no fear of doing business in - ahem - sensitive countries, and retain the maverick spirit that Phibro had pre-Salomon Smith Barney/Citi. OR: 2.) Andy Hall is hired by one of the above or another high-roller trading company or hedge fund. Why buy the cow when you can buy just the milk supply? Fox Business News (that paragon of quality financial markets information) said in August that Hall had already told his CT household staff to pack up for London. I have doubts that Hall would move to London, however, in the midst of the FSA's crack down on executive compensation. My bet is Geneva.

Monday, October 5, 2009

There is no 'V' in Recovery

Economist Nouriel Roubini told CNBC today that the recovery is not going to be 'V' shaped, rather a long, slow 'U' shape. He hinted that the "wall of liquidity"created by the government's stimulus package is causing a run on assets and boosting the stock market. The danger in this is that it may also be boosting food commodities and oil prices. It is clear to most interested onlookers that the massive infusion into the financial services companies gave them the opportunity to make some fast cash. What is less clear is whether the 'virtual recovery' caused by the stimulus is strong enough to weather the storm. (Fox News even suggests that there is talk of a third stimulus package.) Oil prices seem stuck at or around $70 bbl fuelled in part by an increase in consumer spending in August and in part by glowing, bullish reports from certain investment banks that seem to miraculously appear  when the prices dip. My take on consumer spending - at least in New England - is that the weather was so awful until August that no one went on vacation until then. When they did, it was sunny and gorgeous and it was a crime not to buy lobster rolls when they were so cheap. Vacations aside, there is little indication that Americans are rushing back to their profligate ways. The latest Dilenschneider Group report put it this way: "Regardless of when the downturn ends, expect the recovery to be very slow." Both Dilenschneider and Roubini are concerned that unemployment will prove to be the straw that breaks the camel's-back of the recovery. Throw in higher oil prices as investors grow increasingly exhuberant and you could see a double dip after all.

Friday, October 2, 2009

Heads I Lose Tails You Win

Looking at the financial press this week has been like trying to talk to a schizophrenic with two equally dominant personalities. The bearish side is absolutely convinced that the 50% market rally since March is about to implode, leaving Grandma even more destitute that she was a year ago. The bullish side quotes 'money on the sidelines' and V-shaped recoveries as evidence that the worst is over. The Financial Times today has a bearish article about Q3 earnings right next to a column saying that we are now in recovery from the recession. Now, as I have said, I am a terrible trader. But there is one thing I am pretty sure of having noticed it a few times in the past 30 years. That is: when a majority of brokers and traders agree on the market direction the market is sure to turn and do the opposite. And YouDevise's Trade Idea Monitor (TIM) weekly report says that total new long ideas (as a percentage of all new ideas sent this past week to investment managers in real time through TIM) increased 3.50 points to a bullish 65.55% .  (Over 50 is bullish; 50 is neutral; under 50 is bearish.)  A year ago the TIM was 66.95% - also a year ago the DJIA was at 10,831. It then plummeted over the next 6 months to around 6,500. How bullish is that? 

Thursday, October 1, 2009

Hormones Versus Bonuses

Women and middle-aged men might make better traders than testorone-fueled younger men, says an article in this week's Securities Industry News. It seems the presence of too much of the male hormone leads to excessive risk-taking on the trading floor. John Coates, a research fellow at the University of Cambridge, has done a couple of studies on the subject. Coates tells Securities Industry News that having more women on the trading floor might limit market swings, as women tend to be more risk averse. (I am not so sure that being risk averse makes a good trader, though. I am pretty risk-averse and can honestly say that I am one of the worst traders I know.)  I wonder if Coates and others (the MBA students at U. Chicago and Northwestern are also looking at the role testerone plays in business) have looked at the correlation between bonuses and risk taking. Because even the most risk-averse, hormone-lite woman or middle-aged man might just make a major punt in the market if they thought they could take home a multi-million dollar bonus. However, the news that the UK is going to curtail bonuses along G20 guidelines might bode well for women and older men getting trading jobs. Today's Financial Times says that these guidelines require that a "substantial portion... such as 40-60%" of bonuses be paid over a three year period or more. This may appeal more to risk-averse traders than to the testerone-rich crowd.

Wednesday, September 30, 2009

Co-Locate and be Damned

I guess Essex girl jokes are totally out of date these days (what does an Essex girl use for protection during sex? A bus shelter!) but they do spring to mind when looking at today's Financial Times. While all the efforts are taking place in the US to ban flash orders, and regulate high frequency trading and dark pools, NYSE Euronext is building itself a giant co-location facility in Basildon, Essex (that is in England - near London - for my American readers). In a hangar-sized building the exchange is installing racks of computer space for its own trading engines and - next door - banks of space for the HFTs' servers. So, as the US says goodbye to HFTs and their sub-millisecond, fractional profit-snatching ways, Europe welcomes them with open arms. In the US Senator Ted Kaufman is hovering over the SEC to make sure they take a ground-up look at the new market structure. This seems to be working quite effectively. The SEC said to him in a letter that it would dig down and take a hard look at  Regulation ATS threshold levels, direct market access, high-frequency trading, and co-location. The FSA has yet to weigh in specifically on co-location and HFT but is adamant that an international approach be taken to policy-making. Otherwise any measures implemented by the UK alone could damage London’s competitiveness. But while the FSA and the SEC are trying to work together more closely, NYSE Euronext is building a hangar for co-location. Europe's new market structure is still too new for regulators to get a handle on it. The SEC had better jump in and advise the FSA before New York and Chicago lose their co-location domination.

Monday, September 28, 2009

In Defence of Conspiracy Theories

Financial journalism has changed more in the past year than anything else on the planet, including the credit markets. Traditional magazine or newspaper-style reporting is flying out the window and bare-knuckle, real-time blogging is taking over. If you ever doubted this take a look at Zero Hedge. It is an analytical yet tongue in cheek blog started early this year by an ex-hedgie. Zero Hedge digs into data, analyzes it and draws conclusions that most financial journos haven't the time or the aptitude for. I found it in my internet trawling a few months ago, loved it and followed it, and it is now becoming mainstream. Today's New York Magazine has a long diatribe about Zero Hedge and financial bloggers. It criticizes ZH's tendency towards conspiracy theories and its campaigns against high frequency trading, flash trading, dark pools and Goldman Sachs' market dominance - among other things. I think if you look carefully at financial blogs you will find many of the same arguments that ZH makes, though perhaps with less vigor. These blogs are trying to do you, the general public, a favor by pointing out things that may not be 100% good for you. You can take or leave our advice, but be aware that we try to tip you off before the banks - or the government - rip you off. And try to remember that where there is smoke there is often fire. If it walks like a conspiracy, talks like a conspiracy and acts like a conspiracy - it probably is one.

Friday, September 25, 2009

And so it Begins

The mere whiff of US regulators poking their noses into energy markets, those last bastions of government-sanctioned bribery and cowboy-style trading, has sent everyone scrambling offshore. S&P is considering an excluding-US GSCI style index, citing interest from investors to freely access commodities exposure. United States Commodity Funds (proud owners of the market-moving USO oil and USG natural gas ETFs), have already filed for permission to create a Brent-related one. Platt's is looking into setting up an index that would give investors exposure to physical commodities, according to Reuters. Presumably if an investor has a physical position then he can play around with futures willy-nilly. None of this news is good for those who want to stamp out oil speculation. Just because speculation may be curtailed on Nymex (and to a lesser extent on ICE) doesn't mean that prices of US futures won't be affected by speculators elsewhere going forward. Asian and Middle Eastern exchanges have been trying unsuccessfully to break into the oil futures markets for decades. But they have always been beaten down by the dominant US and UK ones. Their day in the sun may have arrived. I have said it before and I'll say it again: there was a good reason that Goldman Sachs and Vitol bought 20% of the Dubai Mercantile Exchange. And it wasn't because they like wadi-bashing.

Wednesday, September 23, 2009

Regulating the Dark Pool Palooza

The World Federation of exchanges has taken aim against dark pools, echoing the SEC's concern that they limit transparency. Yes and no. If an institutional buyer cannot execute large trades (which means hundreds of thousands of shares) on the quiet, then market volatility will soar. Transparency is only a good thing in that we know what has happened and when - which we do with dark pools because they have to report trades just like any other venue. Crossing internal and customer business - which is where dark pools started at the banks - is essential in order to save investors money on exchange fees. While it is probably true that there are too many dark pools - around 40 in the US alone at last count - I believe they are a necessary evil. Perhaps what is needed, ironically, is more transparency in dark pools. If more of them were integrated, or if regulators mandated that orders had to go to ALL pools rather than just one or two, then this might help to light them up a bit. Pool providers should be doing more to make their business more understandable to the regulators and the general public. Given the panic over flash orders and HFT, dark pools should be afraid. Very afraid.

Tuesday, September 22, 2009

Too Clever by Half

The noise over bankers' bonuses is growing into a virtual media cacophony in the run-up to the G20 meeting this week in Pittsburg. Everyone from economists to analysts to corporate lawyers are calling for a crackdown on the bonus culture. Nicolas Sarkozy (my new hero) is threatening to 'allez' the G20 if the group doesn't address the situation to his satisfaction (the G20 looks set to give regulators some increased authority in this area, so he will have to 'restez' instead). The SEC seems to be growing a larger pair after its courtroom drubbing in the BofA/Merrill Lynch bonus fiasco. BIS's Financial Stability Board is (of course)trying to tie bonus pools with capital requirements. Not a terrible idea, to be honest. But I worry about the ability of the global mishmash of regulators and central banks to monitor capital reserves, bonus pools and accounting standards as well as the usual fraud. I have heard many a tale where a firm will 'take profit' on future swaps or exchange deals in the current year in order to boost bonuses. It is common, not entirely illegal, and almost impossible for auditors to detect until it is too late. If the regulators work with some forensic accountants maybe they will stand a chance of outwitting the clever clogs at the banks. I won't hold my breath.

Monday, September 21, 2009

Nobody Loves me, Everybody Hates me...

High frequency traders are going to go eat worms next. At the Aite Group roundtable discussion on high frequency trading last week there were reportedly a few HFTs feeling unloved (WSJ Marketbeat). They believe that the high profile criticism over what they do and how they make money is unfair, because they also have to take risks which may not pay off. Oh boo-hoo. That is what traders do. These HFT firms were given the unbelievable gift of Reg NMS which made the equities markets more transparent and allowed routing between exchanges. (The fact that there is still arbitrage available between the venues is also unbelievable, but that's another blog.) That same transparency meant that regulators, retail investors and financial journalists alike could also see what was going on. This is what Reg NMS was all about. HFTs should take their money and run laughing all the way to the bank. Transparency means smaller and smaller margins, which means their days are numbered. Rather than complain, they should start looking at FX and commodities for further opportunities to exploit, while they wait for their quants to come up with some new ideas.

Thursday, September 17, 2009

GDP and the Value of Happiness

France's President Nicolas Sarkozy and economist Joseph Stiglitz trying to start a new trend - using the value of happiness as a component of GDP. Stiglitz led a panel of economists - commissioned by Sarkozy - to look into GDP and whether it was a true measure of a society's health. Stiglitz maintains that GDP statistics often suggest that the economy is doing far better than most citizens' own perceptions. For example, before the credit crisis the US was reporting stellar GDP growth rates, but these were skewed by the massive amount of household debt Americans were taking on to fuel the growth. Sarkozy and Stiglitz argue that happiness, long holidays and a sense of well-being - partly down to having excellent health care - should be part of the measurement of a society's performance. I agree whole-heartedly. Americans live on a knife edge between good quality health insurance provided by their employers and having to use the emergency room and walk on the bill. That causes stress. In France the health care is excellent and paid for by their tax euros. The average American gets two weeks of vacation time each year. Most of them use it in the summer when their children are out of school; that leaves 10 months of the year with only a public holiday here and there. That causes stress too. In France, on the other hand, vacations are long and varied. Most Frenchmen get 6 weeks off plus public holidays. As far as happiness goes, I can't even bear to watch Fox News or CNN for all the vitriol and bile that is spilling out of Americans today. That is not happiness. In France their lifestyle is much the same today as it was 100 years ago - with a focus on good food, fine wines and arguing politics over the dinner table. They do not need the news media to feed them their opinions. In America property prices have fallen between 20-50%. In France property prices have barely dipped (I know this because I check Paris apartment prices weekly and a friend just came back from looking at houses in Provence). I think Sarkozy has something here.

Wednesday, September 16, 2009

Underwater Public Pension Funds

As Ben Bernanke and the Financial Times opine about the end of the recession and the miraculous recovery of financial firms after Lehman's collapse a year ago, spare a thought for one of the hardest hit sectors. Many public pension funds, those owned and managed by individual states (US) or federal governments (US and UK), are in mortal danger of collapsing. I am writing an article about the trend toward liability driven investment (LDI) in pension funds, where funds use interest rate futures and swaps to help manage their long-term risk. If people live 20 or more years after they retire, which is increasingly the case, the surplus risk to the underlying assets can be mitigated. Most pension funds do not employ this method, preferring instead the 'wait and hope' method of investing (which, as we have seen, worked pretty badly last year). A portfolio manager tells me that the worst problems are currently with the public pension funds, and that they are "horribly underfunded". Because we taxpayers fund the public pensions there is little incentive for public officials to tell us how bad the situation really is. We might just vote them out, and vote to stop giving state and federal workers pensions based on their final salaries. The MA state fund lost almost a quarter of its value in the year ended June 30th. California's CalPERS is so underwater that, rumor has it, the government is looking to see if there are legal ways to stop existing pensioners from getting the full amount agreed. (My source tells me that there are retired town managers in CA making $400k per year in benefits.) Until this mess is sorted out I find it hard to believe that the financial markets have truly recovered. This might just test their resilience.

Monday, September 14, 2009

There Will be Blood

Even as the ink dries on the newspapers analyzing President Obama's speech to Wall Street today bulge bracket banks are gearing up to circumvent new regulation. The President was right to tell Wall Street that it cannot resume taking risks without regard to consequences, but he is too late. The resumption of said risk-taking is already off and running. They have jumped back into bond markets, commodities, and derivatives with both feet. The CFTC's imminent clamp-down on oil speculation, arguably the straw that broke the economy's back last year, is already turning banks into oil trading firms. Massive hiring sprees have been reported as BofA, Credit Suisse, Standard Chartered and Deutsche Bank expand their commodities teams globally and plan to start trading spot oil markets. Most of these banks made huge layoffs in the same teams only a year ago when commodities prices went south. My sources tell me that any oil trader worth his or her salt is asking for a three-year minimum salary guarantee before going to work for one of the fly-by-night banks. Because even at $1 million a year (which some reports tout as 'the going rate' for experienced oil traders) they'd be lucky to get a year out of them. The million doesn't go far when you are out of work again for a couple of years. The thought of some of these banks trying to trade physical oil makes me smile, however. The reason Goldman Sachs and Citi and Morgan Stanley have made it in that world is because they bought experienced people and/or companies and stuck with it, year after year. Jumping in when oil and commodities prices rise and out again when they fall is hardly a long-term strategy. Like the title of the film modeled after the excellent Upton Sinclair book "Oil", there will be blood. Meanwhile CME is cracking down on its existing position limits for oil and commodities futures, as I predicted it would (The Wold Report, August 26, 2009). Now for ICE to do the same.

Friday, September 4, 2009

High Frequency Trading and Oil

The hand-wringing over high frequency trading is bleeding over into commodities markets - in particular oil futures. Transcripts released show that HFT Optiver, which has been charged with manipulating oil prices by the CFTC, actively spooked prices up and down to suit them. This makes the CFTC look pretty toothless. A report released yesterday by the Baker Institute at Rice University blamed the sharp price rises last year squarely on speculators, and says that the CFTC botched the investigation by using inadequate models. Amy Myers Jaffe, who co-authored the report and is a highly respected energy expert, went so far to tell the NY Times that the CFTC then played down the results. She told the paper the regulator didn't want the blame to fall on it for providing inadequate oversight. The CFTC has a lot to answer for, it's true, but I believe chairman Gary Gensler is doing his utmost to bring the agency up to speed. There is one huge problem waiting to bite them in the bum, however, and that is the proliferation of HFT in oil. I have heard anecdotal evidence that already 30% of trades going through Nymex and ICE are generated by algorithms. I know for a fact that the bulge bracket's quants have developed algos that trade the arbitrage between ETF prices and the underlying constituent elements. ETFs such as UNG, USO and DXO that become skewed away from their net asset value are offering rich pickings for these HFTs. As the algorithmic trading landscape becomes more sophisticated in oil futures, the CFTC will find it even more difficult to nail down the culprits.

Thursday, September 3, 2009

You Read it Here First

Well, nearly. Last Wednesday I reported that there was something fishy about the FT reiterating that the CFTC was reiterating that banks might no longer be excluded from commodities futures trading limits. I said that the CFTC (probably with the cooperation of its faithful sidekick the FSA) was having a quiet word with the banks to get them to be at least somewhat compliant with existing exchange limits( the CFTC told the FT that it did not 'order' Nymex to enforce its own rules). Lo and behold, yesterday Deutsche Bank snatched its double long crude oil ETF (DXO) off the market when it bumped up to its Nymex limits. DXO is worth about $425 million, which shows just how pervasive these so-called index funds are in energy markets. Another niggling little problem by the name of United States Natural Gas Fund (UNG) has also raised some eyebrows. It seems the fund traded at 20% over its net asset value. It and its sister fund USO (crude oil) are both badly designed and have grown such that they can easily skew the futures markets. They will probably be the next to go. Many of these oil and gas ETFs came to market too quickly after the spike in 2007, and have grown far too large for what is a very limited underlying market. Around 1.2 billion barrels worth of crude oil futures trade on ICE and NYMEX every day. This about 50% more than the amount of actual crude oil produced globally (around 87 million b/d). Can you say 'manipulation'? Meanwhile I applaud BPs tenacity in the Gulf of Mexico. It has discovered another rich oil field that could have reserves of more than 3bn barrels. Maybe BP can help to stop the 'drill-baby-drill' in Alaska idiots in Congress.

Wednesday, September 2, 2009

Who will Pay for News?

Over $10 billion in advertising was wiped out of US media outlets in the first half of this year, according to today's FT. This helps to explain why financial journalists such as myself are currently under-employed. What is worrisome is that advertising in business-to-business magazines, the mainstay of the financial trade press, fell by nearly 32%. Newspapers are failing by the day as print media is replaced by real-time news on the internet. But the carnage in advertising budgets concerns me. What if this is a long-term trend and businesses find that they can do without advertising in local, national and trade publications? How do online news services make money if not with advertising? Even the mega-popular social media outlets such as Facebook and Twitter are struggling to squeeze money out of their subscribers, never mind advertisers. There are any number of free, real-time news feeds available over public sites including Yahoo! Reuters and Bloomberg now offer nearly-real-time news directly via their websites, this content used to make them a fortune. I have to hope that the public and businesses still recognize the value in good, accurate news that is politics-free. Especially since some of my journalist friends and I are bravely considering launching a locally-focused online business publication.

Thursday, August 27, 2009

Be Careful What You Ask For

The call for better regulatory oversight in financial markets rose to a cacophony after the sub-prime crisis and credit derivatives blowup, but I thought that it had been dying down of late. I was wrong. Senator Ted Kaufman from Delaware has charged the SEC to investigate seven practices: flash orders, high frequency trading, co-locating servers near exchanges, direct market sponsored access, liquidity rebates, dark pools, and retail order flow. Everyone in this business knows that Regulation NMS, although it was designed to level the playing field, actually benefited those with good technology. Investment banks, agency brokers, ECNs, ATSs and exchanges (finally) are all making 'new' money thanks to the new market structure. Kaufman and his fellow politicians probably do not fully understand the mechanics of the markets they are trying to regulate, which is one reason they are so suspicious. The industry and the general media have done a terrible job of educating and informing the regulators and other interested parties as the market has evolved. Only the specialist trade press (FT, Financial News, Securities Industry News, Traders, DWT, Wall Street & Technology) have covered these aspects of the business in depth. All have been warning of defects and loopholes in the new market structure that enable some fairly sharp practices. But sharp practices are what financial markets are all about. I would hate to see draconian rules coming down from above - it might signal the death knell of dozens of brokers and technology providers. Those asking for better regulation might wish they had never asked. And, keeping in mind that Delaware is the state that allows dodgy corporations to register there to avoid paying state corporate taxes and getting nailed with huge lawsuits, Kaufman may just be the pot calling the kettle black.

Wednesday, August 26, 2009

Unknown Knowns

Donald Rumsfeld famously said there are things we know that we know and there are things that we know we don't know. I would add there are things that we don't know that we know. Like whether the CFTC is going to increase position limits on commodities futures and remove the exemptions that the bulge bracket banks have enjoyed. I think we pretty much know that they will enforce limits, but officially we don't know. The reason I say this is because the FT today reiterated that the CFTC reiterated that it has doubts that banks should be exempted from position limits. Gary Gensler told the FT that he doesn't share the view that swap dealers (big banks) are 'passive mechanics in the marketplace.' Well, guess what? No one shares that view except the banks themselves. That the FT is reiterating the CFTC's opinion on this at this time sounds to me like the paper has a little birdie telling it something. One of my sources believes that the CFTC is probably already forcing the banks to cut back on their commodities futures positions to comply with the limits that are already in place by the exchanges. It would be hugely embarrassing for all parties if the extent of their current (and especially past) non-compliance were to be revealed. So once they have them cut down to size the CFTC will be able to unveil the new guidelines and - with a straight face - tell the world that the banks were already largely complaint. Face saving all around.

Tuesday, August 25, 2009

Singing from the Same Hymnbook

It seems while I've been away on holiday the regulators and exchanges are all holding hands and pledging their troth to each other. ICE has agreed to provide the CFTC with trade data. The CFTC has strong-armed the FSA into cooperating in trying to reign in oil speculation (even as the FSA continues to claim that the 2007 spike in prices was supply and demand). And now the SEC and the CFTC are joining hands and trying to find a page in the hymnbook that they can sing together. In the past it would seem the SEC was the experienced baritone while the CFTC was the squeeky young tenor. But since Gary Gensler's arrival, the CFTC has grown a pair and seems to be going in the right direction. The SEC remains unwieldy in size and still has too few ex-traders to help build better investigative practices. Plus it has not been given any sharper 'teeth' by the Obama administration, as far as I can see. Until it has the authority and manpower to actively investigate the dodgy goings on in our industry, little can be achieved. The administration and the regulators should heed President Obama's words and not waste this crisis.

Wednesday, August 19, 2009

Woodstock Redux

The Silly Season, la morte saison, the dog days of Summer - this is the time of year when everyone is on holiday and what little news there is is pretty silly. Thus on the 40th anniversary of Woodstock (news item #1 last week) I read that a new wave of protest is rearing its head. This one is not against health care reform, but against the prevention of climate change. The American Petroleum Institute (the last bastion supporting America's gas-guzzling habits and Sarah Palin's 'drill baby drill' policy) is organizing 'town hall' style protests across the US. Oil companies, their employees, and some of the US oil producing states are banding together to protest legislation that is designed to limit greenhouse gas emissions. I can envisage the protests now - obese people on ATVs and disabled-scooters wielding signs saying 'I heart my SUV'. Coal-burning utilities covering their buildings in banners proclaiming 'Soot is good for America'. Oil company CFOs waving placards that say 'Alaska doesn't need more wildlife'. I have a hard time understanding how people can be FOR air pollution. We may not have reached peak oil output yet (it depends who you listen to) but it will happen eventually. Oil is a limited resource. Exploration, production, refining and burning oil is bad for the environment. Whether this causes global climate change or not, we need to slow down our usage and find viable alternatives. How can you protest against that? It is almost as bad as protesting against people having health care.

Monday, August 17, 2009

Consumers Decide They Don't Need More Stuff

I was listening to Bloomberg on the radio this morning and I heard that there is real fear in the market about consumer spending for back-to-school and even this coming Christmas. The US economy, being so dependent upon consumer spending, is unlikely to recover, say the experts, until the spending increases to 'normal' levels. I get the feeling that American consumer spending may never recover to 'normal'. Finally people have realized that they don't really need to buy endless crap at the Christmas Tree Stores or home repair stuff at Lowes. The reason? The value of their homes is equal to or less than what they paid. Home equity is a thing of the past, and unlikely to rear its ugly head for quite some time. A friend who used to work for Fannie Mae, and now handles getting rid of foreclosures for banks, told me this weekend that the record foreclosures seen in July (360,149 - up 32% year on year)were just the beginning. She says that the real pain is still to come and that there is a veritable tsunami of foreclosures already in the pipeline. The end of the housing bust is not nigh, and prices will fall further still. This is not what the market wants to hear. But it might have to soon.

Friday, August 14, 2009

Monitoring Our Lives

I was surprised to see in today's news that market research company Nielsen is still using set-top boxes to monitor television viewing habits in just a few thousand homes. I would have thought that this antiquated technology went out with the Betamax. Newer technology exists for a Nielsen-type of company that would enable it to monitor anyone and everyone's viewing habits. This is particularly necessary now than a large number of people view TV via the Internet. Using complex event processing technology, market research firms could leap ahead of their competitors by analyzing these habits in real-time. Think how targeted and timely the advertisements could be. My old friend Stephen Bates, CEO of monitoring software provider ITRS in London, once told me he could monitor the temperature of the bath water in Bill Gates' bathtub (with Gates' permission surely). The UK's FSA is using event processing technology from Progress Apama to monitor the UK markets for abuse and possible insider trading. Information provider Genscape developed technology to monitor how much electricity is going over certain grids, and how much oil is in storage in Cushing, OK. Nielsen needs to speak to some of these firms. Either that or give up.

Thursday, August 13, 2009

A Tax on Speculators

A proposed bill to tax oil futures and options speculation might be a lot easier to get through the House of Representatives than to actually implement. Representative Peter DeFazio from Oregon and another 29 reps are backing legislation that would add 0.2% to each oil futures contract and 0.5% to every options contract traded by 'non commercial' traders for non-hedging purposes. The idea is to use the tax to fund transportation projects. While I applaud the intention - provided the money is used not just for repairing the crumbling highway infrastructure but also for improving trains and other public transportation - the practice is likely to be downright impossible to implement and monitor. The CFTC can barely figure out who is commercial and who is non commercial, let alone try and separate out the activities of these participants. What if an investment bank acts as the counterparty to a commercial oil company buying futures, then turns that position around for profit? Position limits on the exchanges are a more logical solution. Accountability limits on Nymex have been sorely abused of late, and the exchanges already have a hard time figuring these out. Just last year oil trading firm Vitol was thought to have amassed 11% of the contracts traded on Nymex. The Commodity Markets Oversight Coalition goes as far as recommending to Congress that they stop allowing firms to trade consumer commodities as a US dollar hedge. There is a lot of noise around oil speculation currently, but a tax is probably the worst idea. Maybe regulators should force the investment banks to ring-fence all commodities trading within one subsidiary. In other words, Goldman Sachs could only trade and speculate within J. Aron, and Citi within Phibro. It's a thought.

Tuesday, August 11, 2009

Flash, Ping or Scrape, it is all Gaming

I was not surprised to see that Nasdaq and BATs (and probably soon Direct Edge?) have voluntarily quit allowing 'flash orders'. There are a number of strategies that are less than strictly kosher - flashing, pinging, scraping - all are a way of gaming displayed and dark liquidity. Algorithms are designed by clever people who know how to tease the teeniest margins out of high frequency trading. The convergence of electronic trading, ECNs, for-profit exchanges, NYSE's hybrid system and Regulation National Market System all contributed to enabling high frequency trading. This is generally a good thing because it bolsters liquidity and keeps the exchanges and ECNs in pocket money. But when it becomes too obvious that the HFTs (as the media seems to insist on labeling them now) are taking advantage of the rest of the investing public, the regulators have to step in. The SEC seems to have grown some cojones finally, thus the rush by Nasdaq and BATs to voluntarily ban flash orders. What the HFTs (and perhaps some of the ECNs, exchanges and dark pools) do not want is for the SEC to look under the rug and see the rest of the story. They are hoping that the ban on flash orders will satisfy the regulators temporarily, so their quants can find some new ways to game the market.

Friday, July 31, 2009

Bonus Bonanza Furor

The outrage over last year's bonus pools for the nine largest banks is set to become the next big issue for politicians and, possibly, regulators. The fact that $33bn worth of bonuses was paid out at the same time these banks were close to tipping financial markets into the abyss was not lost on NY Attorney General Andrew Cuomo. His report, released yesterday, expresses his bewilderment that bank employees are rewarded so generously even in bad times. He said: "One thing is clear from this investigation to date: there is no clear rhyme or reason to the way banks compensate and reward their employees." Goldman Sachs, JPMorgan and Morgan Stanley actually paid bonuses that equated to MORE than their net income. Now every financial journalist knows that banks have to pay salaries and bonuses that are similar to their competitors because if they don't they will lose 'talent', blah blah blah. What the nine banks have done, however, with their profligate flaunting of compensation is to ensure that there will be heavy-handed regulation. Their shareholders will crack down on them so hard that they will wish they'd never heard the word bonus. Why, after all, would anyone invest in a bank that pays out more in compensation than it MAKES? I wouldn't. The end result will be that the 'talent', if it has any sense, will move to Switzerland or Dubai or Singapore to continue to get the fantastic bonuses. Plus they'll benefit from lower taxes. NYC and London could be decimated.

Thursday, July 30, 2009

Banks to CFTC: "Not Me!"

The comments coming out of the CFTC hearings in Washington this week remind me of watching an episode of Seinfeld. Everyone speaks but nothing is really said. Banks to CFTC: "I thought YOU were putting limits on positions". CFTC to banks: "What? I thought YOU were doing it."
At the CFTC hearing yesterday the head of commodities at JPMorgan Blythe Masters (who as much as INVENTED credit derivatives and is married to the once head of Phibro and now an energy fund manager) said that the CFTC should absolutely put limits on speculators - but only the 'end users' not the banks. Dan Casturo from Goldman Sachs enthusiastically agreed, reiterating that the banks were providing a critical 'service' to hedgers. According to my sources, Gary Gensler, who used to work for Goldman Sachs and knows exactly what the bank provides, as much as winked at Casturo and in so many words said 'I think not.' Masters hinted that business could go elsewhere if the CFTC was too draconian, but that has always been a danger with better regulation. The energy exchange in Dubai was not set up purely to trade Arab Gulf crude after all, and Vitol did not invest in it for the desert real estate value. Meanwhile the UK's FSA has called a spur-of-the-moment meeting with oil market players to discuss whether changes need to be made to FSA regulations. It sounds like someone at the CFTC had a word in the FSA's shell-like. Hopefully the FSA has invited some 'end users' as well.

Wednesday, July 29, 2009

High Frequency Trading's 15 Minutes?

Is high frequency trading on its way out? Although high frequency trading does not appear to harm anyone particularly, it is certainly getting its 15 minutes of fame and then some. Even CNBC jumped on it briefly, although Maria Bartiromo looked pretty bored when talking to Pipeline and ITG about it the other day. I am waiting for Glenn Beck or Rush Limbaugh to denounce it as the ultimate evil. Meanwhile the London Stock Exchange has said it will stop paying rebates to high frequency traders. The LSE's new CEO Xavier Rolet is either very brave or he sees the writing on the wall. Rebates for volume were intended to draw business to the newer ECN venues such as BATs and Chi-X. They were never intended to be a significant money-maker for traders. The LSE has decided it will end the rebates, even as it loses volume to the European newcomers. It may be too easy, but I can easily link Rolet with the US Treasury and the SEC - both of whom should have some idea what is in the cards for high frequency traders. Rolet used to work for - wait for it - Goldman Sachs. His boss was Robert Rubin. Guess who else worked for Robert Rubin when he was at the Treasury Department? Timothy Geithner. And Lawrence Summers. The guys who are deciding the course of regulation to come. I'm just saying.

Tuesday, July 28, 2009

Asset Class Conundrum

The aftermath of the credit crisis is beginning to look like an asset class bloodbath. First the overuse of credit derivatives - and the dearth of related risk management - caught the attention of regulators worldwide when they took down some banking giants. Volumes plummeted initially but are beginning to revive now that clearing is less problematic. Then oil speculators are called on the carpet by the US Congress and the CFTC for spiking crude oil prices up close to $150 last year. Other commodities are also in the regulators' firing line. Equities markets have attracted some wholly unwanted SEC and political attention due to several issues: huge volumes trading in dark pools, the proliferation of high frequency trading and now 'flash' orders. High frequency trading represents between 40-70% of daily volume in US markets, depending upon source, and could be artificially inflating trading volumes. Now there are reports that currency trading volumes have dropped by almost 25% in the UK and the US (Asia held up slightly better, falling only about 20%). Icap's EBS electronic trading platform saw its trading volumes fall by more than a third in the second quarter. According to Bloomberg, a 'plunge in risk appetite' drove away hedge funds and speculators. If the risk appetite for fixed income, equities, commodities and FX have all dropped off, and naked short selling is now off the menu, what is going to appeal to traders next? Carbon?

Monday, July 27, 2009

CFTC Hearing Will Reveal Little

I would love to be a fly on the wall at tomorrow's CFTC energy speculation hearing - the first of three. Congressman Bart Stupak and some CFTC bodies will speak. One 'witness panel' is being led by Jeff Sprecher of ICE and Terry Duffy of CME (which owns NYMEX), so it will be no surprise when they recommend leaving well enough alone. The other is led by a couple of lightweight petroleum and gas associations, an airline rep and a rep from the Futures Industry Association. I question whether the honorable Congressman or anyone at the CFTC knows enough about the oil business to ask the right questions. Even before the hearings were scheduled Goldman Sachs said it would apply for an exemption to speculative limits because it offers a valuable service to hedgers. (Goldman appears shocked and hurt that anyone would call what it does 'trading'. But its J. Aron commodities subsidiary does not appear to do much in the way of physical oil anymore, so much of its business must be speculative OTC and futures trading...) No doubt Citi will apply for the same exemption for its Phibro division (which DOES still trade physical oil). If the regulators and our Congressman do what I expect, then all of the largest players on the energy futures markets will remain the largest players. Instead of spending all its time worrying about the $100m paycheck of one Andy Hall, the illustrious leader of Phibro, maybe the government should bring him in on the discussion. If anyone knows how much the energy market has changed in the past few years, it is he.

Friday, July 17, 2009

Time Off from the Financial Markets

I'm going on vacation for a week, so you will have to do without me for a bit. You know when you see Glenn Beck on TV explaining Goldman Sachs' and it relationships with regulators and government that it is time for us financial journalists to take a break. Actually we may all be taking enforced breaks in the future. If McGraw-Hill is selling the venerable Business Week for a dollar we are all in trouble. When I was at Platt's in London, the Business Week reporters were the Gods of the office. Us poor plebes reporting oil prices were holed up in little cubby spaces while they had suites. The Business Week ad salesmen were always traveling to exotic countries to take orders for advertisements - they didn't even have to try very hard to sell them. Every firm wanted to be in Business Week. Times change.
Meanwhile my book, Trust Me, is out to agents and I have my fingers crossed that writing financial thrillers is my next career move. Wish me luck.

Thursday, July 16, 2009

Rats Desert City Ship

Almost a third of London's City workers are looking for jobs anywhere but London, according to today's Financial News. The City's history and culture aside, the main reason these people were there to begin with was money. With jobs harder to find, the UK government threatening to crack down on bonuses, and the real threat of a 50% tax band, City workers are taking a harder look at living and working in London. Even if City Boy averages 300,000 pounds per annum that only leaves him with 12,500 a month to spend. The mortgage on his Notting Hill Gate 2 bedroom flat will take 9,000 of that (if he put down the 20% he should have, which he probably didn't). Then factor in nights out at London's most exclusive clubs and dinners at Kensington Place and there is little left for his holidays in Vietnam. FN says that, whereas a London-based banker will receive only 50% of his gross income after tax, in Paris, the comparable figure is 58%; in Frankfurt it’s 60%; and in Zurich it’s 68%. In Singapore it’s more than 80%, and in Dubai it’s more than 95%. Never mind that he will be bored rigid living in any of these places, our City Boy would have enough disposable income to get out on the weekends. London is a remarkable city, full of wonderful museums and restaurants and theatre. But it has become punishingly expensive and the tax burden is untenable. Maybe if more City Boys leave it will become affordable again.

Tuesday, July 14, 2009

Spinning Gold out of Straw

Goldman Sachs' second quarter earnings jumped by 65% led by staggeringly good results in its trading of fixed income, currencies and commodities. The bank made excellent use of the cheap money available from the Fed, and spun the straw into golden profits. I have no issue with this, that is what inventive money makers do. But the general public is outraged that taxpayers' money should be spun into huge bonuses for greedy bankers. This is the tip of the iceberg. If the general public knew what the banks were up to with their high frequency trading they would flip. According to Tabb Group high frequency traders now control almost 75% of US equity market activity. Tabb says they generate over $20bn in profits, and clearly Goldman's gets the lion's share of this. Although these firms represent only 2% of the 20,000 US trading firms they do three-quarters of the business in US stock markets on a daily business. This is a staggering figure and shows just what a house of straw the listed markets really are. This is where the bulge bracket banks are really spinning the gold. The head of JP Morgan's algorithmic product desk Carl Carries wrote in the Journal of Trading that high frequency traders 'feast upon the signals of others' and that dark pools are the place to be to avoid detection. Few retail and even institutional investors have access to dark pools, although their brokers may. And it is unlikely that they are getting good fills. It is more likely that anyone who is not a high frequency trader who is dipping his or her toes into the stock market is getting stung. I wonder if Tim Geithner is looking into this?

Friday, July 10, 2009

The Truth About Oil ETFs and Index Funds

I was incensed when I saw the press release from ICE yesterday basically begging the CFTC not to employ position limits on certain energy market players. ICE's release pointed out that only last year did the regulator conduct studies that concluded that 'supply and demand' were behind the unprecedented price rises. That part is true, but the 'demand' came from previously uninterested financial markets players who were suddenly very keen to capitalize on rising oil prices. They quickly designed ETFs and ETNs to offer their customers, while also playing the futures markets from their prop desks. Today there are at least 35 ETFs and ETNs for crude oil and products and 10 for natural gas.
ICE's release also, very cheekily in my opinion, stated that index funds (ETNs) and ETFs account for an 'immaterial' amount of ICE's revenue. And that these funds typically execute their trades in 'OTC broker markets'. REALLY? Why does no one ever see them in there trading then? Surely OTC swaps cannot be priced in real-time for ETF or ETN calculations. And why, when I do a cursory search on the web for the holdings of these ETFs and ETNs are they ALL FUTURES?? Have a look at the USO ETF - WTI futures only and the volume has averaged 13.6 million contracts per day of late. The OIL ETN? Futures only - 1.7 million contracts per day. DBE ETF? Futures only - 138,256 contracts. Only the index funds holding oil company shares seem to differ. I think a certain energy exchange is telling porkies for a certain energy exchange's own self-interest. A certain energy exchange thinks we are all mugs, clearly.