Tagged: Market Rules

Taint Natural

In 1884, British comedian Arthur Roberts invented a card game of trickery and nonsense for which he coined the name “Spoof.”  In 2015, spoofing is a decidedly unfunny and ostensibly illegal trading technique in securities markets. But the joke may be on us.

Mr. Roberts made a living on the Briton public-house and music-hall circuit offering bawdy cabaret like “Tain’t Natural,” a vaudeville version of Robinson Crusoe. Today as a result we call satirizing parodies “spoofs.”

Nobody is laughing about spoofing in securities markets.  Wall Street Journal writer Bradley Hope, that paper’s new Robin to the caped-crusader Scott Patterson (IR folks should read Patterson’s “The Quants” and “Dark Pools,” available at Amazon), portrayed as “illegal bluffing” the frenetic keyboard-clicking of a derivatives trader dubbed “The Russian” in a Feb 23 front-page piece. Dodd-Frank, the Roman Coliseum of regulation, banned these fake trades.

Yet stock prices depend on fakery.  Rules mandate trading at the best national price even if you’re moved by something else.  Stock pickers may like the story at a lesser or greater price but can’t so choose. Traders with horizons of milliseconds following rules have the price gun. In order to post best prices, stock exchanges pay high-speed firms for trades (nobody cares more about price than those who exist to set it). Those then price all the rest.  Then exchanges sell the data, perpetuating a market version of robo-signing.

Like a mutating hospital supergene, this price-setting matrix replicated globally. We have two million global index products and options and futures on those and on the ETFs that track them and the components comprising them and the currencies for the countries in which they reside and on the bonds from the debtors and the governments and the commodities driving industry from milk to corn to futures on Norwegian krone – and most of this stuff trades electronically at speed.

Take a breath.

In the WSJ piece on spoofing, the Chicago proprietary-trading firm behind them, 3Red Group LLC (if the firm has three Russian founders they’ve got a sense of humor) says if it clicks fastest, that’s skill not spoofing. Melodramatic?  If only Arthur Roberts could say. (more…)

Function Follows Form

Let me go. I don’t want to be your hero.

Those words strung together move me now viscerally after seeing the movie Boyhood, in the running at the Academy Awards, as I write, for best of the year. I’m biased by the video for “Hero” from the band Family of the Year because it highlights rodeo, something bled into the DNA of my youth.  See both. The movie is a cinematic achievement that left us blurry. The song is one I wish I’d had the talent in youth to write.

As ever for the ear that hears and the eye that sees, there’s a lesson for investor-relations. We might have heard MSCI last week refraining those lyrics – let me go, I don’t want to be your hero – to the ValueAct team, activist investors.

Over the past few years as activism has flourished, many companies have longed to be let go but have benefited from the activist grip. Herbalife and Bill Ackman.  Hewlett-Packard and Relational Investors. Dow Chemical and Dan Loeb’s Third Point.  Tessera and Wausau Paper and a raft of others just off Starboard.  On it goes, all around.

A curious condition has laid hold of stocks in the last number of years. It used to be that results differentiated.  Deliver consistent topline and bottom-line performance, do what you say you’ll do, explain it in predictable cadence each quarter – these were a reliable recipe for capital-markets rewards. Form followed function.

Activism by its nature supposes something amiss – that a feature of the form of a company is incorrect or undervalued, or simply operated poorly. By calling attention like the old flashing blue light at Kmart (have I just dated myself?), activists have often outperformed the market.

Meanwhile, the opposite has become more than an exception.  From our own client base we could cull a meaningful percentage of companies following the formula of consistent performance yet missing bigger prizes. (more…)

Moving Averages

What if we forecasted the weather on temperature moving-averages?

It would seem silly. After all, ENIAC ran the first mathematical computations for a weather model in 1950. ENIAC is not an Icelandic singer. It’s the first true computer and was built by University of Pennsylvania professors in 1946 with funding from the United States Army.

Now, TV weather departments use models that consume data about jet streams, moisture, temperature fluctuations, topography and other factors to project outcomes. For instance, those models say it’ll snow in Denver tonight after 80-degree temperatures the past three days. Chances are they’re right. It’s a significant predictive advance over the old method, the Native American Rock model, in which a rock was hung on a string outdoors. If the rock was wet, it was raining. And so on.

Humans use mathematical models in many predictive ways today. In a subset of weather-forecasting, models anticipate the development and trajectory of hurricanes. We track seismic activity to forecast earthquakes with some measure of warning.

In one of the most interesting applications of mathematical modeling, scientists searching outer space for planets like ours have now identified at least one in a solar system beyond our own. How? With instruments so precise that they can measure differences in light as fine as turning a flashlight on and off on the moon. Slight dimming in measurable light is evidence of a shadow being cast along a path – proof of planets. (more…)

The Dark Arts

No, our title does not refer to Surveillance.  Despite the Thomson/Nasdaq deal last week.

Yesterday mavens of equity markets converged on Capitol Hill to debate trading woes. Apparently the Senate, unsatisfied with just one geological trope (“Fiscal Cliff”), must examine “Dark Pools.”

If you missed the news, we’ll summarize. On the Hill, leaders from the big exchanges argued that operators of trading facilities that don’t post prices and which may select which parties can participate in buying and selling are harmful to investors who want to know the true price and supply of stocks.

As you may know, “dark pools” are markets where equity traders may find shares without having to post a price, thus avoiding actions that might move market pricing or draw attention to orders. The price for shares in dark pools is determined by whatever price is best at the exchanges.

Exchanges naturally feel a bit like Best Buy in an internet world. You’re using our liquidity and our prices to determine what you can get at another market.

For their part, dark-pool operators including Credit Suisse (runs the world’s largest dark pool, Crossfinder) and ITG (operates POSIT) countered that markets are ill-served by an exchange oligopoly that writes its own rules, regulates itself and earns some $450 million in shared data revenue off the consolidated tape that is in effect a government-granted monopoly.

It’s akin to knowing that no matter what you do, if you match up trades at a certain pace you’ll earn a profit on data because it’s guaranteed – almost like rate-of-return utilities. Dark pools think that’s a whopping tradeoff for setting prices everybody else uses.

Joe Mecane, head of NYSE equities, made the point of the day though. The nature of markets fostered by rules has “created unnecessary complexity and mistrust of markets,” Mecane said. He wants Congress to simplify it. (more…)

Machinating Your News

For what struck me as a giant one-day life metaphor, I joined 2,500 other clinically insane individuals Sunday on Colorado’s hallowed cycling Triple Bypass (motto: “For Those Who Dare”).

Coursing from Avon to Evergreen over 123 miles and a triune set of towering climbs totaling more than 11,000 feet of elevation gain, the ride seared lungs and legs, testing the flesh with sweeping escarpments and breath-taking descents. Life’s highs and lows, triumphs and travails, rolled up and thrown aboard a road bike. I’ve crossed it off the list. Whew.

And daily deep in the bowels of Gigabit Ethernet connections, machines are performing triple bypass rides through your stock, feasting on economic data en route.

Taking but one example, the Nasdaq announced – fittingly on Friday the 13th – a machine-readable news service called Event-Driven Analytics. Created by RapiData, a firm the Nasdaq acquired this year, news is formatted so “latency-sensitive” traders can process it with algorithms that decide what and when to buy or sell.

Latency is a trading term that describes the pursuit of seamless and blistering speed. Those sensitive to it are like cyclists in a peloton, wheel to wheel at break-neck pace, who can be harmed by the slightest fluctuation. I saw that happen ahead of me Sunday as we raced over Dillon Dam near the Keystone ski resort at nearly 26mph. One rider made the slightest hesitation and the two trailing him collided and were down skidding over the pavement in a fraction of a second. They were okay but skinned, bloody and bruised. (more…)

Be Vigilant

Good to see you folks in Boston last week. But I needed Denver to thaw me out. It was seventy here last Saturday. I washed the car in T-shirt and flip flops.

If at first you don’t succeed, try, try again. So it goes at the Nasdaq.

Last autumn the exchange proposed to charge small-cap companies fees of up to $100,000 to incentivize market-makers to trade small-cap ETFs, arguing to the SEC that it would infuse thinly traded securities with liquidity. The rule would have required the SEC, FINRA and the exchange itself to reverse longstanding prohibitions on paying market makers to trade securities. For certain exceptions only (of course, exchanges pay billions of dollars in rebates to “liquidity providers” each year).

The SEC promptly rejected the rule-filing. Now it’s back. See it here.

IR folks, do you know the adage about being wise as serpents but meek as doves? Question what you hear from exchanges that rely on data and transactions – not issuers – for revenue and profits. Take nothing at face value. Examine the facts. (more…)

Let’s Think of Something to Say

Happy New Year! If the holidays this year seemed sweeter, the air more welcome to the well-caroled note, it’s probably because I’ve been quiet for two straight weeks.

And with good reason. The lovely KQ and I winged southward with fellow wayfarers for time over the keel on the cayes and reefs of Belize. At Queens Cayes east off Placencia past the wildlife preserve at Laughing Bird Caye, we found what one friend called “your own Corona commercial.” As the sun faded toward dusk there, we caught this grand view of our boats on Dec 11. Our companions below the surface included this delightful fellow, a spotted eagle ray. The Eagle Ray Club is a good name for a rock band. (more…)