Tagged: proprietary trading

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…)

Volcker Rocks IR

Volcker would be a great name for a shred-metal band. It seems vaguely gothic and you can picture musicians in leather with guitars and tattoos. Maybe colored hair.

Alas, no. The Volcker Rule is no band. But it’s prompting musical chairs that may rock IR. I’ll tell you how in a moment. First, this:

If you’re a member of MAPI, I’ll be regaling your IR council Friday Sept 14 with tales of the tape. If your IR program is stuck in the 1980s with a mullet and a Wurlitzer, come occupy a seat at the Intercontinental.

Second, a word on markets: No clanging claxons but we’re tapping the tam-tam on market risk. Hedging is up. Sentiment is vastly neutral – like painting the ceiling gray. Market structure to end August was a restive crowd in a mall at closing time.

Paul Volcker calmed the crowd. The six-foot-seven-inch Fed chairman loomed over markets from 1979-1987, earning praise for heeling rampant inflation. In 2010, a section of Dodd-Frank aimed at halting speculative trading by large commercial banks came to be called the Volcker Rule because the eminent economist had proposed it.

The rule hasn’t yet taken effect but Wall Street is already scurrying like a school when the bell rings. An exodus of proprietary traders – professionals deploying a bank’s own assets for return – from names like Goldman Sachs and Morgan Stanley is setting up shop. (more…)