Tagged: stock prices

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…)

Casting About

I remember the day my elementary school friend pierced his ear. By accident.

We were nine-year-olds fishing eastern Oregon’s Burnt River on my dad’s cattle ranch. Young John gave his line a mighty cast. We awaited the expected kerplunk in the water.  Nothing.  Assuming he’d caught a branch in the trees behind us, he yanked the line and let out a yelp. He’d caught himself. The hook had punched right through his earlobe. I admit, I laughed.

The old way for getting answers to moves in your shares also involves a casting process. If your stock moves up or down sharply, you cast about.

Early in the IR chair I did it too. If the CEO rang and said, “Quast, what the heck’s going on?  Why are we down three percent?” I would react by calling others, who would cast about for reasons. The exchange or my market intelligence sources would say variously, “We’re hearing rumors there’s a seven-digit seller,” or “UBS is big on the sellside so we think it’s retail,” or “you broke through your 20-day and 50-day moving averages and the quants are pressuring shares,” or “Smithers on the sellside at Gaujem & Flippitt has got a bearish sector note out today.”

Some or all of it could be causal, and some or all is irrelevant. There’s no statistical link. What if your stock is down today because of something occurring last week?

If it rains today in your city, it’s unlikely that anybody is ringing weatherpersons and saying, “Hey, what’s going on?  What’re you hearing to explain this rain?” Meteorologists have models that while imperfect provide generally accurate predictive views of tomorrow’s weather.  We check forecasts before we travel, right?  Last week Karen and I were glad to know flying into Dallas that the bad weather would hit Thursday and not Friday. (more…)