High-frequency traders are data-dependent. The Federal Reserve ought not be.
I’ll explain. The U.S. central bank today concludes its open-market (FOMC) meeting. Jay Powell speaks.
Before I go further: join the ModernIR webinar today on Leveraging your Treasury for Sellside Coverage. It’s genius. Not because we’re hosting. Because John Rea is speaking. Be there!
To the story, the Fed says it’s “data dependent.” That’s meant to assuage our fears it’s reactive or partisan or political. Well, we’re all data dependent. Citadel is data-dependent. The crucial factor is the timeframe.
Let me give you a scale. Blink your eyes. That’s 400 milliseconds. So yesterday. For years, firms like Citadel, Jane Street, Susquehanna, Hudson River Trading, have been mapping transactions in roughly 30 microseconds. For scale, that’s the time for light to travel from the top of the Burj Khalifa to the ground, about 2,720 feet.
Now trades match in ten nanoseconds, the time in which light moves from the lectern on a stage to the first row of the audience. So says a paper from Systematic Longshort, a research firm, at TABB Forum.
Those trades are data-dependent.
GDPnow from the Atlanta Federal Reserve uses late-breaking data to track GDP. CNBC’s Steve Liesman has a high-frequency data model to predict what the Fed might do.
Is the Fed a Fast Trader?
The Fed shouldn’t be using high-frequency data for monetary policy. The aim of the central bank should be sustaining the TIMEFRAME that preserves the value of the people’s money, so they can make decisions as consumers and businesspeople.
Look, periodically you must bear with me. I like monetary policy and I’m going to write about it.
The dollar is the medium of our exchange. It should be a steady fulcrum of commerce. When central banks move the fulcrum to smooth demand/supply imbalances and “stabilize” prices, promote hiring, there is a cost for us. We can’t figure out what the imbalance is. Insufficient supply? Too much demand?
So we pay too much on stuff momentarily made pricey by a shifting fulcrum. Businesses over-invest, overspend on wages, invest too much in growth.
Then people stop spending. Investment fails. Businesses are forced to lay employees off. Nothing you or I or our businesses did caused inflation. The Fed did that – and then it blames us. Deflation always follows inflation. It’s not a “fight” the Fed wins. It’s a problem the Fed caused.
Then the Federal Reserve intervenes again. The government jumps in too. Credit becomes cheap, bailouts abound, people get emergency cash from the government.
The problem isn’t falling prices but moving the fulcrum.
Add this in: Government has built-in spending increases, and it’s in debt. Unless the economy grows, the government will default. So the government can only move prices higher – like a socket wrench that clicks one way but can’t go the other.
And the cycle repeats. Except we’re deeper in debt, we have businesses that should have failed but didn’t, people who stopped saving and spent instead. And nobody can understand demand or supply.
The solutions isn’t high-frequency data. The solution is fixing the value of the currency.
What’s the cost?
What if prices fell 50%, your pay was cut 40%, and technology improved efficiencies by 10%? Would you be poorer than you are now, or richer?
Richer. It’s not the amount of money you have or earn. It’s what it BUYS. Functionally, you would have 20% more money than now. Would you like to buy, save, 20% more?
The government needs to stay out of resets or we will add failure to the public balance sheet, destroying our own standard of living.
It’s not that complicated! We shouldn’t be wondering if the Fed will cut interest rates. Fix the rates! Current rates are good. Saving should be rewarded. Borrowing should cost.
The beautiful thing about Fast Trading is the machines only need to know the rules. They can sort the rest out, profiting on fleeting Demand/Supply imbalances. Every day, the value of the entire stock market fluctuates roughly 2.2%.
That’s about $1 trillion daily via volatility. Well, who gets that value? A lot of it, nobody captures. But some portion goes to arbitragers. That’s how you make billions of dollars investing today. Citadel. Renaissance. Jane Street. Etc.
This is why Ken Griffin is rich and most investing in stocks aren’t.
We don’t know the Fed’s rules. And who is helped by Fed policy? The intermediaries. Banks, government. Anybody by association connected to those – including all the technology providers.
Is that the right way to run a currency, or a market for that matter?
It is if we want managed behavior. Should our behavior be managed? That’s a question.
If you care about wage-earners, people trading time for money, you fix the value of money and let demand and supply sort out, freely. You stop moving the fulcrum in reaction to high-frequency data.
Why? It’s how average people get richer.
So what will the Fed do today? What benefits banks and itself (the government).
How do you profit on that reality, investors and public companies? Investors, buy when Demand increases. Sit out when it doesn’t. Not that hard. Use EDGE.
Public companies, stop trying to drive alpha. It doesn’t exist. Be beta. Sell characteristics to Passive models – we know how! – and take what monetary policy gives.
Or we could change it. But that is a hell of a lot of work. And I’m old. Youngsters, it’s up to you.
