the finance industry / wall street

Yeah, generally when you hire a Big 4 you're hiring their reputation as an accountant who won't pull an Arthur Andersen

But see what their Asian subs are doing + injunction against Asian subs of Big 4 by a SEC judge

So this A) gives a breakdown of the composition of those assets and B) also has a figure with a suspiciously similar number for "total financial liabilities"! So whoops, unless you net those out you're looking at a very meaningless number because if I promise to give you $100 dollars tomorrow and you promise to give me $100 dollars tomorrow then we both now have $200 dollars in assets (whereas, before, we presumably each only had the $100 we promised to give -- but if we timed it right we didn't need anything at all). But if we do the same thing with $1000 dollars, now we have $2000 dollars in assets.

so yes one does need to look at numbers in context.

― eric banana (s.clover), Friday, February 21, 2014 9:28 AM Bookmark Flag Post Permalink

oh and yeah about half that number does seem to be derivatives, classified as "credit market instruments". no surprise there really

― eric banana (s.clover), Friday, February 21, 2014 9:30 AM Bookmark Flag Post Permalink

Right, and this is a pretty good explanation of why the total "notional" value of derivatives is pretty meaningless, and why scare stories about "five bagazillion dollars in derivatives!" are kind of meaningless.

well if yr a public company with a public balance sheet you only have so many ways you're (legally) allowed to carve things up.

right but HFs are ever public companies?

xp

(and by that I don't mean how public companies account for their participation in a HF)

A: no

So this A) gives a breakdown of the composition of those assets and B) also has a figure with a suspiciously similar number for "total financial liabilities"! So whoops, unless you net those out you're looking at a very meaningless number

I'm not sure the point here. Sure, when it comes to debt instruments and derivatives, one company's asset is another company's liability. (It's a bit different if you're talking about equity - stock outstanding is not a liability, it's invested capital.) The point I was trying to make was just to look at the asset side of the equation - specifically the assets of financial businesses. This is just to give a rough idea of the size of assets being managed by financial businesses in aggregate, in an effort to understand the fees that are paid for managing those assets and how they've grown faster than the economy as a whole. It does seem that the amount of those assets in the aggregate has grown faster than GDP.

oh and yeah about half that number does seem to be derivatives, classified as "credit market instruments"

I think that line item comprises mainly debt, not derivatives.

on the latter, note you also have lines for "Financial business; corporate and foreign bonds; asset" and "Financial business; other loans and advances; asset" so that would cover most sources of debt i know of. credit instruments usually is a catchall for slightly difft stuff, typically derivatives.

on the former, yeah i guess i wasn't really arguing against you so much as the above-linked article that kicked this stuff off still. my one potential disagreement is that fees paid for managing assets are paid by people with "real money" i.e. pension funds etc. so total assets under management matter less in terms of this than "capital under management".

I can't find a standard definition of "credit market instruments" fwiw. There are lots of complex special rules for derivatives accounting in GAAP though, including rules that were added in the runup to and aftermath of the financial crisis.

Not that House Republican Dave Camp's tax law changes package had a chance anyway, but Wall Street has made clear they don't like it

http://www.politico.com/story/2014/02/wall-street-republicans-dave-camp-bank-tax-reform-104065.html

Wall Street is warning Washington Republicans: The money spigot is turning off.
Rep. Dave Camp’s tax proposal — which jacked up taxes on banks and threatens the bottom line of some major private equity players in New York — has infuriated donors in high finance.
Private equity and investment firms in New York are telling key Republican players in D.C. that commitments for big-dollar fundraising have been “canceled for the foreseeable future,” according to one GOP lobbyist with knowledge of the conversations….
Big banks want to turn Republicans against the bank tax. The situation puts the party at risk of seeing a reliable source of campaign cash dry up right in the middle of a critical election year.
The tax proposal itself is not even expected to get a vote in the House, since it’s so unpopular among most Republicans. That Wall Street would react so ferociously to a dead-end bill is a reminder of how hard a powerful player is willing to fight to protect its interests in Washington

This is fucking ridiculous. It's great that Katsuyama created the IEX, but why the fuck is this type of front-running even legal at all? High-frequency trading is just straight-up thievery.

saw that on 60 Minutes. Here's how they defend high-frequency trading, which SEC regulators are now looking at but have not addressed.

http://www.bloomberg.com/news/2014-03-30/high-frequency-traders-ripping-off-investors-michael-lewis-says.html

Traders rushed to defend their strategies.

“While there are bad actors in every industry, the game is not rigged in the favor of professional traders who employ HFT to execute their strategies,” Peter Nabicht, senior adviser to the Modern Markets Initiative trade group and former chief technology officer at high-frequency-trading firm Allston Trading, wrote in an e-mail.

“Rather, they work hard to compete with each other to bring liquidity to the markets, benefiting average investors,” he added. “Continued debate about the next evolution of market structure is needed and welcome, provided the debate is based on fact and resulting actions are reasoned, ensuring average investors continue to benefit from the transparency and efficiency enabled by inevitable technological advances.”

'liquidity, innovation, balanced portfolio, hedging, VAR'

etc etc we are gambling leave us alone and shut the fuck up

high frequency traders are barely gambling, they're more skimming. Cynical me says that the purpose of securities regulations is to maintain the pretense of a fair stock market so the dumb money doesn't get scared off. If this story has enough legs, something will be done about HFT for that reason, but the average person's chances of doing well in the market won't get much better.

Cuz the markets need sub-millisecond liquidity? So it can finally keep up with my ability to make informed investment decisions in 500 microseconds? That is such fucking bullshit.

And yeah, what these assholes are doing isn't even gambling anymore. It's skimming, and if they ever actually do somehow lose money, the Fed steps in to bail them out.

well, I haven't heard of a high-speed firm getting a bailout, no. They can lose money though -- I think it usually happens if they either fuck up or get bested by some other HFT firm.

i hope they all lose all their fucking money

xpost

Yeah, I guess they at least have the sense to not go asking for handouts. But like you said, they are basically just skimming. Seems like the same software that is doing HFT could also stop trading pretty quickly if one of the competitors gained an advantage.

Buddy here at work told a story of his banker friends who figured out that a certain exchange would reboot their routers at a certain time, and then give priority to whoever had the lowest IP addresses (given out through DHCP). So the bank set their servers to renew their DHCP addresses a couple of milliseconds after the reboot, thereby ensuring they would be first in the queue. You know, to increase liquidity and benefit average investors...

Long excerpt/adaptation of Lewis' book: http://www.nytimes.com/2014/04/06/magazine/flash-boys-michael-lewis.html

xp it's more that HFTs are usually independent shops, not megabanks that are seen as an essential part of our financial system.

Wow- that excerpt! Amusing article on pre-emptive Wall Street reaction:

http://www.ft.com/intl/cms/s/0/6f514f02-b684-11e3-b230-00144feabdc0.html#axzz2xZcciV1c

Matt Levine lays out the contrarian case:

http://www.bloombergview.com/articles/2014-03-31/michael-lewis-doesn-t-like-high-frequency-traders

After reading both the Lewis article and the "counterpoint" I'm still not sure I understand whether HFT is actually driving up the costs for the end buyers and sellers or just capturing a little of the spread that previously would have been taken by ordinary traders.

There may be HFTs doing genuine market-making, which arguably could benefit other market participants, but in the more clearly abusive cases, such as "slow market arbitrage", it's hard to argue that they're benefiting anyone other than themselves, IMO. They seem to drive up prices mainly for large institutional buyers who face the problem of executing large orders that can't be filled all at once. The impact is probably less for individual traders, except indirectly through mutual funds and such.

So this might sound a little stupid because I don't think I fully understand spreads and market-making, but here's where I'm confused. I get the general idea of how they're front-running the order: institutional investor wants to by 100K shares of ACME, and in order to purchase that kind of volume they buy on several different exchanges. But because the order gets to one exchange a few tiny fractions of a second earlier than it gets to the others, HFTs are able to get out ahead of the order at the other exchanges. What I don't understand is, what are they then doing? They're purchasing the shares before the institutional investor's broker can and then very slightly hiking the price? To more than the institutional client bid? What if the institutional client balks at the new higher price?

I just assume it's a bunch of algorithms manipulating various positions to disrupt the market and skim off the top of the transaction they're about to make. I think these kinds of trades involve a shit ton of money but I also didn't rtfa

What I don't understand is, what are they then doing? They're purchasing the shares before the institutional investor's broker can and then very slightly hiking the price? To more than the institutional client bid? What if the institutional client balks at the new higher price?

― james franco tur(oll)ing test (Hurting 2), Monday, March 31, 2014 11:28 PM Bookmark Flag Post Permalink

well prices are always slightly variable moment to moment so execution orders necessarily have a little leeway on either side.

I suppose the institutional buyer could balk at the new slightly higher price. But it seems like usually they do need to buy the shares so they just pay up the extra few cents.

Felix Salmon is also unconvinced this is a big deal

http://blogs.reuters.com/felix-salmon/2014/03/31/michael-lewiss-flawed-new-book/

but I kind of wonder if anyone is adequately describing the full scope of what these high-speed/algo firms do.

he didn't even finish reading it yet, lol

Re: Salmon - I think he's forgetting that for most people, the bulk (if not all) of their investments are in their pensions/401Ks. And it sounds like it's those type of funds that are getting screwed by HFT.

If anything this is the most recent story in a long chain of 'the market is rigged' quasi revelations of the past couple decades. if you didn't know the market is rigged already you're not paying attention.

then again I've had all my money in a savings account for the last decade like a fucking asshole so what do I know

NEW YORK (Reuters) - U.S. stocks opened the second quarter on a higher note on Tuesday, with the S&P 500 hitting >>>a record high<<<, after data on manufacturing indicated economic growth was gaining traction after a harsh winter.

^Part of the reason for lack of traction? Market is up like 125% in 5 years.

This is a neat site to play with wrt the S&P
http://www.multpl.com/

Looks like we are hitting not only a nominal but nearing a real (inflation-adjusted) high in the S&P. However, earnings are also nearing a high. BUT, P/E looks high historically -- not insane high, but like probably ready for a correction high.

btw you know what else is historically pretty high? Home prices:
http://www.multpl.com/case-shiller-home-price-index-inflation-adjusted/

the article salmon links to that he wrote earlier on HFT points to the real issues.

if it really is just skimming fractions of pennies whatever, but the problem is they do much more than that and occasionally go nuts. also when something goes wrong everything goes massively out of control quickly, and furthermore they only 'provide liquidity' when everything is already liquid. the moment there's a disruption they pull out entirely and things go massively jagged.

the problem i'd imagine for the book is that getting ppl to talk about their weird prop algos is _hard_, but getting them to talk about being "more efficient" by a fraction of a second is the sort of thing they're not afraid to play up.

yeah theyre not called black boxes for nothing

I think some of the "pro" arguments are making it sound like these company's just narrow the spreads, but my impression is that they actually inflate the price very slightly.

And yeah there is more stuff that HFTs do than just this kind of quasi-frontrunning, and I agree that the "provide liquidity" argument doesn't seem to make much sense, or if it does there's just something I'm not understanding. If 100,000 shares are already available for sale and all an HFT does is instantly buy and resell them, that might increase trading volume by a lot but it doesn't seem to truly increase liquidity in any meaningful sense.

lewis is a great writer tho and the excerpts are just excerpts so i'll read the real book and see then.

(nb: i've met people at hft shops that really are pretty simple stuff, in the main [or at least rumored to be, they're not allowed to say], and also have met ppl at other more hedgefundy hft shops, and the ones at the fancier ones from what i've heard look down at the other guys as chumps who don't like to take risks. also the _exact same_ sort of not-really-frontrunning happened way before hft and electronic trading took off, because at human scale time you can still spot the pattern of a big order being chunked out in blocks and get ahead of it)

Well, "could spot" is probably more accurate than "can spot" no? I mean these orders themselves move so fast now that only the HFT guys can see them in "real time" is my impression, no?

Can anyone explain this to me?
http://www.businessinsider.com/bats-forced-to-retract-presidents-statement-from-cnbc-tussle-2014-4

http://www.slate.com/articles/business/books/2014/04/michael_lewis_s_flash_boys_about_high_frequency_trading_reviewed.html

More Felix Salmon (I think. I have not compared to the earlier Salmon Reuters article linked above)

But what we’re seeing, in the world of HFT, is not fraud, nor is it insider trading. Rather, HFT is a ridiculously and unnecessarily complicated mechanism for divvying up intermediation revenues between banks, exchanges, high-tech telecommunications outfits, and various algo-driven shops. Everybody is in on the game: not just the HFT guys, but also the exchanges, which optimize themselves for HFT game-playing, and the banks, which let HFTs into their dark pools, and especially the SEC, which has been cheering on the whole motley crew from the beginning. Even the big money managers are in on the act.

I liked this:
http://gawker.com/the-worst-things-are-the-things-that-everybody-knows-1556079304

^^

http://mathbabe.org/2014/04/09/lets-stop-talking-about-hft-for-a-little-while/

Nonsense. That's pretty much like saying "let's stop talking about Crimea because the real crisis is in (Syria, Palestine, ____)"

Besides, (1) I don't think we fully know the impact and/or potential impact of this stuff, and (2) in any case, the entire market has dramatically restructured itself in less than a decade, and it's something that needs to be better understood. Maybe it's not something the average person needs to care all that much about, but it's still an important topic.

Also, it seems to me like Wall Street and various trading firms feel very threatened by all this discussion. There's lots of spinning and covering and smokescreening going on. A lot of people with interests in this activity are unhappy about all the attention. That alone to me says we should look at it more closely. Goldman Sachs today announced that it's considering closing its dark pool all of a sudden. That sounds like anxious behavior to me.

nah i agree with cathy here. 'fixing' hft wouldn't fix anything about what's really wrong. to flip hurting's analogy, focusing on HFT is like complaining israeli soldiers in the occupied territories aren't getting meals with a proper nutritional balance.

"the food is terrible."

"and in such small portions!"

I remember leftish publications making an issue over interest rate swaps that wound up screwing over municipalities/pension funds. That was an smaller issue in terms of magnitude of impact, and the banks' conduct there was more justifiable and less egregious. Skimming off small amounts from every trade a public pension fund makes still aggregates to a good chunk of money that does wind up costing individual retirees.

if yr referring to swaps manipulation i think the "screwing pensions funds" angle on that was pretty fake too. depended what side of the swap they were on!