When you combine this article with others, like the fact that JP Morgan had zero days of trading losses over an entire quarter, you realize that the market is clearly rigged by the big guys: http://www.zerohedge.com/news/2013-05-08/jp-morgan-has-zero-...
I've read a lot of articles like the OP and the zerohedge one. What rises out of noise is not so much 'good' or 'evil', 'correct' or 'incorrect', or even 'legal' or 'illegal' but an continual sense of anger that person A is getting away with cheating and I want to cheat too but can't because of condition Y. I suppose at some level its "fair" only if everyone can cheat.
I watched a very strange film, a comedy, called Kung Fu Mahjong [1] in which the central theme are ladies that play Mahjong. And what struck me, perhaps as a westerner, or perhaps it was intentional, was that everyone in the movie cheats in some way or another, and everyone knows it. It reminded me of the kinds of things you would read about in the HFT blogs and forums. You could make a 'Kung Fu HFT' movie with the same theme.
The bottom line is that I have very little sympathy for these guys. As the 'early release' scandal broke and then was documented it felt like more crap to shovel out of the door and not like any sort of progress toward a more durable system.
It's stuff like this that makes me amused by the reverence geeks approach the Kobayashi Maru scenario. Yes, everyone cheats, but what's actually important is that no one feels cheated. That's where the anger comes from.
Thinking sideways is a natural thing to encourage. A particularly subtle and cunning piece of underhanded trickery, once the cards are on the table, is impressive and laudable. The real trick is to not be a dick about it; when you win, you need to learn to share your winnings, to communicate that it's just a game and it wasn't personal and you weren't trying to hurt the others.
The problem isn't that the banks and funds and such are cheating. The problem is that they're causing damage and failing to genuinely express remorse over that damage.
a corporation will not feel remorse. It isn't a person, despite them having the legal powers of a person. They, like water flowing down a river, will find the most efficient way to extract profit, or die trying.
Profit making isn't a bad thing - its only bad when the extracting of profit isn't aligned with interests of society.
Banks do serve a useful purpose - dont get me wrong. But i think lately, the value a bank is adding to society is somewhat deminishing, compared to the burden they weight. A bank makes its profit by "taking on risk" of loaning capital to someone who doesn't have it, and extracting the surplus generated by the capital (ala, as interest on the loan).
This is ok, as long as the capital is used to generate "real" wealth - that is, production of goods and services. I feel that at times, a lot of loans are not used to generate product and services, but to "gamble" (ala, stock market?, buying and selling as a middle man ?). The process a bank goes thru to loan money creates extra currency, and this extra currency, imho, is what causes inflation. In fact, so much of economic activity is now tied to bank loans, that a failing bank means collapsing a corner of a table.
But i have no solution - as long as the illusion of stability is maintained, the system works. When it breaks, its chaos, but so far, all chaos has been prevented by either bailing out, or some other form of tax payer funded activity. Meaning, some people/organizations are using this as an opportunity to profit as a parasite of this system.
If you look at the proposals for moving bank ownership to governments, that's precisely the point. Instead of profit for profit's sake, they expect such banks to profit specifically for the local geography's sake.
I'm not much of an advocate for this solution because, frankly, I don't understand it well enough. Insofar as I do understand it, I feel that it's worth supporting it, or at least being more widely considered. My lit review of reasons not to do it turned up no convincing objections (and I've asked different groups for help several times over the past 5 years).
The reason to be 'mad' is actually a seperate case. There is an unethical nexus of power between the government, the news conduits, and the establishment on wall street. The markets are not "going up" because companies are improving the world. The markets are "going up" because the fed is making decisions (which its entitled to do) which subsidize poor performance. That is step (1). The next reason that people (should) be mad, is that absent arbitrary volatility (in an of itself annoying -- see #1), favouritisms (corruption) by the media is expressly against US public policy (viz Reg FD...and others) dating back almost a century (at least to the 1930's). That is step (2). The thrid reason to be mad is that Institutional traders have structurally boxed out retail to capture profits, physically. That is, through infrastructure. Not only does infrastructure advantage not add any value, its really only properly leveraged with co-opted agents and quasi-corruption in layers (1) and (2). That's layer (3). Basically, a shit sandwitch. Pardon the French.
Nobody is (or should be) mad with people trading on fundamental performance and clean, authentic risk-taking.
Market microstructure is such a massively complicated topic that few insiders, much less the SEC, thoroughly understand it.
For instance, after NASDAQ went down for 3 hours on August 22, the SEC asked the NYSE and NASDAQ for a detailed timeline of events. Each exchange blamed the other. The SEC's response? It told the exchanges to cooperate and please fix the problem, declining to make any further public comment [1].
Trading at high speeds is like the wild west right now with little to no threat of law enforcement.
Market microstructure is such a massively complicated topic that few insiders, much less the SEC, thoroughly understand it.
It's actually not super complicated. A limit order book is a straightforward thing. If you can do FizzBuzz, you can probably whip up a toy implementation of a matching engine in an afternoon. People think it's complicated because of all the FUD (c.f. the comments on this story), but the basic mechanics of how a modern exchange operates are remarkably simple.
>People think it's complicated because of all the FUD (c.f. the comments on this story), but the basic mechanics of how a modern exchange operates are remarkably simple.
I'm referring to market microstructure in terms of the complex interactions amongst exchanges, the impact of Reg NMS, etc. Obviously the underlying algorithms can be boiled down to simple components.
For those interested in learning something about market microstructure, I highly recommend "Trading and Exchanges: Market Microstructure for Practitioners" as an introduction to the basics:
> I'm referring to market microstructure in terms of the complex interactions amongst exchanges, the impact of Reg NMS, etc.
I've heard that the financial interconnections are remarkably similar to ecologies. Would be interesting to get some more of that tooling for analyzing ecologies like fisheries available to financial regulators.
What you defined is not market microstructure, but the platonic ideal of a matching engine. The microstructure of a market is defined (by a Wikipedia source) as: "the study of the process and outcomes of exchanging assets under a specific set of rules. While much of economics abstracts from the mechanics of trading, microstructure theory focuses on how specific trading mechanisms affect the price formation process.”[0]
That is fantastically complicated. As you say, anyone can write a matching engine.
And anyone can code up the Game of Life in a couple hours. But to understand the "physics" behind emergent phenomenæ such as gliders? Much much more difficult.
Even some people who profess to be computer programmers can't do fizzbuzz. How do you expect the general population, even those with skill in MS Excel, to be able to?
It's rigorously documented in public repositories. I used to build trading systems that were highly reliant on (a) how microstructures were supposed to behave and (b) the expected variability in that behaviour. Figuring (a) involved poring over thousands of pages of technical documentation - tedious but doable. There is also help from the OCC, Finra, BIS, Fed, and the exchanges' helplines. Judging (b) is more complicated, and grows more uncertain the newer a particular structure is. But again, doable if tedious.
The tediousness could be relieved by centralising market microstructure documentation. But given the frequency with which we change rules, it may make more sense to have an expanded class of lawyers or risk managers who are dedicated to understanding and promulgating the documentation.
I wouldn't go so far as to say the SEC, Finra, or the Fed Market Surveillance teams don't have a strong handle on microstructure - they have smart people. The SEC's job isn't to manually fix problems. It would be troubling if every time an exchange went down the SEC felt compelled to issue a new rule.
continual sense of anger that person A is getting away with cheating and I want to cheat too but can't because of condition Y
How exactly are you arriving at your minor premise here? My reading is that other people want to compete, but are unable to do so effectively because of (alleged) cheating.
Daytraders using etrade.com are not even competitors to large firms who spend tens of millions of dollars setting up expensive equipment inside the NYSE datacenters that operate at the millisecond level.
I think his premise is that people are mad because they can't compete because they don't have the resources (money) to do so. If they were able to execute trades as fast as the big guys, they would be perfectly fine with the practice continuing. Since they don't have the cash to compete they are upset because they see someone else making money where they cannot.
So you (or parent comment) is saying somebody with limited resources can't effectively compete with huge corporation with resources several orders of magnitude bigger - and somehow this is unfair?
I imagine anybody owning a bike should be able to compete with UPS in delivering packages, and the fact that UPS owns a fleet of trucks, planes, warehouses and complicated logistics software just makes it all unfair. If only one would be allowed fairly competing with UPS by having them deliver packages as slowly as single guy on a bike, or alternatively if the government would create a bike that could fly like a jet plane - that would be fair.
I imagine one guy with a saw should be able to fairly compete with a logging company, and one guy with a bucket and trowel should be able to compete with construction corporation, and one guy with a screwdriver should be competing with Boeing and Lockheed Martin.
When that happens, I think we could take comparing a guy using etrade.com from his macbook with trading division of JPMorgan Chase. Until then - yes, they're playing in different leagues, as it always is in the world. There's nothing unfair about it.
A friend who visited China last year told me that in popular culture (bestselling books, moveis), "conniving/cheating/hacking and winning" is celebrated plot line.
That's hardly limited to China. 'Heist movies' are a popular genre in the west, for example - see the success of the 'Ocean's 11/13/etc.' films just for starters.
Well, that is like statistically impossible. I mean either you are a magician or there is something wrong with you and the market.
Assume the probability of a losing day is just .02 (i.e. 2%, which is rather good). A quarter has 60 trading days. Then
.98^60 = .297+
which means it happens just once every 3 times. But that is a magician doing business.
If the probability of a single losing day is .1 (one out of ten, good for humans, I guess), then the odds are
.9^60 = .00179+ (once every 500 times) =(less than once in a century)
So, really really spooky.
Of course "once in a lifetime" events happen quite easily in the Stock Markets, but they tend to be negative (Long-term Capital Management, today's crisis...)
Having zero days of trading losses in a quarter is easy -- just arrange your trades so that your risks are highly asymmetric. For example, you could sell billions of dollars worth of options tied to the fed rate; you'll make a small amount of money every day until the fed rate changes... and then you'll lose lots and lots of money all at once. Odds are that you'll have several quarters of consistent daily profits first though.
Yes, but we are speaking of real-life traders in banks, so their aim should not be "zero days of trading losses" but something different. So, as can be seen in http://www.zerohedge.com/news/2013-05-08/jp-morgan-has-zero-... quoted above by parent, the usual frequency is around .8-.9...
You (and the article) are assuming that all trades are created equal. At 95% accuracy you can easily never have a losing trading day. Plus given the massive amount of derivatives you can "mark to market" when convenient and end up with no losing trading days.
You are assuming that profits on successive days are uncorrelated.
And in any case, all you have proven is that we can reject the null that the distribution of JP morgans daily returns this year, was different to the distribution of their daily returns in previous years.
Let's leave guilty-by-rejecting-the-null-in-an-artificial-model to the courts and not let their logic infect HN too. All that's been shown is that JP Morgan have had 0 days with a trading loss. No one has actually shown they did anything wrong, or even explained what they might have done wrong.
My local supermarket has had zero days loss in trading in the last quarter. What does it do? It buys things for a cheap price and sells them at a higher price.
Traders do exactly this, it is the service they provide. It is quite unlikely that all the traders in a big bank are going to lose money on the same day.
Couple factors that make your 2% i.i.d. loss probability unlikely:
(1) Banks carry hedged books. You expect to win more frequently than 49 out of 50 times if you're instantaneously buying and selling FX in different regions, or delta hedging an option book.
(2) The riskier assets also tend to be illiquid. This delays loss recognition, not necessarily out of deviousness, but because nobody realises the loan in question is a dud until someone tries to market it.
(3) Market returns are not i.i.d. They are correlated. This makes streaks more likely.
