I do not believe there has ever been such a fuss - coming from all sides - regarding the appointment of a new chairman of the FRB. Markets swooned when PV exited, but I cannot recall in all my observation and readings the attention lavished upon this appointment.
Much is stereotypical of the political divide. Without effort, one could conjure most of the rhetoric verbatim and attribute it accordinly. Like most things macro these days, the nexus with politics is omnipresent, bringing shills of all persuasion to champion their view.
Wishing to stay above the fray, and, at the same time hoping to contribute to the discussion in a constructive way, I have some out-of-the-box suggestions that I believe are worthy of consideration for the next Chairman of the FRB.
1. Leonard Nimoy.
Objectivity. Logic. Fortitude. Strength. An ability to act. Years of training as "Spock" are the ideal preparation for the next Chairman. Dispassionate obstinence based upon logic derived from Vulcan training and being the smartest guy in the room.. Mind-melding with the market. Need we ask for more?
2. Sully (a.k.a. Chesley Burnett Sullenberger, III)
Volatile times, uncertainty, a global economy at stall speed trying to navigate European storms Chinese typhoons, could there possibly be anyone more qualified than than the guy who landed his crippled passenger plane mid-Hudson, without a single injury. Even better, this guy has a name that sounds like a patrician central banker of old.
3. Sir Alex Ferguson
Running the world's largest central bank is almost certainly child's play in comparison to managing a group of whinging overpaid primadona footballers, like Manchester United. The similarities are striking: one must deftly manage multiple constituencies, construct a longer-term strategy for winning, manage the press and PR of mistakes which the macroeconomy is bound to ecounter, and leave the world with a gaggle of timeless quotations one can wheel out in any situation.
4. "B-9 Environmental Control Robot"
No one ever knew his name in "Lost in Space", and he has a problem gboing up or down steps, but with the proliferation of handicap access ramps in all federal buildings, he might be the solution, since the Fed's fiercest critics are perennially concerned about it blowing, or not recognizing bubbles, and this early AI prototype is unique equiped to spot "Danger!! Will Robinson.....Danger!! Will Robinson". No chance of the punch-bowl hanging around too long with B-9 in charge.
5. A Large Advanced Computer
While B-9 is technically a computer, Fed critics like Stanford Prof John Taylor would undoubtedly likely to see a computer as Fed Chairman (so long as he was involved in coding the policy inputs). "HAL" (from 2001) springs to mind - easily capable of running an economy. Powever, logical, a sotto voce, and independent-minded (maybe a tad too much so) qualify him for consideration. For those of us who believe there is too much earnestness in government, I would suggesty "Holly" (who was the ship's sarcastic, moody, computer in Red Dwarf). She is undoubtably capable, and with her moodiness will keep the market on its toes whilst keeping HF macro terrorists in their box. A final AI candidate is "Rybka", the world's greatest chess computer. With a game as complex as the macroeconomy, and the largest players all fancying themselves as chess grandmasters, who better to manage the game than Rybka??!? Oh, and the biggest bonus: since Rybka is an accomplished cheater, it is well equipped to beat macro-terrorists at their own game.
6. Paul Volcker
There is still a role for a highly-qualified 6ft 7inch brutally-honest cigar-chomping bad-ass in government. He makes all other financially-qualified candidates look like weenies.
7. Someone from GS
Conspiracy theorists will be rooting for Bill Dudley to complete the GS CB Grand Slam in order to confirm their belief that GS controls everything.
8. Jim Bunning
Good pitcher. Abortion-of-a-Congressman. (Errr surely some mistake here including him....)
9. Bill Gross
This would be sweet payback. It always looks easier from the other side, eh Bill?
Wednesday, July 31, 2013
Tuesday, July 30, 2013
Clever Dicks
At the next opportunity, when you see a clever-looking high-frequency trader, coder, developer or other predatory HFT enabler in the local Wholefoods market foraging for his dinner after "work", shadow him (and it will be a him for few of us girls have such unashamedly bad manners) to the fresh fruit & veg section. Observe him patiently, and wait. When he appears to covet something, say a mango signed at @$1.50/piece, non-chalantly drift closer. When he reaches for his chosen piece of fruit, make your move, and seize the object of his affection before he can get his mitts on it, using your sharp elbows if necessary to pry it from his hands. I can tell you in advance that this will not curry his favor. Nonetheless, open a dialogue and, without emotion (or an inkling of kindness or warmth) and without any indication as to your actual indifference to the item, ask whether he wanted that one. Accompanying a look of exasperation, he will likely say something like "Duh!" (a response testing the limits of his non-PERL, non-C++ interpersonal vocabulary). If so, empathize for a brief moment at how lovely indeed THAT mango is, and offer to sell it to him at $1.55 or whatever [higher] level you serendipitously desire. Should he hesitate, place it in your cart. Rinse. Repeat. If he turns his shopping chariot in the other direction to get away from a seeming nutcase like you, place the mango back on the display (preferably when he's not looking), but do not be deterred, and follow him. Do exactly the same again with whatever he chooses next, be it the acorn squash, and/or perhaps the very fine-looking white asparagus (the exact item is of course, of no importance so long as he seems interested in buying it). At around the third or fourth item, he will likely become rather distressed (as may the store manager). Stay calm and detached. For being a shy and somewhat introverted persona with a facility for math and a weakness for video games (and porn), he will likely have difficulty directly expressing his dislike of your behaviour and frustration with your insouciance. Indeed you may have to spell out for him the root rhetorical question: "How does it feel, asshole?"
He may, by happenstance, be on the tail of HiFTers ability to communicate, and might muster up the courage to hypocritically ask you why you have done what you've done. An appropriate answer might be: "Because I can" (at least until the store manager calls the police or store regulations codify etiquette), with no need to expand to your fall-back explanation that you admire his choice of products...so much so that you wish to use this admiration and thus his intention to acquire them BEFORE he does, and that you see nothing philosophically, or morally wrong with that. After all, you are both in the market (albeit a supermarket).
When you return to your own place of business (perhaps your Wine Shop), hopefully one that is rather isolated from competitors, you may - from time to time - have HiFTers who enter your place of business, who you might identify by their highly-corrected vision, overly-informal dress sense, laptop bag and baseball hat with their HFT firm's logo embroidered on the front. Greet them normally. They may head for the whites, and choose an over-oaked Chardonnay, a sad caricature of the white burgundy they are trying to imitate, and bring said bottle to the checkout behind which you reside. The price may be marked at say $30 (he buys on Parker's ratings because he doesn't know any better). Tell him, "I'm sorry the price has gone up and is now $40". I can tell you in advance (from experience) he will be none-too-enthused at this apparently swift change in the price, and, because it is the first occurrence and he's been caught unawares, will likely ask "why?", (rather than the more appropriate "WTF Dude!"). Serenely reply, in the most detached of tones, that in the nanoseconds before he reached for the bottle, you saw there was heightened interest in that vintage of that vineyard and in that same split-second, you used your privileged access to acquire the entire inventory of the same, but that you would be happy to part with a bottled (or two even) at the new quoted price. He may lift your offer, but will likely return to the shelves and pick out another bottle - one with greater inventory depth, perhaps, marked at $22/bt., and tentatively return to the checkout. Being charitable, and since you ARE in the business of selling wine and since you are not the Monty Python Cheese Shoppe (something outside the cultural reference of the avg HiFTer being twice its age), inform your customer that while the 750ml is now $30, he can partially fill his order by having a half-bottle of the same (the 375) @ $12. A second 375ml however, will set him back $18. Before he has the chance to inquire, just tell him you saw demand building and bought (most) of the inventory leaving a token amount for him, because, after all, you are there to sell wine. Feel free to point out that the nearest alternative is a 15-minute drive west.
Should we try, we might imagine, in Jimmy Stewart 'Ghosts of Xmas Past' style, all manner of what life would be like were we to apply the principles of predatory HFT to seemingly mundane transactions. Booking.com attempts to stir the browser into action with apparent transparency into (real or feigned) supply and demand. Airlines routinely move quotes at signs of heightened interest on a route. Convention and rules develop to grease the life, add integrity and trust, in the interests of efficiency. Situations where people who have no natural interest, who forcibly intermediate to take advantage of privileged information access, flawed market structure, reveals warning signs of market failure. Until this is addressed, we can each, when the opportunity presents itself, demonstrate some instructive payback to the misfits who ignore or who are unable to understand the coarse, corrosive effects of their pursuits.
He may, by happenstance, be on the tail of HiFTers ability to communicate, and might muster up the courage to hypocritically ask you why you have done what you've done. An appropriate answer might be: "Because I can" (at least until the store manager calls the police or store regulations codify etiquette), with no need to expand to your fall-back explanation that you admire his choice of products...so much so that you wish to use this admiration and thus his intention to acquire them BEFORE he does, and that you see nothing philosophically, or morally wrong with that. After all, you are both in the market (albeit a supermarket).
When you return to your own place of business (perhaps your Wine Shop), hopefully one that is rather isolated from competitors, you may - from time to time - have HiFTers who enter your place of business, who you might identify by their highly-corrected vision, overly-informal dress sense, laptop bag and baseball hat with their HFT firm's logo embroidered on the front. Greet them normally. They may head for the whites, and choose an over-oaked Chardonnay, a sad caricature of the white burgundy they are trying to imitate, and bring said bottle to the checkout behind which you reside. The price may be marked at say $30 (he buys on Parker's ratings because he doesn't know any better). Tell him, "I'm sorry the price has gone up and is now $40". I can tell you in advance (from experience) he will be none-too-enthused at this apparently swift change in the price, and, because it is the first occurrence and he's been caught unawares, will likely ask "why?", (rather than the more appropriate "WTF Dude!"). Serenely reply, in the most detached of tones, that in the nanoseconds before he reached for the bottle, you saw there was heightened interest in that vintage of that vineyard and in that same split-second, you used your privileged access to acquire the entire inventory of the same, but that you would be happy to part with a bottled (or two even) at the new quoted price. He may lift your offer, but will likely return to the shelves and pick out another bottle - one with greater inventory depth, perhaps, marked at $22/bt., and tentatively return to the checkout. Being charitable, and since you ARE in the business of selling wine and since you are not the Monty Python Cheese Shoppe (something outside the cultural reference of the avg HiFTer being twice its age), inform your customer that while the 750ml is now $30, he can partially fill his order by having a half-bottle of the same (the 375) @ $12. A second 375ml however, will set him back $18. Before he has the chance to inquire, just tell him you saw demand building and bought (most) of the inventory leaving a token amount for him, because, after all, you are there to sell wine. Feel free to point out that the nearest alternative is a 15-minute drive west.
Should we try, we might imagine, in Jimmy Stewart 'Ghosts of Xmas Past' style, all manner of what life would be like were we to apply the principles of predatory HFT to seemingly mundane transactions. Booking.com attempts to stir the browser into action with apparent transparency into (real or feigned) supply and demand. Airlines routinely move quotes at signs of heightened interest on a route. Convention and rules develop to grease the life, add integrity and trust, in the interests of efficiency. Situations where people who have no natural interest, who forcibly intermediate to take advantage of privileged information access, flawed market structure, reveals warning signs of market failure. Until this is addressed, we can each, when the opportunity presents itself, demonstrate some instructive payback to the misfits who ignore or who are unable to understand the coarse, corrosive effects of their pursuits.
Sunday, July 28, 2013
Syphilis Stages a Comeback
Friday, July 26, 2013
Lancing The Boil
Steve Cohen almost certainly didn't set out to be the biggest nor the most successful insider-trader in the history of the world. No one does, or could do, that with the requisite premeditation. Life has too many twists and turns, and in such a business, there is no direct line from 'A' to 'B'. Yet, here he finds himself. The most successful. But still defiant.
I don't know him. He may be a good guy. His first wife (and those he's fired) probably think not. His second (and those upon whom he's lavished generously with money, more likely harbour a different opinion. I am, in fact, not interested in this aspect. But I do wonder at the genesis from ordinary talented trader to systematic abuser of inside info who, despite every indication to the contrary, defends a reality divorced from the one most informed observers share. Maybe he must because he has no alternative. Maybe, he believes his own version of reality. He doesn't appear to be a monster in any sense. But there is, nonethless, a nagging obliviousness that is screaming for precedence if not scrutiny.
When I (from my distance as a detached practitioner) ponder his actions - based upon email, IM, recounted and transcripted conversations - regarding his decision-making process on the blighted trades cited by authorities, I cannot help but think of the bid-rigging scandal perpetrated by Marsh Mac, and detailed in State of NY vs. Marsh Mclennan. Read it. Here, ordinary people - the ones you see at PTAs and on the sidelines of the soccer pitch - break more or less every single rule and law violate every ethical tenet related to business conduct and markets in pursuit of ripping off the end client by systematically managing the pricing quotes to insure an uncompetitive, higher margin environment for all. It apparently went on for so long and became so ingrained, it became the standard operating procedure for the broker to set the price (rather put it out to competitive market tender), get an above-market quote the firm who will be awarded the business, and a way-above market "b-quote" from the designated loser who - in turn - would be the deserving recipient of the next piece of business at similarly inflated margins if they played the game cooperatively. It seems from the complaint, and those in the market, that after a while, no one saw anything wrong with it. It was, in those lines of business, just how it was done. The perps were ordinary, family men and women, however depraved was their sense of obligation, fairness, or fiduciary duty to their clients. They surely didn't set out that way. They likely stumbled upon it, and it worked. Their clients not noticing. Their fees higher. Their underwriting counterparties fatter and more profitable, and so in their debt. And it was easy to the point where everyone involved knew what a b-quote was, and their obligation when asked for one.
"The edge" or other pseudonym SAC had for insider trading, eerily resembles 'b' quotes. It was SOP, so much so, SAC, like Marsh, became brazen - ruminating amongst themselves in IMs about who's got the better inside information edge. And (before Level Global, Raj, and the spotlight was shined) this discussion (on recorded media) was NOT with respect to feigning attention to the legality or appropriateness of use, but solely on the establishment of which was more potent and therefore reliably useful in pursuit of the edge. It had, by then, become SOP. Apparently without fear of retribution by authorities. People, it would seem, including Cohen, constructed the intricate scaffolding to enable, support, cultivate and legitimize what in ethical terms is very very wrong and bent - cultivated to the point that in THEIR minds their transgression was diminutive, victimles, that perhaps they were entitled due to their tenacity andf cleverness. Who knows the precise narrative one makes to oneself...
America has a strange relationship with culpability. They rarely do it. Legal advice seems always to suggest to deny it. Claim innocence. Blame others. At Marsh Mac, only the infantry was sacrificed. No Generals went down. And Wall St. throughout the crisis (excepting Raj) is little different. We see the same with Fab Fabrice. But with SAC, there is an apparent determination to make a more meaningful statement. Make no mistake, this is not about market efficiency, but about the appearance of fairness. And the biggest sin of SAC, like Marsh Mac, was to go so far down the perditious route, there is no recourse for authorities but to use every means within its grasp to lance the ethical boil, so fat, ripe, and overgrown...
I don't know him. He may be a good guy. His first wife (and those he's fired) probably think not. His second (and those upon whom he's lavished generously with money, more likely harbour a different opinion. I am, in fact, not interested in this aspect. But I do wonder at the genesis from ordinary talented trader to systematic abuser of inside info who, despite every indication to the contrary, defends a reality divorced from the one most informed observers share. Maybe he must because he has no alternative. Maybe, he believes his own version of reality. He doesn't appear to be a monster in any sense. But there is, nonethless, a nagging obliviousness that is screaming for precedence if not scrutiny.
When I (from my distance as a detached practitioner) ponder his actions - based upon email, IM, recounted and transcripted conversations - regarding his decision-making process on the blighted trades cited by authorities, I cannot help but think of the bid-rigging scandal perpetrated by Marsh Mac, and detailed in State of NY vs. Marsh Mclennan. Read it. Here, ordinary people - the ones you see at PTAs and on the sidelines of the soccer pitch - break more or less every single rule and law violate every ethical tenet related to business conduct and markets in pursuit of ripping off the end client by systematically managing the pricing quotes to insure an uncompetitive, higher margin environment for all. It apparently went on for so long and became so ingrained, it became the standard operating procedure for the broker to set the price (rather put it out to competitive market tender), get an above-market quote the firm who will be awarded the business, and a way-above market "b-quote" from the designated loser who - in turn - would be the deserving recipient of the next piece of business at similarly inflated margins if they played the game cooperatively. It seems from the complaint, and those in the market, that after a while, no one saw anything wrong with it. It was, in those lines of business, just how it was done. The perps were ordinary, family men and women, however depraved was their sense of obligation, fairness, or fiduciary duty to their clients. They surely didn't set out that way. They likely stumbled upon it, and it worked. Their clients not noticing. Their fees higher. Their underwriting counterparties fatter and more profitable, and so in their debt. And it was easy to the point where everyone involved knew what a b-quote was, and their obligation when asked for one.
"The edge" or other pseudonym SAC had for insider trading, eerily resembles 'b' quotes. It was SOP, so much so, SAC, like Marsh, became brazen - ruminating amongst themselves in IMs about who's got the better inside information edge. And (before Level Global, Raj, and the spotlight was shined) this discussion (on recorded media) was NOT with respect to feigning attention to the legality or appropriateness of use, but solely on the establishment of which was more potent and therefore reliably useful in pursuit of the edge. It had, by then, become SOP. Apparently without fear of retribution by authorities. People, it would seem, including Cohen, constructed the intricate scaffolding to enable, support, cultivate and legitimize what in ethical terms is very very wrong and bent - cultivated to the point that in THEIR minds their transgression was diminutive, victimles, that perhaps they were entitled due to their tenacity andf cleverness. Who knows the precise narrative one makes to oneself...
America has a strange relationship with culpability. They rarely do it. Legal advice seems always to suggest to deny it. Claim innocence. Blame others. At Marsh Mac, only the infantry was sacrificed. No Generals went down. And Wall St. throughout the crisis (excepting Raj) is little different. We see the same with Fab Fabrice. But with SAC, there is an apparent determination to make a more meaningful statement. Make no mistake, this is not about market efficiency, but about the appearance of fairness. And the biggest sin of SAC, like Marsh Mac, was to go so far down the perditious route, there is no recourse for authorities but to use every means within its grasp to lance the ethical boil, so fat, ripe, and overgrown...
Friday, July 19, 2013
SEC Launches Torpedo at SS Cohen
It seems obvious from the SEC's complaint that SAC was in need of a compliance oversight department to insure that its compliance dept was insuring that PM's were in compliance with SAC's Code of Ethics. Oh, yeah, that was Cohen's job. So perhaps what SAC needed a CEO-overseer to make sure that the CEO was overseeing the compliance department in order to insure that SACs PMs (or the CEO!) was complying with its Code of Ethics (not to mention applicable law).
One also might speculate on SAC's understanding IM and service-provider archiving of IM messages. Since the ground rules on accepted communications between suppliers of edge and SAC consumers of edge was crystal clear to suppliers, one might wonder whether SAC believed IMs were somehow disposable and "not like email", somehow vanishing into cyberspace upon exit. This seems (to me) rather amateurish in comparison to the sophistication and lengths employed to cultivate an edge systematically throughout the business over time.
One also might speculate on SAC's understanding IM and service-provider archiving of IM messages. Since the ground rules on accepted communications between suppliers of edge and SAC consumers of edge was crystal clear to suppliers, one might wonder whether SAC believed IMs were somehow disposable and "not like email", somehow vanishing into cyberspace upon exit. This seems (to me) rather amateurish in comparison to the sophistication and lengths employed to cultivate an edge systematically throughout the business over time.
Monday, July 01, 2013
Confidence Crisis
When I started out in the business, despite my knowledge of delta-hedging portfolios of options, I wasn't smart enough to dream-up of "portfolio insurance", nor implement or encourage its deployment in any way. Truth be told, I am often intimidated by Maths PhDs, self-conscious over my incapacity for visualizing anything but the most basic of quadratic functions (I hit "the conceptual wall" in Linear Algebra). And I admit was jealous that I was unable comprehend the beautiful genius of mathematical formula's and risk-analysis validating highly-leveraged (and crowded) carry trades, on for example, the Japanese Yen in 1998. And heaven knows I didn't have the prescience (or wisdom) to ride the most rip-roaring and snorting of bull markets in internet and technology stocks, unlike so many other much-smarter-than-me investors.
It is apparent to me now that I wasn't clever enough to understand the intricate business models or the unmitigated allure supporting the "merchant energy" craze, so I was never accused of being one of the smartest girls in the room, despite the untold billions flushed-away by Mirant, Dynegy, Calpine and Enron. I am so slow that CDOs didn't even register with me until they were near their sell-by date, and never in a million years could I have been so wickedly sharp as to invent the idea of putting a wrapper on them to miraculously transmute a still-steaming pile of dung into scentless triple-A.
In the markets and strategies that I invest (quant equity long vs. short) I almost certainly am one of the dimmer bulbs, blind to the opportunities that applying 10x (or yet higher!!) leverage to crowded trades might afford my P&L, as it might have in the summer of 2007. Despite beginning my professional days in the bullion business, my feeble grey-matter could never have conceived of turning a gold-and-oil-heavy commodities basket cum "index" into a permanent portfolio allocation for pension funds across the USA - a genius ALMOST as brilliant as that which dreamed up the idea of encouraging housewives to buy a box of baking soda, take it home, to immediately flush it down the toilet!
Lacking the requisite creativity, I missed the chance to design something really useful for humanity, like Payament Protection Insurance. I am still in awe of the risk-management intellect behind tail-risk insurance funds. The savvy required to make these attractive when implieds were already highly elevated (historically) and the market had already more-than-a-halved is humbling. I often wonder how I've managed to compete at all! Then, if I wasn't feeling stupid enough, I just need to take one look at luminaries like Galleon, Diamondback, or SAC. Top ivy-league schools, minted MBAs. IB training programs. Couple of years at Och-Ziff or Perry. These guys are so smart, and have had such good returns they just seem to know what is going to happen before it happens! And to think that for all these years, I'd never dreamed of the games one might play with LIBOR!
But far-and-away, the smartest guys, the ones whose certitude, sound logical reasoning, and mathematical notation are (to me) both most impressive and humbling to listen to are the guys (and they ARE guys for only guys can be this brilliant) touting risk-parity strategies. The engineers who've championed them sound soooo clever, and have so many academic letters following their name, one would just have to be a dolt NOT to want to adopt it for your pension plan. Really, who could quibble with the formulaic logic that miraculously gifts you a levered long bond position when it's yield is as close to the ZLB as, ummm errrr, it's EVER been??
It should be comforting to investors everywhere that so many of our best educated minds and brightest talents have chosen to serve investors' interests with such forward-thinking creative imagination. The investment world thus appears meritocratic. In this hierarchy, simpleton's seem to get what they deserve. Looking back to history, to President Carter's "Crisis of Confidence" in 1979, his implied solution was imbued in "redemption" in the biblical sense. I cannot help but wonder whether investors today will discover the same solution with regards to risk-parity and its associated gamma-negativity.