Monday, May 10, 2010

Recap: Crash Coverage and Greek Tragedies

So I've been writing pretty prolifically for the past several days, and have seen record blog traffic resulting from what I think were some quality posts, and some nice mentions from major sources.  Felix Salmon and Tyler Cowen each had nice things to say about my coverage of "The Crash,"  as did EconomicsOfContempt.

Tyler Cowen and the Globe And Mail each linked to my Greek ramblings today, as did Clusterstock.

Just in case you missed any posts, here they are in the order I wrote them.  I think they are all well worth the time to read, and again, I am lucky to have a very tuned in audience of market participants who have added exceptional value in the comment threads.  Thank you all for that.  And thanks to the few people who hit my Tip Jar!  Much Appreciated.

"The rumor is that some Joey Baggadonuts meant to type in 15M (for million) but typed 15B (as in... BILLION) instead.  Now, I can't believe that guys can still do this. It boggles my mind that there aren't risk controls in place.  When I was trading, we took great lengths to make sure that you couldn't do this - even if you had fat fingers, if you dropped a can of soda on your keyboard, if a ferret ran across your computer, or if you suffered from some sort of dementia and just went crazy - you couldn't send an order like that without being 100% sure that you were doing it, if you could even do it at all.  When we moved to a new execution system from a third party, we mandated that they install confirmation screens on every order entry window.  "The devil is in the details," my boss always used to say..."

"While I don't want this to become a debate over the merits of high frequency trading, we need to acknowledge a few things:  1) there is a red herring argument that one of my loyal readers already made in a prior comment thread, to the tune of "but you said that HFT algos would provide all the liquidity we need!"   No  - what HFT proponents say is that HFT algos provide liquidity, which is always a good thing. I would always prefer liquidity to lack of liquidity.  Now people are going to crucify them for NOT providing liquidity! Well, which is it?  If you're complaining that you don't like the HFT liquidity, here's what happens when you don't have HFT liquidity!  I read comments on other blogs that said things like "I was trying to buy near the lows but HFT algos kept out bidding me by a penny!"  Well - wouldn't that be good? Wouldn't that STOP the price decline, if HFT algos kept putting in higher bids?!?!?"

"And the Law of Unintended Consequences rears its ugly head again.  Merkel's point is simple and accurate:  if buyers who step in later see their trades canceled, it removes all incentive for them to step in - and then you don't get the bounce back that we saw!  Think about how much havoc it causes a trader who astutely bought cheap stock, then sold it out at a profit.  He's now short!  Or, he spent the entire day wondering if his order would be canceled, in a state of limbo.  What's the alternative - that traders should just assume that the orders will get canceled, and NOT buy stock?  Guess what - if no one buys, the stock stays cheap!  SOMEONE has to buy, and that someone shouldn't be penalized in favor of remedying the ignorance of the seller who screwed up."

The audio of TraderAudio's Ben Lichtenstein's call from  the S&P 500 futures trading pit during the crash.  I listen to this every day now, and will probably put it on my Ipod to listen to while I run!

"There's one key issue, though:  when the LRP is triggered, the NYSE's quote (behind the scenes - you wouldn't see it, but the market centers who "talk" to each other to make sure that you get the best price would see it)  gets a special tag on it, essentially labeling it as "slow," and as a result it's no longer protected by Reg NMS as part of the NBBO.    Essentially, all the other market centers and exchanges no longer have to honor the NYSE's prices, and can simply trade "through" the NYSE's bids. 

Now, this is a problem. If we're going to have trading curbs in individual stocks, they need to be standardized across all trading venues!  Furthermore, it's clear to me that since the NASDAQ wants to cancel trades that are out of line with prevailing prices, we do need individual stock curbs.  Why on earth should the trades be allowed to happen at all if they are then going go be canceled?  Be proactive - prevent the trades from happening in the first place! "

"there's really no reason why we couldn't ban the "market" order type.  Really.  There's no reason why anyone should ever use a market order. None.  In fact, BATS exchange automatically adjusts all incoming market orders to limit orders, where the limit is the greater of 50c or 5% of the stock price:  higher for buy orders, and lower for sell orders.  Just a little bit of built in protection. "

And then, on to Greece:

"The Ponzi world is in full effect, with Europe's massive bailout program announced last night.   Basically, in case you don't get this - the ECB (European Central Bank - Europe's version of our Federal Reserve)  will buy the crappy assets no one else wants to buy.   It's like TARP for Europe, only their problem is that the "toxic assets" are not complicated synthetic structured mortgage bonds - it's their own currency and the debt of their constituent countries!

Solving debt problems by printing more money... Again... As if that will solve the problem - which, remember, is INSOLVENCY...  I guess we (the U.S.A.) can't complain, though - after all, we wrote the book on Ponzi bailouts. (related:  see FNM's earnings from last night).  The Fed and Helicopter Ben originally created this plan and implemented right here on our home soil, buying mortgage backed securities and treasury bonds, and then, when they finally called it quits on that program, simply using Fannie and Freddie to overpay for mortgage loans in a relentless attempt to prop up the housing market."

"Europe is making the same assumption that our Fed and Treasury made back in late 2008 - that the market was screwing up and not properly recognizing valuations.  Why is it that when assets aren't priced as governments wish they were priced that it means the securities markets are malfunctioning?  As I commented on Marginal Revolution:  we, in the USA, already watched this show - and guess what - it wasn't malfunctioning securities markets at all! It wasn't temporarily depressed prices (LIQUIDITY PROBLEM) - it was that the assets really weren't worth as much as people previously thought (SOLVENCY PROBLEM!). Really - we did EXACTLY this in the US, but didn't learn anything from it, apparently.   Just ask Fannie Mae.

Greece's debt isn't mispriced due to a malfunctioning securities market or because evil speculators are manipulating it. It's priced as it is because Greece is insolvent and people KNOW that."
 In closing, here's a picture of Oscar (r)  and Mr. Griffey (l), who have become fast friends:



EconomicDisconnect said...

Well I have linked you often as well, but I am small time!

Thanks for the Times article, a good preview I should think.

It is The Big Do Over and like in the film "Dune", the spice must flow, here it is unlimited bailout money. Unreal and so fake.

Anonymous said...

i'm going to link to you as well, but i don't have a blog, so i'll do it here.