There is an inverse relationship between penis size and hedge fund performance, one study of a nine-month period shows. Read more »
studies
Study Suggests High Frequency Trading Might Cost Small Investors Almost One One-Hundredth Of One Percent Of Their Investments
By Matt Levine
What do you think of the big HFT study? It’s this big HFT study that CFTC chief economist Andrei Kirilenko conducted on S&P 500 e-mini futures at the CME, and it’s already inspired a metaphor from CFTC commissioner and all-purpose spinner of metaphors Bart Chilton:
Mr. Chilton said that the study would make it easier for regulators “to put forth regulations in a streamlined fashion. It’s a key step in the process and it should fuel-inject the regulatory effort going forward.”
Not his best effort, fine. Anyway, the study: I’m not sure I’ve earned the right to have an opinion, both because (1) that, generally, and (2) my model of high frequency traders as micro-mini-market-makers is a bit upended by the fact that the bulk of the HFTs in this study seem to be taking, rather than providing, liquidity.1 It’s possible that the e-mini market is not the best place to measure the overall effects of HFT, either for fundamental reasons (its use for hedging etc.) or more crassly because it lacks the liquidity rebates that drive a lot of HFT in other markets.
That said what I like about this study is that instead of measuring transaction costs in naive ways like “bid/ask spread,” it measures transaction costs in sensible ways like “in a series of zero-sum transactions, how much money do HFTs suck out in profits.” Though the measure of profitability is sort of kooky:
The profits calculated in Table 3 are the implied short-term profits: we calculate the marked-to-market profits of each trader on 1 minute frequencies2 and reset the inventory position of each trader to zero after each of these 1 minute intervals. Then, we sum up all the 1 minute interval profits to get a measure of daily profits. Therefore, we capture the short-term profits of traders and not gains and losses from longer-term holdings.
What this means is that if your model of market-making is “buy at 99.9, wait five minutes, and sell at 100.1,” then your profits might end up showing as 0.2 or -0.2 or zero or something else on that calculation.3 So regular old market making may look bad, while HFT market making – designed to move quickly – looks much better. And so you get this table: Read more »
A useful though debatable proposition is that much complexity in the financial world is due to the fact that the people running that world like complexity. It’s good for business. If raising money or doing mergers is super complicated, you need to hire expert advisors to do it. If structured products are opaque, you end up paying your dealer more than they’re worth. Good times.
But this sort of sucks for the people working for the people running the financial world. I mean, sort of sucks: they get to be employed! They get to be paid lots of money for, like, connecting boxes and arrows in CDOs and drafting environmental reps in underwriting agreements.1 But then they have to do that. It’s often unpleasant. And it leads to the cognitive dissonance of analysts updating comp sets in M&A board books at 4am while bitching that the board wants to sell and no one will ever look at the appendix full of comps. Those analysts are wasting precious hours of their young lives doing a pointless thing, and are naturally furious. But the alternative is just not having anyone do that pointless thing, and then what will the analysts do? Get a real job?
Also: M&A lawyers. I was an M&A lawyer once, briefly, and it was awesome and exciting and you get on calls and yell “how can you ask us to schedule these exceptions to our representation about ERISA plans, I’ll show you where you can put your ERISA plans!,” and then you sit at your desk and re-draft reps and warranties until 4am and you’re like, VALUE ADDED.2 Or not: Read more »
This paper from David O. Lucca and Emanuel Moench at the New York Fed, concluding that 80% of excess returns to U.S. equities come in the 24 hours before Fed monetary policy announcements, is pretty amazing. Here is the money chart; what does this tell you about the effect of the Fed’s actions on stock prices?
I guess one answer is:
(1) Fed actions push stocks up.
But I submit to you that this answer, by itself, is self-evidently wrong, since the stocks go up before the Fed actions. Two better possibilities are:
(2) The Fed’s actions travel back through time to push stocks up, or
(3) The Fed’s actions are irrelevant to stock prices, but the warm fuzzy feeling people have when they remember that the Fed exists and takes actions pushes stocks up. Read more »
So there’s a law firm called Labaton Sucharow and a big chunk of their business model is:
(1) read newspaper,
(2) see bank did bad thing,
(3) sue bank.
This is a great business model because banks just cannot resist doing bad things and courts just cannot resist taking piles of money from shareholders of those banks and divvying it up among other shareholders of those banks and the lawyers who facilitated the transfer. For those same reasons, though, it’s a highly competitive business model and there’s every reason to branch into other related fields. So they did:
Labaton Sucharow was the first firm in the country to establish a practice exclusively focused on protecting and advocating for SEC Whistleblowers. Led by Jordan A. Thomas, a former Assistant Director and Assistance Chief Litigation Counsel in the Enforcement Division who played a leadership role in the development of the SEC Whistleblower Program, our practice leverages unparalleled securities litigation expertise and significant in-house resources to protect and advocate for courageous individuals who report possible securities violations.
This is clever as that is also a lucrative business model but a safer one: unlike securities class actions, where the decision about which lawyers get paid and how much are left to courts and can seem arbitrary to those lawyers, in whistleblower suits you actually find a client and convince him to pay you your fees out of any money he can get. And that money can also be serious money.
The problem though is that you cannot typically get these cases just by keeping a casual eye on the newspaper: banks cannot resist doing bad things, true, but once those bad things are in the newspaper the expected value of whistleblowing is low. The whole point of a whistleblower is that he voluntarily goes to regulators with information that isn’t yet widely known, so your job, as a whistleblowing broker, is to find people who have not yet come forward with their valuable crime information and make them come forward to you. And that is hard. It’s not like you can just contact a bunch of people in senior roles in the UK and US financial industries and say “hey, would you like to talk to us about possible misconduct in your industry?” Right? Read more »
John Chrin, a former managing director at J.P. Morgan Chase & Co. who left the firm in June 2009 to pursue an executive-in-residence position at Lehigh University, recalls seeing junior staff gain 30 or 40 pounds within a couple years on the job. When he worked at Merrill Lynch & Co., now a unit of Bank of America Corp., he recalls that one managing director ordered a chauffeur to turn on the air conditioning even though it was out of order, causing the car to burst into flames. The managing director then threatened to have the driver fired. Bank of America declined to comment…Alexandra Michel, an assistant management professor at USC’s Marshall School of Business, shadowed the bankers at the office—sitting next to them, following them to meetings, mirroring their hours and even pulling all-nighters—for more than 100 hours a week during the first year, about 80 hours a week during the second year, and then followed up with in-person interviews. One mild-mannered banking associate spoke about exploding in rage at a cab driver after unsuccessfully attempting to open a locked door from the outside: “I became so furious that I kept banging against the windows like crazy, swearing at the poor guy. And then I turned around and saw that a managing director was watching with his mouth open. I was so ashamed.” [WSJ]
Someone hit F9 on the random number generator that decides how much capital European banks need and now it’s $115 billion, which I guess is more than it used to be, so that’s a thing. As you might imagine this is a problem because who in their right mind would buy equity of a European bank? Or, in diplomatic terms:
One analyst questioned [Commerzbank’s] ability to make up the deficit through shrinkage or other means. “It certainly seems hard for them to come back with another equity raise from the market, so if all else fails it looks like the government is the answer.”
But the bank insisted this was not part of its plan. Eric Strutz, finance director, said: “We stand by our intention not to make use of additional public funds.”
So that’s nice. But if you’d rather look at it in world-historical-demographic terms, it turns out you can. Because this little consulting outfit called McKinsey occasionally sends out musings to its friends and supporters, and today they’ve got a mammoth, slightly odd financial markets study, which the Journal has written about, concluding that nobody will buy stock anymore, especially from Commerzbank (though I may have just made that part up).
Are you a strip club owner whose city doesn’t appreciate the performing arts you’re bringing to the community? A guy whose spouse is unconvinced that spending several hours watching topless women dance is just as if not more culturally enriching as taking in Swan Lake? A first-year analyst who’s about to get canned if you can’t explain to HR why you’ve started to take meetings at/had your calls forwarded to the Hustler Club? Judith Hanna’s got your back. Read more »
Arriving Early And/Or Staying Late At The Office? Consider Coke Over Coffee As The Responsible Thing To Do
By Bess LevinDoes your gig necessitate waking up at some ungodly hour? Or working 100+ a week? Read more »
Gang, something big has come up this morning and we need to discuss it right now. Don’t want to scare anyone but also don’t want to minimize the enormity of this news so let’s just get right to it. Wall Street has been keeping a secret. Look around at your colleagues this morning. The ones who attended schools like Yale, Princeton and Harvard and played sports like lacrosse and squash and use the word ‘summer’ as a verb and describe the color red as Nantucket red and argue the HJs don’t count if you give them to a guy whose named ends in IV and get aroused at the mere thought of an ACK sticker? They might have had an easier time breaking into the industry than those who graduated from lower ranked universities and did not get their WASP on. Yes, really.
After you’ve picked your jaws up off the floor, you’re presumably going to want to fight us on this and shout “It can’t be!” and “You lie!” Sorry to say it, pumpkins, it’s the truth. But don’t take our word for it- someone actually did a study on the shocking phenomenon. Read more »
Move over, white boys. Read more »
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