Posts filed under “Really, really bad calls”
“May 6 was clearly a market failure, and it brought to the fore concerns about our equity market structure.”
-Speech by SEC Chairman Mary L. Schapiro
What a surprise! The SEC has acknowledged that the flash crash was a structural issue:
As the Securities and Exchange Commission finalizes its report on the May 6 “flash crash,” it is being forced to confront the fallout of its own decisions—which Wall Street sought and cheered—that ushered in an era of fast trading dispersed across dozens of venues.
As recently as this spring, many were applauding the speed, lower costs and competitive nature of the U.S. stock market that largely grew out of a series of policy and technology changes over a decade . . .
What created these structural flaws? A decade of increasing de-regulaton, de-centralization, and privatizing public exchange obligations all worked to release the markets from their historical constraints.
I was somewhat surprised how readily the WSJ acknowledged that the flash crash more or less by Wall Street tinkerings with the basic trading structures. Over the past 13 years, Wall Street requested various regulations, modifications, restructurings — and they were completely accommodated by the SEC, the exchanges, CFTC, CME and others. Whether this was a case of regulatory capture, or a belief in radical deregulation movement is hard to discern at the moment.
Various Wall Street critics quoted in this article blame changes that “left markets more vulnerable to rapid and unchecked swings than had been anticipated.”
Those changes that led to the Flash Crash include the following regulatory changes:
• Regulation ATS: The SEC adopted this reg in 1998 to allow for nonexchanges to execute trades electronically.
• Dark Pools: The rise of private trading venues with no obligations to maintain stability and orderly markets;
• Penny pricing: The 2000 SEC mandate of pricing stocks in pennies instead of 1/8 fractions (reducing per-trade profits and incentives for traders)
• Regulation NMS: In 2005, the SEC adopted opening stock trading to greater competition, thereby ending the duopoly of the New York Stock Exchange and Nasdaq Stock Market. Goodbye specialists, hello dark pools.
• Decentralized Trading Centers: Does having numerous trading centers (vs concentrated exchanges)impact stability? Apparently yes
• Instantaneous bid/offer quotes: There should be minimum requirements on the duration of orders, which can be measured today in 1000s per second.
• Phantom liquidity: High-speed traders do not reliably supply liquidity in a crisis. that disappears when most needed by long-term investors and other market participants?” the release asked.
One area of discussion which I doubt the SEC will discuss is the Exchanges themselves. They are the ones who sold out the investing public, allowing the high frequency, co-located servers, quote sniffing, quote stuffing algo driven traders too steal from the public at will.
In the zero sum game that is trading, every penny in profits of HFTs comes from somewhere: Your pockets. That the NYSE exchanges would even defend this is, quite frankly shameful.
The remaining issue is what the SEC is going to do about this . . .
Strengthening Our Equity Market Structure
Mary L. Schapiro,
U.S. Securities and Exchange Commission
Economic Club of New York, September 7, 2010
Investors, Regulators Laid Path to ‘Flash Crash’
TOM LAURICELLA, KARA SCANNELL and JENNY STRASBURG
WSJ, September 28, 2010
Last week, we noted Robert Prechter’s Dow 2,000 forecast. Today, we are going to the other end of the scale: A wild Dow 38k forecast from the usually sedate Jeff Hirsch of Stock Trader’s Almanac (UPDATE: Full report here) Bloomberg: “The Dow Jones Industrial Average will surge to 38,820 in an eight-year “super boom” beginning…Read More
As if we need further evidence of the gross and willful malfeasance of Moody’s S&P’s and Fitch: The latest evidence of their criminally irresponsible behavior comes to us via the Financial Crisis Inquiry Commission. This was not, as the narrative has been reconstructed, a case of good loans gone bad. Mere incompetence does not explain…Read More
“Normal distribution curves — if I would submit to you — do not exist in financial markets. Its not that they are fat tails, they don’t exist. I keep hearing about fat tails, and Jesus, it’s only supposed to occur every 100 years, and it appears every 10 years.” -Former Federal Reserve Chairman Paul Volcker…Read More
Some years ago when I was on the sellside, I would occasionally got dragged into these banking meetings to discuss funding new and existing companies. I had a good understanding of Tech, and apparently lent gravitas (ha!). These sorts of meeting request went up after the media exposure increased.
I got into a bit of hot water at some of these for saying what I thought. I recall one of these meetings was with a group that had made a large previous investment into Blockbuster (I don’t recall if they bought via public or private equity).
Curious, I asked what the value was: This wasn’t a turnaround play, it was more of a sell off the whale oil and meat to recoup what was left from the carcass play.
“You describe this as if its a dying industry.”
Well, duh. “Isn’t it? Isn’t Netflix and internet delivery going to make driving to a store and renting plastic discs ancient history? You could no more turnaround a steam engine company once gasoline engines came around.”
The bankers were not happy with me, but I certainly saved them (or their investors) money, as Blockbuster just filed for Chapter 11, wiping out shareholders, and reducing their debt load 90% from nearly a billion dollars to about $100 million or so.
Somewhere between then and now, we rec’d shorting BBI, but it was a tough borrow, and a regular squeeze play.
CrowdQuery: Who is the next major company, business, or sector to go belly up?
Let’s consider 3 categories:
1) who goes down in 2010 or ’11
2) who is in danger between now and 2015.
3) Whose long term prospects are clouding up?
What say ye?
video after the jump
The following is from independent banking analyst XXX, who has been accurately forecasting the crisis and its structural underpinnings. He wonders why (generally nice guy) Mark Zandi has become a favorite of public policy makers, despite his rather lackluster track record. ~~~ The Fed, Treasury and the Senate Budget Committee appear to have a favorite…Read More
From today’s WTF file, the Florida Mortgage Mill Machinery, hard at work: “When Jason Grodensky bought his modest Fort Lauderdale home last December, he paid cash. But seven months later, he was surprised to learn that Bank of America had foreclosed on the house, even though Grodensky did not have a mortgage. Grodensky knew nothing…Read More
“What were the alternatives to the bailouts?” In light of the Summer’s resignation, its worth looking at the question I still hear from time to time. This article, Stopping a Financial Crisis, the Swedish Way, published exactly 2 years ago today, provides an answer: “A banking system in crisis after the collapse of a housing…Read More
Karl Smith is a Professor at UNC-CH and blogger at Modeled Behavior. He was a graduate fellow at the Institute for Emerging Issues, where his work was focused on state and local tax reform. Smith holds a BA and a PhD in economics from North Carolina State University.
The Conservator’s Report on Fannie and Freddie is out.
Fannie Mae and Freddie Mac are members of a long list of individuals and entities including Gary Condit, Tom Delay, Michael Jackson, Rod Blagojevich and JonBenet Ramsey’s parents. These are folks who were unjustly tried and convicted in the popular press essentially on the grounds that they were creepy or otherwise unsavory characters.
As I hope to continue to argue, being creepy, a bad person, or even a usual suspect does not make one automatically guilty of any particular crime. In this case government subsidies in the housing market are a bad idea for a host of reasons and have been for years. I will testify to this with vigor and passion.
However, that does not mean that Fannie or Freddie caused the housing bubble. Indeed, by my count they were among the biggest victims of it.
The proper question is not: What story is consistent with my general philosophy or worldview?
The proper questions is: What story is consistent with the facts?
Fact One: Fannie and Freddie’s primary business of subsidizing conventional loans was not a driver of the housing the bubble.
Indeed, conventional loans represented less than a third of all mortgage originations during the peak price acceleration years.
This was a phenomenon of private-label non-conventional loan securitization.
1.1 Peaking in 2006 at a third of all mortgages originated, the volume of Alt-A and subprime mortgages was extraordinarily high
between 2004 and 2007. In 2005 and 2006, conventional, conforming mortgages accounted for approximately one-third of all
[ . . .]
1.2 Private-label issuers played a large role in securitizing higher-risk mortgages from early 2004 to mid-2007 while the Enterprises
continued to guarantee primarily traditional mortgages.
Fact Two: Fannie and Freddie lost market volume during the boom.
That is, during the boom not only did the fraction of loans securitized by Fannie and Freddie fall, but the absolute number fell. At the same time the absolute number of private-label securitizations rose.
There is a simple and obvious reason for this. The development of structured products meant that for many consumers the free market offered a more attractive loan than the government subsidized one.
The good news: Summers is gone Jan 1 (no word yet on Geithner). The bad news? I am not sure what (if any) impact this will have on the administration’s economic policies. To review: Summers is the former Clinton Treasury Secretary, mentored by Robert Rubin. As such, he was one of (many) architects of the…Read More