Why Are Exchanges For-Profits?

Call it the revenge of Dick Grasso:

Since May 17, 1792, when the Buttonwood Agreement was signed by 24 stock brokers outside of 68 Wall Street (under a buttonwood tree), the NYSE has been a non-profit, run for the greater benefit of the public companies that trade there.

Following the brouhaha over NYSE Dick Grasso’s pay — New York State law at the time prohibited excess compensation for executives at non-profits — that changed. In 2006, the NYSE and ArcaEx merge, creating NYSE Arca — forming the publicly owned, for-profit NYSE Group. They later merge with Euronext.

Why is this significant?

As a for profit entity, the exchange is concerned with maximizing profitability. Hence, selling co-located servers for high frequency traders becomes a new revenue source. Allowing flash traders to see order flow of the public — also for a fee — is permitted, consequence be damned.

The SEC investigation of the so-called Flash Crash will be out next month, and these HFT are likely to be blamed, at least in part, for the disruptions.

Jim McTague in Barron’s reports:

“A final report on the Flash Crash by the staffs of the Securities and Exchange Commission and the Commodities Futures Trading Commission, due in September, will reveal that when the market went into an apparent death spiral around 2:30 p.m., virtually every professional trader immediately high-tailed it for the hills, an SEC staffer indicated in a public meeting last week. As a result, panicked retail investors were left on their own, struggling to liquidate their positions to save the profits they had amassed from the beginning of the year.

With the pros gone, so was liquidity—the ability to convert equity into cash. Bids on stocks that the pros—hedge funds, institutions, and high-frequency traders—had posted earlier disappeared with the big boys. The market suddenly had no depth. The dam had burst, and the reservoir was empty. All that was left, the SEC staffer suggested, were “stub quotes,” bid and ask prices ridiculously outside the usual trading range of a stock. The prices get posted to satisfy an essentially pointless regulation.”

Anyone care to hazard any guesses about the following?

• What was the cause of the crash?

• How much are the exchanges themselves to blame?

• What proposed solutions will the SEC suggest ? What might they insist upon?

• What will HFT look like in the future? Will it be modified slightly, dramatically curtailed, or banned outright?

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Source:
Dirty Rotten Scoundrels
Jim McTague
Barron’s August 14, 2010
http://online.barrons.com/article/SB50001424052970203880104575419671044248964.html

Category: Markets, Regulation

The Gulf Oil Spill Disaster

The Gulf Oil Spill Disaster
August 13, 2010
By John Mauldin

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The Gulf Oil Spill Disaster
From Unmitigated Disaster to Merely Disaster
The Corexit Decision
Some More Takeaways
Time to Lift the Moratorium
Getting the Balance Just Right
Omaha, Carbondale, and San Francisco

As I mentioned last Monday night in my Outside the Box, I did not make it to Turks and Caicos, but did end up in Baton Rouge for a special seminar on the Deepwater Horizon Gulf oil spill. I have both good news (or maybe more like less-bad news) and bad news. Today’s letter is a report on what I learned.

The conference was sponsored by the Global Interdependence Center (GIC – http://www.interdependence.org/). David Kotok of Cumberland Advisors organized the event with help from people from Louisiana State University. The quality of the speakers was outstanding. They were extremely knowledgeable and well-connected. The meeting was conducted under the Chatham House Rule, which means all the speakers spoke off the record, unless they indicated otherwise. This allows for a more frank discussion. So, much of what you will read from me is my impressions of what I heard, which I cannot attribute to specific speakers. Indeed, some would be at some occupational risk if I did so.

Some of what I write today will be controversial to some readers. That is a risk I will take, as the large majority will find this interesting, or at least I hope so.

From Unmitigated Disaster to Merely Disaster

First, let’s begin with the “good” news. The ecological destruction that was first feared is not going to be as bad as once thought, for a variety of reasons. It is not good, but it is not the unmitigated disaster it could have been.

Edward Overton, PhD, Professor Emeritus, Dept. of Environmental Sciences, LSU, is an expert on oil spills. He was at the Exxon Valdez. The Exxon Valdez (EV) was a big, black, thick tide of oil. The Deepwater Horizon is a much bigger spill: every ten days the amount of the EV spill spewed into the Gulf, from April 20 to July 15. Professor Overton spoke mostly for the record. He is very much a concerned environmentalist, and he is also a very serious scientist.

He reminded us that the Louisiana wetlands are a very important part of the ecological system of the Gulf of Mexico. Oversimplifying, they are the nutrient source for the small animal world which feeds the larger. Without the wetlands much of the Gulf ecosystem dies. If they were destroyed, they would not come back very easily, as without their very root system the land would erode away. Bluntly, oil kills wetlands if it gets into it.

There are only three ways to get rid of an oil spill. You can mechanically remove it, chemically remove it, or burn it. They used all three methods. But not fast enough. The Obama administration dithered while Rome burned. (This is not from Overton.)

As The Christian Science Monitor reported in “The Top Five Bottlenecks“:

“Three days after the accident, the Dutch government offered advanced skimming equipment capable of sucking up oiled water, separating out most of the oil, and returning the cleaner water to the Gulf. But citing discharge regulations that demand that 99.9985 percent of the returned water be oil-free, the EPA initially turned down the offer. A month into the crisis, the EPA backed off those regulations, and the Dutch equipment was airlifted to the Gulf.”

Really? For 0.0015 percent clean water from badly contaminated, toxic water? It takes a month to get that decision? I can guarantee you that there were people arguing for such a decision early on, and some rookie environmentalist at the EPA who never had responsibility in the real world made things a lot worse. Moving on:

“A giant Taiwanese oil skimming ship, The A Whale, is only now working on the spill. It can process 500,000 barrels of oily seawater per day, but it also needed the same waiver from the EPA which, expressed in another way, limits discharged water to trace amounts of less than 15 parts-per-million of oil residue. It also needed a waiver from the Jones Act, which prevents the use of specialized foreign ships from the North Sea oil fields because they use non-American crews. Previously, the skimmers had to return to port to offload almost pure seawater each time they filled up with water.” (http://reason.com/archives/2010/07/09/the-governments-catastrophic-r)

Ok, Let’s get this straight. The oil industry screwed up by not having enough disaster equipment and ships available. That’s bad beyond words. But for the government to compound that by not allowing needed ships to do the work, just because they did not have US union workers is just as bad. You expect better from government in a disaster, or we should.

(Overton said we never really did learn whether The A Whale would have been as useful as advertised, as it did not get into the Gulf soon enough.)

What should have been a no-brainer decision to use the Dutch ships was delayed for whatever reason. What should have been a no-brainer decision to waive the water purity rules was delayed beyond reason. My personal opinion. Whoever participated in that decision should be allowed to return to the private sector. They only made the problem of the spill worse. They should not be allowed near the decision-making process again.

Please note, this is no defense of British Petroleum. As noted below, they were extremely negligent, and deserve the costs and more. We just don’t need to compound stupid, incompetent, irresponsible (choose several more adjectives, some with color) corporate acts with dumb government ones.

Read More

Category: Think Tank

Weekend Miscellany

A few items I thought noteworthy for weekend perusal: Corporations are issuing debt on record terms (and in the junk market in record volume).  IBM recently issued three year paper at a meager 1 percent.  And JNJ just set the record for longer paper — “around 3.10% for the 10-year maturity and 4.5% for the…Read More

Category: Credit, Economy, Financial Press, Fixed Income/Interest Rates, Markets

Stocks vs Bonds

My disdain for the efficient market hypothesis came about by observing the difference between the stock and bond markets.  It was apparent that the Fixed Income traders were of a “rational” mindset so often lacking in the equity world. Indeed, I have frequently called Bonds the market that acts as “Adult Supervision.” So I got…Read More

Category: Dividends, Markets, Valuation

Quit your job with style!

I bet these t shirts won’t age well . . . > Quit your Job with Style: Steven Slater Shirt

Category: Weekend

The Scientific Debate on Climate Change: Part 9, 10

9. Climate Change – Meet the Scientists

In response to several requests, I’ll put references in the video description rather than the body of the video:

In response to several requests, I’ll put references in the video description rather than the body of the video:

John Coleman listed as media graduate in 1957
University of Illinois Alumni Association
http://www.uiaa.org/illinois/honors/c…

Coleman claiming to be a meteorologist in Weather Channel founder suing Gore? Glenn Beck interview with John Coleman, March 5, 2008
Transcript at:
http://www.glennbeck.com/content/arti…

Certified Broadcast Meteorologist Program
http://www.ametsoc.org/amscert/index….
list of Certified Broadcast Meteorologist (CBM)
http://www.ametsoc.org/memdir/seallis…

Christopher Moncktons resume:
Whos Who 2010

Oregon Petition found at:
http://www.oism.org/pproject/

Steven C. Zylkowski credentials found at:
http://www.forestprod.org/durability0…
http://www.forestprod.org/durability0…

Earl Aaagard web page:
http://www.theseventhday.tv/Experts/a…

John Stossel clip from Global Warming? Really Bad? on YouTube
http://www.youtube.com/watch?v=XUlGoa…

Bob Carter listed as palaeoclimatologist in US Senate Minority Report,
http://epw.senate.gov/public/index.cf…

Sorry to ruin the fun, but an ice age cometh
Phil Chapman
The Australian, April 23, 2008

Chapman bio on NASA website:
http://www.jsc.nasa.gov/Bios/htmlbios…

Tim Ball 28 Years Professor of Climatology at the University of Winnipeg
Letter to Paul Martin
http://www.john-daly.com/guests/marti…

Tim Ball: for 32 years I was a Professor of Climatology at the University of Winnipeg.
Deniers vs Alarmists in the Eco-Argument
Orato website, May 28th, 2006
http://www.orato.com/health-science/g…

Tim Ball lettrt to Royal Society, listed as professor of climatology
http://www.pbs.org/moyers/moyersoname…
and
http://sciencepolicy.colorado.edu/pro…

University of Winnipeg website:
http://www.uwinnipeg.ca/

Geography course units at the University of Winnipeg
http://www.uwinnipeg.ca/index/cms-fil…

Tim Ball described as professor of geography
Fraser Institute Website
http://www.fraserinstitute.org/author…

Tim Ball letter to Royal Society, listed as retired professor of geography:
http://www.nhinsider.com/nhigb/2006/9…

Global Warming, Two Points of View
Bio of Tim Ball showing time spent at University of Winnipeg
http://www.stam.mb.ca/Global_Warming_…

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~~~

10. Climate Change – An imminent ice age debunked

In 2005 the media told us we were on the brink of another ice age. What happened?

SOURCES:
(in chronological order)

Movie clip at the beginning from “The Day After Tomorrow”

Broeker’s hypothesis that melting ice will interrupt thermohaline circulation:
“Thermohaline Circulation, the Achilles Heel of Our Climate System; Will Man-Made CO2 Upset the Current Balance?” — Wallace S. Broeker, Science (Nov 28 1997)

Linkage of glaciation to shut down of AMOC:
“A model for Northern Hemisphere continental ice sheet variation”
– R. G. Johnson and B. T. McClure, Quaternary Research (Sep 1976)

See also “Was the Younger Dryas Triggered by a Flood?”
Wallace S. Broecker, Science (May 26, 2006)

“Slowing of the Atlantic meridional overturning circulation at 25° N”
– Harry L. Bryden et al, Nature (Dec 1, 2005)

NEWSPAPER HEADLINES SHOWN:

“Britain faces Big Freeze as Gulf Stream Loses Strength”
– The Times (Dec 1, 2005)

“New Gulf Stream fears bring UK Ice Age warning”
– The Evening Standard (Sep 6, 2001)

“Scientists probing a dying current bring worst climate fears to the surface.”
– The Australian, (Dec 5, 2005)

“Fears of Big Freeze as Scientists Detect Slower Gulf Stream”
– The Independent (Dec 1, 2005)

RealClimate quote “while continued monitoring of this key climatic area is clearly warranted, the imminent chilling of the (sic) Europe is a ways off yet” at
http://www.realclimate.org/index.php/…

Richard Wood saying Britain and Scandinavia should cool if Gulf Stream slowdown was real:
“Failing ocean current raises fears of mini ice age”
– New Scientist, (Nov 30, 2005)
http://www.newscientist.com/article/d…

Gavin Schmidt saying surface temps should have dipped:
“Scientists Say Slower Atlantic Currents Could Mean a Colder Europe”
– New York Times (Dec 1, 2005)

Robert Dickson saying much more data was needed to determine whether a slowdown was underway:
Ibid.

Harry Bryden saying not sure if change was temporary or signals a long-term trend:
“Failing ocean current raises fears of mini ice age”
– New Scientist, (Nov 30, 2005)
http://www.newscientist.com/article/d…

Bryden says a variable signal, but too early to detect any trends:
“No new ice age for western Europe.”
– New Scientist, (Nov 7, 2006)
http://www.newscientist.com/article/m…

Wunch saying it’s a complicated story reduced to a fairytale:
Ibid.

“Sea change: why global warming could leave Britain feeling the cold”
– The Guardian (Oct 27, 2006)
http://www.guardian.co.uk/environment…

“Can in situ floats and satellite altimeters detect long-term changes in Atlantic Ocean overturning?”
– Josh K. Willis, GEOPHYSICAL RESEARCH LETTERS (Mar 25, 2010)

“New climate change myth: Gulf Stream is NOT slowing down”
– Daily Mail (Mar 30, 2010)
http://www.dailymail.co.uk/sciencetec…

“IS BRITAIN ON THE BRINK OF A NEW ICE AGE?”
– Daily Mail (Dec 2, 2005)
http://www.thefreelibrary.com/IS+BRIT…

“Global warming ‘will bring cooler climate for UK’”
– Daily Telegraph (Dec 1, 2005)
http://www.telegraph.co.uk/news/uknew…

“Gulf Stream is not slowing down, scientists claim.”
– Daily Telegraph (Mar 30, 2010)
http://www.telegraph.co.uk/science/sc…

Category: Science, UnScience, Video

Succinct summation of the week’s events

Succinct summation of the week’s events: Positives: 1)UoM and ABC confidence bounce a touch off multi month lows 2)Chinese economic data mixed at best but reduces odds of more tightening and raises hopes for soft landing Negatives: 1)US retail sales, trade deficit, and jobless claims weaker than expected and Q2 GDP may be revised to…Read More

Category: Uncategorized

Succinct summation of the week’s events

Succinct summation of the week’s events: Positives 1)UoM and ABC confidence bounce a touch off multi month lows 2)Chinese economic data mixed at best but reduces odds of more tightening and raises hopes for soft landing Negatives 1)US retail sales, trade deficit, and jobless claims weaker than expected and Q2 GDP may be revised to…Read More

Category: MacroNotes

Just Like Heaven

To counteract our Friday the 13th post, here is a lovely cover of The Cure’s Just Like Heaven from Katie Melua Some songs totally change when they are recorded acoustically, or more slowly or both. Subtler melodies get revealed, the nuances of the harmonies are brought forward. What was a rock song becomes a lovely…Read More

Category: Music, Weekend

A Closer Look at the Bush Tax Cuts

The Bush Tax cuts seem to be dominating the debate about deficits and stimulus. I found two recent MSM articles (with graphics!) quite informative. From Bloomberg BusinessWeek, we see this ginormous graphic from the article The Wisdom and Folly of the Bush Tax Cuts.  The full graphic is informative as to the longer term impact…Read More

Category: Taxes and Policy