UBS Rogue Trader Loses $2 Billion In Unauthorized Trades

PolygamousRanchKid writes with this snippet from Reuters that sounds like a ready-made movie script: "Switzerland's UBS said on Thursday it had discovered unauthorized trading by a trader in its investment bank had caused a loss of some $2 billion. 'The matter is still being investigated, but UBS's current estimate of the loss on the trades is in the range of $2 billion,' the bank said in a brief statement just before the stock market opened." Asks the RanchKid: "I wonder how this will reopen the debate about the role of computer systems in the trading and the safeguards that are supposed to protect against these risks. But if microseconds mean millions in trading ... who has time for checks?"

Comments

Re:FIRED ??

[ge7]

A guy who makes losses like that is a huge asset to any company. All you need to do is send him working to a competitor and watch as they burn down.

makes me wonder who earned $2 Billion

[desertfool]

Who came out on top on this trade? Or was is spread amongst many?

Re:makes me wonder who earned $2 Billion

[nine-times]

The stock market is not a zero-sum game.

Re:makes me wonder who earned $2 Billion

[Pharmboy]

No, but you can "lose" money in order for someone else to "gain" it, in a laundering fashion. There is more to the market than buying and selling stock.

Re:makes me wonder who earned $2 Billion

[instagib]

My guess: he wanted to boost his bonus and gambled. He failed, tried to earn the loss by some more gambling, but as it goes the casino won.

The question is, how was he able to hide these transactions from controlling, and was it even difficult to do that.

To add insult to injury, this is a bailed out bank!

Re:makes me wonder who earned $2 Billion

[tomhudson]

The stock market is not a zero-sum game.

Ultimately, it is, because ultimately, every trade has a winner and a loser, and ultimately, the value of every stock goes to zero. We just haven't seen the game played out long enough yet (though we came pretty close recently).

Re:makes me wonder who earned $2 Billion

[jeffmeden]

You're right, in the end it's net negative thanks to the commissions skimmed by the traders and fund managers. If a company like UBS bought and sold at a loss to the tune of $2B, you can be sure there were benefactors on the other side (say, someone or a group of someones who bought/sold and ended up UP by $2B). If they made one super-stupid purchase that later dropped by $2B, you can be sure that the price bump caused by the buying of all those shares was profited by someone. If it wasn't, the value of their positions would not have dropped, prices don't just go up and down for no reason at all, they change as money goes in or out of a particular stock.

Of course, why would a company give one guy the authority to make horrible trade after horrible trade? Unless of course they were facing huge losses and had to do something to explain it to shareholders (yes companies whose revenue is obtained via buying/selling stocks are themselves bought and sold on the exchange. beautiful, isn't it?)

Re:makes me wonder who earned $2 Billion

[xelah]

The stock market is not a zero-sum game.

Ultimately, it is, because ultimately, every trade has a winner and a loser, and ultimately, the value of every stock goes to zero. We just haven't seen the game played out long enough yet (though we came pretty close recently).

No, it isn't (except in the 'in the long run we are all dead' sense). Consider the dot com boom. Over-inflated dot com stock valuations caused large amounts of additional investment in dot coms which were never going to make money, or quite possible provide any useful service at all. The economy wasted resources in pointless rubbish, thus reducing the amount available for consumption and investment in other things.

Stock market valuations and stock market investors motivated by them affect many decisions. Things like: should company x buy company y? What minimum rate of return should we require internally on our investments/what should we take our internal cost of capital to be? Should the current managers be retained? Should we raise money via a new share issue or IPO? What should I, as a VC or private equity investor, invest in and how much money do I get (from sales of businesses) to spend on new investments? What interest rate must the government pay me for me to lend to it instead of buying stocks?

I'm not going to claim stock markets do these well. I don't know the answer and I don't know what to compare them to. Nor will I claim there isn't a great deal of zero-sum or near zero-sum activity going on - that described in the article is almost certainly near-zero-sum (probably somewhat negative). It's quite plain, though, that these decisions have to be made and that they're important. They affect economic growth rates. They affect the distribution of wealth (amongst ordinary people, not just those in the industry). They are most certainly not zero sum.

Re:makes me wonder who earned $2 Billion

[alexander_686]

Unless, of course, the underling capital was put to productive work, and grew in value. (Or the company paid dividends)

Re:makes me wonder who earned $2 Billion

[UnknowingFool]

I read it as trade(s) meaning the employee made many bad choices over a period of time. I also read it as "unauthorized" meaning UBS wasn't paying attention or that he bypassed some safeguards.

Re:makes me wonder who earned $2 Billion

[nine-times]

I don't think you understand what a zero-sum game is. The idea that, eventually, the stock market will be destroyed (or whatever you're saying) wouldn't make it a zero-sum game. From the wikipedia article:

a zero-sum game is a mathematical representation of a situation in which a participant's gain or loss is exactly balanced by the losses or gains of the other participant(s)

So the stock market isn't a zero sum game. It's not that stocks are simply traded-- the total amount of wealth in the world grows and shrinks.

Re:makes me wonder who earned $2 Billion

[Artraze]

The economy isn't inherently zero sum because growth in the populous leads to an increase in wealth. Basically, think that the amount of gold is constant, but the number of people wanting it grows, so its price goes up with the population (which is how we used to use gold for coins, but now that's almost unthinkable). You could buy gold one year and sell it for a profit the next. The person that bought it could then resell it the year after and also make money. Nobody lost. (This assumes, of course, its increase in value outpaces inflation and there is unbounded growth.)

Of course, that very last bit is the sticking point. Probably the main reason we are in a recession these days (not that, of course, people can get past blaming politicians long enough to realize it) is because the enormous growth (birth rate 3.8) provided by the baby boomers pumped up the economy, which is what funded the "greatest generation". These days, the birth rate is around 2 for the US and 1.5 for Europe (where about 2.1 is replacement). A decline in the population naturally cases and rescission, but the effect is massively amplified by hedging on unbounded growth (social security, pensions, etc). In short, the market will hemorrhage for years.

So, in summery, the economy isn't zero sum, and in the current market, the 'winners' may have only gotten about half of what was lost.

Re:makes me wonder who earned $2 Billion

[Anonymous Coward]

I would guess it started out with trying to cover up a mistake.

Re:makes me wonder who earned $2 Billion

[Savantissimo]

His background is in computers, his former job at UBS before becoming a trader was in communications. He may have hacked the oversight systems.

Re:makes me wonder who earned $2 Billion

[bluefoxlucid]

Dot-com shows up IPO'd overvalued at $100. Shrewd investor spends $100. I: -$100; IPO: +$100. Total: $0.

Market frenzy overvalues dot-com at $350/share. Shrewd investor sells his stock to Sucker for $350. I:+$250. IPO:+$100. S:-$350. Total: $0

The IPO gained the company $100 per share. Investor spent $100, so he was down by $100. Then the value went up to $350. Investor sold, got $350, some other sucker went down by $350. The investor has made $250, as he just got $350 after giving $100 to the IPO. The IPO got $100. Suckerballs is at -$350 and if the stock drops to $250 and he sells then he's at -$100 and someone else has -$250 and a $250 valued stock, bringing the total value overall to ... the value of the stock ($0 plus stock valued at $250).

If you ever add the value of stock to the value of money that's gone into and come out of the market, you find it always equates to zero. That doesn't mean that there's as much money floating around anymore... which, by the way, will adjust out. If you put $1000 monies in and buy $1000 stock, there's $1000 monies for people who IPO'd $1000 of stock, while the money injectors have $0 monies and $1000 of stock. If you pull that $1000 of monies out (the IPO holders are no longer interested--and neither is anyone else), then since nobody wants to buy your $1000 of stock, it becomes worth less--$500, $200, $100, $1. If it becomes worthless, you put in $1000 and $1000 came out; if someone buys it at $1, you are at -$999, they are at -$1, and $1000 has gone out. There is now a $1 share and $1 in the market.

Zero sum.

Re:makes me wonder who earned $2 Billion

[Rolgar]

Market trading is a zero sum game. What if the price of a hypothetical $2billion trade increased to 2.1billion? The $100 million the seller, was given up by the buyer. There is no net change in the total net worth of the two traders so, economically, this is a zero sum game. Over time, the stock may be worth more than the trade price or less, but it's still a zero sum game. If the investment goes up, the buyer benefits. But the seller may regret not owning the investment. Likewise, if the seller is relieved to have sold if the price goes down, the buyer regrets buying the stock.

Obviously, investing in profitable companies changes things because you can come out ahead by buying and collecting the profits, but that isn't the stock market. That's investing, which can be done without the market, on smaller scales anyway.

Re:makes me wonder who earned $2 Billion

[tomhudson]

The stock market doesn't affect the amount of wealth in the real world - it just lets you exchange tokens that represent that real world weath.

The amount of iron in the universe doesn't suddenly triple if someone issues 3x as much iron stock. Just like the number of tons of iron in a warehouse doesn't suddenly triple if the stock of the warehouse operator triples.

Re:makes me wonder who earned $2 Billion

[tomhudson]

Except that there's a difference between "the economy" and "the stock market" which your analysis fails to take into account. Please try again. The stock market IS a zero-sum game. It's easy enough to see - when a company is liquidated and their stocks go to zero, the real-world assets don't magically cease to exist.

All the stock market is, is a way to gamble legally.

Re:makes me wonder who earned $2 Billion

[nine-times]

You do not understand what a zero-sum game is. Check it out:

Over time, the stock may be worth more than the trade price or less, but it's still a zero sum game.

So if the stock goes up from $2.1 to $2.2billion after 10 years, does that necessarily mean that the rest of the stock in the market lost $0.1 billion during those 10 years?

Re:makes me wonder who earned $2 Billion

[Artraze]

"Please try again" is soooo classy, especially when you're wrong :/.

First, the stock market is completely tied to the economy and follows it fairly closely. Or do you think that all the economists looking at it don't know what they're talking about? Sure, in theory, the market could go to zero. Or aliens could kill off humanity. The simple fact of the matter is that there are feedback mechanisms inherent to the market (both stock and whole) that make that basically impossible.

More to the point, though, is that you're completely ignoring how the market actually works. A new company doesn't start selling their stock a $0, but rather some price (say $X). People buying that give money to the company in exchange for stock. The company has $X and the stockholder 'has' $X in the market. The market has grown by $X because the introduction of a new business. Who do you think created that new company but new people (in the big picture)? This is just like the economy as a whole. More people -> Bigger/more companies -> bigger market.

So long as the population grows, so will the economy and the market will follow, just like I said. When the population shrinks, so does the economy and market, also like I said. What this means is that to size of the market roughly follows the size of the population. So yes, across all of human history starting with the first humans and ending with the last, the market will indeed be zero sum. However, during these trades and, well, any other time people are discussing the market that's simply not the case.

Re:makes me wonder who earned $2 Billion

[bberens]

The market when looked at as a closed system will always return a net negative equal to the IPO price. Your analysis ignores the fact that the $100 came from outside the system to begin with. And at the end of the day when the stock price hits zero that $100 will be lost.

Re:makes me wonder who earned $2 Billion

[LunaticTippy]

You are ignoring dividends, splits, reverse splits, and probably some other things, not to mention all the friction from trade costs.

Re:makes me wonder who earned $2 Billion

[bberens]

The stock market is not a zero sum game. During an IPO someone takes money which is not in the stock market and puts it into the system. Eventually the stock goes to zero and the IPO price is a net loss because when the stock goes to zero the IPO price isn't pulled out of the system, it just evaporates because money is a myth to begin with.

Re:makes me wonder who earned $2 Billion

[bberens]

Technically you can make new gold atoms, it's just prohibitively expensive with current technology to do so.

Re:makes me wonder who earned $2 Billion

[xelah]

Dot-com shows up IPO'd overvalued at $100. Shrewd investor spends $100. I: -$100; IPO: +$100. Total: $0.

Add up all the money people give to others. Take away all the money people receive from others. Total: $0. (Neglecting changes to the money supply which isn't really relevant here). This doesn't mean your economy has zero output. It doesn't mean your economy is a zero sum game. Prices affect decisions. Decisions affect production and consumption. Production and consumption affect human welfare. Human welfare (ideally, but conceptually tricky) or output is what you're summing, not transactions.

Market frenzy overvalues dot-com at $350/share. Shrewd investor sells his stock to Sucker for $350. I:+$250. IPO:+$100. S:-$350. Total: $0

Hypothetical Situation A: Market frenzy overvalues dot-coms in general. Investors pile money in to starting and buying dot-coms, thus causing resources available for investment to be used to start dot-coms. Dot-coms consume economic resources: developers' work, office space, computers, bandwidth. Dot-coms produce few useful products. Add all the transactions: Total: 0. Add up output: amount 'a'.

Hypothetical Situation B: Market correctly values all companies. Resources available for investment are channeled to the best possible investments, all decisions correctly risk and value adjusted. Those companies consumer resources. Some of those companies product useful products. People use those useful products. Add all the transactions: Total; 0. Add up output: amount 'b' > 'a'.

Result: not zero sum

The IPO gained the company $100 per share. Investor spent $100, so he was down by $100. Then the value went up to $350. Investor sold, got $350, some other sucker went down by $350. The investor has made $250, as he just got $350 after giving $100 to the IPO. The IPO got $100. Suckerballs is at -$350 and if the stock drops to $250 and he sells then he's at -$100 and someone else has -$250 and a $250 valued stock, bringing the total value overall to ... the value of the stock ($0 plus stock valued at $250).

You missed out: company spent $100 dollars per share (or the founders founded or VCs invested in the company in the hope of receiving $100 per share) on getting people to do stuff. The stuff they did produced no useful output. Had the company not got them to do that most (or possibly all) of those people would have done other stuff....stuff which quite possibly would have produced useful output.

If you ever add the value of stock to the value of money that's gone into and come out of the market, you find it always equates to zero.

Erm, no. Your terms don't appear to be conceptually sound, but I'll try. Suppose you define the 'value of stock in the market' as (current trading price) x (outstanding shares). Let's say $100m goes 'in to the market', as you put it, in an IPO (money transferred from investors to company and/or original owners) in the form of 100m shares x $1. Then suppose that one trade of 100 shares goes through at $2. Current trading price = $2. Outstanding shares = 100m. 'Value of stock in the market' = $200m. Suppose you define 'money in to the market' as 'money spent on shares' and 'money out of the market' as 'money received by individuals selling shares plus dividends', and suppose that we neglect commissions and so forth. Money in = $100m+$200. Money out = $200. Money in + money out + value of stock in the market = $100m+$200 - $200 + $200m != 0. Possibly you mean money in - money out = value of stock in the market ($100m+$200-$200=$200m), which still isn't true. And I haven't even started on dividends.

You need to start with better terms, at least. The '(fundamental) value of a stock' is the net present value of all of its future dividends (including any final one on liquidation). This is determined by its products, its decisions, future consumer sentiment and preferences, t

Re:makes me wonder who earned $2 Billion

[geekoid]

yes, but you can also just lose it.

Re:makes me wonder who earned $2 Billion

[bluefoxlucid]

Uh, if you IPO and nobody buys, you inject worthless stock valued at $100 in the market and nobody gives you $100 for it. Then you have $100 of stock that spirals to zero.

It's a net zero regarding money. Any money you put in from the outside is money added to the system, but it won't vanish in the system; it will ALWAYS move to someone else's hands. The first $100 you put in gets you $100 worth of stock, injects $100 of MONIES into the system, and puts that $100 in someone else's hands. As you and that someone pass it back and forth, unless it goes over $100 and is sold at that price, no new monies come into the market and nothing disappears. Money changes hands, or is eventually unavailable because it's pulled out.

Let's say that stock is now worth, say, $50. The guy you bought it from took his $100 out of the market, he no longer wants in this game. You put in $100, he took $100 out. Okay, that's zero. Now a new guy shows up, buys your stock for $50--he has to bring $50 to the table and put $50 in the market, so you get $50. YOU have lost $50.

Start at YOU=$100, IPO=$0.

BUY. YOU=$0, IPO=$100.

IPO LEAVE. You=$0.

At this point, you put $100 in and some IPO guy took $100 out. No loss. You're poor, he's rich.

THIRD PARTY APPEARS. INVESTOR=$50. YOU=$0.

INVESTOR BUY. YOU=$50. INVESTOR=$0.

Now you run away with your $50. There is $0 in the market again. The investor has a stock that spirals down to worthlessness and loses $50. You also lost $50. The guy who IPO'd gained $100. $50 + $50 = $100, zero sum.

The money doesn't vanish into the stock market. There are other players at the table. The money is changing hands. It's a bunch of people getting together and haggling over goods that they're just going to sell back to each other, hoping that they can sell off their goods and walk away at a point where everyone really, really wants the goods they've acquired for a cheap price. You buy it for $5 but then a day later everyone decides they'd rather have it, well tough shit it's $10 if you want it... then you walk away rich.

So, your argument is fallacious due to the undistributed middle. You could make an alternate argument that "The market when looked at as a closed system will always return a net positive equal to the IPO price." The IPO comes in, someone hands a bunch of money to the guy offering, and he walks off with a box of cash. The only thing lost is a paper that says "STOCK IN COMPANY," and when that paper spirals to zero I'm the one that has the money and who cares about the guy who has the paper?

Re:makes me wonder who earned $2 Billion

[geekoid]

"The stock market doesn't affect the amount of wealth in the real world "
absolutely it does.

That iron is now worth three times it's previous value. The owner of it is now 3 times more wealthy.

I know have Iron butterfly stuck in my head, thank you very much~

Re:makes me wonder who earned $2 Billion

[bluefoxlucid]

Dividends come from profits from doing business, and are new money injected into the market as a pay-out for holding a share in the company; they don't appear magically, there is a source (money comes from consumers) and a destination (shareholders). Splits just multiply the number of shares while dividing the price. Reverse splits multiply the price by dividing the shares. Trade commissions are a service cost that leaves the investor's money pile and goes into the broker's money pile.

Money is not created or destroyed here; it's only moved around.

Re:makes me wonder who earned $2 Billion

[xelah]

Quite right. The 'gain' or 'loss' (or 'payoff', as it'd normally be called) from your engagement with the economy is not money. Money is part of the 'game' not its outcome. Consumption of goods and services, your provision of labour, the effect on you of economic decisions which affect your physical environment and so on are your payoff. It's too easy to see 'gain' and 'loss' and thing 'money.

Re:makes me wonder who earned $2 Billion

[xelah]

The stock market doesn't affect the amount of wealth in the real world - it just lets you exchange tokens that represent that real world weath.

Of course it does! It affects decisions, including investment decisions. These affect wealth. If it misprices shares it can cause poorer investment decisions, which causes resources to be poured in to activities which increase wealth by less than the best alternative activities.

The amount of iron in the universe doesn't suddenly triple if someone issues 3x as much iron stock. Just like the number of tons of iron in a warehouse doesn't suddenly triple if the stock of the warehouse operator triples.

Indeed not. Though wealth isn't measured in amount of stuff, it's the value of stuff that's important. And, of course, iron can go round and round, being recycled, producing new and better products or infrastructure each time.

Re:makes me wonder who earned $2 Billion

[bluefoxlucid]

You missed out: company spent $100 dollars per share (or the founders founded or VCs invested in the company in the hope of receiving $100 per share) on getting people to do stuff. The stuff they did produced no useful output. Had the company not got them to do that most (or possibly all) of those people would have done other stuff....stuff which quite possibly would have produced useful output.

I don't want to deal with the extremely complex socio-economic arguments in an argument about whether the stock market makes money vanish or not. The stock market is not a place where money goes to die; it is a place where people go to gamble... or, not quite, more of a game of skill against risk. Risk is controllable, whereas in gambling it's stacked such that risk is fixed. Still, the model fits: you put money in, someone else puts money in, and the lot of you hope to get your hands in the pot when it's full of everyone else's money.

All of your arguments apply to the gambling industry as well: people show up, dump money in, and a few come out rich; most come out poor; and for the most part the bulk of the money goes to the casino. The casino produces no useful output (arguable: it provides valuable entertainment; however, the gambling aspect is damaging and most people aren't coming to spend $500 on the privilege of enjoying blackjack so much as they're coming with a fantasy that they'll make $5000 on blackjack).

The money isn't disappearing though. The stock market is a zero sum game: any money you put in will come out, one way or another. You will leave with more or less. If you leave with less, someone leaves with more; if you leave with more, someone must leave with less. If you leave with the same amount you showed up with, it is guaranteed that every single person in the market besides you will also leave together with the sum total of every single cent they brought, but distributed differently amongst themselves.

Social economics are a different beast, and I direct you to Barack Obama's stupidity and just about every other politician's failed ideal of "improving the economy" by "creating jobs" in which we use tax money to pay people to build temples or dig holes and fill them back in again. Also see Orwell's discussions of economics, and the Parable of the Broken Window (because it explains this shit nicely, directly by going to a subtle and complex example that people will argue about with you because they're too short-sighted to understand the wider impact).

Re:makes me wonder who earned $2 Billion

[blair1q]

Ever heard of "IPO"?

How about "cancellation of shares"?

"Options"? "Mutual Fund"? "Index Futures"?

"Ponzi Scheme".

The stock market is not zero-sum.

This guy was, reportedly, dealing in currency futures. Also not zero-sum.

Re:makes me wonder who earned $2 Billion

[fatphil]

Your argument is remarkably similar to the "evolution violates the laws of entropy (2nd law of thermodynamics)" one.

You're not looking wide enough.

Re:makes me wonder who earned $2 Billion

[punisher777]

Any market does not have a winner and a loser but a buyer and a seller. People lose a trading the same way they lose at the casino, they don't know when to cut their losses. You can make money in both directions by buying or selling. The market is not like a football game where there is a definitive winner and loser. In fact, one person on the trade may make more money than the other but still lose because their total sum from all trades is still negative they just made money with that specific contract. Don't make wild statements on matters you don't have enough knowledge in to make a sensible answer.

Re:makes me wonder who earned $2 Billion

[Actually, I do RTFA]

The stock market is not a zero-sum game.

Holding stock is non-zero sum. Trading stock is zero sum.

Re:makes me wonder who earned $2 Billion

[punisher777]

You have to be kidding me. We are in a recession currently because the equity and derivatives markets caused major issues in the market. Companies like AIG defaulted on their trades because instead of only trading with the resources they had they would also trade with resources they did not have and instead tried to make sure they would not default with trade A by using trade B as insurance for trade A. When trade A asked for the trade to finally be honored AIG went to trade B and asked trade B to honor their end of the deal, but guess what trade B didn't have the resources to honor the trade. Then it was like a stack of dominoes because trade B defaulted cause AIG to default which most likely cause trade A to default with another company. There were tons of these types of deals between companies like AIG, Goldman Sachs, Lehman Brothers, etc. And an even better example is the Great Depression which was cause by an initial drop of 200 pts. in the market which freaked many traders out and they all started selling which started a domino affect. It can seem daunting but you really need to pay attention to the state of the market because it can help you plan for times ahead. Though you cannot just look at the stock/equity markets but you also must look at the derivatives/futures markets which deal with things like commodities, metals, oil, natural gas, etc. My company, CME, is one of the largest exchanges on the planet and when you see things like gas prices go up I can guarantee you that events happening on my exchange help affect that change, though some outside factor is usually what causes wide variation in gas prices like if a new oil source is found that can be drilled into. Lastly, I want to correct you on the iron. If someone has three times as many iron contracts it does mean that they own three times as much iron than they did before. Iron is traded on futures markets where you pay a set price now so that on a set date you will receive the physical (unless you trade the futures contracts before taking delivery, which is what 95% of trades are). Southwest Airlines actually became very successful in the futures market because they bough tons of oil futures before oil prices sky rocketed and kept the oil futures contracts until final delivery. By doing this they were able to buy oil at $35 a barrel instead of $55 a barrel like everyone else was. This allowed them to provide extremely inexpensive flights which they are still seeing gains from to this day.

Re:makes me wonder who earned $2 Billion

[tomhudson]

First, the stock market is completely tied to the economy and follows it fairly closely.

Really - so we should either be in boom times this last year, or the DOW should be around 3000. Take your pick.

Or do you think that all the economists looking at it don't know what they're talking about?

They've consistently proven that they don't.

Re:makes me wonder who earned $2 Billion

[Dahamma]

ultimately, every trade has a winner and a loser

That may be true with shorts, futures, or other derivatives, but it's not true for normal stock transactions. It's entirely possible for every transaction on a stock to make the seller money as long as the company grows. And even once it stops growing, it's still possible for the current owner to make money off of a stable company with decent dividends. Stock is just an asset (limited ownership in a company) - it's really not much different in this respect from buying gold or other assets.

ultimately, the value of every stock goes to zero

You can even claim that eventually the world will end some day and the value of all assets will have no meaning, but then you might as well just call life or the universe zero sum games. But using the argument "nothing is permanent so nothing has any lasting value" doesn't really make for very interesting discussion...

Re:makes me wonder who earned $2 Billion

[tomhudson]

The iron isn't "worth three times it's previous value." What has happened is your money has LOST 2/3 of its' value, because it only buys 1/3 as much.

That's why the "rising stock market creates wealth" is a myth - in theory, it should only rise to the extent that production rises, because ultimately, it's just a proxy for the underlying assets - anything more means the dollar is losing value.

Think of it - in the last generation, the dollar has dropped in value by 95%. Getting paid 20x more doesn't make you 20x richer than your parents were at the same age - especially with a greater % of income going to taxes.

Re:makes me wonder who earned $2 Billion

[xelah]

I don't want to deal with the extremely complex socio-economic arguments in an argument about whether the stock market makes money vanish or not.

Good. Nor do I. It's not money that's important, except as a mechanism. The payoffs to the game are goods and services people consume, not money. I claim two things: 1. These payoffs are not zero sum. 2. The total of these payoffs across all players are affected by the existence and operation of the stockmarket.

The stock market is not a place where money goes to die; it is a place where people go to gamble... or, not quite, more of a game of skill against risk. Risk is controllable, whereas in gambling it's stacked such that risk is fixed. Still, the model fits: you put money in, someone else puts money in, and the lot of you hope to get your hands in the pot when it's full of everyone else's money.

No, it doesn't fit. The pot varies in size based on whether the investments are good investments or not and whether stock market pricing is good or not. It does this because it affects the investment decisions of firms, amongst other things, which in turn affects the productive capacity of the economy and dividend paying capacity of the companies. Finally, there is a time delay element which does not exist as a necessary part of gambling.

Gambling: the act of paying someone to deliberately increase the risk to which you are exposed for your pleasure (or through addiction). (The opposite is insurance). The risk is typically purely synthetic. No doubt some people do use the stockmarket for this. Most people do not. Saving: the act of giving up your ability to consume some of your share of current economic output in exchange for the ability to consume part of future economic output, possibly with some sort of risk element attached. Typically this risk is real risk (of product failure, crop failure, changes in consumer tastes, refusal of a borrower to repay his mortgage) which has to be borne by someone. Investment: the use of some of current economic resources to product something (a factory, a new house, a new product) which will produce a stream of future output.

Most stock market participants on the demand side are savers - they do it to exchange consumption now (eg, while working) for consumption in the future (eg, while retired). Companies participating are investors. They try to use the current resources the savers have chosen not to consume in order to create things which produce future output (part of which is the future output those very same savers will end up consuming in the future). Participants on the supply side (brokers, liquidity suppliers, exchanges, etc.) are, collectively, suppliers. Not necessarily good ones. They supply the mechanisms necessary for savers and companies to make their exchanges in exchange for as much of the right to consume output as they can get. These three things are not gambling.

All of your arguments apply to the gambling industry as well: people show up, dump money in, and a few come out rich; most come out poor; and for the most part the bulk of the money goes to the casino. The casino produces no useful output (arguable: it provides valuable entertainment; however, the gambling aspect is damaging and most people aren't coming to spend $500 on the privilege of enjoying blackjack so much as they're coming with a fantasy that they'll make $5000 on blackjack).

No, my arguments do not apply to gambling. Take my hypothetical scenarios, A and B. Whether you bet on red or black or not at all makes no difference to the size of economic output, except for any entertainment value and the resources used supplying casinos. Whether you choose poor investments (A) or good ones (B) does. The amount you get to consume in the two cases is different, and that extra output in case B does not come at the expense of someone else. It is not zero sum.

The money isn't disappearing though. The stock market is a zero sum game: any money you put in will come out, one way or another.

Again: what has money got to do with it? Why does the conservation of money mean that the game is zero sum?

Re:makes me wonder who earned $2 Billion

[xelah]

Your argument is remarkably similar to the "evolution violates the laws of entropy (2nd law of thermodynamics)" one.

How? My argument is: stock market participants' behaviour affects stock market valuations, stock market valuations affect decisions, those decisions affect real output, variation in real output affects human welfare. Therefore stock market participants' behaviour which produces good valuations results in higher welfare. Therefore the game is not zero sum: the total payoff varies depending on participants' behaviour.

You're not looking wide enough.

What do you believe are the boundaries to the area at which I'm looking and what outside them do you believe I should be including?

Re:makes me wonder who earned $2 Billion

[xelah]

Money is not created or destroyed here; it's only moved around.

Please, please, PLEASE, tell me WHY you believe that the conservation of money implies that the game is zero sum!

Re:makes me wonder who earned $2 Billion

[xelah]

A 'game' is a scenario in which interacting participants choose actions which, taken together, result in a set of payoffs to those participants. In what way is 'gold' such a thing, zero sum or otherwise?

Re:makes me wonder who earned $2 Billion

[xelah]

The only money that actually has any possibility of being used for productive work is in the initial sale of a share from the issuing company. Every other trade of that share is a zero-sum game.

No, it isn't, because:

• - As I've said many times in this thread: Trading behaviour affects prices, prices affect decisions by various people (eg, 'do I start a dot com?'), those decisions affect production.
• - Even if production were not affected the trade can be mutually beneficial to the trading parties. eg: Person A is 70, owns shares, produces nothing (is retired) and would like to consume. Person B is 40, produces output, has some money and would like to give up some of his right to consume this year's economic output in exchange for a probability of having something to consume when he himself is 70. This may be zero sum in terms of amounts of output, but not in terms of the welfare of these two parties.

Re:makes me wonder who earned $2 Billion

[Red Flayer]

No, it's not... but individual trades are zero-sum actions.

Re:makes me wonder who earned $2 Billion

[ChrisMaple]

You can lose without anybody winning. Ask the old shareholders of GM and Chrysler.

You can win without ever selling, if you own a dividend-paying stock.

Stocks are not zero-sum because they are ownership of corporate entities, and those entities can grow greatly in value, often in concert with the economy.

Re:makes me wonder who earned $2 Billion

[tomhudson]

The shares themeselves are never worth anything - it's only what they represent that has value, whether it's a piece of a business or the right to buy corn pr pork bellies in the future.

If people actually traded the goods, or, in the case of futures contracts, be required to take physical deliver, then we wouldn't have the problems we have now - people would understand that the stock market is not the measure of "wealth", but the underlying goods.

The stock market really is a zero-sum game, because nothing in it really exists, it's even less a fiat method of exchange than fiat currency is - which is why it can vary so much. If it accurately represented "worth" or "value", it would not fluctuate wrt the real world commodities it represents.

The stock market goes up 1% - the nation did not increase in value by 1% in that single day - that would represent an annual compound rate of 3,740.93%. In other words, if the stock market began the year at 8,000, by now it should be at 1,116,733.31.

And yet, people expect the stock market to go up 1% a day, when it should only be going up in relation to the actual value of the REAL market - the outside world. Morons.

Re:makes me wonder who earned $2 Billion

[tomhudson]

Funny how people claim that the stock market does better than inflation - by ignoring all those companies that went bust. Where would the DOW be if you included the losses from bankrupt Union Carbide, bankrupt GM, bankrupt Chrysler, bankrupt Distilling & Cattle Feeding, dissolved US Leather Co, bankrupt American Smelting, bankrupt National Steel, bankrupt Bethlehem Steel, dissolved American Can, defunct International Harvester, bankrupt Johns-Manville, Anaconda Copper (negative worth), currently in bankruptcy ASARCO, Nash Motors (eventually part of bankrupt American Motors), Hudson Motors (eventually part of bankrupt American Motors), bankrupt Paramount Publix, liquidated Fuller Company, Studebaker, Baldwin Locomotive, Republic Steel, US Leather, serial bankrupt Colorado Fuel and Iron, defunct Pacific Mail Steamship Co., ... there's more, but I think I made my point.

Including those bankrupt businesses (and the others that were once part of the DOW) would chop the DOW by what, half or more?

Re:makes me wonder who earned $2 Billion

[Dahamma]

But that's irrelevant... the DOW is a measure of overall stock market health, not some chart of an unchanging particular set of companies over the history of the market.

Also, the DOW is irrelevant to your claim that the market is a zero sum game. If it was, and your examples were the way to think of things, than the actual US GDP would never change. Anecdotes about failed companies don't change that.

The fact is, GDP does go up and so does the aggregate value of all companies traded on the market. Here's an easy way to think of it - millions and millions of people every day do work. That work adds overall value to the economy in whatever way you want to measure it. One measure is the stock market, though it's not really the best one (GDP is a better one).

Re:makes me wonder who earned $2 Billion

[tomhudson]

The stock market has no connection with GDP.

Face it, the economy continues to build wealth during the hours that the stock market is closed. And on weekends.

Re:makes me wonder who earned $2 Billion

[jedwidz]

In terms of the numbers of dollars and shares held by market participants across a trade, it is zero-sum if you ignore the transaction costs.

But that's not what people mean when they talk about 'the market', because there's this fixation on 'capitalization' whereby a value of a parcel of shares is deemed to be the number of shares multiplied by the current price per share. And that's there the zero-sum-ness of the market goes out the window, since the share price can vary independent of trading volume.

You could buy $100K worth of shares in a company today, pushing the share price up and increasing the company's market cap by $1M. Then you could sell those same shares tomorrow, pushing the share price down and reducing the market cap by $5M. There's no getting those numbers to sum to zero.

Re:makes me wonder who earned $2 Billion

[smellotron]

I'm sorry, I'm not sure if you're arguing in favor of zero-sum or against it, so I'm just going to embellish upon your comments:

You are ignoring dividends, splits, reverse splits

All of which adjust the price of the stock appropriately, so the net capital is the same. 20% dividend issued on a $50 stock? It opens at $40 the next day, with $10/share added to the accounts of the shareholders. The $50/share of wealth still exists. Stock splits? Now twice the number of shares exist at half the price, same wealth.

not to mention all the friction from trade costs.

That friction (which some call "skimming", depending on how much vitriol they want to inject into the conversation) is what pays for the services of exchanges, regulators, and market makers. The wealth still exists, it just stops becoming "shares" and turns back into "money". Glorious, Swimmable, Scrooge McDuck money.

Re:makes me wonder who earned $2 Billion

[tehcyder]

The stock market is not a zero-sum game.

Ultimately, it is, because ultimately, every trade has a winner and a loser, and ultimately, the value of every stock goes to zero. We just haven't seen the game played out long enough yet (though we came pretty close recently).

If I buy a share for one pound today, and sell it for five punds tomorrow, I have made four pounds profit because (for whatever reason) the company is perceived as being worth more. In a logical world, this would be because it had just announced excellent profits and a high dividend, or else it had just acquired a subsidiary or made a discovery that increased its total assets and future earning potential.

In practice, share prices fluctuate for many reasons, not all of them sensible, but the fact remains that at heart the company has become more valuable in terms of delivering future cash flows to investors.
,br> Shares in a company like Apple are worth a lot more now than theywere ten years ago, because Apple has generated huge profits, which could at least in theory have been distributed to investors as actual cash in the form of dividends.

Re:makes me wonder who earned $2 Billion

[tehcyder]

Using your logic, economic growth would be impossible, as any increase in wealth in one place would just be a decrease in another, with the two summing to zero.

As there clearly has been economic growth since (say) 1500, your logic must be flawed..

Re:makes me wonder who earned $2 Billion

[tehcyder]

Actually it depends on how you define wealth. If you ignore paper gains, then a stock trade is a zero sum game. There is exactly the same number of shared and dollars after the trade as before. While I understand many people believe otherwise, paper profits are not real. Belief in paper profits causes people to make lots of foolish decisions both in microeconomics and macroeconomics.

Not true. If I buy a share in an oil exploration company, and the next day it announces it has found a massive new oil field somewhere, that company is now worth a lot more, as it will be able to create larger future cashflows. My share has made a "paper gain" which I could translate into cash by selling it, but it is still an actual gain even if I hold onto it.

Re:makes me wonder who earned $2 Billion

[tehcyder]

Gold is a zero-sum game

Only if its value never changes.

Re:makes me wonder who earned $2 Billion

[tehcyder]

A 'game' is a scenario in which interacting participants choose actions which, taken together, result in a set of payoffs to those participants. In what way is 'gold' such a thing, zero sum or otherwise?

I assume the GP meant "trading in gold is a zero sum game". This is clearly not true, unless you describe all economic activity as a zero sum game, in which case it is hard to explain why there are billions of people leading a better life than they would have done ten thousand years ago.

Re:makes me wonder who earned $2 Billion

[tehcyder]

The stock market is not a zero-sum game.

Holding stock is non-zero sum. Trading stock is zero sum.

Even if it were true that trading stock is zero sum, you can't have trading in stocks if no one holds any to start with, can you? So the two are indivisible, and the whole thing is a non-zero-sum game.

Re:makes me wonder who earned $2 Billion

[TFAFalcon]

The money does not stay in the stock market though. The person(s) who owned the company that did the IPO takes it.

Re:makes me wonder who earned $2 Billion

[TFAFalcon]

But how can you benefit from the value of that stock? The only way is if a person is willing to actually give you the 2.2 billion, which comes from outside the system, and you take it - also outside the system. All of the money stays outside the market.

Re:makes me wonder who earned $2 Billion

[nine-times]

But the trades themselves are not where people make or lose money. You spend $2 billion and get $2 billion worth of stock. It's what happens after that trade-- when that stock loses its value-- that you lose your $2 billion.

Re:makes me wonder who earned $2 Billion

[websaber]

You are forgetting about dividends. That is the real reason to invest as they are suppose to represent the profit for use of your capital. It is just now that things are so distorted, everybody wants capital gains because it is taxed less and is a quicker "high".

Re:makes me wonder who earned $2 Billion

[punisher777]

When the stock market goes up by 1% it has nothing to do with the national growth rate. It has to do with the compound valuation of all the companies within that market. When they say that the NASDAQ went up by 1% it means that the overall value of all companies in that market went up by 1%, not the value of the nation. There are many factors which go into calculating the value of the country, one of which includes the combined value of the all the markets - NYSE, NASDAQ, CBOE, AZX, ISE, MS4X, NSX, Direct Edge. Other factors include the private consumption, government consumption, imports/exports, gross investments which are used to calculate the GDP. Then there is inflation which is determined by how much and how many goods and services were sold from one point in time to another, which provides an indicator how much inflation is faced by consumers.

Also, stocks do have actual value because when you own a stock it means that you own a certain portion of the company. This means that you own a certain amount of every asset the company has and are entitled to a certain amount of profits gained. If you own a single stock in a company you own a small portion of each desk, computer, building, equipment, etc. that the business owns. A stock is similar to gold backed currency where for each paper notice you have you own a small portion of all the gold the country has in its coffers, but with stocks you own a small portion of all assets the company has.

It does seem like they are hardly worth anything because there are high frequency traders that have so many transactions in a day that it seems like they are worth nothing but you really look at what a stock entails it is actually worth more than high frequency traders seem to make it look like.

Re:makes me wonder who earned $2 Billion

[bluefoxlucid]

Money and wealth are two different metrics.

Re:makes me wonder who earned $2 Billion

[bberens]

I'll spell it out for you..

INITIAL STATE
Market: $0

IPO @ $100
Person 1 Net: $-100

Sale @ $50
Person 1 Net: $-50
Person 2 Net: $-50

Sale @ $75
Person 2 Net: $25
Person 3 Net: $-75

Bankruptcy
Person 1 Net: -50
Person 2 Net: $25
Person 3 Net: -$75
System Net: -$100, which equals the IPO price

Re:makes me wonder who earned $2 Billion

[xelah]

Okay. I get what you are saying but pay attention here. 1) Alex buys a stock from Barry. Barry may be the holder of the stock or just represent a company but the money to purchase the stock goes to someone.

Yes

2) The payment for the stock is given on to Barry and simply represents the value of the stock at the moment of purchase. Bary now has Alex's money.

The money given to Barry represents the agreed price, and if mediated through an exchange is probably the market price. However, at a detailed level, notions of 'the market price' get a bit fuzzy. At any one time there will be various prices at which people are offering to sell various numbers of shares, and various prices at which they are offering to buy. There will be a gap between them (or they'd be matched and disappear). If you sell some number of shares in to this market then you may get several prices as your shares 'use up' the highest bid and the remainder get matched to the next highest bidder.

'Value' could be a synonym for 'price' here, but more logically could be its fundamental value. We're talking about a financial asset, so it can be said to have an objective fundamental value theoretically calculable from a probability and time weighted sum of all future payments to which its holder is entitled. This value is usually not know for sure and will differ from the market price. Also, for very large trades negotiated individually outside a market, the trade might not take place at the prices being offered/bid in the market before and after; and for some trades the existence of their trade may signal information which triggers other price movements.

3) The stock gains or loses value. These gains or losses do not effect the initial purchase. Alex's stock is worth more or less, but Barry still has the money used to purchase the stock.

Yes, the stock gains or loses value, but the value isn't known for sure and the changes may or may not be well correlated to market prices. The market price goes up and down, but Alex may not be able to sell his stock for the current market price depending on its size and who he is. Whilst it's very unlikely any single trade is going to change much, if, say, the buyer is Carl Icahn (an activist investor) the management may change their behaviour. Or if the buyer is Google and the seller is A Startup Founder and the price is $1bn, it might stimulate others to start new businesses in that area and encourage investors to invest in those kinds of new businesses rather than in other kinds of new businesses. Or if the new market price implies a yield of 20% it might cause the firms managers (in the possibly unlikely event they're not complete idiots) to cancel the plan to invest retained profits in that 5% return project and give them to shareholders instead. Or, more directly, it might cause the value of manager's options to vary and result in changes in behaviour that way.

Re:makes me wonder who earned $2 Billion

[Dahamma]

Face it, the economy continues to build wealth during the hours that the stock market is closed. And on weekends.

Maybe 20 years ago stocks stopped trading at the closing bell (though not really, anyway) - but now they pretty much trade 24/7 with after hours trading. Though, again, not that it matters. Not sure why you think some aggregate statistic like the DOW has anything to do with actual growth - it's just an indicator. But one that over the long term is *an* indicator of that wealth being built.

This is still all going back to the zero sum gain claim, which continues to be untrue. And now that you are at least admitting wealth does build, does that mean you are coming around? ;)

Re:makes me wonder who earned $2 Billion

[bluefoxlucid]

IPO @ $100

Person 1 Net: $-100

Corporation doing IPO: +$100

Sale @ $50

• Person 1 Net: $-50
• Person 2 Net: $-50
• Corporation: $100

Sale @ $75

• Person 2 Net: $25
• Person 3 Net: $-75
• Corporation: $100

Bankruptcy

• Person 1 Net: -50
• Person 2 Net: $25
• Person 3 Net: -$75
• Corporation: $0
• Liquidators: $100

System Net: $0

Fixed that for you.

It's also notable that this is simplified: the corporation IPOs to raise capital, which is then used to run business interests. That means the IPO allows expansion, meaning more production, more jobs, more output. But that is complex and I'd like to ignore that part; it's not the point I want to make.

Did you think that IPO money just went nowhere? It goes into someone's hands. What do you think an IPO is for? Getting stock in the market to watch speculators play a game? It's for getting money into the corporation's coffers without taking a huge bank loan!

System Net: $0

Re:makes me wonder who earned $2 Billion

[Red Flayer]

Sorry for late response.

That's not true either. You lose your $2 billion when you realize the loss, that is, when you sell your stock or when the company dissolves. Paper gains/losses are ephemeral. It's the realized gain/loss that's important.

The only way for there to be a net gain/loss on an individual trade is (aside from the bid/ask spread) due to different valuations by the buying and selling parties. I think it's worth $10, I sell it to you for $11 -- I've made $1. You think it's worth $13, but you only paid $11 -- you made $2. This is why in theory it's not a zero-sum game; however, until we actually realize or leverage our gains they don't exist.

Re:makes me wonder who earned $2 Billion

[nine-times]

I'm not sure what point you're trying to make here. Are you admitting that it's not a zero-sum game? My point is that it's possible for someone to lose $2B without anyone gaining $2B. It's possible for the whole stock market to just be valued at $2 Billion less without the money "going somewhere".

First to trade, first to lose

[TiggertheMad]

But if microseconds mean millions in trading ... who has time for checks?"

At that price, who doesn't have time for checks?

Re:First to trade, first to lose

[hedwards]

That's the thing. They don't have time to do checks, because it's a race to beat the other vultures to fleece the individual investors. It's still common practice for hedge funds to buy and sell stocks with knowledge of what the prices will be ahead of time on some of the smaller exchanges

Re:First to trade, first to lose

[LordNacho]

Citation needed?

Re:First to trade, first to lose

[smooth wombat]

They don't have time to do checks,

Yes, they do. Every trade is supposed to be monitored. Even if it means a few bad trades get through, they can and are supposed to review the accounts, timing, etc that go in to every trade to determine legitimacy and adherence to trading rules.

It's one thing to say you can't check an instantaneous trade. It's quite another to say you can't look at multiple trades your traders make and not pick up on improprieties.

This comes down to willful ignorance. So long as the guy was doing well, it didn't matter if the both internal and external rules were being violated. It is only when trades go bad that, "Oh my! How could that have happened?" comes into play.

For a short time I worked at a brokerage firm and I can tell you, everything you do is watched.

Re:First to trade, first to lose

[LordNacho]

Pretty simple theory: you see someone with similar skills as you making much more money. How do you feel?

To compare, people here tend not to whine when sports stars make a buttload. You can't really be jealous of someone you don't compare yourself to.

Re:First to trade, first to lose

[hedwards]

IIRC, Phillip Fischer talks about that practice in his book Common Stocks And Uncommon Profits. The time frame for which the future price is available has shrunk significantly since the 20s, but it's still there. Back then, being a broker meant that you'd have access to the stock price for the next day when you could still act on it.

Re:First to trade, first to lose

[smellotron]

It's still common practice for hedge funds to buy and sell stocks with knowledge of what the prices will be ahead of time on some of the smaller exchanges

The time frame for which the future price is available has shrunk significantly since the 20s, but it's still there.

Well I bet it's certainly shrunk a lot in the last few years, given that the US stock market is governed as a National Market System. In other words, that behavior (presumably arbitrage between exchanges and giving brokerage customers the worse price) is illegal.

I'm a better trader than this guy.

[Thud457]

I would just like to say that I have never lost any company I work for 2 billion dollars.
Not even 2 million.

Re:I'm a better trader than this guy.

[Anonymous Coward]

I've never even lost 2000.

*checks retirement account*

No, wait, never mind. There it goes.

Re:I'm a better trader than this guy.

[Artifakt]

There were several points in my military career where I was signed for over a billion dollars in mobile property, and a few where the amount was over three billion, a lot of it in the form of already loaded full cargo trucks with crates of helicopter turbine engines and such, that could easily have been stolen if I'd screwed up. When I left the service, I had to pay 2 dollars for a missing laundry bag, so i can't quite say I've never lost anything for anyone I worked for. But still, with a record like that, why weren't some large companies competing to offer me a multiple six digit salary to do the same sort of thing this idiot was doing, the day I became a civilian again?

Re:I'm a better trader than this guy.

[LordNacho]

They made you PAY for losing a bag? Seriously? That's a friggin risk of the business. What do they do if you mess up an F/A 18?

I've seen people screw up in trading, and quite simply nothing happens to them. When I was starting out the bosses were always telling us "mistakes cost money" but in the end, they just ate the losses. Part of the business is that people will forget to repo, they'll forget to roll their overnight currency positions, and they'll sometimes accidentally trade millions of dollars by clicking in the wrong place. It happens.

Re:I'm a better trader than this guy.

[jeffmeden]

No offense but a successful career in a high-stakes environment like the military is no preparation for being a complete waste to society and eventually losing $2B on top of it all... For that you need a business degree.

Re:I'm a better trader than this guy.

[rtfa-troll]

Right; you just don't have the killer instinct it takes.

badda da booom

Thanks folks I'll be here all week. Just drop by and take in the show.

Re:I'm a better trader than this guy.

[Bucky24]

I'm guessing that by lost a laundry bag parent means the bag didn't get destroyed by enemy fire. He just had no idea where it was. If I was in charge of an F/A 18 and suddenly didn't know what happened to it I'd expect to have to pay for it too.

Re:I'm a better trader than this guy.

[timeOday]

What do they do if you mess up an F/A 18?

You can get fired just for having a close call.

Re:I'm a better trader than this guy.

[LordNacho]

Yes, and employees randomly losing stuff is a risk of the business... you gonna charge everyone for every teacup they drop as well?

Re:I'm a better trader than this guy.

[Bucky24]

Maybe not the first one, or the second, but probably after that I would make them pay for it, yes. Though I don't think I would give my employees teacups... I'd probably give them ceramic mugs.

Re:I'm a better trader than this guy.

[tehcyder]

I would just like to say that I have never lost any company I work for 2 billion dollars. Not even 2 million.

And I've never headbutted someone in a World cup final, so I'm a better player than Zinedine Zidane.

Re:I'm a better trader than this guy.

[Lakitu]

Trying to make him pay was actually just part of the application process for a post-miitary job. If he would have successfully written off the laundry bag loss, a defense contracting job would be waiting for him as soon as he left where he could put his expertise to work losing laundry bags on a large scale or losing truckfuls of pallets of cash.

Re:FIRED ??

[Wyatt Earp]

Since he got arrested at 3am local time, I don't think he's going to have a job much longer.

You know you read USB at first

[Anonymous Coward]

Just say it.

Re:You know you read USB at first

[Bucky24]

Yes... Yes I did.... And then after that I thought "WTF does Universal Bus Serial mean?"

Random delays?

[Anonymous Coward]

Why do we even allow this real-time trading? It only serves to benefit big investment banks who want to game the system at the expense of other investors.

Exchanges should prohibit these types of games by instituting a random delay of one to two minutes on every trade in the system. Why should a big investment bank with a room full of computers be able to do what the man in the street can't?

Re:Random delays?

[hedwards]

Indeed, it's like those too big to fail banks that still haven't been broken up. IIRC the efficiencies of scale tend to max out somewhere around $100bn in holdings, why we haven't broken up larger ones is purely a matter of politics.

Oligarchies suck, unless you're one of the oligarchs, in which case it's pretty awesome to be able to behave in this sort of sociopathic way and be rewarded for the bad behavior.

Re:Random delays?

[smellotron]

Exchanges should prohibit these types of games by instituting a random delay of one to two minutes on every trade in the system. Why should a big investment bank with a room full of computers be able to do what the man in the street can't?

If you don't want to compete with an automated system, you can restrict your stock trading activity to the opening and closing auctions. Everyone gets the same price!

Nah, wont happen like Steve Perkins.

[140Mandak262Jamuna]

You see this guy is black. Which means he won't be treated well by the good old boys network.

Re:Nah, wont happen like Steve Perkins.

[Savantissimo]

His name is Kweku Adoboli. "Kweku" seems to be a Ghanian name meaning "born on a Wednesday".
(Updated verse: "Wednesday's child is full of WHOA")

What?

[J'raxis]

How does a human being engaged in $2B worth of fraud say anything about computer algorithms and millisecond-level trading?

Re:What?

[show me altoids]

Was this USB 2.0 or 3.0? I wouldn't think 2.0 would be fast enough to lose this much money this quickly.

Re:What?

[Anonymous Coward]

Because the banks could have checks in place to avoid this kind of unauthorized trading, but they chose not to because it would slow down the system a little bit. Bankers believe that a bank implementing all proper security protocols would be too slow to compete in this era of millisecond-level trading.

Re:What?

[Daniel Dvorkin]

The idea is that the fraud wouldn't have been nearly as easy if it weren't for the insanity of the trading system. Your question is kind of like asking, "how does a human stealing secure data say anything about operating system security?" Humans choose to commit the crimes, sure; that doesn't mean we should structure the system to make it as easy for them as possible, which appears to be what we've done with trading.

Re:What?

[brunes69]

So if the trade took 1 second instead of 0.01 seconds, it would have been easily noticed???

This is total nonsense. This has nothing at all to do with high-speed trading, if anything it has to do with policy enforcement, plain and simple.

Re:What?

[medv4380]

If any of this has to do with High Speed Trading or anything really to do with electronic trading it is because of WHO was arrested. FTA

"Adoboli, a University of Nottingham computer science and management graduate"

The investigation is still underway and I haven't seen anything that says how he did it or how long it took just that they noticed Wednesday, Yesterday.
If this has anything to do with HST then the only way to fix it is to put a 24 hour delay on electronic trades. However if this was done over the course of months or years and they just now found out then even putting a delay won't fix it. Your example of trading at 1 second vs 0.01 wouldn't allow for the review nessisary. A second pair of eyes needs to look at the electronic trade.

Re:What?

[Daniel Dvorkin]

So if the trade took 1 second instead of 0.01 seconds, it would have been easily noticed???

Was it one trade worth $2 billion? I kind of doubt it. Most likely it was a bunch of trades, spread out over days or weeks. And yes, if those trades had taken a hundred times longer, maybe they would have been caught before such an insane amount of money was lost. (I'll note that the 0.01s you suggest is actually much, much slower than modern trading; it's more like a factor of a thousand, or ten thousand.)

This is total nonsense. This has nothing at all to do with high-speed trading, if anything it has to do with policy enforcement, plain and simple.

Again, policy enforcement is easier when the system isn't structured to make it easy for people to do this kind of thing under the radar -- or, as some posters on this story have quite reasonably suggested, to give the higher-ups plausible deniability. High-speed trading isn't the only culprit here by any means, but it sure doesn't help.

Re:What?

[Anonymous Coward]

There is an enormous amount of risk analysis software that monitors the traders activities, whether their doing large manual-esque traded, or millions of small computer trades. It's really the quants and developers involved in risk analysis that keep the traders in line with national laws, exchange rules, and bank policies. UBS obviously need to hire better risk analysis people.

Re:What?

[GlobalEcho]

fraud ... that doesn't mean we should structure the system to make it as easy for them as possible, which appears to be what we've done with trading.

Rogue traders and corruption have plagued large organizations basically forever. The structure of financial organizations actually makes it reasonably hard for them to operate, though obviously not impossible since one makes the papers every couple of years. Rogues have to "hack" the risk management system in one way or another; only a few succeed to the point of making spectacular losses. Nobody has an incentive to structure their risk management systems in such a way as to be easily hackable by rogues, I don't know where you get that idea.

A rogue almost always gets started with good (-ish) intentions. They fucked up, and want to fix the problem without anybody finding out. They fuck up more trying to to do so and the whole thing becomes an ugly spiral. We had the beginnings of such a situation at our large hedge fund. However, risk control detected the problem immediately and the fellow was fired before the day was over.

With purely electronic trading and algorithmic systems, by the way, it is (so far) unheard of for such monstrous losses to mount. This is not least because the algorithms lack necessary human qualities of a rogue, such as deliberate deception of coworkers, ability/motivation to forge false reports in an artful manner, and a profit motive.

Re:What?

[alexander_686]

Your right about HFT, but let me put a spin on it.

To lose billions would probably require lots of trades over a long time period. There should be compliance and risk checks – and it looks like these failed. However

20 years ago if you wanted to sell 100,000 shares of a stock you would have done a block trade. Maybe one of the big Investment Banks would have taken the whole thing or maybe it would have to be spread out - but it would have 2 to 5 trades - max. And you would have taken a big hit on the price to move such big block.

Today, with automated computers (think HFC – but that is a special case) the trade would be chopped into 100’s of smaller trades to sneak under the radar – after all you would not want to alter people that a huge trade is coming though. And since the HFC might detect that you are selling a large block and front run you, you might actually put in 100s of trades to buy back the stock to muddy the waters.

So, in the end, all of the trades should be clearly laid out in both cases. In the first case it’s easier – not because of the speed of HFT and their ilk, but because the sheer volume. A trader (who is almost always higher paid and makes the firm’s profits) might be able to bamboozle / bully the Compliance or Risk manager.

Re:What?

[blair1q]

You know what you do when everything is moving too fast?

Stop and wait for it to crash, then pick up its stuff for cheap.

Re:What?

[J'raxis]

I assume you have citations for such bold and declaratory assertions.

Right?

Re:What?

[J'raxis]

No, the question is more like me saying: "How does a human being stealing your car have anything to do with the fact that Google can return a million search results in 0.15 seconds?"

In other words, the fraudster's crime had nothing to do with computer algorithms doing the trading, nor the trading taking place at millisecond resolutions.

Re:What?

[smellotron]

This is not least because the algorithms lack necessary human qualities of a rogue, such as sneak attack, trapfinding, improved evasion, and a profit motive.

FTFY

Re:What?

[epine]

You're both right and you're wrong. Nice stomp job on people trying to argue the case from inappropriate details. Now we can start an actual discussion.

In the bigger scheme of things, the adrenaline nature of the finance sector does lead to safeguards being trimmed in the interests of race to the buck.

There was an EconTalk podcast in the last year or two where the guest spoke about a proposed reform where a certain percentage of credit (I recall 5%) must be obtained from an especially sophisticated tranche of institutional investors. As I recall the thrust, it was spoken about with bankers at the highest levels and had support from many wonks within Washington. The bankers demured for what the subtext depicted as total B.S. reasons. The quip I remember was a moment out in the hall where the guest asks, "what's really going on here?" and the banker replies, "look, we don't want this".

There's the problem: neither of those phrases is likely to be recalled with 100% accuracy, or even transcribed accurately as I recall hearing them. I'm suffering a bad case of Google spam and I haven't been able to dig it up.

"Look, we don't want this" fell on my ears as meaning, "we know this would lead to adult supervision and spoil the party".

I'll have more time another day to wade through the EconTalk podcast transcripts. I was extremely disappointed in the direction of the discussion at this point. Russ Roberts went down a peg or three in my mind. He didn't seem to want it, either.

Don't tell me the bankers stalking the corridors of power aren't clever about slapping away the hand of adult supervision whenever they think it has actual teeth, the kind that leave tooth marks on giant bonus payments spewing out of a centripetal leverage pump.

Re:What?

[tehcyder]

How does a human being engaged in $2B worth of fraud say anything about computer algorithms and millisecond-level trading?

It says that if you blindly trust computers and dilute human control security, you end up in trouble.

Re:What?

[GlobalEcho]

That proposal for a certain amount of debt issuance to be held by "an especially sophisticated tranche of institutional investors" was a smart one, and it angered me to no end that the banks weaseled out of it. It would have been a low-cost parallel form of regulation, and the prices of that debt would have been interesting indicators of institutional health completely independent from the ratings agencies.

There is a little bit of similar activity out there, such as the bonds issued (earlier this year) by Credit Suisse that turn into equity if the Tier 1 capital ratio falls below a certain level, but it isn't organized, widespread, or well-known.

To your point about regulations, I'll just note that we're kind of talking past each other here. I was mainly posting about Adoboli's presumed circumvention of internal risk controls, while you're taking a larger perspective on financial regulation. It's quite true that the finance industry fights regulations, in many cases to the detriment of the economy, because they want to make more money. The same stresses occur within a financial organization between its traders and risk control, but the difference to me is that a single company is a lot like a communist dictatorship (planned economy, central control) and imposes risk controls through a very different sociological process.

I would take care, incidentally, about lumping the finance industry all together in its attitude to regulation. Hedge funds and trading exchanges, for example, would love to see all CDS contracts traded on exchanges the way the SEC tried to mandate. The dealers in the investment banks fought that one off.

In contrast, equity short sale restrictions were really annoying to long-short asset managers (hedge funds, a few mutual funds, option market makers), but much less of a problem to equity market makers, brokers, and the big banks.

Finally, consider capital requirements. With the exception of the banks, everybody would like to see those go up because no one wants to have to worry to much about counterparty risk or their prime broker going bust. (I learned the word "rehypothecated" in 2008).

My point is that there are players in the finance industry on either side of almost any regulation. The only counterexamples that come to mind right now are cross-border capital transfer controls.

Re:What?

[J'raxis]

Using computer algorithms to trade at millisecond resolution is not incompatible with adding security checks, suspicious activity reporting, and so on, to said algorithms.

Re:What?

[jafac]

No, the reason why they choose not to have checks, is so that most of them can get away with this kind of fraud without getting caught. I guarantee - this guy is like one in one-hundred, who got reckless, and got caught.

They are paying people to gamble

[badzilla]

Sometimes you don't win at gambling. What do they expect? If he had been lucky and instead made a 2 billion profit you would not be reading this.

Bonus

[0123456]

How big a bonus will he get this year?

Re:Bonus

[clampolo]

Tyrone is going to give him a big bonus in his prison cell.

Re:Bonus

[blair1q]

Depends on how big a bailout the government gives UBS for failing to pay attention to its own knitting.

Re:FIRED ??

[Andrewkov]

He got a promotion. He learned what not to do, you can't buy that kind of experience.

Re:FIRED ??

[0racle]

At a competitor? Hell, this man is CEO material. You can't let assets like that get away.

Right....

[fuzzyfuzzyfungus]

These "rogue trader" stories come out from time to time, among employees of all the more respectable class of casino, and they leave me deeply skeptical...

Either these outfits are, in fact, handing people the keys to gigantic piles of risk with controls roughly on par with the ones used to keep bored 16-year-old cashiers from skimming the till, or there is a substantial amount of tacit looking-the-other-way as Mr. Golden Boy flouts the rules and makes huge piles of money, and then, if things go south, his actions were "rogue".

Honestly, I find it hard to believe the former. This industry is riddled with perverse incentives toward taking on outsize risk loads(that hopefully won't blow up until you leave, or will blow up in somebody else's face) in exchange for rewards now. Am I supposed to believe that Poor li'l UBS just got plumb slickered by some smooth talker, or that "rogue" is simply the PR response to those who operate particularly close to the risk/reward envelope and happen to stop producing the numbers that HQ wants to see?

Re:Right....

[Pecisk]

I thought *exactly* the same when I first heard the news in more detail. It really feels like systematic abuse (especially when you take their history into account) and dropping all fault on guy when everything goes down the drain.

Re:Right....

[Attila Dimedici]

Your skepticism is definitely warranted. I am pretty sure this is the same bank that had a "rogue" trader story very similar to this sometime in the last 10 years. Except in that case, he ended up somewhere in Asia before they tracked him down, with supposedly most (or all) of the lost money in accounts that he controlled.

Re:Right....

[xelah]

This industry is riddled with perverse incentives toward taking on outsize risk loads(that hopefully won't blow up until you leave, or will blow up in somebody else's face) in exchange for rewards now.

I rather suspect it's more like 'Let's give myself a chance of saving my own arse by covering up that $10m loss I shouldn't have made by making an even bigger bet' repeated with exponentially increasing losses than 'Let's see if I can become a hero by making lots of money with a monstrously huge bet which breaks all the rules'. I suspect that breaking the rules imposed on you in a really big mult-$bn way is going to get you fired whether you're successful or not.

Re:Right....

[TubeSteak]

These "rogue trader" stories come out from time to time, among employees of all the more respectable class of casino, and they leave me deeply skeptical...

Regulations and controls have not prevented the biggest market disasters of our time,
because those companies and individuals set out to do wrong from the beginning.
Locks only keep honest people honest.

I'm more interested in the fraud that doesn't get reported,
because companies think that eating the cost is better than the bad publicity.

Re:Right....

[blair1q]

If it's the latter, that will no doubt be revealed in his defense. If he doesn't parlay it into a big settlement.

Re:Right....

[Dahamma]

Exactly. If this "rogue trader" made $2B for UBS with risky trades, he'd be promoted and given an 8 figure bonus.

Re:Right....

[Rich0]

Ok, imagine if you required a cashier at Walmart to have a witness come over every time the drawer opened, and count the money three times. Actually the drawer would be in a separate room from the customer to reduce the risk of theft. Every sale takes 30 minutes. Security is improved, but nobody would want to shop at Walmart. To prevent odd losses of $20 a day the company puts itself out of business. It just doesn't make sense.

Well, it is the same thing on Wall Street, but with a bunch of zeros added. If you make every trader quadruple-check things every time they want to spend $50M that will slow things down. In the end the firm is likely to lose more in opportunity than the odd $10M in embezzlement here or there.

I know somebody who was involved with Wall Street, and he said that people there tend to lose any normal sense of the worth of money. When every time you make a phone call $50M changes hands and you get $1M of that it is kind of hard to have a perspective.

I'm sure the rate of waste/loss is the same as in any other industry. The problem is that since trillions of dollars are changing hands a few percent is like the economy of many medium-sized nations.

Re:Right....

[quenda]

This industry is riddled with perverse incentives toward taking on outsize risk loads

Which industry? That could equally apply to any business that pays perversely large performance bonuses.
When an executive can get a multi-million dollar bonus, why not take any necessary risk? The downside is insignificant for an individual who is already got enough to retire on.

"Rogue"?

[A5un]

So, if you lose money, you're "rogue". But if you win money, you're "managing director"?

HFT is a problem

[rickb928]

High-Frequency Trading is a bet, not much different than counting cards at a Las Vegas blackjack table.

You're betting that:

- You get your trade in milliseconds or less before the opportunity vanishes.
- Your coders are not missing anything that would cause you to fail.
- Your coders are sharper than the other coders our there, or...
- You are taking from the humans, and aren't at risk from other HFT code.
- Nothing goes bad in all of this, from comm links to the market platform.

And of course you can always beg the SEC to unwind the transactions, claiming it was a programming glitch. That's been done before. The SEC is no longer an effective watchdog over the industry. It has in effect been 'captured'. Game Over unless Mary can turn it around. Unlikely.

When you dig into how the NYSE actually works today, with DMMs and 'liquidity providers', that one entity can account for 10-20% of total volume, and all of that is HFT, you may realize that the days of humans trading on news and speculation are over. If you want to hold for a duration and take profits over the span of years, just hope you don;'t need to cash out on the same day as the machines have decided they see opportunity in trashing your holdings. Nothing personal, it was an algorithm you know. Just happens.

It's a genuine miracle that we don't see more flash crashes and >$1B fails than we do. HFT is going ot destroy the market, but only for actual humans. One day, when we realize that 70% of the market volume is HFT, we will then understand that the NYSE in particular is a house of cards. Then what?

Re:HFT is a problem

[hedwards]

More or less, it's astonishing to me that the SEC hasn't cracked down on these scams. It's not like it's some sort of secret, people outside the industry know that Wall Street is largely run on fraud and insider trading and that there are massive bonuses handed out even when a company isn't doing well.

But, as long as the GOP continues to whip up anti-regulator sentiment, it's going to be really tough to get the regulations in place that are going to fix that.

Re:HFT is a problem

[DemonGenius]

It's a genuine miracle that we don't see more flash crashes and >$1B fails than we do. HFT is going ot destroy the market, but only for actual humans. One day, when we realize that 70% of the market volume is HFT, we will then understand that the NYSE in particular is a house of cards. Then what?

This.

Re:HFT is a problem

[Maximum Prophet]

If you want to hold for a duration and take profits over the span of years, just hope you don;'t need to cash out on the same day as the machines have decided they see opportunity in trashing your holdings.

If you diversify your holdings, and sell over time, you don't have much risk from this. When you are young, you should be investing in higher risk investments, but as retirements looms, you should move your holdings into guaranteed vehicles, like bonds. As all this happens over years, HFT shouldn't affect you too much. "Cashing out" is not part of a sane investment strategy.

Re:HFT is a problem

[rickb928]

I'm still stuck on why the machine trades are backed out. It's not like the blackjack table where you ask for your chips back 'cause your double didn;t pan out.

Re:HFT is a problem

[blair1q]

it's the same bet as any other in the market, it's just done using low-latency computing resources

but it does create some interesting opportunities for those of us who aren't beholden to equations

that flash-crash made a lot of people temporarily poorer on paper, but many who were on the ball a lot richer in real life.

Re:HFT is a problem

[blair1q]

and as long as money is the prime political motivator, it will only get worse

and it is, so changing it from within is, basically, impossible

so if you want it changed, you'll have to mobilize your fat ass to mobilize your local collection of fat asses to vote the fat-cats' fat-assed shills out of office, first.

Re:HFT is a problem

[ChrisMaple]

You can't get forced out in the normal course of affairs (companies buying up all their stock excepted), if you don't buy on margin.

Re:HFT is a problem

[khallow]

More or less, it's astonishing to me that the SEC hasn't cracked down on these scams.

Why are you surprised? As I see it (and several other repliers as it turns out), the purpose of the SEC is to make investors feel secure, not be secure. That subtle difference enables a lot of the scams out there.

But, as long as the GOP continues to whip up anti-regulator sentiment, it's going to be really tough to get the regulations in place that are going to fix that.

Why do you think more regulation is going to make a difference when the real problem is lack of enforcement?

Re:HFT is a problem

[Rich0]

I dunno - if you're convinced the game is rigged then the only way to win is not to play. I plan to work until I die, or until you end up taking care of me (assuming inflation and crashes don't destroy the value of your savings)...

Re:HFT is a problem

[AmiMoJo]

There needs to be a cap on political donations and campaign funds. Remove the ability for companies to buy politicians, then we might get some proper regulation.

Re:Does anyone care?

[Tridus]

They're not paid enough for that. Seven figure salaries don't cover being responsible for your own failures in this industry. That's something for poor people.

Results matter:

[Hartree]

I doubt they'd be calling it unauthorized if he'd made them 2 billion.

Re:Results matter:

[nedlohs]

They would, but you wouldn't hear about since there'd be no need to make an announcement or have someone arrested. They'd just internally discipline - from sacking to lowering their limits to adding more oversight. Losing $2B is pretty obviously outside your limits whereas you could make $2B without exceeding your trading limits - so they may not notice if their oversight is shit (and apparently it is).

Re:Results matter:

[AmberBlackCat]

I wonder if it became unauthorized before, or after, it cost them $2 billion. I wonder if they even have an authorization process, or if they just allow their traders to do what they will until they see something that loses money.

Bitcoin

[goombah99]

I hear UBS is going to go to 100% bitcoin. A spokesman said, "basically there aren't enough computers on the planet to handle a billion bitcoin transactions per hour, so it will be days before the money is actually transferred. This gives us time to roll back anything, plus we can get interest on the float while we wait for the transaction to close."

Bitcoin, is there any problem it can't make better?

Re:Bitcoin

[tehcyder]

Bitcoin, is there any problem it can't make better?

Apart from anything that is connected to reality, no.

Re:Does anyone care?

[fuzzyfuzzyfungus]

More to the point, isn't it interesting how losing money from "unauthorized" trades is a problem that crops up from time to time; but nobody who makes money on a trade is ever "unauthorized"?

Back Door Code in Trading Algorithims?

[BoRegardless]

Suppose you put in a trigger to "toss a trade" so your "friend" at another firm, which only you and your partner friend know how to trigger or exploit.

The payday could be small enough to set you up for life and still be chump change and pass by an audit or the other normal wins and losses each month and wouldn't be easily found out as long as everyone kept their mouths shut.

This is the danger of electronic algorithmic trading. No doubt there are safeguards in place, but that doesn't mean they can catch an exploit that may only be two lines of code.

Re:Back Door Code in Trading Algorithims?

[boner]

The market is anonymous, unless you and our 'friend' agree on which product to trade you have no way of identifying the other party. On popular products, i.e. Google or Apple, this is impossible. On other products liquidity (trade volume) is so small that such transactions would stick out like a sore thumb.

On top of that, it will take a lot more than two lines of code to defeat all the checks and balances in trading code. These checks and balances usually trace their origin to things having gone wrong in the past. I would expect all trading firms to have good source code management systems, your 'enhancement' will not go unnoticed.

Re:Back Door Code in Trading Algorithims?

[HornWumpus]

Wouldn't take but one database entry.

In risk management there are far more commodities traded then you have good market data for.

What you do is assign proxies for all commodities so you can aggregate your risk exposure. For example (pulled from a dark place) electricity traded in Phoenix could be proxied as 50% four corners, 50% S. Cal.

To break risk management you simply have to mis-proxy a commodity trade. Switching a sign on the commodity that you do half your trading on will turn a huge exposed position into a risk free position.

Disclosure: I wrote risk management for electric power trading and scheduling systems. Had a bug report once because a large S.Cal power company overflowed the total value at risk (IIRC it only had 9 digits).

Re:Back Door Code in Trading Algorithims?

[blair1q]

it's impossible for the market to be fully anonymous

everything you enter or transact is linked to your broker's account, and your broker accounts for it on your account (n.b.: this means you don't really own the shares in your account; they're held "in street name" meaning they're in your broker's account and your ownership of them is a contract between you and your broker; that's why your broker forwards you your proxies and prospectuses instead of the share issuer mailing them to you directly).

but that doesn't mean you can't deal with cohorts to game it

happens every day. luckily, people dumb enough to play that game are generally too dumb to do it well enough to really fuck the market over. and various gamesters are all churning each other, so it works out as noise. and they're all small players or they wouldn't risk the SEC's wrath (unless they're dopey fat fucks like that Rajaratnam slug), so it works out as piddly fuzzy noise. if nothing else, these gorks are "creating liquidity" and sintering the system from quasi-stable states into its major stable states.

Re:Back Door Code in Trading Algorithims?

[Actually, I do RTFA]

happens every day. luckily, people dumb enough to play that game are generally too dumb to do it well enough to really fuck the market over. and various gamesters are all churning each other, so it works out as noise. and they're all small players or they wouldn't risk the SEC's wrath

You're describing one class. The other class is "does it well, and gets hired by an amalgamator of gamesters", aka Golden Sachs, etc.

Re:Blaming the computer is the easy out...

[CharlyFoxtrot]

I hate to burst your bubble but all banks are like that. The only reason these stories are coming out now is because we're in a bear market and the incompetence of these assholes is being exposed, in a bull market where the rising tide lifts all boats these kind of guys were superstars because hey couldn't lose.

Re:Digital money

[Jeremiah Cornelius]

So. What I want to know is...

Who has this 4 Billion now?

I invoke Teslacle's Deviant to Fudd's Law: "It Comes In, It Must Go Out"

If no one GOT this money? It never existed. Like the money I 'lose" when my stock-options lose value.

If someone - or many someones - GOT this money, then there's the possibility of collusion to be investigated.

I think this little fish is sombody's patsy. But who remembers Barings Bank and Nick Leeson?

Re:Ka-ching!

[h4rr4r]

The same thing senior execs do to earn millions at other companies, play golf.

Re:FIRED ??

[Jeremiah Cornelius]

"you can't buy that kind of experience."

Yes you can. For a mere $2 Billion, USD. :-)

This level of trading is hazardous to the world

[erroneus]

I think it is increasingly clear that the more developed this trading gets, the more risk it offers the world's economy. It is also recognized that "safeguards" need to be in place to prevent certain things from happening. These same safeguards also serve to decrease that highly sought-after and desirable "leverage" power when making trades. These market people have been pushing regulators to remove such safety restrictions which have apparently been connected with all manner of troubles including the most recent market failure.

I wouldn't be against banning the markets entirely. I think Hitler had it right in his analysis of why speculating is such a problem for economic stability. (Just as in the legal system, the only real winners are the lawyers)

Of course the world's bankers would never allow any governments to take their playground away, but that's what I think should be done.

Re:This level of trading is hazardous to the world

[jez9999]

If there's one person whose name I wouldn't invoke to try and back up my argument, it's Hitler.

Re:This level of trading is hazardous to the world

[erroneus]

Hitler, as unpopular as he is, did a great number of things right. Are you seriously more interested in politics than truth? Does the source of truth matter more than the truth?

Re:This level of trading is hazardous to the world

[HiThere]

I think you're wrong. But short-term trading *is* a problem. It could probably be handled with a per/transaction tax of a percentage of the trade...say twice what the average trader makes. And have it adjusted according to a linear equation so that if you hold the stock for longer than 5 years there's no tax, and if you hold it for a minute or less there's a 100% tax. (Obviously I'm not planning on extending the equation to more than 5 years. That should just be free. But it might be worth extending it to below a minute, so that if you sell after holding the stock for less than a minute you owe more than the transaction price in taxes. Possibly all the way to zero, though I doubt that anyone would be so foolish as to engage in HFT under that tax plan.)

Re:This level of trading is hazardous to the world

[erroneus]

He also started the Olympics, modern highway systems, Volkswagen and lots more.

And you know? The US was pretty indecisive as to which side it would take in WW2 as there were arguments being made for both sides in the early days. If there were more German speaking people in the US at the time, it would have been more likely that the US would have sided with Germany. (In fact, when the US was started, German was almost the official language.) So your "he's evil, sick" etc depends largely on the historians reporting things and how things resulted. Hitler was extremely well celebrated for restoring Germany's economy and national pride and the people loved him for it.

Germany was suffering greatly at the hands of Jewish money interests back in those days and Hitler wanted to put an end to it. His end was changes in financial policies. The response was this:

http://www.theapricity.com/forum/showthread.php?t=17720

A Massive global boycott on German goods by all people and businesses of Jewish faith or association. This is when things really started going south. Hitler just wanted to restore sanity to financial markets. He was resisted.

And many details of the tragic suffering have changed over the years as claim after claim has been disproven. These changes are documented at the various holocaust museums in the US and other places. (For example, claims of lampshades made of jewish skin, soap making and the like have all been disproven and removed. People are still working on the gas chambers and the massive body burning details, but progress on those issues have been made as well.) I am not a "holocaust denier" but I am interested in the truth in whatever form it may result; better or worse. It is fact, for example, that lands and holdings were unfairly seized from innocent people based on their ethnic/religious status and as a US citizen, I hold this act to be extremely unforgivable. (But you know, the US did the same to the Japanese... and the people of the day supported the action.)

What I am saying is that while facts and details are both lost and refined over the years, our views change. But to summarily say that "anything that came from Hitler is evil" reveals the speaker to be of a very limited view and capacity to see things for what they are/were.

Not so surprising

[LordNacho]

First of all, he'd worked in the back office, so he'd know both people and procedures.

Second of all, anyone who's ever worked in finance can tell you big banks are chaotic. It's not really that strange that he can go about his business undetected for a while, because there's loads of traders with loads of portfolios. And most people on one desk are not going to be experts on the business of another. UBS has had a number of restructurings since the financial crisis. People are moved on, some desks are closed, some are merged, it's gonna be a mess. Makes it easier to hide.

Third, risk officers are not what you think. They are not the internal police, vigilantly keeping an eye out for every possible transgression. They look at the positions, calculate the risk (big can of worms, don't ask), and when someone is over their limit, they show up at the trader's desk and are told to fuck off.

Finally, it is not at all clear that technology played an important role in this fraud. Yes, some HFT market makers trade ETFs, but it's not clear his desk was. That doesn't mean a software error caused it, or that the fraud could not have occurred without whatever system he was using. From efinancial (which you need a subscription to read) the latest rumour is that he messed up a hedge in EURCHF, and his attempt to fix it made it worse.

Re:Not so surprising

[afidel]

I don't know, I'm pretty surprised that things are lax enough that a single trader can lose ~9 months of the companies profits.

Re:Not so surprising

[LordNacho]

Profits are quite variable at a big bank in turmoil.

I can understand your surprise, but he's trading financial products. Most of them are simply numbers on a screen. There's no extra effort involved in buying 100M bucks worth of something over say 100K. It's not like if he bought and sold widgets which actually have to manufactured and delivered. And for the same reason, the bosses can't see him doing it either.

And if you wonder why it can be done at all, it's because you have to move a lot of money around to make money in this business. Suppose you're doing an arb of 100M of eg Coca Cola vs 100M of Pepsi, your risk is pretty low. (One cancels the other). But if you were to do just one of the two, you're suddenly taking a huge risk. But who is gonna be able to tell from casual observation?

Big banks in particular have a bunch of stuff going on, hirings and firings, new systems, that type of thing.

Re:Not so surprising

[HornWumpus]

Big banks don't run VAR reports nightly (or more)?

VAR is designed to aggregate portfolios risk so you _can_ tell from casual observation.

Value at Risk is just a tool and has problems and limits. Catching 2Billion positions should be well within its grasp.

Re:Not so surprising

[RogerWilco]

arb? I can't follow what you're saying in the Coca Cola vs Pepsi Cola example. Can you elaborate?

Re:Not so surprising

[Savantissimo]

That makes sense. For those not paying attention, EURCHF moved several percent in just a few minutes (1.12 to 1.20 IIRC) when the Swiss central bank decided to peg to the Euro. That is several times the expected daily range and about a hundred times the expected range over such a short period. Ordinarily since movements are so small, currency trades are highly leveraged, often 10x or more. Even small traders have trades nominally worth several hundred thousand euros. When the market gaps in price, stop-loss orders are not honored at the level the trader set if that stop was set in the price gap, but only when there is a matching order or set of orders on the other side, which might not have happened in the EURCHF case for several hundred pips (each pip worth 10 euros for each contract of 100,000 euros, which he likely needed only 2,000-4000 euros margin initially to obtain.) If he was on the wrong side of 6400 contracts that broke 500 pips past his stops, he could have lost $2B on a trade he thought he was only risking a few $10s of millions. Using options the risk surprise could be even worse.

Re:Not so surprising

[GlobalEcho]

UBS runs VaR frequently. They have their own internal system, which isn't cutting edge but gets the job done.

The losses are $2B, but the positions that made those losses, especially when aggregated with other traders', may not have looked so large. But since this guy had also worked in the back office, another possibility is that he "hacked" the risk management system, for example by setting an override that would treat the EUR/CHF price as a constant during risk runs.

Re:Not so surprising

[LordNacho]

Suppose you're making the following assumption: Coca and Pepsi prices should roughly move together, because they essentially do the same thing. For simplicity, suppose they're both normally 100 USD each. Once in a while, for various reasons, Coke goes to 105 and Pepsi goes to 95. So, guessing that the long run price should return, you sell Coke and buy Pepsi. That's a statistical arb. (Not a pure arb, which would be sth like sell in London to buy in NY at the same time). Anyway, if you're and arb trader, this is the kind of thing you're doing all day long. You see Pepsi at 98 and coke at 102, you do the opposite to what I just said. And get out for a profit, hopefully. Of course the spread might move against you, that's a risk. But that's different from if both Coke and Pepsi moved up, to say 110, because you're long one and short the other.

Now this guy was on an ETF desk. ETFs are essentially the same as a stock, but they follow the index. So if the basket of stocks is under the index price, you could buy all the stocks and sell the ETF, and liquidate for a profit when the prices matched again.

The thing is, your guy at UBS has to have the flexibility to buy some ETFs sometimes, and to sell the individual shares. So if he just buys a load of index, who is gonna know if he "forgets" to sell some shares? In that case, he's just got a long position in the index, with nothing offsetting. Much bigger risk.

(My examples are simplified, actual arb trading has a load of complications.)

Re:Not so surprising

[LordNacho]

There's a couple of shenanigans you can do. If your firm is amateur enough, you can put in manual trades that weren't real. In other words, because he's a voice trader, he could type in a trade that offsets his big position, but isn't matched by a counterparty. This will naturally create a "break", but some shops have a special portfolio in which error trades are dumped. If the dude has backoffice connections, he might be able to "explain" the discrepancy to someone, and they'll leave it, because there's a thousand other little trades people have dumped there.

Another thing you can do is create transfer trades, so that you have a buy and a sell between internal portfolios. The price you transfer at, if not the market price, will move PnL between accounts. I worked at a shop where a guy got busted for this. He tried to give himself money from another trader's book. Not clever.

Another thing to note is that VaR measures risk. (Well, heh, it's supposed to.) If you move losses into the past by messing with the dates, it won't show up in risk reports. All this sounds ridiculous, but it's perfectly possible that nobody checks the previous days' PnLs AFTER they've been recorded at the end of the day. This is crazy as well, but if you really want to hide stuff, it helps to have known a few back office staff. Also, keep in mind the aggregate is the aggregate of quite a number of positions, from various strategies and traders. The VaR leading to the loss might be quite small in comparison. Remember you can lose over x even if VaR = x. It's only a percentage chance.

Oh, and finally, the most obvious thing you can do is to not put in the trades that led to losses. This will also result in a "break" when the counterparty gives up the trade, but unsettled trades are commonplace. Your VaR will look fine. You can pretend for a few days you didn't do it, until someone digs out the tape of the conversation.

Re:Not so surprising

[HornWumpus]

If your trade is on a thinly traded commodity you can also setup the proxy commodities deliberately wrong. Again you would need back office co-conspirators.

That assumes they did VAR on thinly traded stuff the same as my former employers.

Re:Not so surprising

[HornWumpus]

Why wouldn't they run VAR with totals per trader? Seems like common sense.

Once position records are generated re-running VAR is fast.

Re:Not so surprising

[blair1q]

it's not the crime that takes you down. it's the coverup.

the question is, did his attempt to fix it consist of martingaling hoping he could even it out, or did he do something else he didn't understand and fuck that up too?

Re:Not so surprising

[LordNacho]

We'll have to wait for more details for that.

Re:Not so surprising

[GlobalEcho]

I've got no answer for you there. All I can say for sure is that UBS runs VaR. How exactly the reports were ignored, deleted or altered might be broadcast someday, but there are lots of possibilities (e.g. the override I mentioned).

Re:Does anyone care?

[LordNacho]

They've been having board-level meetings about improving their risk management. I'd expect head to roll.

Here's the guy:

[oGMo]

UBS Rogue Trader Loses $2 Billion In Unauthorized Trades

They're investigating now. Apparently it was this guy:

@

Report anything to the nearest K. Last seen running toward a > .

Re:Here's the guy:

[blair1q]

don't let him get to the %. if he goes down there we'll never catch him.

signed,

H

Re:Here's the guy:

[WebManWalking]

Oh, it's that rdctd fckhd again. I've seen a lot of stuff by him lately.

2 Points

[alexander_686]

Your right but....

ETF & Delta Hedging – the desk he was on - tend to be “commodity” trading. Simply, low risk / low profit stuff. It’s mostly arbitrage in the classic sense. Pounding out pennies as they say – and you make up the profit with large volume.

As for many players – maybe yes – maybe no. For example, the largest ETF out there is Blackrock’s S&P 500 (SPY). Because it is open ended, this means that Blackrock is contentiously creating shares (and thus having to buy the underlying stock) or destroying shares (and thus having to sell the underlying stock). If he was on the ETF desk and was working with Blackrock (I don’t know if it was Blockrock – but if he were on the ETF desk it would have been with whomever the sponsor of the ETF was) he may be only dealing with a few trades.

Re:Digital money

[infodragon]

This was a trader, not HFT. He was manually calling in trades, either through a computerized system or through UBS's trading desk. The money was lost over a period of time in which he was probably exploiting loopholes in the controls of UBS. It's really disturbing seeing the trend against HFT when there is no evidence to show how it's being perceived. The flash crash last year was not caused to to HFT but due to a fund selling $4.1bn in E-Mini S&P futures.

From Wikipedia...

http://en.wikipedia.org/wiki/2010_Flash_Crash

The joint report "portrayed a market so fragmented and fragile that a single large trade could send stocks into a sudden spiral,"[10] and detailed how a large mutual fund firm selling an unusually large number of E-Mini S&P 500 contracts first exhausted available buyers, and then how high-frequency traders (HFT) started aggressively selling, accelerating the effect of the mutual fund's selling and contributing to the sharp price declines that day.

Still lacking sufficient demand from fundamental buyers or cross-market arbitrageurs, HFTs began to quickly buy and then resell contracts to each other – generating a “hot-potato” volume effect as the same positions were rapidly passed back and forth. Between 2:45:13 and 2:45:27, HFTs traded over 27,000 contracts, which accounted for about 49 percent of the total trading volume, while buying only about 200 additional contracts net.

"a large fundamental trader (a mutual fund complex) initiated a sell program to sell a total of 75,000 E-Mini contracts (valued at approximately $4.1 billion) as a hedge to an existing equity position."

--- end quoting

I just roll my eyes... "portrayed a market so fragmented and fragile that a single large trade could..." It was a sell order for $4.1bn let me type that out... $4,100,000,000. Anybody have any idea what that does to available liquidity? No time in the history of the US markets could they have withstood this type of hit. HFTs provided liquidity during that time, higher spreads but without the HFTs the bottom would have fallen out. The drop would have been MUCH MUCH worse.

Right now HFTs are the target of a smear campaign by the SEC, it's a scapegoat. HFTs almost uniformly lost their butts that day. Read between the lines and stop drinking the Kool-Aid.

Two more things I'll hold your hands on... a large FUNDAMENTAL trader, this means somebody who trades on fundamentals not technical analysis, which is critical to HFT, initiated a trade for 75K contracts. HFTs passed that around for a volume of 27K almost 1/3 of that... So if you try to take the worst slant on that they provided liquidity to 1/3 of the order that started this. hmmm... what if HFTs weren't trading that day... others would have had to absorb over 33% of that hit. The result, Armageddon!

Sometimes I don't know why I try... I guess the Kool-Aid is too tempting.

This is the same ***hole!

[Kamiza Ikioi]

This is the same A-hole who requested an iPad with company paid data plan from AT&T from IT! I knew he was up to no good the moment he mentioned AT&T! Think how much money would have been lost paying those data overages!

- UBS anonymous IT personnel (not authorized to make a statement)

Looking for a New Job?

[MichaelCrawford]

Quantitative Investment Software coding is just about the highest paying work a software engineer can get. The jobs typically start at $150,000 per year, and can pay as much as a million if you're really good. It's all written in C++, with Linux being the operating system in recent years.

But you have to work in New York City. I don't want to live there, I think I'd go nuts. I've been looking for West Coast quant work, but none is available. You'd think there would be, as all the investment houses have offices in the West, but I guess they don't do their development there.

Re:Looking for a New Job?

[gknoy]

I expect they need their dev houses to be near their real datacenters, which have to be in close physical proximity to the markets.

Re:Looking for a New Job?

[Bucky24]

From what I understand, $150,000 is not that much if you live in NYC.

Re:Looking for a New Job?

[LordNacho]

Their datacentres will be colocated with the exchanges, and nobody from the firm can access them. You have to call the datacentre and get "remote hands" to do your plugging in wires, reboots, etc, at any time during at the day.

They don't really need to be in NYC, it just happens to be a financial centre.

Re:Looking for a New Job?

[TurtleBay]

You need to be in NYC as the programmer is usually in a team with the Ph.D in Econ Guy, the crazy math Statistics and Stochastic Calc Guy and the Finance Guy.

Re:Looking for a New Job?

[LordNacho]

Yeah, exactly. The kind of guys that you can find in a financial centre.

Quite a number of small HFT teams can be found outside of London/NYC after they've established themselves.

Re:Digital money

[DynamoJoe]

I really misread the name of that law.

Poor Elmer Fudd's got deviant testicles.

Re:FIRED ??

[DynamoJoe]

Meh. He's nothing special. We've got a congress full of people like this.

Actually, there are benefits

[unassimilatible]

HFT has increased liquidity and lowered transaction costs for the retail investor. And how would a delay help? As soon as trading resumed, it would be speed of light machines v.s my fat fingers.

Re:Actually, there are benefits

[tqk]

And how would a delay help? As soon as trading resumed, it would be speed of light machines v.s my fat fingers.

You know that game in casinos with the spinning wheel and the little ball?

"Players" place their chips on numbers they think the ball's going to land on. At some point, the croupier announces "No more bets." Then he spins the wheel and launches the ball. When it lands, winners and losers are tallied, then you start over at the beginning.

Your fat finger trades and the HFT trades can go on side by side until the moment trades are executed. HFT can get a lot more trades done than you and your fat fingers in that time, but HFT will be constrained from gaming the system via milking the milliseconds between trades.

Or, that's the theory.

Re:Actually, there are benefits

[tehcyder]

HFT has increased liquidity

Whose liwquidity?

How is this computer trading's fault?

[unassimilatible]

""I wonder how this will reopen the debate about the role of computer systems in the trading and the safeguards that are supposed to protect against these risks. But if microseconds mean millions in trading ... who has time for checks?""

This sounds like part of the closing summation from the culprit's defense attorney. Blame the computer? HFT had nothing to do with this. A man caused this withhis deliberate actions, not an algorithm.

Re:Digital money

[TooMuchToDo]

A whole lot of effort in that post, and I still want HFT firms and the people who work there gutted. Good luck with that.

http://www.zerohedge.com/news/goodbye-high-frequency-trading-regulators-seek-secret-hft-codes

The requests for proprietary code and algorithm parameters by the Financial Industry Regulatory Authority (FINRA), a Wall Street brokerage regulator, are part of investigations into suspicious market activity, said Tom Gira, executive vice president of FINRA's market regulation unit.

``It's not a fishing expedition or educational exercise. It's because there's something that's troubling us in the marketplace,'' he said in an interview.

The Securities and Exchange Commission, meanwhile, has also begun making requests for proprietary algorithmic trading data as part of its authority to examine financial firms for compliance with U.S. regulations, according to agency officials and outside lawyers.

The requests by SEC examiners are not necessarily related to any suspicions of specific wrong-doing, although the decision to ask for it can be triggered by a tip, complaint or referral.

Fucking scumbags is what HFT firms are.

Nobody noticed?

[cvtan]

So $2 billion vanished and no alarms went off? I am impressed. Almost as good as Solyndra going out of business after getting $500 million loan from govt. Even if you do nothing, how do you go out of business that soon after getting a giant pile of $$$? Those private sector guys crack me up with their zany antics!

Re:Nobody noticed?

[tehcyder]

So $2 billion vanished and no alarms went off? I

Er, I don't think it was like cash in a suitcase or anything

Re:Digital money

[flaming error]

> If no one GOT this money? It never existed.

Nearly all our money originated with fractional reserve loans, making it fictional money. Take the entire US money supply, subtract Fort Knox and the Strategic Oil Reserves, and the difference is all vaporware.

Are you sure this is not a front?

[roman_mir]

Are you all sure this entire story is not a huge lie, that this one trader is not used as a scapegoat, a fall guy for a larger systemic problem at the bank? On one hand knowing how Credit Swiss and UBS handle customers I can sort of believe that there is large level of confusion and things are not, as you would expect them, at least not what engineering types would expect it to be. It's like you are always trying to build a better system, a system that handles transactions properly, a system that does not allow errors, but when you deal with some banks, it's as if they are still ran with pen and paper, it's amazing. (though it's not true, they do have computer systems, but sometimes it feels like their computer systems have routines there, that create chaos, havoc and confusion on purpose). But seriously. 2 billion dollars in this case. There was a guy who lost 6-8 billion a year ago or so in some French bank.

Maybe, maybe. Or maybe the bank is using this guy as a stooge, a sap, somebody to take the fall in case some shady deals go wrong. After all, do you hear about banks catching such cases, where money was made and not lost? I mean if somebody used bank resources to trade and to make money for themselves personally, they would have to draw that money out somehow.

--
In other news the Federal reserve bank and national banks of UK, Switzerland (fuckers) and Japan came out with a strategy to ensure that the paper currencies are destroyed even faster by printing more of it to buy all the outstanding short term securities that USA is issuing or that are maturing. It's all nonsense, it forced a bunch of people to cover a bunch of short positions in a bunch of commodity markets (those who hedge against their dollar and other currency reserves by using commodities), because this news of the national banks is more inflation, the relative prices of commodities must go higher, so people are buying to cover shorts.

The DOW and other markets go up in dollar and other currency terms of-course, because again, this is more inflation.

Interesting times, as always, wrong solutions driven by wrong understanding of economics, as always.

We really should actively discourage microtrading

[jbeach]

It doesn't do *crap* for the main alleged purpose of the stock market - investing in worthwhile companies and business ventures as opposed to less worthwhile ones. Basically microtrading is just a way to shave money off of **everyone else's** trades and pocket the difference. Making money by taking it from other people trading, and NOT because you've made a wise investment in a good company.

OF COURSE it results in instability. It takes the irrationality of people's emotions that's already a play in the market, and then it does more emotionally-charged guessing based on that. It's instability squared.

One of the best ways to discourage it would be for the US to just start charging a fee for every chunk of shares traded that's more than, say, 1000. Something like $.50 . That could cut down the profits, AND help pay for some programs to dig us out of the whole Wall St. put us in back in 2008. Maybe even some enforcement for the SEC (imagine that?)

Re:More basic problem that computer systems' speed

[HornWumpus]

The person administering the basket risk is supposed to not a have an interest in the basket.

Typically you proxy a thinly traded commodity to one or more commodities for which market data is available. Setting that proxy up wrong is how you could game the risk management system. Of course that is _not_ the traders job.

Re:Digital money

[infodragon]

First off I don't work in HFT... Secondly you are entitled to your opinion and feelings. Thirdly is your derision aimed solely at HFT or is it all algorithmic trading? Many of which, HFT is only a small portion, hold positions for days, weeks, months, years...

So what evidence do you have, other than the Kool-Aid from the SEC, that HFTs are any worse than other conventional financial players? All government entities look for scapegoats when they come under fire. Since Bernie Madoff the SEC has been on the hunt and FIRNA is just a patsy of the SEC. On top of the economic collapse all government entities try to create scapegoats. The black box that is HFT gives them the perfect target, 99.99999% don't understand it so its easy to makeup whatever you want!

A Dummy Account for Manipulating the Markets

[h5inz]

It could have been a dummy account for manipulating the markets. They have to search for another trader(s) somewhere, who bought before it bought and short selled right before it selled a huge amount of some stocks for less than the market value.

Re:We really should actively discourage microtradi

[roman_mir]

I don't believe this has anything to do with 'micro-trading', you won't lose that much money in microtrading, there you make money by sucking it out of the system efficiently :), but you can't fix HFT without fixing the underlying fiscal misconceptions.

Re:FIRED ??

[SmurfButcher Bob]

Oh hell... HP? Is that you?

Re:Digital money

[TooMuchToDo]

First, I almost worked at Teza in Chicago (a high frequency trading firm). I think, between the job interview and speaking to people there, I'm qualified to comment on the subject to an extent. Also, while not a professional economist, I have enough knowledge with regards to market liquidity to understand that HFT firms aren't required to provide the liquidity they so often proclaim is such a wonderful function of what they do.

HFT firms provide no value; they are a check valve sucking cash out of whatever market they're interacting within. If you work for an HFT firm, while I can't wish ill against you, I wouldn't exactly shed a tear if you were on the street. I'm not saying they're the only problem, but proclaiming "BUT! BUT! They're are other bad guys too!" is like trying to justify being a rapist because murders still exist.

Fuck HFT firms.

Re:Does anyone care?

[umghhh]

I think the boss of the guy resigned already. Still come to think of it there is something wrong with finance sector. Take arbitrage - it serves a purpose but if done in milliseconds tact it actually does not serve any purpose other than screwing others out of business - why is high frequency trading at all allowed I do not know especially as some of big actors can look into the future. Take so called innovation in finance - the economist run a polling once on whether innovation in finance is actually a good or bad thing - it turned out people believed it is not such a good idea. Seems like an old idea of Kenneth Galbraith - published long time ago - still a novelty for some. Take CDS or some other nonsense like calling finance sector an industry as if they produced something - hey does it not worry you that your bank is producing something? They were supposed to hold your money and invest now they produce something - what could this be? I guess something is wrong - yet nobody is not willing to look at it in a way control theory has it - put some breaks and it will stop swirling out of control - this however prevents them from making another stash of (mostly virtual) money - guess a change will come only if something really drastic happens. I hope I will not be around when it does.

Other than that - it is only 2 billions. German gov threw 150 at HRE only to throw some more and now it is doing the same with Greece - I guess 2 billions is not such a big sum after all.

Money makes the world go round

[TiggertheMad]

It is an interesting statement. At first i was going to disagree with the parent poster like you did, but consider the broader question, what is money? In the contemporary sense, money is issued by governments base on GNP projections and other factors. Sure, the market is zero sum in the sense that every time a transaction occurs, one person goes up x ducats and one person goes down x ducats, but it is being purchased with money from a central money source that just wills money into and out of existence on whim.

If there were an exact formula that governed the creation of money down to the last cent, I might agree with you, but it is really just a lot of really educated guesswork. Since the money is the medium that defines market values, I don't think that you can divorce the two, and money is very much an non-zero sum game.

So, I back the parent poster. The stock market is not a zero-sum game.

Re:Money makes the world go round

[xelah]

It is an interesting statement. At first i was going to disagree with the parent poster like you did, but consider the broader question, what is money? In the contemporary sense, money is issued by governments base on GNP projections and other factors. Sure, the market is zero sum in the sense that every time a transaction occurs, one person goes up x ducats and one person goes down x ducats, but it is being purchased with money from a central money source that just wills money into and out of existence on whim.

Money is a tool, it's part of the game but it's not the output or payoff of the game. The payoff of the game is the consumption of goods and services. If the game participants' behaviour affects the amount of consumption that happens then the game is not zero sum.

If there were an exact formula that governed the creation of money down to the last cent, I might agree with you, but it is really just a lot of really educated guesswork. Since the money is the medium that defines market values, I don't think that you can divorce the two, and money is very much an non-zero sum game.

Money is the unit in which all market prices are expressed, but absolute amounts of money get their meaning from the market prices expressed in that currency. Is $1m a lot? That depends on what you can buy with it. Is something worth $1m? That depends on how it compares to the other things you could buy with $1m. All prices are ultimately relative. Double all the numbers and they carry the same information. If you could define the absolute intrinsic value of an object you could define the absolute value of money. It's not obvious the question even makes sense.

Can someone remind me?

[MMC Monster]

I can't remember. Is $2 Billion considered a lot of money to UBS?

Re:FIRED ??

[leonardluen]

it said that it was unauthorized trades, so i would assume he was arrested for either fraud, embezzling, or theft of that $2 billion.

he was likely hoping that he would make even a 1% profit and return the $2billion before anyone at the company noticed what happened. and then he would retire the next day.

Re:Digital money

[infodragon]

I love the miss-characterization... Goldman Sachs is one of the worst entities in the financial industry. Taking out CDSes from AIG for their CDOs then knowing it would bankrupt AIG they bought insurance from another insurance provider against the event AIG would go bankrupt. They screwed AIG, they screwed Wall Street and they screwed Main Street. Big GOV stepped in and screwed Main Street even more so they could salve the violated cavities of Wall Street and AIG. Then Big GOV steps in and fines Goldman just over $400m which is a parking ticket compared to what they made. Average Joe has no idea that $400m is not a lot of money compared to what was gained and so is pacified that GS PAID.

The list goes on and on, but there are many good banks, investment banks, hedge funds, HFT funds... You don't kill off an entire tranche of an industry because a few are bad, otherwise there would be no industries.

As to your comment about an economist and having one interview, you should know that a sampling of one is bad. Did you have a personal interview or was it a phone screen? For something like that there are typically 3-4 phone screens before you get a face to face. You may have had an interview with a bad company, I've had a few myself its not fun. Also was an offer made? If not why was the offer not made? If no offer was made or you did not make it to the face to face then you did not have what they wanted. Rejection is bitter and I sense some bitterness from you. I am only going off what you say in your comments and am probably miss-characterizing them. It's a slippery slope and I hope you see my comments for what they are worth, an attempt to expose your possibly innocent miss-characterization of my comments. Though perception is formed from the perspective of the observer...

You imply a lot in which it would seem that you hope others infer that you have something of substance to your comments. So far your arguments are as structurally sound as a wet paper bag. Provide a little more backing and I'd be happy to adjust my thinking and publicly state as such.

Rogue Trader gone bad? Only one thing do to, then.

[Chris Mattern]

They should revoke his Imperial Warrant!

Re:Don't follow the market do you?

[rickb928]

HFT accounts for 60-70% of volume every day, news or not, events or not, doesn't matter.

If you trade on current events, you do live and die by that sword. But the quants implement trader speculations and blend them into the stream of HFT that is pure arbitrage, on a microsecond scale.

Yes, other than the occasional flash crashes caused by interacting or misperforming algorithms, market swings are often driven by news and events. And these swings usually correct well, with exceptions.

HFT distorts this by playing the game on an entirely different scale.

Re:Digital money

[NoSig]

The problem with HFT isn't just that it is too fast for a human to pull the brakes in case of something going wrong. The basic problem with HFT is that it is profitable without creating anything. So the HFT profits are just extracted from everyone else while contributing nothing of value. The best I've ever heard HFT apologists come up with is that HFT provides liquidity to the rest of the market. But a HFT trader won't buy something to hold on to for more than a fraction of a second (or by definition it wouldn't be HFT), if things go according to plan, so if I'm trading at a reasonable human speed of a few actions per minute, that does nothing to help me sell or buy. All that occurred was that some amount of money is now in the pocket of the HFT, and no benefit was provided to anyone else trading at human speed that I can see.

The problem here is that trading faster than humanly possible is pointless in itself - there is no intrinsic benefit. The only reason HFT traders want to trade at superhuman speed is that they themselves gain a benefit from trading faster than everyone else. Suppose tomorrow that we could somehow make everyone able to trade 1000x faster. Does that add anything of value to the world? I don't see it - but feel free to enlighten me (yeah, if it goes from a week to minute, then yes, that could be a benefit, but we are talking about sub-second trades here). Suppose tomorrow we make trades faster than 1 second impossible. I don't see anything has been lost to the world there either. Contrast to something actually useful like agriculture. If we could make agriculture 1000x faster, that would have a tremendous impact on the world, because agriculture is useful. The only effect of HFT I can see is to distribute wealth and effort in an inefficient way.

It's much like insider trading - as an insider you can do something that gives you an advantage in the market, yet the thing you can do isn't actually useful to the world. All it does is redistribute wealth to you even though you didn't do anything useful. That is not a good thing.

Re:Digital money

[LordNacho]

Why don't you expand on what you found out at the job interview?

Re:Digital money

[LordNacho]

I think this is misinformed. A couple of general issues, and then on to HFT itself:

1) Cab drivers do something that is profitable without creating anything. Waiters do something profitable without creating anything. Neither of those is especially controversial. Why should HFT be required to create anything?
2) Optionality is worth something. Got a 24-hour convenient store that you've never bought anything at? It's still of use to you. Liquidity is just that. It's useful to know that it's there, even if you don't think you'll use it. (There is the common complaint that HFTs vanish when panic sets in, which is somewhat valid. But real traders would do the same.)

Now, does it help to be able to trade at lightning fast speeds? I certainly don't, but I can see why HFTs do. Quite often all they're doing is offering something in one market and waiting to take in another market. Arbitrage, basically. If you're going to do this, you want to minimize the period of uncertainty during which you don't know your position. If you can't be sure you can get your hedge off, you won't leave as much in the market for other people to take. Less liquidity, everyone loses.

Re:Digital money

[infodragon]

"The problem here is that trading faster than humanly possible is pointless in itself - there is no intrinsic benefit."

So building cars faster than humans with computerized machinery has no intrinsic benefits? That's the logic you are utilizing.

As to making the money, where does it come from? It comes from the market makers on the floor. Just as manual labor is being replaced so are the floor traders that used to provide the liquidity. When there were no computers the traders on the floor, market makers, were competing to get ahead of the others, their competition. Now that we have computers with algos that simulate what the MMs do they are competing with other algos. The computer reacts much faster than a human so it is only natural that they compete in the microsecond realm, soon to be nano second. The benefit is tighter spreads which means better price discovery which means better market efficiency which means a better price for Joe Trader. The profit that goes to HFT didn't come from Joe Trader, it came from the MMs who had wider spreads because they couldn't react as fast.

When things go wrong, they go WRONG. Please observe

http://en.wikipedia.org/wiki/List_of_largest_daily_changes_in_the_Dow_Jones_Industrial_Average

9 of the top 10 largest percentage drops in the Dow Jones happened before 1990. This would ague the fact that algo trading has stabilized the markets. The flash crash was about 9% drop which would be #5 on the list if it closed at the day's low. DISCLAIMER: One data point is always "bad" when attempting to draw conclusions but I'm not attempting to conclude the matter. There are many more far more informed and intelligent than I who have attempted this.

Also there is a lack of clear communication. What you are referring to is Ultra High Frequency Trading (UHFT.) I have worked with HFT that would buy/sell many different products as the algo adjusted then hold when it came to a "final" decision. This hold could extend over hours if not longer. This is the scarey part because it exposes the Black Box that I alluded to earlier. HFT means different things to different people which allows anybody to say anything and make up their own facts.

Re:Digital money

[TooMuchToDo]

NDA

Re:Digital money

[infodragon]

In many interviews, face to face, I had there was one NDA. There is MUCH I could discuss about that interview that would not violate the NDA. I smell straw man defence. If the NDA says you cannot speak about anything in the interview, which means you cannot work with anything that was in the interview then it is incredibly foolish to sign.

Re:We really should actively discourage microtradi

[LordNacho]

The UK charges 50 bps on share purchases. This does nothing to stop trading, because it is necessary for market makers to be able to trade without this fee. The MMs then do a CFD contract on the shares, giving the same result.

Re:Digital money

[LordNacho]

Dude, this is the internet. You can say whatever you want, even name companies. They won't come for you.

I wonder...

[anyGould]

If the guy had made 2 billion, would they still be "unauthorized trades"?

Re:Digital money

[TooMuchToDo]

You have no idea the money that was involved for the position. I easily signed an NDA just to interview.

HAHAHA

[Weaselmancer]

And the winner for worst advice ever given goes to...you!

Right...nobody ever gets busted for anything on the internet ever. It's a safe haven! You can do what you want here with no chance of repercussions. The RIAA doesn't exist, the Feds don't troll chat rooms looking for pedophiles, cops don't check Facebook pages and bust parties. These are all rumors.

Hey, as much as I'd like to hear what happened at the interview - an NDA is an NDA. They have you sign them for a reason. And it takes only one lawyer to ruin your whole entire life.

Re:HAHAHA

[LordNacho]

LOL. Who the hell thinks they're being told anything remotely interesting at a job interview?

I suppose you've got a point though, it is the small fish that tend to be fried in internet related funnies.

Bogeyman (CHF) Got Him?

[krisamico]

If this guy was at an equities desk and suddenly needed a "miracle", I am wondering if maybe something like FXF got him. Huge one day loss after the SNB bolted the top of the swiss franc to the euro. Being long the swissie for a million a pip before the last big intervention might have done him in. Not sure what else it could have been. In any case, this guy is only a "rogue trader" because he lost money. I will wait for an earnings restatement from UBS, then I will go long if I get a chance.

Re:Digital money

[UnresolvedExternal]

Yep me too - total hadron collider moment there....

Re:Digital money

[Red Flayer]

9 of the top 10 largest percentage drops in the Dow Jones happened before 1990. This would ague the fact that algo trading has stabilized the markets. The flash crash was about 9% drop which would be #5 on the list if it closed at the day's low.

Except t would have gotten much worse. They suspended trading to prevent it from getting worse due to algo HFTs reacting to the shitstorm. That's antithetical to the liquidity they provide, which is supposed to make the market behave more like an ideal free market.

Errrrm, I'm a full time trader myself

[DCFusor]

And what likely happened was something with the Swissie. Currencies are usually traded with a metric crapload of leverage, else the tiny fraction of a percent *normal* differences in the moves make them not worth trading at all, and they need to be traded some for price discovery to make the system work.

The Swiss recently did a jaw droopingly stupid desperation move on their currency. They pegged it to the euro, in the attempt to stem their own currency's appreciation, which was ruining their trade with other countries, being thought of as "safe" in a time of turmoil, when so much cash was out of the other markets due to fear (the rest was going into gold). This resulted in a HISTORIC move of over 8.5% in something that normally moves .1% at most a day, overnight...That's a big enough move to really hurt (or help, depending on which side of a trade you're on) a normal trader. Now, with 100x leverage -- wow - even a tiny bet adds up very quickly, for or against you. With 100x leverage, everything is multiplied 100x -- except the money you have to put down to open the trade. In a gross oversimplification, you can bet $1, but lose $100 in that case. Meaning he might not even had had that huge a bet on. A lot of "safety obcessed" individuals also got hammered on this one. (and soon enough, on T bills when the bond vigilantes come out and treat us like the bankrupt jerks we are -- they'll be around as soon as BenB and TimG stop buying them in debt monetization).

Most people figured that when that happened, the safe trade would switch entirely to gold. The thing is, the Swiss needed tons of instant dough to buy Euros with all of a sudden. So they sold tons of gold (literally) and tried to do it when the western markets weren't open. That was too much for the Asian retail investors to eat, so gold went down too -- they (for reasons that should be obvious) didn't give anyone a heads up on this, except perhaps a few special friends, so the whole deal caught everyone completely off. It will fail, but the Swiss had no choice but to try it or face ruin anyway - their currency was so overvalued that they could sell nothing to anyone else, and no country can live with that very long.

Y'all might want to go look at zerohedge (no link, their servers are chronically overloaded as is - but a few more snarks won't hurt the place, just not all slashdot please) for some more on this. Sometimes they publish microsecond graphs of what the *headline reading* bots are doing too, they don't like HFT either, but it had nothing to do with this one. I used to think with my signal processing experience I could blow those bots off, as some of them seem pretty stupid. But they are a little ahead of most slashdotters in text understanding -- they actually can read the news tickers and adjust based on the headlines and content(!).

The SEC is more or less completely owned by the people they are supposed to regulate. Too small, they don't care about you. Too big, they're already bribing you. Middle size is all they do, and they do little of that. It's like with drugs where the big dealer turns in the smaller competition once in awhile to the bribed cops, so everyone gets a benefit -- cops look good, getting a bust, big dealer gets rid of competition, all go home happy, well...almost all. It's a dirty game, but you can still win at poker even with a cheating dealer, if he's not after you personally.

Re:Errrrm, I'm a full time trader myself

[quenda]

Probably a stupid question, but if they think their currency is over-valued, why not just "print" more to buy euros?

Re:Errrrm, I'm a full time trader myself

[janimal]

I'm no expert, but this is what it seems like to me:
Printing is a bit weird; it causes changes in measurement calibration of the money system, while globally, the system will still be unstable. You're only supposed to print enough to cover your GDP growth and keep inflation at a slight positive which makes your mesurements (valuations) constant for certain reference amounts, but you can't influence the system.

Money supply is like water in a container. Usually, there are ripples and waves, but once in a while, you get a tidal wave, because the whole system gets a shock. So here we are with a tidal wave that has just left our "shore" of the container. We don't like the water level, so we just add water on our end to bring the level to something comfy, right? Think what will happen, when the tide comes back. What are you going to do then? Siphon the water? The water is money.. who will you take it from? There is actually no right amount of water to add! You are not supposed to do it, no matter how tempting! (this is assuming you want to keep *average* inflation more or less constant)

So what is done instead is maneuvers that don't add water to the system. You can take the water from another location in the container and put it where you need it. But that takes energy... you need a source. And if the system is very unstable, your source is also going to be difficult to manage... and you're not going to change things anyway. The source of the instability is not the level (exchange rate) of water... so adding water (money) doesn't actually solve the tidal wave problem in any predictable way.

Large masses of money dilate space/time?

[TiggertheMad]

Money is a tool, it's part of the game but it's not the output or payoff of the game. The payoff of the game is the consumption of goods and services.

The payoff of the stock market 'game' is the cash you make when you 'cash out' and sell off stock. I think you are expanding 'the game' to include the separate issue of capturing labor value in the form of hard currency.

The point I was making about currency value being fluid is akin to the issue of measurements when dealing with relativistic physics. One of the analogies that physicists will use is to describe measuring thing with rubber rulers. It seems to be very similar to what is happening in the market, where on a micro transaction level, the game is strictly zero-sum, but on a larger level you are measuring your losses and gains with the 'rubber ruler' of currency value.

Re:Large masses of money dilate space/time?

[xelah]

Money is a tool, it's part of the game but it's not the output or payoff of the game. The payoff of the game is the consumption of goods and services. The payoff of the stock market 'game' is the cash you make when you 'cash out' and sell off stock. I think you are expanding 'the game' to include the separate issue of capturing labor value in the form of hard currency.

No, the payoff of the stock market game is what you can buy with the sale proceeds and dividends. This differs in two ways from your definition of payoff: I'm including dividends and you're not, and I'm expressing them in terms of goods and services and you're not. Narrowing it to sale proceeds only is not legitimate, for obvious reasons. Describing payoffs in terms of money would be legitimate if the correspondence between money and what you can buy with it were fixed no matter what you do in the game. This is untrue because investors change the cost of capital and return to entrepreneurs through their behaviour by changing prices. So, payoff is affected by the behaviour of market participants as a whole in two ways: 1. their behaviour changes companies' and entrepreneurs investment decisions and therefore dividends. 2. their behaviour changes companies' and entrepreneurs investment decisions and therefore the products available for sale in the economy.

I don't understand what 'capturing labor value in the form of hard currency' means.

The point I was making about currency value being fluid is akin to the issue of measurements when dealing with relativistic physics. One of the analogies that physicists will use is to describe measuring thing with rubber rulers. It seems to be very similar to what is happening in the market, where on a micro transaction level, the game is strictly zero-sum, but on a larger level you are measuring your losses and gains with the 'rubber ruler' of currency value.

Yes, on a small level you can imagine equivalences between certain amounts of money and certain bundles of output which break down completely on a whole economy level. Similarly, equivalences between currencies don't work on whole economy levels. Logic which works on a personal finance level no longer works at an economy level.

Re:Large masses of money dilate space/time?

[TiggertheMad]

I separated the value of money to present a simple model and demonstrate how the market is a non-zero sum game. You are really just over complicating things with your argument.

On a transactional level, an exchange is zero-sum. I sell you a share of acme at 34 dollars. I gain $34 dollars, and you lose $34 dollars. This is a zero-sum game.

On a larger level, $34 dollars is being measured with a 'rubber ruler', where what you can buy with it is constantly growing or shrinking, in a non-zero sum fashion. ergo, the stock market is a non-zero sum game.

Re:Large masses of money dilate space/time?

[xelah]

On a transactional level, an exchange is zero-sum. I sell you a share of acme at 34 dollars. I gain $34 dollars, and you lose $34 dollars. This is a zero-sum game.

Again, no. If you sell me one share of Acme at $34, then the right to consume $34-worth of stuff now passes from me to you, and the right to consume stuff in the future (depending on Acme's profits going off in to eternity) passes from you to me. We may value these things differently. The motivation for trading may well be that we value these differently....why else would we exchange them? For example, I may have different time preferences to you (eg, I'm in the middle of my career saving for retirement and you are retiring; or your house/one you're insuring has just fallen down and mine hasn't), or I may have different or changed risk preferences. If I value what I'm buying more than $34, and you value the $34 more than what I'm selling then it isn't zero sum.

Of course, sometimes information asymmetries, agency problems and the rest may mean that actually one of us is ripping off the other or a third party some, or even most, of the time - but without there being the possibility of mutually beneficial trade we'd know that this was always the case and always refuse to trade. In fact, being know to be a well informed trader can be to your disadvantage as it can lead to people refusing to trade with you.

Re:Large masses of money dilate space/time?

[TiggertheMad]

If I value what I'm buying more than $34, and you value the $34 more than what I'm selling then it isn't zero sum.

You appear to have a solid understanding of economics, but you don't seem to to be getting the portion of the discussion that centers on Game Theory. If you value money more than I do and you win $5 from me in a game of poker, that doesn't make the game non-zero sum. Your analysis is insightful, but ultimately incorrect.

Barings Bank Redux

[cmholm]

Until such time as we get the details, this smells to me much like how Nick Leeson's trading in Singapore sunk Barings back in 1995. To rehash: Nick lost big on a trading position, and rather than take his lumps like a man, proceeded to double down with larger and larger trades while attempting to make good his initial loss.

Given the modern day trading culture/technology, this kind of thing is unavoidable.

Re:We really should actively discourage microtradi

[DCFusor]

You don't understand the markets, obviously. Once a stock is bought in an IPO, the company has the money, and you've got a piece of paper, and what you do with it after that has zero -- zero -- effect on that company thereafter, and no, you can't take your 100 shares of GE and demand a clock-radio either. They're out of the picture at that point, entirely. They can choose, or not, to pay a dividend, and can change that at any moment, no recourse on your part for common stock (there are tiers of things where you have more control out there).

If you do things that drive the stock price up and down, the only people affected are other owners of that stock, which may or may not include the issuing company. They're pretty much out of the picture at that point. The only reason they want a high price is so they can get a high price should they arbitrarily (and with no recourse by you) decide to dilute your shares by issuing more to get more cash.

Thus, 99.99% of market trading is all you and the other traders - the companies are mostly uninterested other than for ego reasons (and because it's cheap to pay CEOs in stock etc). It isn't necessarily a zero sum game either. Just today, I sold some stocks, in the morning, as they'd hit my targets at last, and I wanted to take risk off the table. Obviously someone else bought them. Those stocks continued to go up all day. So they made money too, assuming they sold at the close. Later, who knows. The thing that makes the markets tick is that we all have different ideas about what something is worth right now, to that particular player. For every buyer there's a seller.

Investing, buy and hold, is for idiots too lazy who feel like there's a set-and-forget way to riches. Nope, TANSTAAFL in this like everything else. If you did that 10 years ago -- you lost money, both in nominal dollars and certainly in purchasing power. If you trade, you surf the waves and it's all skill, sometimes thrilling. The other players know the score, you're not taking candy from babies, but from idiots with more money than brains, and you know the saying about fools and their money (and yeah, a lot of those fools work for the big banks and I'm doing my level best to steal *my* tax dollars back from those jerks). You musta drank the kool-aid sold by some investment manager who doesn't want to have to work for a living paying attention, and who is afraid that if you ever get "out" - no matter how wise that might be in the situation -- you won't get back in -- with HIM and prop up his butt with fees anymore.

How many banks?

[jacobsm]

I wonder how many banks have not published the story that a Rogue Trader has made a $2 Billion profit while making unauthorized trades?

Re:Digital money

[Gorobei]

If you signed an NDA to interview, you are a seriously junior cog in the machine.

The only point of the NDA is to make you think the firm is super cool and has magical secrets for making money. Oh, and if by a miracle, you actually understand what the real bet is (trust me, you don't) they would like you to be afraid to talk about it.

Re:Digital money

[Mindflux0]

I claim shenanigans. You're either intentionally ignoring the OPs point or didn't understand it.

Your first point about the cabs is an absurd strawman. What the OP meant was that the HFTs contribute nothing of value. He wasn't saying that they're useless because they don't build something, that would be idiotic to claim. He's saying they provide nothing. No physical object, no useful service. They're taking money and giving nothing back. A cab driver takes money and gives back transport. Not at all analogous.

Your second point addresses this. "They provide liquidity." Maybe that's a valuable service but there's been a number of posts here claiming that they don't actually provide that. (Also, I have a 24 hour convenience store here that I never use. There is no way in the world I would pay them just to be there even if I never bought anything from them.)

Re:Digital money

[dragonturtle69]

Yep.

Synchronous clocking

[Richard_J_N]

This problem has been solved before, for clock distribution on large chips. The way to make it slower, and *fairer* is:

1. All transactions execute at 00 seconds past the minute.

2. Between 10 seconds - 30 seconds past, the results of the transactions are confirmed.

3. Beween 30-50 seconds past, people or algorithms decide on and submit their next bids.

4. Then there is 10 seconds to get the next bid in, and the executions happen simultaneously.

It also means that the speed of light needn't disadvantage more distant traders, and gives the humans a chance against the machines. Also, because the total trades in an hour goes from ~ 100k to just 60, the speed of market-crashing is reduced.

Re:Synchronous clocking

[kikito]

I agree. It's obvious that allowing micro-second level transactions aren't a good thing in general. I don't know how they got away with that in the first place.

Re:Digital money

[TooMuchToDo]

I don't think you're a small cog when you're offered $320K/year and report directly to the CTO/partner, but heh, that's just me.

The NDA was put in place so we could discuss specific timing advantages they had over competitors.

Re:Digital money

[smellotron]

Your second point addresses this. "They provide liquidity." Maybe that's a valuable service but there's been a number of posts here claiming that they don't actually provide that.

Providing liquidity is useful because it reduces bid/ask spreads and lowers volatility. However, as at least one other poster mentioned, most HFTs—most traders, really—are not required to provide liquidity. That role is reserved for a handful of entrenched registered/lead/designated market makers (most of which are probably HFTs by now, simply out of necessity).

Also, I have a 24 hour convenience store here that I never use. There is no way in the world I would pay them just to be there even if I never bought anything from them.

To continue the analogy, you only "pay" for liquidity when you trade. A long-term investor should only be interacting with the market once a month, or once a quarter. You're not funding HFTs or market makers unless you trade on a regular basis. In short, I agree with you: you shouldn't pay for liquidity that you don't use. You don't.

A few corrections

[Anonymous Coward]

This move by the Swiss national bank was discussed a lot here in Switzerland... A few corrections:

1. The Swiss franc is not pegged to the euro (meaning a fix exchange rate), they only fix a roof price for the Swiss franc (in euros).
2. They need not sell gold to buy euros. They can just offer Swiss francs at the price of 1/1.2=0.83 euros per franc. Of course they can use several options at the same time.

The bank can sell as many francs as they want, no risk they go beyond their capacity or something. The only risk is creating inflation. This might occur in the long term; for now, we are still worried by a possible deflation, so the politics won't pressure the bank to stop printing money.

Thus the franc will never rise above 0.83 euros, but it might go below.

To jusdge this a "jaw droopingly stupid desperation move" is premature, the future will tell us is they end up making a profit, or facing huge losses, and whether it matters.

Re:Digital money

[Dr_Terminus]

In response to your point 1), I think your analogy is flawed. Yes, both cab drivers and waiters don't 'create' anything, but they both provide a service for the money they earn. On the other hand, what useful product/service/etc does HFT provide? What value is created by HFT (other than the $$$ coming out)? Its just shuffling money around and taking advantage of fractional differences in markets. Nothing more than a shell game.

Re:Digital money

[tehcyder]

> If no one GOT this money? It never existed.

Nearly all our money originated with fractional reserve loans, making it fictional money. Take the entire US money supply, subtract Fort Knox and the Strategic Oil Reserves, and the difference is all vaporware.

Yes, and when you buy a car or computer with this non-existent money, you don't actually own it. And if you take out a mortgage on a house and don't receive the loan in gold bars you don't actually owe it to anyone. Oh, wait...

Re:Digital money

[LordNacho]

Used car salesmen? How about that for an analogy. They do precisely the same thing as market makers. They are just shuffling cars around and taking advantage of fractional differences in markets.

Re:Digital money

[Dr_Terminus]

Hmm, still not sure that analogy holds. The used car salesman provides both a good (the used car) and a service (advertising/buying/selling of cars). The used car salesman analogy would apply I think if you were talking about the services provided by the traders themselves to clients. But within the actual trades themselves, theres nothing there.

I think a better analogy for HFT is this: lets say that using an ultra-sensitive, high-speed camera system, you could calculate with a high degree of accuracy the movement of the ball on a roulette wheel. And for whatever reason, this roulette system allowed betting during movement of the roulette wheel. Then I'd say you could make a fair amount of money using this setup if you had an automatic betting system. But I wouldn't say any value is being created here.

Re:Digital money

[tehcyder]

There is no advantage to having "liquidity" based on fractions of a second. Any real life situation that requires access to liquid funds is not going to change in a few milliseconds.

This is all just trading for the sake of it to earn money for the traders, it does nothing to help support actual businesses or real people.

not "discovered" . trader told bank of problem

[eionmac]

BBC has just announced the bank did not discover the error or problem. The trader told bank about problem. So no bank checks or audits were in any way involved until after the problem was known to bank.
http://www.bbc.co.uk/news/business-14943084

Re:Digital money

[LordNacho]

The used car guy IS a market maker. Remember, he doesn't net create any cars. All he does is wait for a guy to sell him a car, then waits for a guy to buy the same car. That's his core business. There's sideshows like financing that I won't deal with (banks have sideshows too). They are completely analogous.

Wrt to your casino analogy, that's already been done. And you say no value is being created in gambling, but gambling is a form of entertainment. People will literally pay the casino to take their money. But that's no different from say, watching a game of football. You're enriched by the experience. People don't whine about the casino always winning. Anyway, I wasn't going to agree with your analogy, just pointing out a few issues down the road with it.

Re:FIRED ??

[tehcyder]

I've yet to see any explanation of exactly what he was arrested for. I'm pretty sure it's not illegal to lose money in the stock market, even large amounts of it. What's the criminal activity here?

He's not trading with his own money, genius.

Re:Digital money

[Dr_Terminus]

I guess we'll have to agree to disagree.

But at the risk of keeping things going, I just want to point out that something of value is moved within the economy when the used car salesman sells somebody a car. Someone who didn't have a car before now has a car. Same with financing - banks lending money to businesses/entrepreneurs/homeowners/etc allows them to expand their business or buy a house, thereby enriching the local economy.

And yes, as you point out, people gamble as a form of entertainment. And no doubt there are some traders on the stock market who trade for entertainment as well. But if I follow your point correctly, I'd say that claiming that HFT is a form of entertainment is a bit of a stretch.

It comes down to this: what value is created by a trader holding a stock for a few seconds and then selling it?

Re:Digital money

[LordNacho]

There is no advantage to having "liquidity" based on fractions of a second. Any real life situation that requires access to liquid funds is not going to change in a few milliseconds.

This is all just trading for the sake of it to earn money for the traders, it does nothing to help support actual businesses or real people.

Here's a very simple strategy a guy told me about: you have two markets trading the same stock. One of them is in NYC, the other is in London. The HFT guy puts some liquidity in the NYC book, expecting to be able to arb it against a London order. Suppose he sees 100 shares in NYC and 50 in London. He then adds 50 in NYC to bring the total to 150. He or someone else might do the opposite, ie adding the NYC liquitidy to London, so you get 150 in each place.

Now, how is this valuable? Well, if you have an investor who wanted to buy some shares, that guy can now invest more at that price.
Why does the HFT need to be fast? Well, there's gonna be more than one guy after the lean in the other market. If you get done on an order, you want to be able to get out asap.

Yes, there's lots of shenanigans that can happen, such as quote stuffing to slow down the exchange, but hopefully that can be gotten rid of.

Re:Digital money

[LordNacho]

"But at the risk of keeping things going, I just want to point out that something of value is moved within the economy when the used car salesman sells somebody a car. Someone who didn't have a car before now has a car. Same with financing - banks lending money to businesses/entrepreneurs/homeowners/etc allows them to expand their business or buy a house, thereby enriching the local economy."

When a MM buy/sells stock, that also is moving around something of value. People are either investing the money or retrieving it for use.

"It comes down to this: what value is created by a trader holding a stock for a few seconds and then selling it?"
Here's a response I wrote for another guy:
http://slashdot.org/comments.pl?sid=2429950&cid=37417910

To cut to the chase, it's valuable because investors can invest more money at a given price. All those guys trying to game a few ticks will end up increasing the size of the orderbook, which everyone else can use to invest more. Remember, HFTs are only themselves holding the stock for a few seconds. An investor can do just one trade with the HFT, leaving the algorithm to sort out it's own problems.

California Real Estate Investor

[harddisk01]

http://www.californiarealestateinvestor.com/ This website as I said will cater to investors looking to buy residential or commercial properties in California and Vegas for the Vegasrealestateinvestor website. Many people don't know where to start with buying a property in this economy. There are many difficulties they run into such as lending, foreclosures, short sales, pre-qualification, escrow and title.

His only crime was losing money

[BSalita]

How come you never hear about successful traders getting arrested?

Re:Digital money

[andymadigan]

Person A deposits $1000 in a bank.
Person B takes a personal loan for $500 from the bank and deposits it in their account.

Person A: $1000
Person B: $500
Total bank deposits: $1500.

Person B fixes Person A's car for $500. Person A withdraws the money from their account and Person B deposits it in their account.

Person A: $500
Person B: $1000
Total deposits: $1500

Person B repays their loan for $500.

Person A: $500
Person B: $500
Total deposits: $1000

Yes, money can be created and destroyed. However, neither Fort Knox or the S.O.R. have anything to do with it. The value of gold is set by speculators. The value of oil is set by supply/demand just like money. The amount of money available at any moment is limited, just like oil. The amount of money that *could* be available is theoretically unlimited, but we don't know how much oil is available, and we don't know how much money the government will allow to be created.

Re:Digital money

[pnutjam]

HFT is not like insider trading, it IS insider trading.

Twenty years ago, you could know 10 seconds before anyone else and it didn't mean squat, now you can leverage that knowledge.

Re:They are paying people not to gamble

[WebManWalking]

Some would take issue with the view that you're paying people to gamble, on the grounds that the odds aren't rigged against you. In the parimutuel betting system, for example, a fixed fraction of all bets (1/6th in my state) is set aside for the profit of the house and government, and the remaining money goes into pools to pay off winners of bets. So in my state, you have to do 20% better than chance (on average) just to break even. In the more common view of gambling, the house and government are said to be running a service, not gambling, because the system rigs the flow of money in their direction. Only the bettors are said to be gambling, because the odds are rigged against them. Under that definition, gambling is always ill-advised, stupid, a crime and/or a sin.

In the case of the stock market, the flow of money seems to go to many of the same traders, over and over again. This seems to be based on good business practices, good analysis of publicly traded companies, etc, not based on policies or procedures meant to guarantee that certain parties always succeed. To the extent to which that's true, the odds aren't rigged against you. But to the extent that some folks violate the rules (stealing, insider trading, just trying not to look bad so as to have a decent chance at success in the marketplace, etc), there is sufficient variability of outcome to cause others to say that the stock market is gambling too. Under that definition, gambling is an unavoidable condition of life itself, and your best bet is to work for those who seem to know how to put food on their own tables.

And now here's my point, which I apologize for taking so long to get to: Regardless of how you view the stock market, there's no doubt that compulsive gamblers view it as a bet that isn't rigged against them, and therefore a better bet than rigged-against-you gambling. So in hiring stock market traders, it would seem prudent to screen out compulsive gamblers, who will be naturally attracted to the job. Unauthorized use of someone else's money to gamble, in false hope of winning and paying back that money, would seem to qualify.

Re:Digital money

[NoSig]

So building cars faster than humans with computerized machinery has no intrinsic benefits? That's the logic you are utilizing.

That's the opposite of my logic. I'm saying that sub-second trading is not intrinsically useful. Faster cars are intrinsically useful. In any case, you are talking about computerized trading, which is necessary for HFT but you can have computerized trading that is not HFT. In a market where you can only trade at a slow speed, you can still have computers involved or even to do the trading itself. It just won't matter as much how fast your computers and connection are.

Re:Digital money

[infodragon]

I did not say making faster cars, "Building cars faster..." Making more cars in the same amount of time, compared to making more trades in the same amount of time. That is the analogy I was drawing.

HFT is defined for this discussion as market making otherwise known as liquidity provider.

No mater the application, humans have always tried to do things faster. The assertion of trading at speeds of fractions of seconds having no intrinsic value is correct. Speed in of it's self has no value, it is the utility that is derived from such item/activity that lends intrinsic value; speed only multiplies that value (off the top of my head I cannot think of one thing in which making it faster reduced value.) Perception of reality drives intrinsic value. If nobody valued gold, gold would not be valuable. HFT follows the same line of reasoning. A vast majority of the profits of HFT is derived from competing with the previous generation of market makers. The first ones to really hit sub second speeds made a killing at first then the market became flooded, higher competition and margins became razor thin for anybody that was not the fastest. This is the same thing with human market makers. The fastest took the lions share, everyone else had razor thin margins. It's now an arms race of infrastructure for the Ultra High Frequency Trading. This has resulted in many leaving the HFT arena, there is only so much that can be made and the costs keep going up while potential profit is flat or declining.

Your arguments are the same as as every industry has "suffered" from the advent of progress. Mechanized farming, automated industry, computerized accounting... All allowing for more to be done in the same amount of time. In fact the original definition of computer was a woman doing menial math in a room of women, at least in the USA. It was the social dynamics of the time that it was a "woman's" job to do the menial task. As computers became more ubiquitous the human labor had to change markets.

Accounting is now faster than ever because of spread sheets. What took hours before the PC and spreadsheet took seconds.

RIAA/MPAA have the same issue with digital distribution.

HFT takes nothing from Joe Trader, as I've outlined in a previous post, and usually helps him (tighter spreads) The brokers screw Joe Trader with high transaction fees. Similar diff of wholesale and retail.

So far I have outlined in this post and others how HFT benefits, I've not found on example that I have not easily discredited, that shows how it harms. No one has been able to discredit my comments, all assertions have been emotionally based (irrational or otherwise.)

You hid behind an NDA and then made this statement

"The NDA was put in place so we could discuss specific timing advantages they had over competitors."

You should be able to discuss topics outside the "specific timing advantages" to detail how HFT harms. Please correct me if I am wrong, I seek truth as it is THE most valuable thing we can possess.

Re:Digital money

[NoSig]

Your NDA discussion must have been with someone else. I have said nothing about NDAs. As for cars, exactly, the whole point is that making cars faster is useful, just as growing crops faster is useful. If we could grow crops at twice the speed, we'd get twice the food for the same effort. When the inefficient farmers go out of business because they can't compete with the efficient ones, that means that food is being produced more efficiently. Great. The problem is that trading faster doesn't result in something of value for the world that trading slower would not also accomplish. Rewarding fast trading only has the result of wasting resources in trading ever faster. Again, I ask you, if everyone who now trades in less than a second could suddenly trade in less than a nanosecond, at no additional cost, how does that help anyone? I say it doesn't help anyone because the only point of fast trading is to be faster than the other people, it doesn't matter how fast you are going - only that the other people are slower. Is that wrong? If trading is 1000 times faster for everyone, that helps no one to get ahead, so the outcome is the same. So making sub second trading faster doesn't do anything useful. Do you also think that moving from millisecond to nanosecond trading is pointless? (except for the people who ahead, obviously)

Re:Digital money

[infodragon]

Sorry about the NDA.

You've posed as philosophical discussion rather than a discussion regarding the technical merits. Trading used to take days, then hours, then minutes then seconds... Each step of the way there were those that said the same things you are saying. As to Rewarding fast trading, the market rewards those that take the risk and take it before somebody else. It's been that way since the dawn of securities trading.

Trading faster means a more efficient market with better price discovery. We are reaching the point of diminishing return but that will not stop those seeking a profit from pushing harder. Which by the way a significant portion of Linux kernel improvements have come from the finance industry pushing the envelope. The same for the first adopter principle of hardware. There is a LOT of trickle down.

"Great. The problem is that trading faster doesn't result in something of value for the world that trading slower would not also accomplish"

It would eliminate the ability to beat your competitor. It would introduce an artificial lag in which many things can happen in that would invalidate the reason for your trade(s). You would not be able to cancel your trades in a timely matter because all trading activity would have to follow this rule. i.e. introduce a 2 second delay, at 1.9 seconds market dynamics change and your system sends a cancel for the trade, it'll take 2 seconds to get there leaving 1.9 seconds for your original trade to execute. So lets say you let cancels through immediately, that 2 second window is known and will be exploited by those that develop some arbitrage that exploits that edge case. Now the market is behaving in such a way that is exploiting an artificial construct while attempting real price discovery, creating more volatility.

What if you are a news trader, you have a low latency news feed and you execute trades based on events in the world. There are many human mistakes in reporting the news, fat finger a 9.0 earthquake vs an 8.0, HUGE difference. That 2 seconds can mean the difference between a good trade and a bad trade. Somebody that has a higher latency system and gets the information LATER and executes a trade that has exploited the mass move by those that had the earlier information and their trades are now just hitting the exchange. This introduces a bias and can and will be exploited.

"Again, I ask you, if everyone who now trades in less than a second could suddenly trade in less than a nanosecond, at no additional cost, how does that help anyone?"

It doesn't, the advantage comes in incremental movements where a few get ahead of everybody else. It's the nature of competition. You pose the question in such a way as to bias the outcome. It does not reflect real world mechanics.

The whole point of trading faster is to be further in front. Similar to racing cars, those that come in 1st win more than those that come in 2nd, 3rd, 4th... If you made all of them equally faster there's no point, but if the one in 4th makes some improvements and then is able to take 1st, he wins.

Re:Digital money

[NoSig]

It doesn't, the advantage comes in incremental movements where a few get ahead of everybody else. It's the nature of competition. You pose the question in such a way as to bias the outcome. It does not reflect real world mechanics. The whole point of trading faster is to be further in front. Similar to racing cars, those that come in 1st win more than those that come in 2nd, 3rd, 4th... If you made all of them equally faster there's no point, but if the one in 4th makes some improvements and then is able to take 1st, he wins.

How does the HFT being further in front benefit the world, though? I think it only benefits the HFT trader. I agree that trading faster is a good idea for the people who are able to be faster than everyone else by doing so. I agree on this in the same way that I agree that insider trading grants a benefit to the person doing it. I also think that it is reasonable to think that investment in HFT has the side effect of developing technology that other people can benefit from such as Linux kernel patches. I also agree that care would be needed in developing a system to stop HFT, and just saying that trading can only occur at for example 1 second intervals may not be the best way to go. I also agree that if computers can trade as well as humans, then replacing some of the humans with computers is a good thing.

Where I don't agree is that having the opportunity to beat a competitor is a benefit to the world. Beating a competitor is simply allocating funds inefficiently if the basis on which the competitor is beat does not produce value. If an efficient farmer puts an inefficient farmer out of business, value is produced by giving the opportunity to profit from production to the more efficient producer. If a fast trader beats a slow trader, I don't see that kind of benefit. In fact I see harm, since, as you acknowledge, fast trading does not in itself produce value over slow trading, and perhaps the slow trader is actually doing smarter things, so he should be beating the fast trader.

In short, if I were a HFT I would want HFT to continue for my own sake. At the same time, if I were a market regulater, I would want HFT to stop because it only benefits HFT traders by extracting resources from the market and allocating them inefficiently. That is the exact same reason that I would want insider trading to stop. The function of the market is to allocate resources efficiently, and both HFT and insider trading are harmful because they disrupt that.

Re:Digital money

[infodragon]

"How does the HFT being further in front benefit the world, though? I think it only benefits the HFT trader."

HFT has tightened spreads so the HFT trader is providing more liquidity and better price discovery for everybody. The competition amongst HFT and market makers is to get there first. So speed does have an advantage to HFT and the market as a whole. As speed increases spread, generally speaking, decreases. I observed this in the spot forex market as more and more entered HFT. Spreads significantly tightened, of those I watched especially the GBP/JPY and GBP/CHF narrowed by 50%. I ran a MFT (Medium Frequency Trading) algo that hugely benefited from this.

"Where I don't agree is that having the opportunity to beat a competitor is a benefit to the world."

The case I'm making above is it tightens spread which is better price discovery.

"I agree that trading faster is a good idea for the people who are able to be faster than everyone else by doing so. I agree on this in the same way that I agree that insider trading grants a benefit to the person doing it."

Insider trading is exploiting something that nobody else has, period. HFT is exploiting your own efforts and resources to execute in less time. Others have resources and the ability to put effort into HFT, there is no exclusivity. In theory if you get into naked connections to exchanges then this statement becomes invalid, regulation is attempting to correct this.

"In fact I see harm, since, as you acknowledge, fast trading does not in itself produce value over slow trading, and perhaps the slow trader is actually doing smarter things, so he should be beating the fast trader. "

please re-read my statement...

"if you made all of them equally faster there's no point"

There is a point in an HFT firm investing time, resources, and effort to achieve a speed increase over the others. If all trades took one day to execute, and then something happened to decrease latency to one hour and was EQUALLY granted to everybody then there would be one benefit, better price discovery. So I retract my statement, this is something that I did not consider previously. FASTER trading, just in theory being purely faster provides better price discovery. As information changes the faster the market reacts the more efficient the market is. There is a point of diminishing return and we have crossed that point but there is return.

In summary HFT provides...

- Better spreads which create lower transaction costs for Joe Trader
- Better price discovery, i.e. market efficiency
- Trickle down technology

So far I've not heard an explicit example as to how HFT harms.

Re:Digital money

[NoSig]

I do imagine that if the market was limited to trading to once a day, then increasing speed to once an hour could provide some benefit. That is not what we are discussing though - we are discussing going from a minute to a second to a millisecond to a nanosecond and so on. The difference is that a day and an hour makes a real difference to human being trying to do something even if that human doesn't care about being first. The difference of a minute to second doesn't mean as much, and a second to a millisecond doesn't matter much at all other than for being first.

Trickle down technology happens because money is flowing to HFT and HFT requires technology. If the money did not go to HFT they would go somewhere else and I don't see why that could not equally result in technology development. This is the broken window fallacy. In any case I doubt that a very large amount of the money flowing into HFT results in open technology that gives benefits beyond the HFT firms where the technology is developed, since HFT firms are in direct competition and revealing their technology puts them at a disadvantage. To put it pointedly, I doubt that putting money into HFT is a cost-effective way to improve Linux. If that were the goal, it would be much more efficient to impose a tax on trading and use the money to fund Linux development. So I don't think that trickle down technology is a strong argument in favor of HFT.

How does faster trading lead to a lower spread? I understand that computerized trading leads to lower costs which would reduce spread in a competitive market and I understand that increased competition would lower spread. How does faster trading do that, if I'm willing to wait a little bit to buy or sell?

It seems to me that HFT can't really help with price discovery. At most, it seems to me, it could make the price settle down less than a second sooner than it otherwise would, which is pointless. In any case, for the price to reflect something real, which is how price discovery leads to a benefit, the price has to reflect something real about the world. HFT acts only on the activity already in the market, so it doesn't add any new information, and if it does add information, say by reading the news very quickly, all that happens is that this information gets into the market less than a second sooner than it otherwise would. Is that wrong?

The harm that HFT does is that it wastes resources that could otherwise be allocated in an efficient way. Consider the recent Slashdot story about a transatlantic cable laid down to transfer information a few milliseconds faster between exchanges. I believe that a few milliseconds faster trades between exchanges doesn't benefit the world. If I'm right here, one effect of HFT is to extract money from the stock market without providing a benefit and then pouring it into projects like this cable that also doesn't do anything useful. Another way of saying it is that the harm of HFT is the opportunity cost of the resources that HFT extracts from the market.

Re:Digital money

[infodragon]

I do imagine that if the market was limited to trading to once a day, then increasing speed to once an hour could provide some benefit. That is not what we are discussing though - we are discussing going from a minute to a second to a millisecond to a nanosecond and so on. The difference is that a day and an hour makes a real difference to human being trying to do something even if that human doesn't care about being first. The difference of a minute to second doesn't mean as much, and a second to a millisecond doesn't matter much at all other than for being first.

So speeding up trading, which by natures means reducing latency, stops being beneficial at some point? Lower latency by it's very nature no matter how low the latency allows for better price discovery, see below.

Trickle down technology happens because money is flowing to HFT and HFT requires technology. If the money did not go to HFT they would go somewhere else and I don't see why that could not equally result in technology development. This is the broken window fallacy. In any case I doubt that a very large amount of the money flowing into HFT results in open technology that gives benefits beyond the HFT firms where the technology is developed, since HFT firms are in direct competition and revealing their technology puts them at a disadvantage. To put it pointedly, I doubt that putting money into HFT is a cost-effective way to improve Linux. If that were the goal, it would be much more efficient to impose a tax on trading and use the money to fund Linux development. So I don't think that trickle down technology is a strong argument in favor of HFT.

I wasn't posing it as a strong argument. It's *something* beneficial, in which you claimed HFT only harms. You've moved your argument away from the original point.

How does faster trading lead to a lower spread? I understand that computerized trading leads to lower costs which would reduce spread in a competitive market and I understand that increased competition would lower spread. How does faster trading do that, if I'm willing to wait a little bit to buy or sell?

Faster trading, by very nature includes lower latency, encourages competition over smaller amounts of profit. If there is a spread of 10 points on a security; somebody that can be faster means they'll cut it down to 8 or 9 points. Somebody who gets a little faster will then undercut them yet again. When the spread is one, getting there faster means you get filled before the other guy. With a spread of 1 or 2 you've reached a point of significantly diminishing returns.

It seems to me that HFT can't really help with price discovery. At most, it seems to me, it could make the price settle down less than a second sooner than it otherwise would, which is pointless. In any case, for the price to reflect something real, which is how price discovery leads to a benefit, the price has to reflect something real about the world. HFT acts only on the activity already in the market, so it doesn't add any new information, and if it does add information, say by reading the news very quickly, all that happens is that this information gets into the market less than a second sooner than it otherwise would. Is that wrong?

Any time it settles down faster is an increase in efficiency and by very nature lends to better price discovery. Market makers on the floor only act on the activity already in the market. HFT only does it faster. So the activity of human MMs doesn't add any real information?

The harm that HFT does is that it wastes resources that could otherwise be allocated in an efficient way. Consider the recent Slashdot story about a transatlantic cable laid down to transfer information a few milliseconds faster between exchanges. I believe that a few milliseconds faster trades between exchanges doesn't benefit the world. If I'm right here, one effect of HFT is to extract m

Re:Digital money

[NoSig]

So speeding up trading, which by natures means reducing latency, stops being beneficial at some point? Lower latency by it's very nature no matter how low the latency allows for better price discovery, see below.

Not better, faster.

Faster trading, by very nature includes lower latency, encourages competition over smaller amounts of profit. If there is a spread of 10 points on a security; somebody that can be faster means they'll cut it down to 8 or 9 points. Somebody who gets a little faster will then undercut them yet again. When the spread is one, getting there faster means you get filled before the other guy. With a spread of 1 or 2 you've reached a point of significantly diminishing returns.

Say Alice offers to sell at 2$ and buy at 8$. Bob wants to undercut Alice. So Bob offers to sell at 3$ and buy at 7$. How is speed of transactions relevant to this situation, or are you thinking of something else?

Any time it settles down faster is an increase in efficiency and by very nature lends to better price discovery. Market makers on the floor only act on the activity already in the market. HFT only does it faster. So the activity of human MMs doesn't add any real information?

I'll give you that if we all trade 1000x faster using computers, then prices might settle down less than a second faster. That has never been in dispute. The question is how that is useful. It seems to me that there is no difference if you are willing to wait a second to trade. the point is exactly "HFT only does it faster". Faster isn't better for the world, unless that speed is somehow useful outside of the competition of getting there first.

I wasn't posing it as a strong argument. It's *something* beneficial, in which you claimed HFT only harms. You've moved your argument away from the original point.

Crashing your car has the benefit that then you'll be driving in a brand new car. So that is a benefit of crashing your car. Yet crashing your car is still harmful, and pointing out the benefit of having a new card to replace it doesn't negate that. So if someone tells you that crashing your car is just harmful, it's not a good point to say that he is forgetting about the benefit of having a new car, except perhaps to make him feel better.

You are falling back on old arguments in which you have not provided any evidence. How does HFT harm? Nothing backing it up but what you believe. Please backup what you are saying, I'm very seriously interested in discovering the truth. The transatlantic cable is a large investment in which banks are lining up to pay. It's not all HFT, in fact much will be MFT that needs to react FAST with a few trades. You pose an interesting theory but again have nothing to back it up. Also the current pipe is clogged up something fierce. I wonder what the costs of laying a new pipe just for bandwidth would cost? Subtract that from the actual cost of the pipe and then you have your HFT difference, in which you have to subtract out the MFT stuff and other low latency applications.

I think you might not understand what I wrote. If HFT doesn't provide significant benefit to the world, yet significant money gets allocated to pursue HFT, then the harm to the world is the opportunity cost of those investments. That is an a-priori logical argument, it doesn't need anything to back it up, it's just logic. To put it more simply, suppose there were only two investments in the world, investment A and investment B. Investment A gives a return of 5% but it only benefits you. Investment B gives a return of 4%, but it also benefits the world (positive externality) by 20%. The smart money goes to A, and the harm of that is 19% of the value. So 19% is the opportunity cost for the world of allowing A. In this case A could be HFT or insider trading or something that pollutes. Obviously I just made these numbers up to illustrate the idea of opportunity

Re:Digital money

[infodragon]

It's been > 12 hours today of C++ multi-threading and parsing 100 20GB(compressed down to manageable sizes) brain dead csv files. I've been responding between some long jobs. I'll respond tomorrow. Thanks for the discussion, I've been enjoying it!

/me heads off to find something other than a computer

Re:Digital money

[infodragon]

Not better, faster.

This is the best public information that I can find on price discovery, you'll have to do a bit of gleaning. I believe you are commingling price discovery and valuation. Valuation takes an extreme amount of effort and time that the markets rarely reflect.

http://www.ssc.upenn.edu/~fdiebold/papers/paper61/abdv2_062804.pdf

How is speed of transactions relevant to this situation, or are you thinking of something else?

The faster you are the more risk you can take with less possibility of return. The tighter the spread the less return a MM will receive, per transaction. Low latency allows for quicker reaction time to adjust prices, minimizing risk the market will move against you. If MMs can get out of a bad position, as a liquidity provider, much more quickly risk is reduced and parties are more willing to offer MM services for less profit, i.e. tighter spread. In this regard HFT is market making or liquidity providing. There is substantial evidence showing that HFT absorbed quite a bit of the flash crash of 2010, delaying the inevitable rather than exasperating it. The crash started as HFTs pulled out and stopped absorbing the toxicity.

Crashing your car has the benefit that then you'll be driving in a brand new car. So that is a benefit of crashing your car. Yet crashing your car is still harmful, and pointing out the benefit of having a new card to replace it doesn't negate that. So if someone tells you that crashing your car is just harmful, it's not a good point to say that he is forgetting about the benefit of having a new car, except perhaps to make him feel better.

You are miss-characterizing my statements. There is nothing broken/destroyed, HFT does not harm, except when used illicitly just as a knife harms when used illicitly.

I think you might not understand what I wrote. If HFT doesn't provide significant benefit to the world, yet significant money gets allocated to pursue HFT, then the harm to the world is the opportunity cost of those investments.

This argument can go for man many things in this world. You can always argue that where some money is put it can be put to something better. Also HFT is a tiny, *TINY*, fraction of all infrastructure and development that goes on in the financial world.

As of the first quarter in 2009, total assets under management for hedge funds with HFT strategies were US$141 billion, down about 21% from their high.

http://en.wikipedia.org/wiki/Algorithmic_trading

PIMCO has over USD$1 trillion under management and that is one entity and they do not engage in HFT.

Markets are good because they allocate resources to the most productive endeavors. However, there is a mismatch between the interest of individual traders and the interests of the market/world. One example of that is insider trading - it is bad because it mis-allocates resources based on something that isn't useful to the world, yet it is very profitable. HFT is redistributing a lot of resources, but you have not demonstrated that the benefit that HFT provides is anywhere close to that.

I believe you are over estimating how much HFT is as part of the financial industry. There is only so much room that HFT can function, it is limit of market mechanics. It will grow in proportion with market growth. Tighter spreads across the entire financial trading realm returns more to the pockets of other traders than what has been made from HFT. HFT is a net positive.

I agree there is significant mismatch, legal and illegal. The finance industry has a higher proportion of psychopaths that would swindle their own mother for a buck. It has been this way since the Knights Templar became a popular tax haven and

Re:Digital money

[NoSig]

As I understand it price discovery is for the market to arrive at a price of a good, while valuation is about determining what a good should actually be worth. I've always liked the quote "the market can stay irrational longer than you can stay solvent", which relates the two concepts. If it takes lots of interaction (and nothing else) between market participants for the market to settle down at some particular price, and HFT allows more interactions faster, then price discovery should occur faster with HFT, I agree. I just don't think that the price HFT arrives at is better than before, it is only faster. If there is a particular point you want me to take from the linked article, then I'll look for that. I did skim the abstract and conclusion. I'm not surprised that there is a link between HFT prices and news, but I'd be surprised if HFT prices aren't worse valuations than human speed prices are, since HFT prices in reaction to news have to be based on computerized reading of the news, which can't be all that accurate or insightful.

There are two separate issues there. One is replacing people with computers, which I think is great when it works well. The other is allowing trades to occur at the speed of computers, which is where I don't see the benefit.

Low latency allows for quicker reaction time to adjust prices, minimizing risk the market will move against you. If MMs can get out of a bad position, as a liquidity provider, much more quickly risk is reduced and parties are more willing to offer MM services for less profit, i.e. tighter spread.

I could turn this on its head and say that HFT increases market maker risk since the HFT traders could move against the market maker faster than the market maker can respond to them. Your argument seems to require an assumption that market makers are automatically able to perform HFT faster than the people moving against market makers. Without that assumption, it seems to me that risk might as well go up due to HFT as down. Am I misunderstanding your argument? As I understand it, this is your main argument and main point that shows that HFT is a boon, so I'd like to understand it.

I agree that banning something because of its opportunity cost is a slippery slope at the end of which we all end up in a prison where we are told exactly what to do each day. Also, it's hard for a regulater to know in the first place what the optimal thing to do is. So there is a balance. However, trading in markets is different from, say, growing marijuana in your garden for fun. The marijuana is only going to directly affect the person using it, and the resources spent are contained to the person growing it. So there is a strong freedom argument that banning marijuana is wrong because it infringes on our freedoms. Trading in markets is specifically about the economy which affects all people, and it's not just a place for people to have fun, it is all about everyone's money, jobs and savings. When markets go wrong, it affects everyone. So I'm sympathetic to the freedom argument that we can't go around banning every single harmful thing, but I'm not sure that that argument is so strong for trading in the market as it is for most other things like growing marijuana (which is never the less illegal).

According to Google, the world's gross domestic product in 2009 was $58.26 trillion=$58260 billion, so $141 billion is about 0.24% of the world's total yearly output. I think that's a tremendous amount of resources and more than I would have thought. I'm also not sure that only hedge funds do HFT, but perhaps "hedge fund" is defined broadly enough that that would be true.

Re:Digital money

[infodragon]

If it takes lots of interaction (and nothing else) between market participants for the market to settle down at some particular price, and HFT allows more interactions faster, then price discovery should occur faster with HFT, I agree. I just don't think that the price HFT arrives at is better than before, it is only faster. If there is a particular point you want me to take from the linked article, then I'll look for that. I did skim the abstract and conclusion. I'm not surprised that there is a link between HFT prices and news, but I'd be surprised if HFT prices aren't worse valuations than human speed prices are, since HFT prices in reaction to news have to be based on computerized reading of the news, which can't be all that accurate or insightful.

No particular point, it was just a reference to determine price discovery. Definition of terms is fundamental when discussing anything.

We're getting into the nebulous here and can discuss this until we are blue in the face. " just don't think that..." well I *THINK* faster discovery is better. So how deep a blue are we going to go :P

The reason I think it is better is because even though the price at the moment of "discovery" may be off by a bit, there will be a drift from that moment to a better discovery. The moment being the point after volatility settles after a major move due to fundamentals, technicals, or "irrationals," people's knee jerk reaction. The market will snap to stability faster which then you get a minor drift to better. A quicker move to stability in the micro scale lends to overall stability. From that foundation of stability a better price discovery results.

HFT is not about valuation, it's about doing exactly what human MMs do at a much higher speed, which is providing liquidity and deriving profit from the spread.

I could turn this on its head and say that HFT increases market maker risk since the HFT traders could move against the market maker faster than the market maker can respond to them.

Almost exactly my point. Human market making is dwindling. It is moving into the deeper areas of the book for heavy volume trades, almost a niche market. The market of providing liquidity has a finite amount of room, which is almost directly proportional to market volume. Well over 90% of HFT is MMing, which means there's been a reduction in human MMing. Many humans have been burned in the scenario you suggest, also many HFTs, thus the large reduction in HFT over the past few years. The market is rebalancing due to many HFTs losing BIG.

Ref: MMs http://en.wikipedia.org/wiki/Market_maker.

So I'm sympathetic to the freedom argument that we can't go around banning every single harmful thing, but I'm not sure that that argument is so strong for trading in the market as it is for most other things like growing marijuana (which is never the less illegal).

I completely agree, it's why the financial markets are the most regulated industry in the US. I don't think we need more regulation but I do think we need better. The recent Barny-Frank bill is causing hedge funds to go further into the dark, just check out what Soros is doing.

According to Google, the world's gross domestic product in 2009 was $58.26 trillion=$58260 billion, so $141 billion is about 0.24% of the world's total yearly output. I think that's a tremendous amount of resources and more than I would have thought. I'm also not sure that only hedge funds do HFT, but perhaps "hedge fund" is defined broadly enough that that would be true.

The $141bn is what is under management, this is capital derived from previous years GDP. The net gain from the trading is a percentage of what is under management, if you take a weighted average return of all HFT you'll come to a number well below 30%. So lets use 30% and you get about $42bn net world GD

Re:Digital money

[NoSig]

A quicker move to stability in the micro scale lends to overall stability. From that foundation of stability a better price discovery results.

I think you are saying that having HFT around leads to a stable price, say, a second sooner. So if I wait a second, there shouldn't be a difference in this regard compared to if HFT was not around, or at least the non-HFT market won't be more than one second behind. Is that what you are saying?

I could turn this on its head and say that HFT increases market maker risk since the HFT traders could move against the market maker faster than the market maker can respond to them.

Almost exactly my point. Human market making is dwindling. It is moving into the deeper areas of the book for heavy volume trades, almost a niche market. The market of providing liquidity has a finite amount of room, which is almost directly proportional to market volume. Well over 90% of HFT is MMing, which means there's been a reduction in human MMing. Many humans have been burned in the scenario you suggest, also many HFTs, thus the large reduction in HFT over the past few years. The market is rebalancing due to many HFTs losing BIG.

Ref: MMs http://en.wikipedia.org/wiki/Market_maker.

I may be confused about what you mean by risk. You wrote that HFT decreases MM risk since with HFT you can avoid people moving against you by being faster than them. You also write that many market makers are losing big because they are getting moved against by other people using HFT. That seems like an element of risk to me. The only way I can make these two things make sense to me is to say that SOMEONE is fastest, and then that someone can do MMing without risk since no one else is fast enough to move against them. However, that wouldn't lead to tighter spreads as I see it, since that fastest person could then exploit everyone else trying to do MM by being faster, so no one else could do MM, resulting in no competition which is going to increase spreads. Costs also increase due to the overhead of maintaining the lead in HFT. I think I'm misunderstanding your point.