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back to article Hey, Michael Lewis: Stop DEMONISING Wall Street’s SUPERHUMAN high-speed trading

Yesterday's energetic debate on CNBC between BATS Global Markets president William O'Brien and Flash Boys author Michael Lewis and IEX's Brad Katsuyama put the cat among the pigeons over high-frequency trading. It was all provoked by Moneyball writer Lewis' new book, Flash Boys, which, among other things, makes the claim that …

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Ah yes - on Planet Tim, in spite of proof of LIBOR fixing, fx fixing, commodity price fixing, the wholly inexplicable banking meltdown (the one that everyone saw coming except the markets), and that whole thing with Enron and such, the world's trading houses remain paragons of virginal market purity, and there is no cause for concern - so go back to sleep and don't fluster your naive and ignorant little heads, it's all working as it should.

Just how stupid does this person think we are?

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Yes indeed, perhaps Mr. Worstall could address these little financial pecaddillos?

Instead of ignoring them quietly as he seems wont to do.

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"in spite of proof of LIBOR fixing, fx fixing, commodity price fixing, the wholly inexplicable banking meltdown (the one that everyone saw coming except the markets), and that whole thing with Enron and such"

Oh, LOL, now explain what all of these things you just mentioned has to do with HFT?

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If it were an article on the bad badness of the market, yes, but...

The market is more than deeply dodgy, but can we park that for a moment and talk about HFT and the interesting issues that arise simply within this topic? I thought the article was a good analysis of the problem. I had peripheral involvement with some of these trading systems as they were coming online in the early 2000s, and remember much debate about the value of a nanosecond.

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Don't get your point...

What has algorithmic trading got to do with any of the listed scandals in your comment? IMHO, this is the general problem, anything wrong in banking/markets is naturally blamed on the least understood of all components.

If you read some of the details surrounding recent flash crashes (say 2010), you'll see that even there, the exchanges have found that it has little to do with HFT, and most likely the result of something done by a meatbag. Typically such an action would ripple across any algorithms (as it did in 2010), but you'll also find that the algorithms also help to stabilize the situation and provide the necessary liquidity.

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@theotherhobbes

"the one that everyone saw coming except the markets" - Lucky thing. You must have retired on all the profit you made.

--

"Just how stupid does this person think we are?" - I'm sure he's just revised that opinion down.

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Oh, LOL, now explain what all of these things you just mentioned has to do with HFT?

Okay, all of those things were perpetrated by the same group of people who are running HFT systems.

And despite Tim's simplistic explanation, the algorithms used in HFT don't just perform time arbitrage. Time arbitrage is always brought up by supporters of HFT; they rarely bring up the fact that the algorithms aren't restricted to that and there is already evidence of the algorithms manipulating stock prices in ways totally unrelated to time arbitrage (beyond frontrunning).

To go back to Tim's gun analogy, would you give out guns to people who had used them to murder in the past?

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OK: Libor fixing. Came in two flavours. One, traders would get their own blokes to skew the quotes a basis point or two in order to favour their own trading books. Of minor importance in the scheme of things as the various traders would be randomly trying to influence the market their way. So no great danger to the market or society in general. Also illegal and people will rightly be going down for this.

Second flavour: the banks themselves misreporting Libor in the depths of the crisis. Note that what Libor is is the rate at which the bank thinks it can borrow, in that currency and for that time, in size. Note also that at the depths of the crisis no bank could borrow on any terms. The overnight market (which is what the Libor rate measures) simply disappeared. Everyone borrowed from the Bank of England instead. So, in this case, all the big money centre banks tell the Libor committee, well, to be wholly honest, we can't borrow at all. Interest rates are effectively infinite. Libor thus soars to what, 100%? More?

Think that does us any good in the depths of the crisis? No one's actually going to come out and say it publicly (well, me, but I mean anyone important) but everyone's damn glad that the banks were lying through their teeth that couple of weeks.

FX I did hear something about fixing but don't know the details, sorry. And commodity price fixing, what story is this? Sure, there's always been people who try to corner the commodity markets but the usually go bust, like the Bunker Hunts and that Sumitomo trader. But what story are you interested in today?

The banking meltdown, you may have noticed that some people did forsee it. Paulson for example: and he and his bet were the subject of an earlier book by, umm, Michael Lewis.

Enron was criminality, pure and simple. I hope we're not about to start claiming that without financial markets there would be no tea leaves?

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Permit me. I'm no economist but some things seem evidently crap. So...

It's about the *attitude*, which is that any tool (HFT is one) is to be exploited to the max and damn the consequences: 1) TBTF, let the peasants pick up the pieces 2) the mythical balance that the free market tends towards. I don't believe (2) any more, at least under the system we have now.

a) HFT gives advantages to the biggest guys. Most can't afford it but they can, so they profit at the expense of those who can't.

b) HFT may be associated with volatility; from <http://en.wikipedia.org/wiki/High-frequency_trading>

"HFT may cause new types of serious risks and dangers to the financial system.[14][1][15] Algorithmic and HFT were both found to have contributed to volatility in the May 6, 2010 Flash Crash, when high-frequency liquidity providers rapidly withdrew from the market.[1][15][16][17] Several European countries have proposed curtailing or banning HFT due to concerns about volatility.[18]"

c) Morality doesn't matter, as exemplified here. "and can be thought of as being a bit naughty.", "Certainly, if you get the information from your mate executing the large order and do this you're guilty of insider trading. ... Whether this is important is another matter"

'naughty'? whether illegal trading is 'important'?

d1) divorce from reality. This is what causes bubbles which inevitably explode. The more divorced, the bigger the bubble, the bigger the final bang. I've seen a bloomberg terminal and it feeds you apparently pure information from which to make decisions. Knowing a specialist corner, we checked it out and the info was markedly dodgy. If you don't realise that info is corrupt you make wrong decisions as a human, and far more so if you get a program to deal with it.

d2) divorce from reality redux. Manipulating the markets at a distance allows one not to see what it does the peasants[*] at the bottom of the heap working in virtual slavery in many places. Their lives can be unpleasant, sometimes short. Also they get pressured in other ways. I knew a thai woman, she said that the poor in her country used to get by because there were many small areas where food would grow wild or could be grown. These areas are now being snapped up, consolidated into bigger farms and the poor go hungry. These bigger farms grow stuff for export. I'm sure the corporations owning them show up on bloomberg terminals in nice colours.

e) They'll just use it to fix other stuff to their advantage. Just another tool to abuse.

In summary HFT is a tool but I don't trust the wielders. I also simply don't trust Tim Worstall to even try to present a balanced picture.

Just a thought from a non-economist, so, does that at least make some sense or am I missing something crucial, Victor?

[*] I'm sure he used that word deliberately to provoke.

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"all of those things were perpetrated by the same group of people who are running HFT systems"

What, you mean the IT guys?

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Plenty, both are methods by which money is apparently conjured from thin air especially when the front running technique is involved.

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@ Steve Knox

> all of those things were perpetrated by the same group of people who are running HFT systems.

The founding of the NHS and the privatisation of the Royal Mail were perpetrated by the same group of people too: governments. And?

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@ BlueGreen

> 'naughty'? whether illegal trading is 'important'?

Well, there are some completely sane arguments that insider trading should not be illegal because (a) no-one's yet been able to properly define it and (b) it actually does some good. For instance, when a big company is crashing secretly and its senior managers are shoring up its share price by lying through their teeth while they get their money the hell out, a bit of insider trading would tip off the market and therefore the public and allow ordinary people to lose less money. Yes, it would also allow people to profit in other situations. Maybe the pros outweight the cons and maybe not. My point is that "Whether this is important is another matter" is a perfectly reasonable thing to say about insider trading.

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@ Vladimir Plouzhnikov

"Oh, LOL, now explain what all of these things you just mentioned has to do with HFT?"

If you add HFT to some of the ingredients in that list, you get a nasty broth. Whoever knows the quirks, errors and biases of a given HFT algorithm - no matter whether said errors are unintentional or otherwise - has a powerful tool to perform price fixing and/or related malfeasances. Insider trading? Ditto. The ability to hack some news site so that for a few hours or even minutes it displays false data, coupled with HFT, can give the crooks the financial equivalent of a thermal lance against the fabled free markets.

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@Tim Worstal

> Second flavour: the banks themselves misreporting Libor in the depths of the crisis. [...] No one's actually going to come out and say it publicly (well, me, but I mean anyone important) but everyone's damn glad that the banks were lying through their teeth that couple of weeks.

Right, so the banks didn't predict the collapse they in large part led us into so when it when it blew up in their faces they had to lie to avert a likely disaster?

Yes, they had to lie because they fucked up because those wankers couldn't see what was coming even though it was their fucking job?

And you're presenting their lying as a good thing while kind of not noticing why it was needed??? You are beyond incredible.

I suppose genocides in africa aren't all bad because, damn, gonna be a lot of jobs re-sharpening those machetes afterwards.

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Re: If it were an article on the bad badness of the market, yes, but... @Hollerith 1

> but can we park that for a moment and talk about HFT and the interesting issues that arise simply within this topic?

First time I've ever disagreed with anything of yours, but no we cannot park it up to admire the paintwork. Things have consequences and however intriguing HFT may be as a tech and intellectual problem, it is potentially another sharp stick in the hands of idiots.

(edit: apologies, that came out a bit rough, but I've spent my entire working life considering the consequences of what I do and in some cases turning down jobs because of that)

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Re: @ Vladimir Plouzhnikov

"If you add HFT to some of the ingredients in that list, you get a nasty broth."

So you would if you add HFT to, say, an exchange system crash or a a major bankruptcy or nuclear war. That in itself does not make HFT any worse or more dangerous than any other routinely used systems - payments processing, comms, transport, power grids etc. If any of them breaks, it's usually unpleasant and disruptive and people want it fixed ASAP.

"Whoever knows the quirks, errors and biases of a given HFT algorithm - .... - has a powerful tool to perform price fixing and/or related malfeasances."

No, not really. If you know the deficiency of an algorithm you can theoretically exploit them against the company that uses it, yes. You will need to find a serious backer though. If you are a disgruntled programmer you won't have the capital needed to set up your own HFT trading outfit to play the algorithm. So, you will need to go to the competition, not that such cases are unheard off, but it's not easy and it will be detected unless your backer is very, very patient and careful - which they won't be or they wouldn't try it in the first place.

But as for rigging the markets with HFT? That just not how it works. You can move the markets unintentionally, sure, but there it's - you move them, you pay for it.

Rigging is done by humans through collusion, disinformation, fraud, social engineering, exploiting or cornering the OTC markets.

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Re: the same group of people

.... which is why, for the group of people in your example, we hold elections and throw out those we really can't stand.

Bring back ostracism (in a multinational form of course).

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Re: @ Vladimir Plouzhnikov

"So you would if you add HFT to, say, an exchange system crash or a a major bankruptcy or nuclear war. That in itself does not make HFT any worse or more dangerous than any other routinely used systems"

Yes, yes it does. You do not want lightning speed reaction during a crisis. You do want lightning speed decision making. But knowing how to manage when to act is the key. Act first think later can be a problem. Any algorithm is designed first, implemented after.

Put it simply, if your computer is going wrong, probably not best to type out "format c:" too quickly, as the PC will action it at "high-speed", before you realise you want to turn it off. It appears HFT is a similar problem (but I'm no expert or judge on the matter :P ).

(PS, mine is the one with the file recovery USB for quick formatted disks... pray you did not full format it)

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Re: @ Steve Knox

> The founding of the NHS and the privatisation of the Royal Mail were perpetrated by the same group of people too: governments.

Ah yes, "governments", that self same group of people who both abolished slavery and sent Jews to death camps.

A similarly absurd comparison, of course, because those who founded the NHS were not the same people who privatised the Royal Mail. But those who wield HFT are the exact same people who wield all the other tools of stock market manipulation.

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Re: Re: @ Vladimir Plouzhnikov

But as for rigging the markets with HFT? That just not how it works

One of the possibilities that has been amply discussed about HFT is that it could be used for simulating a 'landslide' in some stocks prices, and also be fooled to believe that one of these landslides is taking place.

A 'privileged party' with access to this technology and a lot of capital has a(nother) great tool for manipulating the markets.

Rigging is done by humans through collusion, disinformation, fraud, social engineering, exploiting or cornering the OTC markets.

Totally agreed, but allowing this technology to 'the usual suspects' -e.g. Big Money- is like allowing the neighbourhood junkies to own UZIS. The synergies between HFT and the other means available to the miscreants are too big to just ignore them.

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Re: the same group of people @ Uffish

> which is why, for the group of people in your example, we hold elections and throw out those we really can't stand.

Yes, but I think you missed the point, so I'll backtrack.

This article is about HFT. Steve Knox criticised HFT by bringing up a load of things none of which have anything whatsoever to do with HFT. When asked what they had in common, he said they came from the same group of people. By which he can only mean bankers in general, because it's not as if all the things he mentioned come from the same departments or trading markets or anything more specific like that. So his argument is: A is bad; the people who did A and the people who did B work for the same type of organisation: therefore B is bad.

My counterargument was to point out that exactly the same reasoning can be used to conclude that (for instance) the founding of the NHS and the privatisation of the Royal Mail are morally identical. Which, whatever you think of either act, is obvious bollocks.

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Re: @ Vladimir Plouzhnikov

Ah. So HFT doesn't screw over investors, it's people who screw over investors?

That's like saying, "oooh, that thermonuclear device you just built is fascinating. Let's discuss it with no thought whatsoever as to how it will get used in real life."

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Re: @ Vladimir Plouzhnikov

"You do not want lightning speed reaction during a crisis. You do want lightning speed decision making. But knowing how to manage when to act is the key. Act first think later can be a problem."

Yes, you are quite right. That's why the exchanges use trading halts as a "circuit breaker" when panic starts. They have come up with that protection mechanism long before even manual electronic trading appeared, because with humans panic works just the same as with algos.

The difference is that for humans an exchange may halt trading for 5 minutes for "cooling off", while with algorithms, as was the case with the Flash Crash of 2010, the CME only needed to stop it for 5 seconds.

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Re: @ Steve Knox

> Ah yes, "governments", that self same group of people who both abolished slavery and sent Jews to death camps.

Oo, thanks. Wish I'd thought of that example now.

> those who wield HFT are the exact same people who wield all the other tools of stock market manipulation.

No, they're really not.

The comparison of banks to governments is a fairly reasonable one, I think. Massive sprawling organisations, containing factions with a mind of their own. They have a handful of people at the top who try to control the whole thing but have only a limited effect. Certain things change beyond recognition with a change of leadership while other parts of the culture stay the same no matter how much the leadership try to change it. Various of the different parts of what is ostensibly the same organisation end up in effective competition with each other. You get the picture.

I have plenty of time for the idea that leadership comes with responsibiliy and so the CEO of the bank or the Prime Minister should take the fall when their underlings do something bad, even if they knew nothing about it or did know about it and had tried to stop it. Fine by me, and I think the salaries reflect that risk. But to argue that two things must be morally identical because they were perpetrated by people within the same organisation is nonsense.

If you don't like the example of two different governments, fine. Plenty of totally unrelated stuff comes from the same government. How about the Affordable Care Act and the Christmas tree tax? Or the invasion of Iraq and the creation of the Ministry of Justice? Or sending Jews to death camps and building a really effective network of motorways?

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Re: @ Vladimir Plouzhnikov

"So HFT doesn't screw over investors, it's people who screw over investors?"

Perhaps I did not explain it clear. HFT (systems AND people who use them) and market manipulators (people and systems they use) use totally different properties of the markets, different methods, channels and opportunities.

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Re: @ Vladimir Plouzhnikov

"One of the possibilities that has been amply discussed about HFT is that it could be used for simulating a 'landslide' in some stocks prices, and also be fooled to believe that one of these landslides is taking place."

But you don't need an HFT system to start a selling-off panic. Much cheaper just to bribe an analyst to twat something on Twitter...

"A 'privileged party' with access to this technology and a lot of capital has a(nother) great tool for manipulating the markets."

The problem with this approach (exactly as with manual attempts to move markets) is that you start with a lot of capital and end up with much less, which is usually not what the manipulator wants to achieve. In addition, by doing this you are sticking out as sore thumb in the market and the regulators will have your hide in no time. Finally, you will be the laughing stock of the entire market when it's all finished.

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Re: @Tim Worstal @ BlueGreen

> Right, so the banks didn't predict the collapse they in large part led us into so when it when it blew up in their faces they had to lie to avert a likely disaster?

There are two problems with this argument. The first is that you seem to be suggesting that, if someone does something wrong, they may never ever be allowed any credit for trying to alleviate the problem. I'm a grumpy judgemental unforgiving curmudgeon myself, but I still don't treat other people quite that harshly.

The more serious problem, though, is your use of the phrase "the banks" to describe one entity with one set of opinions and actions. That is simply not the case. The crash was caused primarily by bad mortgages. The guys responsible for the Libor fixing had sod all to do with that. Most investment bank employees have been spending the time since the crash working their arses off trying to fix and improve the system. Should we give "the banks" credit for alleviating their mistakes? Arguably not; it's what we expect anyone to do. But should we give credit to sections within banks for trying to fix the mistakes other sections made? Well, why the hell not?

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Re: @Tim Worstal @ BlueGreen

Poor choice of context for using the word "credit", I admit. Mea culpa.

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Re: @Tim Worstal @ BlueGreen

> The first is that you seem to be suggesting that, if someone does something wrong, they may never ever be allowed any credit for trying to alleviate the problem.

*They* should be given 'credit' for lying to cover up the continent sized turd *they* created?

And how badly does one have to fuck up before one is judged unfit for a post? (this is stuff that could trash a country's economy, just in case you hadn't noticed. Saying Oops and giggling over your little mistakes is less attractive in the banking sector than it is in children, I find).

> The crash was caused primarily by bad mortgages. The guys responsible for the Libor fixing had sod all to do with that.

I did not suggest that the libor guys necessarily had anything to do with the mortgage guys. However if you stand back and squint you might notice the former were dishonest and the latter were incompetend (and in some cases dishonest as well, packaging up known-crap mortgages as AAA and flogging them off, some US banks did that, recall?). Do you detect a pattern?

> Well, why the hell not?

Something seems systemically broken. We need to find out what it is and fix it, not make excuses.

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Re: @Tim Worstal @ BlueGreen

> *They* should be given 'credit' for lying to cover up the continent sized turd *they* created?

> I did not suggest that the libor guys necessarily had anything to do with the mortgage guys.

Are you even reading what you're writing?

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Re: @Tim Worstal @ BlueGreen

OK, maybe I've missed something or been dumb. Please point it out explicitly then I can try to address it, thanks.

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Re: @Tim Worstal @ BlueGreen

The first quote is you doing exactly what you claim in the second quote you're not doing.

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Re: @Tim Worstal @ BlueGreen @Squander Two

> The first quote is you doing exactly what you claim in the second quote you're not doing.

First quote is *They* should be given 'credit' for lying to cover up the continent sized turd *they* created?.

That we me sounding incredulous that you could even propose as excusable their lying to cover up their mess.

second quote is I did not suggest that the libor guys necessarily had anything to do with the mortgage guys.

Which says I agree with your point that the two banking sectors were distinct and likely unrelated.

What's the link between them? Where's the contradiction?

And you've avoided my questions, to wit

> And how badly does one have to fuck up before one is judged unfit for a post?

-and-

> Do you detect a pattern? (viz. of large scale incompetence and/or deceit)

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Mr. Worstall didn't read the book.

But I did.

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Re: Perhaps I did not explain it

Oh, you were clear enough. Some people's prejudices simply cannot be fixed by telling them the facts.

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Re: @Tim Worstal @ BlueGreen @Squander Two

> First quote is *They* should be given 'credit' for lying to cover up the continent sized turd *they* created?.

Yes, and tracing back up the conversation for context, the first "They" refers to the guys who fixed Libor and the second "they" refers to the people who created the banking crash, which you acknowledge weren't the same people.

Have you never worked somewhere where some people fix or alleviate the errors of others? Quite a normal line of work, in my experience. Doesn't deserve a medal, but doesn't deserve demonisation either.

> And you've avoided my questions

No, I just saw that you don't even understand what you yourself are writing and decided that the chances of you understanding what anyone else is writing are even lower, so decided not to bother. But OK, then.

> how badly does one have to fuck up before one is judged unfit for a post?

Are you suggesting that no-one in banking lost their jobs over the '08 crash? Since I personally opposed the bail-outs and have said so many times, I simply have no case to defend here: had I had my way, far more bankers would have lost their jobs, being judged unfit for their posts by the market itself, as they should be. (My preference, if anyone cares, would have been to let failing banks fail but then, if necessary, to bail out the non-failing banks affected by the knock-on effects.) For the record, banks are still restructuring now as a result of the crash, which includes job reductions, while the economy as a whole is apparently now picking up and unemployment beginning to fall. This isn't a sob story, just a counterexample to your claim that no-one has been judged unfit: entire departments have been judged unfit for purpose and are being got rid of.

> Do you detect a pattern? (viz. of large scale incompetence and/or deceit)

No, I think there was some incompetence and some deceit, with large-scale effects. Large-scale deceit sounds nice to conspiracy theorists, but the truth is more mundane: banks are comprised of humans, with all the good and bad that entails. Which, really, was all I was saying, in response to your insistence that every single employee of every single bank is directly guilty of causing the crash.

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Re: a lot of capital and end up with much less

The Hunt Brothers and the silver market being a clear case of that.

More interestingly, for all the bitching about them having privilege, everything they did was legal and everything was done at slow speed. Until the regulators decided to stick it to them and everything collapsed faster than it was put together.

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Re: crash was caused primarily by bad mortgages.

Proximal, but not root, which is the biggest problem with trying to fix what caused the market crash. The root cause was that the politicians FORCED the banks to make bad mortgage loans and racism is still at the heart of the problem. Despite sound methodological studies which show banks do not redline based on race but only on actual loan risk the politicians continued to demagogue the issue and force banks to make loans to black people who shouldn't have gotten them. But if they left it to only black people who couldn't afford them they could be sued for reverse discrimination so they also got extended to other people who couldn't afford them. That left the banks holding loans they knew were no good which is a violation of their fiduciary responsibility to the stock holders of the bank. Again a suing offense. So they looked for a way to offload the bad loans and hit upon the MSB. Which would have worked if the MSBs had been priced appropriately and the risk assessed properly. But the risk wasn't assessed properly. It was assumed that because an MSB consisted of nothing but mortgages it was in the same risk class. And it was handled that way until some German company tried to collect on an MSB that didn't pay their note on time by foreclosing. At which point the property owner defended by saying "but you don't own the mortgage." Which the courts properly held they did not. So the MSB holder dumped their holdings to convert it to other reliable assets.

And THAT is when the bottom fell out. Because 20 years of making lots of bad mortgage loans had been spread all over the market in MSBs. And the payment came due all in one week.

We've played around the edges trying to shore up the banking system. But the fundamental problem still hasn't been repealed: The US Congress still requires banks to make loans to people who can't afford them or face being charged with racial discrimination.

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Re: bit of insider trading would tip off the market

And here we see more rose tint in the Googleglass.

Where is the incentive for *ANYONE* to "alert the public" if they have money in the markets? Insider trading only works AT ALL when the information is kept close to the chests of a few "insiders". That's why it is called "insider" trading. You *don't* alert anyone in the case you cite because if you so much as sell to fast the HSTs and humans with better connections will stampede and you'll be broke in sparrow's fart time.

Quick analogy for you: do sellers on eBay benefit from the now-common practice of high-speed end-of-sale "sniping", or were they better off when people just bid throughout the sale?

Why is this an analogy? Because the stock in your pension fund is only worth what it will *sell* for. When you need the money, this sort of fuckwittery will ensure you don't have any.

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Re: bit of insider trading would tip off the market

> Where is the incentive for *ANYONE* to "alert the public" ... You *don't* alert anyone

When you trade based on information, you place the pricing elements of that information into the market, by definition. The market may not know the rest of the information, but then it doesn't need to.

Apart from that, I don't need to defend insider trading, as I didn't say I supported it. I was just pointing out that there's a reasonable debate about its legality and morality, and that therefore saying that it may or may not be important is hardly as rabid a thing to say as whoever-it-was-up-there screeched.

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Re: crash was caused primarily by bad mortgages. @ Tom 13

> We've played around the edges trying to shore up the banking system. But the fundamental problem still hasn't been repealed: The US Congress still requires banks to make loans to people who can't afford them or face being charged with racial discrimination.

Well said, sir. You are going to get so many downvotes.

That aside, though the US was the source of the major part of the crash, I believe the British retail banks did a certain amount of bad lending too, for different reasons. The funny thing about all this is that the problems are rooted in what politicians and regulators made retail banks do, and as a result the public are demanding more legislation and regulation, and the politicians and media are calling for the "safe" retail banks to be separated from the investment banks which "caused" the crash. Funny old world.

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Re: crash was caused primarily by bad mortgages. @ Tom 13

Yes, this being El Reg I expect to rack a good few down votes.

And I do quite understand there was a fair bit of knock on afterward. With the slick players making money on the scam, everybody else joined in too.

It's been a while now, but I read an article once about a company that specialized in profitable NINJa loans before the bubble. There's a particular segment of the employment market where you have people with unpredictable yearly incomes and small base salaries. Think really high power commission salesmen. If the sale comes through they pocket a couple hundred thousand, otherwise bumpkiss. So they want to buy a house, but their official salary is only $50,000/year and you can't count the bonus because that's not recurring. So they came up with alternate criteria for analyzing these individuals and giving them loans. Most important was the meeting with bank officers in which they personally appraised your character. And because they were high risk, and good at their assessments, they made good money and never were in risk of bankruptcy. Everybody else saw what they were doing and jumped in for the profits without knowing the secret formula with predictable results. IIRC the NINJa specialists also weren't a commercial bank, just a private lender assuming all the risk.

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Re: crash was caused primarily by bad mortgages. @ Tom 13

> You are going to get so many downvotes

Reg commenters aren't perfect by any means but a valid point still counts. Let's actually count the downvotes when they happen, ok?

> The US Congress still requires banks to make loans to people who can't afford them or face being charged with racial discrimination.

This may or may not be valid. I can't judge but maybe you can <http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=4136&TC=1> "Did the CRA cause the mortgage market meltdown? / / Two Federal Reserve economists examine whether available data support critics' claims that the Community Reinvestment Act spawned the subprime mortgage crisis."

Summary:

"Two basic points emerge from our analysis of the available data. First, only a small portion of subprime mortgage originations is related to the CRA. Second, CRA-related loans appear to perform comparably to other types of subprime loans. Taken together, the available evidence seems to run counter to the contention that the CRA contributed in any substantive way to the current mortgage crisis."

Like I said, I can't judge the veracity of this.

> British retail banks did a certain amount of bad lending too

Yes, I know a couple that got into huge debt (like, huuuuge), and the deeper they went, they observed that the more the banks pushed loans at them (until it went titsup). The bank then reduced their repayments to sweet FA & evergreened the loans so they don't materialise on their books for as long as possible. They certainly weren't an isolated example.

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Re: @Tim Worstal @ BlueGreen @Squander Two

Right, I see what you're saying. OK, my original use of 'they' was referring to banks as corporate entities in their entirety. The 2nd use was libor fixers as a few individuals. I was unclear. My mistake.

> Have you never worked somewhere where some people fix or alleviate the errors of others?

Let me try to be clear: I don't think banks (as collective entities) did an acceptable job. Libor fixing was insider by individuals, ok, fair enough, but insane lending practices were systemic to the banks' structure, not isolated pockets of people within. That's the problem.

> Are you suggesting that no-one in banking lost their jobs over the '08 crash?

Are you implying the people responsible were all held accountable? Perhaps any sent to prison? The people responsible for loosening banks' lending practices? What are you trying to defend?

Yes, the line between a banking corporation and the people that compose it is not being well represented here by me. I accept that.

> far more bankers would have lost their jobs, being judged unfit for their posts by the market itself, as they should be.

The idea of 'the market' ... I have no faith in it any more (as it stands currently).

> This isn't a sob story, just a counterexample to your claim that no-one has been judged unfit

Don't misrepresent me. I never said that.

> in response to your insistence that every single employee of every single bank is directly guilty of causing the crash.

Or that.

> No, I think there was some incompetence and some deceit, with large-scale effects.

SOME?? jesus, SOME??!?

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Re: @ BlueGreen

"...when a big company is crashing secretly and its senior managers are shoring up its share price by lying through their teeth while they get their money the hell out..."

is pretty much the definition of insider trading. The insiders have information unavailable to the general public (the company is in bad shape financially and is lying about it to the public) and they are financially benefiting from that knowledge.

Something that "...would tip off the market and therefore the public and allow ordinary people to lose less money..." would be whistleblowing on that insider trading.

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Re: @ unitron

> is pretty much the definition of insider trading. The insiders have information unavailable to the general public (the company is in bad shape financially and is lying about it to the public) and they are financially benefiting from that knowledge.

Agreed. However, interestingly, this is the legal type of insider trading, which is where the problem arises with defining it -- which is the other reason there's a reasonable debate about whether it should be illegal.

If you have insider information, it is illegal for you to make a trade based on that information. However, another way for you to use insider information is to not make a trade that you otherwise would have made, which is perfectly legal, because obviously it's impossible to criminalise a non-action. But both types of use of insider information can be equally profitable.

If you want to shore up a worthless company's share price, the last thing you want to do is to sell stock, as selling large amounts of it would signal to the market that it's worth less than believed. So, in such a situation, the legal non-active type of insider trading -- insider non-trading, if you like -- is the dishonest immoral thing, whilst the illegal type of insider trading is what would help thwart the immorality. That perverse incentive is why some quite serious experts want insider trading legalised.

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Re: @Tim Worstal @ BlueGreen @Squander Two

> OK, my original use of 'they' was referring to banks as corporate entities in their entirety. The 2nd use was libor fixers as a few individuals. I was unclear. My mistake.

But you weren't unclear. You were in fact very clear: every time I or anyone else has suggested that "banks in their entirety" and "some people who work for certain parts of banks" be treated as not exactly the same, that's exactly when you've flown off the handle. What started this whole conversation was your fury with Tim for suggesting that it was a good thing that the Libor fixers did what they did, because, you said,

> Yes, they had to lie because they fucked up because those wankers couldn't see what was coming even though it was their fucking job?

If you now acknowledge that the "they" and "they" in the above refer to different theys, how does it even make any sense?

> Don't misrepresent me.

Yes, it does seem a bit pointless when you're doing such a great job of it yourself.

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Re: The root cause was that the politicians FORCED the banks to make bad mortgage loans

No, the root cause was that the bad debt which was encouraged at many levels in the extremely multi-tiered system for buying a house in the USA was bundled into packages and these bundles became an investment end in and of themselves.

Here is some food for thought: In a system where mortgage brokers take a commission every time a mortgage is taken out, where does the incentive lie: in selling a house once in a given period of time, or in selling it many, many times in the same period?

Now consider the case of balloon payments. What factor do you think was foremost in said brokers' minds when pushing people to sign paper for which they couldn't possibly muster the dosh in the long term?

I'm rather closer to this nasty business than some here, and those pointing to group X (most popular are politicians, next the home buyers) are underestimating the incentivization issues that permeated and still permeates the home market.

The debt is the point these days, not the eventual settlement of it. That is why there is another crash waiting in the wings when holders of impossibly large student loans start defaulting. Their debt is also being bundled and traded around.

The situation with credit card debt (another bundled investment vehicle) got so bad that there was a popularization of the actual predatory nature of the business in the mid 90s and people, finally, got educated. Banks were told in no uncertain terms to stop sending pre-approved credit applications to debtors because they were not only making the problem worse by the hour, but were opening massive ID theft opportunities for the less lawful. After the crash they finally did stop, for a while, but I think it was because someone did a cost benefit analysis rather than an outbreak of sudden-onset ethics.

Faced with a record wave of personal bankruptcies brought on by impossible credit card debt, King George the Second reacted with firm and swift leadership and ... changed the law to make it much harder for a person to declare bankruptcy (but corporations were still able to avoid their liabilities with ease).

With leadership like this it is no wonder that the ship of state staggers from one iceberg to the next while everyone runs about asking what happened to all the lifeboats.

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