My last blog post on high frequency trading got a remarkably wide reception – and was reprinted for a number of different audiences. The remarks at Talking Points Memo were muted and didn’t touch the overall angst concerning this issue. That’s not surprising – that is clearly the politics driven audience. The commentary at Business Insider was outright hostile with the overall consensus being that I am an idiot. The reception by myself blog was balanced – with several people pointing out errors I made (and I made a few and with most talking about the argument on its merits.
Still – one lesson – if you write an article that is not outright critical of Wall Street practice then you should expect to be named an idiot. I acquired endless email messages asserting my stupidity. All I needed to really understand what the risks Goldman is taking to make those trading profits. Sure I know most of them are fixed income – however the balance sheet continues to be in the trillion-dollar range that crisis has demonstrated that eventually these balance sheets get socialized. If taxpayers are eventually on the hook then it is incumbent on taxpayers (at the very least) to understand and manage the potential risks that they are taking through their regulatory organizations.
- Buy-out/restructuring disputes
- Video Performance
- Know your people and appearance out for their welfare
- $25 cash return granted after first purchase3
- Science fiction
- Which basic principle is adopted in single entry system as well as double entry system also
- Resolution expertise
Anyway back to the hot-button issue which is digital and high frequency trading. – let’s discuss front working First. 129.60 over me. I called this entrance working. 129.55 they are not committing the criminal offense of “front running” – but using the public information in my own bid to make a different bid.
129.56. That difference is significantly less than 0.01 percent and if you are in my business (strict fundamental investing for the medium and long terms) it creates no sense to worry about that sort of percentage. Front running as a criminal offense might have mattered when notional spreads were wide and we did not have 1c prices. But now the issue is just prices over me and my clients – not whether those orders are legal or elsewhere.
The issue is not front-running per-se (except maybe using my broader – non-criminal use of the word). The problem is that more often than not, as a smallish organization, we are compelled to go to the middle of the pass on or often cross the pass on to get stuffed. Traders – whether they are bots or the traditional screen addicted investors of yore make a good percentage of their revenue simply by regularly earning spreads. One old Sydney Futures Exchange investor (open up outcry) accepted that (unsurprisingly) was how he made his living.
Traders make profits on the short-term positions (and sometimes make surprisingly good profits on collateral). Those profits come out of someplace – and I am not averse to the idea that Bronte and its clients pay a little share of them. I am not averse to the idea that clever algorithmic traders effectively “tax” other market participants (and I am not especially scared of that loaded word “tax”). Nonetheless the taxes is small and the pressing concern is not and really should not be considered a target for major reform.
The attention performed in the blogosphere – powered in part by Zero Hedge – is merely not warranted. 15 shares (say 0.07 percent) and I can easily get brokerage at a tenth of a percent. I can often buy more than enough stock at the top quality of spreads. Even if I lose to the algorithmic traders each time (and I acknowledge that I really do a fair bit) then – hey – I am paying 0.15 percent for trading.
That will be a lot better than it was back many years ago when brokerage fees were set, large and non-negotiable. Moreover as a simple-driven investor the turnover in my own portfolio is low. Ideally we will start less than once per three years – but as market volatility is high we seem to be getting more opportunities once and for all switches than that. I can’t envision how the switching charges for Bronte Capital’s stock portfolio are greater than these were before brokerage reform despite having the “tax” that high-frequency investors impose on all of those other market.
Likewise we trade money with spreads of just one 1 point (ie down to the hundredth of a US cent). This pressing issue is – as I recommended – a distraction. There are many real issues for financial reform – and one of the most crucial in my view, being the large and seemingly wholesale-funded balance sheets of investment banks.
Nobody really understands these balance sheets but eventually we (though the tax foundation) are guaranteeing them. That is what the slogan “no more Lehmans” means. Can we concentrate where it issues? HFT remains a distraction. PS. Thomas Peterffy described in the responses to my last post that pretty good algorithmic trading is open to small institutions like Bronte at suprisingly low fees.