Locklin on science

The Atlantic: tool of the oligarchy

Posted in finance journalism by Scott Locklin on June 30, 2010

I’ve been sent this “article” a number of times recently by people who don’t care about my blood pressure. Like most mass media expositions where the reporter is out of his depth (aka virtually everything you read anywhere), it ends up being a recitation of the talking points of someone with an agenda, aka the entrenched powers, and other people who can afford marketing campaigns and press agents. The state of modern democracy being what it is, I have no doubt the dirtballs who originated these talking points will get their way in this matter just as they did with the recent “health care reform” -what I like to call “the continued insurance company, government agency and AMA gravy train act.”

Correcting these bozos is a sisyphean task, and I’m already sick of doing it, but I’m going to anyway, with excerpts and translations.

“But he thinks that without better regulation, more algo-gone-wild scenarios are inevitable. He notes that while controls at big firms, like Citi, are generally exemplary, second- and third-tier firms present a graver risk.”

Yessiree; let’s hand over all our liquidity provision to the geniuses who destroyed the economy in 2008. What a brilliant idea. They’re too big to fail, after all. What could possibly go wrong with only letting “first tier firms” participate in the market? Sure, the little guy doesn’t have as many safeguards; he also controls hundreds or thousands of times less capital.

“The SEC wants to hire a lot more staffers, both for its new risk division and for its trading division, and it is considering new methods of tracking algorithmic trades”

Well, that’s a surprise: a modern American government bureaucracy who wants to hire a “lot more staffers!” Usually they meticulously squeeze every penny of value from each bureaucrat, whose every waking moment is devoted to their mission, so the taxpayer gets best value for his money. Since the SEC did so well in 2008, giving them lots of money and power is the obvious solution.

“The commission also may soon outlaw a practice called “naked access,” in which some broker-dealers offer their clients direct access to exchanges—allowing them to potentially bypass risk controls—in pursuit of faster trading.”

Obviously, having 2-3 really good companies doing direct market access is, like, way better than 1000 little ones who all do it a little bit different with vastly smaller amounts of money. By this logic, distribution of all goods and services in America should be done by Walmart. All food will now be distributed by MacDonalds: they have really excellent food safety compared to most people’s kitchens. Or hell, let’s just nationalize it all and spend the rest of our lives eating gruel and hunting thought criminals, like the proles in Metropolis.

“At least a few high-frequency traders have learned to make a killing by detecting the more simplistic algo strategies deployed by basic pension funds and mutual funds, buying the next stock the funds plan to buy, and then selling it to them at a higher price. This may not be illegal, but it’s almost certainly unfair to the funds’ investors.”

Oh no; liquidity providers are stealing from Widows and Orphans! Wheras market specialists, operated by the beneficent charities known as Citi, JPM or Goldman; which is what we’d get if we restrict this business, would never, ever, ever do such a thing, right? What this knucklehead journalist is describing is called “providing liquidity.” If the pension funds don’t know how to look for cheap liquidity, that’s because they don’t care about their investors. This isn’t mere Locklin hyperbole: this is direct business experience. I’ve pointed out where people are getting robbed by placing orders for giant lots, and they merely shrug. What do they care? It ain’t their money! So, rather than pointing out the pension fund managers who are actually stealing billions in unearned management fees from widows and orphans via their laziness and ineptitude: they go after the little guy who is just buying and selling competently, because it’s his money at risk.

“…says Joe Saluzzi”

We already know about Joe Saluzzi -the fellow who thinks it’s his civil right to profitably trade using a squawk box and ticker tape. If we listened to guys like him 100 years ago, we’d still be stepping in horse pookey when we cross the street.

I’ve spent a good fraction of the last two years of my life developing tools to be used in this business. Should these talking points be turned into laws, assuming I don’t do something like move into a yurt in Mongolia and write anarchist manifestoes for the rest of my naturals, this means I (and everyone else who does this) will go work for one of these gigantor companies. Rather than keeping the half of the fruit of my labor the government allows me to keep, I’ll hand most of it over to some faceless ingrate and toady for a bonus like everyone else does. If they succeed in making liquidity provision the domain of large entrenched bureaucracies, you will pay more, rather than less for it, and it will be dealt out by powerful cartels rather than risk taking individuals. What they are proposing is like banning all non-chain restaurants because someone might get food poisoning at a greasy spoon, and because individually owned restaurants are more profitable than chain franchises. I, personally, don’t want to live in that world. Neither will anyone else: trade flow will simply move elsewhere, and Wall Street will end up looking like the ruins of Detroit.

The anti HFT moral panic is a naked power grab by large firms who don’t want to have to compete with the small businessman. The fact that it is perpetuated by “journalists” who are supposed to be watch guards protecting the little guy is an obscene perversion. Pardon me if I shed no tears for them as they’re made obsolete by the internets. When they stop acting as mouthpieces for the people who are turning my country into a 21st century version of the Byzantine empire, perhaps I’ll develop some sympathy for them.

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8 Responses

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  1. L said, on June 30, 2010 at 9:19 am

    Hopefully the SEC will install Net Nanny on new staffers’ computers. It would be a shame if they were the last to know about the next crash because they were too busy jerking off to pr0n. Again.

  2. William O. B'Livion said, on July 1, 2010 at 3:37 am

    The hard part is not figuring how who to kill, it’s who to let live.

  3. kid dynamite said, on July 2, 2010 at 6:09 pm

    hi scott –
    and the funny thing is that the public is being told that high frequency traders ARE the big bad TBTF firms manipulating the market and getting bigger and richer… while in reality it’s largely small entrepreneurs (like you) and big ones too (like Citadel, etc)… do you read my blog? i’ve written about HFT at length…
    -KD

    • Scott Locklin said, on July 2, 2010 at 8:02 pm

      Hey Kid: no, I hadn’t read your blog before, but you have some good stuff on HFT indeed.

      http://fridayinvegas.blogspot.com/search/label/HFT

      The HFT thing happening right now is precisely a disinfo campaign by someone in the banking industry (and dudes like Saluzzi). It’s classic “slight of hand” trick -don’t look at the securitization industry, no sirree, bub; go look at them evil greedy HFTs who are ruining everything. Since the HFT business is, to say the least, highly fragmented, there are no designated spokespeople to keep the public informed on the subject. The only real thing to be done is to point out the worst offenders for ridicule.

  4. deniz said, on July 3, 2010 at 5:08 pm

    I guess some people want to go back to the days of 1/4 spreads and getting screwed by specialists on the floor.

  5. cargocultist said, on September 12, 2010 at 5:56 pm

    There are a few things about HFT that should worry people. One is the effect on stock prices assuming that the velocity of circulation of money does actually means what economists say it means. The trading volume on the NYSE these days is what is it is because of HFT trading.

    The other is that a lot of the trading is done on leverage using borrowed money. So although at some level HFT is what should be happening, in terms of transforming the old market makers into some form of fully automatic routing system, at another level its probably at least in a part yet another product of the run away debt process.

    • Scott Locklin said, on September 13, 2010 at 1:59 am

      Most of the strats I know of in HFT are not levered. That’s the point of HFT; big returns, low risk: no need for leverage and gambler’s ruin risk. Not to say you can’t get wiped out, but you’re not wiping someone else out with your leverage.

      Contrast that to the financial apocalypse, which, despite what the fucknuts in the media will try to get you believe, happened via good, old fashioned banking -no crazy derivatives were necessary for that insanity. Just too much cheap money.

  6. [...] least they’re not pimping talking points for the oligarchy this time: it’s just general journalistic imbecility. No, Anne Hathaway news does not drive [...]


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