1/05/2011

When Regulators violate their own rules and principles

Below is part of an article I copied from Yahoo. Investing Dying as Computer Trading, ETFs & Dark Pools Proliferate On Tuesday January 4, 2011 There's an old Wall Street adage meant to inspire investors that goes "it's not a stock market, but a market of stocks." Consider that dead. Computer trading, dark pools and exchange-traded funds are dominating market action on a daily basis, statistics show, killing the buy and hold philosophy still attempted by many professional and retail investors alike. Everything moves up or down together at a speed faster than which a normal person can react, traders said. High frequency trading accounts for 70 percent of market volume on a daily basis, according to several traders' estimates. The average holding period for U.S. stocks is now just 2.8 months, according to the Crosscurrents newsletter. In the 1980s, it was two years. "The theory that buy-and-hold was the superior way to ensure gains over the long term, has been ditched completely in favor of technology," said Alan Newman, author of the monthly newsletter. "HFT promises gains are best provided by holding periods measuring as few as microseconds, possibly a few minutes, or at worst, a few hours." The problem is only made worst by the proliferation of exchange-traded funds, traders said. The vehicles, which make trading a group of stocks as easy as buying and selling an individual security, passed the $1 trillion in assets mark at the end of last year, according to BlackRock. This is probably why all ten sectors of the S&P 500 finished in the black for two consecutive years, something that's only happened one other time since 1960, according to Bespoke Investment Group. "The capital raising stock market of the past hundred years has morphed in just the last 10 years into a casino," said Sal Arnuk of Themis Trading and a market infrastructure expert who advised the SEC after last year's so-called Flash Crash. "Who is doing the fundamental work analyzing stocks? In the end, we've greatly increased systemic risk." Another factor jumped into the fray in December: dark pools. Off-exchange trading accounted for more than a third of the trading volume in December, says Raymond James. While these trades are eventually reported to the public markets, they further damage price discovery, an essential element for a fair securities market, investors said. "This was a record high market share for off-exchange trading and we believe the SEC will ultimately be forced to react to support the price discovery process by limiting off-exchange trading for all traces except for large block trades," wrote Raymond James analyst Patrick O'Shaughnessy in a note to clients yesterday. "This destroys capital markets," said Jon Najarian, co-founder of TradeMonster and a 'Fast Money' trader. "Hidden trading venues, where some participants get to peek at the orders as they are entered so long as they agree to 'interact' with a minimum percentage, is not an exchange, it's a license to steal."....

21 comments:

Anonymous said...

For the World to be truly productive, NO PAPER TRADE SHOULD BE ALLOWED!

Wally Buffet said...

Computer trading programmed to buy and sell at certain predefined signals have been around for quite some time and yet retail investors, the astute ones, that is, is still able to turn a profit on medium to long term hold.

The fears are actually quite unfounded for value investors.

If you are a day trader and buys and sells many times over a day, you defintely won't win against the computers.

Matilah_Singapura said...

> The fears are actually quite unfounded for value investors. <

Amen to that.

Let the gamblers and their folly be constant entertainment to those who can kick back and not get excited at humans and their irrationality.

Chua Chin Leng aka redbean said...

Computer trading against the average human brain is already a mismatch. To allow computers of big funds to tap into the system to see who is buying or selling what, or who is in the queue for what, then use the computer to calculate the odds to buy or sell is CHEATING. S

Stock exchanges that allow such a practice is an accomplice to the cheating.

Matilah_Singapura said...

Alamak, it is now down to computer vs computer doing the trading.

The human brain is out of the picture already -- if it is used it is there only to DECIDE whether to execute a trade or not, but that role is quickly diminishing.

The machines are gambling!

Chua Chin Leng aka redbean said...

Exactly. But the Stock Exchanges will claim that they are providing a fair system for all. No one is given an unfair advantage, no insider trading. A level playing field!!! Wow, wow, the small investors are in good hands.

In the meantime the big funds are programme their computers to do the trading against the small guys trying to use their little brains. Oh, this is fair system. Oh the big funds did not have an unfair advantage.

Perfect system and perfectly moral and legal?

Wally Buffet said...

When the fucking computers pit their algorithms against each other, the smarter programmed ones will laugh all the way to the bank.

The losing ones will be sold to the karang guni man.

Pretty soon, governments courts will also be run by computers but you can be sure that they will be damn impartial because all the grand mother tales of woe will fall on deaf years.

No mercy, to jail you go.

Hahaha............

Wally Buffet said...

Again, the greedy and ignorant ones will suffer but is that really so bad?

It is a zero sum game. Even the friggin' computers' artificial intelligence understands this.

Just like the casinos. Everyone knows that you will ultimately lose to the house but these suckers just keep coming.

The "one arm bandits" are just that. Bandits. But who is complaining that the friggin' computer inside the machine will only pay out a "jackpot" when the money just cannot be stored any more in the pirate's chest and something gotta be paid just so the lid can close!

All losers in the stock market and the casinos are willing lambs for the slaughter house.

Chua Chin Leng aka redbean said...

When I was a student, the lecturer announced that in his next lecture he would bring a tape recorder to play out his lecture. Students no need to take notes. Just bring a take recorder to tape down the lecture. Both no need to remain in the lecture hall.

In future we will have machines as judges and droids as lawyers : ) Clinically clean legal processes.

Chua Chin Leng aka redbean said...

The main difference is that the casino did not claim to provide a level playing field. They did not try to deceive the gamblers that all is fair. But they tried to key all players at the same level, no computers allowed.

Matilah_Singapura said...

If you guys think it will go back to "the good old days" I'm here to inform you that you can wish and hope :-)

The game's up fellas.

However if you are a value investor, you are better off.

Why? Because the core philosophy of value hunters is different from the "technical" guys.

Value folks begin their "reasoning" from praxeology -- or the "logic" of human action.

So fuck the technicians. Let them blow up their hedge funds and derivatives.

I love it!

Wally Buffet said...

Who even want to attend a dull, droning lecture nowadays?

Just buy the friggin' degree complete with a graduation kit consisting of a graduation gown, a mortar board, a framed degree of your "study" and a letter from the "Chancellor" of the "University" congratulating you on the successful completion of your academic career and best wishes for your future as a scam artist and high tech conman on the banking and stock market circuit.

Hehe.

Wally Buffet said...

Hehe, matilah, are you talking about me?

Matilah_Singapura said...

wally:

> matilah, are you talking about me? <

Huh? What/ when? You lost me there bro.

I was merely re-affirming my position as a value-oriented operator and one who is perennially skeptical about "technicians".

Wally Buffet said...

Then we both have something in common.

Value investors look for bargains in "gems" offloaded by gamblers conned and trounced by the computors and other unsavoury sorts lurking around or dark pooling in the den of thieves they call a stock market.

To hell with candlesticks, moving averages, head and shoulders, flags, pennants, MACD, Elliot wave theory and all the mumbo jumbo that only inmates in a mental asylum will understand.

Just know two things.

When to buy and when to sell or vice versa.

Hehe.

Wally Buffet said...

Sorry guys.

"Computors" should be spelt "computers".

Just woke up from my afternoon nap so a little bit disorientated.

Hehe.

Matilah_Singapura said...

> To hell with candlesticks, moving averages, head and shoulders, flags, pennants, MACD, Elliot wave theory and all the mumbo jumbo that only inmates in a mental asylum will understand

Actually I understand that stuff. In my younger days I used to be in awe of my friends who used to boast how much they made trading after attending XYZ courses or reading ABC books. But I think all of that is bullshit. Just like I understand religion and politics :-) Both bullshit too, and all mentioned work more or less on the same cognitive biases we as "imperfect" humans have.

Anyway I couldn't think of anything more wasteful of a life than staring down a computer screen all day in the hope of making money.

In the mid-early 1990's (when the economy was going stupid nuts -- with Greenspan printing money) I did a stint in S'pore as an expat -- replete with Dist 9 apartment, obscene salary and a challenging variety of gold-digging gorgeous regional females, I decided to re-visit Ayn Rand - an author I read in my youth.

Rand is probably to date the best author who expressed capitalism as man's highest moral achievement, derived from the nature of The Individual -- a view I hold close to my heart til today.

After reading her, I ventured on to von Mises, Hayek, Hazlitt, Rothbard -- got right into what is known as "The Austrian School", and then onto Benjamin Graham. I read Graham before I even bothered with Buffet. Actually I still don't bother with Buffet -- I don't really dig him as he's now swung to the left -- just like Soros and Gates.

All the above thinkers have one thing in common: they view economic activity in praxeological terms. The structure of capital and finance is also explained in praxeological terms instead of all that mumbo-jumbo you mentioned previously.

I've actually een working on some content I hope to put out aimed at the young 'uns -- who break my heart when I observe and experience the ridiculous ideas they've picked up from the state, popular culture, their schools and often their own homes.

The "Entitlement Mentality" is alive and flourishing -- and it is those ideas which will foster the re-birth of a collectivist ideal like communism or socialism.

Chua Chin Leng aka redbean said...

Matilah, your harping of this entitlement mentality is misplaced.

Singaporeans could have been very rich, cash rich, with their high propensity to save. Remember, we have the highest or second highest saving rates in Asia if not the world.

Why are Singaporeans so cash poor? Why are Singaporeans worrying that they have not enough savings for retirement?

If their savings have not been 'robbed', they would not have to beg for handouts, to hope for charity, to depend on entitlements.

Something really bad has happened.

Anonymous said...

It is seriously and ominously bad if the citizens are made(forced) to be the customers of their leaders.
But then hoh there WILL BE CONSEQUENCES leh, when the maggots crawl out of the closets.
Jus wait and c lah.

Chua Chin Leng aka redbean said...

Hi anon, when principles and rules and regulations are compromised, these are signs of rot. And yes, the maggots will crawl out in times to come.

Taking the first step to the dark side is easy and before long, the dark side seems so exciting.

Matilah_Singapura said...

redbean, you are mounting a "chicken-and-egg" argument.

There is only one agency that can rob legally throughout the territory: the state, which is run by the government.

...and you already know about the truism between the people and the government in power.

It is self-inflicted misery brought out by the manifestation of The Entitlement Mentality

This idea is not new, so I don't take any credit for it. Better people than me have pointed this out -- Hume, Hayek among others.