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HomeSense on Cents Interviews Joe Saluzzi Regarding High Frequency Program Trading
Posted by Larry Doyle on July 29th, 2009 7:07 AM |
High frequency program trading is the single hottest topic on Wall Street today. No individual has generated greater focus on this topic than Joe Saluzzi of Themis Trading.
I look forward to interviewing Mr. Saluzzi this Sunday evening, August 2nd from 8-9pm on NoQuarter Radio’s Sense on Cents with Larry Doyle.
This show will comprehensively cover the gamut of issues and topics involved in this highly controversial trading activity. Does high frequency program trading engage in front-running? Are retail and institutional investors disadvantaged? Are the exchanges and regulators looking the other way? What were the developments in the marketplace which brought us to this point?
NQR’s Sense on Cents with Larry Doyle will address these questions and more with the man ‘in the arena’ and at the center of the debate, Joe Saluzzi.
The show is available as a podcast on iTunes, and also archived in an audio player right here at Sense on Cents so it should serve as a tremendous informational resource as we continue to navigate the economic landscape.
Please share with friends and colleagues.
LD
Editor’s Note, 8.03.09: For a full review of this broadcast, please visit Review of Sense on Cents Interview with Joe Saluzzi on High Frequency Trading.
Related Sense on Cents Commentary:
High Frequency Trading Debate: Mano a Mano (July 24, 2009)
Is Uncle Sam Manipulating the Equity Markets? (July 1, 2009)
TARP Warrants a Review
Posted by Larry Doyle on July 28th, 2009 5:09 PM |
How is Uncle Sam doing with his TARP investments? Recall that there are two components of the TARP (Troubled Asset Relief Program):
1. Straight capital injections
Treasury would have us believe that we are doing fine on these disbursements given returns from a select few institutions. Neither Treasury, other government officials, nor the media choose to highlight that as of June 30th, the TARP disbursements had a $159 billion loss. Although Treasury defines this ‘loss’ as a ‘subsidy,’ Sense on Cents classifies the negative difference in dollars allocated versus market value of investments as a ‘loss.’
Read my full review: “The TARP Has a $159 Billion Loss”
2. Purchase of warrants
What is a warrant? From our trusty Investing primer, we learn a warrant is:
A derivative security that gives the holder the right to purchase securities (usually equity) from the issuer at a specific price within a certain time frame. Warrants are often included in a new debt issue as a “sweetener” to entice investors.
These warrants were purchased last Fall at the time of allocating capital to a wide array of financial institutions. How is Uncle Sam doing? Should he exercise these warrants? Are they ‘in the money,’ meaning the current price of the stock is higher than the ‘strike price?’ Warrants also have time value. That is, the amount of time until the warrant expires. TARP warrants were generally 10 year warrants. That is a long time and represents a lot of value for the taxpayer.
Let’s check Subsidyscope, our fabulous link in the right sidebar here at Sense on Cents, to monitor a whole host of developments going on in Washington with OUR tax dollars. In regard to the TARP warrants, we learn:
Based on the closing prices on July 27, 2009, only 37 of the 234 warrant transactions listed on Subsidyscope are in the money. Some of the biggest recipients of TARP funding are in the most difficult financial situations. For example, the closing stock price for AIG was $13.00 on July 27, which is 420 percent below the strike price of $2.50 of the warrants that the government received on November 25, 2008; and Citigroup’s closing stock price of $2.69 on July 27 is 85 percent below the strike price of $17.85 of the warrants the government received on October 28, 2008.
While AIG’s stock valuation may appear to be in the money, please be aware that AIG recently executed a reverse stock split.
Readers can regularly check these TARP warrants at Subsidyscope’s Monitoring the Value of the TARP-Funded Warrants.
Additionally, not unlike many brokers who tout their winners while disregarding their losers, please do not allow Secretary Geithner or any other government official to ‘blow smoke’ about how well we are doing with our TARP investments.
A $159 billion loss combined with only 37 of 234 warrants being in the money after an enormous rally in our equity markets is not exactly a stellar performance.
Please utilize the tools at Sense on Cents and Subsidyscope to keep Uncle Sam honest as we all navigate the economic landscape.
LD
Finding a Job and Growing a Career
Posted by Larry Doyle on July 28th, 2009 2:28 PM |
Is business more a function of what you know or who you know? While some people may believe one factor is more important than the other, prudent risk management dictates you put as many ‘arrows’ as possible in both ‘quivers.’
We are obviously living through extremely challenging times. The greatest challenge facing many people revolves around the question of employment. I do not pretend to have a magic formula on finding a great job and developing a long and successful career. That said, I have had enough experience helping people on and off Wall Street to provide insights on this all important topic.
In my opinion, the key to finding a job and then growing a career centers on two factors: discipline and relationships. One needs the discipline to continually move further up the learning curve. Knowledge is power. That said, all the knowledge in the world will be minimized without the ability to engage and develop relationships.
Business of all stripes is ultimately all about relationships. The ability to initiate and grow relationships is of paramount importance in any field. In the process of developing relationships, one should network extensively so that one relationship grows into multiple relationships.
This is all well and good but many people will ask, ‘where do I start?’ I would respond by collecting data and material via informational interviews before you even start to think about pursuing a job. (more…)
The Downfall of Kidder Peabody or Taking ‘the House’ to ‘the Cleaners’
Posted by Larry Doyle on July 28th, 2009 12:24 PM |
Some of the greatest financial heists in Wall Street history have been ‘inside jobs.’ What do I mean? Virtually every financial con on Wall Street has been predicated on the ability to control the flow of funds and information from the ‘back office.’
For this very reason, Federal Reserve rules now dictate mandatory two weeks of consecutive vacation for bank employees involved in the markets. Why? During that time period, compliance and control officials can check the books and records and make sure there are no illegal or illicit activities.
I am reminded of this rule in reading a Bloomberg report Kerviel Lawyer Says SocGen Knew of Trading Positions:
Jerome Kerviel, the trader blamed by Societe Generale SA for a 4.9 billion-euro ($7 billion) loss last year, told a French court that his superiors were aware of his activities.
Kerviel never tried to hide his trades and about 300 of the Paris-based bank’s employees would have been able to see his trading positions on his computer, Kerviel’s lawyer Olivier Metzner, said in an interview today. Metzner filed arguments to a Paris court countering prosecutors’ recommendation that Kerviel be tried for abuse of trust, falsifying documents and computer hacking. The filing repeats Kerviel’s long-held stance.
“In 2007, he was making money and they let him go on,” Metzner said. “In 2008, it all went bad, the machine was exposed, they unwound the positions in a panic and they created losses.”
The defense argument is the final step before a decision by investigating Judges Renaud Van Ruymbeke and Francoise Desset in September on whether Kerviel should be tried. The judicial inquiry began less than a week after Societe Generale disclosed the loss on Jan. 24, 2008, after selling Kerviel’s positions.
Societe Generale said Kerviel made trades without proper authorization and hid them with faked hedges.
“The bank wasn’t aware of the extent of Kerviel’s positions,” said Jean Veil, Societe Generale’s lawyer. “That’s been proven by reports by the financial police department, by stock market regulators and by the Banking Commission.”
Whether SocGen management knew of Kerviel’s trading activity or not is for the courts to determine. Either way, though, there was an enormous breakdown in risk management and internal controls.
During my career, the downfall of Kidder Peabody – a 130 year old firm – in 1994 was the greatest example of ‘taking the house’ to ‘the cleaners.’ How did this occur? A government bond trader by the name of Joe Jett figured out a scam to ‘arb his back office,’ meaning he gamed Kidder’s internal systems to create the illusion of hundreds of millions in profits. In the process of doing so, Jett’s trading book in his sector of the market ballooned to astronomical levels. (more…)
Wall Street 2009: Too Smart for Our Own Good?
Posted by Larry Doyle on July 28th, 2009 8:03 AM |
Did the world’s candlemakers openly rail against Thomas Edison and his development of the light bulb? I have to imagine those candlemakers weren’t all that happy at the time. Edison embodied the American spirit. Capitalism thrives on the entrepreneurial spirit. That spirit promotes competition and has propelled our economy, our country, and our world over the years.
Capitalism also thrives on honest, open, and fair markets. Major financial and economic scandals over the years have often centered on self-dealing, abuse of insider information, and some semblance of unfair trade. These practices often capture enormous profits for a period of time but ultimately they kill trade. Why? Profits are a function of increased productivity, increased margins, and increased market share. To the extent that questionable, if not unethical or illegal, business practices initially promote greater profitability at the expense of future business flows, the foundation of that business has serious flaws.
Welcome to the world of finance 2009. In one way, shape or form, we have seen increasingly abusive business practices coarse through our markets and economy over the last few decades. From questionable asset securitizations to various forms of electronic trading, the practitioners have often reaped initial windfall profits while enacting real long term damage. How and why does this happen?
Highly intelligent people who are not properly regulated will drive profits to levels which are initially euphoric but if not properly monitored and managed are ultimately fatal. How so? When market participants feel that playing fields are not open, level, free, and fair, they will take their bat, ball, and capital and go play elsewhere. In so many words, the best and the brightest who implement trade strategies and computer programs are often simply ‘too smart for their own good.’ This scenario repeats itself regularly! (more…)
An Open Letter to the Board of FINRA Regarding Auction-Rate Securities
Posted by Larry Doyle on July 27th, 2009 3:17 PM |
To: The Board of the Financial Industry Regulatory Authority (FINRA);
FINRA Investment Committee;
FINRA Audit Committee
From: Larry Doyle, Sense on Cents
Re: Auction-Rate Securities
I am a longstanding Wall Street veteran, a private investor, an avid supporter of free and fair markets, and a financial blogger at my site, Sense on Cents.
I launched my website/blog earlier this year specifically to help people more fully understand the economy and the markets during these challenging times.
In my opinion, the greatest challenge facing our markets and our country at this time is the question of confidence and integrity in the system. Little surprise why the topic of financial regulatory reform is receiving so much attention.
Against that backdrop, I am heartened by recent increased legal action taken primarily by selected attorneys general in pursuing entities involved in the fraudulent marketing and distribution of Auction-Rate Securities. We could debate at length why and how the ARS market failed, but there is no doubt these securities, sold as cash surrogates, were distributed in a fraudulent fashion. Thousands of investors and approximately $165 billion in ARS remain frozen.
I view the ARS market as having three legs — issuers, investors, and distributors (both primary Wall Street banks/brokers and downstream entities). Who was situated at the epicenter of this debacle charged with protecting investors? The SEC and FINRA.
FINRA specifically occupied a position not only as a regulator but also as an ARS investor. Whether FINRA representatives want to believe it or not, any semblance of rational and prudent thought would determine that FINRA was conflicted as a result.
Having written extensively on this topic and engaged FINRA spokesperson Herb Perone on this issue, I call upon you, the members of FINRA’s Board, Investment Committee, and Audit Committee, to release all pertinent details involved with FINRA’s liquidation of their ARS position in 2007.
Why is this necessary? Very simply, in order to regain total confidence in the markets it is of paramount importance that there be complete transparency and integrity on behalf of the regulators. To that end, for the benefit of all issuers, investors, and distributors of ARS, I believe it is incumbent on you to release the following information regarding FINRA’s liquidation of ARS:
1. Date of sale
2. To whom or through whom did the liquidation occur?
3. At what price did FINRA sell their ARS?
4. Why did FINRA decide to liquidate the entire $647 million ARS at that time?
5. Did FINRA possess material non-public information at the time of liquidation and act upon it?
6. Given that FINRA is charged with protecting investors, and given its position in the financial industry, how and why did they not post an investor warning about the freezing and subsequent failure of the ARS market prior to its complete failure in early 2008? How many investors and how many dollars could have been protected in the process?
I issue this letter publicly hoping that others may also be able to utilize the information contained herein and generate the release of this information.
In the spirit of full disclosure, I have never owned an Auction-Rate Security. I write merely as a private individual interested in helping the thousands of investors looking for a timely return of their capital.
I thank you.
Respectfully,
Larry Doyle
http://www.senseoncents.com/about/
Wall Street Has a Problem as High Frequency Trading Moves to Washington
Posted by Larry Doyle on July 27th, 2009 11:25 AM |
When a hot financial topic hits Main Street and there are political points to be scored or lost in the process, little wonder it quickly moves on to Washington. I speak of the increasing attention and focus on high frequency program trading.
The serious ethical, if not legal, concerns surrounding high frequency trading hit Main Street this past Friday with a lead article in the New York Times. I highlighted that article along with my extensive writings on this topic here at Sense on Cents in my piece “Wall Street Has a Problem as High Frequency Trading Moves to Main Street.”
Well, we awaken this morning to see the high frequency trading issue making waves in Washington. The Wall Street Journal reports In a Flash, Schumer Warns SEC:
Sen. Charles Schumer (D., N.Y.) told the Securities and Exchange Commission that he will move to limit “flash” orders for stocks if the agency takes no action against them.
The practice routes stock trades through private liquidity pools before being sent onto other exchanges for filling. Critics contend that flash ordering creates a two-tiered system of investors, where those with access get a better price than those without.
“If the SEC fails to curb this practice, I plan to introduce legislation in the U.S. Senate to prohibit the use of flash orders in connection with optional pre-routing programs in order to ensure that trading in U.S. public capital markets is fair and transparent for all market participants,” Sen. Schumer wrote Friday.
While on one hand I commend Schumer for being proactive on this front, I am reminded that he has been one of the largest beneficiaries of campaign contributions and lobbying dollars from the banks and hedge funds engaged in high frequency program trading. Without questioning Schumer’s motivations, is he taking action to curry public favor against his being linked so closely with Wall Street?
Additionally, the fact that Schumer or any other political representative needs to address this issue again brings into question the efficacy of the regulatory bodies charged with protecting investor interests. How can any observer of high frequency program trading believe the investor playing field is anywhere close to being level?
Why has the field sloped? Very simply, as the various stock exchanges compete for business, the officials running the exchanges have traded investor protection and interests for the volume and revenues provided by high frequency program trading.
Who should have been engaged with these exchanges to prevent these abusive trading programs? The SEC and FINRA. Who actually exposed the issues surrounding high frequency program trading? Financial blogs and Joe Saluzzi of Themis Trading. I commend Mr. Saluzzi given his position in the marketplace.
I am excited to apprise our readers and listeners that I will have Mr. Saluzzi as my guest this Sunday evening August 2nd from 8-9pm on my internet radio show, NoQuarter Radio’s Sense on Cents with Larry Doyle.
Perhaps our elected representatives in Washington along with financial regulators at the SEC and FINRA may care to listen and learn.
LD
Related Commentary
Is Uncle Sam Manipulating the Markets?; July 1, 2009
Is Uncle Sam Manipulating the Markets? Part II; July 6, 2009
Is Uncle Sam Manipulating the Markets? Part III; July 8, 2009
Why High Frequency Program Trading Smells; July 14, 2009
High Frequency Trading: Point-Counterpoint; July 17, 2009
High Frequency Trading Debate: Mano a Mano; July 24, 2009
Chinese Stimulus Superiority or Just Another Bubble?
Posted by Larry Doyle on July 27th, 2009 8:48 AM |
Is China leading the global economy out of the severe economic recession or is it setting the table for another leg down by creating another bubble? Is the United States economy beholden to developments in the People’s Republic of China? Let’s look eastward and navigate the Chinese economic landscape.
Recall that China has recently become our largest creditor. Additionally, China’s economic stimulus enacted and largely disbursed is already three to four times the size of the United States stimulus as a percentage of GDP. (U.S. stimulus of $700 billion is approximately 5% of GDP. China’s stimulus of approximately $600 billion is the equivalent of 20% of their overall GDP of $3 trillion) From China’s perspective, it is nice to have an enormous surplus and a government controlled economy.
Let’s review some of the inner workings within the Chinese stimulus and the current view of the Chinese economy and markets. From Stratfor Global Intelligence, we learn:
1. fully one fourth of the Chinese stimulus is targeted at helping the province of Sichuan recover from a massive earthquake in May 2008.
2. the bulk of the Chinese stimulus is focused on infrastructure with little assistance for faltering export based industries.
3. loan growth has exploded in the first half of the year. This has to be a positive, correct? Stratfor is very concerned and writes:
China is more concerned about maintaining employment than about ensuring that money is used efficiently. And the result of such a sudden surge in loan-granting will inevitably be a mounting of nonperforming loans that will eat at the very heart of the Chinese financial system (a similar problem is what brought down Japan in 1991).
And that is the good news. Much of this loan surge — by some reports, perhaps as much as half — is being lost to scams, corruption and simply using the money to play the various Chinese stock markets. The Shanghai Composite Index, for example, is up 50 percent since its lows in November 2008 — an otherwise inexplicable development considering the steady stream of bad economic news that has trickled out of Beijing in recent months.
As I think of this analysis, I immediately wonder if China is creating a semblance of a bubble in their economy and in their stock market. Arjun Divecha, portfolio manager of Berkeley, CA based GMO, holds similar concerns. In an interview published in Barron’s this weekend, Divecha was aksed about his concerns in China and specifically Chinese lending. He asserts:
“I believe a lot of the money is not going into productive investment. What we are hearing anecdotally is that a lot is being lent by the banks, which remember, are government-owned. Who are they lending to? For the most part, this money is going to state-owned enterprises, which are not particularly efficient companies.
We know they are buying real estate, and they are doing all kinds of things we don’t think in the long run is particularly productive investment.
Barron’s asks Divecha what will be the consequences in China of this stimulus plan? He responds:
“Two things are likely to happen. First, longer term, if the banks don’t have a problem with bad loans now, they will almost certainly have a lot more bad loans two or three years from now. Second, from a short term point of view, at some point the government is going to get really worried about having too much credit-creation; that leads to a credit bubble, just like you had in this country and everywhere else. As a result, they will start to withdraw liquidity by tightening the gates on the money. I don’t know when that will be. But I worry that it is coming.
A fair amount of the stimulus money has found its way into the real estate and stock markets because China has a closed economy. So there is no way for money to leave the country. The stock market and real estate have had huge spikes. So when that liquidity is withdrawn, it seems inevitable that the stock market will take it badly.
Is the United States likely to suffer a similar consequence? I am very concerned.
For further analysis of China and all the emerging markets, please review my interview last evening with Dr. Paulo Vieira da Cunha on No Quarter Radio’s Sense on Cents with Larry Doyle. Dr. Vieira da Cunha is a former Brazilian central banker and currently works at Tandem Global Partners in New York. He is also a visiting scholar at Columbia and serves as a consultant to the International Monetary Fund. He provided riveting insights and perspectives not commonly found in financial periodicals or the financial media.
LD
Related Commentary
Rise of Emerging Markets Triggers Alarms
by Dominic Elliott and Elizabeth Pfeuti
Wall Street Journal; July 27, 2009
NoQuarter Radio’s Sense on Cents with Larry Doyle
Posted by Larry Doyle on July 25th, 2009 10:07 PM |
UPDATE: The show has concluded, but you can listen to a recording in its entirety by clicking the Play button on the audio player below. Once the playback has started, you can fast forward or rewind to any portion of the show by clicking at any point along the play bar.
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Please join me this Sunday evening July 26th from 8-9pm for my weekly internet radio show, No Quarter Radio’s Sense on Cents with Larry Doyle. For our newer readers and listeners, this show is a weekly one hour discussion, commentary, and review of the markets, economy, and world of global finance. Call-ins and a chat room promote active Q/A.
This week I have a very special guest. Allow me to introduce a man who, in the world of international finance, needs no introduction: Dr. Paulo Vieira da Cunha, renowned emerging market economist of Tandem Global Partners.
Former Deputy Governor of the Central Bank of Brazil and one of three Monetary Policy Committee Members, Dr. Vieira da Cunha was Brazil’s representative at the G-20 meeting of Central Bank Governors and Finance Ministers until January 2008. Dr. Vieira da Cunha is a visiting scholar at Columbia University and a consultant to the International Monetary Fund (IMF).
For nearly a decade, he produced and managed research on Latin America for the global securities industry, first at Lehman Brothers and later at HSBC where he managed research teams in Buenos Aires, Mexico City, New York, and Sao Paulo.
Dr. Vieira da Cunha had a distinguished career at the World Bank where he was Senior Adviser to the Chief Economist, Nobel Laureate Joe Stiglitz from 1993 to 1996. From 1996 to 1998 he was the Lead Economist for Mexico and also had operational assignments on Russia, Turkey, and Uganda.
Prior to joining the World Bank, he was the CFO of a large state enterprise in the state of Sao Paolo (Prodesp) as well as advisor to the Secretary of Budget and Finances on the issues of renegotiation of domestic and foreign debt. Earlier in his career he held senior positions in the government of the State of Sao Paolo.
To say that I am excited to have Dr. Vieira da Cunha on NQR’s Sense on Cents with Larry Doyle this Sunday evening would be a gross understatement. With the emerging markets leading the world at this juncture, there is much to navigate in this sector of our economic landscape. Dr. Vieira is uniquely qualified to provide perspectives and insights not commonly found.
Please spread the word.
LD
Sense on Cents Week in Review: July 20-24
Posted by Larry Doyle on July 25th, 2009 11:41 AM |
If you have to dig for something there is a greater chance of not finding it. In an attempt to lessen the digging and facilitate the delivery of my work here at Sense on Cents, I would like to launch the first of my weekly reviews.
Sense on Cents Week in Review is strictly a descriptive listing of my written work over the course of the last week. Please let me know if you find it helpful and productive. I hope so. With no further adieu . . .
1. Wall Street’s Greatest Fraud, July 20
-Charles Schwab is being sued by NY AG Cuomo over Auction-Rate Securities.
2. Obama Playing ‘Four Corners’ Offense in Budgetball, July 20
-White House delays in releasing updated economic and budget reviews.
3. Tim Geithner: Anything but Transparent, July 20
-Geithner is taken to task by Neil Barofsky, the Special Inspector General overseeing the TARP, for lack of transparency.
4. Detroit Schools: ‘A National Disgrace’, July 21
-Detroit Public Schools are on the verge of bankruptcy. This school system has previously been designated a national disgrace by Secretary of Education Arne Duncan
5. Is Ben Bernanke a Grand and Wonderful Wizard?, July 21
-can the Federal Reserve and Fed chair Bernanke manage the economy? Is it time to audit the Fed?
6. Bernanke Promises to Keep ‘Punch Bowl’ Filled, July 21
-Fed chair Bernanke promises to keep short term rates low for an extended period. Market rallies big in the process.
7. CIT-go Into Bankruptcy?, July 21
-despite an emergency financial transaction over the weekend, will CIT still enter into bankruptcy?
8. The King of Wall Street Takes on the Casinos, July 22
-Larry Fink, CEO of BlackRock (and Sense on Cents proclaimed King of Wall Street), rails on Wall Street banks for their lack of capital commitment.
9. CIT Gets ‘Don Corleone Financing’, July 22
-the terms of CIT’s emergency financing are released and are reminiscent of those imposed by the Godfather!!
10. Financial Literacy Is the First Step to Financial Independence, July 22
–Sense on Cents looks to help people navigate the economic landscape and become more financially literate on the path to financial independence.
11. Are We in the Early Stages of a Depression?, July 23
-a review of a white paper put out by Sprott Asset Management
12. Uncle Sam’s Dirty Little Secret Is Revealed, July 23
-further color on the hundreds of billions in projected losses at Freddie Mac and Fannie Mae.
13. The Relaxation of Mark-to-Market May be Stiffening, July 23
-Bloomberg’s Jonathan Weil addresses a FASB proposal to require fair market valuations of assets held by financial institutions.
14. Daily Market Discipline, July 23
-your host waxes philosophical on the necessity to take a long term, disciplined approach to the markets, economy, and life itself.
15. Wall Street Has a Problem as High Frequency Trading Moves to Main Street, July 24
-STRONGLY RECOMMENDED, this piece addresses the increasingly hot topic of high frequency program trading.
16. Wall Street Supercop, July 24
-what will be the future of Wall Street regulation?
17. No Quarter Radio’s Sense on Cents with Larry Doyle , July 24
-do not miss my Sunday evening radio show as I welcome Dr. Paulo Vieira da Cunha, renowned emerging market economist, of Tandem Global Partners.
18. High Frequency Trading Debate: Mano a Mano, July 24
-Joe Saluzzi of Themis Trading and Irene Aldrich of Able Alpha Trading engage in a heated exchange about the relative merits and ethical nature of high frequency program trading.
I do sincerely hope this compilation of my work over the past week facilitates your ability to easily access issues and topics I considered most interesting. If so, please let me know and share this review with your friends and colleagues.
If you like my work, please follow us on Twitter, become a fan on Facebook, or perhaps best, subscribe to our work via e-mail delivery. All of these links are in the right sidebar.
Enjoy your weekend and thank you all for your tremendous support.
LD
