Professor Mark J. Perry's Blog for Economics and Finance
Dr. Mark J. Perry is a professor of economics and finance in the School of Management at the Flint campus of the University of Michigan. Perry holds two graduate degrees in economics (M.A. and Ph.D.) from George Mason University near Washington, D.C. In addition, he holds an MBA degree in finance from the Curtis L. Carlson School of Management at the University of Minnesota. In addition to a faculty appointment at the University of Michigan-Flint, Perry is also a visiting scholar at The American Enterprise Institute in Washington, D.C.
103 Comments:
A somewhat specious comparison.
Usually, investors in equities can only go on margin by 50 percent.
There are substantial paper trails (digital trails) that means identifies of equity buyers can be obtained. If the SEC wants to know who was behind suspicious trading, they can find out.
The commodities markets allow identities of true buyers to be cloaked permanently, and heavy leveraging is possible.
It is legal to plant stories about commodities, or issue "reports" and trade on perceptions generated. That is illegal in equities.
I could go on. But parallels are feeble.
benji-
but what difference does that make in terms of prices in anything but the shortest of terms?
sure, a futures contract is levered, but less so than many equity options. your idea that equity purchase is limited to 50% margin is way off. 20:1 is common in options. market makers/issuers there delta hedge exposure by buying the common. it's little different than commodities.
however, a future differs from an option in a very important way: hold it to expiry and people show up at your house (or depot of choice) and actually deliver the goods. at that point, you need to pay cash. therefore, speculators cannot, in most cases, hold a contract to maturity. they must sell before it expires. that pretty much demolishes the ability to drive prices up long term.
imagine you make a pork bellies market. you see huge open interest near contract expiration and know there is no way that many people are going to take delivery of hogs. the prudent speculator sells like crazy ahead of the others having to bail out and not take delivery.
options do not work that way. if you hold a losing call, you just toss it.
futures markets cannot cloak ID anymore either. since 9/11 there has pretty much been no such thing as an anonymous financial transaction into or out of the us.
"futures markets cannot cloak ID anymore either. since 9/11 there has pretty much been no such thing as an anonymous financial transaction into or out of the us."
Morgan, are the "into or out of the us" transactions ID'd, but all transactions inside the U.S. anonymous?
You are completely wrong, Bunny. Again.
Even retail guys like you can qualify for portfolio margining (which is 6x leverage) if you have an account with your broker as small as $100,000.
And while Morganovich is correct that 15x and 20x is not uncommon in options (30x for market makers!), the 6x leverage I'm talking about is for plain vanilla equities. And any Tom Dick or Harry can increase his leverage by simply buying S&P 500 futures, for example. Yes, Virginia, futures are not solely a feature of commodity markets.
Professional traders' margins requirements for equities can be much smaller than that.
Leverage is not what drives price.
No matter how often our ignorant resident Bunny is corrected, he just repeats the same idiocy on every thread about speculators.
Buddy, the broker you trade through is not anonymous. His MPID is always visible. The account to the which the trade is posted within the brokerage obviously must be known to the broker and the CFTC and SEC can root around in your account any time they want.
Judge!
I object, this witness is executive chairman of the CME, regulator of MF Global, who just made $1.6 BILLION disappear right under their nose...hardly a credible witness!
" No matter how often our ignorant resident Bunny is corrected, he just repeats the same idiocy on every thread about speculators."
more hot air from the resident blow bag.
Since when is the chairman of an exchange a regulator, Moe?
from article:
"In the interview, Mr. Duffy addressed the fallout from last year's collapse of MF Global Holdings Ltd., the brokerage that counted CME as one of its main regulators"
SROs
http://www.sec.gov/rules/sro.shtml
buddy-
no. there is no such thing as an anonymous transaction in the us at all apart from using cash.
moe-
thats a weak ad hominem argument of just the sort that the ignorant use when they cannot address the issue itself.
you need to do better than that.
Moe, the head of my SRO is not the chairman of the exchange, nor does he personally examine my books. It ain't his job. I know of no exchange where the chairman is a regulator. Member firm regulation is a department in the organization. So, The chairman of the CME has nothing to do with regulating MFG.
But that aside, what the hell does speculation have to do with segregated accounts?
Your comment is pure ad-hominem.
moe-
the CME is not a regulator, they are an exchange. they have rules the require to be followed, but they are a private entity, not a regulator. all they can do is prevent you from using their exchange. they do not have the legal reach of the SEC etc.
further, so what? what is it you think that demonstrates? i do not see any actual argument coming from you, just a smattering of information.
no regulatory scheme is perfect and most if not all can be tricked by a determined liar.
what does that have to do with speculators?
you seem unable to speak to the actual issue and determined to drag the discussion into ad hominem.
can someone point out what Mo said that is an Ad HOminem?
when did he personally attack Methinks or Morg?
Morganovich,
That's not strictly true. Each exchange includes a department of member firm regulation. Some exchanges (ARCA and NYSE) outsource their regulatory duties to FINRA. CBOE, CHX and CME have their own SROs which are answerable to the CFTC and SEC. Just be thankful that, as a hedge fund, you're not forced to deal with all that. Yet. Who knows how Dodd-Frank will stick the knife into you hedgies.
But, that's just detail important only to those of us who are directly caught in the grip of the regulators. Even though CME reg is part of the exchange, the chairman of the exchange has nothing to do with any of that.
Morganovich:
I need to do better than that or what exactly…you’ll call me ignorant again?
MF had nothing to do with speculation. Never said it did. The irony I was pointing out is listening to the head of an SRO talk about how things are AOK, when previously they just got subpoenaed due to MF.
Methinks:
The chairmen overseas the regulatory division - that is why he was subpoenaed during the investigation.
The fact that he doesn’t personally oversee your books or wipe your nose for you is no surprise to me.
Both of you need to look up "ad hominen". My attack was not against his character - it was his companies lack of oversight while he was at the helm.
moe-
or i'll do what?
simple.
fail to take you seriously and stop paying attention to you like i ignore many of the non contributing folks on this board. i had hoped you might have somehting useful to contribute. alas, it appears i may have been wrong.
you seem to just be trying to duck back into the ad hominem and fail to address the actual issue. you may not like the cme chair nor think he does a good job, but it seems to me you have no actual counter argument to what he said. you may want to give that some thought when you assess your opinion.
larry-
his ad hominem was against the cme chair. he said "udge!
I object, this witness is executive chairman of the CME, regulator of MF Global, who just made $1.6 BILLION disappear right under their nose...hardly a credible witness!" and tried to pass that off as a counter argument.
when you attack the speaker and not his argument, that is ad hominem.
doesn't sound like they really know what Ad Hominem is...
or they're playing cutesy dumb...while they tag-team, rabbit-punch Moe.
so they call you "ignorant" but if you question regulator or non-regulars practices, it's an Ad Hominem.
It's called Alice in Carpe Diem.
methinks-
ah, yeah, i see your point. good clarification.
hedgies are tough to come after. they made us all become RIA's (for about 3 months) at great cost, but, mercifully it didn't stick. (though somehow i never got a refund on all the compliance consulting i had to pay for)
i'm sure D+F would love to shut us down entirely, but they are going to have a really tough time. the SEC trying to watch hedge funds is like the keystone cops trying to police burning man. they don't even understand the question, much less the answer.
also, it's pretty tough to clamp down on LP's without a big knockon effect into other industries.
it's not that easy to clamp down on partnerships and it would not be difficult to sidestep this ham handed carried interest tax idea.
instead of profit share, you get a zero interest loan from each investor on jan 1 repaid dec 31. does the same thing, avoids recognition as ordinary income. it's more of a pain, but would be the first thing i did.
Morg - An Ad Hominem is most often between you and another person that you are conversing with.
it's "to the person".
and when you call the other person "ignorant" or threaten to if they don't agree with you.. that's less than wonderful behavior also.
" i had hoped you might have somehting useful to contribute. alas, it appears i may have been wrong"
more sanctimonious blather.
who appointed you the decider of worthwhile opinion or "contributions".
EVERY SINGLE PERSON brings a perspective to a discussion.
For you or anyone else to think they have nothing to say worth listening to is the height of arrogance and to be honest - ignorance.
you can "share" your better/superior knowledge about something as a way of giving to others without being a dumbass about it but for you to presume that others know nothing is just plain asinine.
larry-
actually, you are the one who does not understand what ad hominem means.
when you say "that guy is an idiot/partisan/etc, don't listen to him" as a substitute for addressing his actual argument, that is ad hominem. the latin literally means "to the man".
go look it up.
that is 100% exactly what moe did. he tried to substitute an attack on the cme chair's credibility (to the man) for an actually counter argument to what he said. (to the argument)
it's a lazy and weak minded way to argue.
also note: i never called moe ignorant. i said that is the sort of argument used by the ignorant. but hey, if the shoe fits...
larry-
as one of the folks i have mostly stopped reading or responding to in any way precisely because of your endless and useless prattle, you ought to know precisely who makes me arbiter: i do.
i am my arbiter, just as you are yours. feel free to ignore my posts (i really wish you would leaving me free of your clutter) just as i will now return to ignoring yours as you have yet again demonstrated that you cannot follow even basic logic.
bye again lar. happy prattling.
" : marked by or being an attack on an opponent's character rather than by an answer to the contentions made"
Morg - " thats a weak ad hominem argument of just the sort that the ignorant use"
you're playing technical games here..your intent was clear and it was to his person.
earler Methinks said: " No matter how often our ignorant resident Bunny is corrected.."
this is a regular daily occurrence here and you buddy up to Methinks who is engaging in Ad Hominems towards others.
the least you can do is be honest about it.
I'd be very happy if the folks who engage in Ad Hominems WOULD shut up here.
there are some good discussions here by those who do not engage in such.
it is marred all the time by the "smarter than thou" types who cannot resist attacking others.
"prattle" is what I get from you guys... most of the time but I put up with it until you can't control yourself from dissing others.
ok, sorry, can't resist one more:
"EVERY SINGLE PERSON brings a perspective to a discussion."
what a pile of new age tripe. perspective? you think that's important? like ooh, i have feelings and i want to add my perspective? who cares? adding a perspective is not the same as adding value and can often (most of the time in your case) actually destroy value by adding repetitive insightless blather to an otherwise productive conversation and wasting the time of others.
if you want the height of arrogance and ignorance it's pretending that perspective is the same as value. i completely agree that dismissing someone without listening to them first is wrong and will prevent one from learning. but dismissing someone after listening to them repeated prove they are a fool is not the same thing at all. that's just the way effective people work.
why would anyone listen to a fool over and over?
lar
are you really this unable to think?
"
Morg - " thats a weak ad hominem argument of just the sort that the ignorant use"
you're playing technical games here..your intent was clear and it was to his person."
no. that's not true at all. saying "that's a stupid idea" is not the same as calling a person stupid. we all have stupid ideas.
saying "that is the sort of argument the ignorant use" is a way of saying "you should use better arguments". i think you know me well enough to know that if i want to call someone ignorant, i'll do it straight out. i've certainly done it you you enough times and you certainly keep earning it.
" ok, sorry, can't resist one more:"
" why would anyone listen to a fool over and over?"
can't resist, can you? you pretty much prove who you are - you cannot deal with folks who disagree with you... so you call them names... 3rd grade "intelligence" if you ask me.
that's fine..you stay out of my way and I'll return the favor.
if you want to tangle..we can do that too.
I do not suffer fools any more than you do even those who think quite highly of themselves.
capiche?
Sorry irony is such a foreign concept around here.
Attacking a person’s credibility based on past questionable creditable incidences - is not "ad-hominem"...never was, never has been and never will be. Find a lawyer to explain this to you. Ourtside of that; here's one more shot at it...
Here's an example of ad-hominem:
"What would Mary know about fixing cars? She is a woman."
Here's my argument:
"Why should we believe Mr. X when he says things are fine in is department, when 4 months ago $1.6 went missing"
Not the same really is it?
Guys, c'mon. This is getting stupid.
Nothing is being said.
Nothing is getting done.
You're freaking arguing about arguing about insults.
Can we please get back to the topic on hand?
moe-
1. you clearly do not know what ad hominem means.
http://en.wikipedia.org/wiki/Ad_hominem
i think you'll find that that is precisely what you did.
2. yes, it pretty much is the same. both are attempts to avoid addressing an argument directly by instead going "to the man" which is, of course, the meaning of ad hominem.
if i said "you only got a 70% on your econ final, so why should i listen to you" when you raised an issue, that would be 100% ad hominem. i'd be ducking your argument and going after your credibility. it is neither a valid logical construction nor a valid debating technique. it's the realm of sophists and rhetoricians.
Jon - you are correct.
it takes two (or more) to tango.
I have repeatedly asked these "folks" to refrain from attacking the character of those they do not agree with and they just can't seem to help themselves.
the attack on Moe is the latest example of how they "decide" that a person is not only "not learning", not worth listening to, "ignorant" therefor needs to be attacked as a person.
I respect the knowledge of Methinks and Morg here (and learn from their perspective) but they are insufferable bags of hot air at times...and that's okay.. until they start to hammer on people for no other reason other than they disagree with them.
that's not okay.
and you just saw them do it to Moe.
lar-
i have no problem with people disagreeing. that's why i come here. but i expect them to have reasons for their views and be able to express them and willing to go back and forth on the actual issues.
i have interesting and profitable disagreements with jon, methinks, vangle, and a number of others.
they add a great deal of value and provide useful information and ideas that, even if they do not always change my mind, help me sharpen and refine my own views and ideas.
i suspect many feel similarly about me.
i have all the time in the world for that.
but for folks that add no value, nope, not so much time.
good luck with your endeavors.
Morganovich,
There isn't a scrap of doubt in my mind that you hedgies will outsmart government on the issue of carried interest and many more to boot.
They're finding new and interesting ways to raise the cost of doing business, though. The latest move by Big Brother is the "large trader" rule - which will attempt to force you to sign up for a customer version of the MPID and will ensnare everyone from a retired dentist actively trading his retirement portfolio to SAC Capital. The SEC will then stomp around demanding your OAT and hopes to use that as a reason to stampede your office with examiners should the political need to do so arise.
As far as I can tell, it's an attempt by the SEC to widen its jurisdiction (and increase its potential fines) to every single person who happens to have a brokerage account. It's trying to impose regulatory authority which is now reserved for broker dealers directly under its control to everyone.
We'll see if it gets away with it. Recently, the courts dealt FINRA a set-back. The court ruled that FINRA could not use the court system to go after member firms for fines.
Run your definition and my original post by a lawyer - I did, he sits 2 doors down.
It is Ok to admit when you are wrong. I have done it here - at least twice.
" but for folks that add no value, nope, not so much time."
more sanctimonious blather from someone who thinks much more highly about himself than any one person should.
Morg - you have "not" learned at all guy. you not even there yet.
" It is Ok to admit when you are wrong. I have done it here - at least twice." Moe
good advice Morg. you could use it.
Moe,
"Why should we believe Mr. X when he says things are fine in is department, when 4 months ago $1.6 went missing"
Not the same really is it?
Yeah, no, it's not the same at all....as what Terry Duff said.
"When the Dow goes above 13,000, Google goes above $600 per share and everybody celebrates, who do you think did that? The U.S. equity market is 100% speculators."
Is NOTHING like saying that "everything is fine in his department".
Duffy said absolutely nothing about his department. Waving your hands around screaming that he can't possibly have anything valid to say about speculation because the reg department of the firm he heads didn't ensure MFG segregated customer funds is pure ad hominem. Hopefully, this clears up your confusion.
moe--
lost of ad hominem attacks are legal in court.
that does not make them not ad hominem attacks.
"Ad hominem circumstantial points out that someone is in circumstances such that he is disposed to take a particular position. Ad hominem circumstantial constitutes an attack on the bias of a source. This is fallacious because a disposition to make a certain argument does not make the argument false; this overlaps with the genetic fallacy (an argument that a claim is incorrect due to its source).[7]
The circumstantial fallacy applies only where the source taking a position is only making a logical argument from premises that are generally accepted. Where the source seeks to convince an audience of the truth of a premise by a claim of authority or by personal observation, observation of their circumstances may reduce the evidentiary weight of the claims, sometimes to zero.[8]
Examples:
Mandy Rice-Davies's famous testimony during the Profumo Affair, "Well, he would [say that], wouldn't he?", is an example of a valid circumstantial argument. Her point was that a man in a prominent position, accused of an affair with a callgirl, would deny the claim whether it was true or false. His denial, in itself, carries little evidential weight against the claim of an affair. Note, however, that this argument is valid only insofar as it devalues the denial; it does not bolster the original claim."
nice try, but you are still deeply wrong here.
btw-
moe, that's another logical fallacy and a bad debating technique called an "appeal to authority". you provide no data, just try to set up a source to which we have no access as authoritative.
you really seem determined to find ways to avoid addressing the actual issues.
why is that?
could it be because your arguments are weak?
I'm changing the subject from logic lessons for the learning impaired back to speculation.
Duffy is absolutely correct. Not a single one of the traders in the stock market is hedging. They're all speculating.
So, if speculation is pure evil, then why do we allow it in any market? Why should Bunny, Larry or Moe be allowed to speculate in the stock market?
So, if speculation is pure evil, then why do we allow it in any market?
Playing Devil's Advocate, here, but I think the argument would go something like this:
Speculation in the stock market is different because the speculators can't affect the price the rest of us pay when we use real goods. When they buy Apple stock, that doesn;t drive up the price of an iPad. When they buy GE, it doesn't drive up the price of washing machines.
On the other hand, when they buy oil, it drives up the price of gasoline for the rest of us.
That's what I imagine the argument made would be. Again, just playing Devil's Advocate.
JM,
No, but when speculators drive down stocks, the value of your portfolio goes down. The market value of the companies whose stock declined goes down.
You will notice that complaints about speculators in commodities markets evaporate when prices are low and in stocks when prices are high. As soon as the stock market tumbles, complaints about speculators rise as they do in commodities markets when prices rise.
In steps the regulator to do what it can to manipulate prices upward.
I think if someone made the argument that is is IMPOSSIBLE for speculators to affect the price of something... there would not be 100% agreement.
I think there are ways for speculators to "corner the market" so to speak - at least long enough for them to make money before it collapses on them.
Despite my other "issue" with Methinks and Morg - I put some stock in their opinions on this and especially so when they walk folks through a scenario.
If China were to buy heavily into Middle East futures - in enough volume - could that effect the market?
If a trader KNEW that China was doing that could they make money at timing their involvement?
I do not think that the vast majority of market prices are caused by speculation...but I'm not convinced it cannot ever be done.
Now. I expect Morg or Methinks to either ignore this "ignorant" post or to be polite in pointing out the error of my ways.
If they insist on picking door #3 again.. I remind everyone else that they had the same choices as before and did chose their path once again.
signed... Ye old ignorant one
Duffy was testifying about the goings on in the market - assuming, as head of the CME, he speaks from a position of both knowledge and trust.
I was merely (in what I thought was a light-hearted tongue-in-cheek way) pointing out the irony of it based on what happend within the CME with MF Global.
I didn't realize we were solving the worlds problems and that this was such a serious business going on here within the message boards of Carpe Diem.
Life is too short.
Anyway - Jon you are right - onwards!
Hence my constant lament:
You can't buy commodities and you can't sell stocks. I've never had a single regulatory inquiry about stocks I've bought. 100% of the inquiries are about sales - long or short.
People would like to live in a world without trad-offs. They would like to take huge risks without suffering any downside. Scapegoats are essential to such a make-believe world.
Speculators have a long history of being scapegoated.
Duffy points out a sweet irony. The very same people who screech about speculators are themselves speculators. I am almost certain that Larry, Moe and Curly...I mean Bunny...are all speculators. I'm willing to bet that each of them owns stocks either directly or indirectly through a Mutual Fund.
...." Larry, Moe and Curly...I mean Bunny"
what am I going to do with you?
I am not a believer in speculation per se but I do believe there are speculators and they can harm the market with their activities.
Am I wrong?
100% of voters are citizens. That does not mean that some of them are not bad.
Are you claiming there has NEVER been a speculator involved in, and convicted of, fraudulent practices?
I am not a believer in speculation per se but I do believe there are speculators and they can harm the market with their activities.
Am I wrong?
I'm not going to say you're wrong, but I am going to disagree. Or, at least, offer some conditions.
Any given speculator has one goal: to make a profit.
Regardless of how big his purse is, he is still under the whims of supply and demand.
But let's say, for the sake of argument, there is one rouge trader who believes he can beat the system.
For the sake of simplicity, let's make the following assumptions:
1) All speculators only care about themselves and their profit
2) There is only one commodity; it has no substitutes.
3) This commodity is widely available. It's easily and cheaply accessed.
4) Everyone involved in this market has the same information regarding supply and demand
5) Supply and demand are constant. There are no supply shocks or demand shocks.
Ok. Now that's out of the way.
Our speculator, let's call him Chuck, wants to manipulate the market. He wants to buy low and sell high.
Chuck, being the ultra rich SOB he is, starts buying up our special commodity, let's call it Douinium, to drive the price up.
The other traders in the market see the price rising faster and faster. They know there are no fundamental shifts going on in the market. Knowing the price can't rise forever, they start selling their stocks of Douinium, or shorting the commodity. This, of course will put downward pressure on the price.
In order to get prices higher, Chuck will have to buy even more and more. He is shoveling money into this market, but the reciprocal pressure of the other traders is keeping the price down.
He will eventually have to call it quits. This endevour is costing his too much.
So, while theoretically, you could have a buyer with the purchasing power to manipulate a market, they are fighting the forces of the market and the manipulation ends up costing more than they'll make.
For a real life example, see China. They were manipulating their currency to keep it within a certain range of the USD. This was costing them millions, if not billions, of dollars a day. The RMB is now allowed to float more than it was before (it's still manipulated some). You can;t fight nature.
The short answer is yes.
Speculators can and do move price. Moving a price is different from manipulating it. If there's reason to believe supply will be tight, speculators understand that price will rise - which means that today's price is too low. Following the wisdom of "buy low, sell high", they buy at today's low price and hope their predictions regarding decreased supply in the future are correct and the price rises. Reverse that if speculators think more supply is coming or demand will fall.
Buy low, sell high. None of that is manipulation. And it is not different from you thinking that the iPad four is going to be in demand, providing you with reason to believe that today's Apple shares are trading too cheaply.
If a trader knows that a trade large enough to move the market (usually temporarily - prices don't move to one position and stay there) is coming, then he's an insider. That's not manipulation either, that's front running.
Thank You John. You make a pretty persuasive argument.
two questions for you:
1. - do you think it is possible for ENOUGH speculator money to "outrun" the market?
2. - why do the stock markets stop trading sometimes on fast moving trades?
what am I going to do with you?
Nothing, Larry. I realize this probably hasn't occurred to you, but as a guy in some remote location (from the rest of us) behind a computer, there's nothing you can do with any of us. Just as we can do nothing about you. I guess you'll just have to dig deep and find a way to cope.
Are you claiming there has NEVER been a speculator involved in, and convicted of, fraudulent practices?
Is there a point somewhere in there?
thank you Methinks.
no "prattling" here..
And JM provides us with another winner. An excellent illustration of why you either need to have market rules that bastardize the market (as is the case in the regularly manipulated - with the approval and consent of the SEC - stock loan market) or you need to have the ability to print money.
In order to get prices higher, Chuck will have to buy even more and more. He is shoveling money into this market, but the reciprocal pressure of the other traders is keeping the price down
The more liquid the market, the more that's true. And who adds liquidity? You guessed it - speculators.
Somebody give JM his internet credits!
You're welcome, Larry.
1. - do you think it is possible for ENOUGH speculator money to "outrun" the market?
2. - why do the stock markets stop trading sometimes on fast moving trades?
Good questions, Larry.
1) No. I think, for the reasons outlined above, that there simply is not enough money to outrun the market for any significant period of time. When you watch a country as big as China, or Hell even the US, say "too much, man. We may need to cave," that's a pretty good sign. One may be able to outrun the market for a little while, but not for any significant period of time and when that bubble bursts, you are screwed. How many people were destroyed in the housing market? Or the Great Dutch Tulip Bubble?
2) I believe that is more due to a Great Depression-era law, although I could be wrong on that.
2. - why do the stock markets stop trading sometimes on fast moving trades?
What do you mean? Can you describe the scenario because securities can stop trading for a variety of reasons - including a temporarily jammed up system that stops matching trades for a minute.
I am not a believer in speculation per se
I am willing to bet my fortune that you are. Do you own a house? Do you have bonds or stocks in your portfolio? Did you save for retirement or NOT save for retirement? In each case, when you made that decision, you were speculating about the future.
By the way:
Just to be clear, no one is saying that markets aren't subject to bouts of irrational activity. Of course they are. We are all humans after all and we can get swept up in the herd mentality.
The point I am making is that these bouts cannot outrun the forces of nature. The market will correct itself, either because of or in spite of speculator activity. Any market manipulating power is disastrously short lived.
" A "non-regulatory" trading halt occurs if "significant order imbalance between buyers and sellers in a security" exist. (The NASDAQ stock exchange does not implement non-regulatory trading halts.) Before trading resumes, market specialists must determine an appropriate price range in which the security can trade."
http://en.wikipedia.org/wiki/Trading_halt
" I am willing to bet my fortune that you are. Do you own a house? Do you have bonds or stocks in your portfolio? Did you save for retirement or NOT save for retirement? In each case, when you made that decision, you were speculating about the future."
you have a fortune? geeze..I must have missed that course.... :-)
I own said things but I did not buy a house to make money and I've been known to move money into treasuries - and leave them for a while when the market is cratering. ( I realize this is probably ignorant behavior)but the market was a seriously scary place and many that I know got whacked.
I do not buy lottery tickets even when the pot is HUGE. I don't think I've bought one in my life.
Yup, Larry. Although, the specialist system is history now. IMO, to the benefit of the market if not me personally. Specialists used to have to take the other side of the trade to correct imbalances, but they got a lot of benefits for taking that risk.
Trading halts also happen if the company is about to announce big news or, as a result of the newly imposed circuit breakers.
I didn't buy my house to make money either. However, I did have to speculate about what's going to happen in the future to decide to pay the price I did and buy this particular house. I bet you did too. Moving money into Treasurys is also speculation. Maybe you moved it into Treasurys because you thought Treasurys were too cheap or because you thought whatever you moved it out of has become too expensive or because you thought there would be more volatility to come in the stock market. All speculation.
It's a good thing you don't bother with lottery tickets. The odds of you winning if you buy a ticket are about as low as if you didn't buy one.
The odds of you winning if you buy a ticket are about as low as if you didn't buy one.
Considering the odds, buying a $1 lottery ticket only makes sense after the jackpot is about $176 million post-taxes.
Mr. Duffy's statement seemed straightforward to me. Equities have no fixed price - I buy equities because I am speculating that they will go up in value. Others may expect them to go down and sell or short them. That's the nature of a market.
Mr. Duffy has testified to Congress about CME's role with respect to MF Global. If you read that testimony, you see that they audited MF Global, found that things looked ok until they found out about deception involved.
classifying any/all speculation as the same in impact is not really the reality.
you can 'speculate' on a lottery ticket or even buy a house that may or may not appreciate or lose money but the potential impact of that to others is negligible.
If you bulk-buy lottery tickets or buy up a bunch of properties in anticipation of a more dense zoning approval - you CAN effect others.
A few years back, if I recall, someone was buying up as many lottery tickets as they could after they calculated that they had a higher percentage chance of winning a jackpot.
If I recall, the lottery ticket people did put a limit on bulk sales.
If someone buys a tract of land and all properties hoping for a rezone and they "grease" the skids with those that grant approvals - that's much more than mere "speculation".
Remember KELO?
While I am convinced that it's very difficult to successfully speculate in the markets, I do not think it is impossible especially when the goal of the speculators is not to permanently alter the price of something - only move it temporarily but as a purposeful strategy to get in and out such that profits are made and others end up with the losses.
Multiple large purchases in quick sequence can and does move the market.
the goal of that is not to corner the market but to move it - in a direction that you want it to move and then to take profits before it collapses.
are the examples I have provided legitimate?
how have I got it wrong?
If you buy 100,000 shares of a stock that normally trades 33,000 per day, you will likely drive up the shares of that stock for THAT DAY. As soon as your bid is gone, the price normalizes to the market's assessed fair value.
You'd be hard pressed to have ANY effect on a stock that trades as many shares as apple.
The stuff about KELO and anticipating rezoning while "greasing" anything isn't speculation. It's rent seeking, pure and simple. Remember what I told you: If you have the ability to print money and change the rules, you can successfully manipulate the market. Successful manipulation only occurs when a speculator buys the power of government.
the goal of that is not to corner the market but to move it - in a direction that you want it to move and then to take profits before it collapses.
It is never the goal of the speculator to move the market because that's the mark of an idiot. If you're the one moving the market, then you are by definition the bid. Where will the bid come from when you stop bidding and start offering? Here's a trading lesson for you Larry: If you have bought enough shares to move the market in one direction, you have enough shares to move it in the other. If you don't believe me, go right ahead and try your manipulation strategy and let me know how it worked out for you.
Here's a real life example from this past December: The stock in question is super illiquid. It trades roughly 33,000 shares per day. On this particular day, it was creeping up and hung around up 2% on the day for most of the day and that's where it was with three minutes to go in the trading session. Suddenly a very large buy order (executed by a moron, apparently) materialized. In order to execute all of it, they had to blow through many, ever increasing offers. With 60 seconds to go in the trading session, the stock had been bid up 10%. When the order was completed and the bid evaporated, there were no more bids and the stock tumbled back down to up only 1% on the day by the time the bell rang. The volume on the day was 10x the average daily volume or 330,000 shares.
How did this guy, who bought most of his shares up between 7% and 10% on the day benefit? He didn't. He lost a lot of money and he lost it right away.
Why did this happen? I am almost certain it was either a very inexperienced trader or an index fund or it was one or more retail guys who were after the big dividend. The stock went ex-dividend the next day and a lot of retail guys think the dividend is free money. The only thing I'm certain of is that this was not manipulation and if it was, I don't care.
Like the traders in JM's excellent example, I was selling the stock to him all the way up and made all the money he lost and the price - even in something illiquid and thus easily moved - was affected for only 3 minutes.
wait a minute.. you can't buy low with leverage .... boost the price up... higher than what you paid...then sell and make profits?
be nice now...just explain it.
Larry, I already explained exactly that to you. It doesn't matter where you get the money to buy. Do you not understand what leverage is?
What part of the explanation I gave is most confusing to you?
you did say the game is to buy low and sell high.
are you saying there is no way to influence the market to enhance that strategy?
that's the typical thinking of a lot of people that speculators use leveraged money to buy as much of something that they can... in turn causing the price to advance...and then get out when the price beats what they paid for it.
again... be patient here...
it sure seems not unreasonable that people buy and hold anticipating gains and then sell when they see it starting to drop.
what I'm asking is .. are there no strategies that could be used to influence the market to your advantage.
Seems like if you bought a bunch of stock at a bargain price.. and then it went up - you'd clean up.
if you and a bunch of like-minded buddies were doing coordinated buying in an effort to bid up the market ..you'd win if the market accelerated to catch up - and overran what you paid... and if you got out quick enough.. you'd beat the collapse.
does that not happen? Is it impossible to happen?
Yes, I'm saying that there is no way to influence anything in your favour by merely buying and selling.
Leverage is a red herring. All leverage means is that people borrow money. But, it doesn't matter how you got your bank roll.
Speculators who have reason to believe that something is over-valued will sell or sell short and if they are correct, they will benefit from their prediction. In the process, his activity will signal to the market that all is not well and that information is valuable. What people resent is that they make money doing it. Yet, somehow, they don't resent their dentist making money off the pain and suffering of his patients.
what I'm asking is .. are there no strategies that could be used to influence the market to your advantage.
There are no trading strategies, but there are some really good rent-seeking strategies. Cronyism is the most successful market manipulation strategy I know of.
you'd win if the market accelerated to catch up - and overran what you paid... and if you got out quick enough.. you'd beat the collapse.
I'm sure in some parallel universe that happens, but not in this one. I don't know of any such successful strategy that didn't involve a posse of fools and fraud. Mind, the fraud cannot be stopped by the regulator. It can only be prosecuted afterward.
If you think a stock is worth $60, what would you do if the market is at $55? You'd buy. What would you do if the market is at $65? You sell. If some fool is driving it up to $70? You'd sell more. That is how to be a successful trader in one lesson.
The market does not "chase you". Anyone who thinks that should re-read my previous example. I chose it because it so representative of what happens, not because it's an anomaly.
thank you Methinks. I appreciate your perspective and taking the time to explain it.
I understand the buy/sell dynamics and also that the folks have good info and understand it are better off than those who are buying/selling mostly blind or by what they "think" will happen.
On EBAY - the guy selling the item has been known to bid it up...then get out ..
It's against the "rules" but it did occur ....
do you consider that "influencing"?
off to do a little paddling.. see you Monday...
;-)
The difference is that on ebay the bidding did not cost any money. When you're buying stock to bid up the price, you have to spend money to do that and that makes it a losing strategy.
Program trading & HFT:
http://www.nowandfutures.com/images/program_trading2.png
Oh, yeah. Program trading and HFT are the new bogymen.
Oh, and incidentally.....
After the May 6th "flash crash", the SEC imposed 16% wide bands on all stocks. So, market makers are forced to have programs. We're all HFT traders now.
Methinks said...
Oh, yeah. Program trading and HFT are the new bogymen.
I can't tell for certain from your comments if you decry or disapprove of HFT etc. or not?
I neither decry nor disapprove.
This comment has been removed by the author.
I do find it a little hilarious, however, that Mary Shapiro ominously warns that HFT traders might be given "speeding tickets" while forcing everyone to become an HFT.
The effect is that if you put in a bid and market conditions change, you'll be fined for pulling that bid. The average bumpkin heartily approves without realizing that such activity will just widen the bid/ask spread and ensures no bids in the next market tumble. They think they're getting an improvement. Instead, they're going to pay through the nose for worse market conditions.
Methinks said...
I neither decry nor disapprove.
I can't reconcile that with your comment about recalling a bid and getting fined, or ~80% of the market being Wall St. & hedgies.
I have no idea what you're on about, Bart.
You don't disapprove of HFT or PT, but seem to think that being fined for pulling a bid is ok, as is gaming the market and average investors via "superior tech".
I'm really not trying to attack, I really and honestly can't reconcile your various posts.
Oh, I see the confusion now. No, I do NOT think that it's okay to fine people for pulling a bid or offer. I do NOT think that the SEC is in a position to decide when people should bid and offer.
I do NOT think a market can be successfully "gamed" by simply participating in the market.
I DO think (know) that a market can be successfully "gamed" if you can get government to change the rules in your favour.
The members of the CME adn COMEX did that to the silver market in 1981 (or 1980).
BTW, I think it's fine if you think that you can manipulate the market with your own buying and selling activity and your own money. I know the market will teach you exactly how unprofitable that effort will be and I think those are important lessons. We do not need the SEC to prevent people from trying.
I thought I understood with the post above the most recent, but then you confused me again with the last post.
You said the market can be successfully gamed, but then said that the SEC (or folk that should be real rule makers and keep the playing field somewhat level) should stay out???
The SEC does not in any way level any playing fields. It does exactly the opposite.
The only way to successfully (by which I mean "profitably") game the market is to harness the power of authorities like the SEC, the Fed and the CFTC.
In 1981, the members of the CME and COMEX were short silver contracts. The price of silver kept rising against them. They convinced the CFTC and the Fed to help them. The CFTC allowed the exchanges to stop accepting buy orders. You could only sell or buy to cover a short. It also jacked up margin, putting everyone in call and forcing liquidation of positions. In addition, the two exchanges convinced the Fed to strong-arm lenders into pulling financing for anyone long silver. Obviously, the price of silver tanked as longs were forced to liquidate and a huge an unfair winfall was created for the shorts by, essentially, the CFTC and the Fed.
Suspicion about Bernie Madoff's firm grew over time. He said he was employing an options strategy that every options trader understands can't generate the steady returns he said he was generating. The SEC tried to investigate, but Bernie was buddies with Chuck Schumer (and a huge contributor to him). Chuck is a pretty influential guy at the SEC. He made a couple of calls and inquiries were dropped. This I have confirmed with a regulatory insider.
Two of a very long list of examples how the regulators cost an enormous amount to keep around and use your money to screw you over.
Of course on the existing (owned) SEC, that's why I added "or folk that should be real rule makers and keep the playing field somewhat level".
I've traded futures on & off since 1979, and I am totally familiar with manipulation and bias-to-the-max. If you surfed my site, http://www.nowandfutures.com, you'd see the evidence.
It's still confusing and even more so in a sense though.
HFT is "bad", the SEC is "bad" - so what's the solution that will work then?
I took a quick look at your site, but it's got a lot on it. I don't want to sift through all of it, so if you have specific examples of what you think is manipulation, then please share.
My partners and I have been market makers in stocks and derivatives for many years. I'm all for private certification and rule of law, but totally against government regulation. The market whacks any wise-guy who thinks he can profit from moving the price around. We don't need an SEC or CFTC for that. Fraud is already illegal and front-running is a breech of fiduciary duty. The legal system can handle those cases without regulators sticking their overpaid noses into it. Mostly, the SROs run around fining people for not crossing "t's" and dotting "i's". They shake firms down and make it difficult for small firms to compete with larger ones - to the detriment of customers. There shouldn't even BE a "market maker" designation.
As an MM, I'm required to provide a bid and an offer from the opening to the closing bell. In the last minute of trading, somebody lifted my offer apparently. For 100 shares. That's one options contract's worth. The SEC wanted to know if that trade was executed in an effort to manipulate price. 100 shares. Morons. But, I had to take the time to formulate a serious reply. This is how the SEC spends most of its time. When its employees are not glued to their computers watching porn. And we're all paying for it.
There is no incentive for government regulators to follow their mission statement - to maintain a fair and orderly market. None at all. So, they don't - and there's no way to change that.
BTW, I think the HFT guys are fine and I think they're scapegoated. The "father" of program trading, founder of Interactive Brokers and Timberhill, Thomas Peterffy, recently complained that the SEC should slow down HFT trades because he was having trouble competing with them. Good LORD! What blatant rent seeking!
I think the solution is getting government out of markets. Things would work much smoother, there would be nobody for powerful interests to lobby government to change the rules in their favour or persecute their competition and disputes can be settled in the court system.
Oh and BTW, Bart, there is no "level playing field" and there will never be one. You are a casual trader. I'm a professional. This is my life. Odds are, if I'm taking the other side of your trade, you're not on the winning side. "The field" is always skewed to those with more skill, talent, experience, etc.
That's why I don't try to play poker with the top 5 poker players. I know the odds are not in my favour and I think it is a gross injustice to ask that they should be artificially damaged in order to rob them of their competitive edge.
There's my original reconstruction of M3, the first on the planet to do one - and it still leads every other reconstruction out there. There's also articles on POMOs, TIOs, ECB control/manipulation of gold, program trading & HFT tracking and lots & lots more. I generate almost 2000 charts/week.
Thanks for the clarifications, I think I finally understand.
We do disagree on HFT and similar though, they make a massively unlevel playing field and are a toll on all investors - especially the small guys. It's certainly not black & white either, as you point out about Peterfly... and at least the area is becoming a bone of contention amongst the big guys. That may (and I hope it does) help the political pressure games.
The main problem with the SEC, CFTC and all the rest is that they're owned and have been for decades - and incentive issues are indeed part of the problem. So we do pretty much agree there. The Glass Steagul repeal is part of it too, and it goes much deeper.
Thanks.
HFT is just a market development in response to changes in the market that was caused by both the SEC and tech advancements.
Yes, the small investor cannot compete against them and it's a mistake to try. They do, however, provide about 70% of the liquidity and killing that liquidity would very much hurt the small investor. I point to the May 6th flash crash for an example of the consequences killing off that liquidity.
I also point to the May 6th crash as a good example of how they (way) excessively control liquidity.
And the example of liquidity itself is bogus - liquidity did fine, all the way back to pre 1987 where program trading records start - it's just a justifier for slime ball activities on the part of the greed & control freak side of the profession.
I also vehemently believe that there *should be* a level playing field and with a consistent and fair application rule of law, regardless of how long one hasn't existed. And yes, I know that means I'm a dinosaur... and I like the high road.
Skill, talent, experience, etc. do apply... but both slime ball greed freaks and bogus gov't intervention can and do defeat skill, talent, experience, etc.
And no, I'm not a casual trader - it's my profession and I trade substantial contracts in various markets. Independent trader - yes. Casual - no.
Happy 2nd Anniversary, Flash Crash of 2010 !
http://www.ritholtz.com/blog/2012/05/the-flash-crash-of-2010-happy-2nd-anniversary/
My mistake. I was thrown off by the "off and on" part of your comment.
Rule of Law is the only "leveling" of a playing field I agree to. I have no idea what you mean by "slime-ball greed freak". Sounds like a pejorative concocted to malign somebody you're unable to legitimately compete against and/or don't understand.
Liquidity is absolutely too concentrated in the hands of large HFT shops. You can thank the SEC for that. All SEC regulations do is increase barriers to entry (as an independent, you should know all too well) and sucks out liquidity. In response, SEC creates a special category called "market maker" in order to inject liquidity. Since 2008, the SEC has been imposing more regulation (read: cost) on MM's and gutting exemptions that allow them to inject liquidity. So, "you are obligated to do your job and we're going to make you pay for it". In response, stock market makers have been leaving the business. And I mean big ones, not just locals. SIG, Timberhill and Goldman no longer make markets in stocks. HFT (which are not broker dealers) are all that's left.
I argue that if you remove the idiotic rules imposed by the SEC (especially WRT shorting), then there will be plenty of liquidity naturally and it won't be so concentrated. All the SEC does is create rules that prevent people from acting in their best interest, so they either don't trade or trade less. That reduces liquidity.
And your example of pre-1987 liquidity included a huge number of market makers whose job it was to add liquidity and they got juicy exemptions (which amounted to rents) from the SEC. There was no level playing field. No customer had the advantages of a specialist or market makers in the pit. But, you must also know that there is far more liquidity today, with the advent of electronic trading than there was back then. Markets are far deeper and thicker than they were then. Let's not pretend how fabulous the den of thieves on the floor were for customers.
It is SEC restrictions that prevent better, more diverse sources of liquidity. Killing off what's left of providers is dumb. Just loosen the noose of regulation to increase competition.
The media potrayal of trade in the commodity futures markets focuses on two fictional participants, hedgers who are the wise unlevered,respectable businessmen trying to manage their risk, and on the other side the speculators,wild,irrepsonsible and greedy traders. These are both myths.
"Off and on" referred to trading from 1978-1982, and then not getting back in on a serious basis until 2004 to date,
As far as "a pejorative concocted to malign somebody you're unable to legitimately compete against and/or don't understand.", I haven't had a year below 30% net after tax etc. return since 2004 and through 2009 when I hit my net worth target, and at least one year with a triple digit return -- so I have no problem with beating the slime ball greed freaks at their own game.
Just to be clear too, *all* people on Wall St or managing money or similar aren't greed and control freaks.
As far as liquidity and HFT though, I think it would be pointless to continue. You seem quite convinced of your views, and I'm not into beating my head against a wall... at least since my 1st marriage (intended as humor).
Bart, I'm sorry I seem set in my views about HFT. It's just that I don't find "slime ball greed freaks" to be a compelling argument.
Sincere congratulations on your returns. Good for you! I don't find returns alone (in the absence of the strategy that generated them) compelling, though. I have a friend whose annual returns have been triple digits for years, but he swings like a maniac and he could blow up on any given day (which he is well aware of). In light of his risk, his returns cannot be convincingly attributed to skill alone, although he's an incredibly smart guy. Which doesn't mean you're doing the same - I don't know enough about what you're doing to judge you at all. For all I know, you were running a completely hedged strategy with a fabulous sharpe ratio and generating alpha all over the place, but your returns on their own don't tell me that.
However, you've peaked my curiosity on another matter. If you were such a successful trader, why did you stop for so long? It's exceptionally rare for professional traders to take 22 year breaks - particularly over a period of time when alpha was way more abundant and easier to capture for professional traders because the customers were getting screwed in the pit. Usually, we spend time as juniors in larger firms and then the pain in the ass of becoming an independent dealer prevents us from jumping in and out. 22 years is most of your working life. What were you doing all that time?
No worries on your HFT views, and understood about "slime ball greed freaks". It would take hours to do justice to the concept and communicate even close to a full picture, and my lady is already unhappy with the amount of time I spend online and with my site - hope & trust that you understand... and given what you know about the pit and its "special moments" - turn the volume up to 11 and that's what I've seem since about 2006 with HFT and the like, including Fed etc. "shadow" interventions.
Very different times and purposes on futures trading - in the late 70s and early 80s, I owned a large photo lab and primarily traded silver. I sold the majority of the company's physical silver in early Jan 1980 before the peak at "real" spot around $33 and then just sort of fiddled around with it as the volatility faded. The last few months I had some losses - not big ones, but enough for me to see that I should get out while I was nicely ahead. I also had a great teacher who truly understood risk and money management, Luck sure did play a part too.
I've been retired since 2004 and friends call me a geezer sometimes, and not because I'm anywhere near close to my 30s anymore. ;-)
Since 2004, all the futures trading has been for me alone. I can say that I'm very eclectic (no apologies to Hugh Hendry ;-) in my signals and also have various iron clad rules, like *always* having both a target and a max loss in mind and written down before opening a trade - and only once have I violated a stop, and it was when I shouldn't have been trading anyhow (death in the family, and more). I never hedged anything before I hit my net worth target, but find that these days, hedging has been the majority of my trades given that I have substantial physical quantities of various hard assets, etc.
I have virtually no use for things like Sharpe or alpha or even options (if you're not correct, get the hell out), and do have a "tinfoil hat" in the sense that the signals I pay attention to are usually well off the beaten path, like Bradley or Armstrong a number of years ago, or Puetz or Alphier these days. It may sound like I'm mostly TA based from what I've written but I don't think I am,
My general views are roughly documented both on my "investing hat" and "futures trading" pages.
So, Happy Anniversary to everybody who made the Flash Crash happen. We hope you are enjoying yourself.
Because we, and millions and millions of other retail and institutional investors around the world, are no....
Oh dear! Boo! Hoo! Boo! Hoo!
Jon M: "Nothing is being said.
Nothing is getting done.
You're freaking arguing about arguing about insults."
Que Music:
"But it was Saturday night, I guess that makes it alright, and you say 'What have I got to lose'? "
Name that tune.
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