This has been a good couple of weeks for President Obama.
With just over a year to go to the election, any prediction I make now could well be dead wrong. But for now, the President's prospects are looking good.
The big story, of course, is Thursday's killing of Muammar Qaddafi, Libyan strongman, "mad dog of the Middle East", and one of America's main bogey-men since the Reagan administration. Does Obama get the credit for this? Sure he does; his Administration's plan in Libya was brilliant in its "less-is-more" low-key simplicity-- the polar opposite of his predecessor's big spending, big talking and far less effective efforts in Iraq. Obama spent around $1 billion in Libya (about 0.1% of the Iraq war), and let the allies do most of the heavy lifting and take most of the credit. But does anyone seriously think this could have succeeded without U.S. technological and political backing?
Then, there is yesterday's news that we will be pulling all troops out of Iraq by the end of the year, finally cleaning up Bush's worst foreign-policy mess, just as Obama said he would. Sure, critics warn of a resurgent and dangerous Iran, and the dangers it poses in the region. But if this is the fear, Obama has rapidly proven that he is the best man to deal with the threat -- with his successful targeting of senior al-Qaeda figures (remember Osama Bin-Laden?) and aggressive drone strikes in Pakistan and Yemen he has shown that he is no weakling, and Iran discounts him as an adversary at their own risk.
Whether polls show it or not, military and foreign policy is the most important job of any President, and Obama is now second to none on this front. Who can challenge him when it comes to our security and vital interests: Romney? Perry? Cain? Hah!
As far as the economy goes, most say that this will decide the election. But this has been a good week for Obama as well, with the recent signing of free trade agreements with Korea, Colombia and Panama (in descending order of economic importance). This won't turn the economy around on a dime, but will increase overall prosperity for years to come, and is an issue that has always had broad bipartisan centrist support. And, as reported in today's Wall Street Journal, it has helped lead to a "thaw" in the Senate, which has allowed the confirmation of several judges and other officials that had been "held" for Senate approval for months.
Speaking of the economy, I think the nation is coming to realize that we are in the midst of a long slog, as Americans become more thrifty and save more, reducing consumption, and thus slowing economic growth (see today's WSJ, Spenders Become Savers, Hurting Recovery, by Jon Hilsenrath and Ruth Simon). I believe this might be the beginning of a more sane, sustainable economy, one that is not based on living in a bigger house than you really need, having more (and bigger) cars and appliances than you can use, and financing them with debt. Yes, commerce and dreaming big are American values, but so are modesty, simplicity, spirituality and sacrifice. The idealist in me thinks that Americans can live happier and better lives without a high economic growth rate fueled by ever-increasing consumption. But one of the keys has to be a more equitable distribution of wealth.
There is a national heritage that we are all part of, and which contributes in large part to our well-being as individuals. In this I would include our roads, our national parks, our education system, our social security system, our system of medical care (which is now close to 50% publicly funded), not to mention our rich history and culture. By concentrating on these things, we build wealth for the entire country that we can all share in, and that cannot be taken away from any American. The days of a consumption-based economy, where the middle class buys more than they need, and the rich make a killing off their unnecessary purchases are over.
I hope that people are coming to realize that Republican policies that aim to take us back to this type of consumption-based economy are not appropriate in today's world. I hope that the widespread public support for the "Occupy Wall Street" movement are a symptom of this realization. So far, Obama is the only candidate who seems to get this, and offer something approaching a reasonable way forward.
Saturday, October 22, 2011
Thursday, October 20, 2011
High Frequency Trading: Have Transaction Costs Gotten Too Low?
Article: Wall Street Journal, A Call to Pull Reins on Rapid-Fire Trade, Scott Patterson
This article from today's paper is about Thomas Peterffy, chief executive of Interactive Brokers, and one of the inventors of high frequency trading. Now he's turned against the practice which he helped invent, and says it's bad for the market. (It also hurts his business.) He blames high frequency trading for the flash crash of May 2010, when the market dropped by 1,000 (10%) points before rebounding a few minutes later.
There is an orthodoxy that practices like high frequency trading make markets more efficient through an arbitrage mechanism. As traders exploit inefficiencies to make a profit, they tend to squeeze those inefficiencies out of the market, thus making trading more efficient (cheaper) for everyone else.
But I wonder...
Transaction costs in the stock market have been dropping for decades. Technology enables huge numbers of shares to be bought and sold with very little human intervention--cheaply. Over the years this has caused the loss of lots of middle-class Wall Street jobs. But this has been the way of the world at least since the industrial revolution.
But at the same time, a small number of people have enriched themselves to an unprecedented degree by exploiting every informational and technological advantage they could find. From big trading desks at companies like Goldman Sachs whose alumni staff the Fed and the Treasury Department, to hedge funds which somehow in an "efficient market" are able to charge many times more than what the average mutual fund manager charges --because their rich clients must believe they know something or someone that no one else does-- to high frequency traders, who somehow manage to turn a profit just by trading faster than anyone else.
It seems to me that if Wall Street is fatter than ever (in absolute terms, and as a percentage of GDP), then markets must be less efficient than ever--because after all, Wall Street is just a middle man between savers and borrowers. The less money the middle man gets, the more efficient the market is, right? Is "market efficiency" just a shibboleth that those who exploit an unfair advantage utter to defend their racket?
It's not really a mystery how high frequency traders make money. They act as "market makers", taking the opposite side of the trade for all who are ready to buy or sell, as long as you're willing to accept their spread, which is a market maker's legitimate source of profit. Market makers provide a service; they are always there if you need to sell quickly to raise cash. They earn a spread in return for taking the risk that they will get stuck with a toxic inventory of plummeting stock.
But in most markets, at least traditionally, market makers are regulated, and expected to step up as buyers of last resort in times of market stress. As I read, high frequency traders are different because they stop trading and leave the market as soon as conditions get rocky. So they really are not market makers in the traditional sense. They make a market when it suits them, then step away when it doesn't. This might be OK if they were small players, but high frequency trading is now over 50% of U.S. equity volume. So they have an undue influence on the equity markets, and contribute nothing but this so-called "market efficiency" which mysteriously manages to produce more super wealthy individuals than ever before.
To my loyal readers, I apologize for the 17 days that have passed since my last post. After a wonderful, though truncated visit to the island of Shikoku, Japan, I am now gainfully employed which is interesting, but makes out-sized claims on my time.
This article from today's paper is about Thomas Peterffy, chief executive of Interactive Brokers, and one of the inventors of high frequency trading. Now he's turned against the practice which he helped invent, and says it's bad for the market. (It also hurts his business.) He blames high frequency trading for the flash crash of May 2010, when the market dropped by 1,000 (10%) points before rebounding a few minutes later.
There is an orthodoxy that practices like high frequency trading make markets more efficient through an arbitrage mechanism. As traders exploit inefficiencies to make a profit, they tend to squeeze those inefficiencies out of the market, thus making trading more efficient (cheaper) for everyone else.
But I wonder...
Transaction costs in the stock market have been dropping for decades. Technology enables huge numbers of shares to be bought and sold with very little human intervention--cheaply. Over the years this has caused the loss of lots of middle-class Wall Street jobs. But this has been the way of the world at least since the industrial revolution.
But at the same time, a small number of people have enriched themselves to an unprecedented degree by exploiting every informational and technological advantage they could find. From big trading desks at companies like Goldman Sachs whose alumni staff the Fed and the Treasury Department, to hedge funds which somehow in an "efficient market" are able to charge many times more than what the average mutual fund manager charges --because their rich clients must believe they know something or someone that no one else does-- to high frequency traders, who somehow manage to turn a profit just by trading faster than anyone else.
It seems to me that if Wall Street is fatter than ever (in absolute terms, and as a percentage of GDP), then markets must be less efficient than ever--because after all, Wall Street is just a middle man between savers and borrowers. The less money the middle man gets, the more efficient the market is, right? Is "market efficiency" just a shibboleth that those who exploit an unfair advantage utter to defend their racket?
It's not really a mystery how high frequency traders make money. They act as "market makers", taking the opposite side of the trade for all who are ready to buy or sell, as long as you're willing to accept their spread, which is a market maker's legitimate source of profit. Market makers provide a service; they are always there if you need to sell quickly to raise cash. They earn a spread in return for taking the risk that they will get stuck with a toxic inventory of plummeting stock.
But in most markets, at least traditionally, market makers are regulated, and expected to step up as buyers of last resort in times of market stress. As I read, high frequency traders are different because they stop trading and leave the market as soon as conditions get rocky. So they really are not market makers in the traditional sense. They make a market when it suits them, then step away when it doesn't. This might be OK if they were small players, but high frequency trading is now over 50% of U.S. equity volume. So they have an undue influence on the equity markets, and contribute nothing but this so-called "market efficiency" which mysteriously manages to produce more super wealthy individuals than ever before.
There are various ways to deal with this problem. Thomas Peterffy proposes putting a 1/10 second delay on all exchange orders, which would eliminate the high-frequency houses' speed advantage, and stop their orders from getting in front of legitimate regulated market makers' orders (like Interactive Brokers).
Another solution that occurs to me is to raise transaction costs by imposing a modest tax on each trade. Those off us who buy shares because we actually want to have them will hardly notice. But those who churn the market for profit will have to slow down. And the tax could be used for something good, like fighting off bank lobbyists and splitting up some of the big players, so they have less influence and pose less systemic risk.
But I think the best solution is for the SEC to simply do its job. If you are pumping thousands of trades through the market each day, then you are a de facto market maker, and need to be regulated as such. The SEC's mandate is to ensure fair and orderly markets. If certain players are making profits through activities which destabilize markets and create more risk all around, then they need to be warned, and then banned from the markets if they continue.
Another solution that occurs to me is to raise transaction costs by imposing a modest tax on each trade. Those off us who buy shares because we actually want to have them will hardly notice. But those who churn the market for profit will have to slow down. And the tax could be used for something good, like fighting off bank lobbyists and splitting up some of the big players, so they have less influence and pose less systemic risk.
But I think the best solution is for the SEC to simply do its job. If you are pumping thousands of trades through the market each day, then you are a de facto market maker, and need to be regulated as such. The SEC's mandate is to ensure fair and orderly markets. If certain players are making profits through activities which destabilize markets and create more risk all around, then they need to be warned, and then banned from the markets if they continue.
To my loyal readers, I apologize for the 17 days that have passed since my last post. After a wonderful, though truncated visit to the island of Shikoku, Japan, I am now gainfully employed which is interesting, but makes out-sized claims on my time.
Monday, October 03, 2011
Good News, Trade Pacts Moving Forward
Article: Wall Street Journal, Disputed Trade Pacts Advance, by Elizabeth Wilson
According to the WSJ, trade pacts with South Korea, Colombia and Panama could be passed by mid-October. These pacts have been a source of political conflict for five years. The main sticking point has been the extension of "Trade Adjusted Assistance" or TAA, a U.S. program which gives extended unemployment benefits to workers displaced by globalization. The article says that the White House and Congress are near an agreement on a scaled-back version of TAA, and the President could send the three trade pacts to Congress early this week.
I believe this is good news for the United States, as well as Korea, Colombia and Panama. Economists agree that free trade is a win-win, that increases overall wealth and prosperity, as each country is able to use its comparative advantage to produce those goods and services that it can make most efficiently, and trade them openly. The article says that this pact could boost U.S. exports by $13 billion annually, with most of the gains ($11 billion) coming from Korea.
For Obama, this one is a no-brainer, and shows that he is serious about sound economic policy. Better late than never, I say. Now it's time for tax simplification....
According to the WSJ, trade pacts with South Korea, Colombia and Panama could be passed by mid-October. These pacts have been a source of political conflict for five years. The main sticking point has been the extension of "Trade Adjusted Assistance" or TAA, a U.S. program which gives extended unemployment benefits to workers displaced by globalization. The article says that the White House and Congress are near an agreement on a scaled-back version of TAA, and the President could send the three trade pacts to Congress early this week.
I believe this is good news for the United States, as well as Korea, Colombia and Panama. Economists agree that free trade is a win-win, that increases overall wealth and prosperity, as each country is able to use its comparative advantage to produce those goods and services that it can make most efficiently, and trade them openly. The article says that this pact could boost U.S. exports by $13 billion annually, with most of the gains ($11 billion) coming from Korea.
For Obama, this one is a no-brainer, and shows that he is serious about sound economic policy. Better late than never, I say. Now it's time for tax simplification....
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| from wsj.com |
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