Goldman Market Call for 2013

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The Complexity of HFT Markets

The first article to use the Taleb “Anti-fragile’ terminology

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Ted Kaufman on the SEC changes

Always pertinent to the matter at hand

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Common Sense on Market Structure –

Rare as it may be, there are times when a Senator actually makes sense. True to my allegence to good idea’s over party affiliation – I have to quote Senator Kaufman of Delaware who penned a comment letter to Mary Schapiro of the SEC:

“The proliferation of exchanges and other market centers that has increased fragmentation, the substantial rise in volume executed internally by broker-dealers or in dark pools, excessive messaging traffic, the dissemination of proprietary market data catering to high frequency traders, and order-routing inducements all may be combining in ways that cast doubts on the depth of liquidity, stability, transparency and fairness of our equity markets.”

Although this was written in August of 2010 – with no substancial movement in addressing any of these issues – I remain hopeful that the idea’s  it surfaces needs to become core components of any meaningful market reforms.  Specifically:

  • Stop proliferation of Exchange trading venues in general, and ‘Dark Pools’ Specifically
  • Prohibit internalization of order flow by ANY Broker Dealer on behalf of a customer
  • Limit excessive message traffic sent to exchanges, either by implementing a cancel fee or other monetary cost on unfilled orders.
  • Stop the dissemination and sale of ‘price for performance tiered” proprietary market data by market centers
  • Eliminate the practice of “payment for order flow” arrangements by all exchanges. Make it a simple fee per execution strategy.
  • Review & Simplify the various order types allowed by ALL exchanges

All in all, a pretty simply “Six Point Plan”




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Further thoughts on electronic, high-frequency trading & markets

The recent SEC round-table on ‘Promoting Stability in Today’s Markets’ was held  on October 2nd. It had all the earmarks of being yet another ‘government job’:

A) Round up the usual suspects

B) Bring out the big commissioners

C) Everyone reads from prepared statements


Well, to my surprise – the SEC actually did a fine job by including a fine woman by the name  of Dr. Nancy Leveson of MIT. At first glance, I was starting to roll my eyes & expecting the usual ‘I’m from academia and here is how things should work’ speech, she delivered a performance that rivaled Jeff Goldblum in  Jurassic Park – setting the stage for the remaining 5 1/2 hours of testimony and discussion of how to make the markets better and more stable.

All laudable goals, but given that most of the participants (exchanges, high frequency traders & market makers) are either conflicted, incentivised or actively profited from the most recent Knight Trading Snafu, ultimately doomed to failure by the denial / hubris and conflicts of the participants.

But back to my story – she proceeded to review her long & impressive career / resume in the world of computer science – expounding the lessons learned from working with everything from NASA, the aviation industry, nuclear power, medicine and software – and proceeded to impress even this jaded veteran of Wall St. with her insight and powerful statements and indictments on the design, development and testing of software.

I guess the reason this resonated with me so much has to do with the general, rather than the specific nature of her comments, all of which have been formed from working in every industry except for finance. Sitting back and thinking about what she said provided me with a pretty nice framework for forming an opinion of not only what should be done, but also the basis for my prediction as to what I think will happen.

Her first point – ‘All Software has bugs – there is no such thing as ‘perfect software’

Her second point – Keep things simple – humans have a tendency to make complex as opposed to simple programs, thus increasing the probability of unexpected behavior.

Her final point – Keeping public trust is paramount – the best way to create a  ‘risk culture’ is to remind those involved of the ramifications resulting from errors – very effective, especially when it could mean the death of an entire industry, company or most importantly, their jobs.

She brought up excellent examples such as NASA, the Aviation Industry and Nuclear Power, all of which try and limit the amount of software dependencies on ‘mission critical’ components, and the very public reaction, fallout and analysis which results if something goes wrong.

Taking these points to heart – I have decided that in terms of electronic markets we now have the following situation

I – The Equity Marketplace is far too complex for its own good. The over 2000 order types alone, added to the ever growing number of exchanges, dark pools, crossing networks and the like have made the entire ecosystem far too complicated. Add to this the requirements of Regulation NMS, which mandates the markets to be electronically linked in the name of ‘customer protection’, has lead us to today’s market where it takes an extremely complex algorithm (s) to simply place and properly route an order.

II – Each exchange, trading firm or hedge fund has entirely too much faith in their own approach, platform, development and testing abilities for their own, much less the markets, good health. The Industry Hubris is such that all the leading players continue to believe in their own superiority, reinforced by profits, and believe that they are uniquely placed to be able and harness the most complex and daunting problems. Controls and such are for the lesser, weaker & more pedestrian players. As such, I am more certain than ever that we are due for yet another major ‘incident’ that will roil our markets, further reducing the public trust in our markets.

Given that the balance of the 5 1/2 hours of testimony eventually degraded into a discussion over ‘ISO 3000 Standards, Full end-to-end testing, and a length discussion over the need, design and operation of a ‘kill switch’ for  markets – I left feeling even more pessimistic about the industry’s ability to heal itself.

The smartest guy I know, an industry legend if there ever was one, had a favorite saying: ‘People are Stupid’ – Which he seemed to use in response to a variety of questions about this or that. I am beginning to see what he meant – the more complex markets get, the more likely it is for it to all end in tears….






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The data & models win again – congratulations to Nate Silver

Given that modern Politics looks & acts increasingly like a major sporting event, including recruitment, training, spending & advertising; I am very pleased to see that both Intrade & the data driven forecasters were absolutely correct in predicting the latest outcome. Moneyball – welcome to politics.

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Jokes stolen from the Internet – loosely catagorized

Steven Wright-ish
  • It was hard getting over my addiction to the Hokey Pokey but I’ve turned myself around
  • If we’re not meant to have midnight snacks, why is there a light in the fridge?
  • I poured Red Bull in my coffee this morning, now I can see sounds
  • I once told a Chemistry joke but no one reacted
  • I though I wanted a career. Turns out I just wanted paychecks
  • Ate four boxes of thin mints, not feeling thin at all
  • I changed my car horn to gun shot sounds…people move out of the way much faster
  • I just spotted some ducks practicing their teenage girl faces
  • My current good mood was brought to you by the good folks at Pfizer
  • When a telemarketer calls, I give the phone to my kids and tell them its Santa
  • You can’t make somebody love you, You can only stalk them and hope for the best
  • Your such a good friend that if we were ever in a sinking boat with one life preserver; I’d miss you and think of you often
  • Never piss off someone who bleeds for a week every month and doesn’t die
  • Never laugh at your girlfriends choices….you are one of them
  • If you think 7 years of bad luck are too much for breaking a mirror, try breaking a condom
Bitter & Twisted
  • I want to be there when Karma ass-fucks you with a Cactus
  • If I had a nickel for everytime you said something stupid, I’d have a sock full of nickels to beat you with
  • Let me file that under fuck it
  • Remember me? You kicked me when I was down? I got back up and now you’re Fucked
  • Why is it that every time I hear the Lord’s Prayer, when they get to the “Lead me not into temptation part” I say to myself: Follow me, I know a shortcut
  • If you’re looking for something to do this weekend, you could always replace the litter in you cat box with pop-rocks
  • The bulletproof vest was actually invented by a pizza delivery guy from Detroit after he was shot twice on the job
  • I desperately need a ‘hide political posts’ button on Facebook so I can still like all my friends after the election
  •  By the power vested in me by Mr. Zuckerberg, I now pronounce you Blocked & Deleted….now you can kiss my ass
  •  High school reunion? What for? I’m on facebook and already know who got fat
Work Related
  • You don’t have to be crazy to work here, We’ll train you
  •  There is nothing more comfortable than sleeping while someone else gets ready for work
  • Why yes Wal-Mart, I’d love to wait in line for 30 minutes behind a pajama clad person who lacks deodorant and a bra. It’s so nice of you to have 2 whole registers open..
  • Life is all about Ass. You’re either covering it, kicking it, kissing it, busting it, trying to get a piece of it or behaving like one
  • If still being in my pajama’s at 3:00 PM is wrong, I don’t want to be right
  • I’d dress up at Siri for Halloween if my life didn’t already entail being asked stupid questions all day
  • Sometimes, giving someone a second chance is like giving them an extra bullet for their gun because they missed you the first time
  • Dear Life, When I asked if my day could get any worse, it was a rhetorical question, not a challenge
  • I never make the same mistake twice. I make it five or six times just to be sure
  • Alcohol – because no great business ever started by a bunch of people sitting around eating salad
  • If I had a dollar for everytime I got distracted, I wish I had some ice cream
  • This Halloween I going to follow the kids all over the neighborhood, then once they have begged for the candy I am going to confiscate 1/2 of it. I’ll just call it the Candy Tax
  •  So I lost the first debate – it was Bush’s fault you damn racist…
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