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December 2006 Archives


December 1, 2006

Horse trading

An interesting paper out (via Mark Thoma) supports what many suspected - the petrol (gasoline) price really does drop before an election. According to two IMF economists, Claudio Paiva and Rodrigo Moita, there's a significantly larger average fall in real petrol prices (0.7% against 0.3%) in quarters leading up to an election; and the link's a lot stronger in some countries, where the difference is several percentage points.
The paper just points out a correlation, not a mechanism, and in some countries (such as the UK), where elections can be called at will by the governing party, the causal link could go the other way; parties could be timing the election for when exogenously low petrol prices make them more likely to do well, not working to bring down prices before an election.
According to the Washington Post, this news won't surprise everyone; three out of ten people in the US already believe that the drop in petrol prices before last month's elections were a political ploy; a belief which the Post dismisses as a "conspiracy theory".

December 4, 2006

De Molina - you're no fun any more

Bank of America's CFO, Alvaro de Molina, has hung up his boots - see Risk News and Bloomberg. Apparently the spark has rather gone out of finance since Sarbox came in - it's made his job "a little less fun".

``I like taking risks and you don't want a CFO who's a risk taker'' in this regulatory environment, de Molina said in an interview.

His departure's going to add momentum to the calls from US banks and other companies to roll back some of the Sarbox rules in the name of "competitiveness". Glenn Hubbard's committee on capital markets regulation agrees, but Mark Thoma is sceptical about their independence:
Given that the Committee on Capital Markets Regulation received $500,000 from the C.V. Starr Foundation, a group with strong ties to Maurice R. "Hank" Greenberg, the former AIG chief who is fighting civil charges filed by the New York attorney general, and given that two other committee members, Wilbur L. Ross Jr and Kenneth C. Griffin, contributed a few hundred thousand dollars more, why should we believe the Committee was independent? Is it a coincidence that the committee's findings are favorable to the donors?

The calls for something to be done about Sarbox are presumably related to the increasingly gloomy economic news coming out of the US.
But business should be wary of automatically blaming red tape for every downturn. At the time, pessimists predicted that the US economy would be ruined by the Clean Air Act, the minimum wage, the New Deal, the establishment of the Occupational Safety and Health Administration and the abolition of child labour. Somehow, the economy survived.
The bubble that is reputation is at the foundation of the US and every other modern economy - Enron and WorldCom struck at it, and it is worth paying almost any price to keep it safe.

December 5, 2006

Can hedge funds be cloned?

The few areas around Risk's offices in the West End of London which are not yet contaminated with polonium-210 are awash with hedge fund managers. Mayfair is home to so many prosperous funds that office rents are among the highest in the world - which funds making 2 and 20 are still easily able to pay.
But could the good times be coming to an end? The Financial Times has grown rather excited about Goldman Sachs' Absolute Return Tracker software, which is supposed to provide hedge fund-like returns by monitoring the performance of a pool of funds and using that data to deduce the funds' aggregate positions.

Continue reading "Can hedge funds be cloned?" »

December 8, 2006

Mifid and the future of exchanges

Back in October I blogged about the "Mifid: an opportunity for profit" report from LogicaCMG. Well, Logica invited me to a round table on the report yesterday. Their invitation opened with the words "I am sure all of you are heartily sick of MiFID – the numbingly boring Markets in Financial Instruments Directive..." (you might very well think that; I couldn't possibly comment).

However, it was interesting to see how opinions have changed in the intervening two months. After all, since the report came out, we've seen Project Boat (for reporting of OTC equities trades) and Project Turquoise (a rival exchange) both suggested; and very little progress on exchange consolidation.

The report's author, Graham Bishop, is pessimistic about the prospects for consolidation. "I wouldn't be surprised if the mergers [either between NYSE and Euronext or between NASDAQ and the LSE] occur and are unwound again by the shareholders within five years. There's a very real possibility that the status quo will continue."

Of the three scenarios that Bishop originally outlined, the feeling of the group was that the status quo was the most likely - some even suggested that the various Projects were just bargaining moves, used by the banks to frighten the LSE into cutting its fees.

Thoughts?

Interesting reading for Friday

Via Lars Toomre, a very good article on Amaranth. I've written about this before here and here - and after it originally broke, back in September. This article traces the collapse to April 2005: Amaranth, it says, was suffering from the junk-rating of GM and Ford, and its gas trader, Brian Hunter, the only one turning in profits, was threatening to leave. Nick Maounis, the fund's founder, persuaded Hunter to stay by making him co-head of energy trading, allowing him to run his own trades - a decision which allowed Hunter to run up massive losses and doom the fund the next year. There's not much new but it's a good summary with a lot of interesting detail.

December 11, 2006

The next underlying - diamonds

ABN Amro is leading an effort to introduce diamond derivatives; see Risk News here. It sounds appealling on first glance - production is forecast to hit $11.3 billion by 2010, so this is a reasonable-sized industry - but it seems there are still some issues to be resolved. Most importantly, how useful will hedges on a generic diamond be for users whose physical exposure is to a different set of stones? The oil markets have well established discounts for sour or heavy crude versus WTI or Brent, but is the diamond market as mature? And what will be the role of De Beers, which has ruled the market for decades and refuses to comment?

December 14, 2006

Food for thought on international capital flows

Brad Setser has a look through the BIS quarterly report and picks out a couple of fascinating diagrams showing net capital flow around the world.


Continue reading "Food for thought on international capital flows" »

December 18, 2006

BATS and dogs

Following up on the topic of The Future Of Exchanges (see here, here, here) Alea posts an interesting Wall Street Journal article on algo trading and the importance of location. Also at Infoproc here.

About four years ago, Dave Cummings moved his trading firm's computers from a storefront in this Kansas City suburb to buildings in New York and New Jersey that house central computers for two big electronic stock exchanges.

The move shaved a precious fraction of a second from the time it takes Mr. Cummings's firm, Tradebot Systems Inc., to buy or sell a stock on computer-based exchanges like Archipelago. It now takes Tradebot about 1/1000 of a second to trade a stock, compared with 20/1000 before the move -- a difference of about the time it takes a computer signal to zip at nearly the speed of light from Kansas City to New York and back.

Regulatory question: is it feasible to impose a given delay, so as not to disadvantage traders in Kansas, 20 milliseconds away at light-speed, compared to New Yorkers only two milliseconds away? I doubt it. It would be possible to make sure that, say, Chicago and London got the quotes at the same time as New York, by delaying release by a few milliseconds in NY. But what about traders in Canada? Los Angeles? Butte, Montana? Ensuring that every city released data simultaneously would be a huge problem. So it looks like location is still important. Can't change the laws of physics, and all that.
On the other hand, at least your traders no longer need to live in London or NY - just the algorithms. You can put your traders in Bombay or Chengdu if you want, given that they aren't going to be trading, but just overseeing the algorithms - they don't need microsecond latency, just a big fat pipe to the algo server in a rack in Manhattan or wherever.

On a lighter note: a memo from Alan Greenspan to his puppy.

Although you initially had numerous problems with excessive liquidity, you have done an impressive job of developing internal controls, as well as external communications to provide others enough warning to take preventive action... There is, however, one aspect of your behavior that does portend some trouble, and that is your continuing irrational exuberance...

December 20, 2006

Christmas season

It's been a good year for the industry - and that translates into good bonuses, in particular at Goldman Sachs, where chief executive Lloyd Blankfein has been awarded $53.4 million in compensation for the year, of which $27.9 million is in cash.

What to do with it all? This lengthy article from the New York Times by the Australian ethicist Peter Singer looks at how much we should give to charity. The eight UN Millennium Development Goals - which include halving absolute poverty, halving hunger, ensuring universal primary education and acting against various major infectious diseases - have a price tag of $50-$75 billion a year on top of existing promises of aid.

Meeting this, Singer says, is not impossible - not even implausible. He proposes a sliding scale of giving; the richest 0.01% of the US could give a third of their income without missing it, raising $61 billion. The rest of the top 0.1%, making around $2 million each, could give a quarter, and so on down - the total, he suggests, that could be raised "without significant hardship" is a startling $404 billion every year. That's from the top 10% only, and from one country only - the US. (For an insight into where you fall on the Global Rich List, check here.)

One of the startling things about relieving poverty is not how expensive it is, but how cheap - to use Bill Gates' terminology, the bang for the buck for things like vaccination and educational spending is startlingly high. People who deal in hundreds of millions of dollars may find it baffling that a few thousand can have such an impact.

This isn't an appeal for funds for any particular cause, because this blog doesn't give investment advice. And alleviating poverty is an investment - as well as a moral good.

OTC will be off duty until the New Year - I'd like to wish all the blog's readers happy holidays.

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