traders

‘Nothingness haunts being.’ –Jean-Paul Sartre

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It was an invitation-only party (crabs, cocktails and a D.J. on a moonlit dock) thrown by Jane Street, a secretive E.T.F. trading firm that, after years of minting money in the shadows of Wall Street, is now pitching itself to some of the largest institutional investors in the world.

And the message was clear: Jane Street, which barely existed 15 years ago and now trades more than $1 trillion a year, was ready to take on the big boys.

Much of what Jane Street, which occupies two floors of an office building at the southern tip of Manhattan, does is not known. That is by design, as the firm deploys specialized trading strategies to capture arbitrage profits by buying and selling (using its own capital) large amounts of E.T.F. shares.

It’s a risky business.

As the popularity of E.T.F.s has soared — exchange-traded funds now account for a third of all publicly traded equities — the spreads, or margins, have narrowed substantially, making it harder to profit from the difference.
And in many cases, some of the most popular E.T.F.s track hard-to-trade securities like junk bonds, emerging-market stocks and a variety of derivative products, adding an extra layer of risk. […]

While traders at large investment banks watched their screens in horror, at Jane Street, a bunch of Harvard Ph.D.s wearing flip-flops, shorts and hoodies, swung into action with a wave of buy orders. By the end of the day, the E.T.F. shares had retraced their sharp falls.

It is not only Jane Street, of course. Cantor Fitzgerald, the Knight Capital Group and the Susquehanna International Group have all capitalized on the E.T.F. explosion.

And as these firms have grown, so has the demand for a new breed of Wall Street trader — one who can build financial models and write computer code but who also has the guts to spot a market anomaly and bet big with the firm’s capital. […]

Here is a small sample of Jane Street’s main traders: Tao Wang (doctorate in philosophy and finance from the National University of Singapore), Min Zhu (master’s in chemistry, Columbia), Brett Harrison (master’s in computer science with a focus in artificial intelligence, Harvard) and Srihari Seshadri (bachelor’s in computer science, Carnegie Mellon).

{ NY Times | Continue reading }

oil on Masonite { Grant Wood, Birthplace of Herbert Hoover, 1931 }

‘History is the science of what never happens twice.’ —Paul Valéry

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A recent Wall Street Journal/NBC News poll found that 49% of Americans still believe the U.S. economy is in recession, even though we are now in the sixth year of the recovery. […] If investing when others are skeptical has historically been a successful strategy, why don’t more investors do so? […] Taking advantage of the findings discussed earlier requires investing when the economy and market seem to be at their worst, and rebalancing when conditions appear to be the best. This is counterintuitive for many investors, who tend to wait for confirming evidence before acting. This is related to herd behavior, the tendency to follow the crowd with portfolio decisions. Investing when others are skeptical is emotionally difficult but, as we’ve shown, tends to be when rewards are the greatest.

{ JP Morgan Funds | PDF }

related { It is not possible for a human to know whether Bank of America made money or lost money last quarter. }

art { Jim Campbell, Ambiguous Icon #1 Running Falling, 2000 }

‘Nothing can come of nothing.’ —Shakespeare

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Since The Fed’s extension of Operation Twist (and subsequent unveiling of QE3) in 2012, the stocks of “weak balance sheet” companies are up over 100%. In that same period, the stock prices of “strong balance sheet” companies are up a mere 43%.

{ ZeroHedge | Continue reading }

The last 5 days saw “strong” companies outperform “weak” companies by the most in 3 years - something appears to be changing.

{ ZeroHedge | Continue reading }

If you can look into the seeds of time, and say which grain will grow, and which will not, speak

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A quarter of all public company deals may involve some kind of insider trading. […] The study [PDF], perhaps the most detailed and exhaustive of its kind, examined hundreds of transactions from 1996 through the end of 2012.

{ NY Times | Continue reading }

If at first you don’t succeed, skydiving is not for you

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Long ago, stock trades were reported over ticker tape, and one type of manipulation was called “painting the tape.” Traders would enter orders to give the appearance of activity in a stock to entice others to buy shares, thus pushing the price higher.

Today, a slightly more sophisticated scheme is called “banging the close,” in which transactions are made in one market at the end of the day to benefit a trader’s positions in another market, say derivatives. Same scheme, different means. […]

The growth of high-frequency trading firms and transactions executed on alternative trading systems, called dark pools, have made it more difficult to police potential manipulative conduct. High-frequency traders buy and sell millions of financial instruments but rarely hold a position for more than a day. While such trading provides greater liquidity to the markets, helping to lower costs for all investors, it can also offer new opportunities for manipulating prices. […]

Manipulation can also involve benchmark indexes, which are incorporated into a wide variety of transactions, including mortgage interest rates. When an index relies on reports provided by rival market participants, the temptation to furnish false information to affect its value can be powerful because a small shift in value can affect billions of dollars. Several large banks have already paid billions in penalties for manipulation of the London interbank offered rate, or Libor, and investigations are gaining steam into how currency prices were reported in the foreign exchange markets.

{ NY Times | Continue reading }

Take but degree away, untune that string, and hark

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High frequency trading. I won’t go into the details, but basically it has become an arms race of being a millionth of a second faster than the other guy. The exchanges (Nasdaq and NYSE) started offering co-location within their facilities and traders started fighting for the best physical real estate within the co-location center (ie. literally trying to be a few feet closer to the exchanges’ computers).  Some of the high frequency traders complained about how ‘unfair’ it was to be a few feet farther away.  The exchanges conceded and added ‘latency’, basically a few feet of cable, so everyone within the co-location center is equidistant. It baffles me financial progress is moving in this direction.

Prediction by ‘experts’/pundits. Why do people still believe in pundits and ‘experts’ on TV? If ‘experts’ could predict the future with any accuracy, they would be doing something else. They are not always wrong, they are simply not right consistently enough to provide meaningful value. I’m always surprised how confident and certain people sound on CNBC (I rarely feel sure of anything). Keynes got it right when he said, “If you must forecast, forecast often.”

{ Quora | Continue reading }

Elle Driver: [after getting covered with tobacco juice during her fight with the Bride] Gross.

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On average, ATD made less than a penny on every share it traded, but it was trading hundreds of millions of shares a day. Eventually the firm moved out of Hawkes’s garage and into a $36 million modernist campus on the swampy outskirts of Charleston, S.C., some 650 miles from Wall Street.

By 2006 the firm traded between 700 million and 800 million shares a day, accounting for upwards of 9 percent of all stock market volume in the U.S. And it wasn’t alone anymore. A handful of other big electronic trading firms such as Getco, Knight Capital Group, and Citadel were on the scene, having grown out of the trading floors of the mercantile and futures exchanges in Chicago and the stock exchanges in New York. High-frequency trading was becoming more pervasive.

The definition of HFT varies, depending on whom you ask. Essentially, it’s the use of automated strategies to churn through large volumes of orders in fractions of seconds. Some firms can trade in microseconds. (Usually, these shops are trading for themselves rather than clients.) And HFT isn’t just for stocks: Speed traders have made inroads in futures, fixed income, and foreign currencies. Options, not so much. […]

By 2010, HFT accounted for more than 60 percent of all U.S. equity volume and seemed positioned to swallow the rest. […] For the first time since its inception, high-frequency trading, the bogey machine of the markets, is in retreat. According to estimates from Rosenblatt Securities, as much as two-thirds of all stock trades in the U.S. from 2008 to 2011 were executed by high-frequency firms; today it’s about half. In 2009, high-frequency traders moved about 3.25 billion shares a day. In 2012, it was 1.6 billion a day. Speed traders aren’t just trading fewer shares, they’re making less money on each trade.

{ Bloomberg | Continue reading }

related { Today’s Comforting Stat: Hedge funds are a trillion dollars in debt }

Doesn’t it make you nervous to be in the same room with thousands of dollars worth of diamonds, and unable to touch them?

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REITs [Real Estate Investment Trust] are sold like stocks, and they’re held by many individuals and institutional investors. You might have a REIT in your retirement fund. REITs are trusts that own and develop property and earn rental income. […] “They are forced by law — a law created in 1960 — that provides that real estate investment trusts have to meet certain tests,” says Brad Thomas, editor of the Intelligent REIT Investor. “And if they do, they are forced to pay out 90 percent of their taxable income in the form of dividends.” Those dividends are a regular stream of income, and they’re what make REITs attractive to investors.

I put down $513.94 on a REIT index fund. It’s basically a smorgasbord of many different REITs. It contains what you might expect — REITs that own apartment buildings and shopping centers. But Thomas says the range of REITs today goes far beyond that, “from billboards to prisons to cell towers, campus housing. Even solar is on the horizon potentially.”

{ NPR | Continue reading }

related { Agents use a median 250 characters for homes listed under $100,000. For homes priced over $1 million, they go nearly twice as long, with a median 487 characters. }

related { If There Is A “Housing Recovery” Then This Chart Can’t Be Right }

Where’s my flyswatter?

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In February 2012, a number of hedge fund traders noted one particular index–CDX IG 9–that seemed to be underpriced. It seemed to be cheaper to buy credit default protection on the 125 companies that made the index by buying the index than by buying protection on the 125 companies one by one. This was an obvious short-term moneymaking opportunity: Buy the index, sell its component short, in short order either the index will rise or the components will fall in value, and then you will be able to quickly close out your position with a large profit.

But February passed, and March passed, and April rolled in, and the gap between the price of CDX IG 9 and what the hedge fund traders thought it should be grew. And their bosses asked them questions, like: “Shouldn’t this trade have converged by now?” “Have you missed something?” […]

So the hedge fund traders began asking who their counterparty was. It seemed that they all had the same counterparty. And so they began calling their counterparty “the London Whale.” They kept buying. And the London Whale kept selling. And so they had no opportunity to even begin to liquidate their positions and their mark-to-market losses grew, and the risk they had exposed their firms to grew.

So they got annoyed. And they went public, hoping that they could induce the bosses of the London Whale to force him to unwind his possession, in which case they would profit immensely not just when the value of CDX IG 9 returned to its fundamental but by price pressure as the London Whale had to find people to transact with. And so we had ‘London Whale’ Rattles Debt Market, and similar stories.

The London Whale was Bruno Iksil [a trader working for the London office of JPMorgan Chase]. He had been losing, and rolling double or nothing, and losing again for months. His boss, Ina Drew, took a look at his positions. They found they had a choice: they could hold the portfolio and thus go all-in, or they could fold. They could hold CDX IG 9 until maturity–make a fortune if a fewer-than-expected number of its 125 companies went bankrupt, and lose J.P. Morgan Chase entirely to bankruptcy if more did. Or they could take their $6 billion loss and go home. What could they do if the bet went wrong and they had to eat losses at maturity? J.P. Morgan Chase couldn’t print money. So Drew stood Iksil down, and the hedge fund traders had their happy ending.

[…]

“Why did the interest rate on the Ten-Year Treasury peak at 4%? And why has it gone down since then? And why won’t it go back to its 5%-7% fundamental.” And they looked around. And they found Ben Bernanke. The Washington Super-Whale. […] From my perspective, of course, the hedge fundies’ analogy between the London Whale and the Washington Super-Whale is all wrong.

{ Brad DeLong | Continue reading }

Crucifixion ain’t no fiction

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{ Hedge-fund manager John Paulson’s wager on gold wiped out almost $1 billion of his personal wealth in the past two trading days as the precious metal plummeted 13 percent. Paulson started the year with about $9.5 billion invested across his hedge funds, of which 85 percent was in gold share classes. | Businessweek | full story }

We recommend initiating a short COMEX gold position

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Gold Sell-Off Biggest in 30 Years

Gold was diving 9.5%, reaching at its lowest level since February 2011 on Monday.

What Happened The Last Time We Saw Gold Drop Like This?

Why is gold plunging? The most important factor is that global inflation is falling, reducing gold’s value as a hedge against rising prices.

Did Goldman Sachs release a note encouraging clients to short gold right after receiving the Fed’s FOMC leak information, due to the leak itself?

A long, intimidating, immense and rational derangement of all the senses

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So, it’s mid-March 2013 and, the S&P 500 is at 1550, right where I said it would be nine months ago. […] I see the S&P continuing to frustrate the majority (that is what markets do).  It may hit 1560-1580 prior to actually having a legitimate correction of 5-10%.  There is so much liquidity awaiting deployment upon a pullback that the pullback will be quick.  Later in the year, it’s very likely we’ll see 1600-plus on the S&P (September-November).  In my view, the market will be a good sell at that point, so will many credit products.  There is no way the Fed can shift its policy stance concurrent with having to immunize a $4 trillion balance sheet going into the end of a fiscal year.  2014 is likely to be challenging.
 
Enjoy this while it lasts. […]

The People’s Republic’s big issues will start in fiscal years 2013-2014.  China Merchants Bank, for example, is already seeing a bigger rise in bad-loan provisioning and lower good-loan growth than Western equity analysts think.  The CEOs of two large Brazilian companies, Vale and Petrobras, are starting to plan for China to “hit a wall” in 2015-2018. Essentially, China will look OK through April 2013 then big problems will hit the country.

Europe will not implode.

{ Secret top source/Minyanville | Continue reading }