When algorithms attack
 

[I]Business Insider[/I] has some background on why Knight Capital was making changes to its software: [URL="http://www.businessinsider.com/when-software-kills-2012-8"]When software kills[/URL] (my bold) [QUOTE] On any given day, between 15% and 20% of all trades on the NYSE and NASDAQ went through Knight Capital’s computers.

In early July, the New York Stock Exchange (NYSE) received SEC approval for a new program called the Retail Liquidity Program (RLP). The program, which was slated to kick off on August 1st, would allow retail traders to get access to better pricing on stock. The specification for the programme had been around for less than a year but a lot of wall street firms had planned for its implementation. There was some controversy when the announcement was made but all market makers started preparing for the launch, realizing that this may be another tool to fight the competition and that those who were not ready by launch time could risk losing out precious advantages in the market.

[B]Knight Capital[/B], as one of the largest players in the market, [B]decided[/B] that it would provide that capability to its customers as soon as it became available and [B]that it would take advantage of the price differential for its own trading[/B]. With only a few weeks from the announcement to the release, internal development teams must have burned the midnight oil to get this in place by the August 1st deadline.[/QUOTE]So there you have it. They decided to do two things at once:
1) Implement a new feature for customers.
2) Take advantage of price differences relating to the new feature by making some trades of their own.

Disregarding the issue of insider advantages that businesses seek, it still wouldn't have hurt them to place some time or analysis between step 1 and step 2. Of course, any delay in implementing step 2 would be wasting opportunities to make money.

Maybe they were misbehaving too. If acting on their own behalf made them a Retail Liquidity Taker: [URL="http://exchanges.nyx.com/node/3840"]http://exchanges.nyx.com/node/3840[/URL]
[QUOTE]Retail liquidity takers must represent that their orders are not computer generated and originate from retail accounts.[/QUOTE]Speculation: if an aspect of computer generated trades being verbotten applies to them acting on RLP information, perhaps they delayed pulling the plug out of an unwillingness to admit it. cf. Monty Python Dead Parrot Sketch

Trio of PIIGS-related articles on the front page of the German [i]Die Welt[/i] online today ... I have translated just the headlines, interested readers should paste the links into Google Translate:

[url=http://www.welt.de/wirtschaft/article108485275/Die-bizarren-Sparvorschlaege-der-spanischen-Regierung.html]The bizarre savings proposals of the Spanish government[/url]: [i]Madrid plans savings of over 100 billion Euros – some of which come in strange form. Especially hard-hit is education: Schoolchildren are facing a tax on sack lunches.[/i]

[url=http://www.welt.de/wirtschaft/article108485415/Jeder-zweite-Italiener-verzichtet-auf-Urlaub.html]One in two Italians skips holiday[/url]: [i]The crisis is hitting home in Italy even in terms of summer vacations. In August, when the entire country normally goes on holiday, millions are instead staying home - enduring heat in the city rather than swimming in the Mediterranean. [/i]

[url=http://www.welt.de/wirtschaft/article108484794/Griechenlands-Geldreserven-erreichen-Grenzbereich.html]Greece's cash reserves reach the brink[/url]: [i]The financial situation in Greece is so dramatic that the Government is considering the issue of short-term bonds. Newspapers write of "shocking cutbacks" to be agreed with the troika.[/i]

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Adding to Ross/only_human's note above, Knight Capital seems to have gotten some kind of last-minute lifeline late Friday, leading the shares to nearly double (still less than half their pre-crash value) ... this is one of those pure-speculative plays which can be highly profitable ... if one is privy to the attendant insider-rumors on Wall Street, and moreover is privy to the "right sort of rumors". Otherwise it's an all-or-nothing coin flip with the odds of winning being significantly less than 50/50. But every good tale of big-financial intrigue needs an apt marketing title, in this case the inevitable "Knight of the Living Dead".

ZeroHedge, under the neo-medical-diagnosis of "Schrödingerian felinism", has [url=http://www.zerohedge.com/news/knight-schr%C3%B6dinger-cat-brokerage-scrambles-half-alive-half-dead]the latest[/url] on this and indicates that if the zombie horde does not get a fresh delivery of human flesh soon, the story may end badly for the walking undead.

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Interesting article about the [url=http://brontecapital.blogspot.co.uk/2012/08/richemont-waiting-for-bullet.html?spref=tw]Swiss Watch Bubble[/url].

And speaking of Asia-driven bubbles, the persistent predictions about China soon becoming the world's largest economy remind me of similar predictions about the "mighty juggernaut Soviet Union" during the Cold War, also by some very smart people who should have known better, when it came both to human nature and their own economic models:

[url=marginalrevolution.com/marginalrevolution/2010/01/soviet-growth-american-textbooks.html]Soviet Growth & American Textbooks[/url]
[quote]In the 1961 edition of his famous textbook of economic principles, Paul Samuelson wrote that GNP in the Soviet Union was about half that in the United States but the Soviet Union was growing faster. As a result, one could comfortably forecast that Soviet GNP would exceed that of the United States by as early as 1984 or perhaps by as late as 1997 and in any event Soviet GNP would greatly catch-up to U.S. GNP. A poor forecast — but it gets worse because in subsequent editions Samuelson presented the same analysis again and again except the overtaking time was always pushed further into the future so by 1980 the dates were 2002 to 2012. In subsequent editions, Samuelson provided no acknowledgment of his past failure to predict and little commentary beyond remarks about “bad weather” in the Soviet Union.[/quote]
In the case of the USSR, it was malinvestments and disincentives provided by centrally-planned Soviet-style crony oligarchism which caused economic malaise; China has a unique mix of central planning and quasi-free-marketeering which is much better on the wealth-creation front, but that simply makes the resulting malinvestments by the central planners that much greater ... and China will soon find itself severely limited by basic-resource scarcity. There is simply no way for the world to provide the oil, coal, steel, etc, required for the average Chinese citizen to have an "economic footprint" even half that of (say) an American or even a Japanese.

[QUOTE]Interesting article about the [URL="http://brontecapital.blogspot.co.uk/2012/08/richemont-waiting-for-bullet.html?spref=tw"]Swiss Watch Bubble[/URL].[/QUOTE]Buy a Panerai and avoid execution. They look [URL="http://www.panerai.com/s_page.xpd?id_lingua=2&id_sezione=16&id_prodotto=4847&id_categoria=3205"]pedestrian[/URL] and for every real one you see there are 10 (incredibly well done) [STRIKE]homages[/STRIKE] fakes.

[url]http://news.yahoo.com/facebook-shares-dip-below-20-first-time-171824614--sector.html[/url]

Another British bank in a less-than-flattering spotlight:

[url=http://www.nytimes.com/2012/08/07/business/standard-chartered-bank-accused-of-hiding-transactions-with-iranians.html?ref=world]Shares of Standard Chartered Slide Amid Money Laundering Inquiry[/url]: [i]Standard Chartered, motivated by the millions of dollars it reaped in fees, schemed with the Iranian government to launder $250 billion, New York’s banking regulator said.[/i]

No lack of liars and crooks in high places on the other side of the Atlantic, either:

[url=www.zerohedge.com/news/geithner-sacrificed-pensions-non-union-delphi-retirees]Geithner Sacrificed Pensions Of Non-Union Delphi Retirees[/url]
[quote]Back in 2009 when the government sacrificed GM and Chrysler bondholders just so labor unions (read voters) can be made whole, the media, for various reasons, decided not to pursue the decision-making process that left some workers with their pensions wiped out, while others were made whole and suffered no losses (with a comparable lack of investigation being conducted as to the decisions that shuttered some Chrysler dealers, but left others operating, a topic [url=http://zerohedge.blogspot.com/2009/05/i-am-marlas-observations-on-artifical.html]Zero Hedge had some say over[/url]). In fact, as the [i]Daily Caller[/i] reminds us "The White House and Treasury Department have consistently maintained that the Pension Benefit Guaranty Corporation (PBGC) independently made the decision to terminate the 20,000 non-union Delphi workers’ pension plan...Former Treasury official Matthew Feldman and former White House auto czar Ron Bloom, both key members of the Presidential Task Force on the Auto Industry during the GM bailout, have testified under oath that the PBGC, not the administration, led the effort to terminate the non-union Delphi workers’ pension plan." Turns out they lied... Under oath.

The [url=http://dailycaller.com/2012/08/07/emails-geithner-treasury-drove-cutoff-of-non-union-delphi-workers-pensions/][i]Daily Caller[/i] has more[/url] on this less than shocking revelation: "Emails obtained by The Daily Caller show that the U.S. Treasury Department, led by Timothy Geithner, was the driving force behind terminating the pensions of 20,000 salaried retirees at the Delphi auto parts manufacturing company. The move, made in 2009 while the Obama administration implemented its auto bailout plan, appears to have been made solely because those retirees were not members of labor unions."[/quote]
The administration's shameful treatment of the non-union retirees is precisely the kind of ruthless behavior they accuse Romney and his former firm Bain Capital of ... except here it was on a truly massive scale, covered up with perjury, and went hand-in-hand with similar law-flouting with respect to debtholder seniority. Some "hope and change" there, folks. The Obama administration has no more respect for the rule of law than did the one which preceded it - if they have no trouble violating black-letter law by funneling arms to Mexican drug cartels and to Syrian rebels with known links to Al Qaeda, you think they're gonna give a shit about a couple tens of thousands of retirees whose main "target us" quality is their lack of Obama-friendly union organization?

Sadly, if you believe that any of the perjurers and lawbreakers responsible for this will ever be held to account you are mistaken.

This thread is too depressing to read sometimes.

:sad:

We are curious: If you (Ernst) had a pile of FB shares, what would you do right now?

We should play a game of financial investing, with imaginary money, and see how well we all do in a year. Say everyone gets a [URL="http://www.imdb.com/character/ch0026630/quotes"]million[/URL] dollars to work with.

[QUOTE=Xyzzy;307284]
We should play a game of financial investing, with imaginary money, and see how well we all do in a year. Say everyone gets a [URL="http://www.imdb.com/character/ch0026630/quotes"]million[/URL] dollars to work with.[/QUOTE]
[url]http://simulator.investopedia.com/[/url]

I first heard of it a few years ago, but lost interest after the first few months.

NYT financial columnist Andrew Ross Sorkin discusses the "crisis of confidence" in the U.S. (in)equity markets, and concludes that it's not just the "computer glitches" which are at fault:

[URL="http://dealbook.nytimes.com/2012/08/06/why-are-investors-fleeing-equities-hint-its-not-the-computers/?ref=business"]Why Are Investors Fleeing Equities? Hint: It’s Not the Computers[/URL]
[quote]Which brings us back to the “crisis of confidence.” This does exist among investors, but they are not focused on how computers are making the markets go haywire. Rather, they are concerned about the future of the economy and, yes, trust.

Individuals are worried that it’s hard to make the right bet and worried that the market is rigged against them. Much of this is an outgrowth of woes of Wall Street’s own making, like insider trading cases or market manipulation scandals. Those situations are partly why individual investors don’t believe they stand a chance against the professionals.

Consider this: [B]Of 878 students at 18 high schools across 11 different states surveyed by the Financial Literacy Group, three-quarters of them said they agreed with this statement: “The stock market is rigged mostly to benefit greedy Wall Street bankers.”[/B][/quote]And they say U.S. students have fallen behind the rest of the developed world. And while we're on that topic:

[URL="http://www.reuters.com/article/2012/08/08/us-moneypack-backtoschool-cost-idUSBRE8770QP20120808?feedType=RSS&feedName=domesticNews"]Sending your kid back to school? It's going to cost you[/URL]: [I]NEW YORK (Reuters) - Brooklyn's Juliette Posner remembers the exact moment she realized just how broke public schools really are.[/I]
[quote]Her daughter Merone graduated last spring from Manhattan's LaGuardia High School, a performing-arts mecca and inspiration for both the film "Fame" and the TV series. But one day she came home with some surprising news.

"The teacher ran out of paper," Posner, 35, says. "They didn't have any money for paper. I was like, 'Really?'"

Such is the reality of U.S. public schools, which have struggled in recent years as cash-strapped states contend with gutted tax revenues. And when schools see their budgets disappear, administrators increasingly rely on another revenue source to make up the difference: Parents.

"There's no question costs are shifting to parents," says Helaine Olen, a mother of two, personal finance writer and author of the upcoming book "Pound Foolish." She says that "schools are putting pressure on people to pay up during a time of severe economic hardship. Every year the ante goes up, and parents are asked to do even more."

The different fees can run the gamut from a $5 bill to $200 or more. At Ohio's Brecksville-Broadview Heights High School, you'll pay $130 to be in the spring musical, $50 for student council, $60 for the math club and $250 for fall cheerleading. At Fulton High School in Tennessee's Knox County, budget $30 for art supplies, a $5 "technology fee" for math class, a $10 lab fee if you're taking web design, and $30 for cleaning your band uniform. At Utah's Park City High School, get ready for a $45 student fee, $60 to partake in activities like wrestling or academic decathlon, $120 to rent a musical instrument and $10 to take French or Chinese.[/quote]

Despite some recent late-summer rains, the historic drought in the eastern half of the U.S. (which includes the crop-crucial U.S. "Midwest", headscratchingly for our non-U.S. readership) has taken a sever toll, as official estimates released today confirm. (I'll ignore the singular use of "data" in the subhead - whoops, too late):

[url=http://www.nytimes.com/2012/08/11/business/projections-for-corn-yield-falls-to-17-year-low.html?ref=business]Citing Drought, U.S. Expects Lowest Corn Yield in 17 Years[/url]: [i]The new data raises the possibility of even higher food prices as some major crops suffered damage from the worst drought to hit the United States in 56 years.[/i]


Latest Mars rover had a nice soft landing this week, but the same cannot be said of the overleveraged Chinese economy. Notice how the NYT echoes the financial casinos which fund so much of its home city and readership by immediately tempering the dire headline with "raising expectations of imminent government action" rather than discussing any global-economic implications, especially in light of the fact that July is generally when the export flood of late-tear holiday merchandise begins to ramp up. What "imminent government actions" might we expect here? China central bank bailouts of holiday-merchandise buyers in the western world?

[url=http://www.nytimes.com/2012/08/11/business/global/chinese-export-growth-tumbles.html?ref=business]Chinese Export Growth Tumbles[/url]: [i]Expansion in July slows by 10 percentage points compared with June, raising expectations of imminent government action.[/i]


Did any of our readers sell their remaining Facebook shares today and plow the huge windfall profits they reaped from that into the second-greatest IPO investment of all time (FB was the GOAT, obviously), today's [url=http://finance.yahoo.com/q/bc?s=MANU]Manchester United[/url] offering? (The underwriters have stepped in to keep the price from dropping below the official IPO price just as they did with FB, so next week is when the real fun begins.)


Couple good posts by Mish this day:

[url=http://globaleconomicanalysis.blogspot.com/2012/08/reader-question-could-obama-balance.html]Reader Question: Could Obama Balance the Budget by Getting the Wealthy to Pay Their "Fair Share"?[/url]: [i]Reader "Paul" a high school teacher, wonders whether we have a spending problem or a tax collection problem.[/i]

And a nearby EU-related piece has a very well-put headline, due to Michael Pettis at [i]China Financial Markets[/i] whose latest article is featured. Pettis is clearly not only well-acquainted with the economics of his adoptive land of China:

[url=http://globaleconomicanalysis.blogspot.com/2012/08/problem-in-europe-is-arithmetic-not.html] in Europe is Arithmetic, Not Confidence; Why the Eurozone Cannot Possibly Survive Intact[/url]

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[b]Friday Funnies:[/b]

Courtesy of various Olympics commentators (and the archivists at ZeroHedge) we present

[urL=www.zerohedge.com/news/friday-humor-olympics-edition]Friday Humor: Olympics Edition[/url]

ZeroHedge re-posted [url=http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2012/08/USDA%20drought.jpg]this stunning USDA map[/url] of the extent and severity of this year's record drought.

[b]Friday Humor:[/b]

"It was a dark and stormy Friday Humor session": [url=http://www.bulwer-lytton.com/2012win.html]2012 Contest Winners » The Bulwer-Lytton Fiction Contest[/url]

To celebrate the dual joy of hedge fund crook and notable Obama election-campaign "bundler" Jon Corzine not only [url=http://www.zerohedge.com/news/jon-corzine-will-not-only-not-face-prosectuion-may-be-launching-hedge-fund-imminently]getting off scot-free[/url] but apparently planning his newest "investment vehicle", ZeroHedge is running a [url= http://www.zerohedge.com/news/what-should-jon-corzines-hedge-fund-be-named]fund naming contest[/url].

Hmmm...how about [i]Totally Hedged International Equity Fund[/i]? Other suggestions?

Former Reagan budget director - since then turned Wall Street reformer and anti-crony-capitalist crusader - David Stockman has an Op-Ed on the (Romney running mate Paul) Ryan budget plan in the NYT. I give the Wall-Street-related highlights here, and the entitlement-spending-related ones in the neighboring Electile Dysfunction thread:

[url]www.nytimes.com/2012/08/14/opinion/paul-ryans-fairy-tale-budget-plan.html?partner=rssnyt&emc=rs[/url][url=s]Paul Ryan’s Fairy-Tale Budget Plan[/url]
[quote] PAUL D. RYAN is the most articulate and intellectually imposing Republican of the moment, but that doesn’t alter the fact that this earnest congressman from Wisconsin is preaching the same empty conservative sermon.

Thirty years of Republican apostasy — a once grand party’s embrace of the welfare state, the warfare state and the Wall Street-coddling bailout state — have crippled the engines of capitalism and buried us in debt. Mr. Ryan’s sonorous campaign rhetoric about shrinking Big Government and giving tax cuts to “job creators” (read: the top 2 percent) will do nothing to reverse the nation’s economic decline and arrest its fiscal collapse.

Mr. Ryan professes to be a defense hawk, though the true conservatives of modern times — Calvin Coolidge, Herbert C. Hoover, Robert A. Taft, Dwight D. Eisenhower, even Gerald R. Ford — would have had no use for the neoconconservative imperialism that the G.O.P. cobbled from policy salons run by Irving Kristol’s ex-Trotskyites three decades ago. These doctrines now saddle our bankrupt nation with a roughly $775 billion “defense” budget in a world where we have no advanced industrial state enemies and have been fired (appropriately) as the global policeman.

Indeed, adjusted for inflation, today’s national security budget is nearly double Eisenhower’s when he left office in 1961 (about $400 billion in today’s dollars) — a level Ike deemed sufficient to contain the very real Soviet nuclear threat in the era just after Sputnik. By contrast, the Romney-Ryan version of shrinking Big Government is to increase our already outlandish warfare-state budget and risk even more spending by saber-rattling at a benighted but irrelevant Iran.

Similarly, there can be no hope of a return to vibrant capitalism unless there is a sweeping housecleaning at the Federal Reserve and a thorough renunciation of its interest-rate fixing, bond buying and recurring bailouts of Wall Street speculators. The Greenspan-Bernanke campaigns to repress interest rates have crushed savers, mocked thrift and fueled enormous overconsumption and trade deficits.

The greatest regulatory problem — far more urgent that the environmental marginalia Mitt Romney has fumed about — is that the giant Wall Street banks remain dangerous quasi-wards of the state and are inexorably prone to speculative abuse of taxpayer-insured deposits and the Fed’s cheap money. Forget about “too big to fail.” These banks are too big to exist — too big to manage internally and to regulate externally. They need to be broken up by regulatory decree. Instead, the Romney-Ryan ticket attacks the pointless Dodd-Frank regulatory overhaul, when what’s needed is a restoration of Glass-Steagall, the Depression-era legislation that separated commercial and investment banking.

[i][EWM: Rest of Op-Ed in [url=http://www.mersenneforum.org/showthread.php?p=308476#post308476]ED thread[/url].][/i]

[i]David A. Stockman, who was the director of the Office of Management and Budget from 1981 to 1985, is the author of the forthcoming book “The Great Deformation: How Crony Capitalism Corrupts Free Markets and Democracy.”[/i][/quote]