Wednesday, 28 July 2010


I've got ants in my pants. And it's not because this has been a "spectacular" year for ants. I'm just not suited to leaving stuff alone. The job function I need in the world is "Director of What Comes Next."

We're working on Rockville, and it's going to be a good race. I'm a little tentative about participation, but it seems like there's no Turkey Day this year and that always seemed to have great participation. Mike's figured out a really good course, the municipal people are enthusiastic, it has the potential to be sort of Reston-esque both in the sporting and environment aspects, so all told it should be really good. But I keep thinking about something big.

A brief journey in the not very far back at all machine for a second - I want to revisit some comments that followed last week's "western style consumer capitalism is dead" post. Calvini made an excellent point about how prevalent automated stock trading has become. Although I'm far from an expert on the subject myself (I get the broad picture quite well, I just don't know the minutia), this has got to be the very definition of bastardization of the idea of the market. The principle is that you set up an algorithm to respond to changing variables in stock movements. Whatever your parameters are, you write a script to execute trades - often getting into and out of positions in moments - based on those parameters. The whole idea of the market is that capital flows toward those enterprises which are proving to have merit and are poised for future growth, while hopefully serving some need among the greater whole. There's always been arbitrage and there always will be, but the tail is now firmly in charge of the dog.

The other thing is that Goldman et al are posting decreased earnings based on declining trading revenue. Trading revenue is the product of a zero sum game. Hate to break it to you, but in stocks, fixed income, any kind of securities, it's pretty darn difficult to have a win/win outcome. One party benefits, one gets stuck holding the bag. Michael Lewis makes this abundantly clear in The Big Short. The big guys have the casino rigged, the little guys generally get skinned. I'm normally not a huge ethics guy, but would you invest in an enterprise that's the corporate equivalent of the playground bully, whose earnings basically amount to how much lunch money he steals? The proof of my not being an ethics guys is the preponderance of energy-related stuff in our investments. They're d-bags too, and unbelievable ones at that. But the world is in a place where it needs energy, and I can at least take solace in the rose-colored belief that our investments are fueling (get it?) advances in alternative energy solutions. The world just plain doesn't need playground bullies.

When you study the bicycle manufacturing and distribution paradigm, it offers a lot of insight into the greater situation. Depending on how you account for certain things, a $1000 bike from a manufacturer that sponsors a ProTour team and offers dealer financing has about $200 (on the mid- to low end) of cost (at retail) that are directly attributable to those two enterprises. Throw in the general consumer marketing frenzy that accompanies the standard ProTour sponsorship deal and that number grows on the marketing end. It's wonderful to know that your bike is capable of winning a Tour stage, but I question how much that knowledge is worth. Is it worth 15%? Maybe people are willing to give Specialized $300 on a $2000 bike in gratitude for their sponsorship of pro cycling? Plus another $200 so that the bike can sit in the dealer's inventory so that the factory in Taiwan (yes, Virginia...) can have level loaded production and your friend the bike shop owner can have the Sword of Damocles that is dealer floor plan finance programs hanging over his head? It just seems like a lot of waste to me.

I'm still not back to 100% after this throat thing (technically, pharyngitis, which is a super fancy word for "sore throat"). Good training so far this week, though. Dragged myself up Brickyard a bit last man. That road's pretty steep.


Jim said...

Automated trading ususually isn't algorithmic. Generally it refers to stuff that would ordinarily be done (or used to be done manually - buy and sell orders, primarily. They can be set up in a complicated manner but they are essentially conditional - upon the occurrence of "X" (or X and Y and 50% of Z) then sell. Or If X dips below $50, then buy. While this is bad in one way - the recent blowout dip occurred due to a single trader fat fingering a price on a huge order, thereby triggering all sorts of automated sell-orders - it's good in another way in that it signals that within the market itself there's a lot of equality of information regarding one important factor, which is what people think a particular asset is worth. Reducing information advantage is an important end goal; granted there's a lot more stuff that needs to be made transparent or readily available still. Automation also allows for good controls over the system, good oversight. Note that as soon as the error was discovered, the system was shut down, the trades reversed, and everybody got a do-over.

Yep, it needs to be watched. No, I don't think that it's the problem.

Chuck Wagon said...

The big problem I've got with the whole thing is that people are investing for super short term gains - these micro trades or whatever they call them when they're into and out of a position in instants. Clearly a play to move the market and take advantage. Nothing to do with effective capital flows.

And the whole "technical graphs" syndrome. Good companies and good stocks haven't always been mutually inclusive, but now they are seemingly unrelated.

I wonder how many people who work in equities think that Benjamin Graham was a concert promoter from San Francisco? Or have no idea at all?