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NYSE Embraces a Ruinous Idea

By Rick Ackerman Posted on July 31, 2009, 12:01 am EDT Last Updated July 31, 2009, 12:56 am EDT

Sadly, another venerable American institution has lost its way: the New York Stock Exchange. We read the other day that the Exchange is building a fast-trade hub in northern New Jersey that supposedly will help secure its future in an increasingly electronic world. But raising capital for companies that could conceivably help Build a Better Tomorrow is nowhere on their agenda. In fact, “fast trading” will be about as helpful in achieving that goal as placing five hundred slot machines in the NYSE’s lobby. Instead of one-armed bandits, however, the Exchange will be installing in its new Mahwah facility some very sophisticated computing equipment that will allow hedge funds and other firms to engage in high-frequency trading.

nyse

This type of trading is all the rage these days, and the firms that do it will be trying to get the jump on other traders who lack the hardware to execute scores or even hundreds of transactions in mere seconds. Firms on the cutting edge will be better able to exploit order flow in ways that traders could not have imagined even five years ago. Our guess is that fast trading was invented by the same geeks who gave us program trading. Who’d have imagined they could one-up themselves with yet a new game to further destabilize the markets? The NYSE will say that more efficient markets will better serve the public. Having worked on an exchange floor ourselves for a dozen years, we think fast trading will better serve white collar criminals whose tactics have yet to be imagined by the regulators.

Stick to ‘Gambling’ and ‘Prostitution’

It would be bad enough if the NYSE viewed fast trading as just another profit center. Unfortunately, the Exchange sees it as its bread and butter. “When people talk about the New York Stock Exchange, this is it,” NYSE Euronext co-CIO Stanley Young told a reporter. “This is our future.” We suspect that Mr. Young will be proven wrong, and in a big way. For one, we see fast trading as so far-removed from the Exchange’s core mission that it cannot possibly come to any good. Like Vito Corleone, the NYSE should stick to its brand of gambling and prostitution, passing up the hard-core “drug” of high-frequency executions. Moreover, we have our doubts that trading is a growth industry. Until recently, trading in financial derivatives alone created a paper market aggregating into the hundreds of trillions of dollars.  How can this be when all the goods and services produced on the planet are valued at only $60 trillion or so? Clearly, this game cannot continue. Nor will it. It is in fact the reason why deflation is wringing out the global financial system, bringing speculation back into line with real economic activity. The process has a long way to go, and we doubt it will long abide the feather merchants’ latest scheme, fast trading.  

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  • Chris August 4, 2009, 9:41 pm

    Thank you for an interesting and really well conceived article. I’m glad I’m not the only one who saw the connection between fast trading now and program trading in 1986. The fact of the matter is that any trading that doesn’t allow for trends to develop is dangerous, especially when we’re talking about things like sculpting. It’s like calling the next three moves of a chess game before your opponent has had time to take one. Master chess players in certain situations may be able to do this, but the vast majority of people in the vast majority of cases can’t be that prescient to know what will affect the market as a whole.

    It’s related to an obsession in America with instant gratification where we believe that my profit now is more important than everybody’s great profit down the road. I’m not suggesting we share the wealth or any other mindless catch phrase, but that wise investing helps everybody make more money rather than adding up nickles and dimes in some half-hearted attempt to game the system instead of actually investing in companies so they can succeed.

    If you have some time, I’d appreciate it if you’d read the article I wrote and leave a comment saying whether I seem to have gotten it or not. Thank you for a wonderful blog entry.

  • Ray Newton July 31, 2009, 9:44 pm

    People will believe, misguidingly, they can understand infinity, by understand I mean really visualize it and comprehend it. We talk about it, and we know it could well be that we live in a world, as in a universe with no end. It just goes on and on. But, at some point, a wall comes down to mark an end. We struggle hard to remove it, but there always appears ‘an end’.

    Christians who recite the lords prayer finish up with the words – ‘for ever and ever’.
    Our problem is that in all of us, our imagination is limited when trying to visualize and really take in something that stretches that imagination beyond its limit. The fact we repeat something does not mean we understand it.

    This is particularly true today where technical advances have been moving us faster than our ability to keep pace with what we already have. Suddenly there appears some new innovation with which our minds must struggle to grasp.

    For thousands of years, in fact millenniums, from the time of man, little changed, the only form of transport was something made out of wood that would float on water, or would walk on four legs and swish a tail.

    Then, in the last two hundred years, we have the boat of steel, powered by jet or turbine , an ‘iron horse’, the train, the auto, the airplane, and the space ship.

    But what has all this to do with the manipulation of markets and economies. The point being made, and a very important point is that our minds are not adjusting to understanding the changes which have already occurred, while more is waiting in the wings.

    Bill Gates, whatever you think of Microsoft, is a very clever young man. He wrote a book – ‘Business at the Speed of Thought’. The book’s premise:
    ” Thanks to technology, the speed of business is accelerating at an ever-increasing rate, and to survive, it must develop an infrastructure–a “digital nervous system”–that allows for the unfettered movement of information inside a company. Gates writes that “The most meaningful way to differentiate your company from your competition … is to do an outstanding job with information. How you gather, manage, and use information will determine whether you win or lose.” (Amazon)
    Unless we fully grasp the meaning of ‘digital’ we will fail to connect to the world we are in, and is developing fast.

    We still gasp at the mention of millions. It even has greater impact than the mention of trillions. I see mentioned $400 trillion. They could have said one thousand trillion. It would have the same impact. My mind cannot conceive such an amount. I could easily say I could, but that would not be honest. I cannot take in one trillion dollar bills towering the height of almost 13 Mount Everests..

    These amounts could not exist if we did not live in a digital age. This amount of money could not exist in tangible form. Unless we had a severe Weimar type hyperinflation where they were printing masses of million dollar notes to replace the lower denomination dollar ones. There would not be enough trees to make the paper.

    Yes, one trillion dollar bills stacked on top of each other would reach the height of almost 13 Mount Everests. That is just ONE trillion. (Mount Everest is about 5.5 miles high)

    In a digital world, money, trillions, can be created on a keyboard in seconds. It can be removed just as quickly. Academic Economic theory is meaningless. That is why economists are being confounded, and pass on the confusion every time they write or speak. There are so many, and so many views, like the stopped clock, one is bound to be right at certain times. But it is pure chance.

    In the markets you have not only to be right, you have to be right, at the right time. Timing is everything.

    The secret of survival is to be able to adapt to change. If we don’t recognise, and understand the implications of the change, how can we adapt to it.

    The choice is ours.

  • Rich July 31, 2009, 3:04 pm

    Ok guys, let’s get back to sound accounting and fundamentals.
    Oh…There are none.
    Ok then, lets look at the charts.
    Oh…They say down.
    Well that’s ok, because a manic LK just announced the New Bull Market on Cable yesterday after we’re up 46%, two weeks after his zany colleague DK announced recovery here (on the plateau of permanent prosperity). 11 out of 12 panelists agreed with him, so it must be true. Right?
    So what if the wind blew away the mustard seeds, the sun withered the green shoots and job claims are still rising with people losing more jobs than the previous 9 years created.
    Boys and girls, we know everything is fine because the TV channel owned by the company recommended by Goldilocks Stocks said it is. And LK told us to stop picking on her, referring to a multiyear TV contract and 14 years of sobriety.
    And WEB told us kiddies last year he was buying GE and GS.
    So everything must be fine and dandy, don’t we know.
    What are we going to believe, our eyes, or Big Brother and Sister?
    How we learned to stop worrying and worship the bull…Not.
    We are so far from a bull market it’s frightening.
    But there is plenty of BS going around, so who knows.
    Maybe there is a bull around here somewhere.
    Nah…
    Just before 11 AM ET yesterday at 9246 Dow we may have seen the beginning of the end of the charade that Uncle Sam and his favorite networks know better than US what to do with our money…

  • Edward Kingston July 31, 2009, 2:26 pm

    I second Brian above on his opinion.

  • Edward Kingston July 31, 2009, 2:25 pm

    Great article. Just another way for the capitalists to separate a fool from his money faster than the speed of light, maybe?

  • cosmo July 31, 2009, 12:45 pm

    I’m with ya Brian…I closed my account 2 years ago and sleep better without the temptation of that rigged slot machine. As we all know, in the end, the house always wins.

    Buy gold against the dollar falling in value, as sure a bet as one can find these days. Sure the bullion banks(GS, JPM, BAC) may suppress the price, but when the run on these banks happens, gold is priceless.

  • Ray Newton July 31, 2009, 9:24 am

    “…….Until recently, trading in financial derivatives alone created a paper market aggregating into the hundreds of trillions of dollars. How can this be when all the goods and services produced on the planet are valued at only $60 trillion or so? Clearly, this game cannot continue………..”

    ‘ Until recently’ ? It continues apace. ‘ How can this be? ‘ This shows lack of understanding of the digital world in which we now live. We are just moving our
    ‘analog’ TV viewing to ‘digital’. By nature we ‘see things in analog. This means in a tangible realistic form – ‘feely touchy’ ‘I’m from Missouri’ approach.

    This, to a great extent meant that which exists. In the digital world, to put it simply, and bluntly, nothing needs to really exist other than the means by which it is represented to our senses.

    In fiat money, there is some ‘real value’ (however changeable) in the fiat medium
    that is used ie – a dollar bill, or a dime coin. Something has to be manufactured that uses up raw material and can be handled.

    In a digital world, whether it is a vast crowd scene in some movie epic, or trillions of dollars put on a computer screen from the touch of a keyboard, NOTHING has to really exist, except the computer to display it, or send it thousands of miles around the world.

    Now when you control the system either directly, or by proxy, that is , you are the world’s ‘Financial Establishment’. There is no one to challenge you, or present your IOU’s that enable you to meet them all with more digits, if they tried.

    No one, except a very exclusive few who really control the gold market because over centuries (millenniums?) they have owned most of it, knows how much real gold there is in the world. There are many estimates (guesses). It doesn’t really matter, therefore, because they also control the derivative (digital) financial markets so they can create as much as they need

    There would only be a short term problem if everyone holding it in digital form demanded delivery of the tangible.

    That is NEVER going to happen, as so many events that could theoretically happen, will also never happen in practice. It is under the principle of ‘human nature’.

    Does this mean that gold will not rise? Does it mean you cannot make money out of gold trading? Of course not. It merely means it is not going to behave according to academia’s brand of false economics, like so much today.

    Academia only teaches economics that, to the few enlightened, enables it to be predicted how the masses will behave, and therefore manipulated for the few to gain advantage. It’s all so simple really. Nothing difficult to understand if you are lucky enough to be possessed with a free and open mind.

    That’s the problem of the many, as so few are so gifted.

  • Ray Newton July 31, 2009, 8:28 am

    Wherever large sums of money are involved expect there to be manipulation. Also that those best placed to effect the manipulation will ensure that it is done to favour them.
    So. with that accepted, does that mean there is no place in there for the rest of us?

    If one believes that, then stay out – simple.

    However, markets, all markets that is, are about buying and selling. It is one of the oldest, and to me, the most fascinating pursuits in town.

    Look at the charts of the New York Stck Exchange, and, as with all stock exchanges, those trend lines rise and fall. There are ‘long term’, and ‘short term’
    trends. What these indicate are, no matter what the ‘manipulation’ or the ‘who is doing it’, time wasting, pondering, there is money to be made in those rises and falls. If it flatlined it would eventually fall the fate of the patient whose life suport system flatlined.

    If it continually went up (or down) in a straight, predictable, line, its fate would be likewise.

    Therefore, stop worrying about the small details and expecting a perfect world. If you put a fox in charge of the hen house, it is not going to stop trying to eat the
    inhabitants. And, as not only foxes that like chicken, so even changing the guardians is not going to stop the practice. Not a perfect analogy, but you get the message.

    Like music, trends have a rythm. They have meaning, they are the result of human action. They have movement. And we know what Newton (my namesake) said about movement (I have adapted it to the market) A share, or index, will continue its trend until acted upon by an unbalanced force.

    For those few possessed with ‘imagination’ it will not be difficult for them to apply this and observe that trends, are only trends because they continue sufficiently for them to be accepted as befitting the word, and that if you follow the trend, whether it is manipulated or not, and don’t try to fight it, you will make money.

    Now what is required. All one needs is a little money to get started. An online broker to execute your trades as cheaply as possible (and it is cheap today), a computer to access the trading ‘desk’/ You need an eye that can spot the trend, and a deaf ear to rhetoric from such as Cramer et al.

    To play it as safe as possible, and avoid the individual vagaries that can befall a particular stock, there are ETF’s , today, that take a sector as a whole and are less unpredictable. In the Gold mining sector we have GDX.

    Then you need the strict discipline to back, and stay with, the trend, through thick and thin, plus to get out fast should that ‘unbalanced force’ begin to act upon that trend. However, once you have developed the experience, and good habit, that ‘turn around’ can be your new trend. And the rewards can come quicker, as ‘down’ always seems to go faster than ‘up’.

    A final thought. ‘ Experience is something which allows us to detect a mistake when we do it again.’ (and when we start to believe we are so experienced we deviate from our disciplined approach – ‘again, and again’.)

  • Planet_Mercury July 31, 2009, 5:45 am

    I’m with Brian. While I have the highest regard for traders like Rick who apply keen observation, intuition and hard-won skill to make their money, the market as run by these jokers is beginning to remind me of a gore fest sci-fi flick…too much of a really bad thing. I’m in the process of taking ALL my marbles off the table, trading green paper with presidents on them for gold and silver scattered securely around the planet and just giving it all a pass until the fever burns itself out.

  • BRIAN July 31, 2009, 12:22 am

    As Keynes famously characterized the stock market activity as a casino, the NYSE shall assist the further the interests of the financial oligarches. No I will never invest in the market again.


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