Disgraced Trader’s Struggle for Redemption

“It’s not necessarily about money, it’s about winning,” he told a visiting group of American college students. He told them that to understand trading, they needed to forget everything they learned in economics class and envision the amoral, take-no-prisoners world of “The Hunger Games.”

“The only time when people cooperate is to prolong their own lives,” he said. When rivals are no longer useful, “you stab them in the back.”

He told students he had accepted the fact that he was a rogue trader—but in his telling, it didn’t sound all that sinister.

A rogue trader, he said, “is a risk taker. It’s not a crime. It’s violating the mores established by the institution that you work for. It’s a rebellion against institutional controls that deny individuals opportunities for self-actualization.”

→ The Wall Street Journal

The Warhol of Wall Street

We’re Not in Kansas Anymore is about the 2008 financial crisis that kicked off with the implosion of investment bank Lehman Brothers (for the record, Mr. Saiers thinks the government should have bailed them out). Braille-like lettering symbolizes the systemic blindness that created the crisis, he says—blindness of regulators to the realities of modern finance, blindness of ratings agencies to the real risks of pooled mortgage-backed securities—while circles and squares represent the problem of predicting how financial markets will behave. They reference the classic problem known as “squaring the circle,” which is the idea that you could make a square with the same area as a given circle. It is impossible, but you can get very close, Mr. Saiers explained—just as it’s impossible to anticipate financial markets, though you can make very smart guesses.

→ Observer

In Defense Of The Gaussian Copula

The Gaussian copula is not an economic model, but it has been similarly misused and is similarly demonised. In broad terms, the Gaussian copula is a formula to map the approximate correlation between two variables. In the financial world it was used to express the relationship between two assets in a simple form. This was foolish. Even the relationship between debt and equity changes with the market conditions. Often it has a negative correlation, but other times it can be positive.

That does not mean it was useless. The Gaussian copula provided a convienent way to describe a relationship that held under particular conditions. But it was fed data that reflected a period when housing prices were not correlated to the extent that they turned out to be when the housing bubble popped. You can have the most complicated and complete model in the world to explain asset correlation, but if you calibrate it assuming housing prices won’t fall on a national level, the model cannot hedge you against that happening.

→ The Economist

Leaving Europe Would Be A Leap Into The Light

Michael Gove :

The EU is an institution rooted in the past and is proving incapable of reforming to meet the big technological, demographic and economic challenges of our time. It was developed in the 1950s and 1960s and like other institutions which seemed modern then, from tower blocks to telexes, it is now hopelessly out of date. The EU tries to standardise and regulate rather than encourage diversity and innovation. It is an analogue union in a digital age.

→ The Times of London

That Time I Tried to Buy an Actual Barrel of Crude Oil

On how to buy, store and trade an actual pint of oil. Hilarious :

If gold is the equivalent of a pet rock, then I can confidently say that oil is the equivalent of playing host to a herd of feral cats; it demands constant vigilance and maintenance. If gathered in sufficient quantities, it will probably try to kill you, or at least severely harm your health.

• • •

The ideal oil storage trade works something like this: Buy the crude and immediately agree to deliver it at a later date, thereby locking in the difference between the spot and futures prices for what is, in theory, a riskless profit. In 2008, when the forward price of oil vastly eclipsed the spot price, this kind of arbitrage could net a hefty return.

A true oil storage trade therefore required an early buyer. The usual suspects—think Glencore and Trafigura—wouldn’t dream of touching my puny amount oil, of course. So I looked further afield, all the way to my ex-colleagues, who I thought surely must still harbor those long-ago dreams of owning Black Gold.

→ Bloomberg

Did High-Frequency Trading Answer The Call ?

But it brings back bad memories of the stock market crash of 1987 when some Nasdaq dealers simply wouldn’t pick up their phones. They knew the investors on the other end were looking to sell their stocks and as market makers, these dealers would be obliged to buy—and they didn’t want to buy! In the aftermath of that incident, enraged investors demanded that the SEC prevent it from happening again. The Commission responded by forcing changes on Nasdaq, including mandating that market makers respond to messages on the fully electronic Small Order Execution System.

Today, the fully-automated Nasdaq market, with its market makers often using HFT techniques, is the very model of an efficient market that has dramatically lowered costs for investors.

Contrast that with the findings of the joint government staff report on the US Treasury “flash rally” which found high frequency traders “as a group continued to provide the majority of order book depth and a tight spread between bid and ask prices throughout the day, even during the event window.” In short, HFT answered the call.

→ Traders Magazine