Chasing our tails

Chasing our tails

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Or, the time I talked to a Belgian former call center worker who turned herself into an actual currency trading guru.

This story is about “social trading,’  which ranges from run-of-the-mill sentiment on Twitter to ‘copy-trading’ strategies that see individual investors following ‘gurus’ on eToro or imitating the investment strategies of hedge funds.

“Twitter is great. I like it almost as much as I like Dell,” Carl Icahn, the activist investor, exclaimed when he made his debut on the social media platform last year. He now counts 190,000 followers who hang on his every tweet.

In finance, as in life, imitation is often the sincerest form of flattery and the arrival of new technology combined with the proliferation of social media platforms and online networks makes it easier than ever for investors to share – and copy – trading ideas.

For its supporters this “social trading” is democratising the world of investing by reducing the traditional disparity in trading resources between large and small investors. For critics, this increasing accessibility opens up huge risks for uninformed traders, emboldened to bet big without performing their own due diligence …

Another question that could be asked is what effect the rise of ‘Simon Says’ (from passive investing to seemingly innocuous Twitter trend-following) has on markets? Do the investors who are able to get ahead of – and then generate the most — inflows, stand to outperform? And what impact does that have on markets in general? To the extent that markets were ever concerned with fundamental value, is that dynamic increasingly off-the-table? Do markets and investors become giant inflow-seeking missiles? Hmmm.

From Icahn to ‘I can’ social trading takes off

Reading list – Business adventures: 12 classic tales from the world of Wall Street

Reading list – Business adventures: 12 classic tales from the world of Wall Street

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So apparently everyone who is anyone has already read this book. Except me. It’s been sitting on my Kindle for months – untouched and unloved until very recently. But having started on this compendium of 1960s New Yorker articles just last week, I am now about a third of the way into it and all I can say is that this is the way business writing should be – full of fascinating and powerful narratives that tell you something about human behaviour as much as finance and markets and corporate intrigue. Oh, and the prose is to die for. You know, if that’s your thing.

Given recent events, one passage in the first chapter of the book struck me as particularly prescient.

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Bursting bubbles

Bursting bubbles

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I interviewed Jacob Frenkel, chairman and CEO of the G30 and former Bank of Israel governor, for Markit Magazine.

The full interview is available for free here, but I thought his thoughts on the limits of macroprudential tools in the face of low interest rates are worth noting.

“Let’s not kid ourselves,” [Dr Frenkel] says bluntly. “Interest rates are the most efficient instrument of monetary policy, period. If the use of the interest rate instrument is limited due to the zero bound constraint, can you still operate with macroprudential  policies? The answer is probably ‘yes’ but it will be less efficient. In order to be effective you will need to use macroprudential measures in a draconian way.”

Bursting Bubbles, Markit Magazine

Synthetics, derivatives and leverage – oh my!

Synthetics, derivatives and leverage – oh my!

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Wall Street banks are encouraging the use of derivatives including total return swaps (TRS), credit index options (swaptions) and variants of the synthetic collateralised debt obligations (CDOs) that proved so disastrous during the previous financial crisis in an effort to serve investors the yield they so desperately crave.

(The crucial difference this time around, is that these are tied to corporate credit rather than residential home loans).

Read the following, and weep/laugh as you see fit.

Boom-era credit deals poised for comeback (December, 2013)

Last month Citigroup placed an unusual job advertisement. The bank was seeking an analyst able to crunch the numbers on an obscure financial security: synthetic collateralised debt obligations. Four weeks later, job applicants would find the position filled. Such has been the clamour among investors for the higher yields from higher-risk products that big banks including Citi, JPMorgan Chase and Morgan Stanley are turning again to the more esoteric parts of the financial markets.

Turning to total return swaps (July, 2014)

A type of derivative known as a “total return swap” has become a hot ticket item on Wall Street as investors seek out new ways of playing booming credit markets, while banks – including Goldman Sachs – find fresh methods to finance their assets.

Investors dine on fresh menu of credit derivatives (August, 2014)

The renewed boom in credit derivatives is being powered by yield-hungry investors and Wall Street banks looking for new revenues. The two instruments helping investors play booming corporate credit markets at this juncture include total return swaps (TRS) and options on indices comprised of credit default swaps.

The slow drip liquidity story – updated

The slow drip liquidity story – updated

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Updated: October 17, 2014 given recent market events and sudden interest in all things liquidity-related. To be clear, the lack of liquidity just exacerbates market moves. The underlying problem is that complacent investors have been in the same (long) positions for the past five years, selling volatility and levering up to boost returns.

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A by-no-means-extensive list of my work on the changing structure of the bond market.

Goldman eyes electronic bond trading (March, 2012)

Finance: Grinding to a halt (June, 2012)

Dealer and investor talks over liquidity fears (June, 2012)

Goldman launches bond trading platform (June, 2012)

Bond trading model shows signs of stress (October, 2012)

Banks tout idea of sharing bond data (November, 2012)

Slow-drip bond sell-off masks a problem (November, 2012)

Markets on edge as investors seek exit (June, 2013)

ETFs under scrutiny in markets turbulence (June, 2013)

Markets: the debt penalty (September, 2013)

Digging into dealer inventories (September, 2013)

Verizon’s $49bn bond sale whets appetite for larger issues (September, 2013)

ETFs: Tipped as liquidity source (November, 2013)

Global liquidity: Buyers struggle to find a safe landing (November, 2013)

Big US banks back new bond trade venue (November, 2013)

Investors turn to ‘shadow’ bond market (January, 2014)

Banks are a proxy for credit bubble fears (March, 2014)

Taper tremors fail to deter ETF investors (May, 2014)

Checking out of the ETF hotel could be costly (May, 2014)

‘Patient capital’ ready to exploit bond market sell-off (June, 2014)

Fed looks at exit fees on bond funds (June, 2014)

Bonfire of the bond funds (June 2014)

BlackRock’s Aladdin: Genie not included (July 2014)

Investors in junk bonds face a Matrix moment (August 2014)

Finance: The FICC and the dead (August 2014)

Investors dine on fresh menu of credit derivatives (August 2014)

Yield-hungry markets overlook credit risk (September 2014)

US corporate bond traders go electronic (September 2014)

Gross exit from Pimco tests bond market (September 2014)

Wall St sheds light on Bill Gross reign after Pimco departure (September 2014)

At the risk of sounding like a broken record, expect more on this.

Equity tranches in Dallas

Equity tranches in Dallas

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Northeast Tarrant-20140516-00074

I was in Dallas to cover the annual shareholders meeting of Goldman Sachs. I thought I would take a detour from the plush surroundings of Goldman’s offices to a rather different locale; the site of one of the first – and largest – CMBS 2.0 loans to have defaulted. My cab driver eyed me nervously when I said I wanted to stop by this place in North Richland Hills (he later confessed that he thought I was planning to strike a drug deal in the parking lot).

Here’s the story:

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Shadow banking, a compendium

Shadow banking, a compendium

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Sometimes, looking at your past work reveals not only the progression of a real-world trend but also a subtle shift in the narrative of the topic under discussion.

It used to be that the ‘shadow banking system’ encompassed a relatively select group of non-bank financial intermediaries – broker-dealers, the repo market, money market funds, SIVs, etc. That group grew enormously in the years before the financial crisis, but has since collapsed pretty significantly.

Nowadays the definition of shadow banks appears to have expanded to include a host of non-bank financiers like direct lenders, asset managers, hedge funds etc.

Here’s a selection of some shadow banking pieces that illustrates the trend.

 

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HFT – dazed and confused

HFT – dazed and confused

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Dazed and Confused’s famous “School’s out” scene starts with a warning from a rather candid teacher: “This summer when you’re being inundated by all the American bicentennial fourth of July brouhaha. Don’t forget what you’re celebrating and that’s the fact that a bunch of slave owning aristocratic white males didn’t want to pay their taxes.”

It came to mind as I was reading Scott Locklin’s review of the new Michael Lewis book. I’m a big Lewis fan (a highlight of my career was being CCed in on an email to Lewis, which perhaps says something non-flattering about my career), but amidst this week’s “brouhaha” over Flash Boys, I think Scott makes some very interesting points.

I know a few HFT type people. One of ‘em might be even be as rich as Michael Lewis.  So far, all the ones I have met are clever and decent people, and I figure whatever they’ve managed to earn by the sweat of their brows, they deserve it. I’m not real pleased with the idea of a small group of decently paid, politically helpless nerds being the fall guys for a bunch of crooked oligarchs who don’t want to pay for their liquidity.

Michael Lewis: Shilling for the buyside

Reading list – The cockroach papers

Reading list – The cockroach papers

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Why am I recommending a book about cockroaches? Three words: KNOW YOUR ENEMY.

As a newish New Yorker living in a decidedly old New York apartment building, the occasional cucaracha sighting is an inevitable event. Reading The Cockroach Papers by Richard Schwied is therefore STEP ONE in an ongoing war against these hideous creatures and an experience that is surprisingly informative and, sometimes, even, enjoyable.

For instance, did you know the only food cockroaches won’t eat is cucumbers?

And they are surprisingly social:

Schweid writes, “cockroaches, while not social insects in the entomological sense of bees or ants with clearly assigned tasks that benefit the whole community, do clearly take pleasure in the company of other roaches, and the aggression pheromones draw them together, eliciting their effects regardless of the sex or age.” Cockroaches reared singly develop more slowly and take longer between molts than do those reared in a group. Although those groups can be too big “just as development is delayed in young cockroaches if they are isolated, over-crowding also extends the time between molts. So there is yet another kind of pheromone, called a “dispersal pheromone,” and it serves as the chemical signal that it is time to look for a new, slightly roomier harborage. This chemical is found in the insects’ saliva, and has just the opposite effect of the aggression attractant, in that it repulses cockroaches and causes them to look elsewhere for harborage.”

In true New Yorker fashion, I’ve put my hard copy of the book into storage so the above excerpt is borrowed from the excellent Farnam Street.