Last week several analysts reviewed on the upside Goldman's earnings and revenues estimates. Apparently trading revenues will beat '07 FY. According to these analysts bonuses per worker will probably hit a new record. In this context I would like to call your attention to the following piece of research from John Mauldin's Toughts from the frontline that was published this weekend. John Mauldin is one of the most highly regarded independent researchers on the street especially among the hedge fund community. He warned about the subprime mess and turned bear on the market since as early as '06. His ideas are clear and unbiased regarding how markets behave and where we are heading to. Frequently he tries to destroy the status quo when free markets are at stake and since i've started to read him i have never seen such a direct attack to one of the players in the market.
"But first, I want to direct the attention of those in the US finance industry to a white paper written by Themis Trading, called "Toxic Equity Trading Order Flow on Wall Street." Basically, they outline why volume and volatility have jumped so much since 2007; and it's not due to the credit crisis. They estimate that 70% of the volume in today's markets is from high-frequency program trading. They outline how large brokers and funds can buy and sell a stock for the same price and still make 0.5 cents. Do that a million times a day and the money adds up. Or maybe do it 8 billion times. It requires powerful computers, complicity of the exchanges (because the exchanges get paid a lot), and highly proximate computer connections. Literally, the need for speed is so important that to play this game you have to have your servers physically at the exchange. Across the river in New Jersey is too slow. Forget Texas or California. This is a game played out in microseconds.
The retail world doesn't get to play. This is a game only for big boys who can afford to pay for the "arms" needed to fight this war. But the rest of us pay for the game, as that half cent is like a tax on transactions, not to mention the increased daily volatility, which skews pricing. Think it doesn't affect you? That "tax" is paid by mutual funds, your pension fund, and every large institution.
Frankly, this is outrageous. The more I read the madder I got. And it is going to get worse as computers get faster and software more intelligent. We need rules to level the playing field. Themis suggests one simple one: just make it a rule that all bids have to be good for at least one second. That would cure a lot of problems. One lousy second! In a world of microseconds, that is an eternity.
Goldman Sachs went after an employee who stole some of their latest and greatest software this last week. The US assistant attorney general said in the courtroom that the software had the potential to manipulate the market. Imagine that. I am shocked. There is gambling going on in the back room? Gee, commissioner, I had no idea. ..."
You can read the full article here http://www.investorsinsight.com/blogs/thoughts_from_the_frontline/archive/2009/07/10/buddy-can-you-spare-5-trillion.aspx
You can read the white paper that uncovers this outrageous scandal here
http://www.themistrading.com/article_files/0000/0348/Toxic_Equity_Trading_on_Wall_Street_12-17-08.pdf
Beni
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