Opinion

Felix Salmon

Do employees want investment advice or not?

Felix Salmon
Sep 15, 2010 19:49 UTC

This Charles Schwab survey is fascinating. People want investment advice when it comes to their 401(k) plans, especially if they can get it for free. And when they take investment advice, they change their savings habits significantly. But it turns out that even when companies do provide free investment advice for their employees, the employees don’t take it.

Here are the numbers:

  • On average, someone who receives 401(k) investment advice increases their monthly deferrals by a huge amount: 5.4 percentage points.
  • Approximately 70% of participants that receive and implement 401(k) advice make a change to their deferral rates.
  • People who change their savings rate as a result of getting investment advice nearly double the amount of money they put away each month, from approximately 5% to 10% of pay.
  • 74% of Schwab plan sponsor clients make advice available to their participants at no additional cost.
  • 55% of people surveyed say if free advice was available they would use it.
  • BUT the reality is that less than 10% of participants actively use investment advice available to them.

It’s rare for a survey to show such a blatant difference between what people say they would do, and what they actually do in reality. You can lead your employees to water, and your employees will tell you that if you lead them to water, they will drink. And employees who drink do end up the better for it. But still your employees don’t drink.

My feeling is that the main reason here is the simple distinction between opt-in and opt-out, which governs so much retirement-saving behavior. Employees save much more in opt-out plans than they do in opt-in plans. And for much the same reason as they don’t opt in to 401(k) plans, they don’t opt in to taking investment advice, either.

Would it help to make investment advice opt-out? It would be hard to structure, but essentially firms would automatically schedule a retirement-planning session for all their employees, who would then have to actively cancel it if they didn’t want it. That would surely improve employees’ retirement savings. But would it take paternalism too far? And how many companies are qualified to pick genuinely good financial advisers for their employees, in any case?

Update: My commenters are pretty unanimous that free advice is worth less than you pay for it. And I’m sympathetic: whenever I’ve received “free” investment advice, I’ve been unimpressed. But the fact is that I’m not representative of the financial sophistication of the average 401(k) participant, and neither are the kind of people who comment on this blog.

And while it’s true that many investment advisors are just going to end up putting you into too many funds carrying excess fees, it’s also true that by far the single most important determinant of how much you get out of your 401(k) is how much you put in. And the really important investment advice which is given out by nearly all investment advisers is, simply, “save more money”. It’s simple, but it’s powerful.

The advisers are, naturally, going to go further than that, and start recommending places to put your money. Smart people might well take issue with their asset-allocation strategies. But so long as you end up saving more, you’ll also, almost certainly, end up with more money at retirement. Which is the main goal here.

COMMENT

Regarding your update . . . so what you’re saying is that the ideal is to be unsophisticated enough to accept free (sales) advice, but sophisticated enough to accept only the “save more money” part. (couldn’t resist)

@maynard – I discovered Andrew Tobias’s books just out of college, knowing nothing of the subject, and their information and advice have largely guided me to this day.

Posted by Curmudgeon | Report as abusive

Why Japan’s FX intervention might actually work

Felix Salmon
Sep 15, 2010 14:05 UTC

Has a central bank ever intervened successfully in the foreign exchange market when the momentum trade was against it? The yen has been rising alarmingly of late, and now the Bank of Japan is trying to push it down.

At first glance, the action looks like a something-must-be-done-this-is-something-therefore-this-must-be-done move: a new prime minister and a “bold action” doomed to be proved ineffectual. The FX markets are so enormous (dollar/yen alone trades some $750 billion per day) that it’s hard to believe a single sale of less than $20 billion in yen could even have the short-term effect we saw last night, let alone have any lasting consequences.

But this isn’t just about FX-market intervention. This is also about monetary policy, and that could make a real difference:

Unlike in previous forays, the Bank of Japan will not drain the money flowing into the economy as a result of the yen selling, sources familiar with the matter said.

That indicated the central bank plans to use the sold yen as a monetary tool to boost liquidity and support the economy.

Authorities that sell their own currencies to weaken them often issue bills to “sterilize” the funds and keep the excess money from becoming inflationary. In Japan’s case, it wants to promote inflation since the economy has been dogged with deflation for much of the past decade.

“The government’s aim, and the aim of authorities in general, is to add monetary injections to the economy,” Callum Henderson, global head of foreign exchange strategy with Standard Chartered in Singapore, told Reuters Insider.

“Unsterilized intervention should be yen-negative, it should be very bullish for higher risk assets, very bullish for stocks in Japan and obviously it should add to the impact of the intervention of the yen,” he said.

In other words, the Bank of Japan isn’t simply selling yen, it’s printing yen. (And then selling them.) Given (a) that it’s the central bank and that it can print as many yen as it likes, and (b) that it would actually welcome a bit of inflation, there’s actually a non-negligible chance that this kind of non-sterilized intervention could work.

Of course, a hint of inflation in Japan could end up driving Japanese bond yields up. That in turn could make a huge difference to the government’s annual interest bill on the country’s monster national debt. So this kind of policy is hardly cost-free; indeed, the real costs might well be much larger than the nominal size of the intervention. But at least it has a chance of making a difference, which is more than you can say for most currency interventions.

COMMENT

So, gpowell, kind of akin to a “bill pass” by the Fed, where the the effect covers days, not years… but if Japan genuinely begins doing a lot of unsterilized intervention, that would be a significant policy change, which I suspect some other nations would imitate as part of competitive devaluation.

Posted by DavidMerkel | Report as abusive

The biggest weakness of Basel III

Felix Salmon
Sep 15, 2010 02:06 UTC

I’m unapologetically happy and optimistic about the outcome of the Basel III process, and I haven’t been impressed by most of its critics — until now. In two posts, the first at the Economist and the second at The American Scene, Noah Millman does an excellent job of explaining the biggest weakness with Basel III. Which also happens to be the biggest weakness with Basel II.

The problem is that while Basel II was a bold experiment which took a decade to put together and which even then never really got implemented, Basel III was much more of a rush job, and therefore could not be a soup-to-nuts reimagining of what a global macroprudential regulatory regime should look like. Even if that were a good idea.

Instead, Basel III is essentially a bold new layer built over the old Basel II architecture, in much the same way that early versions of Windows were layered on top of DOS. And just as early versions of Windows shared some of the weaknesses of DOS, do has Basel III inherited some of the problems of Basel II.

The main one is the whole concept of risk weighting: the idea that some assets are riskier than others, and that banks should hold more capital against risky assets (unsecured loans to people with a 550 credit rating, say) than they do against much safer assets, like loans to the US government.

That makes a certain amount of sense, but there are two main problems with it. For one thing, it’s backwards-looking: it reckons that the securities which have been risky in the past are the same as the securities which will be risky in the future. That obviously isn’t true. And secondly, it’s easy to game. Here’s Millman:

The consequence of this Basel II reform was to discourage banks from lending to risky enterprises, and to encourage the accumulation of apparently risk-free assets. This was a primary contributor to the structured finance craze, as securitisation was a way to “manufacture” apparently risk-free assets out of risky pools. What brought banks like Citigroup and Bank of America to their knees wasn’t direct exposure to sub-prime loans, but exposure to triple-A-rated debt backed by pools of such loans, debt which turned out not to be risk-free at all.

Since it did not change this risk-weighting, Basel III effectively doubles down on Basel II. Banks will need to hold more common equity than ever—against their risk-weighted assets. That massively increases the incentive to find low-risk-weight assets with some return, since these assets can be leveraged much more highly than risky assets. Unless I’ve missed something, lending to AA-rated sovereigns still carries a risk-weight of zero. So one result of Basel III could be to encourage banks to increase their lending to sovereigns at the margins of zero-risk-weight status. If that happens, anyone want to guess where the next crisis will crop up?

This is all absolutely true, but at the same time a sovereign default is always going to cause a banking crisis, no matter what kind of capital-adequacy rules are in place. Central banks can’t protect banks from sovereign default, and neither can banks themselves. If you’re a bank and the country you’re based in goes bust, then you’re going to go bust too.

But Millman’s broader point is spot-on:

Since taking any additional measurable risk is now stigmatized, the game becomes how to increase returns without increasing measurable risk…

Developments in banking regulation in the last decade, meanwhile, have turbocharged this process, and I’m increasingly convinced contributed mightily to the financial crisis. At the heart of the financial crisis, after all, was banks investing in highly-rated debt backed by lousy mortgages. But why did they hold so much of this debt? In part because they could plausibly argue that it was risk-free or nearly risk-free… If the exposure was classified as market risk rather than credit risk, the Basel II framework was based on Value-at-Risk, which showed very low volatility.

The big-picture point to take home is: the regulatory framework recommended by Basel II assumes that banks are in the best position to measure their own risks, and that a regulatory framework that aligns regulatory capital requirements with the risk being taken is to be desired. In other words, the regulatory framework was pushing banks hard in the direction they were already going: towards avoiding measurable risks and hence (since you still have to make money) into risks you can’t easily measure (or don’t know exist).

As Joe Nocera explains, the whole Value-at-Risk structure gives banks every incentive to push risk into the tails. And because tail risk can be ignored, banks then go on to embrace other mechanisms — like the Gaussian Copula Function — which essentially fatten the tails, stuffing them with ever more risk. There’s not much in Basel III which directly addresses this problem.

And there’s another weakness in Basel III, too. I was at a Manhattan Institute event this evening, at which Paul Singer of Elliott Associates stood up and declared that the big systemic losses which resulted from the bankruptcy of Lehman Brothers were not actually a function of any kind of monster hole in Lehman’s balance sheet. Instead, after Lehman declared bankruptcy, its enormous derivatives book needed to be unwound very quickly, and it was that unwind which caused something between $50 billion and $75 billion of losses, precipitating the worst months of the crisis.

Singer wasn’t saying that the derivatives book caused Lehman’s collapse — far from it. The book was actually pretty kosher. The cause of Lehman’s collapse was liquidity problems, and Basel III does a pretty good job tightening up the rules on bank liquidity. But if a bank with a big derivatives book does end up declaring bankruptcy, the effects can still be catastrophic. Again, that’s not something that can readily be addressed in the Basel III architecture — it requires instead a lot of detailed tinkering with bankruptcy laws. Still, the tail risk remains.

Ultimately, Basel III does a good job of reducing foreseeable risks, and, like any ex ante regulatory structure, it does a bad job of reducing unforeseeable risks. The problem is that as a result, banks are incentivized to load up on the kind of securities which can blow up in unforeseeable ways. I’m not sure that’s something that the Basel Committee could ever really address, but it’s worth remembering, all the same.

COMMENT

Okay, I might be throwing a spanner in the works here, but aren’t there more effective risk management methodologies than just straight historical VaR?

The guys at RiskMetrics have been warning us for ages, well before the current crisis, of the risk underlying purely historical measures (and yes, this is even before Taleb’s black swan hit the public lexicon). And yet, from a regulatory point of view, we still try and define our risk on a calendar, five year, ten year, line in the sand kind of way, when we know that the reason markets are good is because they can react on information immediately: not with a particular timeframe in sight, but with a ‘real’ profit mindset.

Certainly, when it comes to futures and forwards, we’ve understood that margining is an ongoing process that needs to be constantly attuned so why is it that banks can not be given the same review/monitoring/risk management outlook? (I wrote an article on this recently at http://wp.me/p13SkA-dg)

Thank you Felix for highlighting the issue of sovereign risk but even sovereign risk need not become systemic. If it is acknowledged that even your own country’s securities still require some level of hedging then there should be some scope to aver the worse. There should be a level of freedom in the market to split the political operational risk from the real intrinsic economic risk – if markets are not allowed to incentivise this kind of rational behaviour then we are leaving ourselves open to ongoing confrontation between markets and local spendthrifts government: we should be able to work together on the long run, not just against each other.

Tariq Scherer
http://scherer.dyndns-web.com/

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Unconvincing central banker of the day, Qadir Fitrat edition

Felix Salmon
Sep 14, 2010 21:24 UTC

Some people are like Winston Wolfe. They’re professional, they’re reassuring, they solve problems, they always know exactly what to do. These are the people you want staffing a bank regulator when there’s a banking crisis.

And then there’s Afghan central bank governor Qadir Fitrat:

Afghanistan’s central bank has stepped in to take control of the troubled Kabulbank, its governor said on Tuesday…

Fitrat told Reuters investigations had also started into the dealings of the bank’s top two directors and shareholders, who were told to resign…

The central bank had previously maintained that Kabulbank had not been taken over, despite a central bank official being appointed as chief executive officer…

Fitrat had described reports in The Washington Post and New York Times newspapers and other U.S. media of possible graft at the bank as “baseless information and rumors.”

However, on Tuesday Fitrat said Farnood, Fruzi and Fahim’s brother, Mohammad Haseen, were now under investigation for suspected irregularities, among other shareholders…

“We conduct our own investigation (and) once we see that there are elements of criminality involved, then we submit those cases to the attorney general’s office,” Fitrat said of the investigation process…

Fitrat insisted Kabulbank was still solvent and that its troubles would not spread to Afghanistan’s other private lenders.

“Fortunately, in other banks, mostly professionals are in charge. The good thing is that the other banks follow the rules.”

None of this, it hardly needs be said, is the kind of stuff which calms a restive population and reassures both local and foreign observers that everything is under control. We will probably never know the true state of Kabulbank’s balance sheet, or how much Afghan and US money is going to be needed to get it back on its feet. And there’s no chance that anybody is going to be successfully prosecuted.

In a failed state like Afghanistan, a strong independent bank, plugged in to a reliable international network, can actually be safer than a huge bank taken over in a chaotic fashion by a central bank governor with precious little credibility. The nationalization of Kabulbank does not mean that the bank is now safe, or that the black hole in its balance sheet is going to start getting smaller rather than larger. It’s still a major risk to national security in Afghanistan, and I hope that some US technocrats are being parachuted in somehow to help patch it up as much as possible.

COMMENT

I recall an article in Financial Times around the end of 2008, where Governor Fitrat had sacked an advisor from the US who had raised questions about the Director of Supervision, especially wrt the examination at Kabul Bank. It’s a shame that nothing was done at that time!

Posted by BakedCentipede | Report as abusive

More good news, for debt collectors

Felix Salmon
Sep 14, 2010 19:18 UTC

When the financial crisis caused a sudden stop in the availability of home equity lines of credit, credit-card default rates naturally spiked. No longer could consumers spend as much as they like, and then, when their credit-card debt got out of control, pay it all off with a cash-out refinance.

But two years after Lehman Brothers collapsed, credit card default rates are still high — in fact, at 10.8% in the second quarter of 2010, the charge-off rate is hitting new highs and rising alarmingly. (It was 9.8% in the same quarter of 2009, and 10.1% in the first quarter of 2010.)

Consumers are continuing to rack up new credit-card debt: far from paying down their balances at all, they’re charging new stuff every month. Yes, the total amount of credit-card debt outstanding is falling — but that’s only because the banks have given up on collecting an enormous amount of it — they wrote off $81.6 billion in 2009, and another $43.5 billion in the first half of 2010.

I, for one, didn’t expect credit-card charge-off rates to rise in 2010: aren’t we meant to be in a recovery? Weren’t they extremely high to begin with? Haven’t card companies been reducing credit limits and generally trying to rid themselves of uncreditworthy customers for a couple of years now?

I do think that this data series is probably going to prove a good proxy for the point at which the US population as a whole gets less pessimistic and begins to think that we’re no longer in a recession. I don’t think that the goods being charged onto these credit cards are silly luxuries: it’s just that for a very large part of the country, it’s extremely difficult to live within your means. The banks keep on having to write off credit-card loans as it becomes clear they will never be repaid — but just because a loan is written off, doesn’t mean it disappears. The debt remains, and will weigh down the cardholders’ finances for many years to come. It just now belongs to debt-collection agencies rather than banks.

COMMENT

Debit Collectors a pain,and that’s the time you need for a professional to deal with these companies. Go the http://sandiego.igalaw.com/bankruptcy-at torney-san-diego/mortgage-debt/

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The other bits of Basel III

Felix Salmon
Sep 14, 2010 16:14 UTC

All the headlines about Basel III have concentrated on the new core Tier 1 capital requirements — the amount of pure equity and retained earnings that banks are going to have to have going forward. It was banks’ core equity which proved woefully insufficient during the crisis — hardly a surprise, when the Basel II requirement for it was just 2% — and it’s core equity which has seen the biggest beefing up under Basel III, all the way to 7%.

But Melvyn Westlake reckons that there might be a bigger story here in the total capital requirements under Basel III, including not only core Tier 1 capital but everything, up to and including Tier 2. Westlake knows what he’s talking about: he works for Global Risk Regulator magazine, the trade journal which covers all these issues in enormous detail on a permanent basis. Here’s what he just sent me via email:

I would suggest that the Basel Committee intends that Tier 2 capital will have a much more significant role than in the past. It is not absolutely clear what instruments will qualify for Tier 2 in the future, but they will certainly have to be loss absorbing, possibly in a “going concern” situation as well as a “gone concern” situation.

He also notes what the Basel Committee itself has said:

During the recent financial crisis a number of distressed banks were rescued by the public sector injecting funds in the form of common equity and other forms of Tier 1 capital. This had the effect of supporting not only depositors but also the investors in regulatory capital instruments. Consequently, Tier 2 capital instruments (mainly subordinated debt), and in some cases non-common Tier 1 instruments, did not absorb losses incurred by certain large internationally-active banks that would have failed had the public sector not provided support.

It’s going to take a while (something over a decade, most likely) to fully make the switch from the current grab-bag of instruments which count as Tier 2 capital to a much safer system where holders of Tier 2 capital can and will take losses in the event that a bank comes close to failing. So far, the market in contingent convertible securities is nascent at best, and no one really understands how or whether it will evolve — maybe banks will find it easier to just issue equity instead.

But in any case, the new Tier 2 capital requirement of 10.5% is an important number: it basically means that if any bank does need a bailout, its subordinated bondholders are going to be the first to do the bailing out, rather than the government. And it should give some reassurance to the people worried about leverage, too. After all, if you calculate leverage ratios using total capital rather than just equity, they’re likely to come down substantially. And that’s without taking into account the new liquidity restrictions. Lehman’s biggest failure was in liquidity management; the new Basel rules will, if they work, stop another Lehman from happening again. The capital rules are aimed not at preventing another Lehman, but rather at shoring up the global commercial-banking system. Which is just as important.

COMMENT

Yes, Tier 2 capital is different now.

Criteria for inclusion in Tier 2 Capital

1. Issued and paid-in

2. Subordinated to depositors and general creditors of the bank

3. Is neither secured nor covered by a guarantee of the issuer or related entity or other arrangement that legally or economically enhances the seniority of the claim vis-à-vis depositors and general bank creditors

4. Maturity:

a. minimum original maturity of at least five years

b. recognition in regulatory capital in the remaining five years before maturity will be amortised on a straight line basis

c. there are no step-ups or other incentives to redeem

5. May be callable at the initiative of the issuer only after a minimum of five years:

a. To exercise a call option a bank must receive prior supervisory approval;

b. A bank must not do anything that creates an expectation that the call will be exercised; and

c. Banks must not exercise a call unless:

i. They replace the called instrument with capital of the same or better quality and the replacement of this capital is done at conditions which are sustainable for the income capacity of the bank; or

ii. The bank demonstrates that its capital position is well above the minimum capital requirements after the call option is exercised.

6. The investor must have no rights to accelerate the repayment of future scheduled payments (coupon or principal), except in bankruptcy and liquidation.

7. The instrument cannot have a credit sensitive dividend feature, that is a dividend/coupon that is reset periodically based in whole or in part on the banking organisation’s credit standing.

8. Neither the bank nor a related party over which the bank exercises control or significant influence can have purchased the instrument, nor can the bank directly or indirectly have funded the purchase of the instrument

9. If the instrument is not issued out of an operating entity or the holding company in the consolidated group (eg a special purpose vehicle – “SPV”), proceeds must be immediately available without limitation to an operating entity or the holding company in the consolidated group in a form which meets or exceeds all of the other criteria for inclusion in Tier 2 Capital

George Lekatis
http://www.basel-iii-association.com

Posted by George_Lekatis | Report as abusive

Sob story of the day, Glen Esnard edition

Felix Salmon
Sep 14, 2010 15:46 UTC

Somebody should tell the senior executives of Grubb & Ellis that their president of capital markets, Glendon Esnard, is mad as hell, he’s not gonna take it any more, and that in fact he is seriously considering leaving the country altogether:

Apparently our president thinks that living in America is so wonderful that we will never leave, despite being directly attacked and held responsible for the political class’s inability to constrain its desire to buy votes with our money. He should think again.

“We”, here, in case you were wondering, is that beleaguered and demonized class of people making more than $250,000 a year. They We are being vilified by no less than the President of the United States himself — “for his own personal gain”! And let me tell you, they we are suffering. Take poor Glendon himself:

I have no funded retirement plan save Social Security, if it is there when I need it. I have no guarantee of permanent health care. I am paying off school loans for our three children. A meaningful number of my friends have lost their jobs, and all who are still employed, including my family, have taken significant pay reductions. My brother-in-law has been told to take every Friday off with a 20% cut in pay, but his work load hasn’t changed. Everyone I describe here earned over $250,000 per year.

I’m sure that Glendon, with his 30 years of commercial real estate experience and his extensive knowledge of both investment sales and the alternative real estate investment market, has managed to amass a decent nest egg by this point. Still like any good socialist, he still hankers for a defined-benefit pension and a guarantee of permanent health care. He’d surely love it if the government paid for college education, too. Probably that’s why he’s thinking of leaving the country: he’s decided that he wants to move to Sweden. Or maybe France.

COMMENT

The rest of the story: Poor Mr. Esnard was supposedly let go from Grubb & Ellis, the company went out of business and Mr. Esnard lost his deffered compensation. boo hoo

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Trillium wasn’t quote-stuffing

Felix Salmon
Sep 14, 2010 14:11 UTC

Chris Nicholson is right, where Courtney Comstock and Marcy Gordon are wrong: the $2.26 million fine slapped on Trillium is not for quote-stuffing. Instead, it’s for layering.

The distinction is an important one. Quote-stuffing, if it exists, is a destructive attack on an entire stock market. Layering, by contrast, is relatively benign, and the only people who get damaged by it are high-frequency traders who are looking to sniff out where the market is going and place trades attempting to front-run that move.

What Trillium did is market manipulation, to be sure, and it deserves a fine. But it’s a bit of a stretch to paint this as the first battle in the war against high-frequency traders — not least because there isn’t actually anything particularly high-frequency about what Trillium was doing.

Yes, Finra does say that Trillium’s layering was an “improper high frequency trading strategy”. But fundamentally it was about misdirection, rather than speed.

Layering is a way of getting good execution on a trade you already know that you want to do: it’s not some kind of market arbitrage where you’re trying to make immediate profits in a fraction of a second. The profits calculated by Finra constitute the difference between the prices that Trillium got and the prices that it would have got if it hadn’t been moving the market: in other words, Trillium could easily have made a loss on the trades, while still making illicit profits in the eyes of Finra.

An example would probably help. Let’s say that XYZ stock is trading at a bid of $24.50 and an offer of $24.55. And let’s say that a trader at Trillium wants to sell XYZ stock. He could simply hit the bid, and receive $24.50. Or he could put in a sell order at $24.54, and hope that someone wanting to buy will take him out there. That would be a much better outcome, because not only does he get a better price, but he also counts as the liquidity provider, and so gets a small rebate from the stock exchange. On the other hand, there’s no guarantee that anybody will take him up on that offer.

But let’s say that he puts in a hidden offer at $24.54, in a dark pool. That means that the offer is there, but no one can see it. (This is perfectly legal, by the way.) Then comes the sneaky part: he puts in a large number of public and visible bids at prices like $24.48 and $24.47. He doesn’t actually want to buy XYZ stock at those prices: in fact, he doesn’t want to buy XYZ stock at all. But to other traders, looking at the public order book, it looks as though there’s a large amount of buying interest in XYZ. So they start putting in their own bids: at $24.51, $24.52, $24.53. They’re all trying to get in front of the big new buyer they see in the market.

And presto, when they bid $24.54, they find that hidden sell order from Trillium, which gets a very good price on its trade and gets to count as a liquidity provider. And as soon as that happens, all those fake bids at $24.48 and $24.47 suddenly disappear. But the victims are the people (or algorithms) who thought there was a naive trader posting public buy orders, and wanted to trade against that order. It’s hard to feel a lot of sympathy for them. As Kid Dynamite says,

There’s a big problem with Trillium’s strategy: it’s illegal. It’s called market manipulation, and they got bagged for it. Ironically, most of the same people who are/will be happy that Trillium is getting punished for this behavior would also be happy that the participants who Trillium was trying to fool got fooled. It’s been made quite clear that the Populace At Large does not like the trend of traders, be they high frequency (more so, lately, obviously) or low frequency, reacting to publicly displayed quotations by changing their own quotes. Or lifting bids / hitting offers in response to publicly displayed quotes. Those are the very traders Trillium was trying to (illegally) take advantage of.

And so it’s important to distinguish what Trillium was doing from quote-stuffing. Quote-stuffing is essentially a denial-of-service attack, aimed at trying to slow down a market in an environment where milliseconds matter.

With quote-stuffing, high-frequency traders enter an enormous number of bids and offers, significantly outside the current bid-offer spread, just to introduce a vast amount of noise into the quote feed. All that noise takes time (maybe just a few extra nanoseconds) for rival HFT shops to process, giving the quote stuffer a crucial time advantage.

The SEC is looking into whether quote-stuffing exists, and whether it’s a strategy that anybody has actually used to make money. Opinions differ on that front. But let’s not confuse the SEC investigation into quote-stuffing with the Finra fine on Trillium. They’re two very different things.

COMMENT

This and other topics that are relevant for speed traders and institutional investors will be discussed at High-Frequency Trading Leaders Forum 2013 London, next Thursday March 21.

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Counterparties

Felix Salmon
Sep 14, 2010 05:36 UTC

Exterminators made $258 million from bedbugs in 2009, up 263 percent from three years before — Slate

SEC sues Reserve Fund’s Bents for losing investors’ money. Bents say investors should foot their legal bill — Crain’s NY

White House renominates Diamond to Fed board — Bloomberg

White House denies plan to avoid Warren fight — Politico

Credit Suisse’s handy chart of the core Tier 1 capital of Europe’s biggest banks — Twitpic

NYU’s rent-control scheme — Mankiw

Bike Snob responds to my biking post — BSNYC

Barack Obama becomes the biggest arms dealer of all time, selling $60bn worth of F-15s to Saudi Arabia — Guardian

COMMENT

I’ve never quite understood the reasoning behind “rent control”. Can anybody point me towards some insightful analysis of the concept, either for or against?

Seems to me to be a HUGE government intervention in the marketplace. Those usually have massive consequences, often unintended. Could this be part of why NYC real estate is so inflated?

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