Comments on: Did falling correlations cause JP Morgan’s trading losses?

By: TFF

TFF — Fri, 25 May 2012 01:17:38 +0000

@MrRFox, I try to avoid situations where the “whisper loop” is relevant.

Like I said, it might not be a level playing field, but it is closer than it was 30 years ago. And the big players have their own problems (among other things — they pay half their profits in bonuses to the traders while eating all the losses).

Sometimes it isn’t so bad to be a small, unsophisticated investor.

By: MrRFox

MrRFox — Thu, 24 May 2012 19:13:15 +0000

@TFF – functionally, the individual may be more nimble and have a broader range of markets to play in than the Whales, that’s probably so. Still, after the FB thing, it sure looks like it pays to be inside the “whisper loop”.

By: TFF

TFF — Thu, 24 May 2012 18:43:46 +0000

MrRFox, that is why I’m skeptical of the meme that the market is rigged against small investors. More than ever before, small investors have the information available to make quality choices — and the big guys playing fancy games are pushing against their own inertia. Might not be a level playing field, but it is the closest I’ve seen it in the 30 years I’ve been investing.

By: MrRFox

MrRFox — Thu, 24 May 2012 18:18:34 +0000

“What Eericsonjr said. JPM was creating the relevant correlations.” (GreyCap)

seconded.

There’s damn near no pond big enough for these TBTF Whales to swim in any more. Now JD/JPM has beached itself into a blood-thirsty, locked-in position that it can’t escape, at least not without a truly creative solution. But no problem – JD’s always the smartest guy in the room, no matter where he goes, or so he thinks. Now he gets to prove it – if he can.

By: Greycap

Greycap — Thu, 24 May 2012 16:41:27 +0000

What Eericsonjr said. JPM was creating the relevant correlations.

By: Eericsonjr

Eericsonjr — Thu, 24 May 2012 16:03:33 +0000

No, no. No.

The problem this time and always is in the volume–the size of the position. Iskil’s position was itself market-distorting, and that brought in more players, which distorted things further. All the “correlations” change when some smart guy piles in so many chips into a single sector or index or whatever. That’s what happened. Lately, that’s pretty much what always happens.

By: KenG_CA

KenG_CA — Wed, 23 May 2012 22:14:54 +0000

Are correlations guaranteed? Just wondering.

Or is it like W after Katrina: “nobody could have foreseen it”?

oh, o.k. It’s just bad luck.

By: Foppe

Foppe — Wed, 23 May 2012 22:02:10 +0000

Anyway, to answer the question asked in your title: no, it did not. Thinking in terms of explained variance by a variable, I would say that ‘having a casino mentality’ has much more explanatory value — causal power? — than falling correlations do. Unless, of course, you want to argue that smoking in gas station is a perfectly healthy behavior to engage in.
TFF: indubitably.

By: TFF

TFF — Wed, 23 May 2012 21:48:10 +0000

Foppe, from that chart I would say that falling correlations have more in common with pigeons than rarer birds.

By: absinthe

absinthe — Wed, 23 May 2012 21:44:40 +0000

I also hope not, since presumably correlation risk is one of the things they’re supposed to be hedging in the first place…

By: Foppe

Foppe — Wed, 23 May 2012 21:39:17 +0000

I hope not. That would probably mean more facile references to ‘black swans’ and other exculpatory nonsense, when what is at issue is VaR/balance sheet gaming via “hedging” — that is, legalized fraud. (Also, it would make them about as stupid as those guys at LTCM.)
I realize it probably isn’t “wonky” and exciting enough, but please try to focus on the fraud/crime aspects a bit more.