Rigged Market?

(abbreviated) Rigged-Market Theory Scores a Perfect Quarter: Jonathan Weil May 13 (Bloomberg) – Score another triumph for the rigged- market theory. In a feat that would seem to defy the odds, Goldman Sachs, JPMorgan Chase and Bank of America this week each said its trading desk made money every day of the first quarter. Goldman said its daily net trading revenue topped $100 million 35 times last quarter out of 63 trading days. JPMorgan and Bank of America disclosed similar eye-popping stats. Citigroup, too, recorded a profit on each trading day, Bloomberg News reported, citing unnamed people who knew the results. There seems to be no satisfying way to answer those questions, or even the more basic inquiry: How exactly do these banks’ trading divisions make money? Reading the companies’ impenetrable financial reports is of little help. However they did it, the data suggest it was as easy last quarter as hitting the side of a barn with a baseball from three feet away. This isn’t the way “trading” works in the real world. A simple exercise in measuring probabilities is instructive here. One Answer Of course, no matter what the question is these days, it seems the answer from Goldman always is: We’re a market maker. When senators ask about e-mails that show Goldman telling its sales army to dump crappy mortgage bonds from its warehouse on its clients? Market maker. When the e-mails show Goldman created the crappy deals? Market maker. By Goldman’s definition, an Amway salesman pitching energy drinks to old ladies in nursing homes would qualify as a market maker. It’s all just matching buyers and sellers to create liquidity, you know. So let’s forget about the how and focus on the why. Why were these banks able to make so much money with such uncanny consistency? One logical answer is that America’s political leaders obviously want it this way. Otherwise, for example, the government already would have begun to liquidate Fannie Mae and Freddie Mac and let the crash in housing prices and mortgage-backed securities run its course. To encourage personal savings, the Federal Reserve would have raised interest rates and turned off the banking industry’s easy-money spigot. And the White House would be throwing a fit over the International Monetary Fund’s use of U.S. taxpayer dollars to help bail out Greece and its ilk, along with the European banks that own their debt. Americans don’t want the immediate pain such steps would bring, though. So our government keeps trying to stretch it out through massive subsidies for the financial-services industry, which means traders at America’s largest too-big-to-fail banks get to keep making their killings and bonuses, for now. What nobody knows yet is how long the government can keep up the rig. (Jonathan Weil is a Bloomberg News columnist. The opinions expressed are his own.) http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ax0kTsl0dBXw

Those are some wild stats.

It does seem pretty incredible, but it seems like last if there is ever going to be a chance to do it, last quarter was the quarter it was feasable. Volatility fell pretty much day after day over the quarter, spreads compressed day after day and equities went up day after day. Inventory can be financed very cheap so everything has a possitive carry and with volatility so low it seems pretty easy for a dealer to make money. If they repeat this quarter with the whole Greece and Euro thing I’ll be surprised.

Making money by trading seems to me to be more profitable in volatile markets. Creating bubbles that crash increases volatility and destroys market integrity. If you make money in transactions, then you want to increase your sales units, you create more transactions. This leads to more volatilty as investing theory is based mostly on buy and hold and individual investors believe in this strategy. Once investors give up on the market and start putting their money into starting their own business and ditch 401ks, then we will see who really runs the country.

I think volatility is going to have a couple offsetting effects but I think overall rising volatility is probably bad for the desk profit over a short period like 1 day. The way I look at it, as volatility goes up, the more a trading desk can make from bid ask spreads as efficiency decreases. At the same time, volatility makes asset prices behave strangely so hedges might be exposed to bigger basis risk and the part of the security’s risk that is not hedged, may perform poorly too fast to adjust. Thats just the way it seems to me, maybe I’m wrong.

Morgan lost money on 4 trading days, idiots!

BizBanker Wrote: ------------------------------------------------------- > Once investors give up on the > market and start putting their money into starting > their own business and ditch 401ks, then we will > see who really runs the country. I imagine that people who get 100% matches on their 401-K will go to cash/bonds if they give up on stocks." Doesn’t make any sense to turn down free money. And really? What percentage of the population has the time and money to start a business? How many working fathers/mothers of 3 are going to run businesses in their 12 free hours a week?

joemontana Wrote: ------------------------------------------------------- > I imagine that people who get 100% matches on > their 401-K will go to cash/bonds if they give up > on stocks." Doesn’t make any sense to turn down > free money. And really? What percentage of the > population has the time and money to start a > business? How many working fathers/mothers of 3 > are going to run businesses in their 12 free hours > a week? 401ks usually have non-equity choices, including bond funds / money market / treasury funds.

1morelevel Wrote: ------------------------------------------------------- > I think volatility is going to have a couple > offsetting effects but I think overall rising > volatility is probably bad for the desk profit > over a short period like 1 day. Volatility tends to increase trading profits, but decrease consistency of profitability. The impressive part of this quarter was not how much money they made (their return), but how consistently they made it (Sharpe). Considering banks are mostly long delta and short vega, it’s not surprising they had great Sharpes last quarter. Q2 will be different.

joemontana Wrote: ------------------------------------------------------- > BizBanker Wrote: > -------------------------------------------------- > ----- > > Once investors give up on the > > market and start putting their money into > starting > > their own business and ditch 401ks, then we > will > > see who really runs the country. > > > I imagine that people who get 100% matches on > their 401-K will go to cash/bonds if they give up > on stocks." Doesn’t make any sense to turn down > free money. And really? What percentage of the > population has the time and money to start a > business? How many working fathers/mothers of 3 > are going to run businesses in their 12 free hours > a week? The same way every company that grew into a mega corp did, hard work. My clients did it, so I guess by your reasoning the fathers and mothers of 3 will just have to work for those of us unmarried folks who have the time on their hands.

justin88 Wrote: ------------------------------------------------------- > 1morelevel Wrote: > -------------------------------------------------- > ----- > > I think volatility is going to have a couple > > offsetting effects but I think overall rising > > volatility is probably bad for the desk profit > > over a short period like 1 day. > > Volatility tends to increase trading profits, but > decrease consistency of profitability. The > impressive part of this quarter was not how much > money they made (their return), but how > consistently they made it (Sharpe). > > Considering banks are mostly long delta and short > vega, it’s not surprising they had great Sharpes > last quarter. Q2 will be different. Let me see if I can talk my way through that. Long delta meaning the change in price of their positions is larger %wise than the change in price of the underlying? I guess that is a highly directional bet? IE long delta is good if the S&P is rising assuming your net position is long but bad if you are net short? Short vega meaning rising volatility hurts them?

Thats what happens when you have 4 big banks. We seen this for years after years in Canada. The US banks have a politically corrected monopoly now. The question is who lost $$$ this qtr? Or is the Fed just making it too easy for these folks with basically free lending.

adehbone Wrote: ------------------------------------------------------- > Or is the > Fed just making it too easy for these folks with > basically free lending. Bingo!

FED/Open Market carry trade. Its like f*cking lindsey lohan, impossible to miss. Kinda sad my bank is at the bottom of the pile.

Is this a metric they always have in Ks and Qs or did they just include it this time to brag?

1morelevel Wrote: ------------------------------------------------------- > Let me see if I can talk my way through that. > Long delta meaning the change in price of their > positions is larger %wise than the change in price > of the underlying? I guess that is a highly > directional bet? IE long delta is good if the S&P > is rising assuming your net position is long but > bad if you are net short? You’re confusing delta with beta, but you’ve kind of got it. > Short vega meaning rising volatility hurts them? Right. Banks are generally net sellers of volatility.