Quotes of the day

The economy sucks up people who know [math and science], and the pay and the respect of working for Google or Microsoft, ... or Goldman Sachs (Heaven help them, ... uhhh, just kidding) is a heck of a lot more than there is to teaching in a high school.--Jim Simons

I consider high frequency trading to be natural, and definitely socially useful. What's happened is, that as the markets have become more electronic, and computers have been applied for generating prices and accepting trades, the markets have grown tremendously more liquid. The bid-ask spread has come down. The fellas of old that used be specialists on the floor were supposed to be the market and they were full of baloney, and they would create wide spreads and at the first sign of trouble they would disappear. ... There was a glitch, I think they called it the 'Flash Crash' ... and for 8 minutes or so, some parts of the market took a dive. It came right back. ... In 1987, when the stock market crashed it went down 25% in half a day and didn't recover for 6 months, 'cause there was nobody there on the other side. ... Yes, I consider high speed trading socially useful, and those people who argue against it are wrong.--Jim Simons

[Jim] Clark was particularly irked by the disclosures surrounding Abacus. He had met with Paulson & Co. founder John Paulson in August, 2006 and been impressed by the hedge fund manager’s plans to bet against the subprime-mortgage market. His Goldman brokers talked him out of investing with Paulson, describing him as a bit player, Clark says.--Richard Teitelbaum

Sentiments on how the country is doing break down along partisan lines. Among Democrats, 14 percent said the country is doing very well, while another 51 percent said it is doing fairly well. Thirty-five percent of Democrats said the country is doing badly. Just one percent of Republicans surveyed said the country is doing very well and 24 percent said it is doing fairly well, while 76 percent said it is doing pretty badly or very badly. Independents’ views are middling, with 41 percent saying the country is doing well, while 49 percent said it is doing badly.--Jennifer Epstein

Do we think the administration has even considered that the problem [the slowing pace of new drugs coming out of the pharmaceutical industry] might be the huge costs imposed on new drug development by the FDA?--Jeffrey Miron

As states struggle with enormous deficits and exploding pension costs, some analysts are urging Congress to enact a law enabling states to declare bankruptcy the way municipalities can under Chapter 9 of the federal bankruptcy code. This is a bad idea. A state bankruptcy provision could create more problems than it solves. Bankruptcy proponents understandably worry that states such as California and Illinois are so deep in the hole they may end up petitioning Congress for federal relief. To forestall this possibility, the argument goes, even the threat of bankruptcy would give governors and legislators a powerful new weapon for forcing concessions from recalcitrant public employee unions. Yet state officials committed to cutting costs already have options for putting the squeeze on their unions.--E.J. McMahon

Here we go again with the political grandstanding around the idiotic "debt ceiling" -- idiotic because it's defined in a fixed number of dollars instead of a percentage of GDP.--Steven Conover

The experimental study reported here employed one of the most compelling visual cues of female sexual attractiveness (low waist-to-hip ratio) to test the influence of news anchor sexualization on audience evaluations of her as a professional and their memory for the news that she presents. Male participants saw the sexualized version of the anchor as less suited for war and political reporting. They also encoded less news information presented by the sexualized than her unsexualized version. Conclusions were drawn in line with evolutionary psychology expectations of men’s cognitive susceptibility to visual sex cues.--Maria Elizabeth Grabe and Lelia Samson

Is it better to test sexual compatibility as early as possible or show sexual restraint so that other areas of the relationship can develop? In this study, we explore this question with a sample of 2035 married individuals by examining how soon they became sexually involved as a couple and how this timing is related to their current sexual quality, relationship communication, and relationship satisfaction and perceived stability. Both structural equation and group comparison analyses demonstrated that sexual restraint was associated with better relationship outcomes, even when controlling for education, the number of sexual partners, religiosity, and relationship length.--Dean Busby, Jason Carroll & Brian Willoughby

Quotes of the day

I have learned from prior experience that sometimes the better part of valor in an investment situation is to move on. Onward.--Bill Ackman

... who in the Valley doesn’t know it was Sun Microsystems cofounder Andy Bechtolsheim who handed Larry Page and Sergey Brin a check for $100,000 in August 1998, before they’d even incorporated? Or that Peter Thiel was the first outside investor in a Harvard startup called Facebook? ... in the last 10 years the price of starting a technology company has fallen dramatically. No longer do startups have to pay $60,000 for an Oracle database or shell out tens of thousands of dollars for a content-management system: free open-source software has taken care of that. Bandwidth and hardware are also substantially cheaper. Plus, a company that might have needed dozens of programmers in the past can now get away with one or two. Add to that the fact that most people working for startups eschew large salaries in exchange for equity stakes, and the cost of getting a new tech company off the ground goes from several million dollars to a few hundred thousand.--Doree Shafrir

... Stuxnet is an incredibly advanced, undetectable computer worm that took years to construct and was designed to jump from computer to computer until it found the specific, protected control system that it aimed to destroy: Iran’s nuclear enrichment program. The target was seemingly impenetrable; for security reasons, it lay several stories underground and was not connected to the World Wide Web. And that meant Stuxnet had to act as sort of a computer cruise missile: As it made its passage through a set of unconnected computers, it had to grow and adapt to security measures and other changes until it reached one that could bring it into the nuclear facility. When it ultimately found its target, it would have to secretly manipulate it until it was so compromised it ceased normal functions. And finally, after the job was done, the worm would have to destroy itself without leaving a trace. That is what we are learning happened at Iran's nuclear facilities -- both at Natanz, which houses the centrifuge arrays used for processing uranium into nuclear fuel, and, to a lesser extent, at Bushehr, Iran's nuclear power plant. ... There is one clue that was left in the code that may tell us all we need to know. Embedded in different section of the code is another common computer language reference, but this one is misspelled. Instead of saying “DEADFOOT,” a term stolen from pilots meaning a failed engine, this one reads “DEADFOO7.” Yes, OO7 has returned -- as a computer worm. Stuxnet. Shaken, not stirred.--Ed Barnes

... [Jamie] Dimon has plenty not to be embarrassed about. He fulfilled a banker’s first obligation: he made sure his bank survived. This was thanks to his strategy of maintaining a healthy cushion of capital for a rainy day. When markets melted down and the economy plunged into recession, J. P. Morgan remained not only solvent but profitable every quarter. When other banks were refusing to lend, Dimon’s continued to offer credit to customers ranging from homeowners to Pfizer to the State of California. And when the United States needed a strong institution to bail out a failing bank, it turned — twice — to JPMorgan Chase.--Roger Lowenstein

President Lincoln could have denigrated all Southerners. He didn’t.--Jamie Dimon, to President Obama

Politics, like religion, is a topic where there's no threshold of expertise for expressing an opinion. All you need is strong convictions. Do religion and politics have something in common that explains this similarity? One possible explanation is that they deal with questions that have no definite answers, so there's no back pressure on people's opinions. Since no one can be proven wrong, every opinion is equally valid, and sensing this, everyone lets fly with theirs. ... I think what religion and politics have in common is that they become part of people's identity, and people can never have a fruitful argument about something that's part of their identity. By definition they're partisan. ... there is a step beyond thinking of yourself as x but tolerating y: not even to consider yourself an x. The more labels you have for yourself, the dumber they make you.--Paul Graham

We think its fairly obvious that the Department of Justice won't go after the Times or any of the other papers involved in the [Wikileaks] story. But if it doesn't, that's just evidence that its attempt to use the Espionage Act to go after Assange isn't about enforcing laws: It's about retribution, harassment, and rattling sabers.--John Cook

Liquidity crises do not happen to governments with low debt levels. Liquidity crises are solvency crises during the panic phase, before they are revealed to be solvency crises alone. It is difficult to change government behavior, because the politics of reducing spending, or raising taxes is tough. Once a crisis hits, there are protests. People point at shadowy interests that are denying them the illusionary prosperity of the boom; conspiracy theories thrive.--David Merkel

Abandoning the euro, in other words, is not about taking on costs. It is about distributing existing adjustment costs. What Keynes and Kindleberger (and the other K: Krugman) remind us is that the distribution of these costs is not determined by economic theory but rather by political interests. That is why I said last week that political radicalism in Europe will almost certainly rise and the process of governing will become increasingly unstable. It is through the political process that the costs of adjustment will be assigned to the different groups, and when the costs are likely to be so high, the squabbling over the assignment of those costs is likely to be quite brutal.--Michael Pettis

High frequency profits capped at 4 basis points of trading volume

That's about $20 billion on an annual $50 trillion of trading.

The real figure is probably somewhere between $5-10 billion. While this suggests a nice revenue pie, assuming there are 1,000 high frequency traders (and I'd bet there are more), not everyone is making money after technology and support personnel costs.

It's basically in line with the television revenues spun off by the NFL, except there could be more jobs created by high frequency trading than from NFL television, plus the established fact that HFT provides liquidity to everyone else who has an interest in the stock market, which is pretty much everyone with a 401(k), a pension, or a job. We could even extend that to the jobless, who receive unemployment benefits courtesy of the employees and corporations that pay taxes.

Via Dennis Berman.

Quotes of the day

The killer is that what protects you in a crisis is also what leaves money on the table pre-crisis. The best trades and market positions in the pre-crisis regime are the ones that cause the greatest losses in the crisis.--Rick Brookstaber

Today, Israel is not the belligerent party in the Israeli-Palestinian conflict. It is Israel that has offered partition, and the Palestinians who have consistently refused it. Netanyahu inherited a winning hand. He could have put a peace plan on the table, leaving the Palestinians to refuse it. He could have declared that Israel wanted to withdraw from the West Bank and would do so if its security was guaranteed by an agreement with the Palestinians or a third party. He could have offered state housing help for those who would leave the settlements even before an agreement. Instead, he mumbled something half-heartedly about two states, and then moved on to fight for enlarging settlements.--Gadi Taub

As the rain and the snow come down from heaven, and do not return to it without watering the earth and making it bud and flourish, so that it yields seed for the sower and bread for the eater, so is my word that goes out from my mouth: It will not return to me empty, but will accomplish what I desire and achieve the purpose for which I sent it. You will go out in joy and be led forth in peace; the mountains and hills will burst into song before you, and all the trees of the field will clap their hands.--Isaiah

So men may in any dispensation despise the grace of God, but they cannot extinguish it.--A.W. Tozer

There are two things to say about this. The first is that the consumption of culture is not always worthless. Is it really better to produce yet another lolcat than watch The Wire? And what about the consumption of literature? By Shirky's standard, reading a complex novel is no different than imbibing High School Musical, and both are less worthwhile than creating something stupid online. While Shirky repeatedly downplays the importance of quality in creative production—he argues that mediocrity is a necessary side effect of increases in supply—I'd rather consume greatness than create yet another unfunny caption for a cat picture. The second thing is that it remains entirely unclear if the creative and generous acts made possible by the internet are really a replacement for time spent watching sitcoms. After all, people have always had hobbies; although they watched plenty of bad television, they also read newspapers and built model airplanes, went on hikes and volunteered at the local shelter. In other words, we weren't quite as mindless or disconnected as Shirky seems to believe. In his zeal to celebrate the revolutionary capabilities of the internet, Shirky downplays the virtues of the world before the web. And then there is the terrifying possibility (not addressed by Shirky) that our online life is detracting, not from time spent watching TV, but from our interest in things that have nothing to do with technology, such as talking with friends or taking walks in the park. It's easy to find quibbles with an argument as audacious and thought-provoking as that put forward in Cognitive Surplus. The fact is, Shirky has written an important book about an interesting moment in human history. We have arranged our modern lives to maximize free time. Now, thanks to the virtual infrastructure of the internet, we are able to collaborate and interact as never before. The question is what these collaborations will create. A surplus, after all, is easy to squander.--Jonah Lehrer

It isn't simply a matter of completing the deep pass into the corner of the end zone or sinking the shot for three points at the buzzer; it's the business of sustaining the belief that democracy still works the way the Declaration of Independence says it's supposed to work, Jefferson's "aristocracy of virtue and talent" still out there in uniform on the level playing field, imparting substance to the nation's fondest memories and dearest hopes. Like the infantry platoons that won the Hollywood version of World War II, an American team in good working order affirms the doctrine of egalitarianism, erases the distinctions between race and class, rehabilitates the principle of justice under law. The coach doesn't start the kid at quarterback because the kid is underprivileged; the manager doesn't insist that the dugout vote Republican. On the far side of the left-field wall, wars bleed and children starve; men cheat, women rot, banks foreclose, politicians lie. Inside the park the world is as it was in the beginning, as green as the grass of childhood, as bright as the sky at noon with what the British novelist V.S. Pritchett regarded as "the emotion of being American… that feeling of nostalgia for some undetermined future when man will have improved himself beyond recognition and all will be well."--Lewis Lapham

Quotes of the day

It's hard enough for me to explain my libertarianism (government is good--including the Fed vs. the old gold standard--but we need a lot less of it) to others in New York City. My infant is a little too codependent on mommy to show any libertarian leanings; but I have a lot of hope for my elementary school student and preschooler: both of them favor my Red Sox over the Yankees!--Cav

A couple years ago, I participated in a panel discussion on libertarianism in Mike Sandel's Justice class, along with my friend and colleague Jeff Miron. Jeff is a true libertarian, and he defended that position with gusto. By comparison to Jeff, I seemed lacking in conviction. I described myself as a "libertarian at the margin." By that, I meant that given our starting point today, I believe more reliance on individual liberty and less on governmental solutions is usually a step in the right direction, but I often recoil at more radical libertarian positions. David Brooks's column yesterday offers a good explanation of skepticism about big radical ideas, such as pure libertarianism. It made me feel better about my watered-down variety.--Greg Mankiw

You have to listen. A lot of guys can talk.--Art Linkletter

Was Jesus a wandering sage? Maybe so. A failed revolutionary? Sure, why not. A lunatic who fancied himself divine? Perhaps. An apocalyptic prophet? There’s an app for that … But this isn’t history: It’s “choose your own Jesus,” and it’s become an enormous waste of time. Again, there’s nothing wrong with saying that the supernaturalism of the Christian canon makes it an unreliable guide to who Jesus really was. But if we’re honest with ourselves, then we need to acknowledge what this means: Not the beginning of a fruitful quest for the Jesus of history, but the end of it.--Ross Douthat

Greed-based utility is an assumption lying at the heart of the Capital Asset Pricing Model (CAPM) that has been taught to every finance MBA since the 1960s (including this one), and is the basis for how trillions of dollars of investments are managed in the real world. If utility isn’t greed-based, then CAPM simply can’t explain reality. ... if our actions are based not on absolute wealth but relative wealth—an envy-based economy—the market would need no risk premium. ... Risky investments seem less dangerous when everybody buys them. And in a benchmarking environment, underperforming your peers is itself the riskiest bet. ... Maybe greed isn’t good in an unmitigated sense. But compared to envy, on occasion, greed might actually be a little better. --Timothy Taylor

The sad truth is that under the Ethicist's code of conduct, we have more deaths and more foreclosures than necessary, all in the name of fairness.--Greg Mankiw

The story of Sweden over the last 50 years has been one of a steady loss of exceptionalism. In some ways the outside world has grown more "Swedish" -- we all wear seatbelts, drink less, and believe in gender equality. At the same time, Sweden has grown much more worldly -- it drinks more, works and earns less, and struggles with the assimilation of immigrants. The Swedes themselves no longer believe in a Swedish model, or, when they do, it's very different from the heavily regulated "people's home" of myth.--Andrew Brown

The renminbi, China’s currency, is in global opinion — save in China — held unduly low to keep China’s export machine revved up. When Treasury Secretary Timothy F. Geithner arrived here on Sunday, an opening argument to his counterparts was that Chinese rules were forcing American companies to surrender their technological jewels just for a ticket to compete in the Chinese market. Some of these tactics come straight from the playbook of Japan and other developing nations that have sought to raise their export-driven economies to a higher level. China is different in two respects that may seem contradictory. On one hand, major industries like oil, telecommunications, banking and aviation are deemed strategic and are under tight state control. Of the 22 Chinese corporations listed on the Fortune Global 500, 21 are controlled by China’s central government or state-run banks. Just one, Shanghai Automobile, is run by a local government. None are privately owned.--Michael Wines

At first glance you might think; “Aha Sumner, there’s your smoking gun. [Paul Krugman] does oppose the neoliberal agenda of privatization, deregulation and free trade, or at the very least thinks it failed. Just as you said. You’ve finally nailed him.” Not so fast. He didn’t say these policies were tried and failed, he said they were recommended by American officials, and he also said Latin America had not done well. But he never actually said the policies were tried and failed. Again, you might think I am being absurdly pedantic here. But I am quite serious. Indeed I think it is quite possible that Krugman actually favors neoliberalism–as many of his fans insist who write in the comment section of my blog. As with the President Fox example, my interpretation also has the virtue of being true. In most of Latin American neoliberal policies are been tried only fitfully. Only one country in Latin America has enthusiastically embraced neoliberalism; Chile. And Chile also happens to be the only economic success story in South America. So the facts of the matter actually fit my interpretation, strange as it may seem. ... So is [Krugman] brilliant? Yes. But social intelligence? Let’s just say it’s “on the charts.”--Scott Sumner

Progressives and conservatives alike call the United States a "free-market economy": both sides have an interest in perpetuating this delusion. The idea is ridiculous - as ridiculous as calling Europe's economies "socialist". True, the blend of government and private enterprise is a bit different between the US and the European average, but the models (insofar as it makes sense to talk of a European model) are neighbors not polar opposites. All this was true, obviously, long before 2009. Obama, I agree, does want to narrow the gap a bit more - but it just was not that wide to begin with.--Clive Crook

The average state experiences a 40 to 50 percent increase in earmark spending if its senator becomes chair of one of the top-three committees. In the House, the average is around 20 percent. For broader measures of spending, such as discretionary state-level federal transfers, the increase from being represented by a powerful senator is around 10 percent.--Joshua Coval

I can tell a story about crowding out, where the federal money either does something that the private sector might have done anyway, or hires away resources (particularly skilled labor) from private firms. If the government is monopolizing the local supply of cranes and crane operators in order to build a new sewage treatment plant, your construction project may not get built. And because government funds are for discrete projects, and future funds are uncertain--your chairman may get unelected, or their party may lose power--it's probably hard to get firms or workers to relocate to your area in order to pick up the slack. I can even tell a slightly more exotic story where there's what economists call a "resource curse" to federal funds. Countries that have large deposits of natural resources are not, as you would expect, richer and happier as a result; rather the reverse. It turns out that when you have a fat supply of practically free money, the elites spend all their time thinking about how to divert that money into their pockets, and none of their time thinking about how to build good political and economic institutions. And because the government can support itself without tax revenues, it is not made accountable to the citizenry it is betraying. Norway is the great exception to this rule--but Norway had very strong institutions before it had fossil fuels.--Megan McArdle

After controlling for challenger strength, the presence of major scandals or controversies, and the national political climate, the conservatism of the incumbent's voting record continues to have a strong negative influence on incumbent electoral performance. For every additional one point increase in conservatism, Republican incumbents lost an additional three percentage points in support relative to their party's presidential candidate.--Alan Abramowitz

... as the length of education and training for a scientists gets longer, the value of a scientific career drops sharply. [Also], teamwork has been getting more important. For example, on the issue of teamwork, Jones looks at all science, engineering, and social science journal articles published from 1995 to 2005, and shows that team-written papers have far more impact than solo papers.--Mike Mandel

San Francisco and New York are far and away the leaders in human capital density with 7,031 and 6,357 college degree holders per square mile, respectively.--Richard Florida

Similarly seeking to illustrate how important an issue is to the next generation, yesterday President Obama introduced one of his daughters into the oil mess debate. He told a news conference that when he was shaving yesterday morning, his 11 year old daughter, Malia, knocked on the bathroom door and peeked her head in and asked: "did you plug the hole yet, daddy?' It didn't work for Jimmy Carter.--Tom Shine

A Wall Street Journal investigation provides the most complete account so far of the fateful decisions that preceded the blast. BP made choices over the course of the project that rendered this well more vulnerable to the blowout, which unleashed a spew of crude oil that engineers are struggling to stanch. BP, for instance, cut short a procedure involving drilling fluid that is designed to detect gas in the well and remove it before it becomes a problem, according to documents belonging to BP and to the drilling rig's owner and operator, Transocean Ltd. BP also skipped a quality test of the cement around the pipe—another buffer against gas—despite what BP now says were signs of problems with the cement job and despite a warning from cement contractor Halliburton Co. Once gas was rising, the design and procedures BP had chosen for the well likely gave this perilous gas an easier path up and out, say well-control experts. There was little keeping the gas from rushing up to the surface after workers, pushing to finish the job, removed a critical safeguard, the heavy drilling fluid known as "mud." BP has admitted a possible "fundamental mistake" in concluding that it was safe to proceed with mud removal, according to a memo from two Congressmen released Tuesday night. Finally, a BP manager overseeing final well tests apparently had scant experience in deep-water drilling. He told investigators he was on the rig to "learn about deep water," according to notes of an interview with him seen by the Journal.--Ben Casselman and Russell Gold

What accidents like the [BP oil spill or the space shuttle] Challenger should teach us is that we have constructed a world in which the potential for high-tech catastrophe is embedded in the fabric of day-to-day life. At some point in the future-for the most mundane of reasons, and with the very best of intentions-a NASA spacecraft will again go down in flames. We should at least admit this to ourselves now. And if we cannot-if the possibility is too much to bear-then our only option is to start thinking about getting rid of things like space shuttles altogether.--Malcolm Gladwell

It was only about 10,000 years ago that humans in many parts of the world began raising livestock and growing food through deliberate planting. These advances provided more reliable sources of food and allowed for larger, more permanent settlements. Native Americans alone domesticated nine of the most important food crops in the world, including corn, more properly called maize (Zea mays), which now provides about 21 percent of human nutrition across the globe. But despite its abundance and importance, the biological origin of maize has been a long-running mystery. The bright yellow, mouth-watering treat we know so well does not grow in the wild anywhere on the planet, so its ancestry was not at all obvious. Recently, however, the combined detective work of botanists, geneticists and archeologists has been able to identify the wild ancestor of maize, to pinpoint where the plant originated, and to determine when early people were cultivating it and using it in their diets. ... Looking at the skinny ears of teosinte, with just a dozen kernels wrapped inside a stone-hard casing, it is hard to see how they could be the forerunners of corn cobs with their many rows of juicy, naked kernels. Indeed, teosinte was at first classified as a closer relative of rice than of maize. But George W. Beadle, while a graduate student at Cornell University in the early 1930s, found that maize and teosinte had very similar chromosomes. Moreover, he made fertile hybrids between maize and teosinte that looked like intermediates between the two plants. He even reported that he could get teosinte kernels to pop. Dr. Beadle concluded that the two plants were members of the same species, with maize being the domesticated form of teosinte. Dr. Beadle went on to make other, more fundamental discoveries in genetics for which he shared the Nobel Prize in 1958. He later became chancellor and president of the University of Chicago.--Sean Carroll

For large stocks in particular, algorithmic trading narrows spreads, reduces adverse selection, and reduces trade-related price discovery. The findings indicate that algorithmic trading improves liquidity and enhances the informativeness of quotes.--Terrence Hendershott

Machine Trading Good? At a minimum, not bad. The problem is that many people think stuff they don't understand must be bad. Of course, they still watch their plasma tv. Somehow, not understanding THAT must be okay.--Mungowitz

Any mother who wears her vintage Valentino while making muffin topping with her kids should be hauled up before the Department of Children and Family Services.--Roger Ebert

The finale of Lost pretended to be about the ultimacy and redemptive power of love, or something like that, but it exemplified instead the incoherent ruinous mess of our needy scattershot attachments, our whorish readiness to be doped by the dull, warm, indeterminate golden light. Speak not to me of love, Lost, if you know not love.--Will Wilkinson

This may not sound especially exciting, but watching Pierce is not exactly exciting. Watching Pierce play basketball is like watching a great plumber or great carpenter or great auto mechanic at work. No wasted motion. No pointless energy. No false moves. I love this sort of basketball. It’s why I love Tim Duncan too. “Adventure?” the Jedi teacher Yoda asks in The Empire Strikes Back. “Excitement? A Jedi craves not these things.” Paul Pierce craves not these things. No, he cannot dominate a game anytime he likes, a la Kobe or LeBron. He will not pull out some sort of ridiculous and superfluous move to make the SportsCenter highlights. He will have games when he scored 8 points and games when he scores 30. He plays to play. He does what needs to be done. He has learned Roy Williams’ lesson well. Just do something? Yes. Paul Pierce does.--Joe Posnanski

My theory on yesterday's trading

Several people have been asking me about what happened yesterday. Here is the main cause (on which I would put some serious prediction money):

Whatever triggered the initial selling (manual error, European fear, etc), the liquidity-TAKING algorithms kicked into higher and higher gears. Liquidity-PROVIDING algorithms took time outs.

The Takers employed market orders (not limit orders that specify the price for execution) that filled their orders without consideration of how bad the execution price was. (For some stocks, e.g. ACN = Accenture, a $40 name, that price got as low as a penny).

These algorithms-gone-wild will get people fired and will also close down trading shops. Unwinding trades will only keep the risky actors around longer, betting that they will get bailed out down the road.

Darwin Awards should not be returnable. If an idiotic robot offered to sell you AAPL for $200 so you could turn around and sell it for $240, you should do it until the cows come home.

UPDATE: Kid Dynamite rounds up some respectable voices who agree with me.

UPDATE: Evan Newmark wants more regulation? Not his usual modus operandi:

As a believer in free markets, I think it is both useless and harmful to constrict computerized trading. But on days like today, it really puts that belief to the test.

The purpose of a stock market is to provide an orderly and efficient market for the free exchange of equity securities. At the core of the market, there must be a belief that the market is trustworthy, that it can match buyers and sellers, bids and asks.

Today’s market was neither orderly nor efficient nor trustworthy. It was just a bunch of computers making ugly, messy love with each other . And your money hung in the balance.

UPDATE: SEC is on the case. I wonder if we will hear their report in 2010, never mind before Memorial Day.

UPDATE: Randall Lane conjures up the Terminator series.

Photo link here.

So higher frequency electronic trading DOES improve liquidity and price discovery

according to Terrence Hendershott, Charles M. Jones and Albert J. Menkveld.

Surprise, surprise.

Quotes of the day

A quotation is a handy thing to have about, saving one the trouble of thinking for oneself.--A.A. Milne

The third-rate mind is only happy when it is thinking with the majority. The second-rate mind is only happy when it is thinking with the minority. The first-rate mind is only happy when it is thinking.--A.A. Milne

Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.--John Maynard Keynes

It was wrong for me to ever deny [Rielle Hunter's baby] was my daughter. I am Quinn's father.--John Edwards

Judaism emphasized that what you take into the next world aren’t your material possessions, but rather your deeds and their legacy. Whether you are a believer or not, it is hard to overstate the importance of this cultural belief in shaping our world.--Russ Roberts

When Hitler offered to let German Jews emigrate in the 1930s, FDR bolted the door shut and refused to permit them to enter the United States. The reason for Roosevelt’s attitude? Let’s be blunt. They were Jews. If English Protestants were trying to escape a Nazi occupation of their country, who can doubt that Roosevelt would have opened the doors in welcome to them? The plans to interdict and repatriate Haitians trying to save their lives also brings to mind the infamous Voyage of the Damned, when Roosevelt and his people refused to permit German Jews from disembarking from a German vessel at Miami Harbor with full knowledge that that meant that they would have to return to Germany and Hitler’s clutches. (As an aside, isn’t it ironic that those American Jews today who so eagerly pounce on critics of the Israeli government as being anti-Semitic hardly even issue a peep of condemnation of FDR’s important contribution to the Holocaust, no doubt because they don’t consider it politic to do so.)--Jacob Hornberger

Don't choose a charity for Haiti based on administration costs--Saundra Schimmelpfennig

Actual creators of value, in the form of entrepreneurs and business owners, can get liquidity any day of the week, in the form of a check for all or part of the business they own. They do not need public markets for that. All they need is a buyer with enough cash and a good lawyer. Instead, the true purpose and value of liquidity in financial markets is to reduce investors' uncertainty. It does this first through the regular publication of price data, which serves as a relatively reliable (but: see above) proxy for the true current value of their investments. Second, it reduces investors' uncertainty as to their ability to exit from their investment when they so choose. Together, these two effects turn what might be a long-term bond or permanent equity capital into what looks like a series of rolling, short-term investments with reasonably good pricing certainty. Ceteris paribus, a rational investor should require a lower expected return on such an asset. (Tell me, by contrast, that I cannot sell Apple Inc. stock before 2015, and I will be willing to pay a lot less than current market price for it and will expect a commensurately higher return. I do not think I am unusual in this regard.) Therefore, at least in theory, market liquidity should reduce the cost of capital for businesses which require it. There is good evidence supporting this from the opposite example of private equity, which ties up substantial chunks of equity capital in entire businesses which it closely oversees for many years.--Epicurean Dealmaker

... the prescription for regulation of both investment banks and financial markets is clear: you cannot rely on the participants to regulate themselves. We are too busy counting the paper and inflating the bubble to care. The answer must come from outside the bubble, where the real economy and society lives.--Epicurean Dealmaker

In principle, I am against attempts by government to structure industries. But I take the view that the political economy of small banks is better than that of large banks. Large banks find it easy to persuade regulators that they are doing wonderful things and find it easy to persuade politicians that they need to be bailed out. Maybe small banks would find this task somewhat harder. ... "Agnostic" claims that humans developed an aversion to large economic institutions during the era of "natural states," when the ability to assemble a large coalition mattered more than producing quality goods at low prices. My view of banking is that we are still in the "natural state" mode, where political connections and cronyism matter more than price and quality.--Arnold Kling

[Megan] McArdle Advocates 376,537.65% Marginal Tax Rate.--David Henderson

If you're really looking for the people who benefited from government losses, you'd have to look [at autoworkers benefiting from bailouts]. Or if you look at Fannie or Freddie. Are you going to go and tax the members of Congress who ran Freddie and Fannie?--Warren Buffett

... campaign giving is a normal good, dependent upon income, and campaign contributions as a percent of GDP have not risen appreciably in over 100 years - if anything, they have probably fallen. We then show that only one in four studies from the previous literature support the popular notion that contributions buy legislators' votes. Finally, we illustrate that when one controls for unobserved constituent and legislator effects, there is little relationship between money and legislator votes. Thus, the question is not why there is so little money politics, but rather why organized interests give at all.--Stephen Ansolabehere, John de Figueireido, and James Snyder

The fact that Switzerland works at all is a powerful argument that we do not need such a strong central government. With the exception of national defense and a national currency, I think we could devolve every power currently exercised by the Federal government to the states. Each state could then be like Switzerland. Note that in Switzerland, health insurance works differently in each canton, which would be equivalent to having different health insurance systems in different counties in Maryland. The national government would have no power to bail out banks. State governments could bail out banks, but I suspect that they would not want to.--Arnold Kling

To make a long story short, the World Bank decided to boot richer India out of the group of poorest countries used to determine the poverty line, which made the poverty line higher, which made Indian (and global) poverty higher – all because India was richer. This misguided revision of the poverty line, which accounted for virtually all of the upward revision, was not clear to virtually anyone until this new paper by Deaton.--William Easterly

Quotes of the day

Should you really take financial advice from someone foolish enough to write for a living? Run the numbers. If a typical author earns, say, $3 per book sold and the book sells 20,000 copies, then that's $60,000 in gross income -- before costs. But that may be for a year's work. We're talking maybe $30 an hour.--Brett Arends

There is risk, definitely, but quant funds like us take it all. If a quant meltdown happens, it won't affect the retail investor. All [high-frequency] funds have a profit-and-loss line like this [unusually negative in August 2007, when they all had to sell off in order to meet their margin calls]. And here's the second quant meltdown, in January of '08. It's tiny. You can hardly see it. That's because funds running quantitative strategies are mostly market neutral. When we take a position, we're always balanced somewhere else, and when we unwind, it doesn't affect the market either. We don't take from the retail guy. We make the market more efficient. Things are better for the retail investor because of high-frequency trading. We don't make volatility happen. We reduce it, but it is how we make our money. We create order. When the markets are disorderly, we make a lot of money, but we are doing it by restoring the markets to order.--Manoj Narang

Today, chess programs have become so good that even grandmasters sometimes struggle to understand the logic behind some of their moves. In chess magazines, one often sees comments from top players such as “My silicon friend says I should have moved my King instead of my Queen, but I still think I played the best ‘human’ move.” It gets worse. Many commercially available computer programs can be set to mimic the styles of top grandmasters to an extent that is almost uncanny. Indeed, chess programs now come very close to passing the late British mathematician Alan Turing’s ultimate test of artificial intelligence: can a human conversing with the machine tell it is not human? I sure can’t. Ironically, as computer-aided cheating increasingly pervades chess tournaments (with accusations reaching the highest levels), the main detection device requires using another computer. Only a machine can consistently tell what another computer would do in a given position. Perhaps if Turing were alive today, he would define artificial intelligence as the inability of a computer to tell whether another machine is human!--Kenneth Rogoff

More than any other variable in education—more than schools or curriculum—teachers matter. ... Parents have always worried about where to send their children to school; but the school, statistically speaking, does not matter as much as which adult stands in front of their children. Teacher quality tends to vary more within schools—even supposedly good schools—than among schools. But we have never identified excellent teachers in any reliable, objective way. Instead, we tend to ascribe their gifts to some mystical quality that we can recognize and revere—but not replicate. The great teacher serves as a hero but never, ironically, as a lesson. ... Things that you might think would help a new teacher achieve success in a poor school—like prior experience working in a low-income neighborhood—don’t seem to matter. Other things that may sound trifling—like a teacher’s extracurricular accomplishments in college—tend to predict greatness. ... [Steven Farr] and his colleagues surveyed Teach for America teachers at least four times a year to find out what they were doing and what kinds of training had helped them the most. Right away, certain patterns emerged. First, great teachers tended to set big goals for their students. ... Superstar teachers had four other tendencies in common: they avidly recruited students and their families into the process; they maintained focus, ensuring that everything they did contributed to student learning; they planned exhaustively and purposefully—for the next day or the year ahead—by working backward from the desired outcome; and they worked relentlessly, refusing to surrender to the combined menaces of poverty, bureaucracy, and budgetary shortfalls.

... Poverty matters enormously. But teachers all over the country are moving poor kids forward anyway, even as the class next door stagnates. ... What did predict success, interestingly, was a history of perseverance—not just an attitude, but a track record. In the interview process, Teach for America now asks applicants to talk about overcoming challenges in their lives—and ranks their perseverance based on their answers. ... Gritty people, the theory goes, work harder and stay committed to their goals longer. (Grit also predicts retention of cadets at West Point, [Angela Lee] Duckworth has found.) But another trait seemed to matter even more. Teachers who scored high in “life satisfaction”—reporting that they were very content with their lives—were 43 percent more likely to perform well in the classroom than their less satisfied colleagues. These teachers “may be more adept at engaging their pupils, and their zest and enthusiasm may spread to their students,” the study suggested. In general, though, Teach for America’s staffers have discovered that past performance—especially the kind you can measure—is the best predictor of future performance. Recruits who have achieved big, measurable goals in college tend to do so as teachers.--Amanda Ripley

And when it comes to textbooks, what happens in Texas rarely stays in Texas. The reasons for this are economic: Texas is the nation’s second-largest textbook market and one of the few biggies where the state picks what books schools can buy rather than leaving it up to the whims of local districts, which means publishers that get their books approved can count on millions of dollars in sales. As a result, the Lone Star State has outsized influence over the reading material used in classrooms nationwide, since publishers craft their standard textbooks based on the specs of the biggest buyers. As one senior industry executive told me, “Publishers will do whatever it takes to get on the Texas list.” Until recently, Texas’s influence was balanced to some degree by the more-liberal pull of California, the nation’s largest textbook market. But its economy is in such shambles that California has put off buying new books until at least 2014. This means that [Don] McLeroy and his ultraconservative crew have unparalleled power to shape the textbooks that children around the country read for years to come.--Mariah Blake

"aka Jesse Livermore" bemoans the scarcity of noise traders at Intrade

that he so expertly picked off during the 2008 election year.

Here was my wishful thinking for Intrade (well, Tradesports) utopia, a couple of years ago:

With increased awareness and acceptance of prediction markets, coupled with decreased transaction costs and regulatory barriers, more informational traders should come (and arb out the gamblers and speculators).

Be careful what we wish for?

Quotes of the day

While faith contains an element of reason, it is essentially moral rather than intellectual. ... "Everywhere, everywhere, Christmas tonight." But Christmas either means more than is popularly supposed or it means nothing. We had better decide.--A.W. Tozer

Why was alchemy a terrible idea? It was only chemistry without a sound theory. Chemistry would not have been developed unless alchemy had come before. In the same way, social science today lacks a sound theoretical basis. Economics and sociology are the alchemies of today; not quite scientific, but essential precursors to the sound social science of the future.--pj

Don't forget that even today's 2% to 4% bond yields aren't as paltry as they look, because inflation remains close to zero. The 6% interest income you remember earning a decade ago came at a time when inflation ran about 3%. You might protest that inflation, as officially measured, is understated today—but it is probably no more inaccurate now than it used to be. In real terms, you are only slightly worse off now than you were then.--Jason Zweig

The essence of capital provision is bearing economic risk. The flow of funds is like the flow of urine: important, even essential, as one learns when the prostate malfunctions. But “liquidity”, as they say, takes care of itself when the body is healthy.--Steve Randy Waldman

It is indeed true that the stock market can forecast the business cycle. The stock market has called nine of the last five recessions.--Paul Samuelson

The very young Paul Samuelson bore an odd resemblance to, of all people, Buddy Holly.--Tyler Cowen

When economists “sit down with a piece of paper to calculate or analyze something, you would have to say that no one was more important in providing the tools they use and the ideas that they employ than Paul Samuelson.--Robert Solow

I’ve just campaigned on a platform of fiscal responsibility and balanced budgets and here you are telling me that the first thing I should do in office is to cut taxes?--John F. Kennedy, to his professor Paul Samuelson

Successful stimulus relies almost entirely on cuts in business and income taxes. Failed stimulus relies mostly on increases in government spending. All these findings suggest that conventional models leave something out. A clue as to what that might be can be found in a 2002 study by Olivier Blanchard and Roberto Perotti. (Mr. Perotti is a professor at Boccini University in Milano, Italy; Mr. Blanchard is now chief economist at the International Monetary Fund.) They report that “both increases in taxes and increases in government spending have a strong negative effect on private investment spending. This effect is difficult to reconcile with Keynesian theory.” These studies point toward tax policy as the best fiscal tool to combat recession, particularly tax changes that influence incentives to invest, like an investment tax credit. Sending out lump-sum rebates, as was done in spring 2008, makes less sense, as it provides little impetus for spending or production. LIKE our doctor facing a mysterious illness, economists should remain humble and open-minded when considering how best to fix an ailing economy. A growing body of evidence suggests that traditional Keynesian nostrums might not be the best medicine.--Greg Mankiw

Governments, if they endure, always tend increasingly toward aristocratic forms. No government in history has been known to evade this pattern. And as the aristocracy develops, government tends more and more to act exclusively in the interests of the ruling class — whether that class be hereditary royalty, oligarchs of financial empires, or entrenched bureaucracy. ... Good government never depends upon laws, but upon the personal qualities of those who govern. The machinery of government is always subordinate to the will of those who administer that machinery. The most important element of government, therefore, is the method of choosing leaders.--Frank Herbert

I still have to keep going to Washington and sucking up. Because the problem is when you have a baby with an Uzi, right, they might accidentally mow you down. But here's the thing . . . they're brilliant people. It's just that the idea of a market in health care never occurred to them. ... You can't buy what [healthcare] you want. America will have one car. Everyone will have access to transportation, which means that everyone will have a black Escalade, with spinners. That's it. There's no Hyundais, no bicycles, no nothing. These poor people who clip the things off the backs of cans to make the tomatoes cheaper are subsidizing the hypochondriac who gets his shoulder done with an arthroscope because it clicks when he serves at tennis. ... It is kind of too bad that all these software companies that we're really close to putting out of business, these terrible legacy companies, with code that was written in the '70s, are going to get life support. That's why I call it the Sunny von Bülow bill. What it is, basically, is a federally sponsored sale on old-fashioned software. ... This is a market: its a set of agreements, it's a language. What's needed is a way of exchanging value and making choices, that's ethical—and, you know, nobody, nobody, not nobody, has said a word about that.--Jonathan Bush

High frequency trading quotes of the day

People should expect and be willing to pay a price for the liquidity that they get. No one should expect that a provider of liquidity is just going to stand there while you bulldoze them into submission.--Manoj Narang

If you were on Wall Street in the 1990s ... you would need to take guys out to dinner and build relationships, otherwise you couldn't get at the order flow. And now, if you're good ... there's no barrier to entry. That is a really incredible improvement to the Wall Street environment. That's how we want markets to work.--Cameron Smith

A misunderstood dynamic of high-frequency trading is that it thrives off volatility, thereby reducing it. The clear winners in the revolution are small investors, who have seen their trading costs fall remarkably and markets price shares far more efficiently.--Herbert Lash and Jonathan Spicer

Once you're successful, once you have a system that's making money, you become very secretive because it's very easy for one of your guys to leave and replicate it. What are the exact ingredients and proportions of Coca-Cola? Is there something wrong going on at Coca-Cola? That's the point. It's replication, ease of replication. The barriers to entry, to competing, are not too high.--Robert Olman

Here are some of my musings on HFT, from July and October.

High frequency bovine scatology

Charles Duhigg is a good journalist, whom I've quoted a couple times in the past year.

His latest article made quite a splash on trading desks and the journalists who follow us today. He reports:

Yet high-frequency specialists clearly have an edge over typical traders, let alone ordinary investors. The Securities and Exchange Commission says it is examining certain aspects of the strategy.

“This is where all the money is getting made,” said William H. Donaldson, former chairman and chief executive of the New York Stock Exchange and today an adviser to a big hedge fund. “If an individual investor doesn’t have the means to keep up, they’re at a huge disadvantage.”

For most of Wall Street’s history, stock trading was fairly straightforward: buyers and sellers gathered on exchange floors and dickered until they struck a deal. Then, in 1998, the Securities and Exchange Commission authorized electronic exchanges to compete with marketplaces like the New York Stock Exchange. The intent was to open markets to anyone with a desktop computer and a fresh idea.

But as new marketplaces have emerged, PCs have been unable to compete with Wall Street’s computers. Powerful algorithms — “algos,” in industry parlance — execute millions of orders a second and scan dozens of public and private marketplaces simultaneously. They can spot trends before other investors can blink, changing orders and strategies within milliseconds.

High-frequency traders often confound other investors by issuing and then canceling orders almost simultaneously. Loopholes in market rules give high-speed investors an early glance at how others are trading. And their computers can essentially bully slower investors into giving up profits — and then disappear before anyone even knows they were there.

High-frequency traders also benefit from competition among the various exchanges, which pay small fees that are often collected by the biggest and most active traders — typically a quarter of a cent per share to whoever arrives first. Those small payments, spread over millions of shares, help high-speed investors profit simply by trading enormous numbers of shares, even if they buy or sell at a modest loss.

I agree with everything that Duhigg has reported, but the reporting is one-sided. In order for a high frequency trader (HFT) to make money, someone has to take the other side of the trade, and the liquidity Taker pays a higher fee than the exchange pays the liquidity Provider. The exchange keeps the spread. (You may be familiar with this concept if you have a savings account with a bank, and a credit card or mortgage--the bank keeps the spread between the interest rate they pay you and the interest rate you pay them. If you hate that, maybe you should consider a career in banking.)

Ever play Texas Hold 'Em? If you are the Big Blind, you pay most of the ante, and in return you get to see if anyone wants to play with you--they need to give you information first. So it is with the liquidity provider: putting your limit order out there means you are showing a card first (the shares you are willing to buy or sell at a given price level), and you've taken the risk of getting picked off. You get paid for taking risk and providing liquidity, or at least, you should. Otherwise, there is probably a more productive career somewhere else for you.

Certainly, the grocer who takes the risk to provide food for you in your neighborhood should get paid for that service? Or are "experts" suggesting we go back to subsistence farming so we don't get ripped off by Big Food and Big Supply Chains? I thought reducing poverty was a good thing.

While there is an advantage for the players with the best technology, the playing field is more level than ever. Thirty years ago, a retail investor would have to pay a few hundred dollars to Merrill or other broker to execute a few hundred shares. Now we pay less than $20.

Ten years ago, your mutual fund manager would have to use Goldman or a competitor's block desk to move 100,000 shares of Proctor and Gamble. And they would have to trade an eighth wide, i.e. 12.5 cents per share. The financial intermediaries would take that spread, or more, if another customer was willing to trade through your manager's limit to take the other side of the trade.

No one pays those types of commissions any more. Tick sizes have shrunk over 90%, and as have costs to the retail investor.

The fact that Duhigg had to quote a dinosaur, Bill Donaldson, tells you something. I've spoken to the founder of DLJ and SEC chair on one of his lecture circuit gigs, and the guy is from a different age. His research driven business model was fantastic back in the 70s and 80s, but its a woolly mammoth now. His appointments since cashing out have been largely political; those who can't do teach, and those who can't teach must regulate ...

There are a lot of grizzled Wall Street veterans who pine for the days of tick sizes an eighth wide, and funneling trades to a single market maker on a trading floor. That's because a monopoly is great if you are on the right side of it.

Price discovery is improved with liquidity. There is more liquidity because of high frequency trading.

Right now, GE is quoting $11.97 x $11.98, half a million shares a side. I guess Donaldson and Duhigg are pining for the days when it would be quoting $11.875 x $12.000, and we retail investors would be paying Merrill $300 to sell 1,000 shares, in addition to giving up $95 extra in the day of eighths, in that we would be selling at $11.875 rather than $11.97.

As usual, the good ol' days aren't as good as they seem, once you realize you are giving up your clean running water for the outhouse.

NOTE: The flash orders that Duhigg refers to are a new feature. I'll have more to report on in the coming weeks as I find out more about them.

UPDATE: Eric Falkenstein weighs in a week later than this post, but, oh my, is it worth the wait!

Quotes of the day

Liquidity is not a virtue in and of itself unless it produces a benefit to the real economy.--Yves Smith

Of course, I agree with Yves, but then I would replace "Liquidity" with "Government" and agree even more. Besides protecting individual rights and property, I think government should be tiny to non-existent. The sin of pouring liquidity into the economy in the short-term is miniscule compared with the distortionary subsidization and the unconstitutional regulation of markets over the past century.

Life sends the message, "I'd better not be poor. I'd better get rich. I'd better make more money than other people." Meanwhile, politics sends us the message, "Some people make more money than others. Some are rich while others are poor. We'd better close that 'income disparity gap.' It's not fair!"

Well, I am here to advocate for unfairness. I've got a 10-year-old at home. She's always saying, "That's not fair." When she says this, I say, "Honey, you're cute. That's not fair. Your family is pretty well off. That's not fair. You were born in America. That's not fair. Darling, you had better pray to God that things don't start getting fair for you." What we need is more income, even if it means a bigger income disparity gap.

Using politics to create fairness is a sin. Observe the Tenth Commandment. The first nine commandments concern theological principles and social law: Thou shalt not make graven images, steal, kill, et cetera. Fair enough. But then there's the tenth: "Thou shalt not covet thy neighbor's house. Thou shalt not covet thy neighbor's wife, nor his manservant, nor his maidservant, nor his ox, nor his ass, nor anything that is thy neighbor's."--P.J. O'Rourke (via Don Boudreaux)

And finally:

That's the spirit of America, as John Adams never quite said: may I advocate classical-liberal limited government, so that my son may advocate anarcho-capitalism, and that my grandson may plan to build new artificial countries in the ocean.--Brian Doherty, via Bryan Caplan