Tumbleweeds in Trader Town
A funny thing happened on the way to the forum today. I got a call from a successful trader friend. What made the call strange is that it happened during market hours, actually almost at the opening bell. My buddy is not only unreachable during these hours, he definitely does not want to be distracted with any kind of babble. The fact that he placed the call and was in a rather chatty mood, set a strange tone for the conversation that ensued.
Adding to the Twilight Zone feel was a Michael Lewis piece from this morning.
After a blood, sweat, tear and dollar draining lobby offensive in Washington...big banks are inexplicably taking a step back from prop trading. In fact, it seems as if they are ready to let their bread and butter of recent times, down the river. I couldn't pry out any names or details, but my boy suggested that a few good men he knew, had just gone down with the ship .
At this point, I should alert you that this guy never reads op-ed pieces. Yet as he spoke, I found my eyes reading from the screen what I was hearing him say:
Yet in just the past few weeks news has leaked that Morgan Stanley, JPMorgan and Goldman Sachs all intend either to close their proprietary trading units or to sell their interests in the hedge funds they control.Obviously, something is wrong with this picture. Why fight for a right, and win, only to proceed as if you have lost? Why take prisoners only to surrender to them? Having preserved their loophole the big American banks now appear to be freely abandoning any attempt to exploit it.
There's a certain sort of divine absurdity at play when a thousand voices in a thousand different places cry out in unison...and nobody hears them. I wasn't quite sure if somebody had slipped a few live worms in my tequilas last night. It was getting weird.
Many of us in the finance world have kicked about ideas on the subject of trading and its future. Obviously, the model is changing but why this way? Is this evolution or the end of an era?
Bad decisions never surprise me. When large organizations seemingly intentionally cannibalize themselves and do their best to keep it quiet, however, then you have to ask some questions.
I'm meeting with my guy later today, he has some "evidence" that there's foul play afoot...
I can't talk about it over the phone, man. I don't want to be next.
I'm tempted to dismiss as paranoia, but maybe somebody really is out to get the prop traders?
if you look at what recently happened with Trillium being branded as a high frequency shop and using 'illegal HFT techniques' while we dont use any of the such here at all....so i wouldnt dismiss it as being fishy at all
Midas,
It's not paranoia. For lack of a better term, it's a matter of the Machines taking over the Prop Trader position.
I've said it many times that the equity markets are out of alignment. With respect to the prop guys though, Market Making, one major component of the prop trading business, is going the way of the 8 Track. Why pay people to actualy make markets when you can fund a data center and algo the entire process? Hell, look at Spread Networks (http://spreadnetworks.com/) and their 825 mile long, 13.33ms pipeline between NYC and Chicago using really heavy duty TrueWave RS Non-Zero Dispersal Fiber Optic Cable. Why would any human want to compete against a computer who can execute at 13.33ms? Additionally, while this is a traders market, this is also a rigged market, where everyone gets burned unless they know who to front run and when to do it.
The other thing to consider, especially in the Prop Space is that they are losing out to computers that are not reacting on any rational basis such as on fundementals, news or techincals, but purely based on programming and definied logical parameters which can shift the market without trying. Prop Traders are able to get color and have insight, at least creating a fair balance of liquidity provision and potential profit making. There is a human element in prop trading and computers cannot replicate it. No matter how emotionless and disciplined you might be as a trader, it will always be there.
Oh, and there is something about the Volker Rule, but I really don't see that as the major driving force for the shift in balance in prop trading.
Short,
While I like that you brought up Trillium, my argument against moving to computer driven prop trading is best described by one algo being active for a total of 5 seconds and causing a massive change in the price of Oil. Infinnium Capital Management turned on their HFT commodities Algo and within 5 seconds, they shut it down after causing the price of Oil to jump $1 dollar followed by a $5 dollar decline the following two days. How can humans compete with that kind of sheer computing power and speed (regardless of the fact that the algo was broken to begin with)?
Computers should not be up to the task of humans when it comes to supply and demand, who sets the prices? who wants to buy? what is something really worth? and what are we willing to pay for it? Some computer model or algorithm that some geek created shouldn't be in charge of dictating prices, thats what is fucking it all up.
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