They say that this year it has been colder in Argentina than it has been in the Arctic Circle. Perhaps it is because of the article that the Congressional Budget Office (CBO) recently authored. One thing is for sure, the CBO is used by both parties to make points as the argument allows. No matter which party you may lean towards, the CBO’s points on Argentina are worth reminding us of the need to be more fiscally responsible.

Argentina
Argentina’s experience offers an example of the very serious
consequences that can arise from a fiscal crisis.
Although interest rates on Argentina’s debt had been
comparable for many years with those on debt of other
countries in emerging markets, Argentina’s fortunes
changed quickly when it found itself suffering from a significant
recession in 2000 and 2001. During the first half
of 2001, with government debt equal to about 50 percent
of the country’s GDP, investors became increasingly worried
about Argentina’s fiscal situation—in part because of
the country’s earlier defaults on its debt. As a result, investors
demanded premiums for holding government debt
that increased interest rates by more than 5 percentage
points.7 A few months later, as it became clear that
Argentina was not able to afford (or willing to make) the
interest payments on its debt, interest rates jumped again
to levels so high that the government was effectively
unable to borrow. Subsequently, Argentina ceased paying
its creditors, and ever since it has been unable to raise
funds in international markets. Argentina’s fiscal crisis
accentuated its underlying economic problems, and from
2001 to 2002, the country’s GDP dropped by nearly
11 percent.

How is Medicare Doing?   from Greg Mankiw‘s blog…

Worse than official projections suggest:

Administration officials can always be counted on to praise President Obama’s health care law. But Rick Foster, the chief actuary of Medicare, offers an unvarnished assessment of how the new law affects 47 million Medicare recipients, as well as the federal deficit.

“There is a strong likelihood that the cost projections in the new trustees report under current law understate the actual future cost that Medicare will face. A strong likelihood,” he says. “I’ve gone so far as to say that I don’t think it’s a reasonable projection of what will really happen.” Rick Foster made a rare public appearance at the American Enterprise Institute Friday to discuss the latest projections of Medicare which are required by law.

The single greatest uncertainty in the projections are the cuts to Medicare that the administration is counting on to pay for new benefits.The Obama plan assumes health care can accomplish the same kinds of increased efficiency, or productivity improvements, usually seen on production lines — like manufacturing cars. But few analysts believe that is possible. Joe Antos, a scholar at AEI, says, “they’re productivity improvements if productivity happens. If productivity doesn’t happen, they’re still cuts.”

And Foster adds that, “every single expert we talked [to] has told us they did not think these productivity adjustments were viable. They thought they just would not work.”

FAST FORWARD …….FLASH CRASH

On May 6^th, 2010, 2:45 PM, the stock market had just gone into free fall. No one knew why this is happening, a long-time well known market commentator screamed, “market manipulation,” on CNBC. In a period of less than 15 minutes the market had fallen to an historic intra-day low of down 998 points. We all looked around to try and determine what had just happened. Many considered it a fat fingered trade…..please…..Others thought that large option trading had caused the problem. ……..again, please.

For days people shuffled around trying to figure out what had happened, Congressional hearings were held, the SEC Chairperson testified, Broker/Dealer firms put their two cents out there but then nothing. Can anyone definitively explain this event?

By the way….isn’t it interesting that this issue seems to have faded into the background and no one wants to re-visit it? Where do you think Sergey’s software ended up? Was May 6^th the first foray into the US market? Why no further conversations? Is it fixed? Who fixed it? When was it fixed?

The stock market since May 6^th certainly has been banging around trying to determine in which direction it is heading. Perhaps that is how the problem has morphed? Curiously the market has been very adept at moving back and forth without causing too much furor. I offer the following:

May 6^th, 2010     -347.8

May 10^th, 2010   +404.71

May 20^th, 2010   -376.36

May 27^th, 2010   +284.54

June 4^th, 2010     -323.31

June 10^th, 2010  +273.28

June 29^th, 2010  -268.22

July 7^th, 2010       +274.66

July 16^th, 2010    -261.41

It seems this random walk may not have been so random for someone.

In the 132 trading days of 2010 there were 10 trading days that showed more than 250 point swings positive or negative. Nine of those trading days happened after the flash crash, within 49 trading days of each other, and in swings that were greater than 250 points per day. …..Go figure! Where did that software end up, and what could it do?

Regardless of the conspiracy theory behind these moves, there is one more strange twist to this story. Goldman Sachs, while all this turmoil in the market was occurring, settled with the U.S. Government with regards to its conflict over “disclosure.” Goldman, was looking to put this event behind them and to move on. But in a move brought on by the need to comply with the new FINREG – Volker requirements, Goldman is contemplating spinning off its proprietary specialty trading unit.

According to an article by Mark DeCambre, the Goldman Sachs Principal Strategies unit invests, ….”strictly on behalf of Goldman Sachs”…… What does that mean? …..The article states that the Volker rule prohibits investment banks (GS) from maintaining pure proprietary trading platforms. If GS can’t maintain a proprietary trading unit in the future, wouldn’t it be best to sell it now? Or perhaps it is because GS does can’t afford any other negative publicity to haunt them over their past “proprietary trading systems, units, or programs.”

What if the sale is part of that strategy? Distance yourself from any other potential conflicts with regards to trading, software, platforms, etc., by showing how you sold that business and walked away from the conflict. ( a public relations win for a tarnished firm!) However, what have these trading platforms and software packages spawned? Certainly computer generated trading will not go away, certainly, from time to time, it will have an unwanted influence on the market, and most definitely someone, or some entity, will use it unscrupulously in the future. If individuals feel that they can take advantage of the largest free market, they will, and I am sure that Goldman and others will want to have distanced themselves from even a trace of conflict given their most recent tribulations.

Or perhaps the sale of the trading arm isn’t their main concern, perhaps it is the fallout from these potential Trojan horses that they fostered. The knowledge that this trading exists, that quants throughout the world can create it, and that the stock market may have already been manipulated by it, surely is reason enough to distance yourself from the source of the conflict.

 FINREG may have reintroduced the Volker rule, which will eliminate the idea of cross purpose trading in order to level the playing field for all investors, but it will not stop the attacks on the trading systems and platforms of the different markets.

After all…….where did that software end up, and what can it do?

ENTER Senator Chuck….after all the little guy doesn’t really care. (Hey Chuck, it’s Lloyd, you got a minute?) ……………………..

On July 27^th, 2010 Senator Charles Schumer (D) New York, urges the Securities and Exchange Commission on the floor of the Senate to ban the practice in which some equity exchanges hold orders to buy and sell shares for a split second before publishing them on competing platforms. This practice is overcome by something called FLASH ORDERS. (Bloomberg 07/27/2001 18:22 EDT by Edgar Ortega and Eric Martin)

The article states…. Schumer, a member of the Senate Banking Committee, said in a letter to SEC Chairman Mary Schapiro that he will introduce legislation to ban flash orders if the regulator doesn’t act on his request. He said the practice lets brokerages using rapid- trading programs “profit from advanced knowledge of buying and selling activity.”

“This kind of unfair access seriously compromises the integrity of our markets and creates a two-tiered system, where a privileged group of insiders receives preferential treatment,” Schumer wrote. “If allowed to continue, these practices will undermine the confidence of ordinary investors, and drive them away from our capital markets.”

The article also states, “Goldman Sachs Group Inc., the second-largest market maker pairing off buyers and sellers at the NYSE, doesn’t use flash- order systems, spokesman Ed Canaday said in an e-mail.

Wait a minute! Is this the same Goldman Sachs that just spent millions and millions of dollars to build a proprietary trading platform that takes advantage of flash trading and they don’t use it? Ok, right…I believe it……NOT.

Hey! What’s this, it’s an article that ran in a magazine called the BUSINESS INSIDER, titled, “Russian Arrested for Allegedly Stealing Goldman’s Trading Formula.” (by John Carney 07-06-2009 09:37) The third paragraph states the following,

“What’s more, the theft coincides with a breath-taking decline in the automated “program” trading activities of Goldman. In recent months, program trading–batches of trades of multiple stocks initiated by computer programs–on the NYSE has been dominated by Goldman Sachs. Just three weeks ago, the NYSE reported that program trades Goldman made for its own account represented 60% of all program trading. The following week, Goldman didn’t even show up on the list of program traders.

Didn’t that guy Canaday just say that they don’t use the system? Well I believe him, don’t you? Ok, so he said ‘flash order systems, not program trading. I guess its important to know what your definition of  is, “is.”

The article goes on to say, “Goldman’s until-recently dominant role in program trading has garnered lots of attention, as has the recent drop-off. Goldman’s rise to dominance has been attributed to a variety of causes. Back in April, we mentioned that government guarantees of financial sector debt may have had a distorting effect, driving some high-frequency traders out of the equities markets. Felix Salmon proposed that Goldman’s ability to borrow under the umbrella of an implicit guarantee may have given it cheaper access to capital that allowed it to make profits in markets that those with higher costs of capital could not. Goldman itself seemed to claim that it’s high rank on the program trading tables was just a result of it acting as a market maker in some mysterious NYSE liquidity program.

Of course, the leader in all discussions about the enigma of Goldman’s program trading has been a mysterious blogger who calls himself “Tyler Durden” and writes for a website called “Zero Hedge.“ Tyler points out that the NYSE suddenly announced that it was changing the way it calculated the program trading list, which also coincided with Goldman dropping off the list. This prompted some to wonder if the changes were made in order to conceal Goldman’s dominance. Tyler’s analysis of this arrest is complex but highly worth reading.

Read more: http://www.businessinsider.com/quant-trader-arrested-for-allegedly-stealing-goldmans-secret-formula-2009-7#ixzz0vkjB6ceo

Read more: http://www.businessinsider.com/quant-trader-arrested-for-allegedly-stealing-goldmans-secret-formula-2009-7#ixzz0vkiOlQgl

So Schumer decides that he is going to champion the end of “flash trading,” because it compromises the integrity of our markets….did anyone stand up and object? Was there anyone who felt that his position was untenable? Surely someone wanted to discuss this before they implemented the policy and banned these trades forever? Yet, there is little objection……..

What about all of the firms that have spent MILLIONS of dollars to develop these trading systems, where are they? Where is their response to this move by Schumer? What about the other firms who use these systems for clearing purposes? No screams of indignation, no cries of disrupting the frail fabric of the marketplace? Where is the lecturer from Baruch College being interviewed about how he feels and what will happen to the world if it is denied this capability? No CNBC? no Bloomberg? no FOX Business news?…….Nothing…..just nothing……..

8 days later…..this……

ENTER MARY SHAPIRO SEC Chairperson

Breaking News: SEC Plans To Ban ‘Flash Trades’ That Give Advance Info To Certain Traders

Submitted by Tyler Durden on 08/04/2009 10:50 -0500

In Personal Call With Schumer, SEC Chair Schapiro Pledges That A Ban On The Controversial Practice Is Imminent

Unfair Practice Gives Certain Traders Advance Knowledge of Buying and Selling Activity, Putting Retail and Institutional Investors At Unfair Disadvantage

Schumer, Having Urged SEC To Curtail Flash Orders In Letter Last Month, Praises Move

SEC Proposes Flash Order Ban

Six weeks and two days after Schumer talks to Shapiro, the following release is made by the SEC……

FOR IMMEDIATE RELEASE
Washington, D.C., Sept. 17, 2009 — The Securities and Exchange Commission today unanimously proposed a rule amendment that would prohibit the practice of flashing marketable orders.

So let me get this straight…..On July 3^rd, 2009 they arrest Sergey. Exactly 2.5 months later the SEC bans flash trading…… I guess they thought it could be a problem……

Hey, that’s great. They solved the problem, got ahead of it, nipped it in the bud, squashed the critter, Terminatored the bugger, offed ‘em, good work Chuck, thanks Mary, another one for the big “O.”

Ahh, wait a minute, ahh, has anyone bothered to look here? It looks like this has been going on for a while. Maybe the kudos aren’t so warranted………

Tomorrow…..the Flash Crash and Goldman’s decision to sell its proprietary trading group…….

THE FLASH CRASH

Please come with me on a short but important journey. The journey starts in Chicago where we will board a flight to New Jersey. It’s like any other flight we have ever taken. We are looking forward to getting home and enjoy the 4^th of July. It will be a great weekend. We’ll celebrate with family, we will remember the time that our dad took us to the American cemetery at Anzio, on the shores of a beautiful Italian fishing village warmed by the winds of the Mediterranean, where he wept openly for those that he knew, for those that had died. (If you don’t know Anzio and its battle you really should learn about it.) We are almost home; the pilot is turning the plane to line up with the runway. By the way….have you noticed that man over there? He seems very odd.

Trudging up the gangway and into the airport will be the last queue that we’ll have to succumb to for at least the next 3 days and then we stop dead in our tracks. There is some kind of commotion going on in front of us. That man we were looking at seems to be in some sort of trouble. Men with shiny blue rain jackets are surrounding that odd man. The men have some sort of initials on their back, but then we instantly recognize FBI………..

Sergey Alynikov is arrested, it’s July 3^rd, 2009. Three days later there is a story in the NY Times. Sergey Alynikov has been accused of stealing software code. This isn’t just any sort of software code. This software code was Goldman Sachs software code. This software code according to the New York Times article by Alex Berenson, “Arrest Over Software Illuminates Wall Street Secret,” states that the code, “could be used to “unfairly manipulate”stock prices.” Holy crap!

It seems that by taking advantage of this code Goldman Sachs is enabled to buy and sell shares of stock in milliseconds. In effect it allowed Goldman to get in front of other firms to take advantage of their inferior trading system software. Pretty cool, does it really work?

Well, don’t fret, Alex has done a pretty good job of letting us know that the former head of markets systems at Fidelity Investments Bernard S. Donefer, who happens to be a lecturer at Baruch College, says that they potentially provide BILLIONS in profitability to their firms. So believe it, Goldman Sachs has developed a software program that potentially can manipulate the stock market, looks like it is being used to provide BILLIONS in profitability to the firm that created it, and Sergey stole it.           Holy Crap…….

But it gets better! Sergey, who came to the U.S. in 1991, sent the software to Germany. You know, point and click and whoosh! A multimillion dollar software package developed by Goldman Sachs that makes them BILLIONS went bye-bye….to some dude in Germany. The assistant U.S. attorney tells the NY Times, “GS stands to lose its entire investment in creating this software ……which is millions upon millions of dollars.”  (see the Furry Brown Dog Blog, “On Goldman Sachs’ illegitimate high frequency program trading.”)

ENTER Senator Chuck….the infamous, “after all the little guy doesn’t really care.”  (Hey Chuck, it’s Lloyd, you got a minute?) …………….more tomorrow………..

Chuck’s in a huff!

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