Online Stock Trading – How to Lose Money!

Beware of the Slippage Factor!

It seems that last week, Goldman Sachs was credited with the creation of an entirely new definition for the concept of "slippage".

Who leaked the story? Apparently Matt Goldstein at Reuters did.

The accepted definition for “slippage” is the difference between the ordered price and the amount it eventually costs. Considering what I’m about to share with you this couldn’t be more vague?

Apparently Goldman Sachs has invented a new definition for the concept of "slippage". At Goldman Sachs it’s called being 'risk averse’. Most would call it “let's trade in front of everyone else. Get filled first and what's left to fill is what anyone else gets”. Why? Because Goldman Sachs is 'risk-averse'” of course.

Now, let’s not just pick on GS for the fun of it. But last week, GS supposedly was very quietly told that it could no longer do computerized quant trades at the New York Stock Exchange.

What exactly is "quant trading"? Well Quantitative (or quant, for short) trading encompasses investing techniques employed by sophisticated, technically advanced hedge funds and so called prime brokerages.

Quant use ultra-fast computers to predict the most recent trading patterns from large amounts of live financial data. A "quant," now refers to programmers who code quantitative-analysis algorithms for insider computer trading.

So is quant trading illegal? Generally, NO. But the way Goldman Sachs coded the program seems suspicious at the least. It has been reported that GS represents around 60% of program trading.

When you trade from your desktop, your computer program sends your offer to buy or sell to the exchange through your broker. The computer program that is behind the scenes of your desktop-trading platform uses what is known as a "FIX" protocol. FIX is now generally considered the industry standard.

Apparently the GS program can intercept the FIX messages being sent to the exchange from large institutions, interpret what was is being bought or sold, and then put GS’s trade in ahead of those trades for the same securities. The institutional trade coming in afterwards may or may not get filled, depending upon how large GS's trades were. This no doubt will also affect how your order is filled.

Could this really work in a modern marketplace? Let’s say you wanted to sell 10,000 shares of IBM. GS’s quant program would supposedly intercept the message, and sell 10,000 ahead of you. If there were buyers for only 12,000 IBM shares at that price, GS would sell its 10,000 and you could only sell 2,000 leaving you with 8,000 shares still to be sold.

Ccreative Slippage

What is now being investigated is whether GS illegally used security-access codes to acquire the messages prior to "transaction_commit" timepoints at the NYSE. Although we are talking about a nanosecond trading advantage for ultra-high-speed computers, a nanosecond is a lifetime and profits can be made without much risk. It’s that new buzzword Rick Aversion again.

So how was GS found out? Well quant trading recently hit an all-time high of 48.6% of all NYSE trading. And since GS represents 60% of all program trades ...well, you do the math. The NYSE of course keeps close tabs on program trading and was surprised to find out that nearly half of all trades suddenly came from program trading.

Now wasn't it Goldman Sachs that received $12 billion in bailout money to help it overcome disaster? One might even be tempted to conclude that GS makes money the old-fashioned way ... by stealing it.

Let’s keep an eye on this to see how it unfolds and whether we're looking at a scandal or just another day on Wall Street. But since truth tends to turn out far stranger than fiction, it all makes you wonder why anyone would want to buy stocks.

No wonder so many Hedge Funds are now staying with the Chicago Mercantile Exchange (CME) trading commodity futures.

Wall Street Could Have Learned Lots From This Kid!

If Wall Street hedge fund managers, derivatives traders and mortgage loan officers had just followed this kid’s money philosophy, we could have avoided the financial and economic mess we are now in.

Yes friends, instead of buggering around with bailouts, handouts, TARPS, FARTS and what have you, we could have continued to enjoy high property prices, high stock prices, ever higher oil and commodity prices and ...low interest rates. What a great life it could have been.

But it was not to be. See what message you get out of this little piece sent to me from a fellow fly in the Middle East (yes I have relatives there as well).

A young boy - say we call him Ali - enters a barber shop. The barber whispers to his customer, “This is the dumbest kid in the world. Watch while I prove it to you.”

The barber puts a dollar bill in one hand and two quarters in the other, then calls the boy over and asks, “Which do you want, son?”

The boy takes the quarters and leaves the dollar in the barber’s hand.

The barber says to his customers, “What did I tell you?. It happens all the time. This kid never learns!”

Later, when all the customers leave, the barber comes out of his shop and sees the same young boy coming out of the ice cream store. The barber says to him...

“Hey, son! I’ve wanted to ask you for a long time. Why do you always take the quarters instead of the dollar bill?”

The boy licked his ice cream cone and casually replied,

“Because the day I take the dollar, the game's over!. No more audience for you and no more free ice cream for me”

The message is “Wall Street could have fooled all the people all of the time – but for their stupidity and greed.”

Bernard Madoff now hates all things Chinese?

Well it was Federal District Judge Denny Chin, obviously a man of Chinese heritage, that ordered him to serve 150 years in prison. Madoff, a proud bigot, probably believes that a non foreign Judge may have given him a lighter sentence. That’s the kind of guy Madoff is supposed to be.

Anyway it’s highly unlikely that Madoff will live long enough to serve the 150 years sentence in full... unless of course he’s bought out GOD as well.

In case you’ve been living under a stone, Madoff, was the mastermind behind one of the biggest and longest-running financial frauds in history. His sentence is to serve 150 years in prison, the maximum sentence allowed, for a scheme that has come to define the latest iteration of Wall Street greed.

The sentence far surpasses that of other recent high-profile white-collar crimes and took many noted criminal defense attorneys and former federal prosecutors by surprise. In handing down the sentence, Judge Denny Chin acknowledged that any term above 25 years would be symbolic, given Madoff's advanced age of 71.

However, the judge added, it was important that the severity of the sentence serve as a deterrent to future offenders. "The message must be sent that Mr. Madoff's crimes were extraordinarily evil," Chin said, his voice a stoic monotone.

As usual several legal experts were asked whether the sentence would in fact achieve Chin's objective and as usual they gave their usual garbage opinions.

Swine Flu Pandemic Declaration. A reason for Financial Defaults?

According to an article by Mark Nestmann of The Sovereign Society, earlier this week, the World Health Organization declared the spread of the H1N1 flu virus, the causative agent of the so-called "Swine Flu" to be a "flu pandemic."

This is the first time in more than 40 years that the WHO has made such a declaration. And it seems rather odd that it would do, given that this "pandemic" has had such minimal impact. The last time that the WHO declared a flu pandemic was in 1968, when the Hong Kong flu strain killed more than a million people.

By contrast, as of June 15, the H1N1 flu strain has killed a mere 163 people. That's a significant number, but by comparison, complications of ordinary flu kill about 36,000 Americans every year. True, the spread of the H1N1 strain technically meets the definition of a pandemic—an epidemic that is geographically widespread. Since its discovery in April in Mexico, the virus has spread to 74 countries on five continents.

But the pandemic declaration also has some very significant collateral side effects that could be extremely useful to banks, insurance companies, and hedge funds locked into losing positions on derivative contracts. Call me paranoid if you want, but many such contracts contain a "force majeure" clause that allow the signatories to cease meeting their obligations in situations beyond anyone's control. Pandemics are typically listed as reasons for calling a force majeure.

Now, it so happens that Friday, June 19 is a very significant date when it comes to derivative contracts. That's because the last hour of trading will be one of only four so-called "Quadruple Witching Hours" each year, in which contracts for stock index futures, stock index options, stock options and single stock futures all expire simultaneously. That's only two days away, but if all hell breaks loose in the markets between now and then—or if any of the counter-parties for these contracts can't deliver—they may well declare force majeure.

Seen in this light, the WHO's declaration of pandemic may be more of an economic diversion than a public health emergency. Indeed, interpreted in this light, a more accurate rendition of "swine flu pandemic" may be one its anagrams; "unwind limp faeces."