Thursday, September 24, 2009

The Next Bubble?

Is it possible that the next stock market bubble is stock trading itself? Of late some press has been given to practices like flash trading and high frequency trading. Both these mechanisms are dependent on high tech hardware and software and are therefore only available to the larger players – for now at least.

In flash trading, the trader tries to maximize the rebates offered by exchanges by freezing his trade for a fraction of a second by offering to trade rather than responding to the trade. Additionally a flash trader may seek interest in his security from “dark-pools” or electronic exchanges outside the traditional exchanges.

High frequency trading as the name suggests involves the conducting of really fast trades using sophisticated computers and algorithms. Enormous volumes of stock are traded and even minimal swings in the values of these stocks can lead to gains. Some observers say that high frequency trades account for over half the trading volumes in markets these days. Flash trading combined with high frequency trading can lead to even greater profits. A flash trader may for instance see the interest in a stock and use this information to buy the stock to re-sell at high frequency to people who want to buy it. The spreads sometimes are less than a cent. While some have compared this to front running – the illegal practice of using advance knowledge to trade in a stock – loopholes in the regulations in some markets allow this practice.

Both these practices take advantage of the momentum in a stock’s price. Large volume trades can capitalize on even a 1c movement in stock price and eke out substantial profits. In a way this is an extension of day trading and the end goal is to make profits in fractions of a second and get in and get out of a stock making money in as short a time as possible.

In recent months these practices have led to an explosion in the volumes of shares traded. Many companies see many times the volume of the total shares listed which implies a high frequency or flash trading of the shares. These shares are held for fractions of a second only to be re-sold.

This feeble mind wonders how an ordinary investor can capitalize on high frequency trading.
Currently of course a small investor will not have access to these markets. The only way to play this is to be a high net worth individual, one who has money in the accounts of brokers who use these tactics. Chances are though that these mechanisms will be democratized over time allowing smaller players to participate or to pool their resources in order to participate….at their peril.

Obviously the accelerated trading of large volumes for profits may result in the formation of a bubble until some large companies bet too much and lose too much. On the plus side however, the government is already taking steps to investigate this.

One wonders if this is the continuation of the new paradigm for making money. It started in the dot com boom and bust and continued in the real estate bubble. Inherently these bubbles pushed the envelope on making money from nothing but trading be it in dot com stocks or derivatives and instruments tied to real estate. Flash or high frequency trading continues this by trading in micro momentum with scant regard to fundamentals or other historic measures of valuation.

This leads one to almost yearn for the quaint old days of stock swings on quarterly earnings and the maniacal focus of the top executives in meeting the quarterly figures. People complained that a quarterly focus prevented companies from strategizing long term. Now it appears that even a quarter is too far off the horizon and micro seconds are the new unit of measure.

Monday, September 14, 2009

Leno and other random thoughts

There is a lot of skepticism about Jay Leno's success in the 10pm (E) time slot. I am one of the naysayers - to the skeptics. I believe he will do exceedingly well. I am also one of the people who will watch him.

When I lived in the east coast in the pre-DVR days, I found the late night shows to be on too late (is that an oxymoron?). Also given the current nature of their jokes and the fact that they are on most weekdays, I do not tend to record them on my DVR these days unless there is an expectation of a really interesting guest.

The other reason I feel/hope he will be successful is because I am a sitcom aficionado. I do not particularly care for the serious drama/programming that otherwise occupies networks in this hour. I have never cared for crime or hospital dramas and lately my interest in news magazine shows have also declined. I was never a major reality TV fan either.

As a self admitted news junkie with a ear tuned throughout the day on the financial news especially, I am pretty much worn out by news by the end of the day. I prefer my prime time TV shows to consist of blah sit coms which are good for a laugh. In this environment I believe that Leno will be a welcome change. I am betting that there are many others in this country who feel the same way too and will make his program hugely popular. So popular that they will have to raise the ad rates on it very soon.

Let us see how this prediction pans out.

Either way, whether it succeeds or fails, this is a win-win for Leno. Success of course will give him a vehicle on NBC. Failure may result in him being courted by Fox or ABC for inclusion in their late night schedule. I wonder if ABC will slot Nightline in the 10 or 10:30 pm slot to make room for Leno should that happen.

Speaking of TV shows I watched quite a bit of CNBC during the night of 9-13. I caught the tail end of Maria Bartiromo's interview with Citibank CEO Vikram Pandit and later the town hall meeting with Tim Geithner the treasury secretary. From Pandit's speaking and his body language it appeared that Citi is well capitalized for the time being. I am a little anxious about my shares of C, but I will hold on to them for a little longer. As for Geithner, many of us fail to realize the complex and stupendous tasks that faced policy makers like him and Paulson. It is very easy to criticize them in hindsight but I wonder how many of us would take decisive action like they did during the most challenging times and under intense scrutiny.

Looking at major news today (and contrasting them with the headlines during the beginning of the year),
  • Fed rate is still close to zero
  • Fighting in Israel is no longer headline grabbing and the pirates seem to have mysteriously disappeared.
  • The Dow is at 9592, the NASDAQ at 2083 and the S&P at 1043.
  • Gas is around $2.30 locally
  • There is a lot of debate on health care, some of it very ugly.
  • Money, job and home worries still persist
  • Conflicts continue in Afghanistan and less so in Iraq - at least from the US perspective.
  • Gold has topped $1000.

In the U.S. at least health care and deficits seem to be getting the most press along with a growing wariness about the war in Afghanistan and an undercurrent of a "what are we doing there" attitude. While there is consensus in capturing or killing the planners of 9-11, there seems to be a growing unease on continued guerilla warware without any clear goals.

Lastly, since I started this post off about a TV show, I wonder how many people are out there who would welcome the introduction of a digital VCR? I mean a DVR for all intents and purposes but without programming fees. The only option these days appears to build one using the Windows Media Center software. DVR programming fees - to me at least - is another source of money dripping from my pocket book and I resent the charge. If I could happily record shows on my VCR for free, I don't see why I should have to pay for that privelege on my DVR.