Friday, May 6, 2016

Options Exchanges and Order Flow

Image result for Andy Nybo

In the TabbFORUM, a web platform for discussion of the capital markets by informed participants therein, I see a new piece by Andy Nybo about the segmenting of the order flow in the U.S. listed options markets.

Nybo is head of derivatives research for the TABB Group, where he has worked for 10 years. So he knows all its mysteries, such as presumably why the capitalization convention for the TABB Group is reversed for the name of the TabbFORUM.

His article begins with the observation that there are lots of US options markets, and that they try to compete with one another with various innovations. Isn't that a good thing? Well ... it depends on the innovation. He complains that one new trend is raising havoc, "price improvement auctions."

He defines a price improvement auction as "a trading protocol that allows market makers to improve prices for a segmented swatch of order flow," and claims it has a "number of detrimental consequences."

In essence the market maker (an exchange member) submits a two-sided offer -- that is, both a buy and a sell price -- into the market looking for takers. If there ARE takers, then this is by definition and for them an improvement on the quoted market price. Otherwise they would have bought (or sold) at the quoted market price.

This bifurcates the market and, in Nybo's view, it has contributed "to a steady decline in the long-term health of US listed options markets."  The so-called "lit" market is stripped of its "most valuable retail flow."

Nybo doesn't suggest a solution, though. In fact he ends with a warning that "solutions often have unintended consequences themselves."

That's an odd way to end the piece but, hey, who am I to question Nybo's literary talents?

The discussion confirms my general sense that huge changes in the business of financing business lie just ahead. The next five years or so will see an explosion of new technologies in the field, along with the playing-out of old institutions that are of as much continuing use and vitality as a physical trading floor in the 21st century.

Huge. I said it.

Thursday, May 5, 2016

Dennis Hastert and Walter Block

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Pity former Speaker of the House of Representatives Dennis Hastert.

He is now the defendant in a lawsuit brought by one of the anonymous individuals who were apparently extorting money from him. The extortionist wants $1.8 million.

Lest we forget, Hastert has been sentenced to 15 months in prison for having been too sneaky about withdrawing the funds he was using to pay this guy off.

From an NBC report:

When the FBI questioned Hastert about the money, he lied and said he just wanted to keep it in a safe place, prosecutors said. His lawyers later contacted agents and told them he was actually being extorted by an ex-student with a false claim of sexual abuse from decades ago.

With recorders running, the agents had Hastert speak with Individual A and claim he was having trouble coming up with the next payment. They said the other man's tone and remarks were not consistent with an extortion plot.

So the key legal distinction here is between "extortion" on the one hand and the settlement of an unbrought civil lawsuit for millions. The FBI decided the tone of the person demanding the money seemed more to fit into the latter classification than the former. That, in turn, proved to be very bad news for Hastert.

But what exactly is the distinction? Was the tone a symptom that someone was on one side rather than the other of a distinction that itself seems devilishly hard  to describe? Is it that the claims used to get money from Hastert were true? (As a matter of law, that does NOT seem to be a tenable distinction.)

I'm reminded of a once-notorious book by the libertarian philosopher and gadflyWalter Block, Defending the Undefendable.

One of the 'undefendable' characters Block defended consisted of "the blackmailer," defended under the heading "free speech." If -- that is, most of us, aside from Walter Block -- if we condemn blackmailers: why? And does the reason why do so allow any room for the distinction of "tone" that seems to have swayed the FBI here?

Okay, don't pity Hastert. But the situation seems odd.

Sunday, May 1, 2016

Mendelssohn's ELIJAH

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I recently enjoyed a performance of Felix Mendelssohn's ELIJAH as presented by the Harford Chorale and the Hartford Symphony Orchestra in (surprise!) Hartford, Connecticut.. Accordingly, I've pasted here a photo of an icon of the eponymous prophet.

This work is classified as an oratorio, one composed over a period of years leading up to an 1846 premiere.

The program notes provided at the Hartford performance describe it as a "near opera," referring especially to the dramatic character-driven nature of the libretto.

This gets me into a pedantic definition-seeking sort of mood. An "oratorio" an "extended musical composition with a text more or less dramatic in character and usually based on a religious theme, for solo voices, chorus, and orchestra and usually performed without action, costume, or scenery."  That definition comes from Random House's dictionary.

Presumably a particular oratorio can be considered near opera because it is so easy to imagine action, costume, and scenery added on. And that was certainly the case here.

Thus ends my brief review. Except for one more point. Congratulations to everyone involved in this fine production.

Saturday, April 30, 2016

A Lewinsky Reference? That's dirty pool now?

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I find this odd.

Rosario Dawson has been taking heat for even mentioning the name "Monica Lewinsky" in the course of making a case for voting for Bernie Sanders. Jeez, do these Clintonistas have a thin skin, or what?

On Saturday, April 23, Rosario said, "We are literally under attack for not just supporting the other candidate. Now I'm with Monica Lewinsky with this: bullying is bad. She's actually dedicated her life now to talking about that." She said that bullying is still bullying when it is a "campaign strategy."

First, obvious, point. One doesn't need to invoke Monica Lewinsky's name to make the point that bullying (however actually defined) is bad. In American politics, in a campaign with someone named Clinton  in it, there is a natural suspicion that the name has been introduced for other purposes -- to remind us of a once-juicy sex scandal.

Second point: so what? One's impression is that politicians used to be made of sterner stuff. Dawson was out of line only if your concept of being "in line" involves the Marquis of Queensbury rules or summin like that.

Final point: what the heck does 'bullying' mean in such a context? Those who are complaining about Dawson sound whiney, but the essence of her complaint itself seems a tad whiney.

An odd deal all around, as aforesaid.

Friday, April 29, 2016

Zombie banks

 A member of the board of the Bundesbank in Germany said recently that the European Central Bank should crack down on a political practice engaged in by many of the member states, that of keeping private banks that are effectively insolvent artificially alive on whatever is their available means of life support. 

The issue has become known in Europe as that of "zombie banks." 

I say "Europe" but sense at once that I am guilty of presentism. The term "zombie bank" got its start in the United States in the late 1980s. Remember the days of the "Savings and Loan" scandal? Ah, they seem innocent now. Or ... not. 

But recently the zombie's are a specter haunting Europe. (Gee, somebody once said that about communism, did he not?) 

If a bank has a negative asset value, then depositors will have reason to fear frozen accounts and even notwithstanding national insurance systems the banks may well empty out. If they are still kept alive despite both insolvency and emptiness ... well, one gets the metaphorical significance of Romero movies.

Ireland and Portugal are notoriously inhabited by such walking dead.  

Oh, and the Bundesbank board member I mentioned at the start? Did you wonder about a name? It's Andreas Dombret. He's the fellow pictured above, in the space for which I was tempted to use a clip-art image of a stereotypical you-know-what. 

Thursday, April 28, 2016

Pragmatism on one foot

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Assuming you have respectably good balance, you can stand on just one foot long enough to say this:

Regard ideas as candidates for your belief and distrust them unless they have clear practical consequences. Then once you have come to understand beliefs by their consequences, believe what is in the line of your needs.

That'll do it.

Of course, the implication is that pragmatism isn't so much a belief as a meta-belief. Which is accurate. Recall James' comments about the corridor. James always saw pragmatism as the corridor itself, not as consisting of any of the rooms one might reach by that means.

Sunday, April 24, 2016

A quote from Alfred North Whitehead

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The aim of science is to seek the simplest explanations of complex facts. We are apt to fall into the error of thinking that the facts are simple because simplicity is the goal of our quest. The guiding motto in the life of every natural philosopher should be, 'Seek simplicity and distrust it.'

I like that. But simply allowing my train of association to chug along its own tracks, this thought about science brings me to the issue of cosmogony, and the issue of the apparent demise of the old steady state theory of the cosmos. 

The great motivating factor of the theory was the immensity of infinity, the infinite expanse that opened in the past and presumably too in the future. The contrary Big Bang theory, with its definite moment of beginning and its threat of a heat death of the whole-she-bang, cuts one off from that lovely prospect. Also, relatedly, the Big Bang is sometimes defended as a way in which something might have come out of nothing, and THAT is a strongly counter intuitive notion, which inspires a counter move in some minds. 

Yet the steady state theory may be too simple a way to get the various conceptions it offers. There may be another way, a more complicated way, which passes through the Big Bang theory rather than denying its validity. The error of Hoyle and the others then may have been that they failed to distrust the simplicity of their beautiful hypothesis. 

If what looks like a black hole from the point of view of one universe is in fact the big bang of another, then the universe (understood as a particular continuum of space and time) is one of many in the universe (understood as the totality of that which is the case). Call the latter the multiverse for convenience, and you can credibly posit an infinite duration for the latter, measuring either backward or forward.

Big Bang and Steady State have their reconciliation.