Green investing and the carbon tax market are supposed to be the next Big Thing in the stock market, leading maybe to the next bubble. The problem is that serious reform efforts to combat global warming strike deeply at the capitalist model, since many solutions involve the government working cross border with other governments. Not much room for the profit motive there.

Business wants to control this process so that government actions impinge on corporate profits as little as possible. To the extent solutions are left in the hands of corporations, they will not be serious solutions, just a bit of working around the edges of the problem.

Goldman will need to make a flourishing trading market out of something corporations wish to control and keep as minimal as possible, and therein lies a contradiction. Goldman is probably well aware of this contradiction and is hoping for the best, because what else is there? They have exhausted the tech bubble, and now the housing bubble, and they are close to exhausting the capacity of the American taxpayer to support the federal government's debt binge. They are running out of assets to exploit and taxing power to tap into. That leaves desperate ideas like efforts to form a carbon tax market.

It is good to see others are coming to the obvious conclusion: if someone can use the GS program for unfair manipulation, how is Goldman's use of this program anything other than manipulation as well, and what makes it fair?

... your posting till the end before commenting. After all you make the same point.

A significant subset of all trading activity, since program trading involves orders to buy or sell shares of at least 15 stocks. Often this activity relates to trading an index in order to duplicate the performance of a market or sector of the market.

Still, GS is a huge part of program trading, and the trading they submit for their own speculative purposes, not for customers, is much larger than any other firm.

The algorithm must be set up to constantly update and check the data base against the performance of the model: are trades reverting back to the mean and is profit within the margin of error defined by the model?

I should note quite a lot of quant funds blew up in 2008. The spreads did not revert to normal as quickly as anticipated in many trades, and the losses were also much larger than predicted by the models. Several funds went out of business.

It may not be correct to say that quantitative trading has come roaring back, but we can say that the way Goldman does it is much more consistently profitable than most anybody else. That may mean the statistical randomness implied in these models is eliminated in the GS models because they know or see things no one else does.

All these models will blow up eventually.

We've already discussed them in a prior thread and their inability to work through large exogenous events.

Eventually the statistical fluctuations hit a strange attractor, and the market state changes abruptly.

As an aside, the models success will lead to complacency, instead of heightened awareness that their success is running out. A form of feedback based on the non-linear humans.

Testing on the back market only works is the actions taken as a result of the model do not alter the market. One is just looking for triggers from the algorithms, and decisions based on the trading position (long or short).

Did you see today that John Meriwether of LTCM fame has shut down his London fund? How many big failures does one guy get to have? First there was his Salomon debacle, than LTCM's collapse, and now several of his hedge funds have been forced to shut down due to poor performance.

Given all that, I wouldn't be surprised to read he is starting up yet another fund and has been able to attract billions from new investors.

Those in the Club. They never get punished for failure.

I find it interesting that Wall St said Bernide Madooff could never have produced his returns honestly, and anytning more than 10% anually is unachievable. Then they go on to sell their skills than they can actually product more than 10% annually.

All these models will blow up eventually.

Without exogenous events, if the model is right, it will degenerate to noise.

If the model is wrong, there will be a market full of LTCM type hedge funds which cry that prices are irrational.

_{--Sell Texas to China!}

I agree, with a caveat. Noise is not eventual, it's added at the input.

The market data is already a noisy signal. Noise is random statistical events added to a signal (data stream).

Are these people are trying to do statistical analysis on noise? No they are too smart for that.

They could be creating momentum (rate of increase or decrease in a stock prices), and knowing the case of the momentum (themselves), taking advantage of the momentum.

Or, they are front running large orders,

Or, they have a early view of news from a company, and are trading ahead of the news.

Or something else which is not quite as illegal as these three.

Or, they have a early view of news from a company, and are trading ahead of the news.

Those news are often available from legal or semi-legal alternative sources. The company itself will delay publishing the news. That can be done "legally" too: "We were not sure, figures were not accurate ..."

Analyzing those sources is the job of buy side analysts.

Much of the US market action during the last spring was because of illegal insider information flowing from Washington. Of course the crime gang called SEC was not interested. It seems that Washington even devised one trap to those trading insider rumors.

The job of SEC is to secure that only right people have access to insider information. And do some occasional show business to convince public that this is not the case.

When right people are badly on the wrong side of the market, White House and SEC stop trading. This has happened multiple times but not every year as far as I know.

_{--Sell Texas to China!}

At least 2/3 of US equity trading is automatic.

trading was an insiders game, based on early inside knowledge

Based on trading desk insider bullshit rumors? Case of GE bullshit here. The job of the sell-side analysts and financial press is to guide the public and dumb money managers on the losing side of the trade.

I occasionally post where I think the loser's side trap stands. And I always get counterarguments based on sell-side crap or financial entertainment.

It is much easier to find a consistent liar than a consistent truth-teller in the markets. Warning: Most of the "information" is noise and entertainment like Cramer.

How do all those financial sites which do not have enough ads make money? By writing entertainment to attract readers and then inserting some poisonous tips which are paid.

_{--Sell Texas to China!}

There is a difference between automatic and automated in my mind.

Automatic is set up to buy or sell at some predetermined price.

Automated is run data through a bunch of algorithms and automatically buy and sell stocks based on analysis of the data stream.

Automated brings to mind some truisms of computer and programming.

1. To err is human, to really screw up use a computer,
2. Computer don't make mistakes, they just repeat your endlessly.

Yes I'd believe a majority of transactions are automatic. Automated? Not yet. When and if transactions are automated we'll hear about really gargantuan losses (twice of three times the worlds' GDP), blamed on a "computer error".

200 trades in a day is much for a high frequency trader. So from where do all those market orders originate then? Why is everything insanely correlated? Why do exchanges provide < 5 ms response times?

Bots read even news and react to them.

Automated is run data through a bunch of algorithms and automatically buy and sell stocks based on analysis of the data stream.

Whatever. I wrote earlier that in short time frames stupid algorithms work too.

_{--Sell Texas to China!}

That Wilmot thread is amazing.

C++ A good language? Rapidly evolving?

Please.

...believe in remote viewing.

“The absence of any US-Iran bilateral channel...may have the perverse effect of reinforcing Iranian interest in progressing in the nuclear realm so that the US will be forced to take it seriously and engage it directly." ~ Richard Haass

really funny primary documents to prove that this has not always been true (if indeed it's true today). Operation Stargate et al files are out there...
--
Hongpong.com

...and even wore stars on their jolly jumpers who believe in this horseshit, but not "top military professionals" - it's a Venn diagram where the circles don't intersect. You want to call them "professionals" because they told you something juicy you wanted to hear, hey, have a great time with that - however, my advice (not, I hope, that there's a great risk that you'll need it) would be not to stake your life on a label so casually dispensed.

“Bet your life on the guy who told you the mundane, unpleasant thing you really didn't want to hear." ~ JustPlainDave on living longer in the profession of arms

...for you and your company to hold position until overrun in order to cover the battle group's withdrawal.

“The absence of any US-Iran bilateral channel...may have the perverse effect of reinforcing Iranian interest in progressing in the nuclear realm so that the US will be forced to take it seriously and engage it directly." ~ Richard Haass

Looking at the bank SIVs, which are the ones with which I am familiar, the question you pose is a delicate legal and accounting one. The SIV has to be legally distinct from the parent bank and ownership and control are expected to be remote. The SIV is supposed to be an independent corporation which buys long term assets such as mortgages or auto loans, bundles hundreds together into a security, and then sells the security on to investors. The SIV funds itself by issuing commercial paper in its name.

The bank that sets up the SIV must show evidence that it does not control the SIV. The SIV employees are separate from bank employees and in some cases there is an independent board of directors set up. The SIV needs to raise funds in its own name without a bank guarantee, and it can buy assets from anybody, not just the bank which set it up. The SIV is responsible for getting these assets rated by Moody's or S&P before selling them to investors. To protect itself from a liquidity crisis, the SIV arranges for liquidity lines of credit from banks, starting with the founding bank. On this basis, the SIV is considered sufficiently removed from the bank that it is not consolidated on the bank's books except as a minority interest.

This is the theoretical structure that allowed SIVs to remain off balance sheet. They became not just important, but essential vehicles to allow banks to expand their business without expanding their balance sheets, thereby avoiding costly capital necessary to process new loans. The SIVs themselves had very modest capital because they were considered conduits, merely passing paper on to investors. These investors were often mutual or hedge funds which were not under the supervision of bank regulators, so their capital could remain minimal as well.

What was the reality? The employees of SIVs, and their board members, were all employees of the bank. Their careers ultimately were back in the bank and their bonuses and pay were set by bank management. The assets they bought were almost exclusively from their bank, so they were essentially used as parking lots for new business so that it could be securitized and sold to investors. Their line of credit was usually solely from the bank, and many SIVs were set up just to securitize a particular group of assets the bank wanted off the balance sheet. The regulators and ratings agencies turned a blind eye to these realities, as did the accountants, who continued to believe the fiction that SIVs were independent.

Lots of things went wrong for SIVs in 2008. The value of the assets sold as securities fell below the value of the commercial paper raised for funding, causing the SIV to fall into technical insolvency. The cash flow generated by the assets also collapsed, leaving the SIV with a liquidity crisis and forcing it to borrow under its line of credit from the bank. The Aaa ratings on the paper that was issued were downgraded severely by the agencies once they realized their model was wrong in assuming housing values never went down. The commercial paper market completely dried up for all SIVs and their bank sponsors could not raise enough cash to fund them, so they had to turn to the Fed and programs like the TARP. It became obvious that the SIV model was dead - Jamie Dimon of Chase said as much - so by the end of last year banks were being forced to close down their SIVs and move the assets back on to their balance sheet. This is one major contributor to the recapitalization required of the industry, and it has severely hurt some of them like Citigroup.

Starting in the 1990s but especially this decade, SIVs were the main method banks used to grow their loan portfolios. It was free growth - no capital needed - because the loans could be placed with the SIV awaiting packaging as a security for investors. This permitted an explosion in housing, auto, credit card and other loans, because not only was capital no longer a constraint, credit controls disappeared (it was the problem of the investor, theoretically, and anyway these were all Aaa securities).

It is really surprising that everybody fell for this ruse. No regulator or accounting firm questioned the set-up. No one complained about the obvious fact that the SIVs acted entirely as creatures of the banks which set them up. No one got to the core problem you mention, which is the ability of the banks to set up entities they still controlled, but also count the assets as off the balance sheet.

The SIVs are what are called the parallel or shadow banking system. With their demise the banking industry has lost the ability to make loans at the pace of the past ten years. This ability is not coming back, so we can anticipate living in a world of 1990's credit available for quite some time. No wonder our economy is facing a liquidity crisis and global recession.

for taking the time for such a detailed and informative response. While I was aware of the developments associated with the demise of SIVs (along with all the toxic acronyms), I had yet to see as lucid an explanation as yours of how they worked in practice (and I've read probably thousands of pages from more sources than I can count about the credit crisis, most recently Gillian Tett's "Fool's Gold," which, as you probably know, focuses on JP Morgan's role in financial "innovation").

Just another reason why I'm so glad I registered with the Agonist.

This stock recommendation arrives ½ year too late. You should have bought when Warren Buffett invested more in GS. It was completely public information, especially if you didn't believe in "Warren Buffett has gone mad" scams in financial press.

I've written many times that usually you'll be screwed if you believe in financial press. Matt Taibbi doesn't get even internet bubble essentially right. Probably he doesn't know it. Obviously he is paid for his ranting by words.

GS & SP 500.

_{--Sell Texas to China!}

True Slant (Taibblog), By Matt Taibbi, July 30

So you can see why Goldman alums sometimes don’t do very impressively once they leave Goldman. They find themselves in positions where no one questions their premises and it’s hard to get good feedback and pushback. (This is why Paulson employed telephone banks of analysts to call Wall Street to solicit opinions.) Outside of the Goldman womb of debate and ideas, bankers and traders lack perspective. You might say that no Goldman is an island.

via Will Everyone Please Shut Up About Goldman Sachs? | The Big Money.

And the winner of this month’s Most Retarded Horseshit Written In Defense of Goldman Sachs award goes to… Heidi Moore at Big Money! Come on down, Heidi!

This stuff is just getting funnier and funnier. Now that both Michael Lewis and Joe Hagan at New York have piled on and hammered the “magical” Wall Street bank’s reputation, the tearful, wounded apologies on the bank’s behalf are trickling in with some more urgency, especially now that, as Moore puts it, the bank faces the specter of “disastrously populist” hearings in the Senate for (and Moore left out this part) selling crap mortgages while shorting them at the same time.