Tuesday, November 18, 2014

A High-Speed Trader Looks to Slow Critics

A High-Speed Trader Looks to Slow Critics. They do not provide liquidity; they are arbitragers of time and do not add value. Aivars Lode
By Bradley Hope
Jason Carroll helps run one of the most active trading firms in the world, accounting for more than 5% of U.S. stock transactions on most days.
But to a chorus of critics, his Hudson River Trading LLC represents everything wrong with modern markets.
Mr. Carroll is a high-frequency trader.
After years of operating out of public view, Mr. Carroll and his colleagues are now in the cross hairs of some regulators, politicians and investors who believe firms like Hudson River can gain an unfair advantage and manipulate prices using complex algorithms and superfast communication links to exchanges and other trading networks.
The Securities and Exchange Commission, New York’s attorney general and Federal Bureau of Investigation are among those investigating whether high-frequency traders violate market rules or break laws. Earlier this month, a Chicago grand jury handed up an indictment of a small New Jersey-based firm on charges of fraudulent and manipulative trading, in the first criminal case against a high-frequency trader.
High-frequency traders use their own capital to buy and sell securities, and their willingness to trade rapidly has made them an increasingly important market middleman. If a mutual fund buys shares of a blue-chip company like General Electric Co., for example, there is about a 50% chance it will trade with a high-frequency firm, according to Tabb Group, a Massachusetts-based firm that tracks the trading industry.
In his first interview about the business since co-founding New York-based Hudson River in 2002, Mr. Carroll said he and his colleagues have been unfairly cast as market villains. In their view, they simply used technology to supplant an expensive and inefficient system of floor traders and brokers.
“What we do is very hard to understand,” said Mr. Carroll, 37 years old, whose jeans and T-shirt wardrobe is more Silicon Valley than Wall Street. “Turning the tide of public opinion might be the next big challenge for our industry.”
Critics say the complex structure of markets is what allows high-frequency traders to flourish. Still, Mr. Carroll has aligned himself with industry executives pushing for a less complicated trading environment. Among those who have said markets should be simpler are Jeffrey Sprecher, chief executive officer of exchange operator Intercontinental Exchange Group Inc., and Brad Katsuyama, CEO of trading firm IEX Group Inc.
Mr. Carroll acknowledges he wouldn’t be speaking out if it wasn’t for “Flash Boys,” the best seller by Michael Lewis published on March 31. The book argued the markets were rigged to benefit firms such as Hudson River Trading, as well as big banks and exchanges.“I truly believe investors would feel much better if there was a simple system,” rather than the byzantine collection of order types and fees that drive much modern trading, Mr. Carroll said. “Let’s focus on getting rid of everything that incentivizes the creation of a system that’s more complex than that.”
As the backlash that accompanied the book intensified, Mr. Carroll wrote a memo to employees urging them to keep their heads high.
“You should be incredibly proud of what you’ve done and where you work, and your friends and family should think very highly of you for that,” he wrote.
The controversy was jarring for a firm that enjoys a light-hearted work environment.
When the U.S. stock market opens for trading, computers at its offices in lower Manhattan are programmed to play a clip of cartoon character Homer Simpson bellowing, “No time for that now, the computer’s starting!”
Next to screens showing information about market prices and the status of the company’s trading systems is a live video feed of the ping-pong table in the game room, known as the “Play Tank,” where researchers and programmers often compete in tournaments.
Mr. Carroll, who grew up in Silver Springs, Md., joined Tower Research Capital LLC immediately after graduating from Harvard University with a degree in computer science in 2000.
Tower was among the very first high-frequency trading firms, and it gave Mr. Carroll a glimpse into the way technology was changing the business. He and four friends—also graduates of top schools, with science or math degrees—decided to set out on their own, using about $600,000 of savings and money from family members and friends.
In the early years, they did little more than build programs that automated many of the market-making decisions made by floor traders. Over time, their strategies grew more sophisticated to include algorithms that used statistical analysis of data from across the markets to make short-term predictions on where prices were headed.
After the markets closed, they stayed late in the office to play computer games such as “Warcraft.”
The company, which has 100 employees, made the founders wealthy. Mr. Carroll, who owns the largest stake among partners after buying out others over the years, owns Argo Racing, a sailing team that travels around the world to compete in regattas.
In addition to its massive trading in U.S. stocks, Hudson River also is active in futures, options, European and Asian equities, currencies and bonds on about 75 exchanges and marketplaces around the world.
The firm doesn’t disclose financial measures such as revenue or profit.
Hudson’s head of business development, Adam Nunes, said the firm’s trading isn’t predatory as some critics allege about the industry.
“We don’t try to race ahead of an institution’s order or sniff out whether someone is trying to place an order here or there,” said Mr. Nunes, 38, a former Nasdaq OMX Group Inc. executive.
The firm operates according to one main rule: Every order entered into the market should represent a real desire to buy or sell that security, Mr. Nunes said.
“We are in favor of things we think are better for the long-term stability of the markets,” Mr. Carroll said. “If capital markets aren’t healthy, that’s bad for our business.”

Free Spending by Startups Stir Memories of Dot-Com Era Excesses

Sounds a little dot com-ish to me. Remember for those that didn't see the title of my first book, This time its different NOT, and then if not convinced the title of my second book So Did We Not Learn Anything From the First Book HUH. Aivars Lode

San Francisco real-estate agent Jeffrey Moeller wants tech entrepreneurs to spend less.
“A four-person startup will tell me, ‘We need a 10,000-square-foot office for future growth,’” he explains. “I’ll say, ‘No, you need 1,000 square feet.’”
“Generally, they just get angry at me,” says Mr. Moeller, who during the dot-com-bust had clients that were burned by leases they couldn’t afford.
Mr. Moeller is resisting pressure in startup land to spend, spend, spend. The trend is especially pronounced in San Francisco, where venture capital is pouring in, competition among startups is fierce and rents are rising to dot-com-boom levels.
Venture capitalists have spoken out in recent weeks. Benchmark partner Bill Gurley says Silicon Valley startups are burning capital faster than they have since 1999. Andreessen Horowitz co-founder Marc Andreessen has warned entrepreneurs about overspending, punctuating a string of tweets with the word, “Worry.”Startups feel the need to outspend on recruiting, marketing and designing their offices, echoing poor choices made 15 years ago when unprofitable companies overextended themselves, then crumbled when the market turned.
Big-spending venture capitalists are part of the problem, though. Low interest rates combined with once-in-a-decade investment returns on deals such as WhatsApp’s $19 billion sale to Facebook Inc. have enticed pension funds and university endowments to funnel money into venture capital. Meanwhile, crowdfunding sites such as AngelList have made it easier for entrepreneurs to attract early investment, and mutual funds and hedge funds have rushed in at later stages.
This year 84 U.S. venture-backed technology companies have raised at least $50 million in individual rounds of financing, a figure that was inconceivable a few years ago, according to Dow Jones VentureSource. U.S. companies raising financing in the third rounds or later collected $15.59 billion through the first half, on pace to break the full-year record set in 2000.
That rate is likely to accelerate; venture firms raised 53% more capital in the first half than a year earlier, according to VentureSource. But increased interest rates or a sudden stock-market chill could slam on the brakes.
“In an inflated market, everyone feels like a steroid-adjusted baseball player,” says Khosla Ventures partner Keith Rabois. “But once the steroids are gone, guess what, there are only about five to 10 people who can hit 30 home runs.”
Meanwhile, deep-pocketed startups are spending big on rents, salaries, marketing, public relations, interior design and seemingly limitless perks to impress potential recruits.
“I have one CEO who is building an octagonal, mixed-martial-arts cage-fighting ring because one of his employees asked for it,” says Valerie Frederickson, who owns a executive-recruiting firm bearing her name.
Costs add up quickly. The average salary for a software engineer is about $126,000, up 20% from 2012, according to tech-jobs site Dice. Top engineers’ salaries can be double that or more.
Justin Kan says startups are paying high salaries partly because they can. Mr. Kan, who started Exec, a personal-assistant service acquired earlier this year for less than $10 million, raised $3.4 million for his first round of financing. Justin.TV, which he started in 2006, raised just $300,000 in its initial round.
“When you raise a lot of money easily, it’s easy to try to solve your problems by spending money,” he says. Exec was quick to pay high salaries, he says. “I regret doing that.”
Then there are the perks. Free catered lunches cost about $12 a person each day. A $2,000 custom-designed standing desk may seem unnecessary. But some investors and founders say that such intangibles can help startups nab the best talent, who may be considering several job offers.
“No one wants to lose a candidate over the last emotional mile,” says Dustin Dolginow, a partner with Atlas Venture.
Bay Area interior designer Lauren Geremia, who has consulted for app makers Instagram and Path Inc., charges about $50 a square foot to outfit an office with custom furniture or art.
Commercial rent in San Francisco’s trendy South of Market neighborhood hit about $56 a square foot in the third quarter, its highest level since 2000, according to Cassidy Turley, the real-estate firm where Mr. Moeller is an agent.
And not just any office will do. Entrepreneurs are on the hunt for cool space: exposed-brick walls, polished concrete floors and high ceilings with exposed pipes. Renovations to get that look cost nearly $15 a square foot, roughly a quarter of the cost to rent the space, Mr. Moeller says.
Matt Galligan, co-founder and chief executive of Circa 1605 Inc., which runs a mobile application for news, says rent on his 3,000-square-foot office in SoMa has roughly doubled since the company moved in two years ago. But the rent and renovations to expose the brick walls weren’t “unnecessary burn,” he says. His 12 employees “are spending nearly a third of their life there,” he says. “It helps for it to be a positive experience.”
More worrisome, Mr. Moeller says, are startups with small teams looking for massive spaces and locking themselves in to long leases. Startups are signing five- to seven-year leases on spaces that used to require two, and more landlords are pushing for 10-year leases on new construction. Those could become a burden if financing tightens.
Web-storage company Dropbox Inc. raised $850 million in financing this year and signed three leases in San Francisco in excess of 10 years each. Car-hailing service Uber Technologies Inc., which secured $1.2 billion in funding this summer, recently announced plans for new headquarters in the Mission Bay neighborhood that will consume a half-million square feet in a 15-year-lease.
Sam Altman, the president of Y Combinator, an incubator based in Mountain View, Calif., says he is more concerned about the cultural risk created by “fat startups.”
“I used to live on ramen and Starbucks coffee ice cream,” says Mr. Altman, a former entrepreneur. “It sucked, but it made me very focused on doing what I needed to do to make the startup successful.”
Mr. Altman says he met a few months ago with an entrepreneur who drove up in a new Porsche sport-utility vehicle. The man’s startup had completed a $10 million early round of financing the previous week. Mr. Altman says he looked at him sternly, asking him, “What message do you think you’re sending to the rest of the company?”
By Evelyn Rusli

Goldman Ousts Currencies Trader Connected to Probe

I just love these headlines when i commented on this 3 or more years ago that manipulation was happening, and how, and we are now so amazed. Aivars Lode

LONDON— Goldman Sachs Group Inc., which wasn’t punished in last week’s foreign-exchange-manipulation settlements with U.S. and British regulators, has ousted a currencies trader who allegedly was involved with the misconduct before he joined the firm.
Frank Cahill, who joined Goldman Sachs in 2012 as a currencies trader after working at HSBC Holdings PLC, was asked to leave Goldman’s London offices on Tuesday as a result of his alleged involvement in the currencies-rigging affair, according to a person familiar with the matter.
“This relates to a period before he joined Goldman Sachs and he has now left the firm,” a Goldman Sachs spokeswoman said.
Reached at the office Monday, Mr. Cahill declined to comment, referring questions to Goldman’s public-relations office. He couldn’t be reached for comment Tuesday.
Mr. Cahill, a sterling trader, worked at Barclays PLC before joining HSBC in 2010, according to U.K. regulatory records. He was one of a number of unidentified HSBC traders whose conversations in electronic chat sessions were quoted by the U.K.’s Financial Conduct Authority and the U.S. Commodity Futures Trading Commission as part of their settlements with the British bank last week, according to people familiar with the chat transcripts.
The settlements, in which HSBC and five other banks were accused of trying to manipulate foreign-exchange markets to boost their own profits, resulted in the banks collectively paying about $4.3 billion. The banks didn’t dispute the regulators’ findings.
HSBC’s share of the penalties was $618 million. The bank said last week that it “does not tolerate improper conduct and will take whatever action is appropriate.” HSBC in January suspended two currencies traders in connection with the investigation.
Until now, Goldman Sachs has avoided the spotlight in the currencies-trading scandal. While at least a dozen banks suspended or fired more than 30 traders and sales people in relation to the investigation, Goldman Sachs had not taken any similar action with its staff.
Behind the scenes in recent months, Goldman was aware of Mr. Cahill’s involvement in the electronic chats and has been cooperating with British regulators, according to one of the people familiar with the matter. While Goldman isn’t under investigation, the regulators also have contacted the bank in the past few months to obtain documentation related to some of its currency traders, including Mitesh Parikh, who until leaving in September was the bank’s European head of spot foreign-exchange trading.
Mr. Parikh couldn’t be reached for comment. People familiar with the matter said in September that Mr. Parikh’s departure from Goldman was unrelated to the currencies investigation.
Documents released by the FCA showed that HSBC traders used information gathered by dealers at other firms to pick out the best time and method for conducting transactions designed to boost their profits, sometimes at the expense of their clients. The FCA also said it identified instances where HSBC foreign-exchange traders tried to make money by triggering automatic client orders to buy or sell certain currencies.
Mr. Cahill was one of the HSBC traders involved in those activities, according to two people familiar with the matter, although the precise nature of his involvement isn’t clear.
Mr. Cahill joined Goldman Sachs in October 2012, becoming vice president on the foreign exchange desk, according to a person familiar with the matter. As of Tuesday afternoon, he was still listed in the U.K.’s financial-services registry as an active employee of Goldman Sachs.

Monday, November 17, 2014

The Lesson of Forex Trading: Learn From Your Losses

When I learned that Rabobank the Dutch agricultural bank ( remember the Dutch tulip bubble in the 1600’s one of the first financial meltdowns in recorded history) was providing leverage at 1000 times to individuals trading Foreign currency, it did not make sense. It was an enticement to get people into the market, allow them to make small returns, and get them comfortable then as they made larger trades to wipe them out. I wrote about this before and it now is coming to fruition. Aivars Lode

By Jason Zweig
This past week, six big banks paid $4.3 billion to settle allegations that they had conspired to rig the global currency markets. But even if the bad behavior has stopped, the little guy still has the cards stacked against him. A new study of more than 110,000 transactions finds that individual “forex” traders lose an average of 3% a week.
Yes, a week.
Even if you’ve never put money into the $5 trillion-a-day foreign-currency market and never will, there’s a broader lesson here. No matter what you invest in, you can’t get better at it unless you focus on the one thing nobody likes to pay attention to: your losing bets.
That’s the implication of recent research by Rawley Heimer, an economist at the Federal Reserve Bank of Cleveland, and David Simon of the Berkeley Research Group in Emeryville, Calif.
The researchers tracked activity on a social network operated for individual forex traders—one of many such websites that track traders’ positions, rank the traders relative to each other and enable them to chat online. The one that provided the data received anonymity as a condition of the study.
Messrs. Heimer and Simon found that the most successful traders are nearly 50% more likely to talk about their trades than the least successful are. More important, the other traders they tell about those winners trade about 20% more often than usual in the following week, although it isn’t possible to observe whether these other traders mimic the same transactions exactly.
“People talk to each other about their investing performance, and it’s only human to talk more about successes than failures,” says David Hirshleifer, a finance professor at the University of California, Irvine. “And people are more inclined to adopt a strategy that sounds like it did really well.”
When talking about their trades, losers use a muzzle while winners use a megaphone. If you hear a lot more about profitable trades than unprofitable ones, you get a distorted view of how good that particular trader is, how profitable this kind of trading is overall and your own chances of learning how to be good at it.
As a result, “it is more challenging for some people to learn how long to hang on [trading forex],” explains Mr. Heimer in an interview. “They say, ‘This guy’s doing really well, this market can make you rich, eventually I can be one of the people who make millions.’”
Javier Paz, a senior analyst at the Aite Group, a financial-research firm, estimates that individual forex traders in the U.S. generated about $12.6 billion in average daily volume in 2013 and are likely to surpass that level this year. That’s up from $10.7 billion in 2012.
Forex isn’t the only kind of trading on the rise. On Nov. 3, the Chicago-based North American Derivatives Exchange launched a series of specialized options contracts for individual traders who want to bet on the up-or-down direction of the S&P 500, the Russell 2000, the Nasdaq-100 or the Dow Jones Industrial Average over 20-minute periods.
“People were voting with their clicks,” says Nadex chief executive Timothy McDermott, explaining that the exchange created the new options to meet popular demand. Individuals are trading about $300,000 worth of these contracts daily.
You can’t lose more than your initial capital on such a trade, and trading costs are relatively low. But these contracts, which confer no ownership rights to the underlying assets, are all-or-nothing, either appreciating to $100 or expiring worthless. There is a seller on the other side of every buyer. They can’t both be right.
A simple set of skeptical questions can help you surface the vital information about losers that would otherwise be lost in the noise about winners—whether you speculate in forex or invest in stocks and other assets.
How does the average person do? The National Futures Association, the industry’s self-regulatory organization, recently found that 72% of individual forex accounts were unprofitable and that the average life of an account was only four months. Forex brokers catering to individuals must disclose the percentage of their customers’ accounts that are profitable—a number that rarely goes above 30%.
Regardless of how much bragging you might hear about somebody’s big score, two out of three people trading forex are going to lose money. By the same token, historical data show that approximately two out of three actively managed stock mutual funds will underperform the market average.
Who is on the other side of the trade? In forex, it’s probably an institutional trader at a giant global bank. In stocks, it could be a computerized high-frequency trader, a hedge fund or a mutual fund. In options, it’s often a market maker or other professional trader. You might know more than any of these people (or machines). But you probably don’t.
Is this the simplest, safest, cheapest approach? Let’s say you think the dollar is no longer likely to keep rising. You could buy or add to an international stock fund, which should appreciate if the dollar falls, making the profits that non-U.S. companies earn in other currencies more valuable to American investors. Or you could move up that vacation you’ve been thinking about taking in Europe, enjoying how much your dollars will buy while they are still strong.
Those are probably better trades than a plunge into the forex market. If you’re right, you’ll come out ahead. But if you’re wrong, you won’t end up wiping yourself out.