The professor's wifeOne wonders if anyone out there saw any activities that bore the badges and emblems of inappropriate behavior out there today so that one can maintain my side of the discourse with Mr. Humbert. One noted a strong weakness in the last minute. Could that be the interference with the advantages of the closing prices of JPM and GOOG announcements from the flexes? Or was it more likely yet another wife (or significant other) of a professor from an ivy league university just using her knowingness for her hedge fund as in the free market reform expenditures they conduited, monopolized and discharged their debts in court thereto? Any help you can give me in this continuing discussion so that I can hold my own with my friendly adversary who apparently sees the best in all his former bosses and their colleagues would be appreciated.

Rocky Humbert states his position:

I am not an adversary of The Chair (friendly or otherwise). I simply question why, if the game is as rigged as he suggests, does he continue to participate– especially when more than 70% of the daily volume is attributable to high-frequency computer-generated algorithmic activity– which by its very nature must be a zero sum game. 

Nigel Davies writes:

I think someone will continue professional participation in a game as long as one believes that money can be made. Now there was always cheating in chess tournaments via the throwing of games for prize money and/or title norms, but this didn't stop the better players making money, especially because tournaments had external sponsorship.

But what happened after the Berlin Wall came down is that the bus loads of former Soviets both flooded the market and simultaneously increased the amount of cheating. All but 'elite', non bus-loaded chess events lost their prestige (and thus their external sponsorship) and forced the early retirement of 'professionals' starting with the relatively unsuccessful and gradually working upwards.

Could such a phenomena happen with markets? Very possibly, as once the game starts to get rigged and randomised the weaker pros plus passing wannabes will get driven out, reducing liquidity and making it harder for those who are left to remain. They might not feel the effect at first but the game would become increasingly unplayable.

In this light some early protestations about rigging are sensible as they just might help stop the rot. The creaking gate tends to get oiled and all that.

Nick White responds:

Re: "why bother?"

For myself at least, I would argue that it's a bit like in football.

A running back tries to get through the line and the secondary to make the play and score….most of the time he will get flattened or maybe gain small yardage. Every now and then he'll get creamed, or worse, fumble it to concede a TD to the other side. But - the opportunity to score comes from trying to find that little crease in the D to break into daylight. And so it is with us.

To know where those creases may open up on a given play, the player needs to study the film, know the schemes, know the players they're up against and the tells those players give out ( I recently watched an "America's Game" NFL film about the Patriots; on the other side of the ball, one of the coaches remarked how much they were looking forward to defending against a particular OL because this linesman gave up, without fail, whether their play was going to be a run or a pass by the stance he took at the line: if he was in a two-point, i think it was for the run, and three-point stance for the pass.)

So, there it is….it can be a tough game to play against the ebb and flow of noise; no one doubts that. But the key seems to be (no matter your trading stripe) to put yourself in the best position to find a crease, know the circumstances under which they are likely to occur– and then nail it for all it's worth.

Rocky Humbert adds:

But extending the metaphor, The Chair seems to be suggesting that (1) the referee is corrupt; (2) the other team's blockers are carrying brass knuckles; (3) the clock runs faster when you have ball possession; and worst of all, the Professor's Wife paid off the laundry guy to not-wash-out the bleach from your jock strap. Shall we still play a game?

(It didn't end so well for Mathew Broderick.)

Nick White writes:

I'm no conspiracy theorist. Maybe there's collusion and coercement. Maybe there isn't. I'll never know. I console myself that if I stick to my plans, I hopefully won't have much reason to care. I can only play my game, and (like you, Chair and others) play it staunchly by the rules.

I'm just pragmatic about the potential for shenanigans where there is a competition and money is the prize. To build in some redundancy into my bold assertions I'll try and give some allowance for 1-3. Four is more problematic…that's just going to hurt.

With the current running of the Tour de France, I'm sure there is much we can learn about systematic cheating and cover-ups.

Bill Rafter adds:

The fix or edge was always so, and is so now, but the markets and players have changed.

Many moons ago when my partner and I were active commodities traders (before they were called futures) we made a lot of money in certain markets. Our favorite venues were eggs, cocoa, bean oil and meal. For some strange reason we had the ability to ascertain the fix, but only in those markets. What interested us what that the egg market was clearly a rigged game, but the bean products seemed to be the essence of fair markets. Also of interest was that we could not get any edge in other obviously fixed markets such as bellies (and a tip of the hat to a certain former and future flexions cattle broker and her signiflexiant other). In the case of eggs we had strong evidence that it was the delivery particulars, and delivery also seemed to have an effect on the other markets we could play favorably. Delivery is very much the bailiwick of those in the know.

Fast-forwarding to today's equity markets we suspect that HFT is having a strong effect. Overall share volume had dropped precipitously from the highs of several years ago. It has recently returned to a decent level. But how much of that recent volume increase/recovery is HFT? If it is, then some part of the activity beyond 1-minute bars (or 5-minute bars) is going to be inefficient. For HFT should make the market more efficient in the shortest run, but ignores the forest for the trees.

We ourselves like the presence of HFT as it tends to give us better executions. And we prefer that the giants (e.g. Giant Squid) play in that shortest time frame. Someone has to take over the specialist functions, and better it be the well-capitalized firms. But anyone trying to compete in that time slot is going to have a lot of competition. And should one of the giants discover an opportunity in which THEY had limited, if any, big player competition, watch out. That is, a giant with the room to run a table most certainly will. And if the giant has a dealer at every table, sooner or later one is going to present such an opportunity. That in theory could have happened under the specialist system, but the specialists were constrained from doing so. No such constraint is in place now. The bailiwick of those in the know at this time is the HFT universe. Expect to be taxed by the bailiff.


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