Stock Market Efficiency: Regulating Speed Trades

A flurry of international activity aimed at putting limitations on computer-based speed-trading was striking during the Fall of 2012 in the U.S. because regulators had been slow to act. Typically, the NYSE has been viewed by the world as the Mecca of efficient investment markets. Paradoxically, however, efficiency may be improved by restricting—meaning regulating—the masses of computer-enabled quick trades that take advantage of momentary microscopic arbitrage opportunities that are too quick for the human hand. The American conventional wisdom seems to be that regulation and market-efficiency are inversely related, rather than complementary. This assumption might be overly simplistic, coming from an inherited ideology. Fortunately, the rest of the world has not been following the SEC.

The full essay is at "Stock Market Efficiency."

On Fiat-Chrysler’s Merger Proposal to Renault: Too Broad?

As Renault was considering Fiat Chrysler’s proposal to merge, industry executives and analysts believed “that car makers must link up to share the cost of a transition from internal combustion engines to avoid being run over by fast-moving tech industry challengers like Tesla or Uber.”[1] To be sure, (b)y purchasing parts together, combining their manufacturing operations and sharing the cost of research and development,” the merger could “eventually save 5 billion euros per year,” according to Fiat.[2] The R & D would include funds spent on developing new models as well as on high tech oriented to the future. Although significant efficiency could be achieved due to under-used factories and all the money going into product development, the basic problem was one of insufficient scale (i.e., revenue) to support (i.e., finance) the very costly research and development needed on electric and/or self-diving cars. In its statement, Fiat Chrysler pointed to “the need to take bold decisions to capture at scale the opportunities created by the transformation of the auto industry in areas like connectivity, electrification, and autonomous driving.”[3] The insufficient scale was particularly troubling given the declining E.U. auto market at a time when Tesla, Google and Uber were making progress on electric and self-driving cars. Fiat Chrysler could really use the expertise at Renault and Nissan on electric cars. However, I'm not sure a merger was the optimal route forward.

The full essay is at "Fiat-Chrysler's Merger Proposal."

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[1] Jack Ewing et al, “Renault Considering Fiat’s Offer to Merge Into a New Auto Giant,” The New York Times, May 27, 2019

[2] Ibid.

[3] Ibid.

The FAA Deferred to Boeing on the 737 MAX Jet

After a misfiring-prone automatic stall-prevention device on the 737 MAX jet had caused two accidents in which 346 people died, an internal review at the U.S. Federal Aviation Administration, a regulatory agency, found that the regulators had relied too much on Boeing employees to conduct the safety inspections of the planes. Incredibly, Congress expanded the industry-reliance practice of the agency in 2018. Both the FAA and Congress were admittedly motivated by the added efficiency that such “sub-contracting” could bring. However, to focus on the economic benefit while ignoring the inherent (and obvious) conflict of interest in “sub-contracting” to the very companies that are regulated by the FAA is itself a red flag. A subservient or over-reliant regulatory agency cannot be a check on a company’s claims of not having sacrificed safety or even safety checks in order to focus more on profitability.  Of course, the political influence of a large company such as Boeing may have played a role in the FAA’s “back-seat” approach, but in this case the government’s own interest in stretching the coverage of its human resources may have been dominant. That such an interest could involve minimizing or ignoring outright such a blatant conflict of interest may point to a wider culture in which institutional conflicts of interest are presumed to be innocuous or even benign rather than too toxic to permit even if they have not been actively exploited.  

The full essay is at "FAA Deferred to a Regulatee."

Alan Greenspan on the Self-Regulatory Market

Two days after the LTCM bailout was agreed to in 1998, a worried Alan Greenspan, leaning toward raising rates at the time, cut the federal funds rate. It was not enough to calm the markets, and he cut it again three weeks later. . . . It was not the self-correcting powers of the markets but aggressive central bank intervention plus a new round of irrational speculation that provided a floor under the downward financial prices and the calamitous consequences of bad Wall Street decisions. It was not even the LTCM rescue alone by private banks that saved Wall Street” Madrick, p. 281). “Alan Greenspan learned no lessons from these events about the inherent instability of a completely free market in finance. He still insisted markets regulate themselves” (Madrick, p. 282).

For analysis, see the full essay at "The Self-Regulatory Market."

Source:

Jeff Madrick, Age of Greed: The Triumph of Finance and the Decline of America, 1970 to the Present (New York: Alfred A. Knoff, 2011).

See also Skip Worden, Essays on the Financial Crisis, available at Amazon.

Market or Government: Which Should Reduce Systemic Risk in the Banking Industry?

If the five largest banks—JP Morgan, Bank of America, Citigroup, Goldman Sachs, and Morgan Stanley—are too big to fail and yet substandard operationally on account of their respective complexities (e.g., investment banking added to commercial banking), might it be that the market-based decisions of investors will relegate the giants, which by the way had price-to-book value ratios of between .37 to .77 in May 2012, thereby solving the problem of systemic risk?

The full essay is at "Reducing Systemic Risk: The Market or Government?"

Humans As the Intense Predator: Unbalancing the Food-Chain Unsustainably

By 2015, humans—the homo sapiens species in particular—had become “the dominant predator across many systems”; that is to say, the species had become an unsustainable "super predator."[1] We have had a huge impact on food webs and ecosystems around the globe.[2] Moreover, we have been using more of the planet's resources than we should. By August 2015, for example, humans had already consumed the year's worth of the world's resources.[3] In terms of fossil fuels, the consumption has had an impact on the warming of the Earth’s atmosphere and oceans. Behind human consumption are human beings, so the astonishing increase in human population is a major factor. As a virus-like species incredibly successful genetically over the previous five-hundred years, the self-maximizing feature both in terms of population ecology and profit-maximization may be the seed of the species destruction, and thus long-term genetic failure.

The full essay is at “The Intense Predator.”

We are fishing fish out of existence. (James Watt: Getty Images)

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1 Chris Darimont et al, “The Unique Ecology of Human Predators,” Science, Vol. 349, no. 6250, pp. 858-860.

2 Ibid.

3 Jonathan Amos, “Humans Are ‘Unique Super-Predator’,” BBC News, August 20, 2005.

Anti-trust Enforcement in the E.U. and U.S.: Business, Government and Society

In 2014, the E.U. depended on Gazprom, a state-controlled Russian gas company, for one-third of the natural gas used in Europe. Meanwhile, Russia depended on the company for export-earnings. Moreover, both the E.U. and Russia view Gazprom from not only commercial vantage-points, but geopolitical ones as well. Both dimensions were in the mix as the European Commission weighed bringing anti-trust charges against the company in April 2015. At the time, the E.U.’s executive branch was already formally pursuing Google on anti-trust grounds. Relative to anti-trust enforcement in the U.S., the E.U.’s own represents a formidable attempt to open up competitive markets. We can generalize, in fact, to posit a more balanced “check and balance” between business and government in Europe.

The full essay is at “Anti-trust Enforcement in the E.U. and U.S.”

Oil Supply: Problem or Panacea?

Between June 2014 and January 14, 2015, crude oil prices fell by 57 percent. Between November 1985 and March 1986, the prices had fallen by 67 percent.[1] That time, it took nearly two decades for oil prices to rebound. Would it take that long again? The answer has implications for how efficient the market mechanism itself is, and in turn for public policy on energy and global warming.

The full essay is at “Oil Supply.”

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[1] Russell Gold, “Back to the Future? Oil Replays 1980s,” The Wall Street Journal, January 14, 2015.

Is Dark Trading Ethical?

“Dark trading” has a subterranean connotation, as if it were done by slithering snakes in the river Styx. In actuality, the term refers to trading in stocks that is done on computers that are less public than the exchanges. That is to say, the bid-and-ask quotations on a given computer network are known only to participants on it, and not to the traders on the public exchanges. Ethically, the public-private dichotomy is relevant. I submit that it reflects a wider trend in American society.

The full essay is in Cases of Unethical Business, available in print and as an ebook at Amazon.com.  

Wage Theft: More Companies Flouting Trust

If you are playing by the rules, not trying to cut corners at others’ expense, you need not let the bastards get you down. Of course, if your detractors catch you with your hand in the cookie jar, then blaming them only confirms that a sordid character flaw undergirds the stealing. As a business strategy, accusing union officials of having an agenda simply because they have identified cases of wage theft by the company is not exactly good public relations; in fact, the ploy sends a message that the managers at the helm are more interested in shifting the spotlight onto distractions than “manning up” to take responsibility for the unethical and illegal conduct at the employees’ expense.

The full essay is in Cases of Unethical Business, which is available at Amazon.

Human Weakness Enables Market Bubbles: A Nietzschean Perspective

As a young idealist in business school, I believed in the efficient market hypothesis; an efficient market based on perfect competition would obviate excess profits (e.g., monopoly rents) while keeping prices as low as possible. I assisted a professor with his article on the NASD (National Association of Securities Dealers) as a stellar example of industry self-regulation. The ideology cutting off the far left of my peripheral vision, I dismissed the possibility that an industry would look the other way on a miscreant firm as executives of other companies fear accountability from the industry association. Moreover, the business practitioners may profit, at least in the short term, from foisting on the general public the illusion of industry self-regulation, which can serve as a front protecting a squalid underbelly.

The full essay has been incorporated into (or swallowed up by) On the Arrogance of False Entitlement: A Nietzschean Critique of Business Ethics and Management, available in print and as an ebook at Amazon.

Efficiency and Ethics: On the Fairness of High-Speed Trading

Two months into 2012, the SEC announced that it had been examining the trading activities of high-frequency trading firms.  According to the Wall Street Journal, the SEC was “examining, among other things, whether high-frequency firms benefit from delays in the dissemination of prices from various corners of the markets. . . . High-speed firms use direct feeds from exchanges that can give them a leg up on slower traders.” High-frequency traders “can access prices a split second faster through their access to direct feeds.” This is accomplished by placing the trading computers in the same data center that houses the exchange’s computer servers. Just over a year later, the Wall Street Journal reported that high-speed traders were using “a hidden facet” of the Chicago Mercantile Exchange’s computer system “to trade on the direction of the futures market before other investors get the same information.” Even getting the confirmation of a high-speed trade just one to ten milliseconds faster can enable a computer to know the direction a commodity is going and trade on it. According to the Wall Street Journal, the “ability to exploit such small time-gaps raises questions about transparency and fairness amid the computer-driven, rapid-fire trading that increasingly grips Wall Street and confounds regulators.” Both the increasing use of high-speed trading and the problem of accountability from a regulatory point of view raise the stakes in determining the ethics of the practice. 

The full essay is in Cases of Unethical Business, available in print and as an ebook at Amazon.com.  

Tax Avoidance at GE: On Corporate Income Taxation

In spite of $14.2 billion in global operating profit ($5.1 billion on U.S. operations) in 2010, GE paid no corporate income tax to the U.S. Treasury that year thanks to offsetting prior losses by GE Capital (i.e., bad loans).  In spite of that unit having received TARP funds from U.S. taxpayers, the corporation was able to avoid paying any income tax. This seems like Rousseau's social contract run amuck: corporate welfere in exchange for nada.  Such a modus operendi is in line with the corporate mission: to economize in the sense of maximizing (or satisficing) what is taken in while minimizing what must go out.  In other words, a corporation aims to turn itself from a productive, lean throughput to a concentration of capital in its own right.

The full essay is at "Tax Avoidance at GE."