High Frequency Trading

I just read an article that has caused me to stop and reflect. The article was about high frequency traders who, through the considerable power of high speed computers, trade millions of shares in what can be milliseconds. In one of the main forms of high frequency trading, the trader will capitalize on the difference on the price of a particular share that is traded in different markets. For example if a share is trading for $1.00 in New York but for $1.01 in Toronto, the trader will quickly buy large amounts of that share in New York and sell it in Toronto before that gap closes. $0.01 profit on each share of thousands or more shares traded done many times over the course of the day adds up. My concern is what is the point of this form of trading? Most high frequency traders use their own money or their own firm’s money, they don’t have clients in the traditional sense so the only one or ones who profit are the trader and/or the trader’s firm.

Stock markets were originally set up as places where companies could go to sell shares in themselves to investors in order to raise capital so those companies could further grow and develop and through that growth and development create jobs and provide a further base for taxes and, generally, better the economic condition of society as a whole. Today, much of what goes on in the different markets, is not about creating a more robust, stronger society through the improvement of companies looking for investors to help them grow. Now much of the activity in the market place is simply about making a profit for the banks, investment firms, and some investors with little or no regard for building up society through investing in companies to allow them to grow and in so doing make society a better place for us all. For much of our investment industry, it is now about profit for profit’s sake and if society is impoverished through this hunt for profits, well who cares? That’s what investing is all about, eh? The chase for profits with little or no regard for the society that provides the infrastructure for that profit chasing to take place.

The article on high frequency traders high lights this point I’m making. Such trading builds nothing for society as a whole; its sole purpose is profit only for the traders with no care whatsoever that that profit chasing could well have a negative impact in the long run on all of us. One of the problems around high frequency trading is that we don’t know what its long term effect on society (and the market place) will be. Its proponents say it can only do good – high frequency trading, they say, creates more liquidity (anyone can get an order filled quickly at the market price) and lessens the spread between the high price traditional brokers charge clients who want to buy and the low price those same brokers offer clients who want to sell . However, its critics say such trading could have the effect of blowing the markets up much like the more traditional trading in those toxic investments that precipitated the economic meltdown of 2008/2009. It makes me nervous that once again we, the public, are unwittingly riding the tail of an investment dragon that could well have a serious negative impact on our way of life. Where is the due diligence from both the investment industry’s supposed self-regulatory system and our government on how trading in such a risk filled manner is still, even as we are slowly recovering from the last economic disaster created in large part by a failure by all parties in their regulatory responsibilities, allowed to operate when the real consequences of that form of risky trading are not known?

February 2, 2010 at 12:29 am 2 comments

World Economic Forum

Bankers and government leaders are meeting now at the World Economic Forum in Davos, Switzerland to discuss regulatory reforms to banking practices that led to the recent economic meltdown and a subsequent world wide public outrage at how banks, particularly in the US, Britain, Germany and France, almost destroyed the world economic system in their orgy of greed and extremely poor judgements. The bankers are there in force to try to head off proposed government regulations that would govern how they trade, tax their bonuses and have the banks organized such that single banks cannot get so big as to threaten economic disaster if they fail. The bankers are fighting these proposed regulations tooth and nail. “We will all be losers if we don’t have an efficient market in place”, said Joseph Ackerman, the chair of Deutsche Bank, implying present banking structures aren’t that bad. When the banks were allowed to operate basically as they wished, incredibly short sighted (read short term profit driven actions with no thought given to what the consequences would be as a result of their rush for profits through trading in investment vehicles that were toxic to say the least) actions governed only by how much money they could make were the preferred actions of the day. The pendulum will probably now swing in the other direction and regulations, perhaps regulations that are too harsh in reaction to the damage the banks did to the world economy and all the suffering they caused to so many people, will be enacted by governments to protect themselves from the past capricious behaviour of the banks.
Underlying this sorry economic situation is a dearth of ethical awareness and practice by the banks. They violated trust, treated people not as human beings but as mere things on their accounting ledgers to be treated as after thoughts, if at all, to their drive for profit and did not live up to their fiduciary duty to their clients. In short, they betrayed everyone who counted upon them to display even a modicum of responsibility and accountability that society had expected of them. A profound lack of character was demonstrated by many in the banking industry leading up to and immediately after the economic crisis. I think, rather than arrive in Davos to protect themselves and their privileges as best they can against the governments who will curb their freedom of action to protect their citizens from further destructive bank practices, the bankers involved should do a reality check on their own characters and the flawed ethical stances they showed to the world that led them down their destructive path to chase profits and bonuses in such a destructive manner. No constructive change will really take place through regulations unless the bankers themselves show a greater ethical self awareness and an ethical corporate awareness. No ethical change means no real change. Kind of like putting perfume on a pig….you still have a pig only, on the surface, it smells a little better.

January 28, 2010 at 9:29 pm Leave a comment

Corporations and Politics

Citing freedom of speech, the US Supreme Court by a 5-4 decision allowed corporations to pour as much money as they want into the political process of the US. As well as using their many lobbyists to influence policy makers to see things to the corporations’ advantage, corporations can now spend as much as they want to influence the election of those same politicians. The court stated that the corporation is a person in the legal sense and as such has all the rights of a flesh and blood person. Corporations can sue and be sued, can be found guilty in a court of law, can be punished just like any real non-legally created person; the only thing a corporation can’t have happen to it legally is to be sent to jail.
I think this is lunacy from an ethical point of view. Not even considering whether or not a corporation is in fact a person like you and I or merely a legally created ‘person’ which is a whole other conversation, this decision, while legal, is ethically bankrupt. First of all, while the courts say corporations represent their shareholders and therefore can lobby for those shareholder needs, shareholders in any one corporation are not a unified whole. Shareholders are individuals each of whom has his or her own political viewpoints. Fairness is a critical ethical issue here. For a corporation like a bank to heavily fund a republican candidate, for example, because that candidate favours deregulation of banking laws assumes that every shareholder in that bank shares the same political viewpoint as the bank’s leadership. In fact that will never be the case. There will always be shareholders who, for whatever reason, don’t favour that viewpoint. How is the corporation then representing their viewpoints if those viewpoints do not coincide with the bank’s CEO? What we have is a sham, under the guise of the law now, in which the political and economic views of the corporate leadership cadre are assumed to be everyone’s viewpoint who is a shareholder. This corporate viewpoint then becomes the corporate ‘person’s’ viewpoint even if it is not the viewpoint of all the shareholders.
Every citizen has the right to vote but that right can only be exercised by the citizen physically going to a polling booth to caste his or her individual vote. A corporation cannot vote; while it may be deemed to be a ‘person’ for legal reasons it cannot cast an individual vote. Yet it can use all the resources it has available to it as a massive organization to influence what information gets out to the voting public and how that information is packaged or spun for maximum effect to the corporation’s benefit (read the corporate leaders’ sole interest is the interests of the corporation even when those corporate interests undermine or outright conflict with the public’s interests). In this case the values of fairness, honesty and respect can be severely compromised to pursue the well-being of the corporation at the expense of society as a whole. It has been profoundly proven by the recent economic crisis that what is good for the corporation is not necessarily good for society.
Democracy is not perfect. Yet it is the best political system we have developed that serves the well-being and interests of all citizens. This Supreme Court ruling undermines democracy. Historically, democracy evolved to protect the interests of the general citizenry from being usurped by the powerful few. We call rule by the few an oligarchy. What this ruling has done is paved the way for a dominant and controlling few, the corporate oligarchy, to unfairly influence our democratic process through its access to vast amounts of money and the influence that money can buy to pursue its own profit seeking agenda against the well-being of society as a whole. Ethics is about creating real trust so society can function well and all individuals have the opportunity to flourish, not just those who have access to huge amounts of money to support their own special interests. That trust has been severely undermined by this ruling.

January 26, 2010 at 4:11 pm Leave a comment

No Sex Please…we’re from Bay Street

I see Canada’s financial wheelers and dealers are having trouble with backing a sure fire money maker. Its a company called Avid Life Media and this company happens to own a number of online dating sites including AshleyMadison.com which just happens to encourage its members to commit adultry. It seems the finance types feel they couldn’t get their clients to invest in such a firm that promotes “sin”. Now here’s the problem for me. On Bay Street investing professionals have no problem recommending their clients invest in defence industries whose products kill a lot of people (studies show the killing products of most defence industry firms end up killing far more civilians than combatants), or in the tobacco industry whose addictive product either sickens or kills those who use it, or in certain firms who support third world dictatorships in order to gain access to said countries to make money hand over fist. So, its alright to profit through investments that lead directly to killing, maiming and exploitation and repression but not to profit in a firm that encourages marital infidelity? Is there a priority of levels of “sin” in which investment is pursued or in which investments are discouraged? Is there a professional development course members of the investment industry take that helps them manoeuvre through these murky ethical minefields to decide which “sins” – products that kill, products/services that encourage sexual wildness, partnerships that support repression and exploitation – are OK to invest in and which are not? How is the financial moral compass calibrated in such matters?

Just asking.

January 25, 2010 at 8:18 pm Leave a comment

The “War” on Banks

So, according to the media, President Obama has declared war on the banks. I suppose, using this war analogy, I could say the banks have been waging a successful guerrilla war against general society for a long time. They, particularly US and European banks, have successfully reaped all the profits of their dealings while also, very successfully I might add, shifting all of their loses onto the taxpayers. It has definitely been a one sided battle until now with the banks always holding the upper hand. I think it was Teddy Roosevelt who said that too much wealth concentrated in the hands of too few people will create an unbalanced political environment in which the wealthy will hold much of the political power. It sounds like he was describing our present situation! Through the use of well paid lobbyists pushing bank influenced agendas to government officials and the many individuals in the banking industry who seem to flow seamlessly back and forth between government jobs that set banking policies that are highly favourable to the banks and well placed jobs in the banking industry that benefit from those same policies, regulations governing banks have been lax to say the least. Talk about a cozy conflict of interest situation. The banking mentality, not so much in my experience of the front line people who daily deal face-to-face with the general public and understand the need to cultivate trust  but particularly of middle to senior management where contact with the general public is minimal, is one of entitlement and short sightedness. It is a me-first attitude that wants all the bells and whistles that go with the job but little or no responsibility or accountability for the negative consequences when chasing those bells and whistles causes economic disaster for the general public. That the banks refuse to take responsibility and accountability for their errors is not in doubt. All their past actions prove this point. The public has only one champion to look after its interests when those interests collide with the banks profit driven interests and that champion is the government that is elected by the people to make the best decisions for all of us. The actions outlined by President Obama to curtail the excesses of US banks are long overdue. The public has not been well served by the selfish and self-serving actions of the banks . Banks have clearly demonstrated through their actions since the recent financial meltdown that they are incapable of changing their ways. The only solution to create a fair playing field in which public interests are held as equally important, and in some cases more important, than the interests of the banks is for government, as the representative of all of us, to step in and regulate banking activities so these activites assist us and not ruin us. In this way banks will be forced to play the role society intends for them, which is to support society not to fleece it.

January 22, 2010 at 4:27 pm Leave a comment

A Tale of Two People

Yvonne Martin died yesterday. She had just landed in Haiti when a deadly earthquake struck killing many thousands in Port-au-Prince including her. Ms. Martin was a nurse from small town Ontario who was volunteering her time to help poor Haitians receive much needed primary healthcare. This wasn’t the first time she had gone to Haiti to give of herself to those less fortunate than herself.

Lloyd Blankfein is the head of the investment bank Goldman Sachs. On the day Ms. Martin died in Haiti, Mr. Blankfein, along with three other heads of major US financial institutions, was being grilled by the Financial Crisis Inquiry Commission on his firm’s role in the recent financial meltdown. While admitting mistakes were made and saying he was sorry for Goldman Sachs’ role in the financial meltdown, Mr. Blankfein at one point used the analogy of the financial meltdown being a “rare hurricane”. One of his fellow CEOs who was being questioned by the Commission, James Dimon of JPMorgan Chase & Co., referred to the financial ruin caused by Wall Street practices as a market correction. Both Mr. Blankfein and Mr. Dimon appeared to be proponents of that old adage ‘shit happens’ and so what are you gonna do?

Ms. Martin was killed by an earthquake. Earthquakes and hurricanes are, for the religious minded and insurance companies, acts of God and for the less evangelical among us they are destructive forces of nature beyond human control. Ms. Martin’s deadly earthquake was an uncontrollable force of nature. Mr. Blankfein’s rare hurricane and Mr. Dimon’s market correction didn’t just happen by some mysterious force of nature. On the contrary, they were the logical results of destructive human choices and actions.

Ms. Martin’s choices and actions were dedicated to the betterment of the lives of poor Haitians. She was using her own being as vehicle for human understanding and her healing actions as a means to assist others to have hope for a better life. Her selfless actions created trust in those she encountered in the goodness of humanity. By all accounts, Mr. Blankfein is a great guy. A leader with a great sense of humour, he is the Financial Times’ 2009 man of the year. In contrast to Ms. Martin’s actions and her selfless reasons for being in Haiti, however, Mr. Blankfein’s actions created massive distrust and outright despair for massive numbers of people. His actions as the CEO of one of the key firms on Wall Street were a root cause of the financial meltdown of 2008/2009. Those actions were driven, as has been recorded countless times in the last year by many different analysts, writers, commentators, even politicians, by greed, by ultimately catastrophic financial practices aimed at quick profits for a tiny number of insiders with little concern for the disastrous consequences of those practices on the larger whole and by a true lack of taking responsibility for the mess he and others like him created until they were forced by Congress to say ‘sorry’.

Maybe on Wall Street Mr. Blankfein is the man of the year but when looked through the lens of human decency, my vote goes for Yvonne Martin.

January 14, 2010 at 9:14 pm 1 comment

Promise Keeping

I am concerned about the apparently elastic understanding of promise keeping that seems to be so embedded in many of our businesses today.  The ongoing case of US Steel and its shutting down of its Canadian subsidiary is a good example of what I mean.  US Steel bought a Canadian steel maker, Stelco, in 2007. Canada is concerned about foreign ownership of certain industries like steel making. The concern centres around foreign owners shutting down recently bought Canadian firms. To protect Canadian interests, the Canadian government applied the Investment Canada Act to foreign purchases which, in a nutshell in the US Steel case, extracted promises from US Steel that, in exchange for approval of the Canadian government for the purchase of Stelco, US Steel would not shut down Stelco. US Steel made these promises and the Canadian government gave its approval for the sale of Stelco to US Steel.  Shortly thereafter, the world steel market contracted due to the world wide recession and US Steel subsequently, negating its promises to the Canadian government, shut down Stelco throwing thousands of people out of work. The Canadian government subsequently sued US Steel for failing to live up to its promise. This case is currently in court. US Steel is defending its promise breaking on the vagueness of the Investment Canada Act.

Whatever the outcome of this court case, US Steel has created an ethical problem for itself.  It broke its promise.  Initially, US Steel justified its promise breaking on the grounds it was making a business decision and that business decision took precedence over its promise to the Canadian government and to the steelworkers of Stelco (not to mention all the suppliers to Stelco who were also adversely affected by the decision to shut down Stelco).  US Steel was arguing its case from a utilitarian ethical standpoint – the consequences of the action confirm whether or not the action was ethical or not and the consequences of the action must benefit more than just the decision maker but also those affected by the decision maker’s decision – the greatest good for the greatest number.  In this case, US Steel looked solely at the consequences to itself and its bottom line as the measure of the rightness or wrongness of its decision to shut down Stelco.  It appears to have based its decision on a negative axiom of the utilitarian stance – the end justifies the means.  This is a dangerous ethical path for anyone or any firm to walk.

Ethics attempts to create trust so that we can work effectively with one another.  A cornerstone of trust is promise keeping – you do what you say you are going to do.  By trying to rationalize its decision to shut down Stelco, US Steel has shaken this value of trust.  If US Steel breaks trust by not keeping its promises to the Canadian government and to the employees of Stelco one can question its commitment to creating trust in relation to its bottom line.  Would it surreptitiously encourage its salespeople to offer, for instance, perspective clients delivery dates the salespeople know cannot be met just to close the sale? What is US Steel’s criterion for breaking trust in the former case but not the latter?  What does promise breaking do to the corporate character of US Steel?  The ethical danger for US Steel in selectively choosing to honour its promises is that it embarks on a slippery slope that adversely affects its well-being as a corporation that requires trust to be successful in a highly competitive and constantly changing market.

January 13, 2010 at 8:19 pm 3 comments

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