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September 7, 2017 | Epic Era of Financial Deceit Due for a Comeuppance

Danielle Park

Portfolio Manager and President of Venable Park Investment Counsel (www.venablepark.com) Ms Park is a financial analyst, attorney, finance author and regular guest on North American media. She is also the author of the best-selling myth-busting book "Juggling Dynamite: An insider's wisdom on money management, markets and wealth that lasts," and a popular daily financial blog: www.jugglingdynamite.com

In 1998-2000 I witnessed many promotional pitches from companies that used so many acronyms and buzz words that you were left none the wiser as to what they did even after a 15 minute presentation with glossy charts.  I remember thinking ‘perhaps I’m thick, but I’m not following your value proposition’.

Turned out skepticism was good self-defense.  When capital flows evaporated in 2000, shares of all companies fell, but the many with non-viable business models that had been just surfing waves of indiscriminate capital went bust, taking gullible buyers down for the ride.

In the latest speculative episode, buzz word genius has been all about ‘implementation methodologies’, ‘quantitative investing’, ‘risk-parity’ etc.   This clip says it all.

Ryan Tolkin, the CIO of a $16 billion hedge fund Schonfeld Strategic Advisors, helped us understand what quantitative trading actually is. Here is a direct video link.

If you’re shaking your head in confusion after listening, it means your dung filter is still working.  That’s a good sign.  The other little problem in all the confident talk about relying on computer models and taking human emotions out of investment decisions, is that the capital being ‘deployed’ belongs to humans who, in times of financial strife or falling prices, will ask for their cash back regardless of what the trading models suggest.

In the end, all this madness has only been possible by using the public purse to bail out and backstop financial intermediaries, allowing financial criminals to skirt prosecution, regulatory capture, high-powered computers and trillions of central bank prestidigitation that funneled ‘free’ money into casinos formerly known as ‘investment’ markets.

Still, as in every other prior episode, there is no doubt that this latest wave of financial fraud and abuse too shall end in a cremation of capital and players.  While the earliest riggers and skimmers had a remarkable run early on in this game, their success has had the usual full circle effect of attracting so many others and leverage into their game, that the legitimate ‘investor’ flows on which they preyed for profits have been marginalized, leaving an ocean dominated by sharks trying to feed on each other.  See The fastest traders on Wall Street are in trouble:

HFT firms have been facing stiff headwinds due to low volatility,” Richard Repetto, an analyst at Sandler O’Neill + Partners told Business Insider in an email. “Both implied and intraday volatility have been at lows making it difficult for HFTs to earn meaningful spreads.”

Total revenues brought in by HFTs from equity trading have dropped over 85% from $7.2 billion in 2009 to $1.1 billion in 2016, according to data from the TABB Group. The consultancy expects revenues to slide to $900 million this year.

The payback period has begun.  Couldn’t happen to a more deserving bunch of folks.

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September 7th, 2017

Posted In: Juggling Dynamite

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