Tuesday, February 19, 2008

Fast money (really, really fast money) is transforming Wall Street

Guambat once allowed as how it appeared to him that the market
is becoming dominated by big, lightning quick money.

Oh, the Big Boys have always had a major impact, and in that regard there is nothing new. They've always enjoyed their power to push the market this way or that. They've always enjoyed a clubiness that allowed for information to be shared in ways that didn't quite pass the "insider trading" bright lines. But they usually bought stuff to own it, to manage it, to work it, to put it in thieir trophy room.

But these new guys are not just big bullies; they're bold, cold Matrix-like machines.

[The market now] is a streak of cyberdata, a stateless, motherless virus hellbent to ambush, arbitrage and retreat faster than a ninja.

And they are everywhere, in to everything. Their bytes permeate every conceivable market, like a monstrous whale sieving the nutrients and little, bottom-of-the-food-chain investors and small players from the oceans of cash that trade the world's goods.

They derive their gains from diverse derivatives of incalculable numbers and varieties, trading the shadows of what used to be a currency or a commodity or a stock or a bond, but now come under the most obtuse and arcane of names that only financial rocket scientists can understand.

Their trade is in ideas and concepts and notions and algorithms, not things and companies.
Bloomberg is putting some numbers on the hypothesis, showing the scope of the dealings are even way beyond Guambat's wildest dreams:

Equity Trades Defy Economy as Wall Street Transformers Abound, By Edgar Ortega
The biggest surprise on Wall Street this year is proving to be the record $16.3 trillion of shares traded in the U.S. as stocks show no sign of rebounding from the first bear market since 2002 and the economy teeters on the brink of a recession.

Average daily trading on the London Stock Exchange in December and January was 87 percent higher than a year earlier. Records were also set last month on German exchanges and NYSE Euronext's four European bourses, where 80 percent more trades were completed than a year earlier.

The increase marks a break from history since trading has declined in all but one of the last six bear markets for U.S. stocks.

A major difference now is the proliferation of hedge funds seeking to profit from swings in stock prices, according to Duncan Niederauer, who worked at Goldman for 22 years before being named chief executive officer of NYSE Euronext last year. Hedge fund assets have swelled to $1.87 trillion, almost four times more than in 2000, according to Chicago-based Hedge Fund Research Inc.

Hedge funds are private, largely unregulated pools of capital that use a wider range of trading strategies than most mutual funds, including betting on a decline in stock prices and using derivatives. In total, they account for about a quarter of trading in the U.S. and generate $3.2 billion in commissions

Citadel Investment Group LLC -- Kenneth Griffin's Chicago- based hedge fund named to suggest a stronghold in volatile markets -- uses mathematical models and advanced computer systems to make investments that translate into about 5 percent of U.S. equity trading.

D.E. Shaw & Co., which oversees $35 billion, relies on automated, 24-hour-a-day strategies that exploit shifts in asset prices around the world. The New York- based fund accounts for between 1 percent and 2 percent of trading at the NYSE.

Like the giant, shape-shifting robots featured last year in "Transformers," the movie from executive producer Steven Spielberg, the electronic trading systems tackle a blizzard of tasks in fractions of a second.
Citigroup Inc.'s Automated Trading Desk tries to predict prices for 8,000 stocks 30 seconds into the future to give the largest U.S. bank an edge on rivals.
Credit Suisse Group, Switzerland's second-biggest bank, expanded its rapid-fire algorithmic trading programs to more than 30 countries and almost doubled its equity revenue over two years to 7.75 billion Swiss francs ($7.03 billion).

"Times of extreme volatility tend to favor the stronger players, who have the technology and balance sheet."

So do all other times, Guambat reckons.

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