Friday, April 25, 2014

Rhetoric of Populism vs. Traders and Technicians

On April 18, 2014, the city of Providence, R.I., added to the growing list of lawsuits against exchanges, brokers, and HFT specialists. This demonstrates the power of narrative. The Lewis book, Flash Boys: A Wall Street Revolt, contains nothing new, no breaking story or previously unpublished information. But, Lewis' ability to tell a story and tell it well compels politicians to respond.

Remember, state attorneys general run for office; public officials remain politicians, not mere lawyers. As the media and voting public demand action, the financial industry faces growing pressures. This happened with tech stocks (how VC were taxed), the home lending industry, and now HFT. Laws pass on emotion, seldom offering good solutions to perceived problems. The lawsuits relating to HFT will culminate in regulatory changes, if not outright wins in court.
(Reuters) - Dozens of the largest U.S. stock exchanges, brokerages and high-frequency trading firms were hit with a class action lawsuit by the capital of the state of Rhode Island, accusing them of manipulating the U.S. securities markets.
New York Attorney General Eric Schneiderman's office has been investigating high-frequency traders for several months. Schneiderman has personally spoken out about the issues, including penning a commentary in the New York Daily News about HFT on April 3.
Tamara De Silva, said that while the lawsuit wasn’t inspired by the Lewis book, her clients “felt vindicated” by it. De Silva, who didn’t cite any specific instances or evidence of two-tiered access in the complaint, is seeking class-action, or group status, on behalf of all users of real-time futures market data from those exchanges from 2007 until the present.
The power of rhetoric, the power of stories over data... and what you need to master in business or public service.

Having worked in banking compliance for several years, I caution my students against assuming these issues apply to others, not the technical teams. Investigators seize computers, source code, databases, and other technical properties first, not last. The technical teams answer questions first, and tend to be first released by firms under investigation. General Motors started releasing mid- and high-level managers last week to placate politicians regarding the ignition switch problems and their bankruptcy filing. Bankruptcy, a financial device, becomes "fraud" if you file in part to avoid legal liability. GM blames their "financial team" for some choices, now, since those choices were based on risk analysis.

Learn to tell your stories, I advise students interested in technical aspects of finance. Tell the narratives of what you do, in a compelling manner. People distrust complexity, and politicians exploit that distrust.
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Friday, April 18, 2014

Facebook, Twitter, and more

Instead of blogging everything I read or hear, I use Twitter to promote the better content I encounter online.

Twitter seems to be the replacement for RSS feeds, sadly. I miss the old, text-centric days of newsgroups, mailing lists, and feeds. Oh, well. The market has spoken. 
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Friday, April 11, 2014

The Great Sort's Result: The Middle is Dead in Congress. Really Dead.

The "Great Sort" at the local and state level, not the evils of redistricting, has changed our government — and, more importantly, our national discussions on all issues. And I do mean all issues, because studies show left/right; progressive / liberal / libertarian / conservative; secular/religious; North / South / East / West; and other ways to group people correlate to music choices, television viewing, trust in government, and much more.

How can we prove that redistricting isn't the villain behind our political discourse? Easily: we look at the Senate, which should represent entire states, not statistically modeled and gerrymandered districts. Yet, the Senate, supposedly the great deliberative body of our government, has become little more than yet another left-right battleground.
The ideological middle is dead in Congress. Really dead.
April 10 at 11:08 am

More intriguing — and harder to explain — is how the middle has dropped out of the Senate, which is not subject to redistricting and, because Senators represent entire states, self-sorting should be less powerful.

Well more than half of the Senate fit between the most liberal Republican and the most conservative Democrat in 1982. For the last two years, there has not been a single Republican with a more liberal voting record than any Democrat and not a single Democrat with a more conservative voting record than any Republican. Not one.
Personally, and purely anecdotally, I have experienced the Great Sort. More illustrative, I've been a part of it. The result is that entire regions are growing more homogenous, with islands of urban progressives dotting a nation of conservative rural and libertarian exurb voters. You can draw rings around many cities, with the "beyond" areas socially, fiscally, and internationally conservative. The outer rings are more libertarian, with white-collar workers who are fiscal conservatives, social liberals, and foreign policy isolationists. And then, you have the cities, where progressive ideologies hold sway.

The result is that states are sorting based on which states are rural and which are more urbanized. Red gets redder, blue gets bluer, at least in terms of election results. Even a slight majority of one extreme or the other leads to the election of Senators representing polarized views and depending on voters from their individuals states' majorities. Senators now ignore constituents with moderate views and those unlikely to ever support the Senators' parties.

As Chris Cillizza observes:
Taken together, there are four -- FOUR -- members of the ideological middle out of the 535 members of the House and Senate combined. That comes out to approximately .7 percent of the entire Congress. In 1982, by way of comparison, more than 75 percent of Members of Congress were part of the ideological middle.

So, in the last 30 years, the middle has lost 74 percent of its membership in Congress. And when the middle is represented by less than one percent of the entire Congress, it's not an exaggeration to say the center is gone.
I am a exurban resident. I live in a single-family home, in a limited access (single-entry, no gate) neighborhood, among college-educated white-collar professionals much like my wife and me. We are the muddled middle, unrepresented by the parties, unrepresented at the local, state, or federal levels.

Sorting occurs, naturally, in most ways. We select careers that represent our ideologies. We select workplaces that are comfortable. We choose to live among people at least more like ourselves than unlike us.

I'd be unhappy in a city, and I'd be unhappy in complete isolation. I want my space, my house, my land, but I don't want to be entirely cut-off from the comforts of the suburbs. My ideology also reflects that desire to balance independence and community.

Where I teach, and what I teach, also represent my ideological biases. I teach in a business school, at a university known for technology and research. My workplace reflects my views on work; even the school motto fits my ideology: "My Heart is the Work." That's not an institutional motto most of my colleagues in the liberal arts would embrace with zeal.

How sorted is your life? It might be more sorted than you realize.

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