Posts Tagged ‘HFT’

From Black Friday to Derivatives Saturday

November 28, 2015

Back in the crash of ’08, clueless underlings such as myself suddenly were made aware of a mysterious component of our financial system called “derivatives.”

What is a derivative? you may ask. Funny you should ask. I didn’t know either, and I still don’t. Although I have been trying to figure it out for seven years now, every time I think I know what a derivative is, I encounter acronymic terminology such as MBS, CDO, or SEC.

These slimmed-down nomenclatures should simplify things, but they do, in fact simplify nothing. Although everybody knows SEC stands for Southeastern Conference, which is the football conference where the best American football is played, and where my alma mater LSU exercises its right to excel in athletics, except when teams like Alabama or Florida are on the field.

Tyger

But I digress. I was explaining to you what a derivative is and I mentioned some of the simplifying terminology.

For instance, as alluded to above: MBS.

Well some well-positioned bloggists of the worldwideweb identify an MBS as a Masters of Bullsh*t, which is attained through much blood sweat and tears and dedicated gamesmanship acquired at a venerable institution, such as Barnwell University or Cayman College. The MBS is attained through years and years of shoveling potentially useful data into HFT, which produces a yield from which its index is derived,  and lucrative assets which are then deposited into accounts on behalf of the bullish denizens of WallStreet. These rich deposits build up the notional value of our economy as a hole, thus enriching all of us, not only those who are forever horsing around on Wall Street, but also  you and me and all the folks on Main Street, Easy Street and Ventnor Avenue.

Somebody has to do it. I don’t mind doing my part, working with a shovel. Keeps me in shape.

Anyway, that’s not the MBS of which I spake. I’m talking about Mortgage Backed Securities. I think Uncle Freddie Mac and Aunt Fannie Mae gave these instruments as gifts back during the holidays of 2007, when life was oh simple then, before time had rewritten every line.

My understanding of a Mortgage Backed Security is that they’re something like an Arkansas RazorBack, which is probably why they didn’t work out so well for investors, although Arkansas is ranked third in the SEC west, behind Florida and–excuse my language–Ole Miss.

After that is my LSU Tigers, presently in fourth place of SEC west, but as always and forever will be, bound for greatness.

It’s quite complex to describe just how LSU could be in fourth place, because its position in the rankings is derived from the ratio of victories to losses, divided by the number of footballs passed beneath the legs of a center when he hikes the ball to the quarterback during any given play of the game.

Nevertheless, as I was saying before, a derivative is derived from the outcome, that is to say the, rear-end of a complex financial instrument.

Now I’m sure you’re wondering, as any serious investor is wondering, about the real question here, which is: how much is it worth?

One thing that my research has revealed, and one thing I can tell you with surety is this: The value of any particular derivative is derived from fluctuations in the value of the underlying asset.

Here’s an example: how much is my ticket to this season’s Sugar Bowl worth? Well, at this point it’s an open question, but let’s just say this: I’ll give you my ticket to the Sugar Bowl for your two tickets to the Orange Bowl.

Meanwhile, back at the ranch (Texas Aggies be forewarned), the guys who are shoveling out in the barn are asking what’s the real value of these derivatives. And as I explained before, you remember that the value of any particular derivative is derived from fluctuations in the value of the underlying ass-set. That should come out plain enough.

As for the collective value of all the derivatives, this figure is derived from its notional value, which is calculated based on the notion, as defined by the US Treasury, the Fed, the NYSE, and the AP sportswriters, that whatever goes around comes around, so therefore if the value of the aforesaid derivatives passes through enough piles of assets then when it comes out the other end nobody really knows what its worth, so that it can be revalued at the going rate.

This is unpredictable, of course, as the LTCM affair had indicated  back in the Glass-Steagall days, but it is bound to be worth, somehow somewhere when you least expect it, more than it was in January of 2009. So that’s progress, although the Progressives may not agree with me. I don’t pay much attention to all those freaks on the fringe anyway.

And you understand, of course, that all this has taken place after Cronkite passed from the scene.  Before that, it was pretty much everybody working together in America toward the same values and goals. But that was then and this is now. Derivatives happens.

I’m glad I could clear this up for you. As for the Sugar Bowl and the Orange Bowl,  may the best team win, as it frequently does, but sometimes not.

 

Glass Chimera

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Dat’s a Millennial trap Rap

March 21, 2015

Oh the Fed treadeth so so lightly

tryin to state the state of things so politely

gotta keep them interest rate so low

but them cant get much lower than half-point from zero;

now it be knockin’ hell outa euro,

propellin’ Dollar to once and future hero.

To raise them rates would be classically correct

oh but then them traders might eject

their programs from gliding oh so perfect

along HFT tracks that them algorithms select.

Autie Jan cant withdraw the punchbowl;

uncle Ben had schooled her ’bout that donut hole.

As you go through life, investor, whatever be your goal

keep your eye on the Fednut, not on the whole.

Kick that can, baby, kick it down the road;

we don’t want them bulls havin’ to unload.

Keep ’em buying on the dips

with e-eyes fixed upon them blips,

Watch ’em risin’, selling on the peaks

this trend could fly for weeks n weeks.

But hey! them near zero rates punish savers;

it aint like it used to be, with small-bank favors.

How them millennials gon’ pay back them college loans

while Zirpy Fed hover in zero zones?

Meanwhile, ‘though emerging nations buy them new cell phones

jihad jinx be out slashin’ no-go zones,

which aint no climates for no new homes,

juxt red-line zones with bloods n bones.

What kinda world is that

for anything but talkin’ skat?

And with no nest-egg savins in the bank,

wha you gon’ do, drive a tank?

Maybe risk your small-caps in data high-risk market,

or spend it at all while at walmart parkin?

I say this secular stagnation

it juxt stultify my ‘magination.

With nutt’n on balance sheets but diminishin’ returnin’s,

where I gon’ stuff my hard-earned earnin’s?

Wit dem central banks winkin’

and HFTs a-blinkin’

and all dem ole free-market opportunities shrinkin’,

I think I feel them fabled long-tails slinkin’

which means I need a different way of thinkin’.

Pshaw! nuf, that ole magic growth it refuse to come

even ‘though gas price be low as scum

While .gov employment indicators

morph to .gov-on-fumes manipulators,

central banks toss hot potato;

but feel to me like rot tomato

Gotta get them econ0my off QE methamphetamine,

get it back on track, American Dream!

Is that dream now juxt pie in the sky?

Just sayin, wtf, don’t ask me why.

But hey! I be tryin’ to discern these market dynamics

and hopin’ there aint no market titanics.

Someone said it juxt a rigged game

for the 1%, you know dem with wealth and fame.

But I’s gon’ get in this game;

ask me again n’ I’ll tell u the same.

It the only game in town that I know of;

I know it still be there when them push come to shove.

And when them market collapses, like them big house of cards,

then I’ll jump in the game; I’ll scoop up them shards!

As them fluffed-up values deflate in them crashes,

it’s then I’ll buy in, as them fall on them assets!

 

Glass Chimera