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Monday, November 17, 2014

US Equity Markets

 Norway's Flag

We have an unfortunate tendency to be uninformed and desirous of remaining so. It is reflected in our political choices. The most recent elections here contained no mention whatsoever of the US deficit, a topic which was all the rage a few years ago.

If the topic is important, the ignoring of it in a hotly contested election needs explanation.

The explanation is that even the greatest issues are poorly understood, and this ignorance is the breeding grounds of the illiterate frenzy which we are whipped into by politicians and our media. I mean, why should any public figure or media company try to supply real information when ideology is so much more lucrative?

Anyway, the deficit is decreasing. After having sky-rocketed during the years of the Iraq and Afghanistan Wars and a Republican House of Representatives that never saw a spending bill they did not like  (remember Dennis Hastert's time as leader of the House?), the deficit is down to about where it was in the middle of the Reagan years.

So.... success.
A success that electorally seems to mean nothing.
I mean, you would think that that very fact of deficit reduction would be meaningful to the people who were so obsessed by it just 2 years ago; you would think it would be entered under the "feathers in our cap" column, instead of under "black eyes"...  or "Baghdadi beheadings".

The point of this post is our understanding of US equity and bond markets. I will wager that most of us think they are rather massive and monolithic and overly regulated.
Not quite.

In Bloomberg we read:

Norway Wealth Fund Outsmarts Flash Boys as Algorithms Abandoned
By Saleha Mohsin Nov 16, 2014 6:01 PM ET

Oeyvind Schanke, head of asset strategies at Norway’s $860 billion sovereign wealth fund, has worked out how to dodge traders in the U.S. trying to profit on his orders by leaving no pattern for them to track.

Investors who want to pre-empt trades by the world’s biggest sovereign-wealth fund and act on that information to make a profit -- a practice known as front running -- won’t have much success, he said.

“We’ve done a lot to try and avoid leaving those patterns,” Schanke said in a Nov. 14 interview at the Oslo headquarters of the fund. “We’re trading less using algorithmic trading now than we did some years ago and are doing much more trading in large block sizes to avoid pattern-reading.”

Norges Bank Investment Management, which runs the wealth fund as part of the central bank, held about $150 billion in U.S. stocks at the end of September, according to its latest quarterly report. It holds $500 billion in stocks globally and is Europe’s biggest investor. Schanke, who started at the fund as a trader in 2001, oversees which companies and instruments it invests in from NBIM’s London office.


The investor’s biggest challenge in the U.S. is the fragmented market structure, which has driven up costs across as many as 52 trading venues, introducing a “latency overcharge,” Schanke said.

The market as he sees it “isn’t good enough for raising investor confidence,” which has been an issue in the U.S. since the financial crisis and was deepened by the flash crash of May 2010. While the solution isn’t necessarily public ownership of exchanges, he said a closer look at the existing regulation could help make markets less complicated.

“Some of the things that an exchange does are in a way a utility function,” Schanke said.

The fund in June said it supported Brad Katsuyama’s IEX Group Inc. exchange because it allows “all players to participate on the same terms.” ...

I should think a fragmented market structure is a considerable impediment to our economic dream world "perfect" markets with "perfect" information available to all investors.
And I remember the Flash Crash, and I remember that subsequently people on the Street spoke of almost daily occurrences of computer-induced volatility.

At least the deficit is coming down, even though no one noticed.


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