Showing posts from October, 2010

High Frequency Trading and Flash Crash – 1: The Ones Who Saw It Coming

The ignorant, pompous academics who created “Continuous-time Finance” — ignorant because they were pompous, pompous because they were ignorant — considered it the crown jewel of their intellectual achievements. Happy were those years of success in the limelight, with this one nominating that one for the Nobel Prize who then turned around and nominated this one for the same. Nobels all around, was the happy cry. Nobels to the Crowd!

To understand Continuous-time Finance (CTF), we have to understand Newtonian mechanics and its language, differential calculus.

Newtonian mechanics revolve around key terms like instantaneous speed and constant acceleration. These are not intuitive concepts. The only way of really grasping them is through mathematics, specifically, calculus. In fact, this branch of mathematics was invented by Newton (and independently, by Leibniz) for that very purpose.

Newton was working to solve the puzzle of the working of celestial bodies that begins with the old question:…

The Foreclosure Mess: 7 Reasons Why It's Much Worse Than You Think

We're in a big, big mess with home foreclosures in the U.S. (foreclosuregate, if you will). I'm not sure many people understand the awful magnitude of this train wreck. So here is my look at seven reasons why it's much worse than you think. Below I partly synthesize much of the fine analysis being done elsewhere (Mike Konczal has been absolutely superb on this issue, as has Yves Smith).

Quick background: In 1996, a private company was formed called Mortgage Electronic Registration Systems, or MERS for short. Why should you care? Chances are better than 50-50 that, if you own a home, MERS officially recorded the mortgage -- probably unknown to you. MERS is headed by R.K. Arnold, a former U.S. Army Ranger with a law degree from Oklahoma City University, ranked #104 in the nation this year by the Association of American Law Schools.

Now you may be worried that Arnold, a guy who apparently doesn't exactly have a stellar legal pedigree, is the CEO of this giant institution th…

Verdicts on TARP: What I Wish I'd Said

When the authority of TARP recently expired, a predictable flurry of opinions made cases for and against the largest bank bailout Western civilization has ever known. I could weigh in too, but I found someone who expressed my sentiments so well, I'd just like to quote her for a few short paragraphs.

Alice Schroeder was writing in Businessweek about Charlie Munger, Warren Buffett's right-hand man, who rather scornfully told an audience of Michigan college students that we "shouldn't be bitching about a little bailout" of the banks. Munger also said, in a curious application of the second-person pronoun (is he secretly from another civilization? or planet?), that the bailouts were "required to save your civilization." (The phrasing carries the whiff of the moral harangue from the elder who knows best; one imagines gramps pulling his cracked leather belt from his trouser loops and announcing to the youngster about to get a good strappin', "I'm…

The Laborers of the World! Behold the Three Nobel Prize Winning Labor Economists: Larry, Curly and Moe

In an ideal world, I would not have bothered with this year’s three Nobel Prize winners in economics; they would not have merited a mention. But this is not an ideal world.

According to the New York Times, three men won the Nobel Prize in economics for their work on “markets where buyers and sellers have difficulty finding each other, and in particular on the difficulties of fitting people to the right jobs.”

So, in a nutshell, the contribution of prize winning scholars to economics is applying the business model of dating services to the labor market.

As for the specific applications of their research:
Some of the applications of the research include understanding why unemployment rises during recessions, why similar workers get different wages, why wages do not fall much during recessions even though that might make additional hiring more attractive to employers, and how so many people can be unemployed even when there are a large number of job openings available.Three mature, presumab…

Translating a Sophisticated American

Today, on its front page, the Financial Times informed its readers of a “call for new global currencies agreement.”
The Institute of International Finance, which represents more than 420 of the world’s leading banks and finance houses, warned on Monday that a lack of [a] coordinated rebalancing could lead to more protectionism. Charles Dallara, IIF managing director, said: “A core group of the world’s leading economies need to come together and hammer out an understanding.”So, forty years after that mountebank, Milton Friedman, swore by his mother’s grave that adopting a “free” exchange rate regime between the currencies would cure all the ills of humanity, including the balance of payment problems, we have to come to this: the spokesman for 420 of the planet’s leading banks and financial institutions is calling for some kind of “understanding” in the currency market. You realize he cannot say regulation or currency management. So, he says “understanding”.

(That’s what Friedman said: i…

A Commentary on the Joint CFTC-SEC “Flash Crash” Report

I have been busy lately reading and rereading Hegel; what he wrote and what is written about his philosophy. I had to. Writing a volume on Dialectics of Finance demands having a dialectical method at one’s fingertips and I noticed in certain places I wasn’t up to par. Hence, the need for going back to the original source.

Hegel purports to explain the world. That’s a tall order. To that end, one must first explain what is meant by “explanation”. At what point, when or how, will we know that the world is satisfactorily explained?

The apparent way of explaining something is pointing to its cause. If we know A is caused by B, then we say that the cause of A is known, or A is explained. The cause of boiling water, for example, is heat; it boils when it is heated to 100 degrees Celsius.

But the world cannot be explained in this manner. Assuming we could show that A is caused by B; B by C; C by D, etc., the last phenomenon – “the first principle of the world” – by definition, will have no caus…

Geniuses at Work

Early this week, the MacArthur Foundation announced the winners of its 2010 “genius awards”. Twenty three geniuses were granted $100,000 a year each for 5 years – no strings attached – to continue doing whatever ingenious work they were doing, free from financial concerns.

One genius was economics professor Emmanuel Saez of Berkeley who, according to the New York Times, “studied the economic impact of outstanding kindergarten teachers.”

I spent a few minute to check out the work. It is a collaborative project with 5 other economists from Northwestern and Harvard which purports to fill a perceived gap:What are the long-term impacts of early childhood education? Evidence on this important policy question remains scarce because of a lack of data linking childhood education and adult outcomes.To that end, Saez et al follow a group of kindergarteners to adulthood and, using tax returns, match the subjects’ income to their class size and teachers’ experience in kindergarten. They conclude tha…