mercoledì 2 giugno 2010

Emanuel Derman su rischio, HFT ed hedge funds.

Ho letto un lungo articolo di Emanuel Derman su Edge: dopo un inizio a mio avviso un po' in sordina e una lunga discussione sulla differenza tra teorie e modelli tra Spinoza e Wall Street (che ho trovato un po' deludente) entra nel merito delle questioni sollevate dalla crisi finanziaria e dagli avvenimenti degli ultimi anni. Qui la lettura si fa più interessante - almeno dal mio punto di vista - e trovo molte delle sue tesi ampiamente condivisibili anche se non sono convinto dell'opportunità di tassare il trading, tranne se la tassazione colpisse in modo esclusivo le strategie genuinamente di alta frequenza, con un tempo di permanenza in portafogli inferiore a qualche minuto. Ecco un ampio stralcio della parte finale del suo saggio (ho evidenziato alcuni passaggi che mi sembravano particolarmente significativi):

It's interesting in this regard that the three biggest banks recently announced their quarterly results and not only day in the last quarter did they lose money. That is totally astonishing. It's really a reflection of what the administration has done. They've made interest rates very low so it's cheap for the banks to borrow money. They have eliminated a lot of the players, so there is much less competition for taking on risky trades and you can do them at a price that is much more preferable to the person who is in control. This is a risk profile that is a result of regulation and administrative policies rather than of genuine market conditions.
In terms of styles of regulation, I'm very disillusioned by what's happened in terms of the bailout. I don't know what is the right thing to do but one of the worst things for society's ethical sense is to see other people having the upside of risky positions and not suffering the downside. It makes me feel very uncomfortable.
What I also dislike is that firms that have made a lot of money out of this won't acknowledge that they made this money by being saved by the taxpayers and the administration.
There's a lot of talk about the role of algorithms and the change in markets. The financial world has changed a lot since I worked in it and the biggest change is more people are playing with more of other people's money. When most of the banks were partnerships, they had to be in it for the long run because people who were partners were playing with their own capital and taking risk with their own assets. Their money was tied up for 10 or 15 years. Even if somebody retired, they still couldn't take their money out of there. They just got paid interest while it was being used and drawn down. So there was a certain culture of not taking extreme risks because you didn't really have limited liability. Ultimately you could be broken completely by your company going bankrupt. With trading houses going public, they're playing with other people's money. They're immediately liquid in terms of stock and cash payment. The culture in all of these places has changed in that it's make money liquid and fast. The way this crisis has been treated exacerbates that attitude in that if you do badly, the government bails you out and if you do well, you keep the profits. 
I used to hear 10 years ago at Goldman from colleagues that there was going to be doom one day at Fannie Mae and Freddie Mac because they were hedge funds in disguise. To some extent the government and regulators have encouraged this and they still haven't tackled the problems at Fannie Mae and Freddie Mac and are doing with them what they accuse Wall Street banks of doing, which is treating them as off-balance sheet and not counting the money they are spending on them as real money.
In terms of algorithmic trading, that's a big change too. I'm not against it — it's inevitable from a technology point of view. (...)
It's unfair, though, to allow high-frequency traders to get what essentially amounts to insider trading, to getting an early look at trades and deciding what to do because they are allowed to put powerful computers closer to the stock exchange. That doesn't make it a flat playing field.
Also, people who benefit from it tend to over-accentuate the need for efficiency. Everybody who makes money out of something to do with trading tends to say, oh, we're got to do this because it makes the market more efficient. But a lot of the people who provide this so-called liquidity and efficiency are not there when you really need it. It's only liquidity when the world is running smoothly. When the world is running roughly, they can withdraw their liquidity. There is no terrible need to be allowed to trade large amounts in fractions of a second. It's kind of a self-serving argument. Maybe a tax on trading to insert some friction isn't a bad idea, just as long term capital gains are taxed lower than short term gains.
Economics is a strange field. One of the things I noticed on Wall Street was that firms use the economists to talk to clients but their trading desks don't necessarily pay attention to what the economists are saying. Unexpected things happen unexpectedly and damage positions and net worths. I don't think there is a good quantitative solution to all of this. I sometimes get letters from mathematicians in Europe saying that they have come up with a better formula for capturing risk or for valuing risk or for trying to control or measure risk. You can do better than VaR but there isn't one formula, one number, that is going to save you in the end.
More important is incentives and disincentives and making sure that people understand they are going to pay the penalties for their own mistakes and somebody isn't going to bail them out. Jim Grant, who writes a newsletter called "Grant's Interest Rate Observer" that I like, had a column recently pointing out that in Brazil they haven't had a big banking crisis and that there, anybody who runs a trading firm is personally responsible for losses. It's not company risk. It comes down to their own assets. So they are much more cautious about this. Those kinds of incentives are going to make a much bigger difference than finding a better mathematical formula for handing risk.
And the scale at which people get paid has become quite astonishing. There is an increasing gap in America in general between what people make at the bottom and what people make at the top.
When I decided to work on Wall Street, I interviewed in '83. The guy who interviewed me said, this is one of the few jobs where you won't have to be an accountant or a lawyer and you can make $150,000 a year eventually. Now a trader might make $20 million. If they can't make it at an investment bank, they go to a hedge fund, if they have a really good track record.
I have less of a pay problem with hedge funds — I'm not sure if I'm right — from an ethical point of view than I do with very big, too-big-to-fail companies because hedge funds are by and large putting their own money or their clients' money at risk, and it's a clearly articulated compact between them. While there is a possibility of systemic contagion, it's a cleaner business in terms of potential conflicts. They are just doing proprietary trading for their own account or their clients' account.
Whereas, what is confusing about the big investment banks, if you watched the Senate hearings, is that there is a very unclear overlap between being a producer and being a market maker. So Goldman, for example, always used to be pretty much a service provider in the old days. Now they and all the other big banks want to be both a producer and the marketplace on which product trades. There are a many conflicts of interest. To make an analogy, I've read articles about how Amazon wants to be not just a place that sells books but one that also publishes books. That becomes dangerous — if you're a dominant player in both the conduit and the content. There is too much concentrated power. It used to be you were either a market maker or a producer.

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