TMJ Partners 金融ニュースブログ: July 2021

Friday, July 16, 2021

Friday Feature Book Review: Flash Boys by Michael Lewis (HFT algo story) フラッシュ・ボーイズ: 10億分の1秒の男たち: マイケル・ルイス

Michael Lewis knows how to tell an entertaining story to anybody, and "Flash Boys" is no different. Curiously, on March 3, 2017, the Japanese Diet released a Bill called FIEA (Financial Instruments Exchange Act). The aim is to help control high frequency trading by overseas hedge funds. You could argue that this is a direct result of this book in many ways. No previous interest in finance or trading is actually needed to enjoy this book. The author tells a very compelling story about people involved, and never gets lost in trading terms or jargon.

In this book, the focus is on the professional education and financial coming of age, of a Canadian trader in New York City, Brad Katsuyama, the lead character. It is a David and Goliath style story, but also an emotional roller coaster of truth, ethics and the moral choices made in any financial market. Just like his many other enjoyable reads like "Moneyball" and "The Blind Side", his latest book could easily be a movie as well. It is non-fiction and packs a punch.

We learn about 2 main sub-stories that collide and learn so much from the destruction. Brad is sent from Toronto, where he works for a Canadian Bank, RBC, to increase trading profits in New York. At the same time, there is a investment banking driven technology plot to lay down fast fiber for a growing high frequency trading industry. The two stories develop in parallel until they collide, dramatically. However, what we observe is a test of character and the system that tries to crush that type of person.

The people described in both of these stories are written about very well, and given just the right amount of detail. We are given a case to consider, and left to wonder if the stock market is indeed fair or rigged by fast technology driven investment banks. It stimulates the reader when the case is made. There are rules but they can or they should be re-written sometimes.

However, it is the unfolding of a trading mystery to prices and what later happens to trading markets, that hooks you in. It is not financial markets, but the technology behind it, that opens your eyes, and sucks you into the story fully. In many ways, it has very wide appeal, and is not just for people working in finance. You can see this as a detective story with a financial theme, not the other way around. The story described has mass appeal and is not just for people familiar with the markets.

The Top 3 Takeaways from this book that really impact any reader are:

1) There is a lot to learn about how the retail investor often gets a price that is "gamed" by market traders with very high speed.

2) The impact of high frequency trading is not so much the trading charge that retail investors pay, but the institutions that runs pension funds, and ultimately the retail investor who draws on them.

3) The top investment banks have always been at the cutting edge of many new trading technologies, and this is no different. It is certainly legal to focus on, but hardly beneficial to the retail investor's accounts overall.

The book has certainly made an impact to markets, and does make an interesting case. Time will tell how much will change as a result of this "shining sunlight on a dark secret" within finance. UK and US banks have since come under fire soon afterwards with dark pool doings, so it is a story that will continue to evolve. It is well written, even more easily explained, and a wonderful read for anyone in finance or not. Highly recommended!

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Saturday, July 10, 2021

Friday Feature Book Review: Super Freakonomics by Steven Levitt & Stephen J. Dubner 超ヤバい経済学:y スティーヴン・Ｄ・レヴィット + スティーヴン・ダブナー

Finance can be really fun! The economics of any interest rate rise is one thing, but it's hardly exciting to the average man on main street. This book is full of great economic observations and head scratching ideas. This amazing series continues on, and keeps on investigating economic questions that many want to know, but few can or are willing to investigate, despite clear economic impact. The team continues to ask economic questions few would consider like "How is a street prostitute like a department store Santa?". It is a very curious comparison that rings true once revealed. If a job is a job, then a temporary part-time job is still that, a temporary part-time job. It does not always lead to a full-time career.

Christmas is only once a year, and temporary short term jobs pop up around that season like Santa Claus roles as part-time jobs in department stores. However it turns out that during holiday season with family gatherings like July 4th or independence day, not everybody wants to stay home and talk to grandma. As a result this is when ordinary women notice that the price for prostitution from men bored, and from out of town, but in the big city of Chicago, peaks. It provides a perfect tax free opportunity to make money for a short period of time often with a temporary client base who do not even live in the city, hence no long term repeat business, just a short term windfall of cash.

We know about health and cleanliness but "Why are doctors so bad at washing their hands?". It turns out that in many US hospitals, the standards were lower than the perceptions by even the doctors themselves. Most doctors when honest admitted to washing regularly 70% of the time. This contrasted with the nurses who observed them washing less than 20% of the time! Until a meeting where doctors present touched their hands in a petri dish and observed over weeks the bacteria growth, that things changed. The use of these petri dishes in the form of a screen saver later used in the hospital, proved popular as a clear visual reminder. In fact, other hospitals started to use the same screen saver in order to help spread the message. The benefits to the patients has been medically and economically extraordinary.

One personal favorite question asked was "Which adds more value: a Pimp or a Realtor?". Again data on such a comparison is difficult to find, but when focused can be created organically by coordinating on the ground with the prostitutes and home sellers themselves. One is clearly more difficult than the other. Some of the data points found though were not expected, like how much revenue from any prostitute is given up in "free" services to police officers, in order to avoid prosecution. We discover what is literally her "cost" of doing business!

It turns out that a pimp does have a direct impact on higher earnings, as he typically acts as a marketer within high-end markets for his prostitute who usually relies on lower end street traffic. It brings a higher paying customers base to a low cost service zone, very much an economic development. This helps bring a better margin for the worker, who can then work less often, but at a higher rate of pay. This is contrasted in time value with a realtor who often encourages a homeowner to sell at the first price offered. Even though if it were their own home, they would wait longer for a higher offer, it is a pattern. It comes down to how much any extra commission is worth for the extra weeks in time spent. The breakdown of this incentive system is very well explained. It turns out to be a very solid case.

The Top 3 Takeaways from this book that really impact any reader are:

1) There is a lot to learn about the real economy around prostitution. I was very surprised to learn that 7% of transactions are free services to police officers in order to avoid arrest.

2) The impact of pimps for prostitutes is often positive economically. A pimp can often act as a marketer and find high end customers. This increases wage income and hours worked compared to independent prostitutes.

3) Input from global warming or global cooling needs another point of view. Can can we cool the planet quickly if we really needed to fast? Quick solutions are possible but not very attractive. However, they are a start.

There are many more questions that are fascinating reading. They include "What's the best way to catch a terrorist?" or "Did TV cause a rise in crime?". Another is "Can eating kangaroo save the planet?" As safety and the car industry interests me, one question really got my attention, and that was "How much good do cars seats do?" Installing them correctly is more difficult than many parents can handle. This kind of product needs better execution clearly, despite the positive intentions of the parents themselves. No matter what the question posed is, this team makes me want to read the answer they find every time time. Highly recommended!