High-frequency trading

HFT has been a hot topic for the last week after Michael Lewis promoted his book on "60 Minutes" and claimed that the markets are rigged.

There's a lot of opinions written on it but the details are often not given.
My knowledge of the market internals are probably out of date, but I'll give a shot at describing what happens for a trade.

A market order from a retail brokerage might be matched internally by the brokerage (ie, your buy order matches somebody's sell order).  If not, the brokerage tries matching your order with consolidators or with dark pools.  If still no match, the brokerage sends the order to a market.
All this happens quickly, typically under a second.

In all the attempts at matching, who sets the price? This is were HFT comes in.

Decades ago, there were human "market makers" who who set the price based on supply/demand of stock trading. Really long ago, prices would be posted on

blackboards by aides every hour or so.

Now prices are set by software and updated in a fraction of a second.  Every trade might change the price. HFT firms compete by have the fastest speed at price detection.

There are 3 government rules that limit price setting:
1) NBBO (National Best Bid/Offer)
2) decimalization
3) regulation NMS

NBBO says all of the national markets have to be shared so that brokerages can
pick which brokerage will get an order. HFT firms try to be faster than the NBBO network so they can find imbalances.

The decimalization law says that stocks must be priced in cents, but dark pools allow trading in fractions of pennies. HFT firms try to find pricing differences
between markets and dark pools.

Finally, regulation NMS uses the NBBO to require that current price settings are

not sent to anybody before it is sent to everyone (via a security information processor). HFT firms discovered they could find a price quicker if they actively probed for prices than wait for the slow SIP network.

(Reg NMS: Warning 500+ pages of mind-numbing)

http://www.sec.gov/rules/final/34-51808.pdf

Reg NMS started in 2007.  That’s when high-frequency trading really started.

So the markets are "rigged" because the laws don't make sense in an era of fast

computers and networks.  It's like applying laws for horse&buggies to automobiles.

HFT firms were really profitable 5 years ago. Now the competition between HFT firms has dropped profits by ~80% as they fight for smaller and smaller sub-penny profit/trade.

I'm not concerned about HFT.  For the average person, the difference is less than

a penny per share and there are other things that have a much bigger effect.

If you are worried, then use limit orders so you can specify the price you want.

Cliometrics and Cliodynamics

This blog has mused about historical and social trends. In particular, how can those trends be understood or predicted

Two academic fields have emerged -- cliometrics and cliodynamics.

Both fields start with economic history but now look to widen their study.

Milk prices

Milk prices are rising in the US.  Prices have climbed to nearly the 2011 highs.

Why the price increase?

Some of the higher prices stem from higher feed prices and smaller herds.

But another important trend is that China is now the world's largest dairy importer and its buying is affecting US milk prices.  Dairy prices could continue to rise in 2014 as Chinese imports more.

Who benefits? Dairy farmers in California are the biggest immediate beneficiaries.  They have been squeezed by high cattle feed prices due to drought conditions over the past year.

Investmet buying of foreclosed housing

Since the bottom of the subprime crisis, some big institutional investors have been buying foreclosed houses to convert them into rentals. Institutional investors have 100s of thousand homes in the past five years.

But, is the big wave of buying over?

The biggest buyers -- Blackstone Group, American Homes 4 Rent, and Colony American Homes -- appear to have slowed their buying.  Instead of buying across the country, they are still buying but mainly in selected regions in lat 2013.

Perhaps the slow-down is due to higher prices.  But some states are completing foreclosure proceedings with the start of a new year as shown in monthly statistics from January 2014.

CBO says minimum wage hike = job losses

The CBO just came out with a document on the effects of a minimum wage increase. The CBO's conclusions is that 16.5 million would get a higher wage but 1/2 million would lose their job.

I'm surprised that news reports are surprised. The evidence is clear that minimum wage increases cause job losses.

The best overview is this book where its authors conclude that minimum wages hurt the poor.

A more recent study in 2010 (and follow-up column) shows the effect of the last increase in 2009 resulted in 100s of thousands of lost part-time jobs:

A 2012 research paper looks at claims of no job losses from higher minimum
wages and found that those claims used poor techniques:

A minimum wage is a clear example of a government distortion that causes
unintended and negative side effects.  For example, unemployment didn't
get really bad until several years after 1929 stock market crash. The "trickle

down" phrase originally meant that high union wages helped other workers.

Google's sale of Motorola -- profit or loss?

There's a flurry of articles about Google's sale of Motorola. For example:

this report gives the broad details on the deal with Lenovo.

Most articles are negative, concluding with a "buy high, sell low" message.

In contrast, I think the deal was good for Google. My calculations:

•  purchase = $12.5B
•  Motorola cash+investments = $5B
•  sale of Motorola set-top division = $2.4B
•  sale of Motorola handset division = $2.9B

That equates to: 12.5 - (5+2.4+2.9) = $2.2B total cost

This columnist came to a similar conclusion but estimates a total cost of $3.2B.

There were probably other tax-loss benefits and some R&D credits to help Google.  They might be offset by about $1B in losses for running the money-losing company for about two years.  Motorola lost $100-200M/quarter on the handset business.

If the patent portfolio is worth over $2-3 billion, then Google comes out ahead on the whole deal.

Google may even show a profit if tax losses from Motorola are realized.
These might be worth $6.5B spread over the next half-decade.

resident vs citizen

Will a two-tier citizen system emerge?
<p>
With the current Congressional debate over aliens living in the US, will the notion of citizenship change?
For example, could a person legally live in the US without being a citizen?  Today that is allowed with "green cards", student visas, guest worker permits, and other exemptions.
<p>
But there are many people -- maybe as many as 10 million -- that reside in the US illegally without having a legal permit.  What should be done with them?
<p>
Maybe Congress will move to a two level system.  Citizens have all rights and protections. Residents have the protections of living in the country but do not have all privileges.
<p>
If such a 2-class system is established, what happens to citizens that lose privileges or rights?  For example, convicted criminals lose the right to own firearms, vote,  the right to live in certain locations, or the right to hold certain jobs. Are these people still citizens?