Up and Down Wall Street BARRON'S
| TUESDAY, JUNE 18, 2013A "Crumby" Business All Around
Scandals of abuse by a few, whether in government or in finance, are undermining confidence of many.
Picking up crumbs under the table. That was how the wife of Sherman McCoy, the rich, Wall Street protagonist of The Bonfire of the Vanities,
derisively described to their young daughter what her bond-trader
father did for a living. Arcane arbitrage trades produced pennies on the
dollar, but when multiplied over millions, those pennies added up to
fabulous sums -- enough to buy a Park Avenue co-op costing $3 million!
That number alone should tell you how much things have changed in the decades since Tom Wolfe wrote his tale of race and class in the pre-Giuliani New York City of the 1980s. Wealth and power have expanded exponentially in the subsequent years, adding zeroes to the numbers describing earnings and real-estate values. What is still a princely sum to average Americans, $1 million or more buys only an ordinary flat in Manhattan and even in now-hip Brooklyn.
Collecting those crumbs has become a challenge in recent years, especially following the near-collapse of 2007-08. So, in the face of diminished profit opportunities, traders have resorted to the next-best thing, manipulation and gaming the system.
In recent days, more instances of unseemly Wall Street behavior -- from gaining just a few seconds' advantage on key, market-moving data to outright rigging of markets -- have come to light. That this has happened at the same time as the revelations of spying by the National Security Agency is more than ironic. Both are shaking public confidence in the major institutions of finance and governments.
Consider the more recent dubious practice to gain attention: the release of privately issued but market-moving reports early to paying subscribers, most notably the widely watched Thomson Reuters/University of Michigan consumer confidence reports. As has been reported in various outlets, high-frequency traders who pay for the privilege get a two-second head-start on the numbers, a huge amount of time for computers to trade on the number based on algorithms.
Less ambiguous is the practice of rigging certain benchmark prices or interest rates, most prominently the London interbank offered rate. Libor, quipped Mervyn King, the outgoing Bank of England governor, was the "rate at which banks do not lend to each other," contrary to the textbook definition of the interest rate that is the basis of trillions of dollars of instruments, from derivative contracts to Americans' home mortgages. Libor is set by collecting data from major banks in London, who declare what they'll pay to borrow and lend dollars for various terms. Just tweaking Libor a fraction of a basis point (one-hundredth of a percentage point) up or down could make a trade pay off -- or not. More crumbs, in other words.
That number alone should tell you how much things have changed in the decades since Tom Wolfe wrote his tale of race and class in the pre-Giuliani New York City of the 1980s. Wealth and power have expanded exponentially in the subsequent years, adding zeroes to the numbers describing earnings and real-estate values. What is still a princely sum to average Americans, $1 million or more buys only an ordinary flat in Manhattan and even in now-hip Brooklyn.
Collecting those crumbs has become a challenge in recent years, especially following the near-collapse of 2007-08. So, in the face of diminished profit opportunities, traders have resorted to the next-best thing, manipulation and gaming the system.
In recent days, more instances of unseemly Wall Street behavior -- from gaining just a few seconds' advantage on key, market-moving data to outright rigging of markets -- have come to light. That this has happened at the same time as the revelations of spying by the National Security Agency is more than ironic. Both are shaking public confidence in the major institutions of finance and governments.
Consider the more recent dubious practice to gain attention: the release of privately issued but market-moving reports early to paying subscribers, most notably the widely watched Thomson Reuters/University of Michigan consumer confidence reports. As has been reported in various outlets, high-frequency traders who pay for the privilege get a two-second head-start on the numbers, a huge amount of time for computers to trade on the number based on algorithms.
Less ambiguous is the practice of rigging certain benchmark prices or interest rates, most prominently the London interbank offered rate. Libor, quipped Mervyn King, the outgoing Bank of England governor, was the "rate at which banks do not lend to each other," contrary to the textbook definition of the interest rate that is the basis of trillions of dollars of instruments, from derivative contracts to Americans' home mortgages. Libor is set by collecting data from major banks in London, who declare what they'll pay to borrow and lend dollars for various terms. Just tweaking Libor a fraction of a basis point (one-hundredth of a percentage point) up or down could make a trade pay off -- or not. More crumbs, in other words.
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