Month: July 2013

From the comments, on high frequency trading

This is from a high frequency trader, in response to my link to this paper (pdf), favoring batch auctions:

The author’s purported cure is far worse than the disease. Positional externalities from shaving latency are indeed real, but they’re not really that large relative to market size. A good way to estimate their magnitude is by how much money has been spent on cutting down the Chicago-NYC messaging latency, the two most liquid and hence profitable trading centers. The cost recently spent on this infrastructure (largely microwave relay networks) is about $500 million. Assume that the infrastructure depreciates in about a year and generously assume that the spending on intra-market latency is about the same.

That’s a total cost of about $1 billion/yr in market costs imposed by latency based positional externalities. American equity markets trade $24 quadrillion in value a year (and that’s only counting shares, not derivatives). Which means the cost to the typical investor of the latency externalities comes out to an upper bound of $4.5e-05 per dollar traded, or for example to trade one share of MSFT: $0.0016. That’s the upper bound of cost savings by perfectly eliminating latency externalities. The cost certainly isn’t trivial, but it is much lower than the forced imposition of $0.005 in bid-ask trading costs because the SEC refuses to decrease the minimum $0.01 tick size. With an economical tick size the average bid-ask spread would easily go in half. (Plus it would reduce the latency externalities since market makers could price improve rather than rushing to jump first in line the order book queue). My point being is that if we’re that worried about reducing costs to investors there’s an alternative that we’re already ignoring that both has a larger impact and poses much less risk than completely tearing up the foundations of the market structure.

Finally the authors assume that batch auctions don’t come with any of there own structural costs. Not only do they indeed have substantial defects themselves, but they don’t even eliminate the latency externalities. The market already uses batch auctions at market open and close. As any trader will tell you these are far more manipulated than continuous trading. During a batch auction an indicative price is published prior to crossing based on the currently resting buy and sell orders. A trader can easily change this indicative price or imbalance by entering a large order and canceling it before auction. Analogous strategies aren’t impossible, but are much harder in continuous trading because a resting order can be crossed at any time, and hence poses real economic risks to the trader. To paraphrase Alex continuous trading acts as a tax on bullshit.

The flip side of a pre-cross indicative price is that traders will wait for as long as possible before the cross to enter their orders. No trader using proprietary signals is going to want other market participants to see his order for any longer than is absolutely necessary. The counter-strategy being shaving down your latency even further so you get to see others’ orders first. Then modify yours accordingly by trading even closer to the cross time using your lower latency. So what frequently happens in opening and closing batch auctions is that the order book and indicative price is pretty much garbage until a few milliseconds before the cross, at which point the real price formation occurs. When I worked in a much larger HFT firm I was a continuous guy, but sat next to the batch auction guys. We certainly cared about our latency, but generally we focused much more on our signals and execution algorithms. The auction guys in contrast were always obsessed with their latency.

Switching to batch auctions will not reduce the cost of latency positional externalities, and is pretty likely to increase them. On top of all that it will give us a much lower-quality and less efficient market structure. There are certainly better ways to tackle the latency externality costs. But it’s important to recognize the perfect’s the enemy of the good here, I doubt we can ever fully eliminate them under any sane structure. It’s better to think of moderate improvements that work on the margin, rather than centrally planned grand sweeping re-designs of the entire market structure.

At the first link, in the comments, he has several follow-up explanations, all recommended.

Japan fact of the day

It’s not just diapers:

Boredom and isolation don’t just belong to teenagers anymore as a report from the Tokyo Metropolitan Police shows that there are now more elderly shoplifters than teenaged ones in Tokyo. This is the first time that this has happened since the police began keeping records about this particular crime.

Statistics show that 3,321 people aged 65 or older were arrested on suspicion of shoplifting in 2012, which accounted for almost a quarter or 24.5% of the total number of arrests. Those aged 19 or below accounted for 23.6% of figures, with 3,195 arrests made. Even though the total number of arrests have declined based on the statistics from 2011, the ratio of elderly people shoplifting is on the rise. While the statistics did not include reasons for shoplifting, the growing isolation of the elderly from society has been cited as a growing problem among that age group.

Here is more, via the excellent Mark Thorson.

Where should Edward Snowden go?

Assuming he can get there, of course.  Currently it’s down to Venezuela, Bolivia, or Nicaragua.  Dylan Matthews argues for Venezuela, on the grounds that the other two countries are much poorer and have lower life expectancies.  He says Snowden should put up with the much higher crime rate (by the way “0.2 percent of Caracas residents [are] killed each year.”)

But Snowden is not playing a Rawlsian game here, he is going to these countries as Edward Snowden.  I say seek out Santa Cruz, Bolivia, which is much richer than Bolivia as a whole and safer than Venezuela at least.  Sloths hang from the trees.  Also keep in mind that much of Snowden’s income may be coming from abroad, whether it be from Wikileaks or book royalties or civil libertarian well-wishers or sources unknown.  That militates in favor of the cheaper, lower wage country and Bolivia fits the bill.  Nicaragua is quite nice, and attracts some notable expats (pdf), but if you can’t travel abroad choose a larger country.

Finally, Venezuela has had some pro-American tendencies in its history and those could return.  Bolivia seems to have a more or less stable indigenous (semi) democratic majority, plus the hijacking of Morales’s plane may give the Snowden issue a resonance in Bolivia for some time to come.

If he loves the beach, however, Leon, Nicaragua is a charming town.

The economic recovery that is America

Averaged across all occupations, we estimate that real median wages declined by 2.8 percent from 2009 to 2012. This is a striking decline, given that productivity increased by 4.5 percent over this same time period….Moreover, as shown in Figure 1, lower-wage and mid-wage occupations saw significantly bigger declines in their real wages than did higher-wage occupations. Occupations in the top two quintiles saw their median wages decline by less than 2 percent on average (and nearly a third of those occupations actually saw real wage growth). By contrast, occupations in the bottom three quintiles saw their median wages decline by 3 percent or more.

That is from a recent National Employment Law Project study, discussed by Kevin Drum here, Felix Salmon too.

Assorted links

1. The first robot?, and are real-life Transformers on the way?

2. There is no great stagnation: shelf life of the Twinkie extended from 26 to 45 days.  One email correspondent suggested to me that the de facto shelf life of Twinkies is already two to three years.

3. Which are the most abandoned books?

4. Good review of a good book on drones.

5. New and important critique of high-frequency trading (pdf), though I am not persuaded by their claim that batch auctions will lower the bid-ask spread.

6. New survey paper on trust and economic growth.

The faculty are unhappy

Here is one recent report of falling salaries in public institutions, and, on the bright side, universities are having trouble filling some of those slots:

Public university professors don’t enter the profession to get rich. But some faculty are having trouble paying bills, and have even qualified for foods stamps, Olson said. “For somebody to go five to seven years beyond college to obtain a Ph.D. degree and to realize that you are in need of federal assistance to make ends meet — and that’s for a tenure-track position –” is devastating.

Adding what some view as insult to injury, a recently published database of public employee salaries shows that some professors earn less than their colleagues at local high schools without doctorates.

Yet how would they feel about actual poor people?  The article focuses on University of Wisconsin, Stevens Point, and serves up the following numbers:

Faculty salaries averaged $67,000 for full professors; $57,100 for associate professors; and $51,900 for assistant professors during the 2012-13 academic year.

The full article is here.  It remains the case that numerous public universities are falling pretty far behind the curve.

The evolution of dining in France

The French are known to prize good food. But almost a third of all restaurants serve dishes prepared largely or entirely elsewhere, says Synhorcat, a big group of hotel- and restaurant-owners. Xavier Denamur, a restaurateur and campaigner for openness who showers details on diners in his own establishments, says the proportion is far greater. Improbably long menus at small eateries are one giveaway.

The rising cost of raw materials and staff has put cooking from scratch beyond the reach of many restaurants. It is cheaper to buy frozen ingredients and ready-made dishes from industrial producers such as Métro, Brake or Davigel. Falling purchasing power adds to the pressure. More workers now bring sandwiches to the office, like the English they used to pity. Mobile vans peddling snacks are increasingly common. When people do eat in restaurants, they are often counting every cent.

Different studies produce different figures but all point to problems for restaurateurs. Synhorcat says that restaurant turnover fell by 5.5% in the year to March. According to Gira Conseil, a consultancy, almost three-quarters of all meals eaten outside the home are now in “super-cheap” establishments charging less than €10 ($13) a head, and fast food accounts for 54% of restaurant sales. The NPD Group, another consultancy, worries that the downturn is beginning to affect parts of the country that once seemed resistant, such as the south. Even fast-food joints, until recently growing rapidly, are beginning to feel the pinch.

That is from The Economist, here is moreThe Washington Post has coverage too.

Surgery price wars in Oklahoma City?

I don’t have deep background knowledge on this particular hospital, but here is a new and interesting article:

An Oklahoma City surgery center is offering a new kind of price transparency, posting guaranteed all-inclusive surgery prices online. The move is revolutionizing medical billing in Oklahoma and around the world.

Dr. Keith Smith and Dr. Steven Lantier launched Surgery Center of Oklahoma 15 years ago, founded on the simple principle of price honesty.

“What we’ve discovered is health care really doesn’t cost that much,” Dr. Smith said. “What people are being charged for is another matter altogether.”

Surgery Center of Oklahoma started posting their prices online about four years ago.

Click here to see the online prices at Surgery Center of Oklahoma.

The prices are all-inclusive quotes and they are guaranteed.

“When we first started we thought we were about half the price of the hospitals,” Dr. Lantier remembers. “Then we found out we’re less than half price. Then we find out we’re a sixth to an eighth of what their prices are. I can’t believe the average person can afford health care at these prices.”

Their goal was to start a price war and they did.

Their first out-of-town patients came from Canada; soon everyday Americans caught on.

Here is a bit more:

Dr. Smith said federal Medicare regulation would not allow for their online price menu.

They have avoided government regulation and control in that area by choosing not to accept Medicaid or Medicare payments.

I would like to know more about this example (maybe Cherokee Gothic can go buy something there), but the article is here and some further coverage is here.  For the pointer I thank Jake Seliger and also Craig Fratrik and Timothy Miano.

Vikram Seth was once a graduate student in economics at Stanford

That was in the heyday of the game theory years at that school.  Then he became a famous author.  And now:

But an author like Seth who commands million dollar advances and who took eight years to write the voluminous A Suitable Boy, works on his own terms. He does not share his manuscripts with anyone until he is ready and will not be bullied by publishers, having once said, not entirely in jest, it was his job to get the money out of publishers and it was the publishers’ job to get the book out of him.

Penguin Random House has in turned asked for its $1.7 million advance back, as they are still awaiting his delivery of a sequel A Suitable Girl.  The story is here, and for the pointer I thank Yogesh.  Seth never finished his doctorate at Stanford but A Suitable Boy is one of my favorite modern novels.

Assorted links

Kickstarter and the NEA

Indeed, people have been saying since last year that Kickstarter funds more art-related projects than the NEA. And it’s true! For 2012, the NEA had a total federal appropriation of $146 million, of which 80 percent went toward grants. Kickstarter funded roughly $323.6 million of art-related projects if you include all design and video-related projects, which make up $200 million of the total.

That is from Katherine Boyle.  Note that the actual comparison has less weight on the NEA side than this portrait might suggest.  The NEA itself notes: “Forty percent of the NEA’s funds go to the 56 state and jurisdictional arts agencies and the six regional arts organizations in support of arts projects in thousands of communities across the country…”  To be sure, these are “grants,” but there is still room in the process for overhead — that ogre of non-profit work — to intervene as yet another grant has to be made.

Is there a new and good plan to exit the euro?

Ross Macleod, from ANU, has an idea:

Greece or any other country in the euro zone could easily reintroduce a national currency without generating the kind of financial and economic calamity envisioned so far—provided it got the mechanics right.

The key is to fix the initial amount of new currency to be issued while allowing the market to set the price at which the exchange takes place. In this scenario, the central bank would announce that it is willing to purchase euros from domestic banks, the Greek public and anyone else, using newly issued drachmas as payment. All such transactions would take place during a specified transition period and be entirely voluntary. This would not be an exercise in confiscation.

After the transition period, the Greek government would deal only in drachmas in its day-to-day financial transactions. Nobody would be forced to hold drachmas, but those wishing to transact with the government would need drachmas to do so.

At the start of the transaction period, the central bank would announce the initial rate at which it offered to exchange drachmas for euros, but it would explicitly make no promise about what the rate will be in the future. The initial rate would be entirely arbitrary, as indeed would the name of the new currency.

…The price offered for euros would be adjusted on a daily basis to generate sales of euro to the central bank of the required magnitude. Sales on the first day may well be zero. But as the offered buying price increased, gradually some people would be willing to have a gamble. Eventually a price would be found at which there were significant demand for the new drachmas. People would be taking the risk that the price of euros will increase in the future—that is, that the new drachma will depreciate.

One problem is that of credibility.  Even seeing a new currency, no matter what the plan, could cause people to think their bank accounts will be redenominated, leading to bank runs.

But more fundamentally, this plan does not do two things which any euro replacement plan must, if it is to have a positive (but also disruptive) impact:

1. Redenominate wages and prices in terms of the new medium of account, to achieve wage and price flexibility, and

2. Ease the government’s budget constraint, by redenominating and indeed lowering the real value of the government’s guarantee to the domestic banking system.

You might ask what pins down the value of the new currency and the answer has to be that the government accepts it for tax payments.  But to that extent the fiscal position of the government becomes worse because they are relieving liabilities and receiving in return an asset on which at best they break even.

Imagine the following plan: the Portuguese government creates a parallel currency by announcing that it will conduct some or all of its transactions in terms of the New Zealand dollar.  Let’s say they find some takers and indeed some Kiwi dollars flow into Portugal.  The country will then have two currencies, but neither problem #1 nor problem #2, as stated above, will be solved.

China estimate of the day

A government policy to promote coal use in Northern China has cut the life expectancy of some 500 million people by more than five years, on average.

That comes from a big new study in the Proceedings of the National Academies of Sciences, which used a quasi-natural experiment to quantify the health effects of air pollution from coal use.

From Brad Plumer, here is more.

Very good sentences

It is perhaps no accident that the ardour for liberty is no longer expressed through political channels. Its main outlets are morally ambiguous figures such as Mr Snowden and Bradley Manning, the US soldier who gave classified documents to WikiLeaks. Technology will pose new challenges for all states. We are not in a world of John le Carré’s spies but one resembling CIA TV series Person of Interest, where states claim power over us ostensibly to prevent us coming to harm. But we cannot navigate this terrain by reinstating a form of moral hegemony where the rights of Americans count more; and the rest of the world be damned.

That is from Pratap Bhanu Mehta in the FT, the whole thing is excellent but the first two sentences cited above are the most striking of them all.