Tonight:
4°c
IT was a somewhat louche lunch that showed signs of deteriorating. In between being mocked for my bonusless life and various other things that are wrong with me, I asked the two City traders this: Do you understand what the guy sitting next to you does all day?
“No idea,” came the reply.
Could you fill in for him at a pinch and figure it out? “Not a chance” (laughter). “It would be total carnage.”
Would you know if he'd built up dramatic losses? “If he was fidgeting more than usual, I might wonder...”
The point of this is that when you hear investment banks claim they are effectively managing downside exposure, leading the way in risk management and prioritising protection strategies, assume they are talking as much rubbish as it sounds.
The banks do take compliance extremely seriously but they are such sprawling affairs with thousands of traders dealing securities of such complexity that they can't really know what collective risk they are taking.
Last week, Goldman Sachs unveiled £2 billion in second-quarter profits, a large chunk of which was from trading. Trading what? Apples?
The bank gave these trading profits four paragraphs of explanation — it was securities, bonds, currencies. What more could anyone need to know?
What became clear from the banking collapse was that chief executives such as Dick Fuld at Lehman Brothers and Stan O'Neal at Merrill Lynch didn't know what their banks were doing — they didn't understand their own companies.
This isn't because they were stupid, but because it is not possible for one person to get a sensible cumulative picture of how much mischief thousands of traders are up to in any one week. Wall Street trading floors in particular are huge — miles of humming noise and heat that reek of money. Goldman Sachs' trading area covers 10 acres — two years ago anyway.
Banks insist that there are controls and checks, and stern managers with an eagle eye for trouble. Then every time there's a rogue trading scandal — about once a year — you realise this is nonsense.
A few years ago, I knew a trader specialising in German bonds who thought the capital of Germany was Cologne. He was good at his job, but perhaps lacked wider perspective.
Some traders get good at dealing just one particular set of securities — the rest of the world may remain mysterious. When they are making money, they don't care about joining the dots. By the time they are losing it, it's often too late.
This is one reason why banks that are “too big to fail” are too big full stop, and should be broken up in our interest.
...as computers chip in with a toxic turn of speed
ROGUE traders are bad enough, so how about rogue computers? By one estimate, 70% of the volume on stock markets is computers running “high-frequency trading programs”.
Employing sophisticated software, they trade with each other or with witless pension funds, searching for any way to squeeze a turn from market volatility. Sometimes the orders are cancelled less than a second after they were made, if the computer figures it can't make a penny profit.
A penny isn't much, but suppose a thousand computers are doing a thousand trades every minute — that's a business. More and more firms are setting up to do solely this. A few years ago, a day trader was considered to be on the edge of responsibility. The computer's idea of long-term investing is five seconds.
Stock exchanges court this business because they get a turn themselves from the intense trading, and because it looks like they are more liquid than they really are.
Who pays? You again.
In a paper called Toxic Equity Trading Order Flow on Wall Street, Themis Trading says: “High-frequency trading strategies have become a stealth tax on retail and institutional investors...toxic trading takes money from real investors and gives it to the high-frequency trader who has the best computer.”
More questions than answers, but Ashley won't be crying over that
SAY what you like about Mike Ashley (people do), but he's got balls.
The Sports Direct founder isn't everyone's cup of bovril, but he serves at least one valuable purpose: showing fund managers what a lame lot they are.
Having unloaded stock in his leisurewear business at 300p two years ago, and bought much of it back for prices closer to 50p, he can be forgiven for thinking that these City types are fools. “A bunch of cry-babies,” as he once put it.
Last week, Sports Direct unveiled annual profits down 91% to £10.7 million, oh, and no dividend this year, chaps.
So there was much to discuss, including: when are you going to get around to appointing a proper independent chairman? What's the full story about the row with rival JJB Sports? And why should we ever trust you again? The answers are probably: when we feel like it, not telling you, and suit yourself — it's your funeral.
Ashley didn't even bother to join the early-morning conference call when he might have been expected to ponder these issues.
Instead, he left chief executive Dave Forsey to block away in stoic Paul Collingwood fashion.
It's hard to recommend the shares for as long as Sports Direct is to public relations what Sweeney Todd was to pork pies.
But when most tycoons are so terribly sensitive about Press coverage, it's refreshing to find one, Ashley, who doesn't seem to care less.
Better to channel fee plan elsewhere
BEDRAGGLED, beset upon and, if George Osborne gets his way, soon out of business, the Financial Services Authority must be having a crisis of confidence. Yet it's still churning out interesting ideas, even if it won't get to see them implemented.
The FSA has just issued a consultation paper recommending nothing less than a complete overhaul of how investment products such as unit trusts are sold — a shake-up sure to invite abuse from Britain's army of (supposedly) independent financial advisers.
The FSA wonders if the way advisers are paid — commission from the product provider — doesn't rather render the “independent” bit of IFA moot.
It is suggesting that all such payments be banned, meaning the advisers will have to charge a fee to their clients instead, a fee many customers simply will not want to pay.
This might be a good rule but Britain would be the first country to employ it. Perhaps it would be better if France, say, gives it a go first...
