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High Speed Computers Push Money Around At The Speed Of Light

The Securities and Exchange Commission has opened up an investigation into high-speed-trading practices, in particular the ability of some of the most powerful computers to jump to the head of the trading queue and — in a fraction of a millisecond — capture the evanescent trading spread before the rest of the market does.

Landon Thomas Jr.
New York Times

London

Wheeler-Dealer Banks Still Wheeler Dealing

Nearly everyone knows that the word’s biggest and most powerful banks have done something terrible.  Based on media reports, it’s increasingly clear that most Americans believe banks are out of control.  Absent a clear understanding of how banks have changed, and why they are so dangerous to both our economy and political stability, few Americans know very much about what the supposed bad bankers did, or how they did it. Nor have we fully grasped the degree to which America’s Band Of Brothers mentality has infected banks and banking worldwide.

World’s 50 Largest Financial Institutions
( Ranked by Assets Based on 2008 data )

2008 Rank	Institution	Assets ($billions)	Nationality
1	Royal Bank of Scotland	3,807,892	United Kingdom
2	Deutsche Bank	2,974,163	Germany
3	BNP Paribas	2,494,412	France
4	Barclays Bank	2,459,148	United Kingdom
5	HSBC Holdings	2,354,266	United Kingdom
6	Crédit Agricole Group	2,268,310	France
7	Citigroup	2,187,631	USA
8	UBS	2,019,173	Switzerland
9	Mitsubishi UFJ Financial Group	1,817,571	Japan
10	Bank of America Corp	1,715,746	USA
11	Société Générale	1,577,745	France
12	JP Morgan Chase & Co	1,562,147	USA
13	UniCredit	1,504,134	Italy
14	Mizuho Financial Group	1,494,960	Japan
15	ING Bank	1,463,437	Netherlands
16	Banca Româneasca	1,390,853	Romania
17	Santander Central Hispano	1,343,905	Spain
18	HBOS	1,336,299	United Kingdom
19	Credit Suisse Group	1,208,956	Switzerland
20	ICBC	1,188,800	China
21	Fortis Bank	1,129,417	Belgium
22	Sumitomo Mitsui Financial Group	1,072,562	Japan
23	Commerzbank	907,514	Germany
24	China Construction Bank Corporation	903,291	China
25	Dexia	889,981	Belgium
26	Intesa San Paolo	843,371	Italy
27	Rabobank Group	839,840	Netherlands
28	Agricultural Bank of China	828,263	China
29	Bank of China	820,198	China
30	Nordea Bank Norge	816,115	Norway
31	Crédit Mutuel	814,518	France
32	Wachovia Corporation	782,896	USA
33	BBV Argentaria	739,296	Spain
34	Dresdner Bank	736,359	Germany
35	Lloyds	707,966	United Kingdom
36	Danske Bank	660,006	Denmark
37	Landesbank Baden-Württemberg	652,766	Germany
38	Groupe Caisse d’Epargne	638,179	France
39	DZ BANK Deutsche Zentral-Genossenschaftsbank	634,973	Germany
40	Bayerische Landesbank	611,864	Germany
41	Hypo Real Estate Holding	589,098	Germany
42	National Australia Bank	584,861	Australia
43	Wells Fargo & Co	575,442	USA
44	Nordea Group	572,728	Sweden
45	Norinchukin Bank	527,504	Japan
46	KBC Group	523,476	Belgium
47	Groupe Banques Populaires	513,639	France
48	Commonwealth Bank Group	443,905	Australia
49	WestLB	421,834	Germany
50	ANZ Banking Group	419,434	Australia

Sources: The Banker, Reuters

Here in the City of London, where banking has taken on the same characteristics as in the U.S., the schism between ordinary citizens and greedy and incentivized bankers has taken on a decidedly angry tone.

Newsroom Magazine’s U.K. based Correspondent Tony Koorlander recently reported on the immense ignorance  about what matters most problem not being limited to the U.S., when he wrote,

The ignorance is prevalent ( here ) . . . but not quite on the issues discussed in this survey. Like all societies, the media have blinded the public with innuendos, unresearched newsblasts and the politicians usually join the bandwagon in an attempt to seek popular votes.”

But Koorlander has also reported that most of his countrymen remain ill-informed on the realities of global banking and international finance.

I believe there is considerable danger of America being seen as the Big Bad Boy with the Big Bad Stick, backed up by a load of short-termist politicians with inward looking agendas. This is the view that perpetrates the European Union, and it is, I’m afraid, entirely created by the self interest perspective of your so-called broadcasters who seem somewhat possessed with the brevity of sensationalism rather than the in depth analysis and detail of fact.

Where are the ‘good men and true’ in the American profile being presented to the media hungry consumers of the World at large?

Banks Without Borders

Nor do millions of Americans realize that what passes for banking today is dramatically different from their perceptions or that the power center in banking is no longer the U.S. Only two American banks made it into the top ten based on assets.

CitiGroup, ranked at 7th on the most recent data ( 2008 ), while Bank of America earned 10th place. Massive changes in these institutions in 2009 likely changed the top 10, but the prevalence of European banks seems destined to remain for many years.

What our table of the top 50 does no reveal is the extent to which the so-called banks on this list remain responsible depository institutions for some of the most pernicious wheeler-dealer banks under investigation are the Royal Bank of Scotland, Barclays and HSBC Holdings — all in the United Kingdom.

Until the Financial Crisis Inquiry Commission completes its work this fall, the extent of high-risk behavior by and between what were once highly responsible and prudent institutions will now be fully known. What we do know is that the blending of depository banking and financial services has produced an unholy alliance that threatens most, if not all G-20 nations.

The Culprits

The culprits behind the collapse of credit markets in the fall of 2008 were financial institutions that dealt in one or more types of high risk transactions.  Some of these institutions were Wall Street wheeler-dealers including Lehman Brothers, Merrill Lynch and Bear Stearns.

Others were onetime mainline banks such as CitiBank, JPMorgan, Bank Of America and Bank Of New York who expanded beyond deposit only business models to engage in one or more forms of securities trading, leveraging or arbitrage.

A few regional banks, such as IndyMAC in California and Washington Mutual were more traditional banks who bet lavishly on, and made immense profits from the creation and resale of high risk mortgage products.

Then there were support players — non banking firms such as Goldman Sachs, Standard and Poor’s and American International Group. These firms provided illusionary insurance, or dealt in or with derivative securities, or offered high priced and usually ill-informed opinions on the validity and/or quality of certain securities or off-exchange transactions.

Statistical Arbitrage

Some, but not all of these institutions, along with many other specialized traders and market makers, also engaged in a super-secret, high speed, computer-driven trading game known as statistical arbitrage. While statistical arbitrage has not been specifically named as a causal factor in the collapse of mortgage-backed securities, it is the ultimate ( highly profitable ) push-money around game.

In Singapore, one source told us, “They have immensely large computer networks in massive math calculating neural mode to rapidly forecast financial trends and automatically time trades in order to earn immense profits.”

Some market technicians see statistical arbitrage as more of a license to steal than a bonafide market making or arbitrage activity. The banks and trading firms that employ statistical arbitrage techniques cry foul at such charges, citing their activities as legitimate market making and trading. Still, the interference of high speed computers in public markets has a clear and sinister feel to it.

In Singapore, one source told us, “They have immensely large computer networks in massive math calculating neural mode to rapidly forecast financial trends and automatically time trades in order to earn immense profits.”

This incredibly sophisticated machinery can outperform any human or group in terms of the accuracy of determining a momentary blip on the international markets. The determination to move funds occurs in a nanosecond based on years of financial data and neural understanding.

We are no longer controlled by a bank consortium that relies on insider dealing or overt speculative trading, we are now at the mercy of a competing set of supercomputers … who have no conscience, no qualms – no discernment and worse still … a possibly inconsistent piece of code that will send our financial stability into a downward spiraling demise.

Whacking And Bullying

In a September 2009 article about the big players in statistical arbitrage, and their tools, the New York Times, in an article written by Landon Thomas, Jr., quoted one firm’s traders concerning alternately whacking and then bullying up oil prices for their own immense profits. While such activities are not visible, or well understood by most Americans, everyone is a daily witness to the impact of bank and financial institution intervention in commodities and securities markets as evidenced in daily fluctuation in the prices of gasoline and other commodities.

At the height of the oil price run-up in 2008 some experts claimed that as much as one third the cost of oil was due to speculation and what was previously unlawful manipulation. Not only is the average American made to pay significantly more for commodities including natural gas and heating oil, it is his money the speculators bet.

American financial institutions are not alone in raking in immense fortunes from artificially inflating the value, or trading cost of nearly every type of commodity, security or derivative. As is made clear from the table to the right, the speculative binge and immensely leveraged trading using other people’s money is now an established reality on world banking and finance.

Thus, most of the world’s largest financial institutions were principal players in some form of money sifting activity — ranging from market making in high risk securities and equities, house account trading, client account trading, and a broad range of futures market activity.

Blurred Distinction Between Banking And Gambling

While some of these firms either are banks, meaning acceptors of depository funds, or chose to become banks when the credit markets collapsed in the fall of 2008, they were also uncontrolled, unaudited and unregulated gambling operations. Most of the firms that survived, including those bailed out directly, or indirectly by massive infusions of TARP monies, are still engaging in some or all of the high risk trading and arbitrage activities that bankrupted them only 18 months ago.

While we know some of the players who bet heavily on derivatives or pushed money around the world through statistical arbitrage, or other high risk strategies, we don’t know much about which big banks did not take inordinate risks with depositor monies or investor equity.

Perhaps the Financial Crisis Inquiry Commission will open the closed doors of big time finance to show how the world was swindled so badly, and by whom.