Monday, April 11, 2016

The best microstructure example for class I have ever seen

The floor of the New York Stock Exchange.
The floor of the New York Stock Exchange. (Photo credit: Wikipedia)


This is really cool.



So most finance classes traditionally talk about how trading floors worked in the past.  You know the drill: open outcry, specialist, floor brokers, etc.  But trading has changed so much, that armed with that knowledge only one would barely recognize today's marketplace made up of many exchanges, OTC, and darkpools.



This week's Masters In Business Podcast  with Barry Ritholtz had the Keith Ross the CEO of PDQ on.  It was very enlightening.  They have a great model and it deserves to be shown in classes.



What do they do?

Instead of operating like a "normal" High-Frequency friendly exchange, they slow things down (milliseconds are a big deal in this space) and while waiting, pings other accounts for their quotes.  THIS IS KEY: they do not say if buying or selling, nor the size of order.  So they then get back the quotes from everyone and essentially have recreated the old specialists' book.  The customer then gets the best price.  This, in my mind, is pure genius.  Well worth listening to the podcast.

You can also read about PDQ here:

About PDQ ATS | PDQ ATS: "PDQ’s pioneering equity auction products were developed with a singular purpose – to provide a more effective market structure for all participants. As an independent equity market where modern technology benefits all, PDQ uniquely solves today’s market issues by putting control back in the hands of the trader and fostering competition to provide best prices among liquidity providers. When trading at PDQ, there is a short pause after entering an order. During the pause, liquidity seekers initiate an anonymous, symbol-only solicitation of trade responses from participating liquidity providers. The responses are aggregated and matched to the initial order in an auction framework that offers improved pricing opportunities and virtually eliminates gaming and spoofing."

Here is more with a picture that might explain it better:
http://www.marketswiki.com/wiki/PDQ_ATS,_Inc.


'via Blog this'

How can financial inclusion improve the lives of poor people? | International Development Journalism competition | The Guardian

How can financial inclusion improve the lives of poor people? | International Development Journalism competition | The Guardian:



There are no easy answers here:



"Can access to financial services, formal and informal help the poorest earn a living, grow their businesses and create new jobs, thereby pulling whole communities out of poverty? When the aim is to create jobs then what is more effective, lending to the very smallest businesses, often referred to as microenterprises, or lending to the slightly larger businesses commonly called Small and Medium Enterprises (SMEs), who are likely to create jobs?
How can savings represent a route out of poverty? Is anyone too poor to save? Why have savings been so overlooked and what does saving-focussed microfinance look like?"


'via Blog this'

Thursday, March 24, 2016

CEO Pay: What is what is sometimes hard to determine



Offers a fascinating look at CEO pay that notes the difficulty in determining exactly how (or why) the CEO is paid as (s)he is.


A look in:

"For researchers seeking to understand CEO pay, the
opacity of some of these instruments is of practical
interest. Salary and bonus payments are the least
opaque; they are just cash payments. But even with
these simple instruments, investors and researchers
do not fully understand the incentives involved
without better information. The way in which future
wage and bonus payments depend on the performance
of the executive is key, and such details are
not usually disclosed: What leads to a salary increase
or bonus payout, or the lack of one?"

Major Trends:
* more market-based pay
* within the market-based pay component, more restricted shares


(FYI This is perfect for my class and its regular assignment of analyzing two companies exectutive compensation practices)

'via Blog this'

Wednesday, March 16, 2016

Buffett vs the Hedge Funds

This is the podcast I was speaking about in class the other day:

Thursday, February 25, 2016

A class post for Mergers and Acquistions

I use this in class, so figured I might as well make it available to everyone.  We look at merger waves, and also some at premiums.

https://helpified.com/paths/mergers-and-acquistions


A look at Fat Tails and why they can be a problem

I have been putting together quite a few Helpifed paths for my classes.  Anyone can use them, but this one is on a topic that most finance textbooks (and seemingly most introductory stats classes do not cover (or at least the students do not remember by the time they reach my classes)

A look at Fat Tails:

https://helpified.com/paths/fat-tails-a-look-at-non-normal-distributions


Wednesday, December 30, 2015

Michael Matheson Miller on Poverty, Inc | EconTalk | Library of Economics and Liberty

Well worth your time!





I just sent an email to SBU officials to have a screening on campus.



Here is the trailer:




POVERTY, INC. | Official Trailer from POVERTY, INC. | The Movie on Vimeo.



Michael Matheson Miller on Poverty, Inc | EconTalk | Library of Economics and Liberty: "Michael Matheson Miller of the Acton Institute and the Director of the documentary Poverty, Inc., talks with EconTalk host Russ Roberts about his award-winning documentary on the barriers facing the poor around the world. Topics discussed include the incentives facing poverty-fighting NGOs and their staff, the importance of secure and well-defined property rights, and the costs and benefits of agricultural aid."


'via Blog this'

Wednesday, November 25, 2015

Finance and Economics podcasts

I have been using podcasts in class and I highly recommend that you do as well!  (or if you are no longer in class, enjoy and learn on your own!)

Here are some of my favorites that are all pre-approved for extra credit assignments:

Approved Podcasts (all also available on iTunes)


  1. Planet Money.  So well done.  I have to remind myself they have a staff of people and a budget.  I do not have either. :) http://www.npr.org/sections/money/
  2. Masters in Business: Finance related.  Tend to be a little more “hard core” finance. My personal favorite http://www.bloomberg.com/podcasts/masters-in-business/
  3. Market Place--a bit “newsier” but well done http://www.npr.org/podcasts/381444600/marketplace
  4. http://www.econtalk.org/archives.html  So many GREAT interviews!
  5. Freakonomics--read the book (I like it better, but still many great episodes).  http://freakonomics.com/radio/freakonomics-radio-podcast-archive/
  6. CGD -- great interviews.  Mainly economics
     6. LSE public lectures
     7.  More or Less.  deals more with stats but very well done



Interested in my own podcasts?  

FinanceProfessor (Really just class audio, NOT YET a true podcast: shoutengine.com/FinanceProfessor/ 

BonaResponds: https://soundcloud.com/jim-mahar-1   (My favorite!)



Updated January 2016

Another great one: https://www.trendfollowing.com/podcasts/

Monday, October 26, 2015

Hedge Funds’ Results: Far From August - Barron's

Hedge Funds’ Results: Far From August - Barron's:



"Through mid-October, the HFR hedge fund index was about flat for the year, compared with a 1.7% price drop for the S&P 500. Once again, the same argument emerges for hedge funds, which usually charge a 2% management fee, plus 20% of any profits, as it did in August: We might not be doing great, but we’re doing better than long-only stockpickers. There are fair arguments to be made on both sides when it comes to how hedge funds fared during these recent tests, whether it’s for August, 2015’s first 9½ months, or longer stretches. It’s important, however, for hedge funds not to move the goal posts in mid-game. If they’re billed as a good vehicle for relative returns—beating the S&P 500 in down markets and lagging behind it in upswings, or some variation of that—that’s fair enough, if expensive compared with mutual funds. Hedge funds look less credible when they purport to offer absolute performance—that is, positive returns in any market—and then fall back on the relative outperformance argument when the going gets tougher. You can’t have it both ways, especially when you’re charging 2 and 20.  "


'via Blog this'

Warren Buffett: Why hedge funds fail - MarketWatch

Warren Buffett: Why hedge funds fail - MarketWatch:



 "The fixed annual fees hedge funds charge are the real money-makers, not the contractual "bonuses" for performance. By extension, Buffett is making a statement about active managers of all kinds. They're not in the business of beating the market. They're in the business of attracting assets and that's all.


For example, a hedge fund managing $1 billion charges a fee of 2% of those assets per year plus 20% of trading profits."



'via Blog this'

Tuesday, October 06, 2015

A Tax to Curb Excessive Trading Could Be a Boon to Returns - The New York Times

A Tax to Curb Excessive Trading Could Be a Boon to Returns - The New York Times:



Interesting piece--not sure a tax would solve the problems, but ???



"Why do people hurt themselves by trading in this manner? Is it like gambling, with its danger of addiction akin to cigarettes? Maybe a little. A different study Mr. Odean worked on showed that when Taiwan introduced a national lottery, trading on the stock exchange fell 25 percent. So at least people there were able to substitute something else for their wagering activity. Mr. Odean chalks up much of the trading to overconfidence. Most of us think we’re better than the average investor, and men trade more than women. The Internet gives us the illusion of feeling well informed, so we conveniently forget that somebody else read everything we found before we did. Then, we compound the sins by failing to diversify"



'via Blog this'

Monday, October 05, 2015

Europe's airlines spruce up their jet fuel hedges | Reuters

Europe's airlines spruce up their jet fuel hedges | Reuters:



"With fuel accounting for 46 percent of Ryanair's (RYA.I) 2014 operating costs, 33 percent of British Airways' (ICAG.L) and 21.5 percent of Lufthansa's (LHAG.DE), price fluctuations can seriously impact company profits. To reduce price-fluctuation risk on projected operating costs, many airlines hedge a proportion of their future fuel needs six to 24 months in advance by buying jet fuel or crude oil contracts from banks or on an oil futures market. But hedging strategies differ and not all airlines – and therefore consumers - will profit from today's low prices. [O/R] "



'via Blog this'

Unfriendly Tax-Friendly Funds - WSJ

Unfriendly Tax-Friendly Funds - WSJ:



"The major finding: In every year [that was studied], tax-managed funds on average failed to save their investors more money on taxes than their incremental expenses, or the difference between their operating costs and the lower fees of the other types of passively managed funds.

In other words, any tax savings were eaten up by fees.

"



'via Blog this'

Friday, August 28, 2015

Scientists Replicated 100 Psychology Studies, and Fewer Than Half Got the Same Results | Science | Smithsonian

This is troubling in many ways.  I would expect the numbers to be better in finance (especially the mathematical studies and modeling studies), but I have no doubt that the timing of studies matters and that the replication is often impossible (possibly in part since the original study influences the subjects/markets).



Scientists Replicated 100 Psychology Studies, and Fewer Than Half Got the Same Results | Science | Smithsonian:

"Across the sciences, research is considered reproducible when an independent team can conduct a published experiment, following the original methods as closely as possible, and get the same results. It's one key part of the process for building evidence to support theories. Even today, 100 years after Albert Einstein presented his general theory of relativity, scientists regularly repeat tests of its predictions and look for cases where his famous description of gravity does not apply. "


Here is another story on this:
http://www.vox.com/2015/8/27/9216383/irreproducibility-research

A simple finance example: CAPM worked well in the era it was developed but could not be replicated in out of sample (more recent) tests).  (and before I get complaints, I realize that CAPM is not a perfect example but it was first one that came to my head).

'via Blog this'