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Salmon, Stiglitz and the problems of HFT reconsidered (1) – Speed

Building bridges between scientists and the public in communicating research findings is one of the most rewarding activities of bloggers and journalists. Felix Salmon is an outstanding example in this respect. In a recent article, he summarized the key points of a widely noticed speech delivered by Nobel prize-winner Joseph Stiglitz on the problems of financial innovation in general, and high-frequency trading (HFT) in particular.

Stiglitz asked Are Less Active Markets Safer and Better for the Economy? and he came to the conclusion that they are. His arguments revolved around three aspects: speed, costs and social value.

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Michael Lewis’ Flash Boys – further comments and links

The publication of Michael Lewis’ book “Flash Boys” renewed the general interest in high frequency trading and fuelled the debate about its potential use or harm. After finishing my first compilation of comments and reviews of the book I came upon further interesting and challenging contributions which I would like to share with you.

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A perfect storm – first reactions to Michael Lewis’ Flash Boys

Since many years, there is a controversy about high-frequency trading which just reached the wider public with the publication of Michael Lewis’ latest book Flash Boys. His conclusion that US stock markets are rigged by high-frequency traders rose strong emotions on both sides. With the following links and excerpts I would like to give an impression of some of the first days’ contributions and comments.

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Paul Einzig and the foreign exchanges

The other day, I came upon an interesting article on Vox about The Returns to Currency Speculation: Evidence from Keynes the Trader where Olivier Accominotti and David Chambers described the results of their research on currency speculation in London in the 1920s and 1930s. Looking for more, I found a preliminary unpublished paper by the same authors on the topic in the internet (which unfortunately must not be quoted). In that paper, describing the London foreign exchange market in the period under consideration the authors drew heavily on Paul Einzig’s The Theory of Forward Exchange of 1937. This is one of several rich and fascinating books Paul Einzig wrote (actually, the author himself considered it his best effort, as he mentioned in his autobiography), which, although from another century (in 1919 the telegraph had just begun to change the nature of foreign exchange dealing in London), bear many lessons, not only for historians.

Paul Einzig was born in 1897 in Braşov in Transylvania, in a “quiet little backwater, a small town at the foothills of the South Eastern Carpathians” (Einzig 1960), at a time when this Romanian region was still a part of Hungary. In 1919, after studies at the Oriental Academy of Budapest and first steps as a financial journalist in his home country, he came to London.

The world Paul Einzig was set to conquer: 2nd October 1919: London Dandies attired in menswear by Beau Brummell promenade in London’s Fleet Street.

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Inflation indexing and Bitcoin rhetoric

The other day, the New York Times provided us with an example of how fads and fashions can be used to draw attention to, and win acceptance for, an economic argument. In his article In Search of a Stable Electronic Currency Nobel laureate Robert Shiller proposed the introduction of an inflation-indexed unit of account similar to the Chilean unit of development or unidad de foment (UF) which is existing since the 1960s. The article is in large parts a summary of the ideas of an academic paper the author published in 1998. In short, its main argument says that recent progress in computer technology has considerably widened the possibilities of inflation indexing which would allow for a better pricing, contracting and risk management in an economy.

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Regulators’ games

Are US regulators corraling their financial system with the latest financial-safety rules for foreign banks as Patrick Welter (Frankfurter Allgemeine Zeitung) and others argued or will their move eventually even pave the way for closer cooperation and a revitalization of the worldwide regime of bank supervision?

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Sneak previews: Deutsche and RBS

Let us hope that this will not become a habit. As David Enrich (The Wall Street Journal) wrote the other day on Twitter

The tactics to choose a favorable moment (in case of Deutsche Bank a Sunday) ahead of the regular presentation of results to confront the markets with bad news illustrates how much, five years after the peak of the financial crisis, both institutions are still struggling to explain their activities and performance to the public in a damage-limiting way. What happened to the two banks which were once the biggest in the world? The following is a short compilation of information from banks’ press releases, media comments and other readily available sources to find out what the main problems are. Of course, this is no substitute for a thorough analysis. If not mentioned otherwise, data are from the banks’ official websites.

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Neu auf CARTA: Eine kleine Übung in Preishysterie

Stoppen oder weitermachen? Das ist die Frage, vor der Zentralbanken in den USA, Europa und anderswo zurzeit in Bezug auf ihre extrem lockere Geldpolitik stehen. Dabei wird an ein Zurückfahren der Programme und ein Abschöpfen der überreichen Liquidität, die sichtbar kaum produktive Verwendungen findet, noch gar nicht gedacht. Und das obwohl Beobachter seit langem vor dem Inflationspotential dieser Politik warnen. Auf Twitter & Co. werden sie dafür mit Spott überhäuft und, sofern sie aus Deutschland kommen, als typisch deutsche Inflationshysteriker abgetan.

Ein Blick auf die offiziellen Preisstatistiken scheint den Spöttern recht zu geben. Gerade meldet Eurostat, dass die jährliche Inflation im Euroraum im Dezember 2013 auf 0,8 Prozent vorausgeschätzt wird. Damit wird selbst eine Inflationsrate von zwei Prozent, wie sie die Europäische Zentralbank (EZB) auf längere Sicht anpeilt, zu einem höchst ehrgeizigen Ziel. Welche Seite recht hat, ist dennoch schwer zu beurteilen. Mit der Geldpolitik wird der Rahmen für Preissteigerungen in einer Volkswirtschaft abgesteckt. Inwieweit dieser ausgefüllt wird, hängt von der Wirtschaftsdynamik und den Aktionen und Reaktionen vieler Einzelner ab. Die entscheidende Frage, die sich hier stellt, ist: Würde ein dauerhafter Anstieg der Preise auf breiter Front, wenn er im Anzug wäre, so rechtzeitig erkannt, dass die Geldpolitik darauf angemessen reagieren könnte? Ein Blick auf die Art der Preisbildungsprozesse in der Wirtschaft und die Konstruktion von Preisindizes lässt daran Zweifel aufkommen.

Mehr dazu auf CARTA.

Rising prices in a deflationary environment

SUMMARY Regarding the ongoing extremely loose monetary policy in the United States, Japan and Europe, some observers worry about inherent inflationary dangers. Those worries are ridiculed by others who point to the lasting tendency of declining prices everywhere as reflected in major price indices. Which side is right is difficult to decide:
–          Even in a deflationary environment there are constantly some prices rising, while others fall.
–          The current state of the economy and our economic knowledge does not allow deciding at an early stage, which would enable monetary policy to act adequately, whether the general level of prices has begun to rise persistently.
–          Official price indices are poor early-warning signs. In simply adding up weighted price changes of goods and services for special groups of economic actors they fail to capture the underlying price dynamics in an economy. Hidden price changes and people’s reactions to rising prices further complicate the diagnosis.
–          The calculation of the German consumer price index may serve to illustrate the way in which official statistics account for a changing environment as well as its shortcomings.

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The US debt drama – soap opera or Lehman quality?

Shortly after the US default had been averted on October 16, the S&P 500 closed at an all-time peak of 1,744.50. Alan Wheatley (Reuters) commented enthusiastically:

“If Wall Street’s record high is a signpost, the U.S. economy has every chance of pulling further ahead of a stuttering Europe despite new battles to come in Washington over the government’s budget and debt ceiling.”

Does this mean that all the worries of the past weeks about a “Lehman moment” were nothing but hot air? Is the debacle that we observed nothing more than an episode in an endless soap opera that long ceased to impress markets?

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