Category Archives: Finance

little know facts about high frequency trading

The price of petrol is very low in the US, the good news and the not so good news

Broken in the USA, Education, Finance, Government Issues

Chapter 28 The price of petrol is very low in the US, the good news and the not so good news

Historically the price of fuel in this country has been very low compared with other countries.  Prices we pay are about ½ the average for Europe and even less when compared to the Scandinavians. There are several countries where prices are lower, but in almost all of these cases the price is subsidized by that government. Current prices (2015) average $2.30 with a range of $2.09 – $3.10 (California). Price where I live is $2.17. In 1963 the price was $.30 per gallon. If you apply the CPI to that the $.30, compounded annually to 2015 it calculates to $2.39. Gas is less expensive today!

Our ability to produce oil and maintain low fuel costs allows us a competitive advantage in the world economy. If we view energy production in the short term our strategy of focusing of additional fossil fuel exploration and production seems valid, but what about the future. Have you asked yourself why the prices in other countries are so high? For certain some of the reason is that they are not producers, but is that the entire reason?

Source: http://taxpolicycenter.org/publications/url.cfm?ID=1000845

“While part of that difference in prices is due to relatively low U.S. pretax gas prices, pretax price differentials are small compared to the total price differential. Pretax prices vary from $1.51 in the United Kingdom to $2.23 in Norway. Thus, the price differential between the United States and the rest of the world can be attributed almost entirely to differential taxation.”

So what, you ask? How long do we expect our supply of gas and oil to last? My research indicates a range, depending on which scientific group is doing the analysis. The most pessimistic view says 2050; the most optimistic indication is 2070. Currently the US derives 86.4% of its energy from fossil fuels. This same rate for the world in total is just under 81%. At the same time there are several European countries that were this number is less than 50% and in France it is 20%. Taxing an energy resource with a limited supply actually makes sense to me, as long as a substantial portion of the revenue is dedicated to developing alternatives.

One promising energy source that is the most abundant element in the Universe is Hydrogen. It galls me that we are letting Japan and Korea take the lead in developing this alternative energy technology. While the focus is currently on supplying energy for vehicles, it has potential applications for the generation of electricity to the grid. There are challenges in terms of the cost and infrastructure required, but in long term it may prove to be economically viable. The side benefit it that it clean!

I am convinced that this issue may be one of the most critical to the welfare of our next generation.

High frequency traders, bank & broker facilitators and how they rip off the small investor

Finance

Chapter 23

High frequency traders, bank & broker facilitators and how they rip off the small investor

Source: http://en.wikipedia.org/wiki/High-frequency_trading

“High-frequency trading has taken place at least since 1999, after the U.S. Securities and Exchange Commission authorized electronic exchanges in 1998. At the turn of the 21st century, HFT trades had an execution time of several seconds, whereas by 2010 this had decreased to milli– and even microseconds. Until recently, high-frequency trading was a little-known topic outside the financial sector, with an article published by the New York Times in July 2009 being one of the first to bring the subject to the public’s attention

In the early 2000s, high-frequency trading still accounted for fewer than 10% of equity orders, but this proportion was soon to begin rapid growth. According to data from the NYSE, trading volume grew by about 164% between 2005 and 2009 for which high-frequency trading might be accounted. As of the first quarter in 2009, total assets under management for hedge funds with high-frequency trading strategies were $141 billion, down about 21% from their peak before the worst of the crises. In the United States in 2009, high-frequency trading firms represented 2% of the approximately 20,000 firms operating today, but accounted for 73% of all equity orders volume.”

Another source: http://www.financialsense.com/contributors/michael-shedlock/high-frequency-trading-hails-its-first-billionaire

The preceding paragraphs might be a bit confusing to most of us, especially if we are only casual investors. Simply stated, high frequency traders sit in the middle between traditional buyers and sellers. They pay banks & main line brokers for information on the prices at which traders are willing to transact. They look for spreads and buy and sell in microseconds. If you want to understand how this is possible, read “Flash Boys” by Michael Lewis. They make a very, very small margin on each transaction, but they do almost ½ of all the volume, so their profits are huge. Keep in mind that all of this is legal, the ethics are another issue. In my view this is the ultimate in inside trading, but there are arguments on the other side.

The HFTs pay banks and brokers for access to their bids and asks and further pay to be close to the computer processors and thus enable them to see the transactions faster and trade as fast as possible. You might ask why does it matter since they are only ripping off such a small portion of each transaction each time and both the buyer and seller will get what they want. However, this is only true for some “limit” orders, not for “market” orders. Because of their ability to see so many orders they can still match a limit order on one side with a market order on the other side. The bottom line is that ordinary traders are paying for their profits.

How much can this amount to. You only have to look at one day’s trading to figure this out:

An average day of trading volume on the NYSE is approximately $55 billion. Assume that HFTs are involved in 40% of these (and evidence is that this rate could be low), then their volume would be $22 billion. If we assume that their margin is only .1% then their daily profits would amount to $22 million. Keep in mind that this is only one exchange and the LFTs work all the markets. If we assume 250 trading days then their profits would amount $5.5 Billion a year just off the NYSE!

 

The Interest rate on the debt is low and is that good?

Finance, Government Issues

Chapter 17

The Interest rate on the debt is low and is that good?

The current interest rate that we, as tax payers, are paying is just under 2.4%. That rate seems to be more than fair given the rates on other securities, but just what does this mean?

First, let’s examine the reasons for this historically low rate. There are primarily two factors at work. The FED is making every effort to maintain artificially low rates in the US as compared to other countries with the idea that this will assist in stimulating the economy. Following is from the FED (http://en.wikipedia.org/wiki/Financial_crisis_of_2007%E2%80%9308):

“The financial crisis that began in 2007 was the most intense period of global financial strains since the Great Depression, and it led to a deep and prolonged global economic downturn. The Federal Reserve took extraordinary actions in response to the financial crisis to help stabilize the U.S. economy and financial system. These actions included reducing the level of short-term interest rates to near zero. In addition, to reduce longer-term interest rates and thus provide further support for the U.S. economy, the Federal Reserve purchased large quantities of longer-term Treasury securities and longer-term securities issued or guaranteed by government-sponsored agencies such as Fannie Mae or Freddie Mac. Low interest rates help households and businesses finance new spending and help support the prices of many other assets, such as stocks and houses.

By law, the Federal Reserve conducts monetary policy to achieve maximum employment, stable prices, and moderate long-term interest rates. Information indicates that economic activity is expanding at a moderate pace. Labor market conditions have improved, however, a range of labor market indicators suggests that underutilization of labor resources is gradually diminishing. At the same time, the Federal Open Market Committee judges that the likelihood of inflation running persistently below 2 percent has diminished somewhat since early this year, and survey-based measures of longer-term inflation expectations have remained stable.”

Unfortunately this strategy has, so far, not produced the desired result, the economy remains sluggish and in fact retail sales declined in the first quarter of 2015.

“US Retail Sales Decline For Third Straight Month

Source: http://finance.yahoo.com/news/us-retail-sales-decline-third-200557373.html Sales in U.S. retail and food stores unexpectedly decreased 0.6 percent from the previous month, following a 0.8 percent drop in January as cold weather kept consumers from shopping malls and car dealers. It was the first time since 2012 that sales had dropped for three consecutive months.”

Of course this result will demand that the FED continue to artificially depress interest rates.

Why do I say that the rate is artificial? Let’s examine a more stable economy with a modest growth rate and one that has a much lower per capita national debt. Here I use New Zealand as an example. It is difficult to find a short term rate at any US Bank over 1%, while the 120 day term rate for KIWI Bank as of the date of this writing is 4.4%!!

What would be the impact on the US taxpayer should the current interest rate double. The answer is that we would incur an additional $500 Billion in costs!