The wisdom of crowds, really?
11 January 2016
In an age where religion is being examined like never before, I have been thinking about belief generally — not only the religious kind — and its effect on human behaviour.
The unlikely prompt for this train of thought was Steve Carell’s appearance on The Jonathan Ross Show on ITV this Saturday. Carell was promoting his latest movie release, The Big Short, adapted from Michael Lewis’ 2010 book of the same title, about the build up to the last decade’s credit bubble and the resulting financial crash when it burst in 2008.
The story focuses on a group of individuals who bet against the ballooning collateralised debt obligation (CDO) market and similar financial instruments, which were underpinned by subprime mortgages. Home loans to skint homebuyers, in other words.
What interests me about this true story is that this small group of naysayers, ‘non-believers’ if you will, are depicted as eccentrics. The film’s main characters were regarded by the majority of their peers as oddballs, for not accepting that an economy built on quicksand could continue to prosper and would not collapse someday.
As a lowly commodities broker at the time, with no economics qualifications to his name, I wouldn’t deem to put myself in a similar bracket as these high-rolling Wall Street players. But to me it was clear as day back then that a collapse was not just a possibility. It was inevitable. Had no one else learned from the junk bond debacle of the 1980s?
A dysthymia diagnosis often accounts for my pessimism and reluctance to buy into mass euphoria, but in this instance, I think my atheism was at work. I refuse to believe in anything that has no basis in fact, be it fairies, leprechauns, unicorns, god, or anything else that seems too good to be true.
Brokers (read ‘salesmen’) regularly advise clients in terms of faith. “Keep the faith, the trend is your friend, the market will come back to you” is the kind of soothing language they use when markets move against hapless investors. The fact is that people take comfort from belief and from the belief of others. The whole herd can’t be wrong, can it?
The lead-up to the global financial crisis in 2008 was nothing less than a global game of Pass The Parcel, the largest Ponzi scheme the world had ever seen. At the bottom of an inverted pyramid that was holding up half of Wall Street, and the City of London, was a bunch of worthless paper backed by US mortgages that were never going to be repaid. Peter had been robbed to pay Paul millions of times over, but for as long as the plates kept spinning, no one would get hurt. It was this shared belief that caused the damage, as it had done so often before.
A notorious non-believer in anything but core value is the legendary octogenarian investor, and world’s third richest person, Warren Buffett. Investors in his Berkshire Hathaway holding company were up in arms during the internet boom of the late nineties, as he refused to ride the wave that saw any old stock with ‘.com’ after its name soar to unimaginable valuations. As the market clamoured to get on board with the latest shiny thing, on the vague promise of vast future returns, Buffett took a pasting for declining to take part in something he didn’t understand. He would buy only stocks with proper balance sheets, which meant Berkshire Hathaway grossly underperformed versus other funds during 1998/99. He would have the last laugh in 2001, after most of the internet’s unicorns had turned into plain old carthorses, fit only for the knackers yard.
History offers many examples of what has been labelled “irrational exuberance”, or the herd effect. If enough people believe in something, anything, it can become a self-fulfilling prophecy. “I do believe in fairies, I do believe in fairies, I do, I do, I do!”, as Wendy exclaimed to Peter Pan, wanting so badly to be able to fly.
Another unicorn that appears to be turning into a carthorse in front of our eyes in 2016 is China, with its centrally managed economy. Its explosive growth since 1978, to become the world’s largest economy in 2014, has been remarkable and a key driver of economic prosperity across the West.
China’s system has until now been sustained not by belief on the part of free-thinking Chinese people, but by that of the Western world, which needs China’s economic miracle to sustain it. Any economist or politician worth their salt knows that the Chinese economic bubble, which is what it is, will burst sometime soon. However, for as long as enough people believe it won’t hurt them, Chinese plates will continue to spin.
Belief works in mysterious ways. Try explaining the intrinsic value of gold (it doesn’t have one), the art market, vintage cars, antiques, the list goes on. Their market values are predicated solely on the value that others place on them. This takes balls, or willful detachment from reality.
People believe what they want to believe, after all.
4 November 2015
Singing the LME Week Blues
This week, James van Bregt takes a counter-intuitive view of the LME Week phenomenon.
The annual stand-and-shout extravaganza that is LME Week was looming. Invitations to events had started dropping on the doormat some two months prior, as they had done, regular as clockwork, for the preceding 25 or so years. This number — which it’s obligatory to tell everyone at every opportunity — is a clue as to why I finally decided to quit the circus in 2015 and reclaim my liver.
Free Food…and Drink…
Why, I hear you ask, would anyone miss the opportunity to load up on free ‘cocktails’ (read wine and beer) and canapés in salubrious West End venues, merely by virtue of having made it onto the hosts’ annual guest list? It is probably the nearest thing to a free lunch, after all. Well, because it is pointless, that’s why.
I should declare a disinterest. Since leaving a metals publisher a couple of years ago, my interest in things metallic has been mostly personal, bar a number of consulting gigs. That’s not to say that the social aspect can’t be enjoyable, catching up with old friends, colleagues and contacts made over what seems a lifetime in the industry. But this whirl of events is hardly conducive to business.
My problem with LME Week is that there is no common business agenda. Unless a supplier, trader or consumer, in town to negotiate deals at private meetings, the exercise is futile. Brokers, bankers, fund managers, regulators, friends-of-friends and hangers-on are there solely because everyone else is. This might have served a purpose in the days before instant global communication and social/professional online networking, though today it really doesn’t. Most of the week’s functions are like watching a chat show whose guests who have nothing new to plug; apart from the nice chit-chat, there is no point to it.
The primary objective for most LME Week attendees is to gather a pile of business cards to justify time away from the office, with “look at all the people I met!”. The truth is that these cards are usually exchanged fleetingly after some small talk about the market, the crowd, the quality of the food, last night’s events, tomorrow’s hangover, or tales of LME Week lore. Having collected hundreds such faceless cards over the years, mostly without recall of their context, these brief encounters probably account for zero new business in my metals career. Apart from a new batch of names against whom one might someday allot some phantom expenses, the business benefit of LME Week nowadays is really close to nil.
One can never dismiss entirely the role of networking or even swapping business cards — though the advent of NFC chipped cards means these should soon be redundant — but emailing later with “Hello, you may remember, we met at so-and-so function” is as likely to draw a response as the unsolicited offer of a nubile Russian bride.
Of course, these functions are a good place to sidle up to potential business or employment targets while they’re ‘out in the open’, without an obstructive PA or spam filter to bypass, though it requires luck. Attempting to ‘bump into’ one target of mine with a proposition, I confess to once having stood in the exact same spot for two hours at one broker’s drinks reception, standing precisely in the place where I had chatted with him the previous year.
Upon arrival, my man’s name was among the hundreds of badges on the reception counter, so no doubt he would arrive at some point. I stood there, rocking back and forth with a fixed grin, resisting all attempts to draw me away from the strategic vantage point from where I would pounce upon my unsuspecting prey. No, I would stand fast, scanning the venue constantly while mouthing inane niceties to any loner brazen enough to introduce themselves to me.
Having left empty-handed, I learned later that my target wasn’t in town. It transpired that he had been neither in the country nor the continent. Which only goes to show the hit-and-miss nature of these receptions.
More Hope than Expectation?
We go along in the hope that we make that lucrative new connection, or revive an old one, to justify the merriment. In reality, much time is spent making polite conversation with monosyllabic foreign visitors, while looking over their shoulder for someone more ‘useful’ to talk to. The ability to offload a bore or an undesirable hanger-on, to an unsuspecting colleague, or frankly, anyone, is an art form that every LME Week veteran has down pat.
My lack of enthusiasm this year for LME Week may have something to do with the global malaise affecting the wider industry, including the exchange itself, of course. Who knows, if the market’s fortunes improve by next October, I may yet be tempted back into the fray. However, judging by the strong turnout for the ‘Regulation’ session of the LME Seminar on Monday afternoon (yes, the afternoon), I don’t hold out much hope…
This article was written by James van Bregt. All views and opinions expressed are strictly his own.
14 August 2015
A change of pace and emphasis
Regular followers of this blog and its derived Twitter stream (@metalsinsider) may have noticed a reduced number of updates and a narrower range of articles in recent weeks. The simplest explanation for this is that the copywriting day-job (the one that pays the bills, that is) has been busier of late.
Having to prioritise focuses the mind and while there satisfaction in the knowledge that the blog is useful for many metals colleagues, and gratification in watching the growing rate of clickthroughs, something has to give. As such, less time is now devoted trying to unearth hidden nuggets from the nooks and crannies of the internet, with more emphasis on must-reads and my favourite area, jobs and people. We are, after all, all keen to know who’s hiring and where the opportunities are, particularly in these testing times for commodities folks everywhere.
A faraway holiday looms here, during which I will be reflecting on some sad losses we have suffered in LME circles recently, namely my former colleagues, Malcolm Culley and Tony Lucas. I will also be thinking of Michael Morrice and his battle with cancer, in the hope that his final months may be as painless as possible.
19 August 2014
As a long-time and daily user of LinkedIn, I thought my professional network of choice could do with some pointers last week. It seemed apt to write this on my very own personal pages on LinkedIn:
First, let’s get this clear, I’m a fan of LinkedIn. There remains much to like about the professional networking site I joined very many moons ago, despite the fact that it’s trying hard to turn us all into pseudo Facebookers. We’re now encouraged daily to “congratulate him, endorse her, share that”, but in between all these prompts, it remains a very useful tool for networkers and job seekers like me.
However, I was once again prompted today to “say congrats” to someone whose new status read “currently unemployed”. Lately, my network has sadly seen an increase in updates along such lines, all of which are now seized upon by LinkedIn’s crude software as an opportunity to drive traffic on the site. Having ignored its dumb, auto-generated prompts over the years, this time I was irritated enough to write.
Read the whole article here:
31 December 2013
News this month that some banks, including JP Morgan, Deutsche Bank and RBS, would be banning or restricting use of multi-party online chatrooms can barely have come as a surprise to many. These forums have been depicted by regulators and commentators effectively as virtual ‘crime scenes’ where collusion ran rife.
While I don’t mean to downplay any illegality, it cannot be controversial to suggest that collusion in markets has existed for as long as traders have been incentivised by personal gain. The elephant in the (chat) room here is the immediate P&L incentive, rather than the behaviour that takes place within its electronic walls.
It is laudable that regulators and enforcers are seeking to stamp out ‘collusion’ or herd behaviour, to continue the elephantine theme, though many of us humans with long memories are unsurprised that people have been caught orchestrating, collaborating, negotiating and celebrating successful deals. They have been doing so since the beginning of time.
In commodities markets dealers have always ‘colluded’, if collusion is defined by acting in concert; even if such collusion is ultimately to the benefit of all parties to a trade, including the clients. As a one-time trading clerk on the LME, I would usually know in advance which broker would be on the other side of a major closing order during the Exchange’s ‘official’ ring. Two clients, using their respective brokers, required a transaction to be struck across the LME’s trading floor for transparency’s sake, though neither would benefit from a blind bidding (or offering) frenzy during the open outcry session. Better, both clients would inform their brokers in advance where the ‘other side’ of the deal would be coming from, to ensure an orderly transaction was done on a quiet mutual nod. If such a deal was to be orchestrated today in an electronic chatroom, I suspect regulators would take a dim view indeed.
However, chatrooms are a relatively recent phenomenon and while those caught out by leaving evidence of their ‘collusion’ in electronic archives stored by their employers, banning the medium is just the thin end of the wedge.
The key point is that it is the collective behaviour, driven by short-term profit/loss incentive, that needs to be enacted upon, rather than the venue where the behaviour took place. If anything, it may be more logical to confine pre- and post-trade dialogue entirely to electronic channels and forums where communication is recorded, than force traders to go off-line, unrecorded, where they may be talking about who knows what?
By killing off chatrooms compliance directors may have ‘shot the fox’, but the elephant in the room lives on undisturbed.
This article first appeared on the Lord Copper blog, on 22 August 2013:
What Data Vendors can Learn from Apple
Today’s article is by James van Bregt. The dissemination of information – data, statistics, news – is a vital part of the market. In this piece, James considers how the model may be changing.
I returned last week from my annual family summer vacation in southern Spain, having spent much of it in the shade, reading “Steve Jobs”, the authorised biography by Walter Isaacson. I had never been a fan of Apple’s products, nor of its illustrious leader, but was persuaded by colleagues in the data vending industry that this business book was inspirational and a ‘must read’. The burning question for me was, why?
The Book of Jobs
As I read, it transpired that former colleagues of mine had also been inspired by Jobs. Having spent four years with Thomson Reuters (“TR”), working on the metals component of their Eikon desktop, it dawned on me that some in TR’s leadership must have read ‘the book of Jobs’ and bought the T-shirt. There were many similarities in the ‘Team Eikon’ management style, though perhaps without the crying to which their business hero was prone.
My impression of the man remained unchanged after completing the book’s 600 pages; Jobs was given to hyperbole. However, I couldn’t help but wonder what he would have made of the state of the struggling data vending industry and how he might have transformed it, just as he had the music business.
While I come at this from my metals markets perspective, I don’t doubt that many of the key issues apply not only to other commodities, but probably to most markets and exchanges as well. The landscape for these is generally dire and while Bloomberg and Thomson Reuters slug it out for ‘top tier’ clients — the financial institutions that buy terminals in their thousands — the truth is that the biggest banks are unlikely to regain their former glory anytime soon. I say ‘terminal’, though these days no hardware is typically supplied nor supported by vendors. The dealing room desktop is now a simple software download, installed on a standard PC. That’s a Windows PC and not an Apple Mac, of course…
Elephant in the Room
The elephant in the room is that the market itself is shrinking rapidly before their eyes. Then throw in the proliferation of smaller data providers in niche markets, offering data sourced via low-cost aggregators, as well as brokers offering their clients free Direct Market Access with live prices and, even, exchanges themselves, all distributing data directly via the web. The only customers in the market for terminals are the ‘professionals’ in the marketplace. But even here, the largest now require only data feeds to populate in-house transactional and reporting systems, while the view-only terminal becomes a thing of the past. So quite where this leaves these two high-end desktop providers one has to wonder.
Even at the lower end, the niche providers with staff levels in the low dozens can now concoct a custom XML feed for industrial users, delivered more quickly and cheaply than the Big Two can muster. Live feeds that are integrated into dynamic risk management software are no longer a mystery, even to metals scrap yard operators in the world’s industrial backwaters.
The premium data providers will counter that they offer access to hundreds of exchanges globally, analytical tools, calculators, real-time logistics mapping, deep history, tick data, news, research and secure chat functionality. Their content and functionality are continually being upgraded in a kind of arms race, firstly to outdo each other and secondly, to justify the hefty price tags they command from their premier clients. However, the reality is that only the most diversified of hedge fund analysts will ever use all of the toys in these expensive boxes.
The pricing strategies for the Big Two are radically different. TR’s Eikon for Commodities is a pared-down version of the Premium product, with users paying for any additional data they need. Bloomberg sells its terminals at roughly double the price — one BIG price — in which it includes everything by default, with the exception of certain exchange-levied live data fees. The curiosity here is that Bloomberg’s better analytics and broader datasets hardly justify the huge extra cost for the majority of users. No, their key differentiator is ‘Instant Bloomberg’ (IB), its closed, proprietary messaging platform. In terms of security, privacy – a touchy subject for Bloomberg, of late – and even functionality, IB probably lags TR’s Eikon Messenger and offers little that even free products such as Skype or Yahoo! Messenger don’t. With one not-so-small differentiator; the directory of 315,000 notable individuals that use it actively.
Bloomberg’s chat network rules because it was there first, having been launched in the early 1980s, years before most of us had email, never mind instant messaging. While this function may at the time have been no more than a handy gadget for young traders to socialise and advertise their hot hatchback cars for sale or to find a likeminded roommate, today it’s the lifeblood of trading. Another happy accident was that Bloomberg stemmed from the bond markets, a core business of investment banks. The largest players in commodities markets today are these very banks, while hedge fund managers too are mostly ex-bankers, so their data provider of choice was always Bloomberg. Consequently, if you have to be on a network that anyone who matters is also on, the answer is obvious. TR is trying its damnedest to change this, but most traders would rather part with a limb than voluntarily cut themselves off from the world’s most influential communications network.
What would Jobs do?
So, what would Steve Jobs do, if he were to set about shaking up the data vending status quo? The reality is that most of today’s customers need something else. The biggest players want wholesale feeds to drive their proprietary platforms, the analysts want industrial strength analytics, while everyone else wants just the data they need, without latency and via the cheapest means possible. And not many traders read news anymore of course, unless that includes textual data, such as interest rate announcements and the US Non-Farm Payroll.
Most users are currently forced to rely on a patchwork of services or they buy bundled data from one provider who packages selected services into a semblance of a single platform. Not one provider gives the user exactly what they need; just as cable or satellite TV providers bundle channels and force customers to pay for content they don’t watch, all in the name of providing ‘value for money’.
Plan for the Future
Unfortunately Steve Jobs isn’t here to show us how exactly he would transform the data market, but just as Jobs was a master of reiteration, rather than of wholesale new ideas, I don’t apologise for borrowing his concept of an ‘app store’ for financial data. Perhaps the future is a collection of apps, compliant with a standard such as iOS, Windows, or Chromium, licensed by me to be sold directly on my platform, where users can cherry-pick from a smorgasbord of data offered by a wide range of suppliers. These could be created by exchanges such as the LME and CME, while one might add the FX app from Interactive Data, analytics from CQG, precious metals rates from Fastmarkets, minor metals from Metal Bulletin and physical non-ferrous rates from MetalPrices.com. Just as Apple does today, I own the relationship with the subscriber; the data suppliers are responsible for and have complete control over compliance, maintenance and usage monitoring, while I take 30%. Sounds like a plan?