July 11, 2010             My Standing Commentary

7:00AM New York time. I am not done with my leave of absence. I am still not trading. The piece below I wrote because I HAD TO. I don't know how long it is going to stay up but I think it can stand for a while as explanation and testimony to one of the major things currently wrong with our financial system.

The most important piece of information you could ever have is not a one-off insider corporate earnings tidbit, or a "whisper" economic number, or some new "holy-grail" discovery of technical analysis. It would be regular knowledge of the positions and average prices of your market adversaries. If you could tell me where the top 10 holders of a stock or commodity or currency were long or short from, and (to a lesser degree) how much size they had on, I could use that information to position myself without looking at another single piece of data. I would not have to check prices or news.

Success or failure in markets above all else is determined by how much money your account makes. Regardless of any fundamental or technical view you might have, making money… or losing money… WILL determine whether your next move is to buy or sell. The most stalwart defender of a view or position will ultimately crumble under the weight of continuing P&L losses. The smartest MBA or most experienced prop trader will eventually be forced to sidelines as these losses continue to mount.

Dave Gilmore gave me a startling piece of information a few days ago. He was at a gathering down in NY and was talking to someone at a major hedge fund. No names… sorry. The hedge fund also engaged in high frequency trading. Anyway… this gentleman told Gilmore that his fund was actually able to purchase historical customer execution data from discount equity brokerage houses for use in their algorithmic trading analysis. Specific brokers were mentioned but I will not name them here. Gilmore was aghast. So was I.

Way back… when I was executing trades for George, everyone I ever did business with knew that if I EVER heard the Quantum name out there behind a particular piece of business, whoever had done it would NEVER see another stitch of business from us as long I was passing it out. In the same way… if I thought my discount broker was selling my execution information… even with a time lag… and even aggregated with other customers… I would close my account and never do business with them again!! My trade data, analyzed over time, can reveal my aggregate position and at what price I am in. It is the single most valuable piece of proprietary information I have. If that data is sold, and revealed, then the offending firm has committed the highest breach of fiduciary confidentiality possible!!! It would be like a tax lawyer ratting out a client to the IRS. If I can't trust my lawyer… or my doctor… or my broker… then I can't trust anyone.

Financial reform will be a joke until the relationship between customer and broker starts to improve. So long as a bank prop desk can trade against a client fund's position, or so long as privileged account information remains available for sale, the gap between customer and client on Wall Street will continue to widen. The entire financial system runs on faith and trust. The increasingly self serving nature of the financial "services" industry to maintain profits over long-term relationships and even MORALITY… will continue to foster an environment where the system is actually running itself down. Over time… more and more customers will seek anonymous electronic exchange-based systems to hook up with counterparties… bypassing Wall Street firms entirely. There will be less and less sheep to prey on. And eventually… as in nature… the wolves will have to turn on themselves.