Streetwise Professor

May 2, 2016

Zero Hedge: Zero Class

Filed under: Economics,Politics — The Professor @ 8:13 pm

Bloomberg’s Tracy Alloway and Jake Kawa wrote an expose on Zero Hedge last week. There was not a tremendous amount of new material here. I was disappointed that they didn’t have anything about Daniel Ivandjiiski’s father: I am convinced there is a Warsaw Pact intelligence connection there. The story focused on the revelations of an ex-Tyler Durden, Colin Lokey. Looked provided information that supports what I’d written almost five years ago, namely, that ZH is a Russian information operation:

Lokey, who said he wrote much of the site’s political content, claimed there was pressure to frame issues in a way he felt was disingenuous. “I tried to inject as much truth as I could into my posts, but there’s no room for it. “Russia=good. Obama=idiot. Bashar al-Assad=benevolent leader. John Kerry= dunce. Vladimir Putin=greatest leader in the history of statecraft,” Lokey wrote, describing his take on the website’s politics. Ivandjiiski countered that Lokey could write “anything and everything he wanted directly without anyone writing over it.”

The remaining Tyler Turkeys responded in their typically classy way. I am very proud to be featured in their lead:

Others, such as “academics who defend Wall Street to reap rewards” had taken on a different approach, accusing the website of being a “Russian information operation”, supporting pro-Russian interests, which allegedly involved KGB and even Putin ties, simply because we refused to follow the pro-US script. We are certainly ok with being the object of other’s conspiracy theories, in this case completely false ones since we have never been in contact with anyone in Russia, or the US, or any government for that matter. We have also never accepted a dollar of outside funding from either public or private organization – we have prided ourselves in our financial independence because we have been profitable since inception.

Hilarious. Hey guys: next time use my name!

And seriously. There’s a lot more behind what I wrote than “simply because we refused to follow the pro-US script.” Such a disingenuous non-responsive response is as much as a confirmation as I could imagine.

The Tylers continue to strike their pose as courageous battlers against the corrupt capitalism. Ironically, given that they recycle the laughable NYT bullshit story labeling me a tool of Wall Street, I have inflicted far more real pain on those that ZH claims to fight than they have. Whereas they are all talk, by my rough estimate I have contributed materially to cases in which banks, traders and others have paid in the mid-to-high nine figures to settle. The figure could realistically exceed ten figures in the near future.

After taking a swipe at me, the remaining Tylers turn their attention to Lokey. They quote extensively from his text messages (more class!) and label him as a drug addict and drug dealer, and claim that this discredits him as a source.

Um, he wrote for them for a year while he knowing about his past and his alleged instabilities. Doesn’t that kind of discredit what they published for a year?

Based on Lokey’s account, the Bloomberg piece describes ZH as the web equivalent of a sweat shop. This makes it highly unlikely that the remaining two named Durdens, Ivaandjiiski and Tim Backshall, carried the load prior to Lokey’s arrival. Thus, there are probably other ex-Durdens out there with tales to tell.

ZH is a dodgy operation. Bloomberg has turned over the rock a little. But there is much more to learn. Let’s hope Bloomberg, or someone else, turn over a few more.

November 20, 2014

How Do You Know That Zero Hedge is a Russian Information Operation? Here’s How

Filed under: History,Military,Politics,Russia — The Professor @ 9:41 pm

I have frequently written that Zero Hedge has the MO of a Soviet agitprop operation, that it reliably peddles Russian propaganda: my first post on this, almost exactly three years ago, noted the parallels between Zero Hedge and Russia Today.

A few days ago ZH ran a post that illustrates perfectly how it spews Russian propaganda that slanders the United States and other enemies of Russia, such as Ukraine: “Ukraine Admits Its Gold Is Gone: “There Is Almost No Gold Left In The Central Bank Vault.”

The lurid post highlights a statement by the head of Ukraine’s Central Bank, to the effect that almost all the gold in Ukraine’s official reserve is gone. It states that this is news, a stunning revelation, which confirms a story that ZH reported a few weeks after the triumph of Maidan: that soon after Yanukovych fled, the gold had been spirited out of the country in the dead of night by airplane. It closes by stating the the disappearance of the gold occurred at the time that US State Department official Victoria Nuland was in Kiev. The implication is obvious. The US stole it:

In any event, now that the disappearance of Ukraine’s gold has been confirmed, perhaps it is time to refresh the “unconfirmed” story that a little after the current Ukraine regime took power the bulk of Ukraine’s gold was taken to the United States.

Wow. Quite a tale.

And one that overlooks crucial details. Most importantly, the Ukrainian CB’s “admission” of that the vaults are empty is not news. At all. A mere few days after Yanukovych fled, Ukrainian Prime Minister Yatsenuk disclosed that the country’s gold reserves had been looted:

Speaking in parliament, Yatsenyuk said that the former government had left the country with $75bn of debts. “Over $20bn of gold reserve were embezzled. They took $37bn of loans that disappeared,” Yatsenyuk said. “Around $70bn was moved to offshore accounts from Ukraine’s financial system in the last three years,” he claimed. [Emphasis added.]

The US dispatched  FBI and Treasury investigators to assist Ukraine in an investigation.

Funny how ZH left out that history, which appeared in virtually every mainstream publication at the time, and made it seem for all the world like the Ukrainian Central Bank’s revelation hit the world like a thunderbolt, nine months after Yanukovych’s flight. That distortion of history makes it plain that the ZH story is not information, but an information operation.

Shortly after Yatsenuk disclosed the theft of the gold, stories started appearing on the web, first on a Russian website, claiming that the gold had been spirited out the country: including on ZH, which quoted the Russian web story. This obviously serves a Russian purpose: it presents a counter-narrative that blames the theft of the gold not on Yanukovych, or the Russians, but on the new Ukrainian government and the United States.

This is the classic Soviet/Russian agitprop MO that I noted 3 years ago. A story appears in an obscure publication, typically outside the US or Europe, where it has been planted by Soviet/Russian intelligence. It is then picked up by another, more widely read publication, in Europe or the West. Maybe it works its way through several additional media sources. It then gets disseminated more widely in the west, sometimes making it to prestige publications like the NYT.

In the era of the web, the information weapon needn’t make it that far. Getting into a widely-read web publication like Zero Hedge which is then linked by numerous other sources and tweeted widely ensures that the lie goes viral.

ZH is an important transmission belt moving the story from Russian propagandists/information warriors to western news consumers. It happens a lot. This is a particularly egregious example, but the transmission belt runs almost daily. ZH is as much a part of Putin’s information warfare as RT. If you follow closely enough, it’s as plain as the nose on your face.

So why does anyone take Zero Hedge seriously? And believe me, many do. Many people who should know better.

And what is the US’s counterstrategy? Marie Harf’s Twitter account. I say again: we are so screwed.


May 1, 2014

Zero Hedge Reveals Its True Colors. Again.

Filed under: Military,Politics,Russia — The Professor @ 7:50 pm

Every sentient being not in the tank for Russia recognizes that the Television Channel Formerly Known as Russia Today (i.e.,  RT) is spewing Kremlin agitprop 24/7. Heck, even the borderline sentient, like our Secretary of State, recognize this.

There is another widely followed outlet, this one online, that is vying with RT for the dubious honor of flacking most shamelessly for Putin: Zero Hedge. There are numerous posts daily that flog the Russian view, but few are more egregious than this one. The part comparing Crimea to the Falklands was rather amusing. As was the statement about Chevron being part of the Rockefeller empire. Yeah. Back in 1910. When it was Standard Oil of California. There was a lot of venting about the Rothschilds, and Jews generally. And WTF about the Yellowstone caldera?

You might say: “but that post is from another source.” But as I pointed out two-and-a-half years ago, this is a classic Soviet influence operation technique.

In that post I also noted the close affinity between RT and Zero Hedge. Some things don’t change.

To say I am not surprised is an understatement. Recall that Zero Hedge is run by Daniel Ivandjiiski, the son of an obvious Soviet bloc (Bulgarian, specifically) intelligence operative.

I’ve thought for years that ZH is a Kremlin influence operation. It is doing nothing now to disabuse me of that notion. To the contrary. It is cementing it.


March 13, 2014

Putin Channels Zero Hedge

Filed under: Economics,Politics,Russia — The Professor @ 3:37 pm

@libertylynx reminded me of one of the whoppers that went unnoticed because of all the even bigger whoppers in Putin’s presser 10 days back:

Now, the stock market. As you may know, the stock market was jumpy even before the situation in Ukraine deteriorated. This is primarily linked to the policy of the US Federal Reserve, whose recent decisions enhanced the attractiveness of investing in the US economy and investors began moving their funds from the developing markets to the American market. This is a general trend and it has nothing to do with Ukraine. I believe it was India that suffered most, as well as the other BRICS states. Russia was hit as well, not as hard as India, but it was. This is the fundamental reason.

Some simple facts.  Since the beginning of March, the Russian market is down 13.74 percent.  The largest decline, of over 10 percent, occurred on the Monday after the upper chamber of the Duma authorized an invasion of Ukraine.  In the same time, the MSCI Emerging Market Index was down 2.55 percent: since Russia is included, non-Russian EM stocks were down less than 2.55 percent.  The MSCI EM Index also includes Turkey, which is lurching into chaos. As for India, it is up about 6 percent, and was down less than 1 percent on the day the Russian market crashed 10 percent.

So who you gonna believe?  VVP or those lying charts? Obviously what has hit the Russian markets is not a Fed-driven phenomenon common to BRICs or emerging markets.  This was a Russia-specific phenomenon.  Which means it’s all about Putin and Ukraine.

But the most revealing thing is that Putin can say such readily falsified things with such confidence and panache.  Has he convinced himself it’s true?  Or does he know that his real target audiences, Russians dependent on TV for news, and useful idiots in the West, will just swallow his swill as Gospel and won’t bother to check?

I’m guessing the latter, but I can’t rule out the former.

December 10, 2012

The Wages of a Zero Sum Mindset, Russo-Syrian Edition

Filed under: Military,Politics,Russia — The Professor @ 3:50 pm

Russia’s defense of Syria’s Assad is overdetermined.  (And don’t believe for a minute its claims that it is not protecting Assad: walks like a duck, quacks like a duck, flies like a duck-it’s a duck.)

There are military-diplomatic reasons.  Syria is a long-term ally in the region-Russia’s last one.  Syria provides Russia with its only port in the Med.  Russia has legitimate fears of another jihadi outpost, this one at the heart of the Middle East.

There are domestic political reasons: in a reprise of its role in the Holy Alliance, Russia’s extreme fear of an popular overthrow of the government leads it support any regime facing popular opposition, no matter how odious that regime might be.

But a big reason can only be described as psychological, and rooted in Russia’s obsession with the Cold War, and in particular its loss in the Cold War to the US,.   Recent Russian squealing about the US’s alleged lapsing into a Cold War mentality (e.g., the Magnitsky Act) is so much projection that reveals just who really thinks about the Cold War non-stop. More generally, Russia is obsessed with respect, and regaining its great power status.

Putin for one marinates in these obsessions.

One effect of this obsession is the pronounced tendency to oppose reflexively anything that the United States supports, or that Russia even suspects it might support.  Hence, the fact that the US is attempting to orchestrate Assad’s ouster is sufficient for Putin and Lavrov and the rest of the gang to oppose it.

Ironically, in so doing they are jeopardizing Russia’s more objectively-based reasons for wanting to maintain a foothold in Syria.  By creating obstacles to every attempt for the UN or NATO to get rid of Assad and transition to some other government, Russia (assisted by China) has ensured that the conflict has become a protracted war to the knife in which the most radical forces-jihadi forces, in particular-have decisive advantages.  Given its longstanding relationship with all aspects of the Syrian military and security forces, and its connection with Assad, if anyone could have brokered an outcome that would have avoided the bloodshed and chaos that have occurred in the last two years, and which will almost get worse when the inevitable comes to pass, it was Russia.  But it dug in its heels, permitting Assad to hang on, and to escalate, and to make a cataclysmic end almost certain.

When this end occurs, Russia’s influence in Syria will be nil, and its image in Syria and the Middle East generally will be deeply blackened.  It can kiss Tartus good bye.  There will be a major jihadi enclave that much closer to Chechnya.

If it had not responded so reflexively to western initiatives to find some way of getting Assad out, and indeed, if it had utilized its connections and influence, it could have preserved something.  Instead it will lose everything.  Even overlooking the humanitarian catastrophe that is unfolding, and the dangers that a post-civil war Syria will pose to its people and the region, and just looking from a purely self-interested Russian perspective, Putin and Lavrov played this badly.  The opposite game will prove very expensive for Russia.  Yes, the US would have gained from Assad’s departure, especially at the outset (not so clear now, given how things have gone, but his eventual departure is inevitable).  In the Russian zero sum world view, given the salience of the US in the Russian mind, that was sufficient reason to fight for Assad to the bitter end.   But it will prove to be a grievous wound, and an entirely self-inflicted one

February 27, 2012

Some Zero Hedge Questions

Filed under: Politics,Regulation — The Professor @ 9:37 pm

Zero Hedge has largely avoided any serious scrutiny for the past several years, after some critical stories in New York magazine and on Felix Salmon’s blog.  I wonder if that’s about to change.

While waiting for serious reporters to subject ZH to the same kind of critical inquiry that ZH routinely aims at its myriad enemies, I have a few questions that might be worth exploring:

1. Do ZH writers have positions in the market?  Any market?
2. Do they disclose positions when they write stories related to their positions, or post tweets related to their positions?
3. Is the SEC at all curious about a hugely influential, and possibly market moving/market influencing site in which someone banned from the securities industry is deeply involved? (Daniel Ivandjiiski, banned from the industry for insider trading denies being a “founder” of ZH, but this sounds weasel-like, depending on the definition of “founder.”  He is the only publicly identified writer for the site.)
4. Is the fear of SEC scrutiny why ZH is registered and hosted in Switzerland? If that’s not the reason-what is?

I have many more questions, but that will do for now.

November 7, 2011

Peas in a Pod: Occupy, RT, and Zero Hedge

Filed under: Economics,Politics,Russia — The Professor @ 5:34 pm

The American and Western media have been fawning in their coverage of the Occupy movement, but for please-get-a-room Tiger Beat coverage they cannot hold a candle to the “News” Organization Formerly Known As Russia Today, which now goes by the more innocuous moniker RT: Gee, I wonder why they dropped the explicit Russia reference.  ‘Tis a puzzler.

RT is a creature of the Russian government, part of its widespread information operations.  It is widely recognized as a means by which the Russian government peddles outlandish, anti-Western, and particularly anti-American conspiracy theories; a haven for loons and wackos; a fine inheritor of the “in America they lynch negroes” school of journalism.

And RT’s current obsession is Occupy. You can test your gag reflexes by Googling “Russia Today OWS” and following a few links to RT stories about the Occupy movement.  RT could be OWS’s press agent: maybe it is.  This piece–done very early in the OWS protests–is gruesomely representative.

So just why would Russia Today–pardon me, RT–be so enamored with Occupy?  Do I need to draw you a map?

Vladimir Putin and the siloviki who run Russia are unrepentant Cold Warriors who harbor intense resentment at the fall of the Soviet Union: they ache for revenge, or at least a replay.  They were weaned on anti-Americanism, and subsist on it as they move into their senior years.  Putin and his most important minions were intelligence operatives who spent their formative years in dirty operations against the US.  It is in their DNA.

Putin’s intense hatred for the US seethes below the surface, and quite frequently bubbles over in tirades against the country.  Indeed, just today he ranted about the “arrogant powers.”

Of late, much of his vitriol has been directed precisely at the American financial system, which he refers to using a word often applied to enemies of the state during Soviet times–parasitical.  It is quite clear that he blames the western financial crisis for inflicting the existential economic plight that has plagued Russia since 2008.

So OWS and Putin/siloviki are a match made in heaven.  Both share a common enemy, and a common diagnosis of what is wrong in the world.  No surprise, then, that Putin is marshalling Russia’s propaganda apparatus to flack for OWS.

For those of a certain age, and who have a passing familiarity with the way the world worked before 1991, might also wonder what other Russian support is flowing to elements within OWS.  OWS, and the sheltering media fog that blankets it, brings to mind the various peace movements of the Cold War era, perhaps most notably the Nuclear Freeze movement.  Said movement was thoroughly penetrated by the Soviets and their allied intelligence services.  No, not everyone who marched was a commie: very few were, in fact.  But more than a few leading lights were Soviet assets.  Given the coalitional, fragmented nature of Occupy, it would strain credulity to believe that something similar is not going on today.  There are useful idiots and Leninist vanguards.  That’s the way these things work, and they no doubt work that way in Occupy.

Interestingly, RT is a favorite source for the conspiratorial/paranoid tribes of the polygot assemblage that claims the libertarian label.  This is an interesting historical phenomenon in itself: these tribes can trace their lineage to agrarian populists, Jacksonian anti-bankers, Jeffersonian agrarians, and Anti-Federalists.  They believe that finance is antithetical to liberty.  Hence their affinity for OWS–and RT.

Another favorite of these folks is the Zero Hedge website.  I have often mentioned that Zero Hedge is aptly named.  One hedges to reduce variance, and the extreme variability of the content on ZH makes it plain that they don’t hedge at all.

The site links quickly to breaking finance stories from major news sources, reports data on prices from sometimes obscure markets in response to breaking news, and often excerpts research from reputable analysts and firms. Hence, ZH can be useful as a de facto news aggregator.

When it comes to the editorial content spewed out under the pseudonym “Tyler Durden,” however—oi.  What a farrago of paranoid, conspiratorial nonsense.  ZH is obsessed with HFT—and utterly warped and delusional in its ravings on the subject.  Ditto for derivatives.  And the Fed.  And especially Goldman and Wall Street generally.  Look, I’ve been critical of all of the above at times, but ZH coverage of them is unhinged and indiscriminate.

ZH’s editorial line on the US and European economies parallels almost exactly that of RT.   Moreover, although ZH is unsparing in its criticism of virtually every Western government leader, it never whispers the slightest word of reproach about Vladimir Putin or Russia.   Indeed, a tweet mentioning that fact almost immediately drew a response from ZH: a link to a ZH piece spouting a common line of Russian propaganda argument about the superior fiscal foundation of Russia as compared to the US.

And like RT, ZH could be an OWS echo chamber.

Apropos the certain-kind-of-libertarian-RT-ZH nexus, a certain commenter on this site has been linking to ZH with some regularity in the comments, all with the intent of mocking my supposed shilling for The Banks and The Man.   A friend of mine remarked on this the other day, which led to a conversation about ZH generally.  We were trying to make sense of it, when a thought struck me: ZH is like a Soviet-bloc influence operation.  These operations would plant disinformation in publications around the world.  Most of the publications were obscure, often in Third World countries.  The disinformation would be mixed in with legitimate reporting.  The goal of these operations was to put disinformation into circulation via more obscure publications, knowing that more reputable publications higher up the media food chain would frequently pick up the planted stories and run them.  Some of the stories would work their way to the very top of the food chain, winding up in publications like the NYT and the WaPo and particularly in major European newspapers.

That comports perfectly with the ZH MO.   Provocative and poorly sourced allegations with a particular slant are scattered among legitimate news and data.  The solid news stories attract eyeballs that also views the agitprop.  And some of the ZH material has made it up the media food chain.

And it is also the RT MO.  RT is well-known for sprinkling its more outlandish “reporting” and commentary in a stream of legitimate news stories told in a relatively straightforward way.

So what is ZH, exactly? Its creator is Daniel Ivandjiiski, a native of Bulgaria.  Daniel has a very dodgy past, including losing a job and his securities license for insider trading.  None of this is hard to find out: it was covered in a New York Magazine piece that ran soon after ZH first gained notoriety.  Mr. Ivandjiiski’s checkered past perhaps explains his clearcut antipathy for Wall Street.   But there may be more to it than that.

In light of my flash analogy of ZH to a  Soviet disinformation operation, what is really interesting is the background of Daniel Ivandjiiski’s father.  Ivandjiiski pere (Kassimir) was a Bulgarian “journalist” and “envoy” during the Cold War.  A member of the Bulgarian Ministry of Foreign Trade, in the COMECON and EU departments.  A journalist.  A “special envoy” (hence presumably with very useful diplomatic cover) in every proxy war in Central Asia and Africa in the 1970s and 1980s.

That is an intel operative’s CV with probability 1.  Probability 1.  Every one of those jobs was a classic cover.  There is no doubt in my mind whatsoever—none—that Mr. Divandjiiski senior was a member of the Bulgarian Committee for State Security (Държавна сигурност or DS for short)—the Bulgarian equivalent of the KGB.  And remember that Bulgarian DS was the USSR KGB’s most reliable allied service during the Cold War.  It carried out wet work in western countries, notably the “umbrella murder” of Georgi Markov in London.  It was linked to the plot to assassinate the Pope; although in the topsy-turvy world of intelligence, it is also alleged that the CIA fabricated the case against the DS.  Regardless of the truth about the links to the attempt on John Paul II, it was a very, very, very nasty operation.  (The African stops in Ivandjiiski’s resume makes it highly likely that his path intersected that of another charmer, Igor Sechin, who was a “translator” in Africa.)

Perhaps it is just coincidence that the son of an obvious Warsaw Pact intelligence service agent with the “journalistic” and “diplomatic” background commonly used in influence and disinformation operations starts a website that employs classic influence and disinformation methods, and spouts an editorial line dripping with vitriol and hostility for American (and Western European) financial institutions and governments: a line that follows that of RT quite closely.  Perhaps.  But if it is, it is a fascinating one, no?  (It amazes me that although Kassimir’s background has been discussed in the context of Zero Hedge, I cannot find anyone in an English language source making the obvious connection with Bulgarian, and hence Soviet, intelligence.  It is as plain as the nose on one’s face.)

So it is clear that there is a strong correlation between OWS, RT, and ZH.  Of course, correlation does not imply causation.  A and B can be correlated not because A causes B, or vice versa, but because a common cause C influences both.  It is evident that this is at work here.  Occupy, RT, and ZH are all strongly committed to the longstanding leftist anti-capitalist critique.  That’s something they clearly have in common.

But a common agenda and a common ideology create the basis for more explicit cooperation and coordination.  With respect to Occupy, there is historical precedent for this.  With respect to ZH, there are even more reasons to wonder.  The employment of classic information operation methods are one.  But the biggest reason is the one degree of separation between the creator of ZH and an obvious Warsaw Pact intelligence operative.  I acknowledge the possibility of coincidence, but that pushes it pretty far.

So if you see a graph from Bloomberg on Italian bond yields or an excerpt from a brokerage report, you can believe it.  Anything else should be treated with extreme caution, and with an understanding of what ZH does, what its methods resemble, and especially its pedigree–literally.

June 8, 2022

Gary “Bourbon” Gensler: He’s Learned Nothing, and Forgotten Nothing

Filed under: Derivatives,Economics,Exchanges,Regulation — cpirrong @ 3:38 pm

Gary Gensler is back, as clueless as ever. Perhaps in a future post I will discuss his malign proposal on corporate climate disclosure, but today I will focus on his latest brainwave: the restructuring of US equity markets.

In a speech, Gensler outlined his incisive critique of market structure:

“Right now, there isn’t a level playing field among different parts of the market: wholesalers, dark pools, and lit exchanges,” Gensler said in remarks delivered virtually for an event hosted by Piper Sandler in New York. “It’s not clear, given the current market segmentation, concentration, and lack of a level playing field, that our current national market system is as fair and competitive as possible for investors,” adding that there was a cost being borne by retail investors.  

“Level playing field” is a favorite trope of his, and of regulators generally. But what does it even mean in this context? Seriously–I have no idea. It’s just something that sounds good to the gullible that has no analytical content whatsoever. Yes, there are a variety of different types of market participants in competition and cooperation with one another. How does the existing setup disadvantage or advantage one group of participants in an inefficient way? How do we know that the current distribution of winners and losers does not reflect fundamental economic conditions? Gensler doesn’t say–he doesn’t even define what a level playing field is. He just makes the conclusory statement that the playing field isn’t level.

Furthermore, note the mealy mouthed statement “It’s not clear . . . that our current national market system is as fair and competitive as possible.” Well, then it’s not clear that it isn’t as fair and competitive as possible. And if Gensler isn’t clear about the fairness and competitiveness of the current system, how can he justify a regulator-mandated change in that system?

For God’s sake man, at least make a case that the current system is inefficient or unfair. If your case is bullshit, I’ll let you know. But to call for a massive change in policy just because you aren’t certain the current system is perfect is completely inadequate.

The Nirvana Fallacy looks good by comparison. At least the Nirvana Fallacy is rooted in some argument that the status quo is imperfect.

Foremost in GiGi’s crosshairs is payment for order flow (“PFOF”). This practice exercises a lot of people, but as Matt Levine notes, and as I’ve noted for years, it exists for a reason. Different types of order flow have different costs to service. Retail order flow is cheaper to trade against because retail traders are unlikely to be informed, which reduces adverse selection costs. PFOF is a way of segmenting order flow and charging retail traders lower prices which reflect their lower costs, in the current environment through zero (or very low commissions). This passes some (and arguably all) of the value of retail order flow to the retail traders.

The main concern over PFOF is that retail investors won’t see the benefit. Their brokers will pocket the payments they get from the wholesalers they sell the order flow to, and won’t pass it on to investors. Well, overlooking the fact that’s a distributive and not an efficiency issue, that’s where you rely on competition in the brokerage sector. Competition will drive the prices brokers charge customers down to the cost of serving them net of any payments they receive from wholesalers. In a highly competitive market for brokerage services, retail traders will capture the lion’s share of the value in their order flow.

So if you think retail customers are not reaping 100 pct of the benefits of PFOF (which begs the question of whether that’s the appropriate standard), then the focus should be on documenting some inadequacy of competition (which has NOT been done, and which Gensler does not even discuss); and if (and only if) that analysis does demonstrate that competition is inadequate, devising policies to enhance competition in the brokerage sector.

Only if (a) it is somehow efficient (or “fair”) for retail investors to reap 100 pct (or a large fraction) of PFOF revenues, (b) brokerage competition is inadequate to achieve objective (a), and (c) policies to enhance brokerage competition are inferior to banning or restricting PFOF is such a restriction/ban sufficient.

Does Gensler do any of that? Surely you jest. He says “unlevel playing field blah blah blah crack down on PFOF QED.” It is fundamentally unserious intellectual mush.

Gensler’s approach to equity market structure is disturbingly similar–and disturbingly similarly idiotic–to his approach to swap market structure in the Frankendodd days. As I (tediously after a while) wrote repeatedly while the CFTC was working on Swap Execution Facility regulations, Gensler favored a one-size-fits-all approach that failed to recognize that market structures develop to accommodate the disparate needs and preferences of heterogeneous traders. OTC and exchange markets served different clienteles and trading protocols and market structures were adapted to serving those clienteles efficiently. He did not analyze competition in any serious way at all. He did not address the Chesterton’s Fence question–why are things they way they are–before charging full speed to change them.

History is repeating itself with equity market structure. PFOF is an institution that has evolved in response to the characteristics of a particular class of market participants, (relatively) uninformed retail investors.

Crucially, it is an institution that has evolved in a competitive environment. There is value in retail order flows. There will be competition to capture that value. Considerable competition will ensure that retail investors will capture most of the value.

Gensler has proposed requiring routing all retail order flow through an auction mechanism where wholesalers will compete to offer the best price. The idea is that the auction prices will be inside the NMS spread, giving retail customers a better execution price.

But it’s a leap of faith to assert that this improvement in execution price will exceed the loss of PFOF that is passed back to investors through lower commissions. Will the auction be more competitive than the current market for retail order flow (including both the broker-wholesale and broker-customer segments)? Who knows? Gensler hasn’t even raised the issue–which demonstrates that he really doesn’t understand the real economic issues here. (Big shock, eh?)

And again, this means that the appropriate analysis is a comparative one focusing on competition under alternative institutional arrangements/market structures.

And insofar as competition is concerned, if auctions are such a great idea, why didn’t an exchange or an ECN or some other entity create one? Barriers to entry are low, especially in the modern electronic world.

I further note the following. One potential reason to eliminate or reduce PFOF that would actually be grounded in good economics is that segmentation of order flow exacerbates adverse selection problems on lit markets (exchanges) causing wider spreads there. However, the auction proposal would not mitigate that problem at all. The exacerbation of adverse selection is due to segmentation of order flow. The auction is just another way of segmenting order flow, and executing that order flow outside the lit exchange markets.

And here’s an irony. Assume arguendo that the auction does benefit retail investors–they capture more of the value inherent in their order flow. That would tend to lead to more order flow being directed to the auction market, and less to the lit markets. This would increase adverse selection costs in lit markets, exacerbating the inefficiencies of segmentation.

Nah. GiGi hasn’t thought that through either.

Talleyrand said of the Bourbons: they have learned nothing, and they have forgotten nothing. That’s Gary Gensler in a nutshell. He hasn’t learned any real economics, especially the economics of market structure and competition. But he hasn’t forgotten that he knows best, and he hasn’t forgotten the things that he knew that just aren’t true. That is a poisonous combination that damaged the derivatives markets when he was CFTC chair. But Gensler figures his work isn’t done. He has to damage the equity markets too based on his capricious understanding of how markets work–which is really no understanding at all.

April 9, 2022

When People Talk About Zero This or Net Zero That, Zero Is a Good Approximation of Their IQ

Filed under: China,Climate Change,CoronaCrisis,Economics,Politics — cpirrong @ 11:34 am

The optimal amount of any “bad” (e.g., crime, cancer) is very, very seldom zero.* This is because the marginal cost of reducing a harm increases (typically at an increasing, and often rapidly increasing, rate): eventually the cost of reducing the harm further exceeds the benefit, usually well before the harm is eliminated.

Unfortunately, a good fraction of the world is in the thrall of those with Zero obsessions who ignore this fundamental reality. COVID and climate are the two most telling examples.

Countries pursuing “zero COVID” strategies have subjected their citizens to draconian measures that have deprived them of the blessings of normal human interaction, and freedom of thought and movement. Children especially have been brutalized, losing two years of schooling, socialization, and even the ability to speak and understand and interpret the non-verbal due to absurd masking requirements.

This brutality has unsurprisingly reached its zenith (or nadir, if you prefer) in China, a nation of 1.3 billion governed by a despotic regime that has gone all in on Zero COVID. The outbreak of COVID in Shanghai after years of restrictions proves the futility of the objective. The CCP’s response to the proof of the futility shows its insanity.

In response to the outbreak, the regime has locked down a city of over 26 million people. And this ain’t your Aussie or Kiwi or American or Brit or Continental lockdown, boys and girls: this is a hardcore lockdown. Mandatory daily testing, with those testing positive sent right to hospital, symptomatic or no–despite the fact that this has overwhelmed the medical system and is depriving truly sick people of vital care. Children separated from parents. People locked in their abodes, often without adequate food. Pets slain.

It is draconian–and dystopian.

The other prominent example is “Net Zero” carbon emissions. This has become the idol which all the right thinking bow down before, especially in the West. Governments, financial institutions, and other businesses (especially in the energy industry) are judged based on a single criteria: do their actions contribute to achieving “net zero” emissions of greenhouse gases? And woe to those who do not pass this judgment.

It is absurd. And it is absurd because the monomaniacal focus on a single measure immediately banishes all considerations of trade-offs, of costs and benefits. The implicit belief is that the cost of carbon is infinite, and hence it is worth incurring any finite cost–no matter how huge–to achieve it.

And the costs are immense, have no doubt. In particular, the environmental costs–the production of battery metals involves massive environmental costs, for example–are huge. Yet they are ignored by people who preen over how green they are. Because to them, Only One Thing Matters.

This is beyond stupid. Those who will impose any cost, and force others to bear any burden, in order to achieve some Zero reveal that that number is a good approximation of their IQ.

Upon reflection, I believe that the worship of Zero is a mutation of the worship of central planning with dominated the pre-WWII era, and which was supposedly discredited by experience (e.g., the USSR) and intellectual argument (e.g., Hayek, von Mises). Central planning involved the determination by an elite of an objective to be achieved by a society, and the use of coercion–at whatever level necessary–to achieve that objective. Actually, compared to the Rule of the Zeroes, central planning was quite nuanced: it usually did involve some acknowledgement of trade-offs, whereas the Rule of the Zeros does not, with everything–literally everything–being subordinated to the One Zero.

But ultimately, central planning foundered on the reef of its internal contradictions. Attempting to impose a singular objective on a complex, emergent system consisting of myriad individuals pursuing their own idiosyncratic goals was doomed to failure. And it did. But only after inflicting tremendous costs in terms of human lives and human freedom, not to mention human prosperity.

The fundamental inconsistency between emergent and imposed orders meant that central planning required the application of massive coercion. The same is true in the Rule of Zeroes. This has been particularly evident in the case of COVID: what is going on in Shanghai proves this beyond cavil. But the same is inevitable for Net Zero. To impose a centrally dictated objective, and a unidimensional one to boot, on complex societies comprised of billions of individuals with extremely diverse preferences and capabilities is to wage war on human nature, and humanity. Sustaining it necessarily requires the application of massive, and massively increasing, coercion. Because it requires people to “choose” what they would not choose of their own volition.

The populism so scorned by the elite is a natural reaction to this fundamental inconsistency. Whether Le Pen prevails in France or no, the mere fact that it is a possibility reveals the seething discontent of large numbers of folks at the presumptions of their betters. And this is just the latest example of the disconnect between the Zeroes who presume rule, and those whom they presume to rule.

It is a disconnect born of a fundamental misunderstanding of the basic social reality that life involves trade-offs, and that different people value trade-offs differently. That supposedly Smart People have Zero understanding of this reality is a shocking commentary on our “progressive” age.

*Note that I do not say “is never zero.” That would be a paradox, no?

January 9, 2022

Yalta II: Poland Gets Schtupped Again

Filed under: History,Military,Politics,Russia — cpirrong @ 5:21 pm

Vladimir Putin has demanded Yalta II. Specifically, a withdrawal of Nato forces to the pre-expansion lines of 1997, which would basically abandon Poland and the Baltic nations.

It is easy to understand why Putin would demand this. It is far harder to understand why the US, and Nato generally, would give this demand the time of day. But it apparently is doing far more than that: it is signaling a preemptive concession.

Hapless, feckless, gormless, chuckleheaded Secretary of State Anthony Blinken sent the signal, in words, not blinkin’ his eyes in Morse Code:

But there’s more!

Of course Blinken said, after suggesting unilateral concessions, there would be no unilateral concessions.

Totally credible! Especially in light of US actions in Afghanistan, etc.

As Casey Stengel once said: “Doesn’t anybody know how to play this game?”

FFS, Russia has taken a maximalist position in its negotiating stance. You don’t respond to a maximalist position by playing Caspar Milquetoast.

TIL that the use of the word "milquetoast" to mean someone ineffectual or  weak derives from the name of a once hugely popular American Newspaper  Comic Strip character, "Caspar Milquetoast", who appeared

(And I swear to God, if Blinken’s photo isn’t next to the definition of “Beta Male” in the dictionary, it damned well should be. Who could possibly be intimidated by this guy? Hell, who in Russia or China isn’t wetting themselves laughing at the thought of seeing this guy at the other end of the bargaining table?)

Somebody comes to negotiations with a maximalist position, the appropriate response is: “fuck you and yo’ mama too.” Call the bluff, then talk.

And it’s so unnecessary. Look, Yalta is hardly a credit to FDR’s legacy, but (a) at the time, Stalin had possession of the territories in question, and possession is ten tenths of the law in international power politics, and (b) FDR was a sick, weak man at the time.

Well, I guess (b) pretty much holds today. (As pathetic as he was, FDR was sharper in 1945 than LGB is now.) But with regards to (a), the situation is totally different. Today Nato controls the territories in question. There is no reason whatsoever in order to make any concessions. Zero. Zip. Nada.

Yes. I have said it’s stupid to include Ukraine in Nato. But Poland and other eastern European nations are already in Nato. Totally different situation. Tell Vova to get over it and get used to it. Don’t egg him on by dangling concessions.

But Biden (and, of course, Germany) appear quite willing to shtup Poland yet again.

One wonders what Poland did to anger God. Placing it on defenseless territory between Germany and Russia. And putting its fate in the hands of feckless fools like Brandon and Blinken.

How disgraceful. Especially since Poland has been the most stalwart member of Nato and very loyal to the US. In stark contrast to the perfidious Germans. Yet whom is Biden apparently content to sell down the river? Yes, disgraceful. But this is a disgraceful administration.

One last thing. Can you imagine the shitshow if the Trump administration had bleated out what Blinken did? “See!!!!! He’s in Putin’s pocket!!!! He’s Putin’s puppet!!! COLLUSION!!!!”

But what do we hear now?: crickets.

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