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Collateralization is not a bad word

May 6, 2014
Regulators and some reporters seem to think that all securitizations are created equal. They're not.

Drowning in debt? Consider a restructuring

Apr 28, 2014
Restructuring sounds scary because it's often associated with bankruptcy.
Posted In: paddy hirsch, bankruptcy

When a company gives 'guidance': An explainer

Apr 17, 2014
Google's profit dropped 11 percent and the company's stock jumped. How does that work?
Posted In: guidance, Earnings, whiteboard

Dark pools come out of the shadows

Dark pools are once again in the headlines, thanks to Michael Lewis' new book "Flash Boys," and there's also reports this week that Goldman Sachs may be considering shutting down its dark pool, which has the admittedly rather thrilling name Sigma X. Dark pools are mysterious, and names like Sigma X only make them more so. That's pretty cool when you're trying to persuade a client to trade in your dark pool: Dude, It's totally secret! No one will know you're in there! No one will ever know what you buy or sell. Total anonymity! But it's not so cool when the press and the public and regulators and lawmakers and basically everyone else is obsessed with greed in the financial markets, and start making a fetish out of transparency.

To the outsider, dark pools look shadowy and suspect, even sleazy. The question goes: Why do bankers need to go to these places to trade? And why do they need to be dark? Suspicion ensues: Are they using these places so that they can just rip us off, quickly and quietly, so that we never know about it and they can run off, laughing all the way to the bank (as it were)?

The fact is that a dark pool isn't an offshoot of the black arts. It's simply a privately-owned exchange, in which buyers and sellers can trade confidentially and in private. And they’re not new: they've been around for years. Creatures from the Black Lagoon, they ain’t. Here’s a short video explainer:


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Apr 10, 2014

Stop being such a front runner! An explainer

It's a phrase that's come up again and again this week: in "Flash Boys," Michael Lewis' new book about high-frequency trading; in today's spirited debate on CNBC between BATS Global Markets President William O'Brien and IEX's Brad Katsuyama; and in almost every high-speed trading article in between.

Front running. But what the heck does it mean?

On Tuesday, I described it as a dog running off with your sausages, but that's not entirely accurate. It's more like the dog finding out how much you are prepared to pay for your sausages, buying up all the sausages itself and then selling them to you for a higher price.

Front running is when a high-frequency trading firm sees you bid a certain price for a stock in one exchange, and then uses its superspeed to get in front of you (hence, front running) in all the other exchanges, buying the stock that you want and then selling it to you for more than you originally bid.

Traders hate being front-run. Not just because it means they are paying more than they thought they would have to pay (heck, the client can eat the loss), but because they like to think of themselves as Masters of the Universe, people who dominate, who control everything around them. But if you're being front run, then you're in control of precisely nothing. You are, in fact, being led by the nose. Like a Master of the Universe's pack mule.

Yes, if you get front run, you're a donkey.

No wonder there's so much hate for HFT firms. Michael Lewis points out that the losers in the hedge fund game are often hedge funds, who trade on behalf of pension funds. Hedge funds don't like to be victims. And they sure as heck hate being seen as donkeys.


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Apr 1, 2014

What is an index fund?: An explainer

Apr 1, 2014
An index is quite simply a basket of shares.
Posted In: index funds

What happens when you shout "buy!"

Mar 31, 2014
Michael Lewis' book, "Flash Boys," reveals a great deal, including people's confusion about the stock market

There's no simpler way to make money

JP Morgan Asset Management has released a thumping great 42-page "Guide to Retirement", which is both interesting and valuable, but reads somewhat like every other document you ever got from a bank.

That said, it does have some very colorful and useful illustrations.

Including this one, which everyone, regardless of age, should stare at until it becomes part of thier very essence. It's a chart showing the value of saving, saving early, saving for a long tme and, most importantly, not touching your savings at any point. It shows, in other words, the value of compounding. To understand how compounding works, you could read and digest the entire JPM document, or you could save yourself some time and check out this 90-second explainer.


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Mar 21, 2014

How feeling rich helps the economy: An explainer

Mar 14, 2014
When we feel wealthy, we spend more. It’s called the wealth effect.
Posted In: wealth effect

When going short goes badly wrong

News that the Federal Trade Commission is poking its nose into the company Herbalife probably had investor Bill Ackman jumping around on his desk, with his fists clenched and his eyes squeezed shut, going "Yesssssss!"

Ackman is a big-time investor who has made a billion-dollar bet (actually $1.2 billion) against Herbalife. He's like a gambler at a race track putting a huge chunk of money on a horse to not finish the race. Ackman's argument is that the horse (Herbalife) is such a busted up old nag that it will drop dead before it reaches the finish line. Herbalife, he says, is a pyramid scheme and a parasitic business model that simply can't sustain itself. The company, he argues, will eventually drop dead, and anyone who has invested in it will lose all their money.

Ackman's opponents say that he's more like a gambler who has made a huge bet, and is determined to make it pay by bad-mouthing the horse. Ackman, they say, has been publicly smearing the company for the last two years in order to drive the stock down.

Patrick Curtis, of WallSteet Oasis, puts it like this: "Ackman's money-making strategy is called short-selling.  He has effectively borrowed $1.2 billion worth of Herbalife shares and sold them. If the price of Herbalife shares fall, he can close the transaction by buying and returning the shares at a lower price and pocketing the difference.  For example, if the value of the Herbalife stock that Ackman sold dropped by $500 million (or about 40%), then he would be able to close out the position for $700 million and profit roughly $500 million (excluding fees and borrowing costs). "
 
Curtis says it's important to note that Ackman does not own the shares after the transaction is closed.  He never owned them and when he buys and returns, it's all done through an intermediary, such as a brokerage house or bank in one step.
 

Unfortunately, things haven't gone quite so smoothly. Instead of going down, the stock's price has risen. By more than 50 percent. Ackman is now, in trader parlance, "out of the money," which means if Ackman had to return the shares he owes today, he'd end up ...

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Mar 13, 2014

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Financial mysteries explained! Watch the latest video explaining capital adequacy requirements in Paddy Hirsch's Whiteboard series.