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Physicist, Startup Founder, Blogger, Dad

Monday, May 21, 2012

Quants at the SEC

Two years ago I was asked by someone at the Securities Exchange Commission to post a job ad for quant risk analysts. During some of my conversations with the people there, I raised the issue of high frequency trading, which wasn't yet on their radar! Hopefully it is now.

This NYTimes article reports that things have improved a bit recently there.
NYTimes: ... Embarrassed after missing the warning signs of the financial crisis and the Ponzi scheme of Bernard L. Madoff, the agency’s enforcement division has adopted several new — if somewhat unconventional — strategies to restore its credibility. The S.E.C. is taking its cue from criminal authorities, studying statistical formulas to trace connections, creating a powerful unit to cull tips and assign cases and even striking a deal with the Federal Bureau of Investigation to have agents embedded with the regulator. 
... Mr. Sporkin has built a team of more than 40 former traders, exchange experts, accountants and securities lawyers to sift through roughly 200 pieces of intelligence a day, distilling the hottest tips into a daily “intelligence report.” “It’s the central intelligence office for the whole agency,” Mr. Sporkin said. 
The overhaul came with an upgrade in technology. The hub of Mr. Sporkin’s outfit is a “market watch room,” replete with Bloomberg terminals and real-time stock pricing monitors that keep an eye on the markets. 
... Rather than examining questionable trades in specific stocks, Mr. Hawke and his team now analyze suspicious traders and their network of connections on Wall Street. The investigators have turned to statistics, using tools like “cluster analysis” and “fuzzy matching,” to identify relationships and trading patterns that sometimes go undetected.

9 comments:

SethTS said...

Good to know that the SEC is getting a clue.  At least they seem to understand that they're in an arms race and better do some R&D.

Al_Li said...

Did the position ever get filled? The salary is hopelessly low for someone who knows both math and programming. 

dwbudd said...

Why is the term "cluster analysis" in quotes? It's not a buzzword, euphemism, or pointless jargon.

David Coughlin said...

They are terms of art.

David Coughlin said...

The beef that I heard about HFT was that is screws up the orderliness of the market.  Technologically speaking, the fastest drive logic down into FPGAs, so they can get in when quotes are out of whack between markets[inefficient?].  Liquidity due to HFTers is ephemeral, demand is dark and it is very hard to engineer regulations to deal with them.

Alex Chiu said...

Zerohedge has been talking about this issue for two years. 

http://www.zerohedge.com/news/presenting-rise-hft-machine-visual-confirmation-how-skynet-broke-stock-market-us-downgrade-day

Most of the financial regulators are clueless.  Harry Markopolos literally walked into the SEC Boston Office with all the evidence needed to shutdown madoff but they wouldn't listen:

http://www.youtube.com/watch?v=uw_Tgu0txS0

The Financial Regulators are too busy watching porn to do anything useful:

http://articles.cnn.com/2010-04-23/politics/sec.porn_1_sec-employees-sec-spokesman-john-nester-inspector-general?_s=PM:POLITICS

RKU1 said...

Suppose a 1% transfer tax were imposed for buying any of these financial instruments.  That's certainly much lower than the regular sales taxes, so nobody could really complain.  And wouldn't it totally wipe out all this crazy high-frequency trading, plus lots of the other financial nonsense that's caused so much harm to our economy.

Suppose you really think a stock is substantially under-valued and is very likely to rise over the next couple of years: paying an extra 1% won't hurt you at all.  But for all the parasitic butterflies who keep on jumping in and out of the market and generating all the crazy volatility, well, they'd soon be gone.  All the financial journalists like to tout long-term investors like Warren Buffett or successful entrepreneurs like Bill Gates and Steve Jobs as the "right sort of capitalist."  Would any of them have been negatively impacted by this extra tax?

I've never really looked into this issue, but is there any logical case against it?  I mean, aside from all the money those parasitic butterflies give to all our politicians...

stevesailer said...

My uncle did audits for the IRS for decades. He was good at nabbing crooked television preachers and the like, but was generally outgunned going up against big time business wheeler-dealers.

David Coughlin said...

 It makes it hard to squeeze four decimal place edges slinging around 8 zeroes a year.

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