Top Stories from Popular Financial Media Outlets that are loaded with B.S.
In this installment of the ongoing series of articles that strive to debunk B.S. articles by the mainstream financial media outlets, I focus on one article in particular. You can see my editorial comments in red.
Don’t Blame Market Makers for Volatility
Whenever markets suffer a bout of volatility, someone blames high-frequency traders. (True) In the bumpy last months of 2018, U.S. Treasury Secretary Steven Mnuchin urged a government investigation of high-speed trading. (True) After the recent August chop, some said the exit of traditional dealers from market-making had hurt stock-trading liquidity. (Also true)
And when someone blames high-frequency traders for causing market volatility, the data nerds at Citadel Securities fire up a study. Citadel’s latest study examines whether stock-trading liquidity on exchanges has declined and aggravated the market’s mood swings. The firm concludes it has not. (Not true)
The stock market’s structure has certainly changed with the rise of trading algorithms, electronic market-making and new investment products, acknowledges Gregg Berman, Citadel’s market analytics chief. “So has the amount of liquidity changed?” he wonders, rhetorically. His answer: “Liquidity has basically remained constant.” (B.S.)
Citadel Securities is the market-making (and hedge fund, lest we forget) business started by Ken Griffin. Its ears have been burning ever since Michael Lewis cast it as a villain in Flash Boys. More-careful examinations (like what?) disproved Lewis’s claim that computerized market-making hurts investors, but his book’s popularity left a sting. (That last sentence alone probably solidified the author's access to Griffin in the future.)
"Founded in 1990 by 21-year old Harvard University student, Ken Griffin, and initially based on a convertible bond arbitrage strategy, Citadel[1] has consistently evolved in a manner that solidifies its reputation as one of the most legendary trading and asset management powerhouses of the modern era. For example, as of 2017, Citadel’s hedge fund business was ranked by Institutional Investor as #3 in the category of all-time profits since launch, trailing only Ray Dalio’s Bridgewater Associates (#1) and George Soros’ eponymous Soros Fund Management (#2). If you’re into forecasting, this achievement is made by a firm that is 15 and 17 years younger than the other legendary managers it trails in this category, respectively.
Today, this very same hedge fund side of the business – managed by another legal entity known as Citadel Advisors, LLC today – sits atop an estimated $30 billion in assets under management (AUM), putting it at #11 in a ranking of top hedge funds by AUM (trailing Seth Klarman’s highly-concentrated, long-only, debt-focused hedge fund management platform, Baupost Group, Inc., at #10), according to Q2-2018 data from Pensions and Investments."
My takeaway from this article
I have no beef with Ken Griffin or Citadel. They are a formidable player on Wall Street. But let's not pretend that Citidel is the knight in shining armor who rides in to rescue the market damsel when she's in distress. Citadel is a hedge fund that gets a substantial part of their profits from high-frequency trading, which was the point of Michael Lewis's book Flash Boys.
Whenever I hear a financial journalist singing the praises of firms like Citadel, I'm reminded of what Lloyd Blankfein (former chief of Goldman Sachs) said in 2009, as the stock market was in the final stages of a major collapse.
“We’re very important,” Blankfein is quoted as saying in The Times of London. “We help companies to grow by helping them to raise capital. Companies that grow create wealth. This, in turn, allows people to have jobs that create more growth and more wealth. It’s a virtuous cycle.”
He goes on to admit to being the focus of public outrage--"I know I could slit my wrists and people would cheer"--but then blows the attempt to reconciliation by saying he is "doing God's work." (Business Insider)
"It would be ideal if we could have an uncontrolled flow of information, but that would only lead to disenchantment, protests and chaos. Better to feed the people with easily digestible information pablum"