Lessons from Hounslow and Portugal

6 min read

I’m afraid I couldn’t but smile at the news of the arrest of 36-year-old Navinder Singh Sarao, a day trader from the down at heel west of London suburb Hounslow which sits right in the Heathrow flightpath.

Sarao, who works from his parents’ modest semi-detached home and who apparently doesn’t even own a car is accused of being solely responsible for the 2010 “Flash Crash” during which the S&P 500 plunged 600 points in four minutes and which played merry mayhem with all those algorithmic traders’ positions and P&Ls.

I certainly am not competent to judge whether he is guilty as charged or not but I am amused when I think of all the cost of compliance and control which is imposed on banks and brokers alike, only to find that an amateur with a couple of desk-tops and a bit of imagination can make mince-meat of one of the world’s deepest markets. Doesn’t it all remind of Matthew Broderick in the 1992 film “War Games”?

Just getting on with it…

Meanwhile, Greece rumbles on. What makes the Greek thing so hard to deal with is not the variety of possible scenarios – I still think that its exit from the euro would be the right outcome but I equally can’t see it being allowed to happen – but the impossibility of working out what follows on. Sartre’s decision tree is a likely analogy where with every decision taken, the number of future outcomes is halved. As, however, the original number of outcomes is infinite, one can halve them as often as one wishes and is still left with infinite outcomes. Simple, eh?

Currently, I am sitting in the Algarve in the office at the back of the house of one of my colleagues. The technological set-up here is similar to the one I enjoy back at base in Canary Wharf and although the work-schedule is identical, the extra-curricular bits are a lot more fun. A change is as good as a holiday.

I have always had a soft spot for the Portuguese – they are England’s oldest overseas allies – and for the stoic way in which they approached the debt crisis when it hit them. The Algarve might be Florida in euros but without the alligators and to compare the area here with the rest of the country is surely no better than drawing conclusions on England from only having visited London. Yet, there is a sense of the country wanting to fight back. Portugal sits on the south western tip of Europe as Greece does on the south east.

That, wherever there is public money being spent, there is corruption and mismanagement is nigh-on axiomatic but the difference between here and there is palpable. The sense of not wanting to fail and to put in the effort to do whatever is needed is palpable.

Portugal was as guilty as many other smaller European countries in miscalculating what benefits would accrue from being economically close to the German behemoth but instead of blaming everybody else for its misfortune, it is trying to re-calibrate its objectives and, above all, its people’s expectations while bringing the ship back head to the wind. Perhaps this comes from navigating the Atlantic rather than the Mediterranean. I hear nothing of compensation claims against France for war damage done by Napoleon’s armies in the early 1800’s.

I noted some weeks back that Greece’s Syriza finance minister, Yanis Varoufakis, knows that in all likelihood the core of the eurozone will, after the customary game of chicken, back down. I see nothing out there which could help me change my mind. And yet, there is surely another massive haircut in the offing. Although it is no longer as visible as it was when the banks and funds owned the debt, the rest of the continent’s tax payers will still end up bearing the cost. Funny how that is never mentioned any more, isn’t it?

Gross calculations

Today, Wednesday, does not look auspicious by way of economic releases and it might prove to be a good one for licking wounds after some of the random price volatility of the past few sessions. What is becoming perfectly clear from trading patterns is that people are trying to jump on the next big market move before it happens but then, when it does not in fact occur, they rapidly pull back again. This is a costly trading strategy which is based on taking lots of little hits in the hope of being on the right side of the next big move. The risk is of course of being wiped out by death by a thousand cuts before it in fact happens. Markets feel uncomfortable here and maybe Bill Gross has a point when he calls “Short Bunds” the trade of a lifetime.

Ten years ago, he would have surely been right when hedge funds with their leverage could out-gun the central banks at will. Now, in the age of QE which has done nothing other than to hand the monetary authorities the leverage which has been taken away from the hedgies, this is no longer the slam dunk it once might have been.

The ECB can remain solvent for a lot longer than you can. I like his thinking but the timing is in control of those he wants to bet against. Risky stuff Mr Gross.

Anthony Peters