Fractured Wall Street Fairy Tales #3: It’s a Kinder, Gentler, Chastened Wall Street (Part II)

Aug.18.09 | About: Goldman Sachs (GS)

(If you haven’t read Part I, for background you can see it here.)

If you believe there is no hope that honest investors can ever take back The Street, the best way to throw in the towel is to invest alongside the smarmy, arrogant – and very well-connected in Washington – big players in all facets of algorithmic trading.

If you believe they are ripe for a fall, however, consider “Other Ways to Profit.”

If you’d like to see them take a fall, consider my “Modest Proposal” at the end.

Riding the Program Traders’ Coattails

How to benefit by riding the coattails of the rich and ethically-challenged? First and foremost, you should buy Goldman Sachs (NYSE:GS). It’s twice the size of its nearest competitor in algo trading, in high frequency trading, in number of lawyers retained, in dollars contributed to the current administration, or in employees on sabbatical to the US Treasury and other key financial positions.

Even Goldman CEO Lloyd Blankfein’s wife feels she’s entitled to be treated like royalty thanks to her husband’s clever ways to squeeze a penny out of some copper wiring. (See story here.)

Other pretenders to the throne include UBS, Morgan Stanley (NYSE:MS), Credit Suisse (NYSE:CS), B of A (NYSE:BAC), JP Morgan (NYSE:JPM), Deutsche Bank (NYSE:DB) and Nomura (NYSE:NMR). And there are also now even companies that claim that their high-speed computers will allow individual investors to program trade right alongside the big boys. I saw a seminar for one of these advertised in the Palm Beach newspaper not long ago.

Other Ways to Profit

If you’d rather grow your money in the brokerage and financial arena along with the someday-rebound in the US economy, regional brokers too small to play the program trading game, mutual fund families (though as you can read here: "Mutual Funds Are Overweight, Bloated Brontosauruses," I can’t fathom why otherwise-smart people would entrust their money to mutual funds) and online discount brokers are the best way to do so.

Publicly-traded regional firms include Raymond James (NYSE:RJF), Stifel Financial (NYSE:SF), Jefferies Group (JEF), Piper Jaffray (NYSE:PJC), and KBW. Unlike Goldman and the others mentioned above, all will still give you a few minutes of their time even if you don’t have a 7-figure portfolio.

Mutual fund families include such familiar names as Franklin (NYSE:BEN), Janus (NYSE:JNS), Cohen & Steers (NYSE:CNS), US Global Investors (NASDAQ:GROW), T Rowe Price (NASDAQ:TROW), Federated Investors (NYSE:FII), BlackRock (NYSE:BLK), Invesco (NYSE:IVZ), Legg Mason (NYSE:LM), and relative newcomer Wisdom Tree (WSDT).

Finally, you can buy shares in the online brokers that will benefit directly from increased individual management of their own assets. The biggest is, of course, Charles Schwab (NYSE:SCHW), but also includes TD Ameritrade (NASDAQ:AMTD), ETrade (NASDAQ:ETFC), Interactive Brokers (NASDAQ:IBKR) and a host of others.

A Modest Proposal

Speaking of “increased individual management of their own assets” here’s how we destroy the program trading / algo trading / high frequency trading cabal: take back our money.

None of what program traders do can be considered investing, which is what the markets must be about if they are to be perceived as a liquid and smart place for individuals to place their money.

Right now, you probably have more money, like it or not, in your employer’s 401k plan or your agency’s pension plan or in mutual funds than you do in money you manage yourself. These institutions have likely demonstrated two things: (1) They are worse money managers than you are, and (2) They are day-trading and algo trading with your future.

So Starve the Beast. Millions of investors change jobs, start their own business, or retire, and leave their money with these capricious millisecond-traders. Take away the pension funds’ and mutual funds’ massive pile of money – your money – with which they disrupt and manipulate the market every day.

Institutions comprise 76% of all trading (up from just 6% in 1950) but “institutions” like the trading desk of Goldman and B of A don’t have that much capital of their own. Relative to the money depositors leave in banks, brokerage clients leave as cash, pension funds control as cash, and mutual funds control as “investments”, the damage Goldman or B of A could do on their own would be considerably lessened.

My own addition to this milieu would be not to abolish program trading, but rather to collar it. I would shut off the capability to accept a computer-to-computer order for greater than 9999 shares anytime the DJI goes greater than 250 points in either direction from the previous day's close. As long as we are in a reasonable market, the elephants can trample the edges of the crops. The second they might be allowed to destroy the entire field, they are automatically reined in. They could still send orders via computer of up to 9999 shares, but they would only be accepted by a human on each end, meaning their order flow would be severely constrained. They would actually have to pick and choose what they wanted to sell or buy the most. Sort of like you and me.

Brokerage firms will push the limit of the law -- but facing criminal penalties involving jail time with a cell-mate named Bubba, they are unlikely to go beyond that point.

Finally, fair warning must be given: if you want to get so big that if you screw up, the repercussions could shake our system to its foundations, know that every executive and shareholder, in that order, will lose everything before a single dime of taxpayer money is forthcoming. You took the risks, you have the most to lose. And PS, if you take taxpayer money, you don't exist any more in your current form. We will break you into pieces just as Teddy Roosevelt did in his day. Actions have consequences. And despite John D. Rockefeller's protestations at the time, the world went on and we still extract, process and sell oil products.

Disclosure: We own no Wall Street brokerages. On a substantial pullback, we’ll be pleased to once again own the crème de la crème of the online and regional brokers.

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