Thursday, April 10, 2014

High Frequency Trading

High-frequency trading is when financial institutions, traders or brokers use sophisticated computer algorithms and high speed data networks to make lightning fast trades. The objective is to make a very small (sometimes only a penny or two) on a large number of trades because the algorithm spots trends before humans and can buy or sell faster.

Anyone reading business magazines is familiar with the concept and accepts it as part of the stock trading process. My question is what value does the stock market add to our society?

Stocks are a form of ownership in a company and business sell their stock to raise capital for buying real estate to house their operations, to buy equipment to improve productivity or maybe just so the owners can recover some of the money they already spent to create the company.

That’s the theory but very little of the stocks being traded today were sold by the company itself, most being re-sold by people who originally bought it when the company first sold it. Perhaps it has been bought and sold many times since the company it represents first sold it to raise capital.

So, how does stock in the secondary market benefit that original company or society in general? If I invest in a company and get stock shares instead of just an IOU then I can sell those shares to someone else when I need or want my cash back. The stock market acts just like a supermarket by putting all the different stocks in one place where buyers can find the ones they want.

That’s the value to the investor but what is the value to society? If I invest in a company and have to wait for them to buy back those stocks or for them to pay dividends I might have my money tied up for a lot longer than I might want and I might not invest at all.

The ability to cash out by selling on the secondary market makes the investment more attractive and helps companies that need the cash to create and make product that people want easier.

OK, I get that. But what value do these “high frequency traders” add?

The honest answer is very little since they are buying a stock for $10.03 and selling a minute later at $10.10 they have not added any value to the process. Yes the seller got a buyer at 10:01 AM. Without that HFT in the process they would have still sold the stock at 10:02 but for $0.07 cents per share more.

Most sellers aren’t selling huge numbers of shares so the seven cents is unimportant but the HFT is dealing thousands of shares and if they only touch 1,000 shares that means they pick up a $70 profit. Now seventy bucks is nothing but suppose they do that with 100,000 in 1 minute ($7,000) and repeat that every minute with yet another stock on and on?

Remember that this is a computer program that never get’s tired or takes a break. They really aren’t adding any value to the process but they are adding cost to the market and driving up the price by that fraction.


When the government imposes a tax we expect that we are paying for some service that adds value to our lives – sometimes it actually works out that way. Same for fees that airlines or banks charge – sometimes we actually get some additional service for that money. The fraction that HFT adds to the cost of stocks acts as a tax or fee, increasing costs but returns no addition value to the seller, to the buyer or to society at large.

Wednesday, March 19, 2014

GM Key Recall

Time magazine online had an article on March 18, 2014 about GM naming a safety czar .

The problem is not that they need a focal for safety but just like Morton-Thiokol, of the Challenger disaster, their whole system is designed to keep bad news from the senior managers.

If their or your system is not specifically designed to reward the first person to bring a potential problem to management it will get minimized and buried by the lower level managers. The next big problem is that any manager who takes a problem to his boss is judged incompetent because he didn’t handle it at his level. But as in this case most managers don’t have the authority to fix the problem at their level.

The last big stumbling block is the false concept that you should bring your manager the solution not the problem. Most lower-level managers are “lower level managers” because they are still in training for the next level of responsibility. That means they should be bringing their boss problems they can’t solve and the boss should be using that problem as a training exercise to mentor that employee and prepare them  for their next assignment where they will know how to handle those issues.


Remember Colin Powell’s great quote - The day people stop bringing you their problems is the day you have stopped leading them.

This is a fast and short post because this is a fast and short issue! If GM had a decent system of reporting that elevated issues to the proper level this would have been handled in a timely manor. 

From the information in the article timely would have been several years ago.

Thursday, February 27, 2014

What happens to the rest of us?

According to the Princeton Review a SAT score of the mid to high 500 seems to be the lower range most colleges expect. While the article takes pains to point out that the scores listed in the chart are not “cut off” scores, students with those scores are most likely to be considered.

All tests tend to have three major groupings, a small group with high scores, a large group clumped around the mean, and a group below average.

If the reports are true and education is the key to jobs and financial success in the future, what happens to the large number of people who score below the “minimums” for college admission? If the tests are to be believed at all, those with too low a score will not be able to either get into college or learn the material without which they will not even get interviewed much less hired.

Americans came to expect that most of us could find jobs that paid well enough for us to own our homes, have cars, TV and the rest of the possessions of modern life. Many jobs at the low end to the middle of the pay scale are disappearing as manufacturing and the associated support functions move to lower cost locations outside the US. Where do those displaced workers, and the new workers going into the job market for the first time, at the same level, find new jobs that pay enough to live as we expect them to be able to live?


This matters to you as a business because those are your customers. No job and they don’t buy and it doesn’t matter how inexpensive your product is.

Tuesday, February 11, 2014

Am I nuts or are they?

I just noticed this report at Time Business on my Feedly blog reader:
“General Motors CEO Mary Barra will earn around $14.4 million in cash and stock bonuses in 2014, the company said on Monday, about 60% more than her predecessor made in 2013.”
Read the full article here.
Is there any way that she can add that much value in the next year? The next 5 years? Since GM is a huge company with long lead times for a new product to make it from concept to market there is very little Ms Barra can do that will change GM in the next 12 months so we need to look at her performance over the long term.
The prevailing theory is that the CEO of a company is responsible for the “master plan” that a company follows and is also responsible for how well that plan is executed and should be compensated for success. The theory also postulates that to attract the very best you have to outbid the competition or lose that candidate to someone else. This supposes a limited supply of people with the training, experience and temperament to lead any particular company.
What if that CEO is not unique?
There are 7,000,000,000 people in the world and while the vast majority are not qualified or able to lead big corporations, it’s safe to say that those who able to lead represent some small percentage of that seven billion total.
We might argue over what that percentage is, but we can surely agree that more than one person has those skills and abilities; if we theorize a 10 percent number that gives us 7 hundred million potential people who could replace your CEO. If we reduce that to 1% there are 70,000,000 people who could do your CEO’s job.
Suppose that there is only 1 tenth (1/10) of one per cent who could replace that mythical CEO and we still have 7 million replacements.
If any one of 7 million people could do that job, why the heck is it worth anywhere close to what they are paying? Remember in the first paragraph we stipulated that the high levels of compensation were justified by the scarcity of the peculiar skills necessary and the limited number of candidates to draw from.
Those huge CEO salaries and bonuses tend to be from a limited number of really big businesses and the theory is that there are a really limited number of people who are capable of managing at that level. Remember that one tenth of one percent of the population of the world is seven million potential candidates, then we must accept the improbable conclusion that the senior managers of the Fortune 500 represent the top 0.0007% of people in the world.
There is an old saying that “figures don’t lie but liars can figure” but the simple percentages do illustrate an important point. You can’t tell which of the seven million potential business leaders will end up being worth those high compensation packages until after the fact. And, since much of what a CEO does is long range planning you can’t tell until years later.

I submit that executive compensation has grown all out of proportion to their contribution because execution is much more important than planning. As General George Patton said: A good plan implemented aggressively today is better than a perfect plan implemented tomorrow. Leading us to the inevitable conclusion that the people implementing the plan are more valuable to the company than any single leader and you should be compensating your employees based on their value to executing that plan and not on their job title or how easy it is to replace them.

Sunday, January 19, 2014

My friend Bryan Neva writes a blog called Profit at Any Price and his latest post is a great read and well worth your time. I am including just a little to wet your appetite and I hope you continue on and read the entire post.

In Greek mythology, Cassandra was the daughter of the Trojan King Priam and his wife Hecuba.  Apollo, the god of prophecy, was infatuated with Cassandra’s beauty and gave her the gift of prophecy in order to win her love.  But Cassandra spurned Apollo’s romantic advances.  So Apollo cursed her so that no one would ever believe her prophetic warnings.  Cassandra, unable to convince people of her dire predictions, then had to spend the rest of her life watching helplessly as her prophetic warnings came true.  She knew what the future held but was unable to change it.

A “Cassandra complex” occurs when valid warnings about the future are ignored or dismissed and has become a metaphor used in psychology, environmentalism, science, medicine, politics, religion, and business.



I have one comment to add. I once asked my son how many times a advisor had to be right before he as a statically trained MBA would begin to accept that advisers evaluation without any statical support.

His reply was "a heck of a lot of times!" My reply was that he was wrong and that his position represented a lot of what is wrong with American business today.

My opinion is that the correct number of times that advisor would have to be right is exactly the same number of times and in exactly the same way he would have to be wrong for you to fire him if he gave you bad advice! 

People didn't listen to Cassandra because a god had cursed her. Without that curse, at some point she would have been right so many times that everyone would have begin to listen and act on her advice.

Are you ignoring some "Cassandra" in your organization simply because they don't have any number to support their intuitive evaluation? If so, how many times have they been right before and might they just have seen something not included in that gorgeous spreadsheet you are looking at?

Sunday, December 8, 2013

Unintended consequences

At the blog Leadership is a Verb, author John Bishop wrote about unintended consequences and asked the following: “What “no brainer” decisions have you reversed once you learned the unintended consequences?

You can’t reverse unintended consequences until you accept that the result indeed had unintended consequences and that those consequences were causing even more problems.

I’ll bet almost every unintended consequence you had to fix is something you tried to call the decision makers attention to BEFORE the idea was implemented and no one would listen. Then the job of fixing fell to you simply because the decision maker couldn’t be bothered to fix it.

The only way to stop, fix or prevent unintended consequences from happening next time is for management (in the form of the decision makers) to include on their team at least one person who is known as a boat rocker. All managers need that someone standing beside them on their chariot of leadership whispering in your ear “thou art mortal”.

Just in case you didn’t get the chariot allusion, here is the reference from Wikipedia:

“Popular belief says the phrase originated in ancient Rome: as a Roman general was parading through the streets during a victory triumph, standing behind him was his slave, tasked with reminding the general that, although at his peak today, tomorrow he could fall, or — more likely — be brought down. The servant is thought to have conveyed this with the warning, "Memento mori" (Remember thou art mortal).
It is further possible that the servant may have instead advised, "Respice post te! Hominem te esse memento! Memento mori!": "Look behind you! Remember that you are a man! Remember that you'll die!".


Oh, wait there is just one more little thing – you also have to listen to the boat rocket and include their warnings in your plans!