Would you trust a banker? Stop laughing now…you there, in the back, stop it… Now, seriously, would you? More to the point perhaps, would a banker trust you? And what matter if they did or didn’t? Generalising, how much trust do you place in your business partners up and down the supply chain? In others in the financial system? And does it matter? Continue reading
Here is a link to a Bank of ireland report on the technology SME sector, featuring some survey work undertaken by myself and a doctoral student. More details tomorrow in the Irish Examiner column.
A couple of weeks ago the NYSE, the largest and perhaps the most influential stock exchange in the world, was closed for a few hours. And nothing happened. The global economy went chugging along without a problem. Perhaps the time has come to consider whether we need to have trades taking place in time intervals measurable only by CERN and comprehendible only by Dr Who.
A further , related issue is that when we think of the stock exchange we are not thinking of the whole market by any means. Just as in other areas stock traders are increasingly resorting to trade in what are called ‘dark pools’, trading centers outside stock exchange rules and regulations. Some studies put the volume of stock traded on these in excess of 40%. The ultra high frequency trading game, characterised by some as an arms race, may exceed 30% of all trades made on exchanges.
While the consensus of research is that there are undoubtedly private, individual gains to be made from shaving a nanosecond here and a millisecond there in executing share trading, the consensus is also that the social benefit is very hard to find if it exists at all. To some extent high frequency trading does increase liquidity of stock transactions, and increases pricing efficiency measures. However, a question that can be legitimately asked is whether or not this matters. Economically, if we are spending hundreds of millions on something that doesn’t yield an overall economic or social benefit then it is wasted expenditure.
Some research suggests that this high speed game is exactly that- wasted. There is some evidence that high frequency trading is associated with increased quote stuffing (submission of lots of offsetting orders to increase congestion and thus advantage the first mover) and increased volatility. There are, in economic terms, externalities with respect to high frequency trading.
Given all this, it may be time to consider slowing down the pace of financial trading? If there is little social benefit, and if the economic benefits are unclear, and I have we got ourselves into this “arms race”. A number of proposals, and analysis, have emerged over the last couple of months which address the extent of which financial trading could be slowed down without any loss of liquidity, and a proposed new methodologies and approaches to ensure that financial training can continue. In essence the proposals are that instead of trade is being processed as they arrive, but on the problems noted above, that they be processed perhaps once per second. Trades would still be executed in the order in which they arrived, so there will still be a significant incentive for companies to invest in high speed trade positioning. But the actual trades themselves would only be executed once per second. That’s still nearly 25,000 opportunities to trade per day.
It is unclear as to whether or not this is possible; it would require coordinated regulatory change on a global basis. Just as a financial transactions tax, a great idea in principle, founders on the rock that so long as one major player opts out then a world where there is a financial transactions tax will see trade is moving towards the area where there is no, so too in an environment where ultra high-speed trading is slow down it requires all major players to agree. Now the Greeks are down a game theoretic finance Minister perhaps he might be available to design the regulatory coordination mechanism…
This is an extended version of an Irish Examiner column
The first DBEF Symposium is to be held on 6 December 2014, in the Sutherland Center, 6th Floor, Arts Building, TCD. The papers are noted below and will be presented by the underlined/italicised author. Complete papers and presentations, when available, will be linked here.
No fee applies to the conference but registration is required. Each paper will be presented for a max of 30m , and a the conclusion of the session papers questions will be taken.
0915-0930 : Introduction to the colloquium and to the Journal of Behavioural And Experimental Finance Brian Lucey and Michael Dowling
0930-1100 Session 1 Placement
- Frenemies: Information Sharing Among Competing Fund Managers Bernard Ganglmair U Texas at Dallas ; Alex Holcomb & Noah Myung Naval Postgraduate School and University of Virgini
- Under-pricing of IPO’s in Experimental Markets Sascha Füllbrunn, Radboud University Nijmegen Tibor Neugebauer University of Luxembourg Andreas Nicklisch University of Hamburg
1115-1245 Session 2 People
- CEO Social Status and Corporate Acquisitiveness Michael Dowling, Liam Gallagher and Yulia Plaksina, Dublin City University
- Trading and beliefs in markets with information flows – does market micro-structure matter? Caroline Bonn & Florian Lindner University of Innsbruck, David Schindler , Ludwig Maximilian University of Munich
1345-1500 Session 3 Products
- The “Objective Valuation” Task: A New Technique for the Study of Product Complexity Pete Lunn, Economic and Social Research Institute (ESRI) & Trinity College Dublin
- Behavioral Aspects of the Regulation of retail gasoline prices Martin Angerer & Georg Peter U Liechtenstein
1500-1700 Session 4 Psychology
- Taking Individual Financial Responsibility Dirk Brounen, Kees Koedijk, and Rachel Pownall Tilburg University
- Psychological Barriers in Traded Metal Prices Mark Cummins and Michael Dowling, Dublin City University Brian Lucey Trinity College Dublin
- Risk preferences, finance and constitutional change Liam Delaney, Stirling
1700-1800 Keynote Behavioral Finance From the Mind to the Market Greg B. Davies, Barclays
Its dire…. Grant Thornton published a report today which is downloadable here : University finances . The picture opposite this paragraph is a wordle of the text. The GT report is done by a bunch of accountants, and it reflects that. As a picture of the state of play of finances in the Irish higher education system its unprecedented in its breadth and scope. They are to be congratulated. As a review of strategic options to fill the holes identified, its not so good, reflecting a curious lack of knowledge of the sector. It would be interesting to know to whom, if anyone, they spoke between the data collection and strategic options formulation.
Lets take the facts first. They are grim. Over the 2007-11 period student numbers rose by 26% while overall income rose by 7%. The operating surplus of the sector fell by 60%. the state grant has fallen by 25% and as a % of overall income has fallen from 40% to 25%. Research grant income has risen by 16% overall in the sector. Tuition fees now account for 36% of the sector income. Overseas tuition fees (this includes everyone from the french Phd to the Chinese BA btw) are not disclosed routinely except for TCD where they now make up 21m, or some 6.5% of the total income. The much ballyhooed pension liabilities in universities have doubled, but this is entirely down to changes in actuarial assumptions.
Overall they state that they consider the sector to have reached an inflection (accountant speak for breaking) point. They then suggest some changes. Its here that I take some issue.
They first suggest increasing fees from international students. This is however set against the fact that since 2007 the non-EU market has been falling. This is mirrored in Australia and in the UK. GT suggest no real way to reverse this, beyond adonyne pleas for a better focused international strategy, better focusing, more internationalisation of the curricula (huh?) etc. The stark fact is that we cannot lump 1500 extra chinese students into a university, milk (bilk) them for high fees and expect the system to cope. These are high paying and should be high touch. There is no cash cow here -the cow costs a huge amount to feed and maintain. Much international student flow is determined by the national and institutional reputation. We are weak on all of these. While universities and IoTs cannot solve the national problem, we neither cannot solver our own when the key metrics that drive rankings are deteriorating (such as staff student ratios).
They suggest increasing income from research, which is fine. They do note however that we attract the smallest monetary contribution from firms for research of all OECD. Irish companies, frankly, ride the system. They do not put back. Thats gotta change and its got to be a cultural one. It is desperately dispiriting that, despite the fact that irish universities are world class in many arts and humanities areas the rest of this section is a jumble of platitudes towards commercialisation of the IP platforms to enable blab blab blab. Why do consultants insist on ignoring the areas of strength? Its notable, and worrying, that the word Humanities appears exactly NO TIMES in this document, the same as Arts.
Alumni funding is noted BUT there are no figures. We have literally no idea what if anything Alumni give. But its clear that a) its not a lot, b) its a hard sell and c) the base is so low that it cannot make a meaningful contribution in the medium term.
Asset utilisation (sweating the assets) is accepted to be high by international standards. This is bizarrely then followed by a suggestion to extend the academic year. But if that is done then research will fall off. If we extend each year will we not decrease the overall amount of years? The suggestion is bizzare and also reflects a worrying assumption that its all about undergraduates. Postgraduate teaching is year round. Plus, this is not costless as it would increase energy, building costs etc, and would result in no extra fees. In any case, a valuable but unnoted income stream is that of conferences and symposia which take place in the undergraduate down time. It is worryingly clear from this small section that GT really don’t understand what universities and IoT’s actually do.
They suggest academic program review, or in short concentrating on profitable programmes. Thats a great idea but the reality is that the finances of the sector are so constrained that there is zero incentive for (say) a business or law school to work harder and put more bums on seats. Any additional generated income will be taken by the center. GT again seem to misunderstand what is going on on the ground. They also juxtapose unprofitable courses that may be central to the mission with cost containment of same. The reality is that universities and IoTs are not commercial enterprises. Looking at them purely through such lenses gives jarring comments such as those.
They suggest cost controls in several areas. Most of these are the usual pleas for process efficiencies, shared services etc. They suggest elimination of multiple programmes. Again, this fundamentally misunderstands what a university does. For instance we have business taught in every university and IoT. And yet, this is not accounting training, at least in the main. It is instead a mixture of technical skills and critical thinking. Universities need to be universal in scope and reach. They cannot be if they are pruned and constrained to de jure fads. In addition, going back to the internationalization strategy, we cannot expect chinese students to pay 20k for a degree if they are one of 5k students taking lectures via video in the national conference center from a NUIG or UL lecturer, they having won the contract from the state to deliver that particular course. They suggest outsourcing services and in what can only be written by someone who has never used a call center state that outsourced services deliver more reliable services. Hmmm…
Overall this is a decent effort. It is strongest in its plain facts. It is weakened by a set of semi coherent suggestions that are internally inconsistent and display a worrying lack of knous about the sector. Its worth reading.
This is a version of my column published in the Irish Examiner 29 March 2014. One thing we know from even a cursory study of economics and finance is that there are cycles. This time is rarely different. Sometimes the cycles are short, sometimes longer. But they are there. Regulators and officials contracted to mitigate the effects of cycles need to first be aware of them and then to understand them in a holistic fashion. Understanding them requires more than just advanced quantitative techniques.
This week I hosted a one day symposium on people risk in finance. We had a good audience composed of academics, bankers, Central Bankers (but not, as far as I am aware, from the Department of Finance) and researchers. The general consensus at the conclusion was that we have, in modern finance regulation and oversight, lost sight of the centrality of people. And that is a problem
Consider for example the data from the Operational Riskdata eXchange Association , a non profit body which looks at financial services risk and losses. Losses are very skewed – the vast majority of losses rise from a small number of issues. These issues tend to be concentrated in areas where the ultimate control is a person. The greatest part of these losses are not down to fraud; they are down to issues such as poor business practices and poor execution of these practices. A particular challenge for finance is that many of the problems that it faces are systemic. While in a healthcare or automotive context individuals can and do take responsibility for ameliorating risk (not leaving surgical tools in body cavities, not forgetting to reconnect brake cables) this is not the case in finance. There we find a significant disconnect. Take LIBOR – if an individual were to have not cooperated in the rigging scandal they would in all probability been sanctioned, and the system would have continued. Rogue traders are almost never driven by personal greed and a fraudulent aim. Therefore exemplary punishment and condign treatment of one will have no great effect on others – they fall prey to and then become trapped in system failure, and it is at the level of systems that regulation needs to work as well.
A key weakness of the modern financial regulatory system architecture is that it is not systemic. Nobody is looking at large parts (FX in particular) of the system; other regulators are nationally, industry or product bounded. As a consequence, the coupling of parts of the system to other parts can become looser or tighter without anyone being able to intervene or even perhaps notice.
A further key weakness is that it is focused on quantitative approaches. Quantification of risk is funny thing. It relies on failure – to know how often we will have a large market drawdown or a rogue trader or a systemic crisis we require a baseline of a number of these events. In the Irish context we have financial regulator and central bank that has been very strongly hiring quantitatively skilled persons. These are ideal at looking at the probability of a mortgage default given lender demographics, or at the role of SME finance etc However, they are limited to the data which they have. This data is typically partial- nobody is looking at the system as a whole, domestically or internationally. What is more, an over reliance on quantitative techniques alone misses the crucial human element. Systems fail either because they are poorly designed or because people find a way around them. The best designed system will not survive contact with someone inept or determined enough to circumvent it. Chernobyl comes to mind… This raises the question – where are the holistic risk managers?
The vast majority of risk management approaches in finance, as seen in the professional risk manager programs and certification, are rigorously quantitative. But they are almost bereft of even behavioural economics or finance. They contain little if any around economic or financial history. They are not people cantered. This is a major weakness. Our regulatory bodies need to take on board a much more holistic approach . On one level this means that we need to see a push for greater scope of regulation on areas such as the Repo or FX or commodity markets where existing regulations are weaker. At another more fundamental level it requires hiring psychologists, behavioural finance and economic specialists, anthropologists, sociologists and historians. Cross disciplinary teams need to be more than accountants and economists. For so long as we do not regulate finance in a human cantered systemic manner we give an implicit nod that these issues are not important. They are and we should begin to signal that clearly and unambiguously.
We need more regulation and better (more holistic) regulation. We need finance to learn from other areas such as surgery or engineering, where safety and risk mitigation are inherent. We need to change culture – this can happen as we have seen in airlines- where individuals are not only empowered but required to halt the system when it is in their opinion going awry. And we need to recenter and deglamorize finance – it needs to be seen as a boring utility.
The ESRC seminar series on people risk (being organized by this motley crew) rolls into Dublin next Wednesday. The final running order is as below.
For more details and to register see here: REGISTER
The seminar is free, and coffee/tea and a light lunch will be provided. Venue is Institute of Bankers, IFSC.
1015-1030 Welcome and Introduction : Brian Lucey
1030-1115 Framing effects in reasoning about the moral acceptability of risky choices (Ruth Byrne, TCD School of Psychology)
1115-1200 – From Hubris to Nemesis ; Irish Banks, behavioral biases and the crisis (Michael Dowling, DCU Business School)
1200-1245 – The meaning of leadership integrity (Mary Keating, TCD Business School)
1245-1330 – Light lunch
1330-1415 – Board Directors – What can we expect from them? (Blanaid Clarke, TCD Law School)
1415-1515 – KEYNOTE – Systemic People Risk : The Final Frontier? (Dr Pat McConnell, Macquarie School of Management)
1515-1600 – Roundtable discussion on future research and policy directions (Moderator, Brian Lucey)