Under the skies of algo-finance, a share remains in the hands of a trader for an average of 22 seconds. A shower of thousands of micro-transactions orchestrated by 15 investment banks controls 70 percent of the trading volume of the US Stock Exchange. The price of a credit default swap is the result of private exchanges, in sealed envelopes, between five intermediaries which take place in complete opacity. Without any correspondence with the economic values or with the rating of a country, as demonstrated by the fact that an equal report card can correspond to even double CDS values (as happened at the beginning of summer between Italy and Poland). The result? “The pressure on sovereign debt – explains Emilio Girino, professor of the Cuoa of Vicenza – it is the fruit of the action of speculators full of cds but who don't have a single Btp in their pocket".
Not to mention the rating agencies, free to operate in a free zone of law according to approximate, if not arbitrary, models. All in a large casino setting, substantially free from controls despite the proliferation of regulators and plethoric rules (the American Dodd-Franck law consists of 2.100 pages). In numbers, the domination of finance over the real economy can be summarized as follows: 836 trillion dollars against 58 trillion of GDP. But shares or other "typical" instruments are now a tiny minority of what appears on the shelves of financial supermarkets: in 2009, 83% of the market was made up of derivatives, of which 87% were "over the counter” basically far from any check whatsoever.
This is much more has emerged since conference "Finance: the servant mistress?" organized by AIAF, the Italian association of financial analysts. Comprehensive indictment of the various aspects of the drift of the financial markets in the years of the crisis. Indeed from well before because the "financial genius that came out of the bottle", image of Francesco Cesarini, is at the root of the crisis. “Once upon a time – comments Salvatore Bragantini – it was argued that wages were a variable independent of the economy. Now it is claimed that this holds for the profit of capital. It didn't work, it won't work!" But the real economy is paying the price, for now, especially that of a country like Italy, manufacturing power where the Stock Exchange, which in terms of capitalization is worth a fifth of GDP, no longer performs the function of raising capital for companies, especially for SMEs: over 90% of trading is concentrated on the main basket, the Ftse/Mib, the other 170-180 only receive the crumbs.
It is certainly not the first time that turbo-finance has ended up in the dock. But it is probably the first time in Italy that an assembly of high-level independent observers (Cesarini, Giacomo Vaciago, Bragantini, Donato Masciandaro, Michele Calzolari as well as Emilio Girino, Antonio Maria Rinaldi, Malcolm Duncam, Mario Bottazzi and Alfonso Scarano) takes examining the individual aspects of a degenerative process that has now affected wallets and the collective imagination, as demonstrated by the mass attention to the "spread" or other symbols of popular unease.
HIGH FREQUENCY TRADING
POWERFUL AND UNKNOWN MASTERS
Let's take the case of HFT (High Frequency Trading) which, six years after their appearance, can be considered the "unknown masters" of the financial markets.
Here is how Giovanni Bottazzi, former columnist of the statistics office of the old Italian Stock Exchange, describes them: "The HFT is a hyper-technological operator, capable of exploiting for himself the technical delay of the orders entered in the price list". Delay so to speak, given that the time we are talking about is measured in nanoseconds. “My proposal to limit the permanence of an order to at least one second – explains Bragantini – was not even taken into consideration. Yet a stock exchange that follows this logic inevitably tends to concentrate on a few liquid stocks, the largest by capitalisation, with significant consequences for the quality of the listing”.
But what is the use of such speed? “The principle – continues Bottazzi – is that in this dwarf, according to the HFT, he must be able to inspect the book an instant before the others and take the consequent decisions”. Apparently a harmless technique, entrusted to the "blind" decision of automatic programs. "It is not so - is the objection - the ethical justification of the stock exchange gain lies in the risk assumed by the investor”. But in this case there is no risk because the operation opens and closes, on average, in 22 seconds.
But how does HFT make money? “The most frequent technique is that of market making. The operator acts as a seller or as a buyer for a minimum quantity, in order to ensure the existence of a counterparty. Once the purchase or sale proposal is successful (and there are private markets that remunerate proposals to stimulate liquidity) the operation is repeated many times. And, of course, it will be cross-selling or buying a relevant number of times so that the minimum unit gain will be multiplied to a certain size.
Other more complicated techniques allow the HFT to "clean up" the market and to position themselves to sell, at better conditions for them, batches of securities to important buyers, such as an investment fund whose manager, perhaps, is no stranger to the game. Naturally a ruthless game where the HFTs, no more than 15 the largest on the market, try to cancel each other out with blinding (or snuffing) techniques by flooding the books with proposals to slow down the competitors' action.
The phenomenon has grown exponentially since 2007, thanks to the proliferation of operating platforms (today about 150) in Europe. The result? A few operators of High Frequency Traders, no more than 3% of the Wall Street players, control over 70% of the volumes traded by the US stock exchanges. And Europe is approaching the same levels. “HFT operators are similar to large predators, invisible among the tall grasses of millisecond technology – Bottazzi lets himself go – but they don't only love large prey, if anything, the small ones that put together make volume: more anteaters than leopards”. But anteaters with unlimited resources: the laying of a fiber optic cable on both sides of the Atlantic dedicated exclusively to this activity is in the pipeline.
