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We're publishing two days late this week, waiting to see if something would top the Madoff news.
Only kidding. Travel constrained time, and something had to give. Hope you don't mind that we kept traveling while the Market Structure Map sat waiting for our return.
About Madoff (pronounced, ironically, "made off"): Some years ago, we would've clustered Madoff volume with that of wholesalers like Herzog Heine Geduld, Spear Leeds & Kellogg, Knight Capital Group and Susquehanna, firms making markets in vast numbers of securities. We've described wholesalers as warehouses for stocks, able to supply almost any kind needed.
Since then, Herzog's been bought by Merrill Lynch, Spear Leeds is part of Goldman Sachs Execution & Clearing, Knight's a prodigious trader dark-pool operator and liquidity provider, and Susquehanna focuses on trading strategies around options expirations and index rebalances.
Madoff? We generally view its trading as speculative, since the firm has morphed into an outstanding short-term trader best known for its "Time Slice" technology for breaking up and feeding out institutional order flow. It's well-named. If volumes in baskets of securities were the loaf of bread, then Madoff was the machine slicing it and sandwiching it with price and volume. It was an active desk, averaging millions of traded shares per week just in our client group.
That was then. Madoff has traded no shares since December 11. On that day, the spigot went from full on to full off in one stroke. For some issues, Madoff's departure disrupted the natural structure, causing price swings and volatility. Programs predicated on average volumes essentially encountered a pothole on the boulevard and shivered. It appeared that highly liquid stocks with expansive related derivatives trading were impacted the most. In one instance, the change seemed to have a 20% downward impact on price.
You can look up Madoff's trading in your stock, or inquire at the Nasdaq Market Intelligence Desk or the NYSE Market Access Center. If you call, ask for Madoff's volumes over the past 20 trading days through 12/12, for a view of its impact on your equity market. It's likely (but unproven as yet) that the broker-dealer operated separately from the money-management business accused of wrongdoing.
The "ponzi scheme" (a term we take from schemer Charles Ponzi, who duped thousands) at Madoff wrought awful destruction affecting families for generations to come.
At the same time, we cannot help but observe how truly staggering is the amount of legal trading today predicated on contracts and financial securities of great magnitude bearing no connection to assets. It's a vast form of Ponzi played out in a web of rules and regulations – the same ones that allowed Madoff to skirt allegations for a decade.
Is the remedy more rules? Rules can always be gamed. Paraphrasing Einstein again as we have on other issues, continuing to do the same thing while expecting different results is a form of insanity. Imposing yet more rules and regulations that constrain the innocent and quicken the cabals of devious opportunity only help the crooks.
What of the bigger Ponzi schemes going on around us? Federal bailouts are Ponzi schemes in which empty shells are passed off as full and left for future generations. We are laying a Madoff on our children and grandchildren and calling it necessary. The Social Security Trust Fund? Ponzi Scheme. Government budgets, ranging from the federal government's down, predicated on spending mandates with no real matching source of funds? Ponzi schemes.
Apparently, these versions are permissible, and actions are only immoral when occurring in the private sector. Even Elliott Spitzer has had all charges dismissed. Alas, what will happen is that the legitimate remainder will be made to suffer, while the ones perpetrating schemes will have nothing left to give, and the ones overseeing markets, who are themselves guilty of the very things they accuse their charges of doing, will mete out judgment where none is needed.
This somehow seems incorrect.
Ah, but the holidays are coming! We'll find some solace in family, friends and eggnog. May your cup be deep, your fires warm, and your spirits as high as that mistletoe hanging in the doorway there...
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