ni-co

I think this vote is classic Buffett. With Schroeder's character description in Snowball in mind, this is exactly the reaction you would expect from him. She described Buffett's board activity as being unobtrusive, rarely criticizing management openly. Buffett hates confrontation – not only confronting management – but people in general. To confront a manager that he obviously thinks of as being a great one must be especially difficult for him. Maybe he was also afraid of the consequences of management not succeeding? This could have forced Kent to resign which certainly is neither what Buffett nor Munger would have wanted. Buffett made very clear that he didn't want to send this signal. Buffett told Becky Quick that he consulted Munger and at least got his view on the plan (being excessive).

Hamburg, Germany

Thanks! This is some great advice.

Haha, I knew this interview would get the discussion going… My philosophy is being invested 100% as long as I find at least 5 or 6 good ideas. However, I enjoy thinking about in which phase the swing of "the pendulum" is, as Howard Marks puts it. Bill Miller doesn't say that it's right at the beginning of a bull market but, according to him, it's not the end either. That's my opinion, too. Market participants are still a bit too cautious. Just to add some fuel to the fire: Isn't this the result you would expect from highly unconventional investing and from aiming at beating the market? You can't always be right and at least you can't accuse Bill Miller of index hugging...

Good interview by Jon Stewart. I found this to be the most interesting part (they didn't include in the "full episode"): http://thedailyshow.cc.com/videos/3efna8/exclusive---michael-lewis-extended-interview-pt--3 Edit: There is an "extended interview" version: http://thedailyshow.cc.com/extended-interviews/o7grtj/exclusive-michael-lewis-extended-interview

Bill Miller on CNBC thinks that http://video.cnbc.com/gallery/?video=3000265869 you could throw a dart at the market and anything you'd buy would go up within the next six months, http://video.cnbc.com/gallery/?video=3000266062 that valuations are likely to be going a lot higher ("we may be in the best bull market of our lifetime"), http://video.cnbc.com/gallery/?video=3000264710 that his "three pillars of a bull market" (liquidity, growth, valuation) are still there and he continues to like homebuilders, airlines, tech companies… http://video.cnbc.com/gallery/?video=3000266119 …and financials, http://video.cnbc.com/gallery/?video=3000266084 last, owns bitcoin and has an interesting theory on why it's going to succeed.

The best about this whole discussion is that we have a very nice control experiment to see whether Lewis is right: There is not a single reason why IEX should succeed if the EFT practices it seeks to hinder were a net benefit to the market. If IEX succeeds in a big way (or other exchanges change their model to resemble IEX more closely) then Lewis will have been right.

http://www.charlierose.com/watch/60368500

I try to sum up the discussion and thereby avoid talking at cross-purposes: One side (HFT) keeps saying: Receiving an information advantage by beating others at being faster at reacting to market action is the way markets should work. If somebody orders shares and therefore indicates his interest in buying, there is nothing immoral in snapping up a part of those shares and selling it to him at a higher price (or raising the price of shares you already hold on offer in anticipation of his order). Nobody knows other participants' orders with 100% certainty, it is always guessing and there is always the risk of guessing wrong. The other side (Michael Lewis & Co.) argues: Speed can be dysfunctional to markets (if not immoral), namely anytime it is used to intercept a specific order (or at least part of it). To make this point very clear: We are not talking about anticipating an order, whereby I define "anticipate" as acting before the order exists (in contrast to reacting as soon as this order hits the first exchange). To anticipate an order you have to bear market risk and you have to provide liquidity. Nobody says anything against that – this is classic market making. And if this was all HFT did, all power to them! But unfortunately, this seems not to be everything. What we are talking about is reacting to an already existing order, more specifically: to the already existing acceptance to an already existing matching offer. Essentially, this is intercepting* the acceptance before it meets the offer it was directed towards and outrunning it. This is not market making, in my opinion this doesn't even provide liquidity and the market risk you have to take to do this is infinitesimal. In a functioning market place this shouldn't be possible. It's also clear to me that sometimes this is done by creating a "fake" offer and retracting or changing it before the acceptance message hits the exchange; but this doesn't change one thing. There is no justification for doing that either. Lewis calls this "fake liquidity", and rightly so imo. To sum up: It is all about acting before the fact vs. reacting after the fact. And in this context the Lewis quote cited by Otsog above makes very much sense to me: ------------------ * Just to clarify what I mean by "intercepting" orders: This doesn't mean knowledge (= 100% certainty) of the order. Knowledge is not necessary, it's enough that you are able to take a very, very educated guess. Let's say 90% of the time you guess correctly, just to put a number on it (maybe it's just 51% but I'd be surprised if you'd never have a losing day in years with only 51% certainty). The point is anticipation (=action) vs. guessing after the fact (=reaction). Even being right only 51% of the time doesn't change a thing, because real buyers and real sellers pay for HFT being wrong in 49% of the time taken all together.

;D Thanks for that link! Strangely resembles the discussion here :P

@benhacker, @writser Are you disagreeing with anything Lewis has to say in this video? As far as I understood your posts: You are not. It's much more about the perception or the tone ("stock market rigged") than about the facts. Most of this discussion seems to me to be a straw man argument around whether HFT is legal or "real" front running. What I'd love to hear your opinion on: Do you agree that this is a (solvable) problem or do you say that this is how an efficient market should work?

This is not true and I wish people would quit saying it. Are management fees legalized theft? Give me a break! Front running is FRAUDULENT. Front running is not fraudulent when you don't pay the front runner to execute orders for you or advise you in any way. It's not illegal to figure out that you want to buy more shares and snap them up right before your nose. That's not to say it shouldn't be illegal but it surely isn't.

I know it's unbelievable. Read the book – Lewis explains it. They lure brokers into placing orders at exchanges where they get the information first and can execute their orders on the other exchanges before the large orders hit them. They are able to recognize from which broker and even from which firm orders come. They are able to figure out from whom the order comes from the time delay and route an order takes to hit one exchange after another. It's not that they know it 100% but they figure it out and the odds are very much in their favor – it's very, very educated guessing. It has nothing to do with "luck". The more data they feed into their algorithms the better they know from whom specific orders come and at what price. When they figure out that T. Row Price buys 100 shares of KO at BATS they can be pretty sure that this is only a partial order and they buy KO on NYSE and NASDAQ and then sell it at a higher price. How do you explain that slowing down orders so that they hit all exchanges at the same time works? This is not a tinfoil hat conspiracy theory. RBC actually sold this system to large institutions when they had figured out how to circumvent this scheme by delaying the orders precisely. Nobody says that's illegal but it's front running nonetheless.

No! HFT did not introduce the middleman. He has been forever: the market maker. Or day trader. Or arbitrageur. Order books have never been sacred bibles where only long-term investors can enter orders. There are and always have been people trying to read the tape. People who think: "well if I can buy at this price I probably sell it over there", "that's a big sell order, let me adjust my quotation slightly lower" or "the market trends up, let me buy something". You make it sound as if HFT is suddenly a new class of assholes. They are not. Only the tools they use are different. Inter-exchange arbitrage is nothing new. These firms just took all the profits the old assholes made because they are far more efficient at their job. They also make transparent how much the middle men are actually making and that is why you suddenly hate them. That doesn't make sense. If the buyers and sellers were already there the trade would, by definition, already have been executed. I know perfectly well what arbitrage and market making are and I get the impression you purposefully "misunderstand" what I'm trying to say. Let's say there are three sellers offering 10,000 shares each at $100 at three different exchanges. I say: "Fine, buy 30,000 at $100". I get a fill at the first exchange at $100 and the ask price ticks up at the other two exchanges to $101 because high frequency traders saw my order coming, bought the shares at $100 and now offer them to me for $101. I'm now left with two options: 1. Pay $101, 2. Not buying the rest of the shares. Now tell me: How does this help the market place? There were three sellers of a total of 30,000 shares asking for $100; there was one buyer bidding $100 for 30,000 shares, but, in the end, the (full) trade didn't happen at $100 simply because the buyer's order didn't reach the exchanges at the same time. At least, that's how Katsuyama describes this phenomenon and it sounds perfectly reasonable to me. What they did to counter it is delaying their orders to the nearer exchanges so that their orders hit all three exchanges at the same time – and their fill rates went up to a 100% (at $100). That's why I say it's an exchange malfunction. What on earth has this to do with market making or arbitrage? How does this provide any additional liquidity? This is simply front running orders. These traders wouldn't have bought these shares were it not for my order – that's what differentiates them from market makers, that's why they don't provide additional liquidity. That's my whole point.

To me this simply is a stock exchange malfunction. To larger institutions this feels like a tax and it adds up to tens of millions a year. It doesn't help to say that in the grand scale of things it's not that much money compared to their holdings or that they should be long term oriented etc. This doesn't change the fact that, in this case, HFT introduces a second middleman between buyer and seller beside the exchange itself (maybe even a third or fourth middleman – who knows?). This makes trading less efficient, especially for large institutions like pension funds, mutual funds, ETFs etc. and now that they know about it, it will stop. Up to recently, the exchanges didn't have any incentive to solve this problem because larger institutions didn't know how the scheme worked. They simply noticed their trading expenses increasing every year. On the contrary, the exchanges had any reason to be silent about it because it multiplied their trading volume and they profited from every single trade. Now that everybody knows about it, the exchanges have to do something about it or their clients will simply leave to create their own exchanges. It's too much money on the table for them not to do this. By the way, the claim that HFT provides liquidity is a very weak argument in this case. Buyers and sellers are already there and the high frequency traders do nothing but putting themselves in the middle and making a transaction more expensive that would have happened anyway at a lower price. That's why those institutions feel ripped off. This has nothing to do with being against HFT in general or being against computerized trading. But this practice will stop no matter how much money went into shorter fibre lines and real estate next to stock exchanges.

I don't doubt that. I didn't want to say that HFT is "evil". What bothers me is not computerized trading or having faster access to new information, what bothers me is that the very fact that I am placing an order (or rather a larger institutional investor) is the "news" that some of these HF traders can trade on even before I get my order filled. I understand what you mean and to me personally it doesn't matter that much because I'm trying to invest for the longer term like Berkowitz and Buffett. But if it's true that orders of larger institutional investors can be legally front-run (be it with faster connections between exchanges or with algorithms or a combination of both), Berkowitz and Buffett are paying the bills of these traders – not of every high frequency trader, but of those using this strategy. It might not matter to Buffett or Berkowitz in the grand scale of things but that doesn't make it right.

Fair enough, a few years ago it even might not have worked this way. I'm fully aware of what I'm watching. However, while being a great self promoter Michael Lewis is also a very sharp guy who does tons of research before he writes a book. I read several of his books and while he certainly takes some creative liberties the gists of his stories have been very reasonable so far. Secondly, it's not only Michael Lewis who says that HFT can be a form of legalized front running but also people who know the markets much better than me, e.g. Charlie Munger (http://blogs.barrons.com/stockstowatchtoday/2013/05/03/charlie-munger-hft-is-legalized-front-running/) and other investors. Thirdly, at least in cases where larger orders are split up between several exchanges the way they explain it to work makes very much sense to me. I'm not advocating to return to "the good old days" but to me this seems to be a fairly new but solvable problem.

And you arrived at that conclusion based on what? This is the popular fear mongering story but is simply not true - if it was HFT firms would be violating the law and even Lewis conceded that they were not. They simply see faster that an order 'has arrived' in the order book. What you assume (the HFT firms can peek at your orders and quickly buy shares before you can) is blatantly incorrect and ignorant but people have repeated it so often that it became a prime argument against automated trading. Have you even watched this 60 Minutes video this thread is about? http://www.cbsnews.com/news/michael-lewis-explains-his-new-book-flash-boys/

What if it was an illiquid stock and your order would only be partially filled because some HF trader snaps up the shares you intended to buy? Then you'd either pay the higher price or wait. To larger institutions nearly every stock is illiquid within a certain time frame. To them, HFT this feels like a transaction tax. There are good reasons why "traditional" front running is prohibited. Orders are atomic operations. A HFT firm cannot snap up shares halfway your order. What they can do is snap up shares after your order is partially filled. Everybody can do that. Everybody could do that 200 years ago. To counter that you can use limit orders, 'click through the book' to fill your order completely, trade smaller chunks or whatever. Exchanges have always worked like that. No. You're missing my point here. They can snap up your shares before you get a single share. They know that your order will come and buy right before you. And not everybody can do that. That's why it pays for them to have the fastest wires to the exchanges. This adds up to quite a lot of money and is exactly the reason why your broker isn't allowed to do that.

What if it was an illiquid stock and your order would only be partially filled because some HF trader snaps up the shares you intended to buy? Then you'd either pay the higher price or wait. To larger institutions nearly every stock is illiquid within a certain time frame. To them, HFT this feels like a transaction tax. There are good reasons why "traditional" front running is prohibited.

Great, thanks!

http://www.washingtonpost.com/blogs/wonkblog/wp/2014/02/27/the-incredible-stock-picking-ability-of-sec-employees/ This makes me wonder why SEC employees are allowed to buy and keep individual stocks in their portfolios at all.

The title of this article is deliberately utterly misleading…

I highly recommend Joel Greenblatt's "[amazonsearch]You Can Be a Stock Market Genius[/amazonsearch]" and "[amazonsearch]The Little Book That Still Beats the Market[/amazonsearch]". Shameless cloning by reverse engineering investments of great investors is also a good starting point: http://basehitinvesting.com/mohnish-pabrai-lecture-at-columbia-university-my-notes/ You have to understand what you buy and why you're buying it, though.

I didn't say that, but that's beside the point. I think we are talking about the same thing: If one quarter's earnings have no relevance for subsequent earnings, an earnings miss won't affect the earnings power of the company. In other words, this hypothetical company can dividend out its earnings completely while keeping its economic size. In this simple case, the value of this company is exactly the sum of all of the future discounted earnings PLUS any excess cash on the balance sheet. If this hypothetical company misses one quarter completely, its value is reduced by this earnings miss (i.e. this quarter's earnings) only. Hence 2) is correct. in an efficient market, 1) can never be the right answer and 3) can't be true, unless future earnings were affected by the earnings miss (which, by definition, they are not).