Thursday, January 15, 2015

Tide that floats us

Moral: Wherein we look for motivations for dark pools (ah, invisible hand, indeed) and other charades. Oh yes, "motivations" means more than just rooking the system.

Essentially, we want to show that the markets are not fair and why this is so. Now, don't go on about life not being fair. This is different; it's basically an issue of the higher class (because they can and are given the right) running a sham under several auspices. You would think that the U.S. would take the high road and show the world how markets ought to be done. We cannot get there until the real story is known and told. 

Too, we are talking from a normative position not unlike that of the U.S. Constitution writers. Let us start real simple and go over the ground work. 

As one watches the markets (yesterday - decline; day before - up then down) gyrate, there are lots of things to ponder and questions to ask. Sometimes, it looks as if something is trying to prime the pump (seeding the chimera, if you would). Say what? Yes, something buys in order to get things up; this would be an attempt to lure in suckers (we'll go into this further).


So, to a basic view of how we get the Cheshire multiple whose reversal throws so many into the quagmire of losing it all. Built on top of this faulty frame are the management strategies and gaming activities that spawn our chimera.

Essence of the Cheshire multiple
The graphic relates to a scenario that is quite common. The approach is fairly simplified but does cover the essential points. The context is equity, for now, however it applies to all markets in some way or other. Yes, as capitalists like to argue, markets are the key/core item for their economy.

You know what? We have never seen such. Rather, playing around, as shown in the graphic, is the reality.

So, we have four states read as normally with English. We start with the upper left which is the starting state. Then, we have three events. Each one of these is some transaction or collection of such.

Let's look at a few details for each of these states. We are assuming that there are 10 stocks; the number of buyers is not important (assume that the number is more than five, though - we'll get to the block dealers soon - as in, one or two buyers, 10 stock).
  • 1 - pre-IPO. I used this term since we see IPOs regularly. Someone floats stock whose value has been determined by various means. Either the stock goes beyond the initial price (how this price is determined is ignored here, for now) or falls. In the first case, we have "winners" which everyone loves. 
  • 2 - All sold. So, we'll assume that the 10 stock got sold for $5 (I'm putting the dollar sign to denote some type of value). We then have a total value of $50, and everyone is happy (if the original price was $4 or lower - keep this in mind as it'll come up in a later post). 
  • 3 - One sold at an increase. Now, everyone is happy as their stock is worth $2.5 more without them doing anything (this is how the Mr. Wonderful's of the world like to dream of making money while they sleep - and actually do). The total value now is $75. Only $2.5 was introduced. How did we get the additional $22.5? Ah, that is the crux (multiply this by billions across the board, and the gist of the problem shows up - those running the game do not want this known - raking off the top is their bailiwick). 
  • 4 - Two sold at an increase. Now, everyone is exhibiting (ir)rational exhuberance. The total value is now up to $100. Yet, we have only seen another $5 introduced. Adding that to the last event's amount, and we have $7.5 introduced. Yet, the overall value has doubled (for those who did not sell). 
Now, of course, when anyone sells out after this point, their gain (considering tax, for instance) will be based upon what they paid when they bought.

To summarize:
  • Holdings: 7 at $5, 1 at $7.5, 2 at $10
  • Gains, if sold at $10: $35 (7), $2.5 (1), $0 (2).
The example does not have a sell example. Too, whole lots of attention goes into this market paradigm daily. Some of the talking heads are trying to be helpful; others seem to be mainly self-serving.

But, looking from a distance, that the game is rigged is obvious. The last author who tried to show this caught a lot of grief. Adam Smith is rolling over in his grave at the thought of what is done under his name.


Finally, one ought not criticize without having something constructive to offer. Do I? You ought to know better than ask. The problem is that we have this to contend with: centuries of practice (not as many as you might think), vested interests to ferret out (they have been at the teat for a long while), convoluted contrivances to counter (theoretics, mathematics, and computing), talking heads densely everywhere muddying the waters (ever think about the amount of money that goes into tracking and telling us about this crooked game?), and more. Hence, we [will] begin with the foundational start which has actually been going on since the beginning of the blog and before.

Remarks:  Modified: 03/22/2015

01/15/2015 -- It is nice to see, today, that the most-read post this week are from years ago. Yes. In particular, the following are in order by read count: Systemic risk (Aug 2009), Why not? (Aug 2009), Von Mises and friends ( Sep 2010), Economic sandbox (Sep 2009), Bean and accounting, thereof (Aug 2009), Value, faired or earned (Sep 2009).

01/16/2015 -- Simple start, but at the core are issues of quasi-empiricism and more. Our approach will stress a re-look at normative mathematics (yes, all connotations apply) in order to regain what we lost with the thrust (modernism et al) which had led us to the state of data-driven purgatory and other ailments (which we have imposed upon ourselves).

03/05/2015 -- First, we had El-Erian saying that people's hope of liquidity had no basis. Now, Cuban is saying the same thing. ... What I was starting here was an explanation. You see, the cheshire multiple provides the supposed equity (illusory in many senses). Then, the dark pool (and similar) activities by those who run the game siphon off the real value (skim the cream). What is left is residue (yes, mere fractions of what was put in - by those who are the guaranteed losers). ... I will start over and make the fictional part more prevalent. ..., Too, the graphic will be more extreme so as to let the message come out (after all, we can use the "thought" experiment approach in order to lay out the framework with which to take the analysis further - for many, it is just incredulity that strikes - how can such crap be? well, it's due to the intellectual/mathematical/computational cloaks that are put out - and, it's pure crap, people). ...

03/14/2015 -- We are talking market capitalization and how modern means allow this to be concept to be mis-used. We are reworking the example to be more extreme. For now, why is not market cap based upon a more sophisticated notion (rather than being a gross estimate)?

03/15/2015 -- Finally, getting around to the pending business.

03/17/2015 -- Dogs of the Dow: Market Cap table, Most activeBeyond the wildest dream.

03/22/2015 -- Jealous? No way, Jose. FED gives Wall Street what it wishes.

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