That Time I Tried to Buy an Actual Barrel of Crude Oil

On how to buy, store and trade an actual pint of oil. Hilarious :

If gold is the equivalent of a pet rock, then I can confidently say that oil is the equivalent of playing host to a herd of feral cats; it demands constant vigilance and maintenance. If gathered in sufficient quantities, it will probably try to kill you, or at least severely harm your health.

• • •

The ideal oil storage trade works something like this: Buy the crude and immediately agree to deliver it at a later date, thereby locking in the difference between the spot and futures prices for what is, in theory, a riskless profit. In 2008, when the forward price of oil vastly eclipsed the spot price, this kind of arbitrage could net a hefty return.

A true oil storage trade therefore required an early buyer. The usual suspects—think Glencore and Trafigura—wouldn’t dream of touching my puny amount oil, of course. So I looked further afield, all the way to my ex-colleagues, who I thought surely must still harbor those long-ago dreams of owning Black Gold.

→ Bloomberg

Did High-Frequency Trading Answer The Call ?

But it brings back bad memories of the stock market crash of 1987 when some Nasdaq dealers simply wouldn’t pick up their phones. They knew the investors on the other end were looking to sell their stocks and as market makers, these dealers would be obliged to buy—and they didn’t want to buy! In the aftermath of that incident, enraged investors demanded that the SEC prevent it from happening again. The Commission responded by forcing changes on Nasdaq, including mandating that market makers respond to messages on the fully electronic Small Order Execution System.

Today, the fully-automated Nasdaq market, with its market makers often using HFT techniques, is the very model of an efficient market that has dramatically lowered costs for investors.

Contrast that with the findings of the joint government staff report on the US Treasury “flash rally” which found high frequency traders “as a group continued to provide the majority of order book depth and a tight spread between bid and ask prices throughout the day, even during the event window.” In short, HFT answered the call.

→ Traders Magazine

Lunch with the FT: Ben Bernanke

Martin Wolf :

I ask him whether he is confident that the improvement in the resilience of the banks is adequate. “It’s a fool’s game to predict that everything is going to be fine, because either it is fine, in which case nobody remembers your prediction, or something happens, and then … ” They remember your prediction, I interject.

Bernanke continues: “My mentor, Dale Jorgenson [of Harvard], used to say — and Larry Summers used to say this, too — that, ‘If you never miss a plane, you’re spending too much time in airports.’ If you absolutely rule out any possibility of any kind of financial crisis, then probably you’re reducing risk too much, in terms of the growth and innovation in the economy.”

→ Financial Times

Black Monday Really Did Look Like 1929 Again

A short and informative recollection of what happened roughly three decades ago, from Barry Ritholtz :

Where were you on Monday, Oct. 19, 1987?

Today is the first time since 2009 that Oct. 19 has fallen on a Monday, and that has me thinking about that day. I recall exactly where I was — in graduate school, walking between classes, when I passed a television broadcasting the collapse.

New York Magazine had a great piece too on February 2008 :

It all started, of course, on Wall Street. On Black Monday, October 19, 1987, the Dow Jones index, for reasons still being debated, fell 508 points, almost a quarter of its total. (The current equivalent, for comparison’s sake, would be a 3,200-point loss on one day.) The drop turned out to be a “black swan event,” a weirdly poetic economist’s term meaning, basically, a fluke (though few people remember it, the Dow still eked out a positive finish for the year). Still, the hiccup seemed to foretell the instability to come. Over the next two years, with the economy perceived to be overheating, the Fed repeatedly jacked up interest rates, which made bonds and T-bills sexier than stocks, which triggered an epidemic of unscrupulous bond peddling, which further destabilized the market—leading to a slowdown. (If that all sounds disturbingly like the recent subprime-debt mess, well, that’s because it is. But more on that later.) And a slowdown on Wall Street, which provides over 20 percent of the city’s cash income, spells a slowdown for New York.

→ Bloomberg View

Why Free Markets Make Fools of Us

Although investors were being phished, they “had no reason to be suspicious. They had been told of the wonders of free markets.” But free markets were not so wondrous, because they put the producers of the new, complex, risky securities at a big advantage over the producers of the older, simpler, safer ones. After all, the new securities promised higher returns while disguising the risk of default:

As long as a significant part of the bond-buying public was willing to swallow the myth whole, the investment bankers had an incentive to produce those rotten avocados, and to extract from the agencies the high ratings that would be the cover-up.

On modern advertising and one of my favorite, beloved Ogilvy’s ad :

Akerlof and Shiller think that the idea of phishing also helps to explain modern advertising, especially when we focus on the crucial role of narrative in human thinking. Clever marketers offer simple, attractive stories about their products, and get those stories to stick in the human mind. Consider a famous advertisement for Rolls-Royce, displaying an elegant young mother in the driver’s seat, turned slightly toward her elegant children, who are walking toward the car from outside the entrance to an elegant grocery store. The headline of the copy: “At 60 miles an hour the loudest noise in this new Rolls-Royce comes from the electric clock.” Advertisements of this kind tell an appealing story about what life would be like with the product.

→ The New York Review Of Books