Thursday, August 2, 2012

Culture of Risk

The news de jour is Knight Capital ticker $KCG. It appears their in house high frequency trading algorithm went berserk resulting in a, are you ready $440 million loss.  Just to give you an idea of the order of magnitude of this loss, Knight Capital financially had;

Q2 revenue of $289million and net income of $3.29million
Q1 revenue of $349million and net income of $33.11million

If you do a quick cocktail napkin tally Knight's quarterly net income backwards this loss wipes out ALL net income since the beginning of 2008. Yes 4.5 years of profit wiped out in 1 day and as you might have guessed, put the company's very survival at risk without a lifeline.
 
I would hazard a guess that there may be a problem with the risk reward model they use over at Knight. Acutally I wish Wall St. would do us all a favor and stop using phrases like risk management and loss prevention. Start calling it for what it is, a culture of risk  plain and simple. A get rich or die trying mentality. Who cares if you sink the ship and 1400 odd people get thrown out of work over your bonus chasing psychopathy you retire in grand fashion maybe even catch a gig at Fed, Treasury or regular on CNBC.

One of the comments I heard to today in the multitude of articles and commentary on this fiasco was something to the tune of 'Knight Capital has been one of the biggest beneficiaries of the evolution of the market (high speed trading)'. Over at the Room Temperature IQ institute, of which I am still a senior fellow in good standing, we call it;

 "you live by the sword die by the sword"


This whole Knight fiasco should simply stand on its own as yet another shining example of how the financial alchemists, snake oil salesmen and Ivy league ponzi prostitutes (shall I keep going) have utterly distorted, corrupted, and perverted a market that was once the envy of the globe into a listless, lifeless shell of its former self. Be proud of your creation fellas, you deserve all the karma that's coming for what you have done. 

When the dust of your genius experiment settles I expect to see many out there, face to face, on the curb under the buttonwood tree readily employing the 4 c's of credit not to mention a handshake as from the ashes of your avarice and greed will arise the trust, honor, integrity and class that an public securities exchange should have and be.

P.S. under that new scenario, fraud and transgressions will NOT result in fines with neither admissions nor denials of wrongdoing!

No comments: