International Fraud a Foul

Lego_Millennium_Falcon_from_FlickerSeveral days ago, CitiGroup settled on penalties (reportedly $7 Billion) for wrong doings. What will come of this is hard to say. Perhaps the business schools will realize that monolithic corporations encounter too much risks to be viable.

As for fraud and how it might affect a startup and entrepreneurs, it is not always obvious. We, of course, know of the random fraud by con-men hawking vaporware; there is even the occasional CXO f’ing friends and family, and the even rarer CXO committing consumer fraud.

A broader fraud internal to the system is worst. Yes Bernie Madoff is the classic example, but a fraud that spans international borders, internal safe guards, buckles regulatory framework, and sends waves throughout the system, that is worse. Such is the fraud within Citicorp.

Banamex ATM in  Barra de Navidad, Jalisco complements of tomzap.com

Banamex ATM in
Barra de Navidad, Jalisco
complements of tomzap.com

In 2001, Banamex was acquired by Citigroup. From 2001 to 2014 Citigroup tried to get the Mexican bank group to modernize so it could place modern safety checks in place. It did not happen. Late in 2013, Citigroup realized a serious issue. Early in 2014, it made it known to the world that $400 million was missing. By May it had no choice but to fire eleven executives without PENSION! This issue will cause Citigroup and the rest of the industry regulatory issues for years.

If that was not enough on June 11, 2014, the New York Times reported suspicions on large stockpiles of copper and aluminum sitting at port. The suspicions are that a Chinese company pledged the same stockpiles as collateral for multiple loans. The division with this issues is Citic Resources, part of the state-controlled conglomerate Citic Group. This is worrisome since China has an estimated total outstanding credit of more than 220 percent of gross domestic product last year — up from 130 percent in 2008. The worry, of course, is how many others have done this.

image complements of flicker Ingot in fort Lauderdale, Fl.

image complements of flicker
Ingot in fort Lauderdale, Fl.

The report said Decheng Mining was suspected by the authorities of having pledged the same stocks of the metals — about 100,000 tons of aluminum and 2,000 to 3,000 tons of copper — as collateral for multiple loans, amassing bank debt exceeding 1 billion renminbi ($160 million). Phone calls and emails to Decheng’s parent company, Dezheng Resources, went unanswered on Wednesday.

 


Meet Benedict Van, the con man of Silicon Valley
http://venturebeat.com/2012/04/10/silicon-valley-con-man/
Silicon Valley Hustle: Former Motionloft CEO Accused Of Defrauding Investors
http://techcrunch.com/2013/12/30/motionloft-jon-mills/
Silicon Valley tech bigwig arrested for fake barcode Lego scam
http://m.digitaltrends.com/home/silicon-valley-tech-bigwig-arrested-for-fake-barcode-lego-scam/#!NysRD

Banamex Said to Snub Citigroup Oversight as Fraud Mounted – Bloomberg
http://mobile.bloomberg.com/news/2014-03-08/banamex-said-to-snub-citigroup-oversight-as-fraud-mounted.html
Citi Fires 11 More in Mexico Over Fraud – NYTimes.com
http://dealbook.nytimes.com/2014/05/14/citigroup-says-it-has-fired-12-in-mexico-over-fraud/
Banks Fear Missing Collateral in China – NYTimes.com
http://dealbook.nytimes.com/2014/06/11/lenders-fear-spread-of-chinese-commodities-fraud-case/?_php=true&_type=blogs&_r=0
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Green, green-washing, and communication?

NPR_RecyclingPlant1Green is mainstream or so I’m reminded by UL (Underwriters Laboratories). At one time they were producing regular reports about green-washing, but it appears the money is elsewhere. None the less, the industry is moving forward with real initiatives demanded by customers and their advocates. The story below points out that there has been a production rise of “16 percent in the last five years” for cups made from paper. That’s a rise of 3% per year, almost the same as organic food.

People vote with their wallets.

 

 Your coffee cup probably isn’t recyclable… yet

http://www.marketplace.org/topics/sustainability/your-coffee-cup-probably-isnt-recyclable%E2%80%A6-yet

In the computer industry, we have a term  similar familiar to green-washing it is known as buzz-word compliant. (Not the same – of course.)

Image source Oregon Sports News

Image source Oregon Sports News

Back to the subject, in 1992 – during his run for president – Ross Perot reminded us that one of the growth areas in business was Garbage. Even so, if you go into most Internet businesses in Silicon Valley you’ll see the obligatory three garbage cans – blue, green and grey. But here’s the test of company communications. Ask someone in the office, which garbage goes in which can. Chances are *someone* in the office can give you a good answer, but look in the cans and more often that not you’ll see a different answer than what you’ve just heard.

In case you are caught short, here is a bit about The Seven Sins of Green Washing.

But if you don’t want follow the link, here are the sins:

  1. Sin of Hidden Trade-off – such as bleaching paper white
  2. Sin of No Proof – claiming as such with no third party verification
  3. Sin of Vagueness – such as, All-natural (my favorite, see below)
  4. Sin of Worshing False Labels – like using the word “green”, when it’s not
  5. Sin of Irrelevance – example: CFC-free, but it’s been banned for years
  6. Sin of Lesser of Two Evils – Organic cigarettes?
  7. Sin of Fibbing – Just a lie

As you can read below, the term “NATURAL” has regulatory issues. As such, it has little meaning we you see a product using that word — with sole exception of meat, fish, poultry and eggs. Regardless of what you see, if regulation is involved, money will move the regulation.


 

From the USDA (United States Department of Agriculture)usda_gov_logo

Natural. As required by USDA, meat, poultry, and egg products labeled as “natural” must be minimally processed and contain no artificial ingredients. However, the natural label does not include any standards regarding farm practices and only applies to processing of meat and egg products. There are no standards or regulations for the labeling of natural food products if they do not contain meat or eggs.

From the FDA (Food and Drug Administration) fda_gov_logo

What is the meaning of ‘natural’ on the label of food?

From a food science perspective, it is difficult to define a food product that is ‘natural’ because the food has probably been processed and is no longer the product of the earth. That said, FDA has not developed a definition for use of the term natural or its derivatives. However, the agency has not objected to the use of the term if the food does not contain added color, artificial flavors, or synthetic substances.

 

Don’t use these words

Kai Ryssdal (of American Public Radio program Marketplace) always seems to have juicy stuff in his Final Note. Keep_right_Portugal_20100107This was on Monday past.

GM doesn’t want employees using these words in memos

http://www.marketplace.org/topics/business/final-note/shocker-no-one-likes-isps-or-cable-providers


http://www.marketplace.org/topics/business/final-note/gm-doesnt-want-employees-using-these-words-memos

Flash Crash of 2010 – More

Monday I talked about the Flash Crash of 2010, and promised more information. Here it is.

Whats Here

nanex.net_PercDrop1

This chart is from nanex.net. It shows the obvious issue with the event. They have good evidence this was intentional.

The compiled evidence, in my opinion, is damming. It is also very long. I don’t expect anyone to read the entire thing in one sitting – unless it’s Sunday and you have several hours to devote to this. I want to mention I was on the couch watching the Flash Crash as it happened. To me – at the time – it was surreal.

  • Where it Starts – This is not an isolated event, humans are involved.
  • The Trading System – The trading system, like the government, can be gamed.
  • Prior to the Incident – Market conditions had to be in place for this to happen.
  • NYSE Circuit Breakers are Off – Only humans are in control of any major market move.
  • Market Capitulation – Actions taken when humans give up on the market.
  • Who lost money.
  • The FLASH CRASH on CNBC – The train wreck in action.
  • The FLASH CRASH Special Report – End of day round-up of events.
  • The FLASH CRASH day on CNBC – CNBC adds context to the day, in six (6) segments.
  • FOX News Version during the crash
  • The FLASH CRASH CNBC Documentary (- 3+ hours) – May 6th 2010 CNBC Stock Market Flash Crash Full Video Coverage DVD #1

POST Event Anaylze and Confessions

  • Jim Cramer with Jimmy Fallon on the Flash Crash – This is a few days after the event.
  • Trader Relives Nightmare Three Years Later
  • Professor Larry Glosten present the academic analyze.
  • A HFT (High-frequency trader) confesses to some actions.
  • What caused the flash crash of 2:45? – A European analyze of the incident. However, it appears the panel did not know much — three years after the fact.

Where it Starts

The bulk of the story that surrounds this is “Artificial Intelligence”. It starts with high-speed computers that “try” to predict the direction of a stock. And of course, since humans programmed them, all they are looking for is – will prices go up or will prices go down.

Add to this that computers can interpret public “news”. For instance, if a price influencer (like a CEO) says something that can trigger a human reaction (to buy or sell), then the computer will try to predict if the price of a stock (or stocks) will go up or will it go down.

The Trading System

Chicago_Mercantile_Exchange_(G._Bush)The system works by a series of bids and offers. Any person can bid to buy a stock; any person can offer to sell a stock. No one is aware of who is bidding, or who is offering. No one is aware of what the volume is (how many stock are available).

Prior to the 1970s – when an electronic system was put in place, a “market maker” would sit in the middle of the exchange and hold a reserve of stock – to keep the market moving and keep the price stable. The market-maker makes money in the transaction difference. Humans still do this, but now machines do this also – either by algorithmic trading or
high-frequency trading.

The market-maker looks at the “bids and offers” via quotes on the CQS (the Consolidated Quotation System) And the world looks at the CTS (the Consolidated Tape System), generally refereed to as the final, trade, or closing price.

Prior to the Incident

Markets had been moving lower for days previous to this. So much so that the Volatile IndeX (VIX) is seen on the screen “VIX up 30%”. We also see gold prices rise ($1200/ounce) and oil prices fall ($78/barrel).

During the video you’ll see a dizzing array of incidents, but things that proceed the Flash Crash including

  • Earnings reports were out and lower.
  • Retailer sales reports were poor. (old money, in many cases)
  • Stocks for all Banks were trading lower. (old money)
  • Japanese Yen & US Dollar are trading higher against all currencies.
  • The Euro is trading lower against the Dollar.
  • The Greek Public Strikes as a “new austerity package” had just passed hours before. (See May 6)220px-2011_Greece_Uprising
  • A comment emerge from the previous day that intra-day lending was becoming unavailable to European banks, and there were signs of “Fragility in the credit system”.
  • A lose in “basis points” as compare against the LIBOR was lending to the volatility.
  • You’ll see, mentioned at the time, but not mentioned in the post-reports that there was “panic buying”.(6:30-end of 5of6) (repeated on 6of6 2:20)
  • Lastly, a report that congress had just passed some new legislation that affected banks and their profitability.

NYSE Circuit Breakers are Off

It’s reported during the “train wreck” that the NYSE Circuit Breakers are Off.

Market Capitulation

It has been widely reported, and appears to be a matter of practice, if a human market makers capitulates (See: Stock market capitulations) – “stub quotes” are put in place. Those quotes are intended to be ridiculous. The practice is to set the capitulation quote at one penny ($0.01 – See: Accenture below)  or one-hundred thousand dollars ($100,000) – neither is realistic for the NYSE.

If this happens – in practice, no humans are in place to slow down the system.

Who Lost Money

Most of the losers were retail investors with stop-lose orders in place. Almost un-reported was that Goldman-Sacks profitted. (See Far Below: High Frequency Trading and the 2010 Flash Crash)

The FLASH CRASH on CNBC

FLASH CRASH! Dow Jones drops 560 points in 4 Minutes! May 6th 2010 – (9:36)
https://www.youtube.com/watch?v=86g4_w4j3jU

The dizzying array of headlines is in the “Breaking News” banner. I won’t repeat a headline, but many are (subtle variations). If I missed a reporter, please let me know.

Gold_Touches_1200

  • below the market price – time mark
  • -$438 – start
  • Gold Touches $1200 (You may miss this, but it will repeat.)
  • S&P Financial Have Biggest One-Day Drop in Six Months
  • More than 95% of S&P 500 Stocks are lower
  • 35% of S&P 500 Stocks are Down 5% or more
  • Five of 24 S&P Industry Groups have had 10% Corrections April 23 Close
  • All 30 DOW stocks lower
  • DOW Down more than 500 Points
  • -$516 – 1:00
  • Stocks Plunge on Greek Worries
  • Rick Santelli, The Euro vs. the dollar just cracked under 126. I’m sure we’re hitting Sell-Stops. We’re hitting knock-outs on the over-the-counter market. (…). -(~1:12)
  • Dow, S&P 500, NASDAQ have Biggest One-Day Drops in over a Year.
  • S&P 500 have Biggest 3-Day Drop since March 2009
  • (NASDAQ has Biggest 3-Day Drop slide March 2009)
  • (Averages Down for Third Day)
  • -$586 – 2:00
  • (Dow has Biggest 3-Day Drop since Late January)
  • Dow Laggards: B of A, Caterpillar, HP, GE (old money)
  • S&P 500 Leaders: Fidelity National, Titanium Metals, MetroPCS, FiServ (new money)
  • S&P 500 Laggards: JDS Uniphase, Office Depot, Time Warner Cable (old money)
  • Many Retailers among Poor Performers as April Sales Fall Short of Estimates
  • Stocks on track for First Two-Week Losing Streak in Two Months.

    S&P500_(1950-12)

    Moving Average from 1950-2012

  • Matt Nesto, ~50, 100, & 200 day moving average broke for the S&P 500.~ -(~2:15)
  • Euro hits 14-month low against U.S. Dollar

922px-Circuit_breaker_10amps

  • -$707 – 3:00
  • Crude hits $78 per barrel
  • VIX up another 30%
  • Matt, ~NYSE Circuit breakers don’t kick in after 2:30pm~ (~3:20-3:30)
  • Scott said, ~This is fear. This is classic capitulation.~ (See: Stock maket capitulations)

 

  • -$860 – 4:00
  • Dow breaks 10,000
  • Michelle said, ~ We’re seeing Fragility in the Credit System (in Europe). ~

Jim_seeDown987

  • -$995 – 5:00
  • Erin, P&G is down 25% (P&G is a bellwether. Hence, Jim’s comment below.)
  • Dow Down over 900 Points
  • Jim says “Look at (P&G). Buy it! (3x)”. (~5:22-5:27) P&G suddenly starts to rise, almost is concert with his words. Fans of the Mad Money with Jim Crammer know, if he says buy three times – it’s usually in the lightning round of his show – and he means buy it now!
  • The market the turns around.
  • -$773 – 6:00
  • (In a matter of seconds, you’ll see the market jump 220 points!)
  • Stock Lose Gains for 2010, 2009
  • -$683 – 7:00
  • Peter (Costic ?) ~ Capitulation with no bid side. (..) There’s Void in stocks. ~
  • Peter (Costic ?) ~ the one thing we can say is we have some serious volume ~.
  • ~8:32 – Jim says, The system broke down.
  • ~9:20 – Jim says, ~ It was there for a blink of an eye, maybe one of these fast pool traders got it. ~

AUDIO from the S&P 500 futures pit at the CME during the “flash crash” of 2010 (Chicago Merchantile Exchange) – (3:38)
https://www.youtube.com/watch?v=E1xqSZy9_4I

May 6th 2010 CNBC Stock Market Flash Crash Special Report Markets In Turmoil – (4:03)
https://www.youtube.com/watch?v=a49nqZxmKJ8
Post analyse on the same day.

  • Erratic trades
  • Accenture (ACN) $40 dropped to $0.01 (one cent)
  • NASDAQ Canceled trades (280+)
  • Liquidity issues

CNBC

FROM: https://www.youtube.com/user/crash6may2010

FLASH CRASH May 6, 2010 (Part 1 of 6) CNBC – (5:24)
https://www.youtube.com/watch?v=IJae0zw0iyU
FLASH CRASH May 6, 2010 (Part 2 of 6) CNBC – (9:13)
https://www.youtube.com/watch?v=_wtFbp6C2h0
FLASH CRASH May 6, 2010 (Part 3 of 6) CNBC – (7:50)
https://www.youtube.com/watch?v=6BkcUYF-QBI
FLASH CRASH May 6, 2010 (Part 4 of 6) CNBC – (5:37)
https://www.youtube.com/watch?v=VlxhHaXh8g4
FLASH CRASH May 6, 2010 (Part 5 of 6) CNBC – (7:30)
https://www.youtube.com/watch?v=Wpx5gBvHNGk
FLASH CRASH May 6, 2010 (Part 6 of 6) CNBC – (8:39)
https://www.youtube.com/watch?v=7UhKOs3dYk4

FOX News

Flash Crash May 6, 2010 Fox Business – (6:29)
https://www.youtube.com/watch?v=Sg4k2NvwG9k

May 6th 2010 CNBC Stock Market Flash Crash Full Video Coverage DVD #1 (~3:17:15)
https://www.youtube.com/watch?v=jhu02uQxKWo

Jim Cramer & JImmy Fallon on the Flash Crash (3:05)JimAndJImmy
https://www.youtube.com/watch?v=9ylwHfKZoJk
This was with Jimmy Fallon on the tonight show.
Jim Crammer, “We have no answers at all.” – (~2:00)
Toward the ends he talks about how “the market is rigged”. (~2:30)

IBTtv – Flash Crash 2010: Trader Relives Nightmare Three Years Later – (5:03) Published on May 6, 2013
https://www.youtube.com/watch?v=htHUJOgX_nw
Mark Otto of Knight Capital is interview.
Mark explains traders realized they knew it was a system error.
He also explains new rules – which require humans to be involved.

Larry_Glosten

Larry Glosten – Columbia School of Business

Larry Glosten: The Flash Crash – (19:30) Talk Given On December 6, 2011

https://www.youtube.com/watch?v=gbk9yXFk4jY
Columbia School of Business – 
Professor Glosten notes the timing coincides with Central Time vs. Eastern Time.
He explanation is, of course, academic.
However, in his explanation  he shows the logical action – which helped break the market, and that is the “stub quotes” entered by the market makers. (~5:00)
They are not high-frequency traders, but high-frequency QUOTERS. (~6:00-6:15)
The market breakdown. (~12:15-13:45)
No limit price on sell order placed at 2:45 (~14:30)
Massive number of quotes and cancellation (~16:00)
New rule added – Rule 13h-1.  (~17:50)
Consolidated Audit Trail was proposed as a new rule – Rule 613. (~18:10)
Nanex.com see something sinister. (~19:10)

hft_trader

Dubbed the Snowden of Wall-Street

High Frequency Trading and the 2010 Flash Crash – Leak Sources News (~6:14) Published on Nov 17, 2013

https://www.youtube.com/watch?v=YS1k5hz0cfE
former HFT trader
suggestion that Goldman Sacks may have profitted from this
MORE (I could not review the Documentary at this link in time for publication): http://leaksource.info/2013/11/17/the-wall-street-code-documentary-2013/
Secrets of a former high speed trader – CNNMoney (5:03) Published on Aug 12, 2013
https://www.youtube.com/watch?v=itxbyXO67XY
Comments on the video include:

  • “HTF were net takers of liquidity during the crash.” (~1:50)
  • “Quote stuffing” is the equivalent of Denial Of Service (~1:55-2:30)
  • “The only explanation is nefarious activity” (~3:20)
  • “Negative externality” (~4:30)

What caused the flash crash of 2:45?  (7:36) Published on Oct 1, 2013
https://www.youtube.com/watch?v=zJja5a7pPSw
Björn Hagströmer, assistant professor at Stockholm University, explains.
Three (3) years after the fact.

The Flash crash of 2010 is not the first and only crash of this sort. Crashes of this sort happen all the time. They are discussed in the longer segments above.
And also here: TEDxNewWallStreet – Sean Gourley – High frequency trading and the new algorithmic ecosystem. (17:42) Published on Apr 12, 2012


I could not review this data.

The Microstructure of the Flash Crash

https://www.youtube.com/watch?v=IngpJ18AhWU

 

Flash Crash of 2010 – Four Years Ago Today

Also known as the Flash Crash of 2:45

nanex.net_PercDrop1

This chart is from nanex.net. It shows the obvious issue with the event. They have good evidence this was intentional.

There is a ton of material for this incident. (I’ll post more material on Sunday.) I’m reminding entrepreneurs of this because sudden downward pressure on stocks are possible. One company I was involved with depended on stock sale of another Startup to be funded. In my case, the downturn for that stock lasted two (2) months – which sunk our company.

FLASH CRASH! Dow Jones drops 560 points in 4 Minutes! May 6th 2010
https://www.youtube.com/watch?v=86g4_w4j3jU
  • Dow Jones (loss) – Time mark on video
  • -438 – start of video clip
  • -516 – 1:00
  • -586 – 2:00
  • -707 – 3:00
  • -860 – 4:00
  • Dow breaks 10,000
  • -995 – 5:00
  • Jim says “Look at (P&G). Buy it!” The market the turns around.
  • -773 – 6:00
  • -683 – 7:00

The Flash crash of 2010 is not the first and only crash of this sort. Crashes of this sort happen all the time. They are discussed in videos I’ll post on Sunday.
and also here:

TEDxNewWallStreet – Sean Gourley – High frequency trading and the new algorithmic ecosystem

https://www.youtube.com/watch?v=V43a-KxLFcg

CNBC – The (Stock) Market is Rigged

flashBoysthumb_scale

What impresses me is the standard deniers and the standard blind-men that show up for these events. In any case, (…), pants on fire.

This story starts with Michael Lewis‘ new book Flash Boys (ISBN:0-393-24466-0)

The New York Times Magazine has an adaptation by Michael Lewis, if you’d like to read a chapter.


TheGreatHFTDebateThis Week on CNBC: Katsuyama vs. O’Brien – (3:05)

https://www.youtube.com/watch?v=K9F-pZu0hiA

In context, William O’Brien &  BATS Global Markets is one the companies highlighted as “riggers”.  In case you missed this, CNBC asked the question Is the (stock) market rigged?, with reponses from the following

  • Henry Blodget – Business Insider, says “The Concept (…) is Crazy.”
  • Larry Kudlow – CNBC commentator, says “No. I don’t believe its rigged.”
  • Mark Cuban – shark investor, says, “Well …  that suggests Micheal Lewis is right. And something is rigged and not right.”
  • William O’Brien – BATS Global Markets President, “Brad and Micheal shame on you….”
  • Brad Katsuyama – featured above, “I believe the markets are rigged, and you are part of the rigging,” to William O’Brien.
  • Micheal Lewis – author of the book, “I visited BATS, and …”. He never complete because of O’Brien interrupting and the CNBC editing.

At (~2:28) the story moves to the unemployment numbers for the quarter.


riggedMarketDebateCNBC trails with a story where Peter Nabicht, of Modern Markets Initiative, claims that “the high volume of participants” makes it legitimate.

High-frequency trading benefits investors: Advocate – (5:06)
http://www.cnbc.com/id/101549113

In the video – when pressed, he (Peter Nabicht) says the real issues are: “Insider Trading, Front Running, & Early Access to Data”. CNBC counters(~3:55), much as Mark Cuban does,

if you take a High Frequency Trader, like Virtu, and they only lose money one (1) day in 1238 (3+years). (It can only be rigged.)

Then there is this:

Silver Lake-backed high-frequency trader Virtu Financial pulls IPO in wake of Michael Lewis book
http://www.bizjournals.com/sanjose/news/2014/04/18/michael-lewis-book-stalls-ipo-by-silver-lakes-high.html

CNBC’s  Bob Pisani has an article that explains the technical.
The New York attorney general to probe high-frequency trading.

And finally, SEC official: What’s hurting the ‘little guy’