By Rick Nason, PhD, CFA
Partner, RSD Solutions Inc.
It’s tax time in Canada, so combined with the end of University classes I have not had a lot of time to get into the juicy details of the Goldman affair. However from my admittedly relatively naïve (or is it ignorant) position, it appears like we may have to lock up 99.9% of the financial trading industry (as well as the real estate industry, the used car industry, etc., etc.) As academics we should throw out any development that we are doing on heterogeneous models. (As academics that will not be a great loss since we are relatively crappy at developing useful models where everyone is not rational in exactly the same way.)
The Goldman affair – in the context of my very small and simple brain – is about a financial institution having two different sets of clients, who just happen to have different views on the future price direction of a set of assets. Goldman – more or less acting as a broker – facilitated the trades between the two sets of trading firms. The shame! The horror! The two-faced greedy pigs! Imagine, facilitating a trade between two parties?!
My sarcasm would be totally misplaced if the two counterparties (and Goldman itself) were small retail clients or entities. But they are not! They are well known and supposedly big institutions with supposedly big brains. But there is the rub. Those of us who have worked in the industry know that not everyone has the mental capabilities that they like to think they do – or more accurately try to project to the world that they do. It is no big secret that lots of people in the financial industry (and almost every other occupation of life) try to pretend that they know a lot more, and understand a lot more than they actually do. In the interests of full disclosure, academics are no better and probably even worse when it comes to the faking competence game (that is for a later blog).
So here we have these Senate hearings and all of the cries about how Goldman was so unethical about being on both sides of this trade. That’s their fricking role in the economy! A trading firm facilitates trade. Trading is not a win-win proposition, except for the brokers who facilitate trades. In almost any type of transaction, one party will do better than the counterparty, while the facilitator will make a profit from both.
The real ethics breach in this case is the supposedly knowledgeable institutional investors who entered into this trade without fully understanding what they are doing. The markets and the regulators have always made a clear distinction between retail and institutional investors. It is clearly understood by all that the required degree of hand-holding is very different for each group. The especially greedy ones in this case is not necessarily Goldman (although I suspect they were not averse to pumping their profits to the max from both sides) but the two sets of counterparties. I say hurrah to all of this greed. Greed makes the economy works. What makes the economy slow down is stupidity, and what makes the economy stall is trying to hide behind your mother’s skirt when you do something stupid. Blaming the other person for your mistakes is the real breach of integrity, responsibility and ethics. Having the government do the blaming for you is just despicable.
Back to the Chicago Board Options Exchange. Can you imagine the gall of that institution? The lack of integrity and ethics of this institution is just disgusting! Imagine – they offer up for trading both calls and puts!!!! Think of the moral decay that allows them to offer products to those who think the price of an asset is going up, while simultaneously offering products to those who think prices are going down. Furthermore these products are offered to retail investors who need to pass a relatively low barrier of knowledge to trade these “exotic” instruments. How do the employees and members of the CBOE live with themselves? The CBOE’s Senate hearings will be especially packed with protestors, and I trust the grilling from the Senators will be especially fierce.
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