(Complete Show Notes Below)
In the 57th episode of the Financial Procast:
Looks Like Some High Speed Traders Might be Too Speedy
Have some high speed bond traders really defied the laws of physics? Evidently, a couple weeks ago right on the heels of the Federal Reserve announcement some traders seem to have been able to react a little too quickly.
Yes, it appears that some traders were able to place certain trades about 5 milliseconds faster than normal. We're not sure exactly how one would be able to measure that sort of thing, however, the fact that algorithms are frequently used by sophisticated traders should indicate that any thing is possible nowadays.
It seems that someone in Chicago got some news a wee bit early. Supposedly it takes 7 ms from news to travel from New York (where the announcements are made by the Fed) to Chicago. What's the big deal? Well, it seems that some traders out in Chicago were executing trades within 2-3 milliseconds.
So it would seem that someone got an edge by getting certain information a little bit too early. Please understand, these sorts of trades are not place manually. These trades are executed by complex algorithms that are written well in advance and are written to gain the slightest edge. This is game of razor thin margins. High frequency traders make their money by achieving thousands of small wins.
But the mystery here is how the information was obtained so quickly? Is there a scandal afoot? Our guess is that we'll never know what really happened and there will likely be no follow up on this at all as it's most likely too complex to track.
Is Benmosche Really that Disconnected?
In a recent interview with the Wall Street Journal, Robert Benmosche, CEO of AIG, made some pretty inflammatory statements going back the financial crisis of 2008 in regards to executive bonuses and performance bonuses.
For our discussion of this topic we relied heavily on the article written over at Rolling Stone.
In this interview with the reporter from the WSJ, Benmosche said:
The uproar over bonuses “was intended to stir public anger, to get everybody out there with their pitch forks and their hangman nooses, and all that – sort of like what we did in the Deep South [decades ago]. And I think it was just as bad and just as wrong.”
Really? Wow…I'm almost speechless. Is he really that out of touch?
Benmosche also makes the argument that the “retention bonuses” that were paid to members of the AIG financial products division (AIGFP) were necessary to hold on to these talented young people who were probably the only people that actually understood the derivatives products that almost sank the ship.
Perhaps he could have made this point in a bit more tactful manner? His point is not lost on us. A company does have to pony up the money to hold on to talented individuals. The message is not the problem for Benmosche–it's his delivery that sucks.
He should probably ditch the ego and probably abandon the idea of throwing out the first thought that pops into his head.
Fidelity Employees Don't Like the Fidelity 401k
There is a pending class action lawsuit being brought by 24 employees at Fidelity claiming the company has breached its fiduciary duty regarding their 401k plan. The employees are claiming that Fidelity has failed to give them the best options available.
What a minute? Isn't Fidelity one of the largest 401k providers in the universe?
Yep, they sure are.
Fidelity says the claim is ludicrous, the plan offers some 150 different fund options–which is far more than the average 401k plan at most other companies. True statement.
However, the employees maintain that all 150+ options are managed by Fidelity and most of the funds have higher fees associated with them than do comparable funds from other providers.
Uh oh…this doesn't sound good at all.
It's really hard to believe that Fidelity isn't giving its own employees the lowest cost funds on their own platform. Most companies aren't in the business of profiting from the retirement money of their employees?
Why isn't Fidelity offering its institutional funds to ther own employees? In general, institutional level funds carry much lower fees than the alternatives. Yes, there are typically stipulations (investment minimums, etc.) that accompany that sort of fund, but you'd think that Fidelity would be willing to waive all those restrictions for their own employees…right?
Evidently, they don't.
Poor Designed Life Insurance Policies Get you Sued
Kevyn Ogawa, a young grocery store clerk won half of a $336 Mega Millions lottery and took that the lump sum payout. So, after taxes and such he netted about $70 million in 2009.
It seems that Mr. Ogawa then decided to work with a couple of financial advisors who sold him a handful of life insurance policies totaling some $100 million. Now, we don't know the logic behind this recommendation and subsequent transaction. All of the information we've found is short on the details.
However, just two short years later, the same advisors recommended to Mr. Ogawa that he exchange these policies for a single premium life insurance policy with a $600 million death benefit.
At this point, Mr. Ogawa started seeking outside counsel and determined that he might not be getting such stellar advice. Now, he's suing the two advisors that sold him the life insurance for a myriad of reasons not the least of which is that they evidently structured the policies so that he received little to no benefit from them during his lifetime and had the policies placed in a trust to which he was not a named beneficiary.
Oops…hard to defend this sort of bad behavior.
Lesson of the day: Don't screw your clients with poorly designed life insurance, they'll figure it out eventually and they won't be happy.