A10, Stock Trader Dude

Upheaval in the market place can be an opportune time for organizations to move ahead of competitors if they recognize significant opportunities and have the ability to act based on low fixed costs, cash reserves, and an ability to shift resources from unproductive business units to more promising lines of business. Forget about concepts of being agile, and being able to weather the storm – business is made based on relationships and doing whatever is most likely to lead to a sale. Companies most likely to survive an economic downturn, and perhaps improve their market position have:1.    Low fixed costs
2.    Substantial cash reserves
3.    Diverse cash flow
4.    Ability to decrease size of organization
5.    Tangible resources
6.    Brand, expertise or technology resources/advantages
7.    Customer partially locked by high switching costs
8.    Protected core market
9.    Significant patron (a powerful government sponsor or investor)
10.  Staff reduction in difficult times

Liquidity rebates on U.S. exchanges offer black box traders an incentive to use their computers for millisecond trading, often at a tiny loss, in order to benefit from rebates of 20 cents per 100 shares. That’s the key, the process, not the stock as an investment that makes it a business. Sometimes the best ideas in the investment game aren’t about using stocks as investments but understanding how to use the platform, or rather, to build one. The Island trading platform was developed by a young guy from Brooklyn, NY in the mid-1990s, and that trading engine he created made him rich when Instinet bought it. When someone writes a book on investing they usually miss the concept of wealth being generated in the platform, rather than in an investment. Bats Exchange is another winner, only three years competing in the market and the company handles approximately 12% of U.S. volume, including 12% of the trading in Nasdaq-listed shares. 7% of trades are happening in dark pools. Someone is benefiting… the provider of the platform, right? Stock rebates are like gold shavings. I don’t blame those for setting up systems to capture them.

The public is outraged when organizations like AIG get approved for bailout funds and then take a vacation conference, which costs several hundred thousand dollars. This is exactly what is wrong with bailouts – rewarding poor management. If you give them the money, there must be strings attached, and the saddest part of the bailout was that members of the government presented it to the public with a portion of the billions going toward executive compensation – that should have enraged the public. The executives get to fail and get paid off millions in bonuses! I think a series of maximum prison terms for executives that engaged in fraud or negligence would do more to instill public confidence than helping financial institutions and also key to restoring confidence in the government’s ability to make sound decisions would be devoting the billions of dollars to universal heath care, which would serve the public better than propping up failed organizations. No matter how bad the consequences of a large organization failing may be, nothing is more reassuring to the average Joe than free and affordable health care so that the public doesn’t have to worry about the financial burden of becoming ill or the natural wear of aging. 

In the November 18, 2008 Wall Street Journal, page C2, there is an article titled UBS Joins the Bonus Chop for Executives. Chairmen and twelve member management team give up bonuses, while others will get less: after accepting help from the Swiss government to recover from more than $46 billion in mortgage-related write-downs, UBS said that beginning next year, both cash and stock bonuses will be far more strongly tied to the bank’s performance and will be held in escrow, as opposed to being paid out immediately. (Opinion – if bonuses were held in escrow for the auto company executives for two or more years it would have helped take away their ability to financially benefit while the company headed toward insolvency) “Those who are rewarded will be those deliver good results over several years without assuming unnecessarily high risk,” the bank said. 

In addition to overhauling the pay program, UBS is looking into the legal grounds for clawing back bonuses made in the past years. Pressure is mounting on former executives such as Marcel Ospel, the bank’s longstanding chairman who was forced to step down, to follow Mr. Wuffli’s example to hand back bonuses. CEO Wuffli was asked to resign in 2007 following mortgage losses. The Swiss seem to be ahead of us on using common sense. The public should demand that those monies be treated like Nazi gold and returned to the company for its survival. 

On page C2 of the same issue of the Wall Street Journal, the article For Wall Street, Less is more, discusses that it is a sensible act for top executives at Wall Street firms to follow the lead of Deutsche Bank and UBS and forgo bonuses and states that keeping the ratio of compensation to net revenues under fifty percent is vital, and adopting the UBS example to keep a portion of cash bonuses in escrow – with a provision for some to be deducted if the bank generates losses in the future. Morgan Stanley failed last year. It raised it the overall compensation ratio to fifty-nine percent, after taking a big hot to net revenues from a bad mortgage-related trade. The article continues: Weak revenues will ensure lower bonuses anyway. But the firms should make a point by also paying out a lower-than-usual percentage of that shrunken revenue number in compensation. The executives at the auto companies should prove themselves worthy by sacrificing bonuses from the last several years and salary. I’d want to see them “all in” at the financial poker table playing the best game they can to rebuild their companies, and if that means bankruptcy so be it. Rescuing the auto companies distracts from the real issue, bankruptcy can be utilized, and maybe we don’t need three U.S. automakers, after all the Japanese have dominated electronics for over twenty years and we accepted that because they could make a better product, and if foreign makers can make a better car for less, you can’t stop the market from voting with their dollars. All the government might be doing at the expense of the public is keeping another car manufacturer operating on the market as an option that consumers don’t want, in the U.S. or abroad. 

So while executive compensation is an important issue, it wasn’t clamped down on, but now that the public has come to their senses and sees that there is more downward mobility than upward, and if the public gets squeezed financially shouldn’t they demand that executives sacrifice their grossly inflated compensation for poor performance. In the May 17, 1997 issue of Forbes there is a section on executive compensation – 800 chief executives paychecks: Median take $1.9 million, up 27%. Looking back, they reaped the rewards but their efforts didn’t build stable empires. Compensation flourished due to stock options but if there had been ten-year options so that performance was calculated over a longer term at least there would be some form of justice. At least then they would have been limited to their salaries, and not walked away with multi-million dollar bonuses for short-term beneficial performance, and in hindsight that would have also cut back on the fraud by Enron, Worldcom, Tyco, Global Crossing and others, or at least voided their ability to benefit substantially from their malfeasance and cash out at the top.