First it was the NYSE, or rather the “New Jersey Stock Exchange Located In Mahwah” that threatened to flee New York if a transaction tax seeking to scalp fractions of a penny for every trade is passed. Now it’s the turn of the firm whose entire business model is based on high frequency trading: Virtu.

According to Bloomberg, the company which has made billions in risk-free “market making” by seeing orderflow nanoseconds ahead of everyone else and trading accordingly, er “making markets”, is ready to quit New York lawmakers implement a financial-transaction tax which would enact a surcharge on stock trades to help close a projected four-year revenue loss, estimated at $39 billion. Lawmakers argue that reinstating the tax would raise about $13 billion annually, helping to avert cuts to services such as education and health care during the pandemic.

A similar financial-tax proposal in New Jersey has also been met with strong opposition from the finance industry whose entire business model has been reduced to scalping the same penny fractions that local governments are now seeking to pocket.

“I understand the pressures of these governments around their deficits,” Virtu Chief Executive Officer Doug Cifu said Thursday on the company’s fourth-quarter earnings call.

But “the notion of a transaction tax in New York is — I’ll use the word foolish. Because I know what we would do. I would shut this office.”

And go where? Florida? Good luck “making a market” if you have to suffer a several millisecond delay by having to route orders from Florida to NJ – where all the microwave towers serving US capital markets are located – and back again.

According to Bloomberg, Virtu has about 400 employees at its New York City headquarters, and is already looking for a cheaper office that will shrink its real estate footprint there by 75%. The company is also seeking sunnier climes by opening a satellite hub in Florida, in the wake of numerous hedge funds which have also decided to flee the tri-state area an its income taxes, opting for state tax-free Florida instead. Virtu has already built up its presence in Austin, Texas – a state that’s considering legislation to ban financial-transaction taxes to attract stock exchanges and financial firms, said Cifu, citing discussions with Texas Governor Greg Abbott.

Despite cries of outage from various financial industry participants whose own businesses are extremely reliant on continuing a model where only they get to scalp pennies from every order and any incremental tax would render their business models obsolete, state senator James Sanders and Assembly member Phil Steck said concerns about financial companies leaving New York were unfounded because it would cost billions to move and “makes no economic sense.”

But in a counterbluff, HFT traders argue that there are no barrier to departure: “We would just leave the state of New York and we would never pay a penny of the New York state transaction tax,” Cifu said.

As the bluffing by both sides continues, we eagerly await to see who blinks first.

No matter where you look in the market, there are signs of exuberance. As discussed previously, stock market bubbles are about psychology. Throughout history, bubbles are a function of the extraordinary popular delusions and the madness of crowds. 

Of course, that is also the name of Charles Mackay’s book, an early study in crowd psychology. The text, first published by Mackay in 1841, debunked everything from alchemy to economic bubbles. However, the three chapters on economic bubbles received praise from the likes of Michael Lewis and Andrew Tobias.

Essential is the understanding of the role psychology plays in the formation and expansion of financial manias. From the 1711 “South Sea Bubble” to the 2000 “Dot.com crash,” all bubbles formed from a similar “panic” by investors to chase ongoing speculation.

Importantly, in all cases, the speculators involved all thought “this time was different.”

What is essential to survive a bubble is first to recognize you are in one.

That may be the most challenging part of it all.

“Men, it has been well said, think in herds; they also go mad in herds, while they only recover their senses more slowly, and one by one.” – Mackay.

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**** Check out Lance Roberts presentation at this past weekends 2021 World Outlook Financial Conference Click Here

The Reddit forum that helped kick off the frenzy has given way to anxiety, financial bloodshed and infighting

Investors plowed billions of dollars through Robinhood and other online brokerages into GameStop in recent weeks, but the share price has crumbled as traders abandon ship. The beleaguered video game chain peaked last week around $483 and closed on Tuesday at $90, its biggest one-day decline yet.

And as GameStop’s stock price has crumbled, posters have increasingly admonished traders with tough-love reminders that they are just as likely to go broke as strike it rich.

“This is a community of full blown first class … degenerates which take pleasure in posting losses accumulating into the millions every” month, one expletive-filled post read Tuesday. It received more than 50,000 upvotes.

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The Fed has charged the investment atmosphere. Today’s investors view markets as get rich quick schemes. Stories of investors turning thousands into hundreds of thousands litter social media. The problem is that such behavior is not natural nor sustainable. It relies on ever-growing amounts of monetary and fiscal stimulus, which are not sustainable.

There is another vital aspect. Capitalism provides better living standards for more people when it is most efficiently run. A core component of capitalism is how productively capital is used.  Ask yourself, is capital being deployed most productively?

The casino may stay open for a while longer, so enjoy it while it lasts. Make no mistake, the doors will close, and gamblers will be trapped.

This time is not different!

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This is going to be an interesting Month. We’ve going to get it all: emotion, manipulation, the behaviour of crowds, what people want to believe, what is true, and fundamental facts about markets; primarily that any financial asset is only worth what people believe it to be worth. What the actual/real worth of any stock is, is an empty question – it’s the price the market is willing to pay that counts.

As we start the week, it’s going to be about Silver as the Reddit traders follow the posts imploring them to buy-into the feeding frenzy and ramp up the precious metal on non-sensical promises they are going to bring down the banks by forcing them to cover trading positions. Ask the Bunker-Hunts how well that worked for them back in 1980.

To understand the current Reddit mentality, check the interview in the Journal with one of the Reddit traders behind the Gamestop mania. Keith Gill is a former marketing chap from Mass Mutual. Today is he “DeepF***ingValue” on Reddit, also known as “Roaring Kitty” on You Tube, and he’s got $33 million in his bank account – which is impressive, but demonstrates the power of convincing others to back your belief. He made a paper gain of $20mm on Gamestop while being interviewed by the WSJ!

What’s interesting is it’s not just Reddit. Full Article