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Island Investing

Riffs, rants, and the upside of investing from way off Wall Street


This Weeks Sign the Lunatics Are Running the Asylum

Roger McNamee runs the venture capital/private equity firm Elevation Partners. Along with his partner Bono – wraparound glasses, sings a lot – his firm recently made approximately $1.5 billion in the recent Facebook IPO.

You might think he’d be thrilled with making that kind of money. Not so much. His comments about ethics on Wall Street these days strike me as particularly informed and candid. Here’s what he said on Bloomberg TV this afternoon when asked about his thoughts on that botched Facebook IPO:

It exposed in my mind the extreme corruption in the capital formation process and really in Wall Street itself. Nasdaq‘s behavior on this, in my mind, borders on criminal. I think Morgan Stanley‘s behavior borders on criminal. It appears they made a profit […] This was clearly done on purpose. You watch what all these people have been doing in secondary offerings. Do you think it’s a coincidence that every secondary offering trades down five or six days before the offering, then they price it down 15%, and then it pops? It sure looks to me like the underwriters are shorting the stocks. I’m just saying, I look at all this, and as a thirty-year investor, I think people on Wall Street have just totally lost track of honesty… And these poor tech companies, where there is a lot of news, and a lot of uncertainty, they’re doing a Bataan Death March because you can create rumors out of nothing. High-frequency trading is part of the problem. Nasdaq is a member organization. High-frequency trading advantages the Nasdaq traders over all other market participants. It allows them to pick off all price arbitrage before it ever hits the market. That is so fundamentally corrupt. Look at the profits of these firms. Their clients are more like marks now. I’ve been doing this 30 years. People say, Oh, hasn’t it always been like this? No, it was never like this. For all the corruption that took place in the LBO community in the 80s, around Drexel Burnham and all that, you never had people manipulating whole markets. The deregulation has allowed people to overwhelm any individual market for brief periods of time and move it. So most of these things aren’t actually trading, they’re arbitrages set up by overwhelming amounts of capital. Most experienced market observers see this and none of us know what to do about it because the regulators are asleep.

And if you’d like to learn more about high frequency trading, please read Scott Patterson’s Dark Pools. I cannot stop talking about this book.

H/t Tiernan Ray at Barrons.