It used to be that you had to see one of two things happen to see a wildly high increase in profits:
Volume of whatever you were doing had to increase substantially (usually in line with whatever the profit increase was).
OR;
Costs had to decrease substantially.
Apparently, the NYSE specialist firms have figured out a way around this hackneyed principle of economics.
As reported in Reuters, costs remained constant, volume increased 20%, but profits tripled.
You read that right.
Now, how can that be? How did they make so GD much money on a comparatively trivial increase in trading volume?
Vague allusions are made to automation - you know, the automation the specialists fought tooth and nail? But how much could automation have decreased costs? 70%? Please. The firms were totally anti-automation. Specialists are basically an anachronism, a throwback to an inefficient pre-automation age where you needed middlemen and auctioneers to match buyers and sellers. They are unnecessary in automated markets - and yet, here's partial automation, and their profits nearly TRIPLE!!!! How's that for a miracle? How did they do it?
Nobody is talking. I wouldn't. That's like discovering that your dog poops gold nuggets. You don't want to broadcast it. Just sell the gold, and feed him well.
Perhaps the NFI shareholder suit, which names Banc of America as one of the alleged perpetrators, will shed some light on the startling performance. That suit accuses the specialist firm of participating in an illegal trading scheme, along with the prime brokers. Basically charges that they were price fixing, and assisting in bear raids - selling into weakness to tunnel the price, day after day - good old fashioned stock manipulation.
I hear that can pay well.
The other suits that target stock manipulation go after the hedge fund industry, which has also experienced unparalleled success and growth in a lackluster market.
So how are all these Wall Street fellows breaking all records for profits, when most of the trading is hedge funds (meaning they are paying more of the fees) and the market is flat?
Great question.
Any theories? I have a few.
Fortunately, the SEC hasn't seen any evidence of wrongdoing, and believes, apparently, that all is well.
And if it isn't, according to Senate Judiciary Committee testimony, they will gladly kill any investigation into your activities - if you have the right bank balance and pedigree.
That's nice to know. If I ever come back as a billionaire crook, I will want the assurance of the best cops my money can buy - who will eagerly investigate anyone I don't like, while running interference for whatever mischief I am up to.
Man, Milken and Boesky could have used that. Maybe if Milken hadn't upset the apple cart, and eaten into so much of Wall Street's investment banking business, he could have still been operating undisturbed today. Who knows.
But you have to hand it to the Specialists. Triple profits on mild growth. That is unprecedented.
Again, you have to wonder how they manage to pull it off.