Tags: Odeon Capital | Mathew Van Alstyne | Banking | Trading

Odeon Capital's Van Alstyne: High-Tech Modern Trading Isn't Always Such a Good Thing

By    |   Thursday, 13 Jun 2013 04:26 PM

Technology and modernization of trading are leading to a contraction in the banking industry, said Mathew Van Alstyne, co-founder, Odeon Capital Group.

"High frequency trading, dark pools, areas where it's just computers doing all the trading -- it really kind of operates against the little guy who's just trying to do his research, buy and hold for the long term, the Warren Buffett-type approach," Van Alstyne told Newsmax TV in an exclusive interview.

"That takes away from people needing to call up and do the old sales pitch and sell a stock because it's just computers doing it for you now."

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Editor's Note: A full, unedited version of this interview is available exclusively to Financial Braintrust Alliance subscribers. Visit www.fbtalliance.com for more information and to sign up.

The wide-ranging discussion turned to changes Van Alstyne has observed on Wall Street.

"It seems it's shifted a lot more to getting ahead of whatever's going to happen and knowing the trends and trading on trends and trading on news," he said.

"It was a big deal … where Reuters put out news to a few high-frequency traders, 15 microseconds before it went out to the regular market. The market moved a couple points on the news. It wasn't material and it wasn't huge to the overall trends, but they made a ton of money in 15 microseconds because they got the news faster. That was impossible five years, 10 years ago."

CNBC reported that Wall Street banks are paying Thomson Reuters to get data earlier and faster than the rest of the market. The early-released numbers include the results of the University of Michigan Consumer Confidence Index. Thomson Reuters offers reports from the Institute for Supply Management on extremely fast connections known as "ultralow latency releases."

Editor’s Note: Put the World’s Top Financial Minds to Work for You

Thomson Reuters has contracts with the University of Michigan that allow it to release the consumer sentiment data early to elite customers. It's long been known that although the general public doesn't get to see the information until 10 a.m. on release day, the data is distributed five minutes earlier on a conference call for Thomson Reuters' paying clients, who are given certain headline numbers, CNBC reported. Less well-known is the highest-level subscribers get the information two seconds earlier, at 9:54:58 a.m.

He added that, broadly speaking, high frequency traders are taking the rules that are there and applying them.

"It's the same thing that happens every time the market gets ahead of itself, same with during the housing crisis," he said.

"You had mortgage brokers and banks … being told by the government to expand home ownership, being told the balance sheet and the bank stops there at Fannie and Freddie. Sell more houses, give out more mortgages, don't discriminate, give people more opportunity, and you take the rules and you apply them. And then they turn around and blame the bankers for actually applying the rules that were given to them."

Van Alstyne was also asked about big financial stocks.

"It's great when your cost of capital is free and you can lend out at 5, 10 percent yields to businesses and doing bond underwriting, fixed-income underwriting and that type of thing," he said.

"I'm not sure in a rising interest-rate market where your cost of capital is rising because banks lend for the long term, borrow for the short term. They have margin compression that can get crushed in a rising interest- rate environment and the Fed's kind of indicated they want interest rates to rise, so I would take that into consideration."

He recommended an examination of the balance sheet.

"It's a unique sector where you get to write up the value of your debt in an up cycle and write it down in the down cycle, so your profits can kind of skew upward if your debt coming out of a financial crisis becomes more valuable to the marketplace. So that inflates their earnings a little bit, too."

Editor’s Note: Put the World’s Top Financial Minds to Work for You

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Technology and modernization of trading are leading to a contraction in the banking industry, said Mathew Van Alstyne, co-founder, Odeon Capital Group.
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Thursday, 13 Jun 2013 04:26 PM
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