Tuesday, February 14, 2012

Vanity books and market hubris

In thinking about the various books that exchanges have put out or guided over the years, generally it's done to celebrate a landmark anniversary such as a centennial, however two books stand out as done solely for the sake of vanity rather than to celebrate a particular achievement.  Granted I don't know the exact arrangements behind the publishing of such books and am speculating but believe they were guided, if not paid for outright, by the exchanges to be published.  I appreciate the addition to historical records of any kind but the problem of vanity books is that they tell the story as it's wished to be told from the official viewpoint rather than pure journalism which might've given divergent viewpoints. 

This post I'll note suffers from not having the actual books on me as I'm traveling and am posting from memory during some slow trading today.

The first book which comes to mind is LIFFE: A Market and it's Makers: A Market and Its Makers which was published in June 1997 just as the exchange was losing it's battle to keep German Bund liquidity.  However at the time LIFFE was riding high as the second largest derivatives exchange in the world after surpassing the CME to take the #2 spot behind CBOT, even the Economist printed an article in July 1997 entitled "Everlasting LIFFE" that gives good flavor of the sentiment enjoyed at the time.  The chart below from a recent academic paper shows how dangerous it was to be complacent (might have click on it to enlarge it) as it illustrates how the bund liquidity was in the final process from leaving LIFFE for good in mid 1997 and nearly wrecking the exchange as a result.

The other book focuses on CME with the title Past, Present & Futures: Chicago Mercantile Exchange and was published near the depths of the recent financial crisis in October 2008. For a project such as the commissioning of a book, my guess is that the approval for it was made either in late 2007 or early 2008 which coincides with a very hubristic time for the exchange.   CME stock peaked in December 2007 and within a couple weeks of that market peak, the CME's Chairman was featured on the cover of Forbes magazine and my guess is the interview for the cover story was simultaneous w/the market peak.    The slide in CME stock continued consistently throughout 2008 and was only about half way in it's course when Past, Present & Futures was published and since then CME's stock hasn't reached anywhere near that level since. 

A large part of this hubris, I believe, is rooted in the broker mentality (which the executive structure of exchanges are populated by) versus a trader mentality (most traders just trade and aren't involved in the exchanges) as the brokerage industry is driven by presenting a positive outward perception whereas traders are simply focused on self satisfaction.  It's still quite common for a trader to submit to hubris but just not as likely due to the immediate feedback of bad decisions which they have to bear.  That said, everyone can draw insight from the speech in the movie Patton:

"For over a thousand years Roman conquerors returning from the wars enjoyed the honor of triumph, a tumultuous parade. In the procession came trumpeteers, musicians and strange animals from conquered territories, together with carts laden with treasure and captured armaments. The conquerors rode in a triumphal chariot, the dazed prisoners walking in chains before him. Sometimes his children robed in white stood with him in the chariot or rode the trace horses. A slave stood behind the conqueror holding a golden crown and whispering in his ear a warning: that all glory is fleeting." - Gen. George C. Patton
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