Bankers as parasites consuming their own hosts, the rest of us, via fraud

Max Keiser, http://rt.com/programs/keiser-report/episode-352-max-keiser/, argues that the banking industry is engaged in massive corporate fraud, just as Rowan Bosworth-Davies, the former Scotland Yard fraud squad officer contended in a later Keiser Report. Analogous to an ecosystem analogy, if the parasite is unregulated in some way, for example has no predators to restrict its activities, the inevitable result is usually that the host is consumed, in this case the system may experience another financial tsunami. Which none of us outside the banking sector need.

One strand of the argument is the mysterious appearance and disappearance of an unknown computer algorithm whose only function seemed to be to slow down the information traffic in the stock exchange so that certain exceptionally placed individuals could profit. In other words, this algorithm rigged the timing of the stock exchange’s information flows, which is an instance of criminal fraud. Keiser mentions the film The Sting in this respect, where the information on certain horse races is manipulated with the objective of defrauding a bad gangster, played by Robert Shaw, who was brilliant in the role – Ya follah?

This, or these, algorithm(s) may have been used to influence other aspects of activity on the trading floors. Watch the video to get an idea of what has been going on. Also mentioned is a comment by a Total whistleblower that oil prices have been and are being manipulated by a certain cartel. This is not new but the effect on gas prices at the pumps has been significant and, due to the severe recession we are experiencing, extremely harmful to the average person, who isn’t benefiting from the rampant banking fraud. Ya follah?

Mention is made of the Black-Scholes-Merton formula, which is used for trading options, whether calls or puts. The primary problem with the formula is that its fundamental assumptions are false. It assumes that the market distribution follows a Normal or Gaussian curve. It doesn’t, as shown clearly by the late Benoit Mandelbrot – cf. The (Mis)Behavior of Markets. He convincingly shows that the markets follow a Cauchy-Mandelbrot distribution, which possesses neither a mean nor a variance, both defining features of a Normal distribution. Since volatility is calculated in terms of the variance of a distribution, the volatility of market distributions is unknown and, therefore, has no known calculable risk. This aspect of the issue is not made clear in the program. A good discussion of this can be found in Taleb’s The Black Swan (2nd ed.).

Of course, if an algorithm utilizing the Black-Scholes-Merton formula is only being used to cause chaos in the market for nefarious purposes, then how realistic it is becomes irrelevant.