Friday, July 31, 2009

Innovation: the strategic differentiator

Business Times - 31 Jul 2009



BENCHMARKING and innovation are 'two sides of a coin', says Ho Kwon Ping, executive chairman of premium resorts operator Banyan Tree Holdings.

Discussing service innovation at the Global Conference for Service Excellence, Mr Ho gave illustrations from his experience running Banyan Tree, as well as his previous experience as a director of Singapore Airlines (SIA).

'Benchmarking is very useful, it gives you a tangible way to compare yourself with competitors. But there is a clear limitation. It tells you where you are and what you can be, but only through innovation, can you get beyond that. Benchmarking alone will not give you that competitive edge,' Mr Ho said.

One simple lesson from his time at SIA, has been that 'service excellence as defined by customers, can be very different from our own perceptions.'

For instance, when SIA benchmarked key touchpoints of the customer service it offers against the industry, they found that what they thought were 'signature touchpoints' were no longer unique to SIA - competitors had quickly caught on to offering Dom Perignon too.

Instead, customers valued little things such as flight attendants putting newspapers away and folding blankets each time a passenger left his seat. 'These were minor things, but reflected a consistent service attitude which was not as easily copied,' Mr Ho said.

After benchmarking, comes innovation, 'the strategic differentiator'. At SIA, a team was formed with individuals representing themselves and reporting directly to the CEO. This team eventually created what Mr Ho called a 'game-changing product' - its new business class seat.

Mr Ho said: 'Structured innovation is very important, you don't just get eureka moments from people. But, you've got to make sure the outcome is protected from all the other varied interests in the company.'

The other keynote speaker, marketing professor Ronald Rust, of the Robert H Smith School of Business, University of Maryland, also identified innovative trends related to service-centred marketing in his talk.

'Information technology definitely drives the service revolution and customer-centricity,' he said. But the next wave is having products themselves adapt and change for customers over time, what he terms 'adaptive personalisation'.

As an example, he elaborated on 'My Mobile Music', a system which generates playlists based on customers' listening behaviour, using an algorithm which learns tastes better over time. A study he did on this system, showed it exceeding benchmarks significantly.

Ultimately, Mr Ho said: 'Service excellence comes from people doing their work consistently with pride in quality, and pride in that bond between themselves and customers. And this, can only come from a society's and a company's values.'

This provided much fodder for the ensuing discussion: Is Singapore a society that promotes that sort of pride in excellent service? How can Singapore move beyond viewing service as mere servility?

Customer service here is highly efficient, Mr Ho said. But, the attitudes behind that service still stem from a culture lacking in respect for those who serve. One of the things he realised from Banyan Tree was that 'it wasn't the silverware, it wasn't the luxury, because from the feedback we got, what people really appreciated was service from people who really like doing what they're doing'.

For now, Singaporean society does not have the same quality of appreciation and respect that the Japanese, for instance, do towards vocational and artisanal work, Mr Ho said.

Asia needn't follow Europe, US: Bocker

Business Times - 31 Jul 2009


(SINGAPORE) Asia may not see the same level of consolidation as European bourses, said Singapore Exchange's (SGX) newly appointed chief executive Magnus Bocker yesterday.

The outgoing president of the world's largest exchange Nasdaq OMX said that, contrary to the West, Asian bourses have various regulatory structures and growth phases.

'The developments we've seen in Europe and to some extent in the US, I don't think we'll see them mimicked in the same way in Asia,' said Mr Bocker, who crafted the acquisition of several exchanges in the Baltic states and engineered the US$3.7 billion merger between OMX and Nasdaq in 2008.

'Just as the (Asian) market is without M&A, it has a lot of growth prospects. From that perspective, M&A isn't the highest priority,' added Mr Bocker, who was speaking to the local press for the first time.

The strategy of attracting foreign listings, including Chinese companies, is unlikely to change, he said.

He added that New York, London and Singapore have succeeded in riding the trend of Chinese companies listing abroad.

'Why shift that (strategy) if that's one of the strengths?' he said. He declined to comment about the S-chips that have reported dodgy accounts.

SGX chairman JY Pillay said at the start of the press conference: 'It may well be that our strategy requires modification but Magnus is not entering a broken organisation that requires a complete overhaul.'

Mr Bocker said that there was a lot of potential in developing high-frequency trading in Singapore.

He declined to comment on the potential conflict of interest in SGX being both a regulator and a listed stock exchange but said that, in general, any division of roles should be thought through carefully.

Mr Bocker - who was selected through a head-hunting firm after a near-six- month search - said he was initially reluctant to join SGX as his family enjoyed being in New York.

'It wasn't love at first sight,' said Mr Bocker, who will be working in Asia for the first time.

But his three sons, who last visited in May, were 'charmed' by Singapore, while he was drawn to the good food here.

'It was my oldest son who was the last trigger,' said Mr Bocker. 'He said: 'You always persuade me to take the challenge. So, of course, you'll take this one.' '

The avid runner has already eased into Singapore. After arriving at around 5am on Wednesday, Mr Bocker went for a jog two hours later around Botanic Gardens before showing up for work at 9am.

'We're going house and school hunting tomorrow,' he said.

Mr Bocker takes over from Hsieh Fu Hua on Dec 1. Mr Hsieh, who led SGX for around six years, declined to reveal any plans after he steps down but said returning to corporate finance firm PrimePartners is a possibility.

A bubble that's a gleam in specuvestors' eyes

Business Times - 31 Jul 2009

Mah Bow Tan's caution aimed at averting pain later, property market watchers say


(SINGAPORE) Better to suck out the froth now than to burst the bubble later - that was what market watchers saw as the government's intention in warning against rash property purchases.

National Development Minister Mah Bow Tan said on Wednesday that there are signs of speculation in the property market, and the government will act if it overheats. He also urged home seekers to buy only within their means.

On the surface, the message may seem puzzling. By most accounts, speculators from the boom years - those who 'flipped' their freshly bought units in the subsale market for a quick profit - have yet to make a huge comeback. Price increases have surfaced only at some projects, while several others still registered price falls.

At CapitaLand's results briefing yesterday, group president and CEO Liew Mun Leong also observed that home demand is 'healthy', supported partly by home seekers whose estates were sold en bloc.

But dig deeper and the cause for concern becomes more apparent. Some industry watchers acknowledge that a group of 'specuvestors' is emerging. These are buyers who are prepared to keep and lease out their properties over the longer term, but are also open to selling them for capital gains if the opportunity comes along.

Although Singapore's economy is shrinking, several factors are working in specuvestors' favour. Notably, interest rates on bank loans are low, and more small apartments going for less than $1 million have become available. Many of them are also lucky enough to still have jobs, and some could have made a killing from the recent stockmarket rally.

These investors, together with genuine homebuyers, have raised market activity to a level that authorities feel is out-of-sync with weak economic fundamentals. The fear? That some would not be able to repay their loans if they lost their jobs, or if banks raised mortgage rates in the future.

'I have seen sufficient cases in my Meet-the-People sessions, where people have over-committed and now find themselves in difficulty,' Mr Mah recounted on Wednesday.

CIMB economist Song Seng Wun said in a note on Wednesday that Singapore's Q2 09 jobless rate is expected to cross 5 per cent. The unemployment rate for Singaporeans and permanent residents rose to 4.8 per cent in Q1.

Falling rentals would also test buyers' ability to support home loans, said Chesterton Suntec International's research and consultancy director Colin Tan.

So to several industry watchers, the government is sounding a note of caution, just in case. As a developer told BT: 'What if the green shoots turn brown?' The formation of a bubble - particularly on shaky ground - would require overt intervention and the consequences are unlikely to be pretty.

Take a look back at 1996, when the government introduced a surprise anti-speculation package to curb sharp spikes in private home prices. Tighter credit, a tax on gains and higher stamp duty caused sentiment to sink and transaction volumes to plunge. This is history that most would not want to see repeat itself.

The key is whether the government's words will help calm the buying frenzy at this stage. Here, views are mixed.

Some people may cool off, said Wheelock Properties (Singapore) CEO David Lawrence. 'I think (Mr Mah is) more focusing on the greedy people who overgeared, took on too many liabilities, and he's just saying 'be careful' . . . I think that's a reasonable message to the market.'

But some also think the buying will continue as long as money from savings, banks or stockmarket winnings is around. A developer also suggested that a few people might bring forward their purchases in anticipation of anti-speculation measures coming on. 'Singaporeans are a bit 'gan cheong' (panicky),' he joked.

At Optima, where people started queuing days before the showflat was due to open, developer TID has conducted a ballot for the 120 units planned for release. All units have been tentatively accounted for with prices starting from $790 per square foot. TID is a tie-up between Hong Leong Group and Mitsui Fudosan. A Hong Leong spokesman said that the balloting process helps to sieve out genuine buyers and the crowds have thinned. BT understands that there were already plans to conduct a ballot when a queue first formed, before Mr Mah spoke to the press on Wednesday.

Market sources also say that around 80 units have been sold at Centro Residences, out of around 110 released.

Helping pros hit goals

Business Times - 31 Jul 2009

Life coaching industry is growing as an increasing number of professionals look to executive coaches for guidance amid job losses due to recession, reports MELISSA LWEE

TORN between an outstanding job offer that wasn't quite his thing and the possibility of a dream job on the horizon, investment banker David Lloyd's first instinct was to ask what his closest friends thought.

But little did he expect that the answers - from 10 friends who were professionals in their own right - would be split right down the middle.

'Half of them told me it would be crazy not to take the job given the economic climate,' he recalls. 'And the other half told me they simply could not see me taking up and enjoying the job that was on offer.'

Caught between a rock and a hard place, Mr Lloyd decided to seek professional help in the form of a life coach, or executive coach as they are sometimes known.

'What I needed was someone to sit down with me, go through my own analysis of the situation and help me make a decision,' says Mr Lloyd, who hired Katherine Warner from Triple E! Coaching to help him with his problem.

'What she did in my two-hour session was to help me clarify my thinking. Good coaches don't give you the answer. But by asking the right questions, they help coax you into making your own decision.

'After speaking to Katherine, I realised that although I had no job offer from my dream job yet, my instincts were telling me that my chances of getting it in the near future were high, and so I held out. True enough, I just started work last week at my dream job,' he declares.

Having had a positive taste of the benefits that a coach can bring to his life, Mr Lloyd is now looking to re-hire Ms Warner to prepare him for the possibility of becoming the head of the firm. He believes that she can help him improve the skills that are necessary to give him the best possible chance of winning that top position.

Mr Lloyd belongs to a growing number of professionals who are looking to life coaches for guidance, especially in the advent of the global credit crunch.


'There's definitely been a lot more interest in the industry since the economic crisis,' observes Ms Warner.

'We're looking at an increase in the number of clients who have been made redundant and don't know how to proceed; or working professionals who are starting to question whether they are in the right job or career path, particularly if they are fearful of their own waning job prospects or job security.'

Agrees life coach Wendy Chua, founder of Wand Inspiration. 'What the economic crisis did for some of them is to trigger questions such as 'Is making money the only thing in life? Am I happy in my job, life, relationship? How can I create more balance?' Some of them may feel so stressed that they look for coaching to manage their expectations and find solutions.'

Motivational speaker and corporate trainer Zaibun Siraj similarly remarks that there has been a resurgence in interest with regard to the self-help industry. But he points out that this interest is not just from individuals, but also from corporations looking to improve the quality of their staff.

'Many companies now face the problem of having staff who are stressed out and unhappy thanks to these tough times. They are now seeking help from professionals like us because they understand that unhappy workers make unproductive staff,' he says.

On the flip side, life coaching is also being applied for those who are already motivated - in being groomed for higher posts. Kenny Toh, founder of The Coaching Academy, notes that there's a marked interest now in corporations which are looking at life or executive coaches to help them groom their high flyers.

But what exactly do life coaches do and how do they help you?

Industry players explain that life coaching is a methodology that directs or trains a person with the aim of achieving a particular goal or acquiring a particular skill. It's usually applied in the career or professional sense.

'We help our clients gain clarity - to understand and acknowledge the problems that they have,' explains Ms Warner. 'Our job is to show them that it is their responsibility to take the appropriate steps towards making positive changes in their lives. We guide them from there but we never tell them what to do.'

Ms Chua adds that she seeks to understand the client's goals, obstacles and strengths, support them to take actions that would effectively overcome their challenges and reach their goals.

Jean-Robert Strele, a former head of a US start-up company in Singapore, hired Ms Chua late last year when he was feeling frustrated with his previous job.

'In my last job, I was facing communication problems with the head office in America. They wanted me to move back there but I wasn't keen. However, I did not want to face up to it. I simply thought I'll cross that bridge when I come to it,' he recalls.

'What Wendy helped me to do was to properly analyse and understand the situation so much so that I was prepared for their request before it actually came my way and I knew how to deal with it. Imagine being able to see the light prior to it being switched on. A large part of Wendy's coaching helped me to do that.'

One industry source, who declined to be named, pointed out however that it's good to look for an organisation that puts you in touch with several coaches rather than just one. She chose a specific leadership development course back in 2000 because it made several coaches available to her in the course of her programme, each specialist in his own field.

'So that was excellent because it's not like one coach can help you with everything,' she notes, who says she had access to specialists who coached on work relationships and even on health issues. 'Life is all-encompassing, it's not just about your career,' she adds.

The more cynical among us would view life coaching as a load of hullabaloo, but could it be the next incarnation of the motivational training or personal development industry?

According to a spokesman from the International Coach Federation (ICF) - the leading global coaching certification body - coaching in general is certainly more recognised today as compared to a decade or even five years ago. In Singapore, there are 120 IFC members to date, up from 66 three years ago.

Greater acceptance

One possible reason for the rise in numbers is greater acceptance for the industry, as Ms Chua points out.

'Before, very few had heard of life coaching or even coaching. Hurdles include stigma that clients may face from others, thinking their lives must be so messed up they need a life coach,' she says.

'Nevertheless, the self-aware clients just ignore this and know they are seeking coaching to make their good lives great.

'Also, organisations are now asking me to train their managers and leaders in coaching skills so that they in turn can coach their teams to better work and life performance. This shows that coaching is now embraced by forward-thinking businesses who see that employees with more positive attitudes towards life will bring more benefit to the workplace,' adds Ms Chua whose clients include organisations such as RBS Coutts and Merrill Lynch Global Services.

Coach Dave Rogers and author of the book Awesome Coaching reveals that he can make anything from 70 to 120 per cent of what he previously made as a bond trader in Hong Kong. He has had clients all over the world including the 2007 Miss Thailand Jenjira Kertprasop and big corporations such as Citibank and Deutsche Bank.

He goes on to add that 90 per cent of the money in the industry is made by the top 10 per cent of the coaches.

'One of the biggest jokes in the industry is that a lot of coaches try to be coaches without having hired their own coach or coaches before. They think that just because they've got a coaching qualification that will make them a good coach but that is not the case,' he says.

'The reason why I can coach people better than others is because I keep on learning. I recently came back from 10 days of learning from 10 great coaches in Alaska.'

Ultimately, it could be passion that sustains the normal life coach. The Coaching Academy's Mr Toh reveals that most life coaches are in it more for the job satisfaction rather than the money.

'Unless your clients are really extremely rich people who think nothing of paying you 10 per cent of the millions of dollars that you have helped them earn, chances are, even with five or 10 clients at one time, life coaching alone cannot be sustained as a full career, not to mention the fact that when you first come out as a life coach, if you're not an entrepreneur by nature, that's it,' he warns.

'The reality is that most life coaches are in the business because they like working with people and the fulfilment that they get from making a positive impact on someone's life.

'In fact, it makes more economic sense teaching people how to coach rather than to coach someone, which is why the best way, I think, is to have a good balance of both cultivating coaches and coaching individuals.'

Inspiring others

The inspiration to inspire is certainly what's driven Guillaume Levy-Lambert to go into coaching. After 13 years as a banker and 10 years heading advertising giant Publicis in the Asia-Pacific, Mr Levy-Lambert, who was recently made a French Knight in the National Order of Merit, decided he wanted to use his own life experiences to inspire others who are stuck at the crossroads of their lives.

He thus started Tyna at the beginning of this year, which he describes as a talent management company.

'When I made those decisions to jump from banking to advertising and then from advertising to what I do now, I did not find them difficult decisions to make,' he says. 'But I do know that these are decisions that a lot of people find difficult to make and I want to share my experiences with them to help inspire them to be able to do the same thing.'

From coaches to the coached, the times are certainly trying enough for those who need help to ask for it, and those who can help to offer it.

Why China is still a buy

Business Times - 31 Jul 2009


THE Chinese equity and property markets have recently been on a roll. The Shanghai A-share market has gone up almost 100 per cent since the beginning of the year, and gained an impressive 17 per cent in the last two weeks.

Housing prices in some cities such as Shanghai, Beijing and Guangzhou have also soared. There is a buying frenzy. It was reported, for instance, that more than 1,000 people queued overnight to compete for about 300 units of a development in Nanjing, pushing the selling price up almost 90 per cent in a single day.

There are a few explanations for China's asset boom. One is simply liquidity. China's economy seems to be bouncing back since the government announced its 4 trillion yuan (S$846 billion) stimulus plan last year - the biggest in the world.

Broad money, M2 and bank lending in China have been increasing at a pace of about 30 per cent year-on- year, which is more than double the pace of the US. The liquidity provided by the banks was not supposed to go into the stock or property markets, but some of it has done so.

There is thus some concern that the asset market rally is not well supported by fundamentals.

The question, however, is whether China's equity and property markets are still a buy. There are at least three reasons to take a positive view.

Firstly, the Chinese government is unlikely to slow down the quantitative easing before the end of the year. The 4 trillion yuan stimulus plan was initiated only in Q1; it will take at least 4-6 quarters to fully take effect. In fact, the Chinese government has expressed concern in public that the current rebound might only be temporary and there are still considerable risks that the economy could turn down again.

The government has repeatedly confirmed its main target of sustaining a growth rate of 8 per cent in 2009. With such a challenging objective, it is unlikely that the government will let up in its stimulus anytime soon.

Secondly, the asset markets, especially the property market in China, are supported by the actions of local governments. GDP growth plays a critical role in assessing the performance of local governments and therefore there is a vested interest among the provincial and city-level officials to ensure a well supported property market.

In fact, in some of the cities, the real estate sector accounts for more than 35 per cent of the local economy

Thirdly, there is a possibility that the US economy might recover later this year. Timing the US recovery is a tough call, on which economists differ. If the US economy does improve, however, there is a good chance that China's export machine will revive, which will further support its asset market.

Currently, this is not on the cards. But next year could see the revival of China's exports and further increases in asset prices.

Of course, all the above factors do not rule out the fundamental weakness of the Chinese economy in the long run. Any asset bubble fuelled by a liquidity boom, after all, will burst at some point. However, for the next six months at least, China will continue to offer interesting investment opportunities.

The writer is a commentator on China. He runs the website

Thursday, July 30, 2009

Toxic Equity Trading Order Flow on Wall Street - The Real Force Behind the Explosion in Volume and Volatility

By Sal L. Arnuk and Joseph Saluzzi
A Themis Trading LLC White Paper


Retail and institutional investors have been stunned at recent stock market volatility. The general thinking is that everything is related to the global financial crisis, starting, for the most part, in August 2007, when the Volatility Index, or VIX, started to climb. We believe, however, that there are more fundamental reasons behind the explosion in trading volume and the speed at which stock prices and indexes are changing. It has to do with the way electronic trading, the new for-profit exchanges and ECNs, the NYSE Hybrid and the SEC’s Regulation NMS have all come together in unexpected ways, starting, coincidently, in late summer of 2007.

This has resulted in the proliferation of a new generation of very profitable, high-speed, computerized trading firms and methods that are causing retail and institutional investors to chase artificial prices. These high frequency traders make tiny amounts of money per share, on a huge volume of small trades, taking advantage of the fact that all listed stocks are now available for electronic trading, thanks to Reg NMS and the NYSE Hybrid. Now that it has become so profitable, according to Traders Magazine, more such firms are starting up, funded by hedge funds and private equity (only $10 million to $100 million is needed), and the exchanges and ECNs are courting their business.

This paper will explain how these traders – namely liquidity rebate traders, predatory algorithmic traders, automated market makers, and program traders – are exploiting the new market dynamics and negatively affecting real investors. We conclude with suggestions on what can be done to mitigate or reduce these effects.

To illustrate most situations, we will use a hypothetical institutional order to buy 10,000 shares of a stock at $20.00 that has been input into algorithmic trading systems, which most buy side traders use. Algorithmic or “algo” trading systems chop up big orders into hundreds of smaller ones that are fed into the market as the orders are filled or in line with the volume of the stock in question. Typically, such orders are easy to spot as they commonly show that the trader has 100 or 500 shares to sell or buy.


To attract volume, all market centers (the exchanges and the ECNs) now offer rebates of about ¼ penny a share to broker dealers who post orders. It can be a buy or sell order, as long as it is offering to do something on the exchange or ECN in question. If the order is filled, the market center pays the broker dealer a rebate and charges a larger amount to the broker dealer who took liquidity away from the market. This has led to trading strategies solely designed to obtain the liquidity rebate.

In this case, our institutional investor is willing to buy shares in a price range of $20.00 to $20.05. The algo gets hit, and buys 100 shares at $20.00. Next, it shows it wants to buy 500 shares. It gets hit on that, and buys 500 more shares. Based on that information, a rebate trading computer program can spot the institution as having an algo order. Then, the rebate trading computer goes ahead of the algo by a penny, placing a bid to buy 100 shares at $20.01. Whoever had been selling to the institutional investor at $20.00 is likely to sell to the rebate trading computer at $20.01. That happens, and the rebate trading computer is now long 100 shares at $20.01 and has collected a rebate of ¼ penny a share. Then, the computer immediately turns around and offers to sell its 100 shares at $20.01. Chances are that the institutional algo will take them.

The rebate trading computer makes no money on the shares, but collects another ¼ penny for making the second offer. Net, net, the rebate trading computer makes a ½ penny per share, and has caused the institutional investor to pay a penny higher per share.


More than half of all institutional algo orders are “pegged” to the National Best Bid or Offer (NBBO). The problem is, if one trader jumps ahead of another in price, it can cause a second trader to go along side of the first one. Very quickly, every algo trading order in a given stock is following each other up or down (or down and up), creating huge, whip like price movements on relatively little volume.

This has led to the development of predatory algo trading strategies. These strategies are designed to cause institutional algo orders to buy or sell shares at prices higher or lower than where the stock had been trading, creating a situation where the predatory algo can lock in a profit from the artificial increase or decrease in the price.

To illustrate, let’s use an institutional algo order pegged to the NBBO with discretion to pay up to $20.01. First, the predatory algo uses methods similar to the liquidity rebate trader to spot this as an institutional algo order. Next, with a bid of $20.01, the predatory algo goes on the attack. The institutional algo immediately goes to $20.01. Then, the predatory algo goes $20.02, and the institutional algo follows. In similar fashion, the predatory algo runs up the institutional algo to its $20.10 limit. At that point, the predatory algo sells the stock short at $20.10 to the institutional algo, knowing it is highly likely that the price of the stock will fall. When it does, the predatory algo covers.

This is how a stock can move 10 or 15 cents on a handful of 100 or 500 share trades.


Automated market maker (AMM) firms run trading programs that ostensibly provide liquidity to the NYSE, NASDAQ and ECNs. AMMs are supposed to function like computerized specialists or market makers, stepping in to provide inside buy and sells, to make it easier for retail and institutional investors to trade.

AMMs, however, often work counter to real investors. AMMs have the ability to “ping” stocks to identify reserve book orders. In pinging, an AMM issues an order ultra fast, and if nothing happens, it cancels it. But if it is successful, the AMM learns a tremendous amount of hidden information that it can use to its advantage.

To show how this works, this time our institutional trader has input discretion into the algo to buy shares up to $20.03, but nobody in the outside world knows that. First, the AMM spots the institution as an algo order. Next, the AMM starts to ping the algo. The AMM offers 100 shares at $20.05. Nothing happens, and it immediately cancels. It offers $20.04. Nothing happens, and it immediately cancels.

Then it offers $20.03 – and the institutional algo buys. Now, the AMM knows it has found a reserve book buyer willing to pay up to $20.03. The AMM quickly goes back to a penny above the institution’s original $20.00 bid, buys more shares at $20.01 before the institutional algo can, and then sell those shares to the institution at $20.03.


Program traders buy or sell small quantities of a large number of stocks at the same time, to trigger NBBO or discretionary algo orders, so as to quickly juice a market already moving up or down into a major drop or spike up.

Because so many algo orders are pegged and are being pushed around by other high frequency traders, program traders are like a fuse. When they light it, that’s when things get really going. This is especially so in volatile markets when things are very shaky and people are very nervous like they are now. Keep in mind that many algo orders must achieve a percentage of volume that matches the market in the stock. So if the program traders can increase the volume on an individual stock just enough, they will trigger even more algo buying or selling.

Program traders profit by having an option on the market. Their objective is to push that option into the money by a greater amount than what they used to get the market moving.


Most high frequency trading strategies are effective because they can take advantage of three major inducements offered by the market centers and not typically accessible to retail or institutional investors.

1. Rebate traders trade for free. Because they are considered to be adding liquidity, exchanges and ECNs cover their commission costs and exchange fees. This makes it worthwhile for rebate traders to buy and sell shares at the same price, in order to generate their ¼ penny per share liquidity rebate on each trade. Exchanges and ECNs view the order maker as a loss leader in order to attract the order taker. In addition, the more volume at different prices, even if that means moving back and forth a penny, the more money the market center makes from tape revenue. Tape revenue is generated by exchanges and ECNs from the sale of data to third party vendors, such as Bloomberg for professional investors, and Yahoo for retail investors.

2. Automated market makers co-locate their servers in the NASDAQ or the NYSE building, right next to the exchanges’ servers. AMMs already have faster servers than most institutional and retail investors. But because they are co-located, their servers can react even faster. That’s how AMMs are can issue IOC orders – immediate or cancel – sometimes known as “cancel and replace.” They issue the order immediately, and if nothing is there, it is canceled. And that’s how AMMs get the trades faster than any other investor, even though AMMs are offering the same price. AMMs pay large fees to the exchanges to co-locate, but it obviously has a decent return on investment. According to Traders Magazine, the number of firms that co-locate at NASDAQ has doubled over the last year.

3. People often wonder whether it is fair or legal for program traders to move the market the way they do. Everybody forgets, however, that in October 2007, just a little more than a year ago, the NYSE very publicly removed curbs that shut down program trading if the market moved more than 2% in any direction. The NYSE said it was making the change because “it does not appear that the approach to market volatility envisioned by the use of these ‘collars’ is as meaningful today as when the Rule was formalized in the late 1980s.” On a more commercial level, the NYSE had been at a competitive disadvantage because other market centers that didn’t have curbs were getting the program trading business.

What Is The Effect of All This Toxic Trading?

1. Volume has exploded, particularly in NYSE stocks. But you can’t look at NYSE volume on the NYSE. The NYSE only executes 25% of the volume in NYSE stocks. You’ve got to look at NYSE listed shares across all market centers, such as ECNs, like the NYSE’s own ARCA, or dark pools, like LiquidNet. Traders Magazine estimates high frequency traders may account for more than half the volume on all U.S. market centers.

2. The number of quote changes has exploded. The reason is high frequency traders searching for hidden liquidity. Some estimates are that these traders enter anywhere from several hundred to one million orders for every 100 trades they actually execute. This has significantly raised the bar for all firms on Wall Street to invest in the computers, storage and routing to handle all the message traffic.

3. NYSE specialists no longer provide price stability. With the advent NYSE Hybrid, specialist market share has dropped from 80% to 25%. With specialists out of the way, the floodgates have been opened to high frequency traders who find it easier to make money with more liquid listed shares.

4. Volatility has skyrocketed. The markets’ average daily price swing year to date is about 4% versus 1% last year. According to recent findings by Goldman Sachs, spreads on S&P 500 stocks have doubled in October 2008 as compared to earlier in the year. Spreads in Russell 2000 stocks have tripled and quoted depth has been cut in half.

5. High frequency trading strategies have become a stealth tax on retail and institutional investors. While stock prices will probably go where they would have gone anyway, toxic trading takes money from real investors and gives it to the high frequency trader who has the best computer. The exchanges, ECNs and high frequency traders are slowly bleeding investors, causing their transaction costs to rise, and the investors don’t even know it.


Forget about short sale restrictions. From a regulatory point of view, we believe two simple, but powerful rules would help to eliminate much of the problem.

1. Make orders valid for at least one second. That will eliminate the pinging. High frequency traders will expose themselves. One second would destroy their ability to immediately cancel it if nothing is there.

2. Reinstate the 2% curb on program trading. When the market is down 3% or 4%, that’s when the program traders can really juice it. The SEC, however, has to institute the curb across the board so no market center has an advantage over another.

With these two rules, at least half the volume of the exchanges and ECNs might go away. The market centers, however, will surely fight it because they don’t want to lose the trading volume and the resultant tape revenue.

Until then, what can investors do?

While there’s little action that retail investors can take, we urge institutional investors to not “walk away from the machine” after they have entered an algo order.

Algo and other electronic trading systems have lulled many institutional traders into a false sense of security. These traders like the electronics because they can enter orders directly and they don’t have to bother with sell-side brokers. The trades are cheaper, at 1-2 cents per share versus 4-5 cents. And the performance seems adequate, in that the trades get done in line with standard metrics, such as the VWAP (the volume weighted average price). These traders, however, may not realize that the VWAP itself might have been 1 to 3 cents per share higher or lower because of toxic order flow. So in the end, institutions might be really paying 5 cents per share or more for their trades.

We also recommend that institutions use algo systems only for the most liquid of stocks. Anything less must be worked, the same as in the “old days.” Institutions need to re-learn how to “watch the tape” and take advantage of, or work around, high frequency traders.

Achieving best execution has never been more challenging.

Sal L. Arnuk and Joseph Saluzzi are co-heads of equity trading and co-founders, along with Paul S. Zajac, of Themis Trading LLC (, an institutional agency broker. For more information, call 973-665-9600

Buy Asian stocks on dips: Merrill, Barclays

Business Times - 30 Jul 2009

Equities ex-Japan are up 49% from March, markets look fairly valued


INVESTMENT strategists from two banks are calling on investors to buy Asian equities on dips as valuations are no longer cheap.

Stephen Corry of Merrill Lynch Global Wealth Management, who has been talking to clients in the region on his second-half outlook, says that the group's preference is for Asian equities and emerging markets.

'We'd rather participate on a pull-back,' he says. 'For Asia ex-Japan, our strategist believes Asia is pricing in a very sharp cyclical recovery - an ISM (Institute of Supply Management) close to 60. It's currently at 45. So there's not much room for error. We'd rather buy at lower levels, although we continue to believe there will be capital flows.'

The ISM index is an indicator of the health of the US manufacturing sector and economy.

Barclays Wealth Asia strategist Manpreet Gill says: 'We continue to believe that Asia remains the most dynamic region. Right now, (markets) are riding on the momentum of earnings upgrades. When that fizzles out, where do we go? There are compelling reasons to use market weakness to add to exposure.'

Asia ex-Japan equities have risen about 49 per cent since March and 17 per cent year-to-date, and markets look fairly valued. 'It is timely for investors who have no significant exposure to Asian markets to add some,' Mr Gill says. 'Those who entered these markets early should consider taking profits and trimming positions back to a modest overweight allocation. Above all, investors should start being more selective with respect to countries, industries and companies.'

Barclays sees the most scope for further outperformance in China, India, Singapore, Hong Kong and Thailand.

Mr Gill does not expect inflation to pose a significant threat, but inflation expectations may be an issue. Barclays Wealth has an overweight on inflation-linked bonds and is scaling back allocations to global treasuries.

Merrill's Mr Corry suggests that any equity market correction may well be 'short and small in magnitude'. This is because, based on Merrill's monthly survey of asset allocators in July, allocations to equity are at a 'very small overweight' compared with a large overweight in 2007. This was whittled down to a 'huge' underweight at the beginning of 2008.

The survey found that asset allocators' cash levels rose in July from 4.2 per cent to 4.7 per cent. Globally, high net worth individuals are holding an average of 21 per cent in cash in portfolios, which is significantly higher than three years ago, he says.

'Cash generates minimal returns. Our chief strategist in New York estimates that if you put money in three-month Treasury bills, it will take you 360 years to double your money. Retail clients should reduce cash levels and put them in equities. Equities love an economic recovery.'

The recovery, Mr Gill says, is likely to be slow and fragile. But companies may well show stronger margins and earnings in the second half, as data indicates that new orders are exceeding inventory.

Mr Corry expects a range-bound market and tells clients to go for a 'best of breed' approach, as stock picking is expected to rise to the fore. 'There are attractive opportunities,' he says. 'Last year was a year for macro strategies. This year is for micro strategies. The good news last year was that it didn't matter if you bought good or bad stocks as there was no differentiation.

'This year, the good news is now that we've seen normalisation and lower VIX, we're starting to see inter-sector correlations decline and differentiation in stock performance. If you buy good stocks with good fundamentals, you should do pretty well.'

VIX measures market expectations of volatility based on the S&P 500.

China receives assurance US will cut record budget deficit

Business Times - 30 Jul 2009

Beijing concerned over value of its Treasury securities

(WASHINGTON) China sought and received assurances from the Obama administration that the US would reduce its budget deficit once an economic recovery was under way, a senior Chinese official said on Tuesday at the end of two days of high-level talks between the countries.

'Attention should be given to the fiscal deficit,' said Finance Minister Xie Xuren. He said Treasury Secretary Timothy Geithner had assured the Chinese that once the economy rebounded, the deficit would gradually come down from its current record levels.

Mr Geithner confirmed that, saying, 'As we put in place conditions for a durable recovery led by private demand, we will bring our fiscal position down to a more sustainable level over time.'

For China, the rising US deficit is a concern because it could weaken the dollar and put at risk China's vast holdings of Treasury securities and other dollar-based assets. China holds an estimated US$1.5 trillion in such securities, making it the US' largest foreign creditor.

The unusual exchange between US and Chinese officials, in consecutive news conferences at the conclusion of the so-called Strategic and Economic Dialogue, underscored a subtle shift in power between China and the United States, one in which the Chinese are showing a new assertiveness as they seek to protect their huge investment.

The two-day talks, co-chaired by Treasury Secretary Timothy Geithner and Secretary of State Hillary Rodham Clinton, produced little in the way of substantive agreements.

Instead, officials from both countries outlined common concerns that they said they would continue to address: the trade imbalance, financial regulatory reform, protectionism and climate change. They also said they would work to reform the governance of the International Monetary Fund and the World Bank to better reflect China's status as the world's third largest economy.

President Barack Obama's decision to combine the longstanding economic dialogue between the countries with a strategic one meant that while finance officials tried to get their economic policies in line, diplomats were doing the same, especially on the North Korean nuclear programme.

China's Vice-Foreign Minister, Wang Guangya, was unusually strong in condemning North Korea for conducting a nuclear test in May, and said Beijing would 'seriously and faithfully implement' a series of sanctions enacted by the UN Security Council.

His bluntness was striking; even two years ago, China was circumspect about publicly criticizing North Korea.

But Mr Wang was not specific about what steps China had taken to crack down on financial transactions, or to inspect North Korean cargo transshipped through China's ports, and he talked about coming up with a new series of incentives for the North to return to negotiations.

In closing statements, Mr Geithner called cooperation between the United States and China 'vital not only to the well-being of our two nations but also the health of the global economy.' Mr Geithner assembled a team of senior US economic officials for the meetings, including Federal Reserve chairman Ben Bernanke and White House economic adviser Lawrence Summers, in part to reassure the Chinese about the safety of their US investments.

Separately, officials from China and the United States signed a memorandum of understanding reaffirming their commitment to cooperation on climate change without agreeing to specific emissions targets.

The agreement was yet another step in slow-moving negotiations seen as vital to the effort to produce a global pact on greenhouse gases. -- NYT, LAT-WP

IBM to pay US$1.2b for biz intelligence software firm

Business Times - 30 Jul 2009

(NEW YORK) IBM took a big step to expand its fast-growing stable of data-analysis offerings by agreeing on Tuesday to pay US$1.2 billion to buy SPSS Inc, a Chicago-based maker of software used in statistical analysis and predictive modelling.

Major technology companies have made a flurry of such purchases in recent years, grabbing suppliers of software that helps businesses and governments organise and analyse data to make better decisions. The industry segment is broadly known as business intelligence software.

In the last couple of years, IBM, Oracle, SAP and Microsoft have collectively spent more than US$15 billion buying makers of such software.

In the recession, corporate spending on technology in general is being trimmed. But business intelligence software, analysts say, stands out as an exception because it is seen as a tool to help identify cost-cutting opportunities and emerging market trends.

The IBM bid for SPSS, analysts say, could well touch off a second wave of acquisitions in the business intelligence sector. SPSS, they say, specialises in predictive analytics, a tool that typically works with a business-intelligence software engine. In late 2007, IBM bought Cognos, which became its business-intelligence software foundation, for US$4.9 billion.

Predictive analytics technology plumbs information in corporate and government databases, and increasingly data on the Web or data streams from sensors on things as diverse as food shipments to cell phones.

The software can help look for developing trends in markets or patterns of behaviour\. \-- NYT

KL's 4-D thrust rooted in sound economics

Business Times - 30 Jul 2009

LAST week, Malaysian number forecast operator Multi-Purpose Holdings told the stock exchange that its subsidiary Magnum Corporation had received government approval for a new four-digit (4-D) game that would incorporate a jackpot element. This follows Kuala Lumpur's decision last October to award all three Malaysian 4D gaming companies - Berjaya Sports Toto, Magnum and Tanjong plc - 10 more special draws a year. Each draw typically adds about RM20 million (S$8.2 million) to total sales.

Such decisions demonstrate Prime Minister Najib Razak's unusual pragmatism. He doubles as finance minister and thus oversees the gaming sector and such decisions leave Mr Najib vulnerable to attack from the opposition Islamic party which could easily accuse the government of being unIslamic. Even so, the decision to allow more draws is rooted in sound economics. For one thing, it will further reduce the share of the illegal gambling market. No one really knows how large the market is. Even the gaming companies think it could be anywhere from one to 15 times the legal market which, in 2008, was valued at around RM8 billion. That is why Kuala Lumpur has always resisted raising gaming taxes. It would only result in illegal gambling stealing market share from their registered, and taxpaying, rivals. So allowing a jackpot element in forecast draws frustrates the underground industry, for their operators cannot match those kinds of payouts. It is in the government's interest to reduce illegal gambling for the simple reason that it will derive more revenue as a result. Last year, gaming companies, excluding casino operator Genting, paid the government over RM1.5 billion in taxes.

Allowing more draws will also eat away at the underground's share while directly boosting federal government revenue. Last year's 10 new draws were estimated to have added RM130 million to the Treasury; a trickle, to be sure, but useful nevertheless. Revenue is what lies at the heart of the matter. Kuala Lumpur remains mired in an economic downturn that could potentially cost it thousands of jobs. To mitigate the effects, it's embarked on a RM67 billion fiscal stimulus package that's yet to produce tangible results. On the other side of the balance sheet is a yawning budget deficit that could rise to close to 8-10 per cent of gross domestic product. The country is being squeezed between falling exports and sharply declining investment. To tackle the latter, Mr Najib has announced a series of liberalisation measures in the services sector and banking.

More recently, he relaxed affirmative action policy guidelines in the equities and property markets. It is too early to say if the measures will work but sticking to the old ways just to remain politically popular will not make Malaysia's economy grow and that can be politically self-defeating in the long run. Sometimes, it pays to be practical, like allowing more lottery draws to boost the country's revenues.

What good are central bankers when assets inflate?

Business Times - 30 Jul 2009


PITY poor central bankers as they agonise over when to withdraw the monetary stimulus they have injected to keep their recession-scuppered economies afloat. Or should we despise them for the generally abysmal job that they do in steering these economies between the Scylla of inflation and the Charybdis of deflation? I personally take the latter view. To me, the typical central banker is like a firefighter who congratulates himself on damping down a little, local blaze while a massive forest fire roars at his back and is ignored until it threatens to consume everything in its path. At that point, our panicked firefighter pumps in 'liquidity', which is like fuel that can spark a further conflagration at some point.

The localised fire is inflation in what we know as the 'general price level' - prices of goods and services. Central bankers have always trained their blinkered vision on these. The forest fire is inflation in the price of stocks, property and other such things, which central bankers long ignored or claimed was none of their business. Yet in creating a huge 'wealth effect', asset inflation drives consumption, output and investment to heights that threaten the fabric of society with overheating and hyper-inflation.

Only at that point do central bankers intervene with crude monetary tools to stop the blaze, unless (as with the sub-prime mortgage crisis) a financial collapse saves them the trouble.

Monetary policy, like economics, is a 'dismal science' which has not caught up with the modern world. I was reminded of this grim fact while attending a conference in Tokyo this week where experts debated the role that monetary policy played in getting us into our current mess and what, if anything, it can do to get us out of it again.

No one wants to defend investment bankers or the grasping and amoral way in which they enriched themselves from the securitisation boom; they are truly a 'sub-prime' breed. But it must be acknowledged that investment bankers could not have made so much hay if central bankers had not kept the sunlight of easy money shining for so long.

Alan Greenspan's name is invoked nowadays not as the Great Helmsman of the US Federal Reserve but as the man who claimed that a central banker's job is to clean up after asset conflagrations rather than trying to prevent them. He pumped liquidity after the collapse of America's IT bubble but was not there to clean up after this fuelled the sub-prime crisis.

I wrote about this subject a decade ago here in this column when I recalled asking Stanley Fischer, former deputy head of the IMF and subsequently a central banker himself, to recommend some literature on asset inflation. To my surprise, he replied there was virtually none then. I was even more astonished this week to learn this is still a virtually unexplored area.

The IMF has produced one or two papers on the subject and the Bank for International Settlements is beavering away on research now. But generally central bankers seem still to be in the dark about how to prevent runaway inflation in asset prices - let alone how to exit from the consequences of dousing it with huge liquidity injections.

The best that people like Hans Genberg of the Hong Kong Monetary Authority could do at the Tokyo conference (organised by the Asian Development Bank Institute) was to talk of the need for central bankers to 'lean against the wind' by restricting credit once they sniff the smell of asset price inflation. That's a bit like spitting into the wind created by a forest fire.

These issues are far from being merely of academic importance. Leading central banks have flooded their economies with financial liquidity (admittedly much of it under political pressure from panicked governments once the Great Recession set in) to an extent where it threatens to produce a Great Inflation once economic recovery sets in.

Nowhere is this fear more pronounced than in China where bank lending has run riot, with official approval, while stock and property prices are soaring - apparently out of control. Yiping Huang, a professor at Beijing University, appealed to the Tokyo conference for advice on how to deal with this. He received little of use.

In an age when super-computers can plot a voyage to Mars or prove the existence of sub-atomic particles, it seems odd that central banks cannot say when asset inflation threatens and produce sophisticated strategies to deal with it. It is even more odd that financial regulators cannot keep up with developments in financial technology that can threaten systemic collapse. Perhaps we do not pay them enough or provide them with the tools to be more effective. Or maybe it is just that central bankers are arrogant in assuming that their wisdom should not be challenged by ordinary mortals.

Fiscal policy can sometimes be as misguided as monetary policy but at least it is in the hands of elected representatives. Central bankers should be called to account.

Building Temasek as a sustainable institution

Its goal is to build a robust framework to maintain discipline and deliver long term value

The following is a speech given by Ho Ching, executive director and CEO of Temasek Holdings, at an Institute of Policy Studies Corporate Associates Lunch yesterday.

TEMASEK celebrated its 35th anniversary on 25th June this year. We celebrated with an orange T-shirt staff dinner at the Orchid Country Club.

Five years ago, when Temasek turned 30 years old, I was privileged to share some thoughts at an IPS lunch. Today, I am privileged to have the opportunity again to provide some perspectives on our journey to build a sustainable institution as we move forward.

Institutionalising discipline

Temasek is a long-term investor. As I had outlined five years ago, this means we will act to enhance long-term value, and will not divest for divestment's sake.

We don't intend to raid the larder, nor sell the family jewels, for short-term gains. We will jealously guard our interests, and will invest; rationalise, consolidate or divest where it makes sense, and where we can achieve clear sustainable value.

Our goal was to build a robust framework to maintain discipline and deliver value over the long term as a sustainable institution.

As one of our founding leaders, Mr S Rajaratnam said in 1966: 'We must learn to do things today with tomorrow very clearly in our minds.'

It has been an intense journey. There was no path, we walked to make the path for ourselves.

We unfolded and refined our investment strategy in public view, even while we were simultaneously transforming our portfolio and upgrading our core engine of people, systems and processes.

In October of 2004, we published our first Temasek Review. As an exempt private company, we were not required to do so.

Our core purpose was not transparency per se, but to instil the discipline, the professionalism and the open willingness to be tested and measured.

Such an annual review would serve more than one purpose. It provides a public marker of our performance, whether good or bad. Today, the market is generally aware that we have had an annual return of about 18 per cent a year since inception. Our year-to-year volatilities are visible.

In our Temasek Review last year, we reported an annual Value-at-Risk of almost $40 billion last March.

This meant a 16 per cent probability for our portfolio value (on a marked-to-market basis) to drop more than $40 billion by March this year. Indeed, it had turned out to be so, and more.

Our Temasek Review was also meant to introduce us to our friends and potential partners; as well as to our portfolio companies, and other interested parties or stakeholders in the market.

Our first Temasek Review marked the beginning of a new phase in Temasek's journey to engage and be engaged with the wider community.

Shortly after, we obtained our credit ratings with two leading international credit rating agencies. These have been based on full confidential disclosure.

We have continued to be credit rated ever since. This establishes a public marker of our financial position and credit risks. Our strategic actions and commercial choices would be bounded by this clear bright tripwire or public OB marker.

Any move to shift our credit risk stance would require deep and deliberate debate within our Board and senior management.

Our credit ratings were followed by an international 10-year US$ bond in September 2005.

The bond spreads are a real-time live indicator of our credit risks, much like the role of a singing canary in a coal mine. This was also a deliberate move to create a new group of sophisticated stakeholders for ourselves.

As I have just highlighted, we have today established three sets of public markers; our annual Temasek Review, our credit ratings, and our bond spreads.

They are like the 18th hole in a long game of golf, our credit ratings the tripwires or OB markers, and our bond spreads the singing canary - they signpost the no-go zones and outline the broad perimeter of our playing field.

These are but one strategic facet of our commitment to build not just for this generation, but to lay the foundations for a robust and disciplined institution for the future.

In the same vein, we have applied the highest practical standards of governance upon ourselves, no different from our expectations of our portfolio companies.

One example, as we had explained in 2004, was the process of CEO evaluation and succession planning.

We believe it is crucial for any board to continually review its CEO succession options. To this end, we have put in place an annual CEO succession review with our Board. This provides the Board with a full view of its options for all contingencies. The first such review for our Board was in early 2005, after we had done our preliminary work in 2004.

Thereafter, our Board has been engaged annually to review potential successors for various time frames; from an immediate interim need, to longer horizons where we deliberately add promising individuals in their 30s for us to track or bring on board over time. We include our internal management as well as external candidates on our list, Singaporeans as well as non-Singaporeans, promising leaders from Temasek-linked companies (TLCs) and non-TLCs.

(TLC: Traditionally used as a term to describe the Singapore companies in the Temasek portfolio in which Temasek has a substantial shareholding.)

It is through this process that we identified Chip Goodyear as an excellent potential successor.

The strength of the Temasek team and the confidence of the Board played a part in our decision to invite Chip to be the next CEO for Temasek.

It is unfortunate that both the Board and Chip recently came to the amicable and mutual conclusion that it was best not to proceed with the CEO transition. This does not mean, however, that we should stop this discipline of succession review. We will continue to do so, regardless of who takes the helm as CEO at Temasek. This is part and parcel of our institutional discipline and board governance to build for the long term.

Apart from CEO succession, we have also worked to improve our other systems and processes.

To enable us to operate efficiently, effectively and responsively to the market, we are mindful of the continual need to keep our systems and processes updated and well-honed. This we have been doing, and will continue to do.

However, one over-riding priority is to expose, train, build up and empower all our staff, young and not so young, experienced and new alike. This interest in giving our people the maximum opportunity to learn and grow, to stretch and test them, professionally and individually, is underpinned by our firm belief that our people, equipped with the right values, are the core foundation for Temasek over the long term. Where it made sense, we were sometimes prepared to sacrifice opportunities when we were not ready to take certain risks. But when it comes to developing our team, we are almost always prepared to sacrifice some efficiency or effectiveness to maximise training and learning opportunities for our staff, both individually and as a team. We are prepared to take the short-term inefficiency pains for long-term people gains.

Growing with Asia

I have just outlined how we have built a framework for good governance and discipline, and shared our trade-offs against the goal of developing people. Meanwhile, we also saw an evolving investment strategy.

To understand our opportunities, we stood back and asked ourselves what the key ingredients of our success have been since the founding of Temasek. We had two important success factors: first, the people with the passion, commitment and capability to think long term and deliver; and second, the success of Singapore itself. With Singapore's success, companies like Singapore Airlines, SingTel and PSA (PSA International is a global port operator) have both benefited from as well as contributed to Singapore's success as a business hub and an economy.

It is not a surprise that many of our portfolio companies have outgrown Singapore. Singapore Airlines could not have succeeded by flying between Seletar and Changi. Beyond Singapore, we were confident that the transformation of Asia was going to be an exciting story which also adds to Singapore's own growth potential. The Asia story would also significantly multiply the opportunities that we and our TLCs have had in growing with Singapore. Asia, including Singapore, was where we wanted to be.

Thus, we decided to shift our portfolio stance from about 85 per cent exposure to Singapore and the OECD economies. We articulated our Asia interest in the shape of a re-balanced portfolio transformation, with one third underlying exposure (this includes the underlying exposure of our immediate holdings by assets. For example, a company like SingTel or SingPower would not just be a Singapore exposure but would also have significant exposure to Australia) to Singapore, one third to the OECD economies, and a new one third share for the rest of Asia. This is a doubling of our previous exposure to Asia in our portfolio.

This projected portfolio shift was not a target cast in stone, but a broad sketch of our risk appetite. We felt comfortable to dial up our risk exposure by moving into the then emerging Asia, because we already had a stable and low risk portfolio, particularly in our Singapore blue chips. At the same time, we were also signalling our confidence in the long-term prospects of Asia. We saw four main engines of growth for ourselves in Asia - from India and South Asia, to Asean, from Singapore, to China and North Asia.

As a result of Asia's strength over the last few years, we ended up with a 40 per cent exposure to the rest of Asia, while our OECD exposure, largely in Australia, shrank to about 20 per cent over the last two years. We mulled over this resultant balance.

We remained very comfortable with Asia. We understand that growth will not be a straight line trajectory. We can expect bumps along the way, but the longer term potential remains strong. By longer term, we mean 20, 30 years. As Asia continues on its development curve, it will also de-risk. We had also planned to add new exposures such as Latin America, Africa, Middle East and Russia. This saw us opening new offices in Mexico City and Sao Paulo, Brazil, last year, after more than a year of analyses and study.

After two years of introspection, our conclusion was to maintain our 40:30:20:10 portfolio mix. My friends joked that this sounds like a football formation. I explained that it signals our continued focus on Singapore at 30 per cent with the rest of Asia at 40 per cent, giving us an overall exposure to Asia, including Singapore, of 70 per cent or more. OECD exposure would be around 20 per cent, plus up to 10 per cent exposure to new geographies such as Latin America, Africa and others.

Building an owner mindset

Even as we maintain focus on Asia and add new geographic exposures, we remain obsessed about building our institution for the long term. A critical element is an owner mindset in our culture. How do we nurture a 'think-owner, act-owner' DNA in Temasek?

Apart from culture and values, we embarked on developing a compensation framework geared towards a strong alignment with long-term shareholder value. Compensation philosophy and frameworks are complex subjects which can be emotional. There are no perfect solutions. The trade-off is how to weigh short-term competitive pressures from the market versus the long-term goal we have set for Temasek. Ideally, all our employees would 'think owner, act owner', and work as one team. To support this ideal, we lean heavily towards having a well-balanced compensation structure which would reinforce a one-team culture, and an incentive philosophy which puts the institution before self, emphasises long-term over short-term, and aligns employee interests with that of the shareholder.

Our compensation framework has two dimensions. One dimension is time. This covers short, medium and long-term pay-out horizons. The other dimension is the different levels of difficulty to earn out the incentives. One key principle is for our employees to share in the institution's performance, both for positive and negative results. We share gains and pains alongside our shareholder. This is in essence having an owner's approach to our business and operations.

For senior management, the bulk of their incentives are deferred between three and 12 years. Some of these deferred components are subject to market risks, and rise and fall with Temasek's total shareholder returns. The remaining components are subject to a 'no-floor claw-back' - these deferred components could potentially be totally wiped out if and when we deliver well below our cost of capital target. This 'clawback' feature is tied to the principle of rewarding only for sustainable performance.

This return above the risk-adjusted cost of capital is what we call Wealth Added, which we report in our Temasek Review.

Returns above the cost of capital target means we have gains to share with our staff. Returns below our risk adjusted cost of capital hurdle means we have negative bonuses to be distributed. It is a tough challenge to share negative bonuses when we fail to deliver at least a return to match our cost of capital. It is even tougher to deliver a positive Wealth Added every year.

While we are certainly not happy with the negative Wealth Added in March last year, as well as March this year, this has enabled us to test our compensation framework through at least one very difficult market cycle. As an example, most of us understand the idea of sharing profits or gains, but how do we share a negative bonus in an equitable and fair way among our staff? Even though we had delivered almost 7 per cent of positive total shareholder return as at March 31 last year, this meant a negative Wealth Added. A share of this negative Wealth Added meant a negative bonus pool. This in turn was allocated among our staff. And so, from CEO to office attendants, all our staff were allocated negative bonuses last year, and will be allocated more negative bonuses this year once we have approved our audited financials.

Our experience over the down-cycle also enabled us to rethink and refine some of our incentive elements. These refinements strengthen the core concept of ensuring that there is, on balance, a strong element of alignment with sustainable long-term shareholder value. In effect, our incentive system is designed to support that owner mindset among our staff.

Expanding stakeholder base

Last but not least, I would like to touch on one more element of institution building - to build a broad stakeholder base for the institution.

While the Minister for Finance (Incorporated) is our formal shareholder, we recognise that the ultimate shareholders of Temasek are the past, present and future generations of Singapore. As Temasek continues to engage and invest in Asia, we also recognise the wider community in Asia as part of our stakeholder base. Temasek succeeds because of friends and supporters all over the world. It is in our long-term interest to contribute steadily to a prospering Asia, a vibrant Singapore and a peaceful world.

It is in this context that we had set up Temasek Foundation and Temasek Cares to add substance to our engagement with the wider community. The business of community engagement is very different from managing money and making investments. Our expertise is not in community engagement per se, though we have a strong culture of staff volunteerism. (From 20-plus years old to 50-plus years old, our staff climbed Kilimanjaro to raise funds for Make-a-Wish foundation for terminally ill children, and swam to raise funds for the Muscular Dystrophy Association in recent months.)

We have been very privileged to have the support of independent, capable and experienced community and business leaders from Singapore and from all over Asia to help evaluate and drive these engagements within Singapore and across Asia.

We set up Temasek Trust two years ago. Governed by a highly distinguished Board of Trustees, the Trust looks after the donated funds. For every year of positive Wealth Added since 2003, we had committed to set aside a portion for the community. Funding for Temasek Trust comes from these provisions for the community.

In turn, the Trustees will determine how and when they will distribute funds to the various approved non-profit units to fulfil their various mandates to serve the community. The Temasek Trust and our various non-profit philanthropic organisations re-affirm our commitment as a corporate citizen to support the continued progress and success of Asia and her people.

More than that, we have created one more group of stakeholders who would be tracking the performance of Temasek closely, benefiting both from Temasek's success and contributing to the larger community by sharing that success.

Over the longer term, we are exploring the feasibility of creating one more group of stakeholders. We can do this by inviting the public to co-invest with Temasek. We hope to start this by first piloting the relevant structures and rules of engagement with Temasek and other sophisticated co-investors.

It is important to test this over at least one market cycle during the next five to eight years. If this pilot is successful, we may then consider a co-investment platform for retail investors in perhaps eight to ten years' time.

This will add to our stakeholder base - from shareholder and bondholders, to the boards and employees of Temasek and our portfolio companies, from Temasek Trust and the non-profit units to our co-investors. A broad base of stakeholders will be part of our ecology for discipline and performance in the decades ahead.

Redefining our Charter

This year is the 35th anniversary for Temasek. In 2002, we launched our inaugural Temasek Charter. It is a living document that outlines our relationships with our shareholder, portfolio companies, the community and other stakeholders. Our 2002 Charter helped to provide some compass points as we embarked on our journey into Asia.

As we evolved, we had also been reviewing our Charter in close consultation with our shareholder over the last four years. This year, in conjunction with our 35th anniversary celebrations, we will be releasing our updated Charter. This Charter will remain a living document. It frames our engagement with our stakeholders, and guides us in our continued journey with Asia and beyond.

To conclude: as we gear up for the next phase of our development, we will continue to focus on our core purpose of delivering sustainable long-term value. We continue to anticipate opportunities, not just within Asia, but also in Latin America and elsewhere too.

As an investor with the flexibility of a long or short horizon, Temasek is focused on the end goal of creating and maximising long-term shareholder value as an active investor and shareholder of successful enterprises.

The Temasek journey will not always be smooth. As we sail in choppy waters, we may need to take shelter if we see dark clouds coming. We may need to wait for the storm to pass before we continue our journey. Because of the changing winds and shifting currents, we may have to adjust our sails and tack off-course for a while.

Meanwhile, we need to keep our ship in good order and sea worthy at all times. From time to time, we may even have to jettison some load, repair some damage or cut some riggings to keep our ship and crew safe. But we aim to bring everyone home safe, and will maintain discipline for a safe journey.

As an institution, we build not just for ourselves, but for our shared future with the wider community and also for our next generation, in Singapore, in Asia and around the world. This will guide us and the institution that we in Temasek are working to build in the years ahead.

Wednesday, July 29, 2009

Should high-speed trading be regulated?

Business Times - 29 Jul 2009

Hock Lock Siew


WHEN a US federal prosecutor was framing charges against an ex-Goldman Sachs employee for stealing some of the broker's secret computer codes earlier this month, the prosecutor said that in the wrong hands these codes could 'manipulate markets in unfair ways'.

Coming from someone with regulatory powers, this can't be good for public relations because if you think about it, the corollary is that in the right hands, the codes can lead to manipulation in fair ways.

No doubt the statement was inadvertent, a simple Freudian slip. But it has nonetheless raised the profile of high-speed computer trading in markets everywhere - and with it, issues regarding fairness as far as small traders are concerned.

The most important question as far as the public is concerned is this: should high-speed/frequency computer trading be regulated?

The answer depends on who you ask. Brokers and institutions who use these tools and spend millions developing faster and more sophisticated computers would of course say no, and for all we know, the same might apply to profit-driven exchanges because enhanced liquidity and volatility mean increased profits. What's more, the numbers can be huge - recent US reports say that high-frequency computer trading has been instrumental in pushing average daily volume on the New York Stock Exchange 164 per cent up since 2005.

But in the US at least, there is a growing lobby against lightning-fast trading on the grounds that it is unfair and possibly to the detriment of investors as a whole. And if the lobby grows, then regulation might well be forthcoming.

For example, US Senator Charles Schumer, chairman of the Senate rules and administration committee, this week asked the Securities and Exchange Commission to prohibit a technique known as 'flash orders' that gives big players an unfair advantage over small investors because it allows some of these big players the chance to peek at large orders a few milliseconds before the rest of the market, thus enabling front-running.

In this sub-category then, high-speed trading is nothing more than high-speed front-running (note that we're speaking of milliseconds here).

There are, however, several other sub-categories which US institutional agency broker Themis Trading described recently as 'toxic' for markets in a recent white paper (Toxic Equity Trading Order Flow on Wall Street - the real force behind the explosion in volume and volatility).

In it, the authors describe various high-speed computerised approaches to making money that are clearly not available to small investors.

For example, Automated Market Makers (AMMs) ostensibly run trading programs that provide liquidity to exchanges by supplying constant 'buy' and 'sell' quotes. But AMMs also have the ability to 'ping' stocks to identify reserve book orders. In pinging, the AMM issues an order ultra fast and, if nothing happens, cancels it. But if the order is filled, it learns valuable hidden information that it can exploit, such as the maximum amount that another algorithm is prepared to pay for an order. Once this can be determined via high-speed trial and error entry and withdrawal of orders, the AMM can then profit by buying lower and selling to the buyer at the buyer's maximum price.

In addition, there's program trading, liquidity rebate trading (a strategy to capitalise on rebates offered by exchanges in return for providing liquidity) and predatory algorithmic trading, which are other high-speed techniques that basically place retail players at a disadvantage and, as the writers conclude, impose a 'stealth tax on retail and institutional investors' because 'toxic trading of this sort takes money away from real investors and gives it to the high-frequency trader who has the best computer'.

Themis concludes that 'exchanges, ECNs (electronic communications networks) and high frequency traders are slowly bleeding investors, causing their transaction costs to rise - and investors don't even know it'.

How to curb the spread of such techniques and perhaps help level the playing field? One suggested means is to make all orders valid for at least one second, which would eliminate pinging and force high-frequency traders to expose themselves. Another is to impose a 2 per cent limit on program trading. With these two curbs in place, it is estimated that half the volume on exchanges will disappear.

You'd have to wonder though - will for-profit exchanges really take the steps needed to level the playing field if it could lead to reduced volume and, by extension, profits?

Teach them money management skills when they're young

Business Times - 29 Jul 2009


THIS is the summer of reviling the rich. The financiers at Goldman Sachs got a populist drubbing after the bank reported record quarterly earnings and analysts began predicting average bonuses of US$700,000 an employee at the firm this year. Now, Congress is debating whether high earners should be hit with a surtax to pay for health care reform. In states like New York and California, that could mean that top earners are paying more than 50 per cent of their income in taxes.

But the rich and the not-so-rich do have something in common this summer: worrying about their children's financial future. This may come as a shock to those middle-class Americans who imagine wealthy parents sunning themselves by their infinity pools, confident that their children, having been given every opportunity, are on their way to productive lives.

In truth, the image is fairly rare at this point. What is more common among the wealthy is their fear that the lives their children have known, and the futures they expected, may be gone.

'The notion that you're entitled to goodies has to be dispelled,' said Fredda Herz Brown, a partner at Relative Solutions, a consultant who works with family businesses. 'They really do think life is going to continue as it has. But most of them are not getting jobs, no matter what their parents do.' While the wealthy are in a better position to help their children financially, having money doesn't guarantee that their child will be responsible and productive.

So that leads to the question: How can parents help children with a healthy sense of entitlement adjust to the new economic reality?

Emotional reassurance: The first thought that pops into many parents' heads when they worry about their children is bailing them out. But the best thing many parents can do, particularly those with children who are not asking for money, is to set the right example.

While children may be idle this summer, many parents are out of work, too, and casting about for ways to pay the bills. If they mope around, their children are going to pick that up. If, on the other hand, they discussed what has happened over the last year, their children will be better equipped to make their own financial decisions.

'The patriarch can say, 'This is the risk I took, this is how I felt, these are the lessons here',' said Evan Roth, founding partner of BBR Partners, an adviser to ultra-high net worth clients. 'It's, 'Look at how I'm handling this - I'm teaching you a valuable a lesson here'.' That lesson is often the need to work hard if you want to earn money. Ms Herz Brown tells the story of a financial services client who got used to flying on private planes. When his role at work was reduced, he started spending less time on jets and more time at home with his teenagers.

'He had a sense that too much came to them,' she said. 'It came from a basic belief that what he had created for his kids was this sense that everything comes to you.' So he made them look for summer jobs. And when they couldn't find any, he made them take odd jobs to earn money. He also gave them a budget for school clothes and other incidentals and made it clear that if they budgeted poorly, they were not getting more money.

The point was that he recognised he was enabling his children's sense of entitlement, she said. While his children will probably never want for money, he realised his actions had been just as indulgent as a parent who gives in to his child's every request for fast food.

Financial planning: There are, of course, many reasons to give money to your children. A popular one during the bull market was estate planning - the more you could pass on while you were alive, the less subject to estate tax later.

One of the most popular structures during the bull market was a grantor retained annuity trust. This arcane-sounding trust was predicated on assets going up. The idea was that parents could put an asset they thought would appreciate into the trust for a set period of time, usually two to 10 years. At the end of that period, their child would get the appreciated value tax-free, less a small interest payment paid to their parents.

Now that most asset values have gone down, these trusts look as if they have failed. But there is a chance to salvage them. The grantor can swap out the original asset for one of equal value without penalty and start another trust with the original asset, if he believes it unfairly lost value.

Rich Kohan, partner at PricewaterhouseCoopers Private Company Services practice, said people who set up the trusts should take advantage of the opportunity. 'If the asset has dropped in value, it's likely not to leave anything for the benefit of children,' he said.

Then there are trusts set up for reasons other than tax savings. Joan Crain, senior director of wealth management strategies at Bank of New York Mellon, said she had seen an increase in older clients setting up trusts for their adult children.

'Their children are in their late 30s to 50s, and they're not good stewards with money,' she said. 'Parents want to protect them from creditors but also ex-spouses, even if the children are happily married or not married.' Money put in trust is doled out to the beneficiaries and kept away from creditors, but it is not shielded from estate taxes. That people are employing this strategy, though, should be a stark lesson to parents: Teach money management skills to your children when they are young.

Practical support: In tough times, parents may need to set aside their estate plan and bail out their child. One way parents or grandparents can help without seeming intrusive is to cover all medical and education costs for their children and grandchildren. If they pay the hospital or school directly, they can transfer the money without incurring gift tax.

Separately, if a husband and wife pool their annual gift exclusions, they can give up to US$52,000 a year to a child and his spouse to help make up for a lost job.

'Parents worry it's humiliating,' Ms Roth said. 'But paying their mortgage is not a direct handout. It's the same thing, but if you don't see it, it doesn't affect them as much.' On the positive side, this may be the right time to finance a child's entrepreneurial idea.

'The consensus is the fortunes of tomorrow are going to be made today in this downturn,' said Mary Duke, head of private wealth solutions for the Americas at HSBC Private Bank.

The key is not to give your child a handout. Ms Duke suggests setting up a board of advisers to look over the plan and provide assistance with framing and carrying out the idea. This takes the child's request out of the realm of asking Mom and Dad for money and into the arena of an actual business plan.

'It's important kids understand budgeting,' she said. 'Everyone is more focused on living within their reduced means.' If a parent can instill that discipline in a child, then the rest may just fall into place\. \-- NYT

Don't hate us for being so smart

Business Times - 29 Jul 2009

Hey, some people have it; some people don't. Is it Goldman Sachs' fault that the rest of America doesn't?


FROM the moment I left Yale and started working for Goldman Sachs, I've felt uneasy interacting with those who don't.

It's not that I think less of Goldman outsiders than I did while I remained among you. It's just that I feel your envy, and know that nothing I can do or say will ever persuade you that I am no more than human.

Thus, like many of my colleagues, I have adopted a strategy of never leaving Goldman Sachs, apart from a few brief, spasmodic attempts to make what you outsiders call 'love' or 'the beast with two backs'. Goldman recognises how important it is for its people to replicate themselves. We bill no performance fees for the service.

Today, the sheer volume of irresponsible media commentary has forced us to reconsider our public relations strategy. With every uptick in our share price, it's grown clearer that we who are inside Goldman Sachs must open a dialogue with you who are not. Not for our benefit, but for yours.

America stands at a crossroads, and Goldman Sachs now owns both of them. In choosing which road to take, ordinary Americans must not be distracted by unproductive resentment towards the toll-takers. To that end, we at Goldman Sachs would like to dispel several false and insidious rumours.

Rumour No 1: 'Goldman Sachs controls the US government.' Every time we hear the phrase 'the United States of Goldman Sachs', we shake our heads in wonder. Every ninth-grader knows that the US government consists of three branches. Goldman owns just one of these outright; the second, we simply rent; and the third, we have no interest in at all. (Note there isn't a single former Goldman employee on the Supreme Court.)

What small interest we maintain in the US government is, we feel, in the public interest. Our current financial crisis has its roots in a single easily identifiable source: the envy others felt toward Goldman Sachs.

The bozos at Merrill Lynch, the dimwits at Citigroup, the nimrods at Lehman Brothers, the louts at Bear Stearns, even that momentarily useful lunatic Joe Cassano at AIG - all of these people took risks that no non-Goldman person should ever take, in a pathetic attempt to replicate Goldman's financial returns.

For too long, we have allowed others to emulate us. Now we are working productively with Treasury Secretary Tim Geithner and Congress to ensure that we alone are allowed to take the sort of risks that might destroy the financial system.

Rumour No 2: 'When the US government bailed out AIG, and paid off its gambling debts, it saved not AIG but Goldman Sachs.' The charge isn't merely insulting but ignorant. Less responsible journalists continue to bring up the US$12.9 billion we received from AIG, as if that was some kind of big deal to us. But as our CFO David Viniar explained back in March, we were hedged. Our profits from AIG 'rounded to zero'. People who don't work at Goldman Sachs, of course, find this implausible: How could US$12.9 billion round to zero? Easy, but you just need to understand the mathematics.

Let's assume AIG transferred US$12,880,560,250.34 of taxpayer money to Goldman Sachs. A Goldman outsider, asked to round this number, might call it US$12,880,560,250.00. That's not how we look at it; at Goldman we always round to the nearest US$50 billion, so anything less than US$50 billion rounds to zero.

Think of it that way and you can see that US$12,880,560,250.34 isn't even close to not rounding to zero.

Rumour No 3: 'As the US government will eat the losses if Goldman Sachs goes bust, Goldman Sachs shouldn't be allowed to keep making these massive financial bets.

At the very least, the US$11.4 billion Goldman Sachs already has set aside for employees in 2009 - US$386,429 a head, just for the first six months - is unfair, as the US taxpayer has borne so much of the risk of the wagers that generated the profits.

Really, we don't know where to begin with this one. It is wrong-headed in so many different ways!

Let's begin with the idea that the taxpayer is running a bigger risk than we are. The billions he stands to lose are trivial; after all, they round to zero.

The real risk, when you think about it even for a minute, is the risk we take ourselves: that Goldman will cease to exist and we will cease to be Goldman employees. To flirt with such tragedy we obviously need to be paid.

Cue balls

Rumour No 4: 'Goldman employees all look alike.' Several recent newspaper photos have revealed that a surprising number of Goldman Sachs workers are white, male and bald. That non-Goldman people glance at such photos and think 'Holy crap! They even look alike!' just shows how deeply anti-Goldman bigotry runs in American life.

We at Goldman represent unique clusters of DNA; if we bear some faint surface resemblance to one another, and to creatures from the 24th century, it is only because our superior powers of reasoning lead us to hold in our minds exactly the same thoughts, at exactly the same time.

A shared disinterest in growing hair, for instance, isn't a coincidence of nature but an expression of healthy like-mindedness.

'The world is a pool table,' our naked-headed CEO likes to tell us. 'And all the people in it are either stripes or solids. You alone are the cue balls.'

Rumour No 5: Goldman Sachs is 'a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money'.

Those words are, of course, taken from a recent issue of Rolling Stone magazine and they are transparently false.

For starters, the vampire squid doesn't feed on human flesh. Ergo, no vampire squid would ever wrap itself around the face of humanity, except by accident. And nothing that happens at Goldman Sachs - nothing that Goldman Sachs thinks, nothing that Goldman Sachs feels, nothing that Goldman Sachs does - ever happens by accident. -- Bloomberg

The author is a columnist for Bloomberg News and the author of 'Liar's Poker', 'Moneyball' and 'The Blind Side', soon to be a major motion picture. The opinions expressed are his own.

Blame credit woes on Wall Street, not Main Street banks

Business Times - 29 Jul 2009


OVER the past three decades, there has been a sea change in the way that credit is extended in America, creating the problems - and the need for reforms - that we face today.

At the heart of the financial crisis lie the complex, opaque derivative securities created not by traditional Main Street banks but by Wall Street, and with the passive complicity of regulators.

Wall Street created, originated and sold an alphabet soup of derivative securities, and it was such synthetic instruments - not traditional mortgage loans, small-business loans or other standard lending originated by banks - that unleashed a flood of credit, created a vast excess of housing, weakened the capital structure of the banking industry and undermined popular confidence in banks.

In previous generations, home buyers obtained mortgages and other loans from local, or Main Street, banks, which typically held those loans until they were fully repaid - and therefore had an interest in making loans that borrowers could afford.

But then Wall Street started slicing, dicing and packaging mortgages into bundles that served as the basis for bonds sold in the securities markets. Traditional bank deposits were no longer the primary funding source for credit. Instead, loans were being financed by the capital markets and packaged and sold by Wall Street. Mortgages were originated by one firm, packaged by another, sold by a third and serviced by yet another - but none of them worried about whether the mortgages would be repaid, because they didn't hold the loans on their books.

Securitised debt grew nearly 50-fold from 1980 to 2000 - compared with a mere 3.7-fold increase for bank loans. In 1998, traditional bank lending was surpassed by securitised debt for the first time. By the end of 2007, Wall Street accounted for two-thirds of all private US debt. This growing market for synthetic mortgage-backed securities inundated the country with credit that, combined with historically low interest rates and exotic new mortgage products, fuelled the housing bubble and turned our financial markets into a virtual casino. In the collapse that followed, billions of dollars' worth of mortgage-backed securities were written off.

But the public continues to think of banks as the primary source of credit - and to blame banks for the credit crunch.

Public officials contribute to the confusion by criticising banks - while allowing Wall Street to operate this 'shadow banking industry', which exists outside the standards for safety and soundness that apply to banks and without obligation to make clear the extent of such firms' debt, leverage, capital or reserves.

Many Wall Street firms played significant and contributory roles in the evolution of this crisis. Wall Street's most prominent investment bank, Goldman Sachs, historically the industry leader, was at the forefront of the creation, origination and sales of derivative securities - and also spent US$40.6 million on lobbying and campaign contributions from 1998 to 2008.

In 2008 alone, Goldman spent US$8.97 million in this way - almost 11 per cent more than the Financial Services Roundtable, a trade organisation that represents 150 top financial institutions.

The conversion of this investment bank into a giant hedge fund went unchecked by legislators and regulators, despite constituting a radical change to our financial system. And it has received billions upon billions in taxpayer bailout funding to keep it alive.

By contrast, consider how regulators treat Main Street banks compared with the way they deal with this highly connected investment bank: When M&T Bank applied for regulatory approval to acquire a modest-size bank in Utica, New York, it took 10 weeks and a promise to divest three branches before permission was granted. When this Wall Street investment house decided to seek a commercial bank charter in the midst of the financial storm, permission was granted in less than a week.

By obtaining this charter, Goldman Sachs received access to the Federal Reserve Discount Window and the Federal Deposit Insurance Corp, which has long been funded by dues from thousands of community-based banks across the United States - and which has since guaranteed US$28 billion of the investment bank's debt securities.

That's equal to 10 per cent of all funds guaranteed under the government's Temporary Liquidity Guarantee Program.

The same could be said of many other large financial firms that are also big spenders in Washington. The 10 largest recipients of federal Troubled Assets Relief Program funds - including two Wall Street investment banks and three other, non-bank institutions that participated - spent US$82.4 million on lobbying and campaign contributions in 2008 and US$523.6 million over the past 10 years.

This sort of behaviour is simply wrong. Corporate leaders have an obligation to set the right tone - a moral tone - lest public confidence in our private enterprise system erode.

Also, we must restore the balance of regulatory oversight between commercial banks and other parts of the financial services industry.

We should do so not only to be fair to banks but because the nation's ailments won't be cured unless solutions are directed at the entire financial system, not just one-third of it. -- LATWP

The writer is chairman and chief executive of M&T Bank, one of the 20 largest US bank holding companies