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8/15/2005
Victor Niederhoffer on Brokerage Stocks and the Market

An example of positive feedback is the concurrent effect of the stock market and fixed income moves on the performance of brokerage stocks. There's always a big mystery about the trading income of these brokers as if it requires great skill in challenging markets or something but really it's 99% correlated with the bond and stock move in the relevant period. Most of these firms have so much money borrowed long in these markets that when there's a rise, their earnings go through the roof and when there's a fall they face " difficult trading conditions". It's interesting to see how the estimates of brokers profits surprisingly goes up in these periods " when the bankers overseers know they are very busy."

The other aspect of this relation is the one described by Loeb and quantified in EdSpec where during 1929, there was tremendous boom in brokerage houses on yachts and fancy offices right before the crash. This relates to the volume of corporate underwriting made during the period which is up substantially this period as well, a positive feedback relation with past prices. Eventually the supply weighs on the market, a tipping point is reached if you will, and the relation between higher stock prices leading to higher profits is counterbalanced by the negative feedback between stock prices leading to higher underwritings which leads to lower prices. All these relations should be quantified in sapient ways for better understanding of market dynamics, and the deflation of trading profits ballyhoo.

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