Search This Blog

Monday, March 4, 2013

Learning Finance Trader Jargon

* All photos taken by us at A&G...

The world of economics, global finance and professional investment is quite a secretive world and in order to communicate with each other both privately and publicly without concern that the vast majority of everyday folk will know what they're talking about, these use insider jargon.

We thought it would be interesting and informative to share some concepts with you throughout the week depending on whether there's any breaking news in the world of market manipulation worth addressing.

Because our Sunday was Quite a busy and exhaustive one, we'll just provide a few interesting sounding terms and in layperson terms what it means...
Painting the Tape:  When we first heard the term a long time ago, our first thoughts went toward the literal - like when you place masking tape to protect certain areas from being painted, thus one can 'paint over' the area..

Of course, that would make zero sense in markets and trading...

'Painting the Tape' is form of market manipulation whereby market players attempt to influence the price of a security by buying and/or selling it among themselves so as to create the appearance of substantial trading activity in the security.

The goal is to create an artificial 'buzz' so that a novice everyday investor will think its 'hot' and then invest their precious money.  Everyone involved (except the ultimate buyer) makes vast profits while the dupe is left holding the bag.

This can be done with stocks as well.

It is illegal according to the SEC but trust us, its done often.  And quite frankly, if you're going to invest in the stock market, you should expect nothing less than this level of deceit and trickery or else you really are a sap.
Touchline:  No this is not a soccer/football reference...

The 'touchline' is the highest price that a buyer of a particular security is willing to pay and the lowest price at which a seller is willing to sell, at a given time in the trading day.

For example, if security A has various buyers who are bidding $10, $10.20 and $10.25 for it, the touchline bid price would be $10.25. At the same time, if security A has various sellers at $10.45, $10.50 and $10.75, the touchline ask price would be $10.45.

The bid-ask spread on security 'A' is therefore $10.25 (bid) / $10.45 (ask).

The touchline therefore specifies the best bid or ask for a particular security at any point in time. Very liquid securities will generally have a narrow bid-ask spread, while illiquid  (non-liquid) securities will have a wide spread.
Mark to Model:  This is the pricing of a specific investment position or portfolio based on internal assumptions or financial models rather than the traditional mark-to-market valuations, in which market prices are used to calculate values as well as the losses or gains on positions.

Mark-to-model assets essentially leave themselves open to interpretation, and this can create risk for investors. The dangers of mark-to-model assets occurred during the subprime mortgage meltdown beginning in 2007.

Billions of dollars in securitized mortgage assets had to be written off on company balance sheets because the valuation assumptions used turned out to be inaccurate.

Many of the mark-to-model valuations assumed liquid and orderly secondary markets and historical default levels. These assumptions proved wrong when secondary liquidity dried up and mortgage default rates spiked well above normal levels.
More finance trader jargon to come..  Happy Monday~