From Chink in The Armor:
Anyone involved in the Casino industry will tell you that people will go to extraordinary lengths to ” game the system”. Counting cards, while not illegal, is highly frowned upon and casino security are trained to spot the card counters. Once spotted, the counter is politely asked to leave, sometimes by brutal bouncers.
There is very little difference between the Casinos in Vegas and the Casino on Wall Street. One major difference is, bending the rules and outright cheating is not only condoned on Wall Street, but if you are one of the ” market makers” it is expected. In Vegas, everyone knows the odds favour the house. On Wall Street, not only do the odds favour the house, but the dealers at the table have their own con going as well.
Case on point is FEDISCOPE, a patented business system invented by Bruce Tuckman of New York and assigned to and operated by Barclay’s Capital, Inc., also of New York.. This patented business system is described as ” METHODS AND SYSTEMS FOR INTEREST RATE PREDICTION”. Here is the abstract:
In one aspect, the invention comprises a computer-implemented method for predicting interest rates, comprising the steps of: electronically receiving data describing one or more Fed fund futures rates to obtain adjusted data regarding the one or more Fed fund futures rates; and electronically determining data regarding one or more expected Fed fund target rates. In another aspect, the invention comprises a system for predicting interest rates comprising: one of more processors operable to determine probability distribution data for one or more Eurodollar rates based on Eurodollar futures option data; one or more processors operable to link said probability distribution data for one or more Eurodollar rates to overnight forward Fed funds rate data; and one or more processors operable to link said forward Fed funds rate data to expected Fed funds rate data.
As you dive deeper into the patent, you find yourself swimming in even more arcane terms of art which can become even more confusing than the abstract. Here are some examples:
Eurodollar rates are quoted for standard maturities of one month, three months, one year, etc. LIBOR is an example of particular Eurodollar rate. LIBOR is an acronym for the London Interbank Offer Rate. It is the rate that large non-US banks charge other large non-US banks for dollar denominated loans. The LIBOR rate incorporates a risk premium due to political and credit risk and is usually slightly higher than the Fed funds rate.
The FEDISCOPE uses Eurodollar futures options to determine the probability distributions of Eurodollar rates; Fed funds versus LIBOR basis swaps (“¦) to link Eurodollar rates to overnight forward Fed funds rates and an estimate of the risk premium to link forward Fed funds rates to expected Fed funds rates.
The FEDISCOPE is a tool that: (1) uses the prices of short-term fixed income securities to infer the probability distributions of the Fed funds target rate at various future dates; and (2) identifies relative value trades arising from differences between personal views about these probabilities and those implied by market prices. [“¦] the FEDISCOPE uncovers not only the expected Fed funds target rate but also its entire probability distribution. Second, the FEDISCOPE combines, in an internally consistent manner, prices from all of the following markets: Fed fund futures, Eurodollar futures, Fed fund versus LIBOR basis swaps, and options on Eurodollar futures. Third, the FEDISCOPE adjusts market prices so that the interest rate risk premium is not mistakenly interpreted as an expectation of a rising Fed funds target rate.
[“¦] the invention comprises a computer-implemented method for predicting interest rates.
It goes on and on to describe the problems this patented business system is designed to solve. So what does all of this mean? It means Mr. Bruce Tuckman of New York, New York figured out a way to count cards and he was so successful at it, Barclay’s Capital, also of New York pays him an ongoing fee to use this system and method to predict differential interest rates so they can use it and bet accordingly.
Jim Cramer of Money Matters often talks about how you have to have an edge if you expect to win on Wall Street. Patents like this clearly give the holders an edge. Is it legal? Ask the regulators. Is it cheating? Ask the regulators. Is counting cards cheating? Ask the Pit Bosses who watch the tables like a hawk trying to catch anyone who may try. Get caught counting cards and watch how quickly you are asked to leave the casino and never come back.