Mumbo Jumbo

The mumbo jumbo expression crossed into English from the Mandingo tribe of equatorial West Africa. Little did they know that it would be used today to depict the nonsensical jargon of the investment world! Today our column will describe (not totally explain) some of this mumbo jumbo.

An MTF is a modern version of the traditional stock-exchange where buyers and sellers of financial assets are facilitated electronically by anodyne, anonymous computers. The MTF is a passive participant in the process and provides no assistance or advice. It is an acronym for Multilateral Trading Facility.

The ominously-named dark pools are private MTFs that are not accessible to consumers. Cynics argue that dark pools border on illegality because there is absolutely no pricing transparency or accountability – but they remain popular!!

Flash trading does not describe the flamboyance or sexual preferences of the investor but rather the process of showing (flashing) the intended trade to interested third-parties to prompt an interest or otherwise in a deal.

A flash crash is a severe and sudden fall in market prices in an extremely short time period, literally seconds/minutes – almost always caused by runaway computer algorithms that have been ineffectively coded.

High frequency trading is automated trading that utilises powerful computers to transact a large number of orders at extremely high speeds. It is often pre-programmed computer-to-computer trading with no human input. In fact, humans would be too slow to handle the velocity and rapidity.

Black box trading employs the use of computing software where the internal workings are known only to the original programmers. The investor provides the inputs and the black box provides the outputs. The workings are completely opaque – hence, black box. The term is also found in science, computing, and engineering.

White box trading is the opposite of a black box where the inner workings are available for inspection and, therefore, provide more transparency.

Derivatives are investment products where the value derives from the value of other investment product(s). The most traditional example is the price of a future foreign-exchange rate, which is calculated from term interest rates.

Options contracts provide investors with the choice to trade if they so wish. Holding an options contract does not oblige investors to trade so it’s useful as a safeguard protection.

Black–Scholes is a mathematical estimate of the price variations of options. History shows that the Black-Scholes model is a close approximation to real option prices. There is one well-known discrepancy – the “option smile“. That’s for another day!!!!

These descriptions might be “nice to know” but consumers should not be inveigled by them. It is much more important to understand the term “investor beware”. The heuristic approach is always best.