April 22, 2024

Ronald H. Coase, a Law Professor And Leading Economist, Dies at 102

Ronald H. Coase, whose insights about why companies work and when government regulation is unnecessary earned him a Nobel Memorial Prize in Economic Science in 1991, died on Monday in Chicago. He was 102.

His death was announced by the University of Chicago.

By his own description, Professor Coase (rhymes with doze) was an “accidental” economist who spent most of his career teaching at the University of Chicago Law School and not its economics department. Yet he is best known for two papers that are counted among the most influential in the modern history of the science.

In one, “The Nature of the Firm,” which was largely developed while he was still an undergraduate and published in 1937, Professor Coase revolutionized economists’ understanding of why people create companies and what determines their size and scope.

He introduced the concept of transaction costs — the costs each party incurs in the course of buying or selling things — and showed that companies made economic sense when they were able to reduce or eliminate those costs by performing some functions in-house rather than dealing in the marketplace.

The ideas laid out in the paper explain why, in the first half of the 20th century, companies tended to become more vertically integrated (for example, Ford Motor building its own steel mills and buying its own rubber plantations rather than relying on suppliers), and why, more recently, companies have tended to do the opposite, aggressively outsourcing even basic functions like paying their employees.

In the second of his groundbreaking papers, “The Problem of Social Cost,” published in 1960, Professor Coase challenged the idea that the only way to restrain people and companies from behaving in ways that harmed others was through government intervention. He argued that if there were no transaction costs, the affected parties could negotiate and settle conflicts privately to their mutual benefit, and that fostering such settlements might make more economic sense than pre-empting them with regulations.

The paper made the idea of property rights fundamental to understanding the role of regulation in the economy. It grew out of a study by Professor Coase on how the Federal Communications Commission licensed broadcasters.

The practice of issuing the licenses more or less permanently for small fees to whoever applied first and met legal requirements made little economic sense, he argued; better to treat them as property, auction them off and allow them to be freely transferred. Decades later, his ideas were used to raise billions of dollars for the Treasury when radio frequencies were assigned for cellular phone services.

Ronald Harry Coase was born on Dec. 29, 1910, in Willesden, England, the only child of two postal workers. Though he spent more than 50 years living and working in the United States, he retained his English accent and habits all his life.

His father was an amateur athlete of some renown, but Ronald’s interests were more academic, not least because of weakness in his legs that obliged him to wear iron braces for a time.

In his autobiographical essay written for the Nobel committee after being awarded the prize, he recalled being taken by his father at age 11 to a phrenologist to hear what could be discovered from the shape of his head. The phrenologist detected “considerable mental vigor,” Professor Coase wrote, and recommended that he work in banking or accounting and raise poultry as a hobby.

Because of his leg braces, Professor Coase wrote, he attended a special primary school and enrolled in secondary school a year late, missing the chance to pursue a concentration in history or Latin. Science was his third choice, but he found he had little patience for the mathematics involved, so he studied the only other subject available: commerce.

At the University of London, he was on his way to becoming an industrial lawyer when a seminar with Sir Arnold Plant, a well-known economist of the time, changed his focus again, this time for good. After graduating from the London School of Economics, he taught there and at other British universities, and married Marion Ruth Hartung in 1937. The couple immigrated to the United States in 1951, when he joined the faculty of the State University of New York at Buffalo. He left for the University of Virginia in 1958.

While teaching at Virginia, Professor Coase submitted his essay about the F.C.C. to The Journal of Law and Economics, a new periodical at the University of Chicago. The astonished faculty there wondered, according to one of their number, George J. Stigler, “how so fine an economist could make such an obvious mistake.” They invited Professor Coase to dine at the home of Aaron Director, the founder of the journal, and explain his views to a group that included Milton Friedman and several other Nobel laureates-to-be.

“In the course of two hours of argument, the vote went from 20 against and one for Coase, to 21 for Coase,” Professor Stigler later wrote. “What an exhilarating event! I lamented afterward that we had not had the clairvoyance to tape it.” Professor Coase was asked to expand on the ideas in that essay for the journal. The result was “The Problem of Social Cost.”

Professor Coase was soon invited to become editor of the journal, and to join the Chicago faculty, where he stayed the rest of his life, disdaining the equation-heavy approach of what he called “blackboard economics” in favor of insights grounded in real markets and human behavior.

By identifying transaction costs and explaining their effects, the Royal Swedish Academy of Sciences wrote in announcing his prize in 1991, “Coase may be said to have identified a new set of ‘elementary particles’ in the economic system.”

Professor Coase’s wife, Marion, died in 2012. No immediate family members survive.

This article has been revised to reflect the following correction:

Correction: September 3, 2013

An earlier version of this obituary misidentified the essay that earned Professor Coase an invitation to meet with the economics faculty of the University of Chicago. It was his essay about the Federal Communications Commission, not “The Problem of Social Cost.” (As a result of that meeting, Professor Coase was asked to write the essay that was subsequently published as “The Problem of Social Cost.”)

Article source: http://www.nytimes.com/2013/09/04/business/economy/ronald-h-coase-nobel-winning-economist-dies-at-102.html?partner=rss&emc=rss

Strong Sales Push Chrysler’s Earnings Up 16%

Chrysler, the third-largest American automaker behind General Motors and the Ford Motor Company, also reported quarterly revenue of $18 billion, a 7 percent improvement from the period a year earlier.

Sergio Marchionne, the chief executive of both Chrysler and its Italian parent, Fiat, said the American automaker benefited from increased shipments of models like the Jeep Grand Cherokee.

“Chrysler Group is poised for a very strong performance in the second half of the year,” he said.

The company said it sold 643,000 vehicles worldwide in the second quarter, up 10 percent from the second quarter of 2012.

In the United States, Chrysler reported an 11.4 percent market share, up slightly from 11.2 percent in the period a year earlier.

Mr. Marchionne said that new products, including the introduction of a new smaller Jeep model, would help sustain Chrysler’s momentum in the American market.

“The timing of product launches and capacity increases causes this year’s performance to be biased in the second half,” he said.

For the full year, Chrysler reiterated earlier forecasts of at least $72 billion in revenue, and net income of $1.7 billion to $2.2 billion.

The positive performance comes as Fiat and Chrysler move closer to completing a full merger of the two companies. While Fiat owns 58.5 percent of the American company, it is hoping to acquire the remaining shares later this year from a retiree health care trust.

A full merger of the companies would allow for more integration of their operations and finances. Mr. Marchionne has said it could be accompanied by a new stock offering to help finance global growth plans.

Chrysler’s results helped Fiat post a net profit of 435 million euros ($578 million) in the second quarter, up from 239 million euros in the period a year earlier.

Fiat said its revenue for the quarter was 22.3 billion euros ($29.6 billion), a 4 percent increase from the second quarter of 2012.

Without Chrysler’s contribution, Fiat said it would have lost 247 million euros in the quarter, about the same as in the period a year earlier.

Mr. Marchionne said that no agreement had yet been reached between Fiat and the health care trust on a price for the 41.5 percent stake the trust holds in Chrysler.

Although Fiat can apply Chrysler’s profits to its financial results, the Italian automaker cannot access the American company’s cash reserves.

At the end of the quarter, Chrysler said it had $11.9 billion in cash, a slight decrease from the $12.1 billion it reported a year ago.

Chrysler’s turnaround has accelerated since it paid off the last of its government loans two years ago.

The second-quarter results were the company’s eighth consecutive profitable quarter.

The profits were depressed slightly by a $151 million charge related to Chrysler’s recall and customer service action on 2.7 million older-model Jeeps. Last month, the company said it would add trailer hitches to some older Jeeps to help protect against fires caused by rear-end collisions.

Article source: http://www.nytimes.com/2013/07/31/business/chryslers-profit-rises-16-as-sales-of-key-models-improve.html?partner=rss&emc=rss

U.S. Factory Orders Suggest Manufacturing Is Improving

The Commerce Department said on Tuesday that factory orders rose 2.1 percent in May. April’s increase was revised higher, to 1.3 percent from 1 percent.

Most of the increase in May was because of a big jump in commercial aircraft demand. Still, businesses also ordered more machinery, computers and household appliances.

A category of orders that is viewed as a proxy for business investment plans — which excludes the volatile areas of transportation and defense — rose 1.5 percent. That rise was even stronger than the gains in the previous two months.

This measure of business investment had not increased for three straight months since the fall of 2011. The consecutive gains suggest manufacturing in the United States could improve in the second half of the year.

Despite its boost to the economy in the first three years after the recession ended, manufacturing has struggled this year. American factories have seen less demand for exports because of a weaker global growth. And businesses reduced their investment in machinery and equipment in the first quarter.

The May report showed that orders for long-lasting goods, like power generation equipment and ships, rose 3.7 percent in May. Orders for nondurable goods, including paper, chemicals and oil, rose 0.7 percent.

Demand for commercial aircraft increased about 51 percent, after a 18.4 percent gain in April and a drop of 43.3 percent in March.

Orders for autos and auto parts fell 2 percent, after jumping 4.1 percent in April, but the decline is most likely temporary.

American automakers on Tuesday reported healthy sales gains in June. Ford Motor’s sales soared 13 percent in June compared with a year earlier. Chrysler’s sales rose 8 percent. The numbers suggest that auto production will resume a healthy pace in the next months.

Article source: http://www.nytimes.com/2013/07/03/business/economy/us-factory-orders-suggest-manufacturing-is-improving.html?partner=rss&emc=rss

A Stronger Economy Lifts June Auto Sales

DETROIT — The nation’s automakers continued to make gains in June, reporting the strongest performance in six years as the improving economy supported a continued uptick in sales.

The Ford Motor Company led the growth, reporting a 13 percent increase for its Ford and Lincoln brands. General Motors reported gains of 6 percent and the Chrysler Group of 8 percent.

Sales for the Nissan Motor Company rose 13 percent, making the automaker’s best June sales month ever in the United States. The Toyota Motor Corporation, the world’s largest carmaker, reported a sales gain of 9.8 percent. Volkswagen was the only major automaker to report a decline in June sales, of 3 percent.

Over all, June showed the best performance in at least six years for Ford and Chrysler and the best month for G.M. since September 2008, when Lehman Brothers filed for bankruptcy.

“We’re in an economy that gets a little stronger each and every month,” said Kurt McNeil, G.M.’s vice president of United States sales operations.

The gains were fueled by strong sales of pickup trucks and sport utility vehicles, as well as compact cars.

G.M. said that sales of its large pickup trucks surged 29 percent. Sales for Ford’s F-Series trucks rose 24 percent, and Chrysler’s Ram truck sales rose 23 percent.

The swell in pickup sales has been helped by the continued recovery in the housing sector, as well as by lower interest rates, better fuel economy and an aging fleet, said Jenny Lin, Ford’s senior United States economist.

More than four million of the pickup trucks on American roads are more than 12 years old, so pent-up demand is bringing drivers into showrooms, Ms. Lin said.

Small and compact cars produced strong sales for all three Detroit automakers. Sales of Ford’s small cars, including the Fiesta, Focus and Fusion, rose 39 percent for the automaker’s best June sales month in 13 years.

G.M. reported that sales of Chevrolet’s small cars rose 66 percent, helped by its Cruze and Sonic models.

Chrysler and Fiat brand sales rose 1 percent, but sales for the Chrysler 200 midsize sedan were up 14 percent.

Ford and Chrysler estimated a seasonally adjusted annual sales rate of 16 million vehicles for the industry, the highest in six years. G.M. estimated a rate of 15.8 million, the highest since November 2007.

Article source: http://www.nytimes.com/2013/07/03/business/a-stronger-economy-lifts-june-auto-sales.html?partner=rss&emc=rss

Trying to Be Hip and Edgy, Ads Become Offensive

Some of the biggest names in marketing, including Ford Motor, General Motors, Hyundai Motor, Reebok and PepsiCo, have been forced recently to apologize to consumers who mounted loud public outcries against ads that hinged on subjects like race, rape and suicide.

PepsiCo found itself meeting this week with the Rev. Al Sharpton and the family of Emmet Till — the teenager whose death in Mississippi in 1955 helped energize the civil rights movement — to try to quell multiple controversies involving its Mountain Dew brand.

“It’s like the Wild West,” said Paul Malmstrom, a founding partner of the New York office of the Mother ad agency.

Advertising experts offer a long list of reasons for the increasing frequency of such incidents, but the primary reason they keep happening, they say, is the growing anxiety on Madison Avenue to create ads that will be noticed and break through the clutter.

“It’s the pressure to create ‘viral’ advertising, the urge to get more views online, that leads people to push the envelope,” said Tor Myhren, president and chief creative officer at Grey New York. He added that another contributing factor was the focus on younger consumers. “There’s so much ‘How do we speak to millennials?’ in meetings,” he said.

The toll that those controversies are taking on the ad business is in some instances more than just embarrassment. Two senior creative executives at JWT India, including a managing partner, lost their jobs after the company produced fake ads for the Ford Figo hatchback that showed women bound and gagged in the trunk as celebrities like Paris Hilton and Silvio Berlusconi sat behind the wheel.

JWT apologized, as did Ford, although there was nothing to suggest that the carmaker had either approved or known about the fake ads.

The celebrities in the Ford India ads appeared without consent, but even instances where stars agree to work with a brand can be fraught with risk.

Those celebrities, particularly rappers and actors with images as rebellious rule-breakers and risk-takers, often appeal to marketers’ youthful target audiences and have huge followings on social media. That is what drew Mountain Dew to Lil Wayne, the rapper who signed a multimillion-dollar celebrity endorsement deal with the soft-drink brand last year. The brand severed ties with the artist last week, however, after the Till family took issue with an ad that referred to Till with vulgar lyrics sung by Lil Wayne on a remix of “Karate Chop,” by the rapper Future.

As part of its efforts, the family also brought attention to an offensive Mountain Dew video ad created by the hip-hop producer and rap artist known as Tyler, the Creator. The spot featured a battered white waitress trying to identify her assailant from a lineup that included African-American men and a goat. Mountain Dew dropped the ad on May 1.

On Wednesday at the PepsiCo offices in White Plains, company executives, including Frank Cooper, the chief marketing officer for global consumer engagement for Pepsi, and Till family members gathered for a private meeting with Mr. Sharpton.

In a telephone interview, Mr. Sharpton described the meeting as good and its tone as respectful. He said, “The family explained the pain that they have gone through since the killing” and Pepsi executives “repeated their apology and said they would have nothing to do with Wayne and his tour.”

In a statement, the Till family said: “We look forward to ongoing and meaningful collaborations which bridge the music community, corporations, grass-roots organizations and youth.” A representative from PepsiCo agreed that the meeting had been amicable but declined to provide details.

David Schwab, senior vice president at Octagon First Call, a division of Octagon, the sports and entertainment marketing agency, said that brands used stars “to build awareness and create differentiation.”

“But a celebrity who can be a difference maker can come with a high risk,” Mr. Schwab warned, meaning “there is more pressure on brands to be careful.”

Article source: http://www.nytimes.com/2013/05/11/business/media/trying-to-be-hip-and-edgy-ads-become-offensive.html?partner=rss&emc=rss

No End to Falling European Car Sales

PARIS — European car sales keep falling, and American automakers are among the biggest losers in the shrinking market, industry data showed Tuesday.

European Union new passenger car registrations slid 10.5 percent in February from a year earlier, the European Automobile Manufacturers’ Association said in Brussels. It was the 17th consecutive drop, with sales falling everywhere except Britain, where they rose 7.9 percent.

E.U. sales, at 795,482 cars, came in at the lowest recorded for the month of February since the records started in 1990, Quynh-Nhu Huynh, statistical director for the automakers’ association, said.

She noted that in February 1990, new car sales totaled 1.1 million — at a time when the European Union had just 15 members.

The euro zone crisis, and the government budget-tightening measures prescribed to combat it, have hurt demand. Record unemployment has squeezed household budgets and left consumers reluctant to upgrade older models, and much of the younger generation lacks the means to purchase their first cars.

“Unless there’s a turnaround in the middle of the year, we appear to be headed for the worst performance ever,” Ms. Huynh said.

American automakers bore much of the brunt. General Motors’ European sales slid 20.1 percent, while Ford Motor recorded a 20.8 percent drop.

The European market sales of Volkswagen, the largest E.U. automaker, fell 7.2 percent, while the region’s No.2 carmaker, PSA Peugeot Citroën, fell 13.2 percent. Sales of Fiat, the Italian carmaker that controls Chrysler, fell 14 percent. Honda Motor led a handful of companies that posted gains, with its sales up 15 percent.

Ian Fletcher, an analyst at IHS Automotive in London, said that G.M., Ford, Fiat and Peugeot faced similar problems, with luxury carmakers reaching down to take their sales in a declining market, and cheaper models gaining at the bottom of the market.

“It’s the squashed middle market,” he said. “They’re facing pressure from the top of the market, from Mercedes and BMW, and pressure at the low end from the likes of Kia, Hyundai and Dacia.”

The U.S. carmakers, he said, are also suffering relative to other companies because they were less willing to offer buyer incentives, and were unable to match some rivals, particularly Volkswagen, on financing terms.

Mr. Fletcher said he expected car sales to grow this year in the United States, as well as in fast growing economies like China, Brazil, Russia and India.

He predicted that the European Union market, which shrank by 8.2 percent last year, was set for another 2.6 percent contraction this year, to around 11.8 million units.

There is hope, he said, that sales might bottom out before long, with gradual improvement possible by the end of the year. But with the monthly data as bad as they have been so far in 2013, he said, analysts might be looking at their forecasts again “in the next few months” for a possible downward revision.



Article source: http://www.nytimes.com/2013/03/20/business/global/european-new-car-sales-down-10-2-percent-in-february.html?partner=rss&emc=rss

Media Decoder Blog: Ford Turns to the ‘Crowd’ for New Fiesta Ads

Four years ago, the Ford Motor Company brought out the Ford Fiesta subcompact with an innovative program that recruited young drivers – members of the target audience for the new car – to help introduce it through blogs and other social media. Now, that effort is being expanded into the realm of marketing as Ford plans a crowdsourcing initiative to create advertising for the 2014 Fiesta.

Executives of Ford plan to announce on Tuesday morning, at a session of Social Media Week in New York, that they intend to recruit 100 socially-connected consumers to produce a year’s worth of advertising for the next Fiesta, which would begin appearing in the spring.

Information about the initiative will be available on a special Web site, fiestamovement.com.

The would-be Madison Avenue ad executives will be asked to create video clips that could serve as commercials, on television or online; digital ads; ads for social media like Facebook and YouTube; and even ads for magazines and newspapers.

Crowdsourcing as a way to create advertising has been a popular trend for several years as marketers seek to take advantage of new technologies to forge closer ties with consumers.

Ads created by consumers have even appeared in high-profile venues that include the Super Bowl, for brands like Doritos and Mennen Speed Stick, and during episodes of “American Idol,” where Coca-Cola ran one such commercial, with a Valentine’s Day theme, on Thursday.

Automotive brands have also taken part in the trend, among them the Chevrolet division of General Motors, which ran a crowdsourced commercial during Super Bowl XLVI last year.

But looking to nonprofessionals to come up with a year’s worth of ads is unusual, if not unique. “This is Ford’s first completely user-generated campaign,” said James Farley of Ford.

Although “there are some risks,” Mr. Farley acknowledged in a phone interview last week, he likened the experiment to the leap that marketers took decades ago with a new medium called television.

“There are new rules, new things to learn about,” said Mr. Farley, who is executive vice president for global marketing, sales and service and Lincoln.

For instance, Mr. Farley said, “if you ask people to help you produce advertising, they expect to see what they do without a lot of filters.”

“You have to be extremely careful about providing too much help,” he added.

That was a lesson Ford Motor learned in 2009, Mr. Farley said, when the company introduced the Fiesta by giving cars to 100 young men and women and asking them to share their experiences on blogs, Facebook, Twitter and YouTube.

“We had a traditional ad campaign, and we had a digital ad campaign we created with them,” he said, and the latter ads were “a little overdeveloped; they sounded like a company trying to be young.”

This time around, for what the company is calling Fiesta Movement: A Social Remix, 100 young men and women will be lent cars, this time the 2014 model. Some will be alumni of the Fiesta introduction, some will be new recruits and some will be celebrities.

Just like the original version of the Fiesta Movement, the drivers of the cars will be supplied with gasoline, insurance coverage and equipment like cameras, then asked to complete tasks (“missions” in Ford parlance) that involve the cars.

And just like last time, the participants will be asked to share their experiences in social media. But this time, the content they create will also be the basis for Fiesta ads in other media.

Although there will be “zero” professionally-produced ads for the 2014 Fiesta, Mr. Farley said, that does not mean the ads will be of less than professional quality.

“We’re going to shape them to be a Ford Fiesta message, not just ‘We’re having fun on the dime of a big company,’ ” he added.

As for the professionals at the advertising agencies that work with Ford, among them units of WPP like Team Detroit and Hudson Rouge, cry not for them. They will continue to create campaigns for other Ford and Lincoln models.

Mr. Farley declined to discuss what the company would spend on ads to be based on what will be created by the participants in the next installment of the Fiesta Movement. But, he said, the money saved on production costs might be added to the budget.

During 2010, the first full year of introductory advertising for Fiesta, Ford spent $102.9 million in major media to promote the car, according to the Kantar Media unit of WPP. Ad spending fell to $42.8 million in 2011.

During the first nine months of 2012, ad spending totaled only $2.1 million, compared with $40.7 million during the same period of 2011. The decline reflects Ford’s intent to ramp up spending again in 2013 to promote the major changes in Fiesta for the 2014 model.

Article source: http://mediadecoder.blogs.nytimes.com/2013/02/19/ford-turns-to-the-crowd-for-new-fiesta-ads/?partner=rss&emc=rss

Bucks Blog: The Least (and Most) Expensive Cars to Insure

A 2013 Ford EdgeFord Motor Co.A 2013 Ford Edge

Not many people consider insurance when they go car shopping, but your premiums can vary a fair bit depending on the type of car you buy. Insure.com each year compiles a list of the 20 least (and most) expensive cars to insure, and a number of S.U.V.’s and crossover vehicles are among the cheapest for the 2013 model year.

In the past, minivans have dominated the list of “least expensive” rankings; last year, for instance, the vehicle listed as cheapest to insure was the Toyota Siena LE.

This year, just two minivans (the Dodge Caravan SXT and the Honda Odyssey EX-L) made the least-expensive list. The vehicle that cost the least to insure was the Ford Edge SE, with an average premium of $1,128. (There are eight other cars on the list that come in under $1,200 as well).

Amy Danise, Insure.com’s editorial director, said in an e-mail that the dearth of minivans on this year’s list is “notable.” Shifts in rankings occur because of insurance claims made over the last year, she said, so when “good” drivers gravitate toward different vehicles, the list changes. This year, the data indicated that drivers of the Ford Edge and the other cars on the least-expensive list have submitted fewer and less-expensive claims than drivers of other vehicles. “That means they’ve had fewer crashes and repair costs are likely not high for the vehicle,” she said.

Even if you are a “bad” driver, she continued, you can benefit from buying a vehicle on the least-expensive list. That’s because even if you have strikes against you on your driving record, choosing a vehicle that’s cheaper to insure can help hold down your costs.

The site also offers a tool that allows you to find national or state average insurance rates for more than 750 cars.

To compile the lists, Insure.com hired Quadrant Information Services to provide average rates for more than 750 car models from six large insurance companies (Allstate, Farmers, Geico, Nationwide, Progressive and State Farm), in 10 ZIP codes per state. Rates were not available for all models, especially the more exotic ones.

The annual rates shown are based on insurance for a single, 40-year-old man who commutes 12 miles to work each day, with policy limits of “100/300/50″ ($100,000 for injury liability for one person, $300,000 for all injuries and $50,000 for property damage in an accident), with a $500 deductible on collision and comprehensive coverage. The hypothetical driver has a clean record and good credit, and the rate includes uninsured motorist coverage. (Actual rates vary depending on individual driver factors, Insure.com notes.)

In addition to the Ford Edge SE, other models that can offer insurance savings, Insure.com says, include the Jeep Grand Cherokee Laredo, the Subaru Outback 2.5i Premium, the Kia Sportage and the Jeep Patriot Sport.

The list of most-expensive cars to insure includes many Mercedes-Benz models. The 2013 Mercedes-Benz CL600 has the most expensive rates, at $3,357. Other costly models include cars from Porsche, Jaguar and BMW.

How expensive is your car to insure?

Article source: http://bucks.blogs.nytimes.com/2013/01/15/the-least-and-most-expensive-cars-to-insure/?partner=rss&emc=rss

DealBook: Trying to Be Nimble, Knight Capital Stumbles

Traders from the Knight Capital Group watched from the floor of the New York Stock Exchange as Knight's chief, Thomas Joyce, was interviewed on television.Brendan McDermid/ReutersTraders from the Knight Capital Group watched from the floor of the New York Stock Exchange as Knight’s chief, Thomas Joyce, was interviewed on television.

As the leader of one of the largest brokerage firms in the nation, Thomas M. Joyce has been an unapologetic advocate of electronic trading and one of the most vociferous critics of companies that struggled to keep up with the ever-changing stock market.

Now, Mr. Joyce, a longtime trader who seized the reins of the Knight Capital Group in 2002, is fighting for his company’s survival.

In a bid to keep a grip on its customers, Knight pushed to introduce a new system that would position it competitively amid market changes that took effect on Wednesday, according to people briefed on the matter. Unlike rivals that hesitated, Knight Capital’s presence on Day 1 would ensure bragging rights and extra profits.

But in the rollout of the system that morning, Knight created a blizzard of erroneous orders to buy shares of major stocks. The orders caused wild swings that affected the shares of more than 100 companies, including Ford Motor, RadioShack and American Airlines.

While the companies quickly recovered, the 17-year-old Jersey City firm was left reeling. Knight will lose $440 million in selling all the stocks that it accidentally bought on Wednesday — more than its entire revenue in the second quarter of this year, when it brought in $289 million.

Timeline: Trading Errors

Knight Capital, in a bid to keep a grip on customers, rushed to introduce a new system that would position it competitively.Mel Evans/Associated PressKnight Capital, in a bid to keep a grip on customers, rushed to introduce a new system that would position it competitively.

On Thursday, rattled customers like Citigroup, Fidelity Investments and Vanguard took their business elsewhere. Knight shares plunged 63 percent, to $2.58. The fallout prompted the company to contact JPMorgan Chase and other big banks for emergency financing.

The company is also facing an onslaught of regulatory scrutiny. The Securities and Exchange Commission’s enforcement division is examining potential legal violations, people briefed on the matter said.

As it faces the flight of confidence, Knight is desperately seeking potential buyers for parts of its business. On Thursday, Knight’s senior executives reached out to hedge funds and rivals like Citadel and Virtu Financial, according to people briefed on the matter. But by day’s end, interest was uncertain and there were questions about whether the company would collapse into bankruptcy.

“With the events of yesterday, you have to question if this is the beginning of the end for Knight,“ said Christopher Nagy, founder of the consulting firm KOR Trading.
Knight Capital declined to comment.
Within the company, the mood grew grimmer as hopes for a recovery dwindled, according to traders at Knight, who were not authorized to discuss the matter. Some employees slept at the company overnight on Wednesday.

“I am grateful that at this point I still have my job,” one trader said.

Originally named Roundtable Partners, in a nod to Arthurian legend, the trading company rose to prominence with the proliferation of high-speed electronic trading. In the first half of the year, Knight accounted for 11 percent of all stock trading in the United States, according to the TABB Group.

The pressures to stay competitive, however, meant that the time between developing new trading software and putting it in use became shorter and shorter.

On Wednesday, the New York Stock Exchange began a program intended to loosen the stranglehold that brokerage firms like Knight had over retail investors. Under this program, trades from retail investors now shift to a special platform where trading houses compete to offer them the best price.

Knight sought to stay nimble. Over the last several weeks, the company tweaked its computer coding to push itself onto the new platform.

Two competitors who declined to be named because they didn’t want to publicly criticize a rival said that they took a more measured approach, choosing not to create new software to coincide with the debut. Some also questioned Knight’s aggressive approach.

“The time between the approval of the software and the time it was implemented was incredibly quick,” said a head of equity trading at another firm.

The errant trades on Wednesday quickly seized Wall Street’s attention. Within seconds of the New York Stock Exchange’s opening bell ringing at 9:30 a.m., Knight’s computer coding malfunctioned.

The code was supposed to direct the firm’s computers to react to trading. Instead, it placed its own runaway offers to buy and sell shares of big American companies, driving up the volume of trading to suspicious levels.

Officials at the exchange began noticing an enormous spike in volume shortly after the opening bell. Exchange officials soon touched base with the S.E.C. in Washington, where an internal e-mail system alerted regulators to the problem. A regulator stationed in the agency’s market watch room sent out regular alerts to senior agency officials.
Within minutes, the authorities traced the problem to Knight.

Yet even after that detection, the New York Exchange had limited authority to take action. Most measures that curb erratic trading are tied to wild swings in stock prices, whereas the problem at Knight was initially tied to the volume of trading and not the price of shares. In addition, circuit breakers that halt individual stocks do not work during the first 15 minutes of trading.

About 45 minutes into the debacle, the exchange shut down Knight’s trading.

By the end of Wednesday, there were winners and losers.

Many big investors cashed in on the market volatility. They saw what was happening when the surprisingly large trades began to register, and they quickly moved to profit from the disruptions.

The winnings were spread from individual traders to proprietary firms that use specialized computer algorithms to spot and profit from market aberrations, including the DRW Trading Group. Hedge funds and other asset managers that trawl the market looking to profit from abnormal pricing also won big.

But while many institutional traders managed to profit from the fiasco, individual investors did not fare as well.

“It’s the retail investor that gets hurt because they are not sitting in front of a computer watching the market all day,” said Scott Freeze, president of Street One Financial, a trade execution firm.

In the aftermath of the bruising day, the S.E.C. is taking a closer look at Knight’s decisions. The agency is examining whether Knight properly tested the coding change — and whether it had sufficient internal controls to avert such a disaster. Some regulatory officials, however, commended Knight for steering customers to other brokerage firms.

On Thursday, S.E.C. examiners remained on the ground at the brokerage firm. Mary L. Schapiro, the agency’s chairwoman, spoke with Mr. Joyce Wednesday afternoon.

Ultimately, the debacle is a significant blow to Mr. Joyce, 57, whose ambition came to define the rapid rise of the firm.

Mr. Joyce, who made his name at Merrill Lynch and Sanford C. Bernstein Company, was a trusted ambassador of electronic trading. On June 20, he testified before a House Financial Services subcommittee, arguing that the booming business democratized a stock market once dominated by a handful of Wall Street firms.

He was also seen as an eager critic of other firms’ missteps. In recent months, he excoriated Nasdaq for bungling the stock market debut of Facebook, which cost Knight $35.4 million.

“This was arguably the worst performance by an exchange on an I.P.O. ever,“ he said in an interview in May with CNBC.

When Mr. Joyce took control of Knight in 2002, he was tasked with cleaning up the firm.

In 2004, Knight agreed to pay $79 million to the Securities and Exchange Commission to settle accusations that it “defrauded” customers. Knight did not admit wrongdoing.
Just last month, however, some outside traders indicated they experienced problems when routing trades through Knight Capital. Craig Warner, head of trading at Capstone Investments, a research boutique firm, said that a few weeks ago an order he placed with Knight went wrong. The trade was supposed to be spread throughout the entire day, but a half-hour before the market close, the remainder of the trade was executed all at once.

“It was alarming because if the stock had been really moving, it could have been a big problem,” Mr. Warner said. “After having the issue I had last week and with the issue yesterday, I lost a lot of confidence in them,” he said, adding that he was no longer using Knight to clear trades.

Even on his first day at Knight, Mr. Joyce was greeted by irregular trading. On June 3, in 2002, the company’s stock was suspiciously trading at 14 cents, after a software malfunction misread a Knight trader’s order. Instead of placing an order to sell roughly one million shares of a penny stock, the system sold the firm’s own stock.

In an interview with Institutional Investor magazine, Mr. Joyce recalled getting on the intercom that day and introducing himself to his staff. “I’m Tom Joyce, he said, “and yes, I know that our stock is trading at 14 cents.”

Azam Ahmed, Michael J. de la Merced and Nathaniel Popper contributed reporting.

Article source: http://dealbook.nytimes.com/2012/08/02/trying-to-be-nimble-knight-capital-stumbles/?partner=rss&emc=rss

U.S. Manufacturing Gains Jobs as Wages Retreat

That is particularly true of global manufacturers like General Electric. With labor costs moving down at its appliance factories here, the company is bringing home the production of water heaters as well as some refrigerators, and expanding its work force to do so.

The wages for the new hires, however, are $10 to $15 an hour less than the pay scale for hourly employees already on staff — with the additional concession that the newcomers will not catch up for the foreseeable future. Such union-endorsed contracts are also showing up in the auto industry, at steel and tire companies, and at manufacturers of farm implements and other heavy equipment, according to Gordon Pavy, president of the Labor and Employment Relations Association and, until recently, the A.F.L.-C.I.O.’s director of collective bargaining.

“Some companies want to keep work here, or bring it back from Asia,” Mr. Pavy said, “but in order to do that they have to be competitive in the final prices of their products, and one way to be competitive is to lower the compensation of their American workers.”

The shrunken pay scale for newcomers — $12 to $19 an hour versus $21 to $32 an hour for longtime workers — threatens to undo the middle-class status of even the best-paid blue-collar jobs still left in manufacturing. A similar contract limits the wages of new hires at a nearby Ford Motor Company stamping plant, but neither G.E.’s 2,000 hourly workers nor Ford’s 2,900, nor their unions nor the mayor, Greg Fischer, have objected.

Quite the contrary, all argue that job creation must take precedence over holding the line on wages, given that the unemployment rate in this Ohio River city is above 9 percent and several thousand people apply for every unfilled, $13-an-hour factory job. “The trade-off is absolutely worth it,” Mayor Fischer said, arguing that while the city is actively subsidizing G.E.’s expansion here, mainly through tax rebates, that is not enough. “You must have a globally competitive wage to create jobs,” the mayor insisted.

The generational setback implicit in a “globally competitive wage” is evident at G.E.’s Appliance Park, the complex of factories where G.E. makes refrigerators, washing machines, dishwashers and other household appliances. Six years into the adoption of lower wages for new hires, half of the hourly workers are paid at the reduced scale.

In an earlier era, that would have been a source of friction, perhaps protest. Now it isn’t, and in an interview William Masden, 62, earning $31.78 an hour after 42 years at Appliance Park, attempted an explanation. The younger workers still get annual raises, he noted, and by the time they top out, he and his peers — the oldest baby boomers — “won’t be here any longer to remind them of what they are missing.”

Linda Thomas, 37, one of the first to be hired in 2005 under the new arrangement, amends that explanation. Her hourly wage, $18.19, has almost topped out, although it is nearly $14 an hour less than Mr. Masden’s. But she keeps silent. Too many unemployed people, she explained, would clamor for her job and her wage if she were to protest. “You don’t want to rock the boat,” Ms. Thomas said. “You take a chance on losing everything you have if you do.”

Mr. Masden’s final years at G.E., doing safety checks, and Ms. Thomas’s willingness, however reluctant, to do equivalent work as a forklift driver at a much lower wage illustrate a big reason that General Electric decided to expand production here. A new hybrid electric water heater will be manufactured in Louisville in a factory now being renovated, rather than in China, where G.E. makes its current model. And some production of refrigerators is being repatriated, mainly from Mexico.

“We have gotten to a point where making things in America is as viable as making things anyplace in the world,” said James P. Campbell, president and chief executive of G.E.’s appliances and lighting division, citing the drop in labor costs as a crucial reason. “They are significantly less with the competitive wage,” he said, “and that is a big help.”

Article source: http://feeds.nytimes.com/click.phdo?i=48f9f84c393b98baffce0672d08e5491