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The Internal Revenue Service is under pressure to better police more than $100 billion of refundable tax credits it issues annually after a government watchdog questioned billions of dollars in payments.

Congress passed in October legislation authorizing a five-fold increase, to $500, in the penalty for paid tax preparers who don’t verify the eligibility of applicants for the earned income credit, by far the largest refundable tax credit.

Tax filers collected refunds of at least $55.1 billion in 2009 from the earned income tax credit, and the IRS estimated that more than $11 billion of that total was issued improperly, sometimes by mistake and sometimes as a result of fraud.

“The IRS is really stepping up enforcement,” Cindy Hockenberry, research supervisor for the National Association of Tax Professionals, said. The initial focus has been on the earned-income credit, but “they’re going to be branching out into other areas,” she said.

The association, based in Appleton, Wis., represents more than 21,000 tax preparers, accountants, attorneys and enrolled agents who work independently or for companies such as H & R Block Inc.

The IRS plans to give earned-income tax credit claims extra scrutiny during the 2012 tax filing season.

Oversight of refundable credits has become a political issue, with Republicans in particular demanding that the IRS do more to weed out ineligible recipients.

“We must balance the mandate to get refunds to those eligible as quickly as possible with ensuring that the money goes only to individuals who are eligible to receive it,” IRS deputy commissioner for services and enforcement, Steve Miller, told a House Ways and Means subcommittee hearing in May.

The earned income tax credit, passed by Congress in 1975 to offset the burden of Social Security taxes for the poor, has been expanded several times with bipartisan support, as an incentive to work.

However, Treasury Inspector General for Tax Administration J. Russell George criticized the IRS’s administration of the EITC and faulted the agency for potential improper payments involving two other refundable credit programs, one for higher education and the other for families with children payday loans.

George’s reports indicate that more than $18 billion of $101 billion for the three programs may have been improperly awarded.

Unlike a regular tax credit that offsets some or all of a tax liability, a refundable credit can include a cash payment in excess of the tax owed. As a result, refundable credits offer an incentive to defraud the government, George told the House Ways and Means subcommittee in May.

Legislation is pending to narrow eligibility for a refundable child tax credit. In a report in September, George’s investigators found that in 2009 about $4.2 billion, or 15 percent of $28.3 billion in additional child tax credits, had gone to people not authorized to work in the U.S.

The IRS declined George’s recommendation to seek more documentation of eligibility. In a statement at the time, the IRS said that the law authorizing the tax credit didn’t explicitly limit recipients to holders of a specific type of identification such as a Social Security number.

The IRS also took issue with George’s findings on the American Opportunity education tax credit, which helps low- and middle-income people pay for college. The credit, part of the 2009 stimulus law, was extended through December 2012 by legislation that also extended the tax cuts enacted under President George W. Bush.

In a report last month, George said 2.1 million taxpayers in 2009 received $3.2 billion in American Opportunity and other education credits that may have been wrongly awarded. That’s about 17 percent of the $18.7 billion of such credits distributed by the IRS.

The IRS disputed the findings, with spokesman Terry Lemons saying they were based on “a flawed and superficial analysis.”

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Firing tear gas and rubber bullets, Egyptian riot police on Sunday clashed for a second day with thousands of rock-throwing protesters demanding that the ruling military quickly announce a date to hand over power to an elected government.

The police battled an estimated 5,000 protesters in and around central Cairo’s Tahrir Square, birthplace of the 18-day uprising that toppled authoritarian leader Hosni Mubarak in February. Tear gas filled the air as protesters, many chanting “freedom, freedom,” pelted the police with rocks.

Sunday’s clashes, which come a day after two people were killed and hundreds wounded in similar violence in the capital and other cities, are stoking tensions eight days before the start of the country’s first post-Mubarak parliamentary elections. Public anger has risen over the slow pace of reforms and apparent attempts by Egypt’s ruling generals to retain power over a future civilian government.

“We have a single demand: The marshal must step down and be replaced by a civilian council,” said protester Ahmed Hani, referring Field Marshal Hussein Tantawi, Egypt’s military ruler and Mubarak’s longtime defense minister.

“The violence yesterday showed us that Mubarak is still in power,” said Hani, who was wounded in the forehead by a rubber bullet. He spoke over chants of “freedom, freedom” by hundreds of protesters around him.

Rocks, shattered glass and trash covered most of the ground in and around Tahrir early Sunday, while a cloud of white smoke caused by the use of dozens of tear gas shells hung in the air. Several hundred protesters were camping out on the lawn of the square’s traffic island, and protesters manning barricades into the square checked the IDs of anyone entering the plaza.

The windows of the main campus of the American University in Cairo, which overlooks the square, were shattered and stores were shuttered. “The marshal is Mubarak’s dog,” said one of a fresh crop of graffiti in the square.

Yahya el-Sawi, a 21-year-old university student, said he was enraged by the sight of riot police beating up protesters already hurt in an earlier attack by the security forces. “I did not support the sit-in at the beginning, but when I saw this brutality I had to come back to be with my brothers,” he said.

Many of the protesters had red eyes and coughed incessantly. Some wore surgical masks to fend off against the tear gas. A few fainted, overwhelmed by the gas.

Sunday’s clashes, which were mostly on a road leading from Tahrir to the Interior Ministry, appeared likely to grow.

Protesters were using social networking sites on the Internet to call on Egyptians to join them, and there were reports of several demonstrations headed to the square, including one from Cairo University guaranteed approval cash advance loans.

The military, which took over from Mubarak, has repeatedly pledged to hand over power to an elected government but it has yet to set a specific date. According to one timetable floated by the military, the handover will take place after presidential elections are held late next year or early in 2013. The protesters say this is too late and accuse the military of dragging its feet. They want a handover to take place immediately after the end of parliamentary elections in March.

On Saturday, police fired rubber bullets, tear gas and beat protesters with batons, clearing the square at one point and pushing the fighting into surrounding side streets of downtown Cairo.

A 23-year-old protester died from a gunshot, said Health Ministry official Mohammed el-Sherbeni. At least 676 people were injured, he said. Another protester was killed in Alexandria, where clashes also took place, said a security official, speaking on condition of anonymity because he was not authorized to talk to journalists.

After nightfall, protesters swarmed back into Tahrir in the thousands, and running battles with the police in the streets took place throughout the night. Acrid smoke of tires set ablaze mixed with the stinging white smoke of tear gas.

The government urged protesters to clear the square.

A member of the military council, Maj. Gen. Mohsen el-Fangari, said protesters’ calls for change ahead of the election were a threat to the state.

“What is the point of being in Tahrir?” he asked, speaking by phone to a private TV channel. “What is the point of this strike, of the million marches? Aren’t there legal channels to pursue demands in a way that won’t impact Egypt … internationally?”

“The aim of what is going on is to shake the backbone of the state, which is the armed forces.”

In a warning, he said, “If security is not applied, we will implement the rule of law. Anyone who does wrong will pay for it.”

Saturday’s confrontation was one of the few since the uprising to involve the police, which have largely stayed in the background while the military took charge of security. There was no military presence in and around the square on Saturday or on Sunday. The black-clad police were a hated symbol of Mubarak’s regime.

Some of the wounded had blood streaming down their faces and many had to be carried out of the square by fellow protesters to waiting ambulances. Human rights activists accused police of using excessive force.

Police arrested 18 people, state TV reported, describing the protesters as rioters.

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Congressional bargainers have agreed to increase the size of mortgages insured by the Federal Housing Administration in a compromise being hailed by the housing industry but criticized by conservatives.

Under the deal by House and Senate negotiators, the FHA would be able to insure mortgages worth up to $729,750 in the most expensive regions of the U.S. for the next two years. The ceiling had been raised to that level during the financial crisis, but by law it dipped down to $625,500 on Oct. 1.

However, in a bow to conservatives, the bargainers would not increase the current $625,500 limit on mortgages that can be backed in expensive communities by Fannie Mae and Freddie Mac, the government-controlled mortgage giants, and by the Veterans Affairs Department.

Realtors and home builders had lobbied hard to raise the loan limits for all four entities, arguing that the last thing the country’s stubbornly weak housing market needs is stricter limits on government-backed mortgages. They were backed by members of Congress of both parties from areas where housing costs are high, like Southern California and New York.

“We’d have liked broader language, but the FHA is still an important part of the puzzle,” Jamie Gregory, a lobbyist with the National Association of Realtors, said Tuesday.

Conservatives and a majority of House Republicans oppose the increase, saying the government should reduce its involvement in subsidizing housing in hopes that the private market would step up.

In a written statement, the president of the conservative Club for Growth called increasing FHA’s loan limits “beyond ridiculous” and said his group would note how lawmakers vote on the issue when they rate members of Congress seeking re-election. He said raising the limits does the opposite of reducing the federal role in housing markets _ something that many conservatives and the Obama administration say they want to strengthen the private market and protect federal taxpayers payday advance.

It has so far cost the government about $170 billion to rescue Fannie and Freddie, which nearly collapsed in 2008 because of risky loans in their portfolios.

The size of loans that federal agencies can back is based on a formula that includes a region’s median housing cost. More than a fifth of the country’s roughly 3,100 counties would be affected by the higher FHA loan limits.

FHA insurance is often used by buyers who put down small down payments. The agency has insured more than 40 million homes since it was established in 1934, and last year three quarters of those it insured were first-time buyers.

“It’s good news for the more than 600 counties that faced loan limit decline,” said Robert Dietz, an economist for the National Association of Home Builders. “FHA is important for first-time home buyers, so that will help support housing demand.”

The provision was included in a bill financing the departments of Housing and Urban Affairs, Commerce, Justice, Transportation and several other agencies for the rest of the government’s fiscal year, which began Oct. 1. It would also keep all other federal agencies functioning through Dec. 16 as lawmakers continue working on permanent spending bills.

The Democratic-run Senate had voted to increase the loan limits in its housing bill, but the version approved by the Republican-led House left the ceilings alone.

The House and Senate are expected to approve the overall compromise legislation later this week.

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A lawyer for protesters camped outside London’s St. Paul’s Cathedral said Wednesday that authorities have offered to let the tent city stay until next year, as the leader of the world’s Anglicans backed a so-called Robin Hood tax on financial transactions to alleviate the global economic crisis.

The loosely organized demonstration against capitalist excess, inspired by New York’s Occupy Wall Street movement, has wrong-footed both city and church officials since it began last month, defying pleas to leave and the threat of legal action.

Authorities have suspended legal bids to remove the tents. On Wednesday John Cooper, a lawyer for the protesters, said that local government had offered the protesters a deal “to stay on site until the new year,” then leave on an agreed date.

“My client is considering this offer,” he said on Twitter. Cooper confirmed the offer in an email to The Associated Press.

A spokesman for the local authority, the City of London Corporation, did not immediately respond to a call seeking comment.

While police and bailiffs have removed protest camps in some cities around the world, the London demonstrators have endured, in part due to their location in front of one of the city’s most famous buildings. Their proximity to Christopher Wren’s 300-year-old icon has embroiled the church in a conflict between bank-bashing protesters and the finance industry.

Archbishop of Canterbury Rowan Williams entered the debate Wednesday, saying “it was time we tried to be more specific” in finding answers to the vague demands represented by the protests.

“The protest at St. Paul’s was seen by an unexpectedly large number of people as the expression of a widespread and deep exasperation with the financial establishment that shows no sign at all of diminishing,” he wrote in a commentary published in the Financial Times.

“There is still a powerful sense around _ fair or not _ of a whole society paying for the errors and irresponsibility of bankers; of messages not getting through; of impatience with a return to ‘business as usual’ represented by still soaring bonuses and little visible change in banking practices.”

The transaction tax _ often called a “Tobin tax” _ was proposed in the 1970s by the late James Tobin, an American economist and Nobel Prize winner. Williams said a low tax rate _ 0.05 percent on each transaction _ could raise more than $400 billion globally each year.

The European Commission supports the tax, estimating that it could raise euro30 billion ($41 billion) a year, but the British government has firmly opposed it, preferring a direct tax on bank assets.

Williams called for a “robust” public debate “to probe how far the government’s preferred option will guarantee the domestic and international development goals central to the ‘Robin Hood ‘ proposals.”

Williams wrote approvingly of three proposals offered last week by the Pontifical Council for Justice and Peace: separation of high-risk investment banking from retail banking; recapitalizing banks with public funds; and a tax on financial transactions.

“If religious leaders and commentators in the U.K. and elsewhere could agree on these three proposals, not as a fixed agenda but as a common ground on which to start serious discussion, the struggles and questionings alike of protesters and clergy at St. Paul’s will not have been wasted,” Williams wrote.

The British Bankers Association opposes a transaction tax, arguing that unless it was applied worldwide it would harm the financial industry in higher-tax countries.

The archbishop’s call for a transaction tax drew a lukewarm response from the bishop of London, Richard Chartres, who is now leading St. Paul’s response to the hundreds of protesters occupying tents outside the cathedral.

“Well, he (Williams) is an intellectual of European standing and I’ll certainly read what he says with great attention,” Chartres said in an interview with The Guardian newspaper.

“He has studied the subject in some detail and, like any other citizen, it’s a totally legitimate thing to do.”

The Anglican church was caught by surprise when demonstrators against corporate greed and banking excess pitched tents outside St. Paul’s on Oct. 15. They had hoped to protest in front of the London Stock Exchange, but were evicted from the private property and moved on to the nearby cathedral.

Since then cathedral officials have appeared uncertain how to respond. They at first welcomed protesters before asking them to leave; closed the building on health and safety grounds then reopened it a week later; and announced legal action to remove the tent city before suspending it and promising dialogue.

The cathedral’s dean and a senior priest have both resigned over the mishandled crisis.

The Corporation of London, the local authority for the cathedral and surrounding area, also has suspended plans to evict the protesters, and the campers say they are prepared for a long stay.

Stuart Fraser, the corporation’s policy chairman, said officials were meeting protesters for the first time Wednesday, “and we will take things day by day.”

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Singapore Airlines is hoping travelers will “Scoot” to its new long-haul budget carrier as one of the world’s leading airline brands seeks to muscle in on Asia’s burgeoning no-frills market.

Scoot, as the new carrier is known, will begin service by June 2012 with four Boeing 777-200 jets flying by the end of that year, chief executive Campbell Wilson told reporters Tuesday.

Scoot plans to initially focus on destinations that are five to 10 hours from its base at Singapore’s Changi International Airport and fly to four or more cities in Australia and China.

“This new market segment is growing fast,” Wilson said. “We aim to bring new business to the SIA group.”

Singapore Airlines, which is also known as SIA, has long relied on its top-rated in-flight service _ epitomized by the iconic Singapore Girl cabin crew _ to lead the long-haul first and business class market, especially in popular Asia to Europe routes.

However, Gulf carriers such as Emirates and Etihad and Asian rivals such as Hong Kong’s Cathay Pacific and Australia’s Qantas have eaten away at SIA’s market share in recent years, pushing the Singaporeans to eye the growing low-cost market.

Scoot will face two main competitors in the region’s long-haul budget market _ Air Asia X, owned by Malaysia’s AirAsia, and JetStar, a unit of Qantas. Analysts expect Scoot will likely seek to provide more frills at a slightly higher price that its rivals.

“This new airline is a poor man’s excuse to fly SIA,” said Shukor Yusof, an aviation analyst with Standard and Poor’s in Singapore. “It will be like luxury budget. When you’re flying 12 to 13 hours, you need to throw in some of the facilities people are used to on intercontinental flights.”

Wilson said Scoot will offer two classes of cabin, with economy tickets up to 40 percent less than full-service carriers. Customers will be able to choose seats, meals and baggage options, he said.

“We’ll offer many other options so people can customize their experience,” Wilson said.

The airline plans to eventually buy several Boeing 777-200ER planes, which can travel up to 13 hours, allowing Scoot to fly to Europe and Africa, he said. Scoot also plans next year to hire about 52 pilots, 250 flight attendants and 40 ground staff with what Wilson called “Scootitude.”

Scoot is a wholly owned subsidiary of Singapore Airlines, which invested 283 million Singapore dollars ($227 million) to start the long-haul carrier. SIA already owns SilkAir, which targets popular Asian holiday destinations, and has a one-third stake in Tiger Airways, a short-haul budget carrier.

Growing demand for budget flights has been a bright spot for the airline industry this year as slowing global economic growth and higher fuel costs hurt earnings. The International Air Transport Association forecasts global airline profits will drop to $6.9 billion this year and $4.9 billion in 2012 from $15.8 billion last year.

Asian airline stocks have also taken a hit, with most carriers, including Singapore Airlines, down at least 20 percent this year. Only AirAsia has bucked the trend, jumping 50 percent so far in 2011.

Some analysts expect travel demand in Asia to improve next year. Airline analyst Mark Webb at HSBC forecasts Asian passenger numbers will rise 7 percent this year and 9 percent next year. He upgraded his rating on Singapore Airlines shares to “neutral” from “underweight” last month.

Scoot hopes to ride the low-cost wave that has made budget flights about 25 percent of Changi’s traffic this year from almost nothing a decade ago. The best earners among Asian airlines this year have been short-haul budget carriers Indonesia’s Lion Air, AirAsia and Cebu Air in the Philippines, S&P’s Yusof said.

“Budget airlines are not a fad. They’re here to stay,” Yusof said. “The market certainly has shifted from legacy carriers to discount carriers.”

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Forecasters say Tropical Storm Rina has formed in the Caribbean Sea off the coasts of Honduras and Nicaragua and it could become a hurricane by the end of the week.

The U.S. National Hurricane Center said Sunday night that the storm’s center was located about 115 miles (185 kilometers) northeast of Cabo Gracias on the border of Honduras and Nicaragua.

It had maximum sustained winds of 40 miles per hour (64 kph) and was moving north-northwest at 8 mph (13 kph) quick payday loans.

A tropical storm watch was in effect on the coast of Honduras from Punta Castilla eastward to the Nicaraguan border.

Forecasters expect Rina to gain strength in the next 48 hours and said it could become a hurricane by the end of the week.

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World stock markets rose Wednesday, with investors emboldened by reports that Germany and France were moving closer toward resolving Europe’s debt crisis through a massive expansion of the region’s bailout fund.

Oil prices hovered above $88 per barrel, while the dollar was lower against the euro but edged up against the yen.

European shares rose in early trading. Britain’s FTSE 200 was 0.4 percent higher at 5,707.19. Germany’s DAX gained 0.8 percent to 5,925.43 and France’s CAC-40 added 0.7 percent to 3,162.89.

But Wall Street, coming off a strong rally the previous day, appeared to be headed lower. Dow Jones industrial futures fell 0.5 percent to 11,465 and broader S&P 500 futures shed 0.7 percent to 1,215.10.

Asian shares were mostly higher after taking a beating on Monday. Japan’s Nikkei 225 index rose 0.4 percent to 8,772.54 and Hong Kong’s Hang Seng added 1.3 percent to 18,309.22. South Korea’s Kospi gained 0.9 percent to 1,855.92.

Benchmarks in Australia, India and Indonesia were higher. Those in Singapore, Taiwan, Malaysia and Thailand fell.

The Guardian newspaper reported that France and Germany have agreed to expand the rescue fund for nations using the euro common currency to euros 2 trillion ($2.74 trillion). The paper cited unnamed European diplomats and said European officials are expected to take up the expansion along with a package of other measures at a meeting this weekend.

Wall Street rose sharply Tuesday on the news. The Dow Jones industrial average rose 1.6 percent to close at 11,577.05. The S&P 500 index rose 2 percent to 1,225.38. The Nasdaq composite rose 1.6 percent to 2,657.43.

Gains in Asia were muted, however, since investors may want to see more consistent gains before wading deeply back into the market, analysts said.

“Following recent volatility, it is unlikely that we will see quite as big a rally locally as our U.S. peers today. Particularly at the retail end of the market, investors will probably wait to see successive gains before rushing back into the market,” Stan Shamu of IG Markets in Melbourne said in a research note.

Mainland China’s Shanghai Composite Index fell 0.3 percent to 2,377 payday loan lenders.51. That comes on top of a 2.3 percent loss Tuesday, when data showed China’s economic growth eased last quarter to 9.1 percent. The smaller Shenzhen Composite Index lost 0.6 percent to 1,004.20.

Hong Kong-based analyst Francis Lun cautioned investors not to overreact to data about China’s economy, which is still enjoying steady growth.

“Don’t worry about China,” Lun said. “I think even a 9.1 percent growth is not the end of the world. I think people just overplayed the slowdown.” The overwhelming concern for markets is Europe and fears of a messy debt default by Greece, he said.

The Greek government is widely expected to go through some kind of default or restructuring of its debt. If that process becomes disorderly, European banks could suffer big losses on Greek government bonds and that could spread overseas, jolting global credit markets. That could escalate into another financial crisis similar to the one that occurred in 2008 after the collapse of Lehman Brothers.

Hopes for a solution to the European crisis sent banking shares higher. National Australia Bank Ltd. rose 1.5 percent, Japan’s Mitsubishi UFJ Financial Group rose 0.9 percent, and Hong Kong-listed Bank of China Ltd. gained 2.3 percent.

Japan’s export shares slid amid a stubbornly strong yen, which makes domestically manufactured products more expensive overseas. Sony Corp. was down 1.2 percent and Toshiba Corp. lost 2.4 percent.

Camera and precision instruments maker Olympus Corp. fell 2 percent, continuing its retreat in the aftermath of the firing of CEO Michael Woodford, whom media reports said was dismissed after challenging Olympus executives about questionable corporate governance practices and several acquisitions.

Benchmark crude for November delivery was up 7 cents at $88.41 a barrel in electronic trading on the New York Mercantile Exchange. The contract rose $1.96 to settle at $88.34 in New York on Tuesday.

In currencies, the euro rose to $1.3806 from $1.3747 late Tuesday in New York. The dollar rose to 76.78 yen from 76.76 yen.

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U.S. stock futures are little changed ahead of a full week of corporate earnings reports.

Citigroup Inc., Wells Fargo & Co., and IBM are among U.S. companies reporting third-quarter earnings results Monday.

Investors will also receive a report from the Federal Reserve on production from factories, mines and utilities in September. Economists expect that industrial production rose slightly last month.

The stock market is coming off of its best week in more than two years no fax needed payday loans. The S&P 500 rose 6 percent last week, its best performance since July 2009.

Two hours before the opening bell, Dow futures were unchanged at 11,565. S&P 500 futures were up less than a point to 1,220. Nasdaq 100 futures were down 1, or 0.1 percent, to 2,366. European shares are mixed.

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ST. CHARLES

Wednesday was a good day for Fawad Khan.

He got up shortly before 3 a.m. and headed to a bank of computers in his Mississauga basement. While his family slept, he started trading.

One screen charted the euro in real time. It looked like the seismic readout for an earthquake. Trading in this kind of market, with one’s own money, is not for the faint of heart.

At 3 a.m., Khan bought euros, expecting the currency’s value to rise. When it did, he sold. Then he bought low and sold high, again. Within an hour he was up $750 (US). For his third move, he went short, predicting the euro would fall. It did, and he made another $300. It was 4:30 a.m.

“Then I went back to sleep,” says Khan, 62, a civil engineer who made day trading his full-time job after emigrating from Pakistan in 1999.

At 1 p.m., Khan was back in the basement of his modest bungalow. He sold short again, both the euro and the S&P 500 stock index. He called it a day at 2:30 p.m. — $2,935 (US) richer after three hours of trading.

“If you go with the (market) trend, you make money. If the bull is in command, you follow the bull. If the bear is in command, you follow the bear,” Khan explains, referring to the beasts that signify a rising or falling market.

It sounds simple enough, but Khan is part of a relatively small group making money in today’s wildly volatile global markets. Most investors are watching their investments, including retirement savings, evaporate. Although marked by frenetic swings, the overall market tendency is down, some 20 per cent since spring.

“We’ve seen a lot of wealth shed away in the last few months. And the ones who lost it are the people who can’t afford to lose it,” says Eric Kirzner, professor of finance at the University of Toronto’s Rotman School of Management.

“Ninety per cent of the people lose money,” says Khan, “and the money they lose goes into the pockets of the 10 per cent making money.”

This lopsided formula rings true to many these days. It partly explains the anger of protesters “occupying” Wall Street for the past three weeks. It might also explain why recent statements on the BBC by an unknown trader — Goldman Sachs rules the world; traders dream of market turmoil and recession — went viral.

“He was honest and forthright in the most scary way,” Rotman’s dean, Roger Martin, says of Alessio Rastani. “This guy was absolutely correct. What he said is, ‘traders like us couldn’t care less whether the economy is doing well or badly. . . all that has to happen is for there to be volatility.’”

There’s nothing of the vulture in Khan. He’s the soft-spoken father of five children who warns against greed and never risks more than $900 in leveraged currency contracts. Yet he too gets a rush from the kind of volatility that has many fearing they’ll never afford retirement.

“I love it,” he says.

The small group of winners in today’s market is largely made up of professional traders selling financial products the uninitiated wouldn’t understand, like index futures, or buying bear market exchange-traded funds. They are people making short-term trades while riding the market’s ups and downs.

“High frequency trading is all the rage now,” says Dave Poxon, 45, a day trader in Whitby.

Poxon says “click traders” — buying and selling with a click of the mouse — can’t keep up with those, like himself, who use algorithms to ride the volatility. He said he and two colleagues made a total of about $5,000 to $6,000 (US) a day last week using an algorithm he designed.

There’s no clearer sign of the profitability of volatility than HBP S&P 500 VIX Short-Term Futures Bull Plus, an exchange-traded fund (ETF). It was the most profitable mutual fund on the Toronto Stock Exchange during the last three months, its value rising an eye-popping 178 per cent.

The leveraged fund doesn’t buy and sell stock. It simply tracks the performance of the VIX Index — known by insiders as the Fear Index — which measures the volatility of U.S. stocks. The more volatile the market, the more money it makes.

“Volatility has been a very lucrative asset class to be invested in,” says an official with Horizons BetaPro, which manages the ETF. The official, who didn’t want to be named, stressed the fund isn’t for typical, long-term investors: “If the market isn’t volatile, you would lose gads of money on that ETF.”

Martin argues that big players are increasingly counting on market volatility. He points especially to hedge funds, which in 2008 controlled $2 trillion of assets in the U.S.

In theory, hedge funds reduce risk by placing bets in opposite directions. They should therefore make money no matter which way the market goes. But the way most hedge fund managers get paid magnifies the theory to the extreme, Martin argues.

Managers are paid according to the “2 and 20 formula” — 2 per cent of the assets they manage plus 20 per cent of the increase they generate. Big paycheques are made when markets shoot up or down.

“The more back and forth the better,” Martin says.

As the market swings, the incentive is to “roll the dice” and make a killing. If the bet turns out wrong, the manger has lost other people’s money — including, perhaps, a pension fund’s — yet still walks away with the 2 per cent fee. If the trade works, the millions or billions of dollars the fund earns is at the expense of other investors or companies because the market is a zero sum game, Martin says.

Either way, Martin argues that hedge fund managers are getting filthy rich without adding value or jobs to the economy. He calls it “the very biggest problem with the economy now.”

Sometimes the action raises allegations of crime. Canadian insurer Fairfax Financial Holdings Ltd. is suing a group of hedge funds, accusing them of spreading false information to drive down its stock and then profit through short-selling. (In short selling, a trader borrows shares to sell, hoping to buy them back later at a lower price. If that happens, the trader settles the loan and pockets the difference.)

Short sellers make money when stocks go down, which explains their reputation as vultures. Kirzner argues they help create an efficient market by moving stocks where they belong, pointing to the recent decline in share price of Research in Motion — maker of the BlackBerry — as an example.

It’s a game many are playing now, but one with a history of dire warnings. The legendary short-seller Jesse Livermore made millions betting short when stock markets crashed in 1929. But he lost as many fortunes as he made. In 1940, after throwing back two drinks, he walked into the cloakroom of a swanky Manhattan hotel and blew out his brains.

Fawad Khan isn’t playing for high stakes. He’s happy making what he describes as a decent living.

He was introduced to the stock market while working as a contractor in Pakistan. He built a home for a businessman who was so grateful he gave Khan a quick course on trading.

In Canada, he realized that contracting work involved the same kind of “palm greasing” it did in Pakistan. So he gave it up, studied trading and for the past nine years has been focusing on buying and selling currencies.

“It’s beautiful work,” he says. “I can do it any time I want. No business will give you that freedom.”

He says most days a handful of people will join him in his basement and copy his trades. He doesn’t charge them, unless they get hooked and want to take a course he gives now and then. He urges them to trade with a “stop loss” of $50 or $100 — if you lose that much, stop trading.

“The people who know this business, they make money. The people who are greedy, the people who have fear, they lose money.”

So what should a cautious trader do these days?

“Keep selling the euro short,” he says. “Short selling is good advice.”

Unless you’re Jesse Livermore, of course.

Big winners

Canada’s top performing mutual funds and ETFs over the last three months:

HBP S&P 500 VIX Short-term Futures Bull Plus: up 178.7%

HBP S&P 500 VIX Short Term Future: up 87.0%

HBP COMEX® Gold Bullion Bull Plus ETF: up 39.6%

Friedberg Global Macro Hedge (US$): up 29.8%

HBP S&P/TSX Energy Bear Plus ETF: up 28.0%

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