PrefBlog

The Nanex explanation of the Flash Crash was discussed on August 9. It now appears that the mechanism is considered plausible by the CFTC:

What this delay means is that, hypothetically, at the same real time, there could be two different price quotes: the real time NYSE price quote feed that had most stocks falling rapidly and the delayed consolidated price quote feed where the prices had not yet fully reflected the downward movement. Therefore, an algorithmic computer program, which would use high-frequency or flash trading and is written to sense price differences, could submit buy and sell orders to arbitrage between the two prices. The algo program could buy at the lower price from the NYSE feed and immediately sell on another exchange portal using the delayed consolidated price quote feed. This could be done is large quantities, repeatedly. Here is what we know: there was a delay between the premium and the consolidated price quote feeds. What we do not know yet is if some algorithmic trading took advantage of that situation.

We had our Technology Advisory Committee in this room last month and I asked the experts if this type of thing was possible or if it was just a conspiracy theory. Four of the panelists assured me that this could take place. In fact, they even acknowledged that some algorithmic programs were geared to not only take advantage of market circumstances, but could be used to instigate certain market conditions in order to then initiate their own program of buying or selling.

Therefore, I urge the staffs of the CFTC and the SEC to not leave this and any other stones unturned as they continue to investigate the flash crash. Did algo price pirates seek false profits on May 6th? Inquiring minds want to know.

Pirates? Sounds like he’s got a solution and is just waiting for a plausible problem.

A Barclay’s settlement illustrates all I find confusing about financial regulation:

Barclays PLC agreed to pay $298 million to settle charges by U.S. and New York prosecutors that the U.K. bank altered financial records for more than a decade to hide hundreds of millions of dollars in payments flowing into the U.S. from Cuba, Libya, Iran and other sanctioned countries.

The bank plans to pay $298 million to settle claims by U.S. prosecutors that it altered financial records for more than a decade to hide hundreds of millions of dollars that flowed to the U.S. from nations like Cuba, Libya and Iran.
…
A federal court filing said Barclays “accepts and acknowledges responsibility for its conduct and that of its employees.” U.S. officials said the bank altered payment messages or deleted information about sanctioned countries.

In other cases, Barclays returned payments out of fear they would be detected by U.S. officials, sending fax cover sheets that said: “Payments to U.S.A. must NOT contain the word listed below.” Prosecutors said payments often were re-sent after references to the sanctioned countries, which included Sudan and Myanmar, were omitted.

OK, so they pay a fine. Good. But it doesn’t say anywhere that anyone’s been banned from the industry. They altered records! They had a protocol for hiding transfers! That shows deliberate intent to break the law, with a policy set somewhere by somebody who thought about it … and nobody’s been banned from the industry? And yet they’re going after a dumbass salesman at Goldman who did his job and did it well? I don’t get it.

It was a good day on the Canadian preferred share market, with PerpetualDiscounts up 24bp and FixedResets gaining 3bp on high volume. Sadly, FixedResets did not set a new yield low today – in fact, the median weighte average YTW actually increased fractionally.

MFC issues continue to be prominent in the highlights.

This entry was posted on Tuesday, August 17th, 2010 at 11:58 pm and is filed under Market Action. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.