February 7, 2011

The SEC Flash Crash Advisory Committee has been discussing the Flash Crash for some time now; speculation is intensifying:

Regarding market structure, Schapiro said more work needs to be done to shore up investor confidence and transparency amid advances in high-speed trading.

“We are examining trading or other obligations that might be required of today’s de facto market makers: the high-frequency traders,” said Schapiro during remarks at SEC Speaks, a conference hosted by the Practising Law Institute.

“We are asking if these firms should be subject to an appropriate regulatory structure, including with respect to their quoting and trading activities.”

“Given the potential for trading algorithms to cause severe trading disruptions and shake investor confidence, we also are considering whether they should be subject to appropriate rules and controls,” she said.

One committe member is floating trial balloons:

Robert Engle, a Nobel Prize-winning finance professor at New York University, said in an interview that the regulator-appointed panel has not yet decided on its final recommendations, though he expects them to be made public at a February 18 meeting.

The focus, he said, should be that buyers all but vanished during the May 6 market plunge, abandoning investors when liquidity was most needed.

This could be fixed by allowing exchanges to boost the rebates it pays for standing buy and sell orders, and by squeezing more of the trading that takes place in anonymous “dark pools” into the public markets.

Engle said he has pushed for rules that would come into effect when markets are under duress and in need of more liquidity, allowing exchanges to boost both the rebates they pay for orders as well as the fees they charge traders.

“You would have a peak-load pricing model, much like the way you use peak-load prices to adjust traffic across a bridge or freeway,” Engle said in a telephone interview from NYU’s Stern School of Business.

In discussions with a four-member subcommittee, the professor has also recommended a move seen for years by many in the industry as far more radical: a “trade-at” rule.

Such a rule would prohibit any of the dozens of U.S. venues and wholesale market makers from executing an incoming order unless it was already publicly displaying the best bid or offer in that particular stock, or unless it improved the price by a set amount.

“The big banks that are internalizing their trades obviously would hate it,” Engle said. “But basically they already had this captive audience of relatively high quality trades that, it seems to me, ought to be part of the price discovery process,” which primarily takes place on the public exchanges such as the Nasdaq Stock Market.

In other words, trading information has now become a public good. I’ll have more to say about this sometime latter – because a CSA/IIROC discussion paper says the same thing. Back to Engle…

In a September 30 report that serves to inform the committee’s recommendations, the SEC and CFTC said a single $4.1-billion futures sale sparked the crash, and that it was exacerbated by computer-trading programs rapidly offsetting positions, and by the crush of sell-now orders.

While “Sunshine” laws have prevented the committee from regularly meeting, Engle said the subcommittee has discussed a bevy of sometimes esoteric market structure issues:

They include excessive quote traffic, trading curbs known as limit up / limit down, a record of all trading known as a consolidated audit trail, restrictions around unfettered “naked” access to markets, and co-locating computers next to exchanges. They also include high-frequency algorithmic trading, he said.

Still, there has been “very little” communication among the full, eight-member committee in the last few months, Engle added. “We haven’t had as much communication as would be desirable.”

The first paragraph seeks to promulgate the mythology that High Frequency Trading exacerbated the Flash Crash, which is a very difficult position to justify. I have taken the view (see the October PrefLetter) that the Flash Crash was merely a case of Market Impact writ large: a single trader sparked it and it was exacerbated not by HFT, but by morons’ Stop-Loss orders.

The bit about the Sunshine Laws makes me laugh!

Here’s an interesting, if self-interested, admission:

Over the past two years, the Bank of Canada, in partnership with OSFI, has developed a stress test that has been applied to all the banks.

Rather than relying on the banks’ own internal tests, OSFI and the central bank have created a “macro” test, White said, adding that the work has put this country at the forefront of such testing.

Some analysts argue some of the results of Canadian bank stress tests should be made public in the interests of transparency. But according to [OSFI Assistant Croupier Mark] White, such public disclosure puts pressure on regulators to present institutions in the best possible light.

Fabulous Fab’s defence against SEC charges continues to grind along:

The Goldman Sachs trader is still fighting SEC litigation alleging he failed to tell investors in the Abacus CDO that hedge fund Paulson & Co. had helped pick out some of the underlying securities and planned to bet against them.

So, Fabrice Tourre is now demanding that Royal Bank of Scotland, hedge fund Magnetar and monoline ACA Capital produce documents relating to the case. And which, he argues, might help him refute the SEC’s claim that companies like ACA wouldn’t have participated in Abacus had they known of Paulson’s involvement.

There was a certain amount of excitement on the Canadian preferred share market today as OSFI’s refusal to grandfather extant Tier 1 Capital reverberated through the market. PerpetualDiscounts were up 30bp, FixedReset lost 13bp and Deemed-Retractibles gained an impressive 110bp.

Deemed-Retractibles? Those are the Straight Perpetuals (both PerpetualDiscount and PerpetualPremium) issued by BMO, BNS, CM, ELF, GWO, HSB, IAG, MFC, NA, RY, SLF and TD. I have added a hardMaturity entry to the call schedules for these issues, at par, effective 2022-1-31.

Who deems them to be retractible? Me. Who chose the issuers included in the list? Me. Who chose the hardMaturity date? Me. I will discuss and attempt to justify my analytical approach to this paradigm shift in the February PrefLetter, scheduled to be prepared as of the close this Friday, February 11, and made available to clients prior to the opening on February 14.

Similar entries have been made to the call schedules of FixedResets from these issuers, but I didn’t bother creating a new index since the overwhelming majority of these issues were overwhelmingly likely to be called anyway, with or without the advisory.

Note that since a REORG_TERMCHANGE entry type causes the analytics to discard prior trading data, all of the reported average volume figures have changed dramatically.

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices

Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)
Median
YTW
Median
Average
Trading
Value
Median
Mod Dur
(YTW)
Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 -0.0356 % 2,399.0
FixedFloater 4.79 % 3.50 % 22,334 19.09 1 0.0000 % 3,553.1
Floater 2.50 % 2.29 % 45,257 21.53 4 -0.0356 % 2,590.3
OpRet 4.82 % 3.57 % 64,927 2.24 8 0.0579 % 2,387.0
SplitShare 5.30 % 1.68 % 319,651 0.84 4 -0.1149 % 2,464.8
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0579 % 2,182.6
Perpetual-Premium 5.74 % 5.15 % 109,906 1.10 9 -0.2131 % 2,033.6
Perpetual-Discount 5.55 % 5.64 % 128,659 14.41 15 0.3008 % 2,108.5
FixedReset 5.27 % 3.69 % 167,574 2.99 52 -0.1289 % 2,267.1
Deemed-Retractible 5.21 % 5.21 % 438,039 8.29 53 1.1040 % 2,081.3
Performance Highlights
Issue Index Change Notes
TD.PR.C FixedReset -1.35 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-03-02
Maturity Price : 25.00
Evaluated at bid price : 26.29
Bid-YTW : 3.87 %
IAG.PR.E Deemed-Retractible -1.04 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-01-30
Maturity Price : 25.00
Evaluated at bid price : 25.60
Bid-YTW : 5.76 %
BMO.PR.M FixedReset -1.03 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-09-24
Maturity Price : 25.00
Evaluated at bid price : 25.95
Bid-YTW : 3.37 %
MFC.PR.B Deemed-Retractible 1.01 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.00
Bid-YTW : 5.80 %
HSB.PR.D Deemed-Retractible 1.06 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.86
Bid-YTW : 5.66 %
RY.PR.B Deemed-Retractible 1.21 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.16
Bid-YTW : 5.11 %
CM.PR.I Deemed-Retractible 1.26 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.10
Bid-YTW : 5.18 %
BAM.PR.N Perpetual-Discount 1.48 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-02-07
Maturity Price : 21.20
Evaluated at bid price : 21.20
Bid-YTW : 5.68 %
BAM.PR.M Perpetual-Discount 1.72 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-02-07
Maturity Price : 21.26
Evaluated at bid price : 21.26
Bid-YTW : 5.67 %
MFC.PR.C Deemed-Retractible 1.80 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.65
Bid-YTW : 5.83 %
SLF.PR.B Deemed-Retractible 1.85 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.70
Bid-YTW : 5.53 %
SLF.PR.A Deemed-Retractible 1.91 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.49
Bid-YTW : 5.59 %
GWO.PR.I Deemed-Retractible 2.07 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.68
Bid-YTW : 5.74 %
BNS.PR.L Deemed-Retractible 2.17 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.97
Bid-YTW : 5.04 %
BMO.PR.J Deemed-Retractible 2.22 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.92
Bid-YTW : 5.02 %
RY.PR.C Deemed-Retractible 2.35 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.96
Bid-YTW : 5.11 %
RY.PR.W Deemed-Retractible 2.47 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.85
Bid-YTW : 4.98 %
BNS.PR.M Deemed-Retractible 2.48 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.00
Bid-YTW : 5.02 %
CM.PR.J Deemed-Retractible 2.61 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.95
Bid-YTW : 5.04 %
SLF.PR.C Deemed-Retractible 2.82 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.25
Bid-YTW : 5.92 %
SLF.PR.E Deemed-Retractible 2.89 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.44
Bid-YTW : 5.87 %
RY.PR.E Deemed-Retractible 3.16 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.82
Bid-YTW : 5.07 %
SLF.PR.D Deemed-Retractible 3.39 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.25
Bid-YTW : 5.92 %
RY.PR.D Deemed-Retractible 3.50 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.92
Bid-YTW : 5.02 %
RY.PR.G Deemed-Retractible 3.59 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.93
Bid-YTW : 5.02 %
RY.PR.F Deemed-Retractible 3.98 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.01
Bid-YTW : 4.93 %
RY.PR.A Deemed-Retractible 4.03 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.01
Bid-YTW : 4.93 %
Volume Highlights
Issue Index Shares
Traded
Notes
BNS.PR.M Deemed-Retractible 160,399 Nesbitt crossed 50,000 at 24.05. TD crossed 24,600 at 24.00 and Nesbitt crossed another 50,000 at 24.01.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.00
Bid-YTW : 5.02 %
RY.PR.A Deemed-Retractible 157,250 Nesbitt crossed 25,000 at 24.01.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.01
Bid-YTW : 4.93 %
FTS.PR.E OpRet 150,400 Nesbitt crossed 150,000 at 26.71.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-07-01
Maturity Price : 25.75
Evaluated at bid price : 26.69
Bid-YTW : 3.57 %
RY.PR.E Deemed-Retractible 123,980 Desjardins crossed 13,700 at 24.00.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.82
Bid-YTW : 5.07 %
TRP.PR.C FixedReset 105,000 Nesbitt crossed 100,000 at 25.45.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-02-29
Maturity Price : 25.00
Evaluated at bid price : 25.45
Bid-YTW : 4.04 %
RY.PR.H Deemed-Retractible 101,675 Nesbitt crossed blocks of 40,000 and 50,000, both at 26.15.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-06-23
Maturity Price : 25.00
Evaluated at bid price : 26.15
Bid-YTW : 4.80 %
There were 45 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
PWF.PR.P FixedReset Quote: 25.46 – 25.95
Spot Rate : 0.4900
Average : 0.3101
PWF.PR.A Floater Quote: 23.51 – 23.99
Spot Rate : 0.4800
Average : 0.3180
TCA.PR.X Perpetual-Premium Quote: 50.28 – 50.62
Spot Rate : 0.3400
Average : 0.2485
BAM.PR.P FixedReset Quote: 27.33 – 27.59
Spot Rate : 0.2600
Average : 0.1956
W.PR.H Perpetual-Discount Quote: 24.38 – 24.68
Spot Rate : 0.3000
Average : 0.2405
BAM.PR.H OpRet Quote: 25.45 – 25.68
Spot Rate : 0.2300
Average : 0.1706

One Response to “February 7, 2011”

  1. […] found it rather disappointing, but this is unsurprising. On February 7 I passed on a Reuters report in which it was stated: While “Sunshine” laws have […]

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