February 16, 2011

The Boston Fed has released its 2H10 Research Review:

  • Public Policy Discussion Papers
    • Who Gains and Who Loses from Credit Card Payments? Theory and Calibrations, Scott Schuh, Oz Shy, and Joanna Stavins
    • $1.25 Trillion Is Still Real Money: Some Facts about the Effects of the Federal Reserve’s Mortgage Market Investments, Andreas Fuster and Paul S. Willen
    • Reasonable People Did Disagree: Optimism and Pessimism about the U.S. Housing Market Before the Crash Kristopher S. Gerardi, Christopher L. Foote, and Paul S. Willen (discussed on PrefBlog)
    • A Profile of the Mortgage Crisis in a Low-and-Moderate-Income Community, Lynn M. Fisher, Lauren Lambie-Hanson, and Paul S. Willen
  • Working Papers
    • In Search of Real Rigidities, Gita Gopinath and Oleg Itskhoki
    • Strategic Choice of Preferences: The Persona Model, David H. Wolpert, Julian C. Jamison, David Newth, and Michael Harre
    • Some Evidence on the Importance of Sticky Wages, Alessandro Barattieri, Susanto Basu, and Peter Gottschalk
    • Imputing Household Spending in the Panel Study of Income Dynamics:
      A Comparison of Approaches
      , Daniel H. Cooper
    • The Distress Premium Puzzle, Ali K. Ozdagli
    • Characterizing the Amount and Speed of Discounting Procedures, Dean T. Jamison and Julian C. Jamison
    • Internal Sources of Finance and the Great Recession, Michelle L. Barnes and N. Aaron Pancost
    • Affective Decision Making: A Theory of Optimism Bias, Anat Bracha and Donald J. Brown
    • The Financial Structure of Startup Firms: The Role of Asset, Information, and Entrepreneur Characteristics, Paroma Sanyal and Catherine L. Mann
  • Public Policy Briefs
    • Evidence of a Credit Crunch? Results from the 2010 Survey of First District Community Banks, Jihye Jeon, Judit Montoriol-Garriga, Robert K. Triest, and J. Christina Wang
  • Multimedia
    • The Great Recession (video), Christopher L. Foote

My discussion with Assiduous Reader Drew (in the comments to February 11) got me thinking about the propriety of allowing Exchanges to determine who gets listed. For instance, it is possible that this made sense long ago, when (I’m speculating) listing fees were a lower proportion of Exchnge revenue than they were now? Is it possible that the rationale behind the regulatory contracting-out of this gatekeeper function is now obsolete?

I went looking for a chart showing proportions of Exchange revenue over time.

I counldn’t find one, but it turns out – naturally enough – that this has not only been thought of before, but has been a big issue. Jonathan Macey and Maureen O’Hara (who has been mocked on PrefBlog) wrote paper titled From Markets to Venues: Securities Regulation in an Evolving World:

Few issues better reflect this divergence of interests than the listing and delisting of securities. Exchanges have traditionally used listing standards to support their “signaling role” of attesting to the quality of firms trading on the exchange. In return for this endorsement, listing firms paid both initial listing fees and continuing listing fees. These fees have been an important source of revenue for stock markets, particularly in the U.S where listing fees have often been upwards of 30% of the NYSE’s overall revenues.

When it was the case that where firms listed determined where shares traded, these fees could be justified as paying for the ongoing regulation of trading. As we have argued earlier, however, the listing-trading connection has broken down, and trading currently takes place on whichever venue provides the greatest liquidity. There is increased competition for listings. Listing fees now represent almost a fee for access to the US markets, a monopoly rent as it were to the few exchanges and venues empowered to list firms. From a purely economics perspective, since exchanges can list firms whose stocks they may not actually end up trading, the incentives are surely to list more firms than would be optimal if listing and trading were linked. Concerns over such perverse incentives were recently raised in Hong Kong, where a government appointed commission pushed for the transfer of the listing function to the regulator from the exchange arguing that “As a listed company motivated by profitability, the HKEx has a clear interest in listing as many companies as possible since listing fees represent a significant portion of revenues (18% in 2002) and there is a disincentive to allocate revenues to enforcement with is costly and produces no revenues.”

Which is my point exactly. A potential criticism of the TMX-LSE deal is that the TMX has regulatory functions and we might not want those to be under foreign control. But assuming that the functions need to be performed at all, should they be performed by the TMX in the first place? Would it be reasonable, for instance, to say … “OK, go ahead and merge …. on the condition that the Listing Authority gets spun out as a stand-alone company.” … ?

For the security market as a whole, however, listing and delisting standards play an important role by delineating the quality of firms allowed to access a country’s capital markets. Restricting access or denying trading privileges is thus a public good in that it enhances the overall quality of the market. Entrusting this decision to self-regulating exchanges is suboptimal because as with any public good, the social costs exceed the private costs. As we have argued above, self-regulation cannot succeed when this is the case.

Vehemently disagree. This has the implicit view that capital markets are stupid and it is wise regulators who should decide who gets to take advantage of the suckers.

It was another mixed day on the Canadian preferred share market,with PerpetualDiscounts losing 6bp while FixedRestes gained 3bp and DeemedRetractibles were up 6bp. Volatility remained low. but volume picked up and can be described as heavy.

PerpetualDiscounts now yield 5.62%, equivalent to 7.87% interest at the standard equivalency factor of 1.4x. Long corporates continue to yield 5.6%, so the pre-tax interest-equivalent spread (also called the Seniority Spread) is now about 225bp, This marks a significant decline from the 240bp recorded February 9; it should be remembered that while the two figures mentioned are compable (with the caveate that there aren’t too many issuers in that index any more), they are less comparable – and a good comparison would require explicit assumptions of spreads between issuers, etc. – with all earlier data.

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 -0.0832 % 2,398.5
FixedFloater 4.73 % 3.44 % 17,433 19.13 1 0.8330 % 3,600.1
Floater 2.50 % 2.26 % 48,724 21.58 4 -0.0832 % 2,589.7
OpRet 4.82 % 3.52 % 59,704 2.22 8 -0.0096 % 2,391.3
SplitShare 5.29 % 0.89 % 280,639 0.81 4 0.2703 % 2,469.6
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.0096 % 2,186.6
Perpetual-Premium 5.75 % 5.64 % 117,770 1.22 9 -0.1344 % 2,032.3
Perpetual-Discount 5.55 % 5.62 % 130,626 14.41 15 -0.0622 % 2,109.3
FixedReset 5.24 % 3.74 % 180,359 3.03 54 0.0302 % 2,262.3
Deemed-Retractible 5.19 % 5.22 % 400,665 8.26 53 0.0566 % 2,086.3
Performance Highlights
Issue Index Change Notes
BAM.PR.N Perpetual-Discount -1.26 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-02-16
Maturity Price : 21.10
Evaluated at bid price : 21.10
Bid-YTW : 5.72 %
FTS.PR.F Perpetual-Discount -1.11 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-02-16
Maturity Price : 22.90
Evaluated at bid price : 23.09
Bid-YTW : 5.32 %
CU.PR.A Perpetual-Premium -1.03 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2012-03-31
Maturity Price : 25.00
Evaluated at bid price : 25.00
Bid-YTW : 5.64 %
GWO.PR.H Deemed-Retractible 1.32 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.81
Bid-YTW : 5.55 %
Volume Highlights
Issue Index Shares
Traded
Notes
BAM.PR.B Floater 58,145 TD bought 18,500 from Nesbitt at 19.00; anonymous bought 25,000 from Desjardins at the same price.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-02-16
Maturity Price : 18.99
Evaluated at bid price : 18.99
Bid-YTW : 2.78 %
BNS.PR.R FixedReset 52,425 TD crossed 20,000 at 26.11. Desjardins crossed blocks of 15,000 and 10,000, both at 26.09.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-02-25
Maturity Price : 25.00
Evaluated at bid price : 26.07
Bid-YTW : 3.58 %
NA.PR.P FixedReset 50,540 Scotia crossed 40,000 at 27.34.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-03-17
Maturity Price : 25.00
Evaluated at bid price : 27.36
Bid-YTW : 3.45 %
BMO.PR.J Deemed-Retractible 48,079 Desjardins crossed 27,800 at 23.81.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.80
Bid-YTW : 5.09 %
NA.PR.O FixedReset 46,659 Scotia crossed 40,600 at 27.33.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-03-17
Maturity Price : 25.00
Evaluated at bid price : 27.34
Bid-YTW : 3.47 %
CM.PR.J Deemed-Retractible 44,564 TD crossed 29,500 at 23.80.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.75
Bid-YTW : 5.16 %
There were 49 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
PWF.PR.A Floater Quote: 23.20 – 23.74
Spot Rate : 0.5400
Average : 0.3593

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-02-16
Maturity Price : 22.93
Evaluated at bid price : 23.20
Bid-YTW : 2.24 %

CU.PR.A Perpetual-Premium Quote: 25.00 – 25.40
Spot Rate : 0.4000
Average : 0.2403

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2012-03-31
Maturity Price : 25.00
Evaluated at bid price : 25.00
Bid-YTW : 5.64 %

BNS.PR.Z FixedReset Quote: 24.30 – 24.80
Spot Rate : 0.5000
Average : 0.4034

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.30
Bid-YTW : 4.26 %

GWO.PR.L Deemed-Retractible Quote: 25.01 – 25.35
Spot Rate : 0.3400
Average : 0.2540

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.01
Bid-YTW : 5.78 %

RY.PR.X FixedReset Quote: 26.90 – 27.14
Spot Rate : 0.2400
Average : 0.1580

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-09-23
Maturity Price : 25.00
Evaluated at bid price : 26.90
Bid-YTW : 4.02 %

ELF.PR.F Deemed-Retractible Quote: 22.50 – 22.75
Spot Rate : 0.2500
Average : 0.1874

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.50
Bid-YTW : 6.70 %

4 Responses to “February 16, 2011”

  1. Drew says:

    I think you are exactly right to question whether regulatory functions should be performed by an organization the principal objective of which is to maximize profit. When in the relatively recent past ownership of the TSX moved from it’s “members”, being the brokerage community, in my mind it became indefensible for the securities commissions to leave the TSX with the regulatory function it previously held. This is because the goal of profit and the goal of the public good can and often do conflict in ways that are insoluable. By moving ownership from the brokerage community the TSX ceased to be, in a sense, part of the equipment of the brokerage community, not unlike the computers on brokers desks, to being any entity independent of them and existing for the sole purpose of maximizing profit.

    That said, I disagree with your disagreement with the following proposition: “Entrusting this decision to self-regulating exchanges is suboptimal because as with any public good, the social costs exceed the private costs.” This proposition is simply an extension of the view I’ve expressed above, namely that there are often circumstances where the goal of maximizing profit conflicts with the goal of maximizing social good. Further, the TSX’s conduct implicitly evinces agreement with the view that it cannot be left to the capital markets to weed out improper listings. I say this because the TSX’s effort to clean up the Wild West image of the VSE consisted almost entirely in refusing to list the dogs run by the rogues that the brokerage community kept bringing to market and which the capital markets gobbled up. If the capital markets were as bright as you say they are, there would have been no reason for the TSX to refuse some of the listings sponsored by the brokerage community, and the VSE would never have gotten its Wild West image. Indeed, I’ve been told by listings officers that one of the considerations in deciding whether to list an issuer is the impact such listing would have on the TSX “brand”.

    Finally, I disagree with your disagreement because yours is founded on a category mistake: the capital market is incapable of intelligence, as it’s an abstraction, not a person. (I appreciate you are speaking in short-hand, but occasionally doing so gives rise to substantive problems, and this, in my view, is one of them.) It’s a collection of individuals, many of whom are gullible and unsophisticated. Public policy is intended, even if it often fails, to protect those individuals, not for the sake of those individuals but for the sake of the “public”, because the widely accepted assumption is that the public will benefit from the enhanced confidence in the capital markets such protection offers; and the capital markets, it should be remembered but often seems to be forgotten, exist not for their own sake but for the sake of the public.

  2. jiHymas says:

    Indeed, I’ve been told by listings officers that one of the considerations in deciding whether to list an issuer is the impact such listing would have on the TSX “brand”.

    This represents part of my problem with the situation. Burnishing the brand is a business decision, not a regulatory one.

    If the TMX wants to pick and choose which issues it lists – fine! Let them! There’s no difference between that decision and Niemen Marcus refusing to sell Chinese Ikea knock-offs. But that should be explicitly a business decision, with no regulatory authority to hide behind. And the decision should not be forcibly imposed on other marketplaces.

    I say this because the TSX’s effort to clean up the Wild West image of the VSE consisted almost entirely in refusing to list the dogs run by the rogues that the brokerage community kept bringing to market and which the capital markets gobbled up
    Rogues who made a living selling moose pasture out of a bucket shop? Or rogues who didn’t go to the right school or know the right people? And how can one tell from the outside?

    Public policy is intended, even if it often fails, to protect those individuals, not for the sake of those individuals but for the sake of the “public”, because the widely accepted assumption is that the public will benefit from the enhanced confidence in the capital markets such protection offers; and the capital markets, it should be remembered but often seems to be forgotten, exist not for their own sake but for the sake of the public.

    I certainly take your point in theory, not so much in practice. The promotion of trade is a legitimate government function and it can be argued that minimum standards for listing are analagous to standards for weights and measures (which, as I’ve always considered fascinating, were specified in Magna Charta).

    The philosophical problem I have is that the listing requirements are “permission to” rather than the “prohibition from” that I am more comfortable with. By all means, let’s charge somebody with fraud if he has committed fraud; let’s even prohibit recidivists from acting as promoters. But lets do that with an open trial and the judiciary, not behind closed doors in the Club.

  3. Drew says:

    I agree with you on all counts, though on the issue of “charge me or let me in”, I’d like to point out that securities law is a category of administrative law, and is therefore unlike criminal law. Roguishness is very much like obscenity: we know the practitioners when we see them, but we can’t necessarily define precisely what it is that we’re seeing, nor can we prove beyond a reasonable doubt that the object of our assessment is guilty of what we suspect them of – we just instinctively know that we should run screaming in the other direction. Faced with this sight, the criminal law is likely to acquit; administrative law is likely to find guilt. Philosophically, this is messy. Practically, it seems to be the best we can do.

    The administrative law function that is performed by securities regulators works where its practitioners are intelligent, possessed of good judgement and fair-minded. The problem, which I think you’ve put your finger on, is that when you mix the profit motive (of a stock exchange) into the adjudicative process you taint it irredeemably. You don’t really even have a fighting chance of getting it right. That, in my view, is why the TSX should be expunged of it’s regulatory role. It’s also why the character of it’s owners is relevant.

  4. […] pre-tax interest-equivalent spread is now 235bp, a significant increase from the 225bp reported on February 16. It will be remembered that comparability of these levels over the long term has been compromised […]

Leave a Reply

You must be logged in to post a comment.