February 15, 2008

I will admit to having felt a certain amount of schadenfreude when Accrued Interest brought to my attention what has to be one of the world’s worst bond funds. A loss of over 50% in a year in what was touted as a fund that would seek:

a high level of income by investing in intermediate maturity, investment grade bonds. The fund seeks capital growth as a secondary objective when consistent with the fund’s primary objective.

… must be something of a record. But this is the modern age! Faster, Stronger, Better! Citigroup’s Alternative Investments unit has brought new meaning to the word “Alternative”:

Falcon Plus Strategies, launched Sept. 30, lost 52 per cent in the fourth quarter, after betting on mortgage-backed and preferred securities and making trades based on the relative values of municipal bonds and U.S. Treasuries. Some collateralized debt obligations in the fund trade at 25 per cent of their original worth, the newspaper said.

OK, well, I think it’s funny! The WSJ had some more detail about the excellence of Citigroup’s risk-control procedures:

Mr. Pickett’s big order last June was for several hundred million dollars of leveraged loans that a group of banks was selling in a private auction on behalf of a German media company, according to people involved in the transaction. At the time, CSO had roughly $700 million in assets, meaning that Mr. Pickett wanted to commit more than half of the hedge fund’s assets.

Some investors in the fund contend that executives at Citigroup didn’t supervise Mr. Pickett closely enough. “I don’t understand…how it would have been possible for him to take on a position that was disproportionately large,” says one investor in CSO.

Citigroup defends its handling of the situation. Spokesman Jon Diat said CSO and similar funds “are subject to comprehensive internal fiduciary risk oversight, risk management practices and senior-level management supervision.”

The mention of collateralized debt obligations continues to resonate, since UBS says there’s a good chance of huge write-downs to come:

Writedowns for collateralized debt obligations and subprime related losses already total $150 billion, [UBS analyst Philip] Finch estimated. That could rise by a further $120 billion for CDOs, $50 billion for structured investment vehicles, $18 billion for commercial mortgage-backed securities and $15 billion for leveraged buyouts, UBS said. “Risks are rising and spreading and liquidity conditions are still far from normal,” the note said…..

And you’ve got to figure … a UBS analyst would know!

Monolines, monolines … Elliot Spitzer, best known for his efforts in singlehandedly saving the world from the horrors of a NY state governor who was not Elliot Spitzer, has made a bald threat to take over the monolines (well … MBIA, anyway) and split them:

During a recess, Mr. Spitzer told reporters that splitting the bond insurers’ businesses was a last resort. “The clear preference is a recapitalization of the companies,” he said. “Even if the deals don’t close, the sort of market comfort that would be needed to stabilize the marketplace could get there pretty quickly. We just have to wait and see what happens.”….

Turning up the heat yesterday on the banks’ discussions, he said in an interview that there are “some mechanisms” in the law that allow regulators to “force [the bond insurers] into what’s called ‘rehabilitation.'” During his testimony before the panel, he asked Congress for a $10 billion line of credit for the bond insurers, which he said could encourage banks to contribute capital.

There are claims that FGIC wants to be split up:

FGIC Corp., the bond insurer stripped of its Aaa rating by Moody’s Investors Service, asked to be split in two to protect the municipal bonds it covers, according to the New York Insurance Department.

FGIC, owned by Blackstone Group LP and PMI Group Inc., applied for a new license so it can separate its municipal insurance unit from its guarantees on subprime-mortgages, David Neustadt, a department spokesman, said in a telephone interview.

And was the regulator holding a gun to FGIC’s head at the time, or what? What’s the whole story? 

How can this possibly be legal? More to the point, how can it possibly be ethical? Those who purchased credit protection on sub-prime did so based on the strength of the whole company, not simply the post hoc selection of bad bits. Accrued Interest speculates that the so-called crisis might simply be political embarrassment:

But the refinancing won’t erase the embarrassment of having an auction failure. Governmental agencies, including the Port Authority, will start putting increasing pressure on the New York insurance regulators to resolve this matter once and for all.

But the combination of heavy political pressure and a viable private sector solution will be too difficult to ignore. A deal will be worked out to insulate the municipal bond market.

Perhaps more to the point, there is at least a little concern that the so-called crisis in Auction Rate Municipals is largely self-inflicted:

Banks including Goldman Sachs Group Inc. and Citigroup Inc. allowed hundreds of auctions to fail this week after they were unable to attract bidders and decided to stop buying unwanted securities. A failed auction nearly doubled seven-day borrowing costs on $15 million of bonds sold by Harrisburg International Airport in Pennsylvania to 14 percent while a $100 million Port Authority of New York & New Jersey bond reset at 20 percent, up from 4.3 percent a week earlier.

“The problem with most auction bonds isn’t the bonds’ credit quality or default risk,” said Joseph Fichera, chief executive at Saber Partners, a New York-based financial adviser to local governments. “The problem is that there isn’t enough demand for the bonds because some issuers gave monopolies on the distribution to a few banks.”

Just to think … there are still some people in the world who believe that increased political involvement via regulation will save the world!

There has been an amusing twist to the increase in the allowed size of GSE mortgages, which was discussed on January 29. The effective infusion of new money into the jumbo mortgage sector will, in the absence of other factors, affect prices of existing securities:

If larger loans can be packaged into guaranteed securities that can trade in the TBA market, the difference between their rates and those on other prime mortgages would probably fall to between 4 basis points and 19 basis points, from more than 80 basis points today, New York-based Credit Suisse analysts Mukul Chhabra, Chandrajit Bhattacharya, and Mahesh Swaminathan wrote in a report last week. The rates offered on other prime mortgages would climb by a similar amount, they said.

So the trade association that regulates such matters is not allowing the GSE-jumbos to trade normally:

The larger home loans that Fannie Mae and Freddie Mac will temporarily be allowed to guarantee won’t be accepted into the main market for mortgage bonds, the Securities Industry and Financial Markets Association said.

The revised guidelines for the so-called To Be Announced market cover mortgages of more than $417,000 that the government- chartered companies are permitted to buy or guarantee under the $168 billion economic stimulus package signed into law this week, according to a statement today from the trade group in New York.

The exclusion of the larger loans should reduce the size of drops in jumbo mortgage rates that will result from the new law, according to analysts at Credit Suisse Group and Citigroup Inc. Including the loans would have hurt bondholders because their securities would have dropped in value.

A quiet day in the market – not much volume or price movement, probably due to intensive preparations for Bozo Day. With markets at current levels, and now that that $430-million in bank issuance seems to have been well-digested … it wouldn’t surprise me much to see a new issue first thing Tuesday morning, or sometime next week, anyway. Maybe one of the insurers will want some capital so they can go after AIG’s business in its weakened state? Who knows? I wouldn’t bet a dime on it, but I’d go so far as to put a nickel on a new Pfd-1 issue next week at 5.50%.

Note that these indices are experimental; the absolute and relative daily values are expected to change in the final version. In this version, index values are based at 1,000.0 on 2006-6-30
Index Mean Current Yield (at bid) Mean YTW Mean Average Trading Value Mean Mod Dur (YTW) Issues Day’s Perf. Index Value
Ratchet 5.56% 5.60% 43,180 14.5 2 -0.1852% 1,072.1
Fixed-Floater 5.00% 5.65% 76,953 14.72 7 +0.1486% 1,025.3
Floater 4.95% 5.00% 72,440 15.46 3 -0.5366% 854.4
Op. Retract 4.81% 1.91% 78,029 2.56 15 -0.1900% 1,047.4
Split-Share 5.27% 5.46% 98,540 4.22 15 -0.0568% 1,044.1
Interest Bearing 6.27% 6.55% 57,942 3.56 4 -0.6207% 1,075.7
Perpetual-Premium 5.72% 4.51% 375,855 4.56 16 +0.0302% 1,030.1
Perpetual-Discount 5.36% 5.39% 285,576 14.81 52 +0.0704% 959.0
Major Price Changes
Issue Index Change Notes
BAM.PR.I OpRet -2.7468% Now with a pre-tax bid-YTW of 4.52% based on a bid of 26.20 and a call 2010-7-30 at 25.50.
FBS.PR.B SplitShare -2.4096 Asset coverage of just under 1.7:1 as of February 14, according to TD Securities. Now with a pre-tax bid-YTW of 5.85% based on a bid of 9.72 and a hardMaturity 2011-12-15 at 10.00. 
BSD.PR.A InterestBearing -2.2822% Asset coverage of just under 1.6:1 as of February 8, according to Brookfield Funds. Now with a pre-tax bid-YTW of 7.30% (mostly as interest) based on a bid of 9.42 and a hardMaturity 2015-3-31 at 10.00.
MFC.PR.A OpRet -1.5818% Now with a pre-tax bid-YTW of 3.91% based on a bid of 25.51 and a softMaturity 2015-12-18 at 25.00.
BNA.PR.C SplitShare -1.1529% Asset coverage of 3.3+:1 as of January 31 according to the company. Now with a pre-tax bid-YTW of 7.35% based on a bid of 19.72 and a hardMaturity 2019-1-10 at 25.00. Compare with BNA.PR.A (5.86% to 2010-9-30) and BNA.PR.B (7.32% to 2016-3-25).
SBN.PR.A SplitShare +1.2720% Asset coverage of just under 2.2:1 as of February 7, according to Mulvihill. Now with a pre-tax bid-YTW of 4.66% based on a bid of 10.35 and a hardMaturity 2014-12-1 at 10.00. 
RY.PR.C PerpetualDiscount +1.3116% Now with a pre-tax bid-YTW of 5.15% based on a bid of 22.40 and a limitMaturity
DFN.PR.A SplitShare +1.7442% Asset coverage of just under 2.5:1 as of January 31 according to the company. Now with a pre-tax bid-YTW of 4.45% based on a bid of 10.50 and a hardMaturity 2014-12-1 at 10.00.
Volume Highlights
Issue Index Volume Notes
PWF.PR.K PerpetualDiscount 50,100 Now with a pre-tax bid-YTW of 5.39% based on a bid of 23.13 and a limitMaturity.
BNS.PR.O PerpetualPremium 33,500 Now with a pre-tax bid-YTW of 5.42% based on a bid of 25.45 and a call 2017-5-26 at 25.00.
BNS.PR.L PerpetualDiscount 33,039 Now with a pre-tax bid-YTW of 5.20% based on a bid of 21.80 and a limitMaturity.
BNS.PR.N PerpetualDiscount 18,202 Now with a pre-tax bid-YTW of 5.37% based on a bid of 24.62 and a limitMaturity.
RY.PR.G PerpetualDiscount 17,100 Now with a pre-tax bid-YTW of 5.20% based on a bid of 21.73 and a limitMaturity.

There were ten other index-included $25-pv-equivalent issues trading over 10,000 shares today.

15 Responses to “February 15, 2008”

  1. madequota says:

    RBC — How do they survive?

    I draw your attention to this news item that nicely summarizes the underlying factors affecting fixed income investments in Canada (for today anyway!) Note the comment by RBC’s Chief Economist.

    Yet, RBC’s fund managers continue to terrorize the pref market with a meriad of dumping behaviour today . . . and, as is becoming customary, with the shares of their own company. RBC is currently offering RY.PR.A and RY.PR.F to the market at discounts to previous day close, and this in another “up” day for prefs in general.

    How does this company keep their mutual fund customers?


    REUTERS WRAPUP 2-Canada Jan inflation slows, rate cuts on horizon [HPRSWMH]

    (Adds Reuters poll on Bank of Canada rate decisions)

    By Louise Egan

    OTTAWA, Feb 19 (Reuters) – Canada’s inflation rate slowed in January as discounts on vehicle prices offset gasoline price hikes, Statistics Canada said on Tuesday in a report that seemed to leave no obstacles in the Bank of Canada’s path as it prepares to cut interest rates in March.

    Statistics Canada also reported on Tuesday that wholesale trade in December fell 2.9 percent, citing weakness in the auto sector, which is highly vulnerable to the U.S. slowdown.

    The two reports provide fodder for the view that the central bank may cut rates by half a percentage point on March 4 to fortify Canada’s economy against fallout from a possible U.S. recession.

    “It does open the door for something a little more aggressive than 25 (basis point rate cut), maybe even toward the 50 (basis points) that we’re looking for,” said Craig Wright, chief economist at Royal Bank of Canada.

    Canada has none of the inflation concerns plaguing the United States or Europe. Its annual inflation rate slowed in January to 2.2 percent from 2.4 percent in December, less than half the U.S. inflation rate in November. A cut in the federal sales tax and a strong currency brought some price decreases, especially for vehicles.

    The core inflation rate, which ignores tax changes and volatile items like gasoline, fell to 1.4 percent, its lowest since July 2005.

    “The core (inflation rate) is nicely below the Bank of Canada’s worry level. It points to a path of rate cuts coming up for the Bank of Canada,” said Steve Butler, director of foreign exchange at Scotia Capital.

    The bank targets core inflation of 2 percent.

  2. jiHymas says:

    You don’t know that it is RBC fund managers selling the shares – you only know that whoever is selling the shares is doing it through RBC trading facilities … or, if you do know different, you haven’t shown me any proof!

    As of about 3:20pm, the long Canada yield has increased about 7bp … if PerpetualDiscounts were strictly tied to Canadian long rates, they’d be down nearly a full (percentage) point right now.

  3. madequota says:


    Well, you are right; I have no “proof” that the perpetual seller of perpetual prefs is an RBC Fund Manager. I guess I’ll just assume that this (these) sellers have access to trading tools not available to you and I, and that they’ve been selling from an account worth hundreds of millions of dollars, based on the cumulative selling I’ve seen over the past 6 months! Just a “retail” investor that’s got piles of investable cash.

    Now about the 7bp increase yesterday. Pretty amazing; Canadian inflation numbers come in weaker than expected . . . a predicted 25 point reduction in the bank rate is now looking more like 50 points . . . and the long bond gets trashed. What did the market expect? Even weaker numbers that might suggest a 75 point cut? Bizarre.

    However, prefs were fairly strong yesterday anyway . . . and today, with the US inflation numbers coming in stronger than expected, these prefs are holding up nicely. Bizarre . . . again.

    I think the reality is that Canadian prefs do not trade off the long bond (corporate or otherwise). They used to, but not any more. Institutional investors, playing month-end bonus games, etc. are the guys who are moving these things . . . sometimes up . . . sometimes down . . . whatever the mood they happen to be in. You mentioned many times that the Canadian pref market is very small, and hence, very volatile by nature. I would extend this reality to suggest that the majority of this market is in the hands of a very few “institutional” investors, and as such, is subject to the girations of their musings.

    Once one understands and accepts this, then the business of making money in this market can be better approached . . . or maybe people will just stop the mindless act of feeding money to these guys, and then the market can be delivered back into the hands of those who rightfully deserve it . . . the original investor.


  4. jiHymas says:

    madequota –

    The RBC trading desk can act for anybody. Any mutual fund. Even a mutual fund that has an associated dealer could route its trading through the RBC desk. An RBC fund could route its trading through Gundy, if it felt like it.

    For example, the RBC Canadian Equity Fund Annual Report shows (page 8 of PDF) $3,152,000 total brokerage commissions of which only $270,000 is Related-party broker commissions.

    Portfolio managers are required to consider ONLY their clients’ best interest when determining where to show a trade. Determining whether or not there had been a breach of this requirement in any particular case would be a very difficult exercise – but the fact that 90% of the examined fund’s trading is done with non-related-parties is a good sign, anyway.

    I disagree with your suggestion that a cabal of institutional investors plays bonus games with price levels. Frankly, most of the ones I know can’t SPELL cabal, much less join one.

  5. madequota says:

    Mr. Hymas,

    I respect your observations, and I’m sure your experience in this industry justifies your beliefs. But please be open to the changing nature of the landscape.

    First of all, the Portfolio Manager [in general] has only, and I emphasize the word . . . only . . . one priority in mind. That priority is, simply stated, his or her own personal gain. In most cases, the success of their clients is a conduit to this end, but it is far from the top of the list of methods employed by these people to achieve success. At the top of the list is what I would refer to as, rogue and unethical trading . . . artificially pumping up prices, and deflating prices to suit their means. Want proof? I could come up with piles of examples of this exact thing. Perhaps we should spend some time together in a streaming quote system, say, in the last 10 trading minutes of the quarter . . . this is when the Portfolio Manager’s true stripes come out for all to see . . . that is, for anyone interested enough to take a look.

    How about “market makers” that spend all day leapfrogging legitimate investors’ bids and offers, in an attempt to dominate trading in any particular stock? As a proponent of the preferred share market where this practice is rampant, certainly you must be aware of this on-going, and highly unethical practice.

    So why does this annoy me then? Because we have Regulation Services, and the OSC out there, who clearly know this is going on . . . let’s face it; if it’s obvious to a lowly “retail investor” like me, they have to be able to see it as well . . . but they continue to turn a blind eye. It’s unethical . . . and it exists.

    If you can’t do anything about it . . . you have to accept it . . . but please don’t deny it. You’re only fooling yourself.


  6. jiHymas says:

    madequota –

    Well … if you have proof of such market manipulation, you should forward it to the OSC & Regulation Services. They nailed RT Capital for high closing and therefore have a precedent.

    If you have specific instances you want to highlight, forward me the materials and I will publish them – subject to the reservation that I will not make myself liable to be sued for defamation! But, for instance, publishing a record of bids/offers/trades for the last 10 minutes of a quarter and simply pointing out peculiarities would be fine.

    I’m not sure what you mean by “leapfrogging”. If you mean “frontrunning”, then this is not just an unethical, but an illegal practice and any evidence you have of such activity will be appreciated and (probably!) published. If you simply mean “improving the posted bid or offer of an unknown third party” then that’s neither illegal nor unethical – that’s just competition.

  7. madequota says:

    OK, thank you for that reply . . . I’m not sure whether I mean “frontrunning” or not . . . can you give me an example of this concept?


  8. jiHymas says:

    Frontrunning is discussed in excruciating detail by Regulation Services as Part 4 of UMIR.

    Briefly … if I’m your broker (and therefore have a fiduciary obligation to you) I cannot take advantage of knowing about your order to make myself a profit at your expense.

    For instance, say Honest Jimmy’s Psychedelic Pref Shop (HJPPS) is broker for madequota. You call up and instruct me to put in a market order to buy 1,000 shares of ABC.PR.A at a time when the market is:

    500 shares bid at 24.00

    1,000 shares offered at 24.05
    1,000 shares offered at 24.50

    If I do my job and enter your market order, you will be filled at 24.05.

    However, in this situation it could be profitable to front-run your order:

    i) First, I buy as principal the 1,000 shares offered at 24.05
    ii) Then, I offer as principal 1,000 shares at 24.49
    iii) Then, I place your market order to buy 1,000 shares

    You get filled at 24.49 and I make $440 profit. I have front-run your order and a wide variety of punishments await me if the authorities find out.


    Note that the fiduciary obligation I have towards you (in agreeing to place your order for a fee) is very important. If I do not have such a fiduciary obligation, the rules do not apply.

    Say, for instance, I am a bond manager and want to buy $100-million Canada 10-years. I call Honest Madequota’s Psychedelic Bond Shop and ask my dealer (NOT broker!) where you’ll sell them to me. You offer them to me at 100.15. I tell you to get stuffed and we hang up.

    You are perfectly entitled to put in a bid of whatever you like wherever you like on Canada 10-years. If that moves the market, so be it. If you’re able to buy a big whack of them at 100.10, then you’re doing well. If you can sell them to me at 100.20, even better.

    Since our relationship was principal/principal and not broker/client, you can do anything you like with the information that a big, market moving, order is coming down the pipes.

    Of course, I knew that all along! Ha-ha! I was the guy who (acting through an anonymous front man) sold you your whack at 100.10! I would have told you to stuff your price no matter what you’d quoted me! There goes your bonus, sucker!

    The grossly over-regulated stock market take all the fun out of trading, y’know?

  9. jiHymas says:

    I should also point out that as long as I execute your instructions as a broker honestly, then I am fully allowed to do whatever I like as principal afterwards.

    If you tell me to put in a limit order to buy 1,000 shares at 24.01, and I do that, then I’m in the clear.

    If I want to put in an order to buy for myself at 24.02 … fine.

    If I want to put in an order to sell at 24.01 … fine.

    Neither of those two subsequent actions is improper.

  10. madequota says:

    thank you for the detailed reply! . . . It looks like my issue is not with the concept of “frontrunning” after all then, since I’m not talking about a broker/client situation.

    What I am concerned with is the aggressive trading behaviour of so-called “market makers”. Here’s an example:

    The bid/ask on ABC.PR.A is say $21.50 – $22.00, market maker on both sides. I come in with a bid at $21.51, hoping to pick up any shares that a seller comes into the market with. What happens almost 100% of the time is the market maker immediately steps his bid up to $21.52, disqualifying me from any potential buy, and ensuring that he himself is the principle of any sell order coming in. Should he get filled on the buy, he invariably goes straight to the sell with these shares. Beyond this, it seems that market makers utilize computer programs to place these trade reactions. Net result is that it’s often near impossible to get a fill, unless you take the bid, or ask, into the middle of the spread.

    Am I the only one who sees this practice as unethical? Is the market maker’s exclusive role not that of providing a market in the absence of any existing one? Should he not be forced to defer to any trader coming into the market with a bonafide order?


  11. jiHymas says:

    madequota –

    Am I the only one who sees this practice as unethical? Yes

    Is the market maker’s exclusive role not that of providing a market in the absence of any existing one? No. His role is to maintain a market that meets certain standards for depth and spreads and, in general, to provide liquidity to the market. If he wishes to maintain a market that exceeds minimum standards, good for him.

    Should he not be forced to defer to any trader coming into the market with a bonafide order? No. In your example, you are suggesting that the MM be prohibited from improving the bid to $21.52 from $21.51. The first among many things wrong with this idea is that it’s not fair to potential sellers, who might appreciate the extra penny. I will also note that there is absolutely no reason to consider your $21.51 more bona fide that his $21.51.

    it seems that market makers utilize computer programs to place these trade reactions. This is called algorithmic trading; while market makers use such software extensively, so do a lot of players. I believe that Interactive Brokers offers software that does this for retail clients (look for “Create a Conditional Order” in their User Guide), but I’m not familiar with the software. You may also wish to lobby whichever execution service you use for access to such software.

    Madequota, your knowledge of the market is fine and I greatly appreciate your contributions to this blog. But I’m going to be frank. Quit whining. If you want to be the best bid on the board … nothing’s stopping you. If somebody’s ahead of you at $21.52, there is absolutely no reason why you can’t bump your bid to $21.53.

    If you want to play with the big boys, play. But don’t expect special rules like “nobody improve on madequota’s bids”. If you’re ahead of me and I want to be best bid, I will be best bid. To do special favours for you and defer to your orders would be to take caviar out of the mouths of my children – or it would be, if I had any children and I was willing to let them have any of my caviar.

  12. madequota says:

    “nobody improve on madequota’s bids”? . . . that should actually be a TSX standard, don’t you think?!

    OK, I understand what you’re saying here, and I suppose, deep down, I would find it hard to intelligently disagree with any of your points on this one.

    You do have to realize however, that many mm’s go beyond their assigned roles to provide depth, spreads, and liquidity. They aggressively trade the market, and their only interest often seems to be making money via trading. Turning the mm role into a profit centre, beyond accepting the fees charged for providing the services you describe is, at the very least, viewed as unethical, and annoying to, traders other than . . . me.

    . . . and caviar has too much cholesterol for children anyway!


  13. jiHymas says:

    Market Makers do not get a fee for this role. As compensation for their labours, what they do get is a bit of preference on certain orders. This preference works through the “Participation” mechanism.

    Say the Minimum Guaranteed Fill on a particular issue is 1,099 shares and the market is currently quoted at 21.50-00, 10×10. Madequota‘s on the bid for 1,000 shares.

    Joe Seller comes in with a market order to sell 1,000 shares. After the dust settles, madequota is outraged to discover he was filled for only 600. The market maker got 400 of them!

    What has happened in this case is that the market maker has elected to participate on the bid side. In such a case, he will automatically fill 40% of any MGF-eligible order. He can elect to participate on either, both or neither side of the market … as long as the spread standards are maintained one way or another, the TSX is happy.

    You should also realize that the primary role of a Market Maker is to be a profit centre. These guys are simply common or garden prop traders who have accepted the responsibility and paperwork of the MM role; firstly because they might make a little (very little) money; secondly, because the TSX applies pressure to its members to ensure the roles are filled, and the members in turn pressure their employees. I don’t believe it’s a huge money maker – there are too many rules about what you’re allowed to do.

    You should also be aware of automated crosses. The market is $21.50-00, 20×10, madequota is first in line on the bid side (via his execution service, HJPPS), bidding for 1,000 shares. Second in line is TD Securities, for 1,000 shares.

    Along comes a market order to sell 1,000 shares … and madequota GETS NO FILL AT ALL! You see, the sell order came from TD Securities … and they filled it as a cross at $21.50 and simply notified the exchange of what they were doing. There’s nothing wrong with that, as long as the seller gets the $21.50 best-price (they can’t do the cross at $21.49, for instance).

    If the sell order had come from somewhere else – Investorline, say – madequota would have been filled completely, since he was first in line.

    I’m not familiar with the intricacies of all the software at all the discount brokers, but I believe this is standard; their software checks for a potential cross prior to transmission of an order. For this reason, it can be profitable to do your trading through a very big execution service rather than a small one, because there’s a greater chance of this automated crossing working in your favour.

    If it’s any consolation, I hear EXACTLY THE SAME COMPLAINTS from the prop traders employed by a major client. They hate algorithmic trading, they hate iceberg orders and they hate penny tick sizes. They also hate the idea that retail can compete with them and get in front of their limit orders. They want to go back to the good old days when they could make good money just by sitting at their screens.

  14. madequota says:

    As usual, an incredibly detailed and worthwhile response, which is much appreciated!

    The 40% rule, as well as automated crosses, are two concepts that I am familiar with, but your structured explanation of both of these are welcome and clear summaries. Thank you again.

    With regard to mm’s and prop traders, I did not know how the service was structured. The fact that no specific fees are paid for the service is quite surprising, especially since this is an industry that has made the creation of fees for everything imaginable somewhat of an artform. I guess I should be a little more tolerant of the presence of these people after all!

    As for prop traders having the same complaints as I . . . this is kind of interesting. It’s a classic “chicken and egg” thing, for without the actual investor, there would be no investable capital, and hence, no need for a prop trader.

    The good old days when they could make money at their screens, not being pestered by the lowly retail investor are over. Why? Because the companies these prop traders work for provided the tools, and the $6.99 commission rates to these annoying retail people in the first place.

    But having said all that, I guess I’ll change my attitude somewhat. I hereby declare tomorrow, February 22 “Kiss your Market Maker Day” . . . and instead of jumping over his bids by a penny . . . well, I’ll just join him on the bid at the same price and pray for an automated cross in my favour!


    p.s. I’d still like to bash the RBC Fund Managers on occasion though!

  15. […] the world’s worst bond fund? I discussed it on February 15, 2008. Now the sponsor has received a comeuppance: Former Chicago Bull Horace Grant won a $1.46 million […]

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