Pragma Trading provides an interesting perspective on high frequency trading:
Market making is an important function in the smooth operation of markets. In theory, there should be a natural equilibrium: market makers will compete only to the point that they can no longer profit by quoting more aggressively. This means they will trade at times or prices that directional traders will not, narrowing spreads and improving market quality.
However, the existence of ultra-long queues suggests that this equilibrium is out of whack. Market makers compete en masse where there is already deep liquidity and no opportunity for price improvement because of the tick size. From a market structure perspective, the concern is that there is no practical way to opt out of interacting with these superfluous market makers, and because of the take fees charged by exchanges, directional traders are effectively forced to subsidize HFTs even though there are other directional traders they could interact with directly. This effect is most pronounced where the spread size is very large despite fundamental liquidity, i.e. for low-priced, high-volume stocks. As demonstrated by the preponderance of ultra-long queues in lower-priced stocks and the total absence of ultra-long queues in stocks priced below $1, it appears that the penny tick size and the liquidity rebates paid by exchanges in the maker/taker model effectively subsidize HFTs in a way that is essential to much of their profitability, and are the root causes of this market distortion.
Bloomberg’s Matthew Philips did some more digging:
The question is whether the benefits speed traders bring to the market outweigh these added costs and trade-offs. Even if slightly longer wait times are costing long-term investors billions a year, having a more liquid market with tighter spreads has saved them that much, if not more, says Rick Cooper, a professor of finance at the Illinois Institute of Technology’s Stuart School of Business. Cooper used to work for long-term investors, building early algorithms and quant models for State Street Global Advisors. He doubts they want to go back to the old days where they were beholden to a small, clubby group of broker dealers serving as market makers. “Back in the day, when demand spiked, they would widen out the spread on you,” says Cooper. “It used to take us days to execute some of our big trades so we wouldn’t move the price.”
These days, any time a market-maker tries to widen out the spread, an electronic market maker usually jumps in and tightens it up again.
There’s some colour on the Facebook fiasco:
UBS’s admission that it lost nearly $356-million on the botched Facebook IPO puts pressure on Nasdaq OMX Group Inc. and raises questions about how quickly the exchange can put this problem behind it.
…
UBS handles most of the order flow from Charles Schwab Corp., one of the biggest U.S. brokerages, with about $1.8-trillion in client assets. It also takes orders from other retail brokerages, including TD Ameritrade and Fidelity.But that alone may not account for the massive loss. UBS also said that, as a result of “multiple operational failures by NASDAQ, UBS’s pre-market orders were not confirmed for several hours” rather than in the usual milliseconds. That triggered its internal systems to re-enter orders multiple times, it said.
When the confirmations finally came through, UBS and other market makers were left owning large amounts of unwanted Facebook stock, which led to losses as the stock plunged.
“As a result of system protocols that we had designed to ensure our clients’ orders were filled consistent with regulatory guidelines and our own standards, orders were entered multiple times before the necessary confirmations from Nasdaq were received and our systems were able to process them,” UBS said. “Nasdaq ultimately filled all of these orders, exposing UBS to far more shares than our clients had ordered.”
No failsafes on the order-reentry algorithms, eh? Well, it’s nice that they saved a few thousand on programming.
The Canadian preferred share market closed the month on a happy note, with PerpetualPremiums up 3bp, FixedResets gaining 4bp and DeemedRetractibles winning 7bp. Volatility was muted. Volume was low.
| 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 | 0.0201 % | 2,295.2 |
| FixedFloater | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.0201 % | 3,433.4 |
| Floater | 3.17 % | 3.20 % | 68,807 | 19.23 | 3 | 0.0201 % | 2,478.2 |
| OpRet | 4.76 % | 2.39 % | 35,313 | 0.89 | 5 | 0.1074 % | 2,534.9 |
| SplitShare | 5.48 % | 4.90 % | 66,028 | 4.66 | 3 | -0.0133 % | 2,762.4 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.1074 % | 2,318.0 |
| Perpetual-Premium | 5.32 % | 0.17 % | 102,065 | 0.46 | 27 | 0.0303 % | 2,268.6 |
| Perpetual-Discount | 4.96 % | 4.96 % | 40,040 | 15.27 | 6 | 0.2188 % | 2,508.6 |
| FixedReset | 4.99 % | 3.04 % | 183,329 | 3.96 | 71 | 0.0445 % | 2,423.3 |
| Deemed-Retractible | 4.96 % | 3.48 % | 146,360 | 1.21 | 46 | 0.0657 % | 2,349.4 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| IAG.PR.F | Deemed-Retractible | -1.06 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 26.22 Bid-YTW : 5.34 % |
| MFC.PR.F | FixedReset | 1.05 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.96 Bid-YTW : 3.98 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| TD.PR.A | FixedReset | 125,743 | Scotia crossed blocks of 21,600 shares, 30,000 and 40,000, all at 25.60. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-01-31 Maturity Price : 25.00 Evaluated at bid price : 25.65 Bid-YTW : 3.22 % |
| BMO.PR.M | FixedReset | 107,715 | Desjardins crossed 100,000 at 25.60. YTW SCENARIO Maturity Type : Call Maturity Date : 2013-08-25 Maturity Price : 25.00 Evaluated at bid price : 25.52 Bid-YTW : 2.71 % |
| CM.PR.L | FixedReset | 89,050 | Scotia crossed blocks of 30,000 shares, 28,000 and 25,000, all at 26.80. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-04-30 Maturity Price : 25.00 Evaluated at bid price : 26.70 Bid-YTW : 2.52 % |
| BNS.PR.J | Deemed-Retractible | 52,575 | National crossed 50,000 at 25.92. YTW SCENARIO Maturity Type : Call Maturity Date : 2013-10-29 Maturity Price : 25.00 Evaluated at bid price : 25.92 Bid-YTW : 2.24 % |
| SLF.PR.C | Deemed-Retractible | 50,503 | National crossed 46,100 at 22.75. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.80 Bid-YTW : 5.75 % |
| MFC.PR.I | FixedReset | 39,442 | RBC crossed 12,000 at 25.05. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 25.12 Bid-YTW : 4.37 % |
| There were 19 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| IAG.PR.E | Deemed-Retractible | Quote: 26.30 – 26.89 Spot Rate : 0.5900 Average : 0.3522 YTW SCENARIO |
| HSE.PR.A | FixedReset | Quote: 25.83 – 26.29 Spot Rate : 0.4600 Average : 0.3051 YTW SCENARIO |
| HSB.PR.C | Deemed-Retractible | Quote: 25.53 – 25.87 Spot Rate : 0.3400 Average : 0.2296 YTW SCENARIO |
| IAG.PR.F | Deemed-Retractible | Quote: 26.22 – 26.65 Spot Rate : 0.4300 Average : 0.3482 YTW SCENARIO |
| BAM.PR.C | Floater | Quote: 16.40 – 16.84 Spot Rate : 0.4400 Average : 0.3615 YTW SCENARIO |
| NA.PR.L | Deemed-Retractible | Quote: 25.56 – 25.77 Spot Rate : 0.2100 Average : 0.1409 YTW SCENARIO |