October 16, 2012

Commodity Futures Trading Commission Democratic Commissioner Bart Chilton’s recent speech contained some ominous points:

Here’s the thing: our futures markets were never established to be gaming at gambling houses. Leave that to Amarillo Slim and Poison Ivey Phil (that’s still not his name, but I like it). Leave the gaming to the poker players and the gamblers—thank you very much. How smooth was that transition? See, I did have a point. But there’s more: A new car! No, not that. These markets were established to discover prices to benefit consumers and manage risk. We can’t overlook that. Once we forget that, we have lost our way.

As I never tire of pointing out, risk cannot be eliminated, only transformed or shifted. Any time you have a capital asset – perhaps your own house – that has benefits to be realized in the future, there is risk. You can transfer the risk of fire to the insurance company. You can transfer the risk of price declines to the bank, with a low deposit, non-recourse mortgage. But the risk is constant.

I agree that futures markets were established to manage risk (I’m not so sure about the “benefit consumers” part!). A commodities market will benefit ultimate buyers and ultimate sellers by allowing them to fix a price. But these terminal users won’t conveniently arrive at the market at the same time, or share the same views on what price is appropriate when they do … so these ultimate transactions are mediated by speculators, aka gamblers.

I confess I got sidetracked by this part of the speech:

At one point, it sort of brought to mind the Sabre Dance. Remember that one (written by Armenian composer Aram Khachaturian in 1942)? It’s that plate-spinning song where an act spins a large number of plates on teeny tiny poles (the world record in 108 plates). Can’t ya just hear it?

Huh? So I found Sabre Dance on YouTube. Ah! I know that song – how can you possibly not know that song? Wikipedia informs me that it is from the ballet Gayane, which I will have to make a point of seeing some day. But plate spinning? Aha! Mr. Chilton is showing his age!

Brenn was a master at the art of plate spinning, a classic circus act that relies on the gyroscopic effect. Brenn’s routine consisted of spinning five glass bowls on four foot-long sticks all the while spinning eight plates on the tables holding the spinning glass bowls. Seem like too much? Intermittently, he also managed to balance a tray carrying glasses and eggs and in one swoop would remove one of the trays causing an egg to fall into each glass.

Aiming to keep the audience at the edge of their seats, he would also carry a separate tray lined with glasses and spoons in front of them. With a simple flip, every spoon would magically fall into a glass.

His act was almost always performed to Khachaturian’s “Sabre Dance,” a piece of music that is now identified by many people with the skill of multi-tasking.

Sadly, I could not find a video of Brenn’s act with the Sabre Dance music. I wonder how much household crockery got broken after each of his appearances? Maybe his show was sponsored by a large crockery company.

Boy, this “Internet” thingy is a real time sink. Back to our regularly scheduled snarky comments on regulators’ speeches – Mr. Chilton wants the ability to approve or forbid market prices based on whether or not he can rationalize them:

Since 2008, I’ve been working to get these limits in place because, and this is supported with many studies, excessive speculation can push prices around. Nobody can rationalize nearly $150 a barrel oil in 2008 based solely upon supply and demand. It cannot be done. Well, Dodd-Frank required that we implement limits to curtail excessive speculation that can lead to unfair prices.

Sadly, he did not share the results of his interviews with buyers of oil at near $150/bbl in 2008, nor did he provide any hints of responses obtained when he asked people who were long but did not sell. However, this is mere idle curiosity. He’s a regulator, you know, part of the team of adult supervisors, and if he doesn’t know the rational price of a market instrument, who does?

He wants lots and lots of regulation:

There are some things, however, that we should do and promptly. Cheetahs—HFTs—were not even mentioned in Dodd-Frank. There was not one word about them. The new law was passed and signed just shortly after the Flash Crash in May of 2010. By then it was too late to put any techno-language in the law. Heck, we didn’t even yet know all of the ramifications of the Flash Crash.

Nevertheless, we need some market protections and a balanced approach to seeking safer markets while not going all in. Here’s my list:

1. Cheetah Registration: They need to be registered. That’s sort of a pedestrian first step. Can you believe they aren’t even mandated to be registered with us? If they are not registered, we can’t command their books and trading records. They gotta be registered.

2. Testing: They should be required to test their programs before they are unleashed in a live production trading environment. Most of the big cheetahs do this already.

3. Kill Switches: It should be compulsory to have kill switches in the event that cheetah programs go feral. I am pleased that the Securities and Exchange Commission (SEC), some exchanges and my Agency are working on that.

4. Wash Blocker Technology: Cheetahs should also be required to create pre-trade risk controls with available wash blocker technology to prevent wash—or cross—trading (that’s trading with themselves). After all, those trades are illegal in the United States. But, as it stands now, things are moving so fast in this gizmo-gadget trading world that some cheetahs claim they don’t even know when wash trades occurs—if their dancing with their self. That’s not a fantastical answer when regulators start asking questions.

5. Compliance Reports: I’ve also recommended that there be periodic compliance reports from the cheetahs and that the senior executives sign their names and are held accountable for any false or misleading information. The days of “he said, she said” responsibility in financial markets needs to end.

6. Penalties: Finally, and this goes to accountability, also. If there is another flash crash where people are damaged (they lose money) due to a rogue cheetah, I think there need to be steep consequences. And when I say consequences, I’m talking not just for the firm, but for individuals at the firm. If the cheetahs want to be involved in the high-flying, incomprehensible gambling world, okay, but if you cause harm to markets and consumers, we shouldn’t stand for it.

The only “consumers” hurt during the Flash Crash were those idiots who implemented their own little algorithm – a stop loss order. Why is Chilton so bent on protecting the the users of idiotic trading algorithms?

The sternest measure Chilton et al. have taken recently is to protect public utilities from themselves since, naturally, mere public utilities can’t be expected to have a clue about what they’re doing. This protection is forseen to have the usual consequence:

Among the toughest rules that are scheduled to kick in next week is one that requires traders to begin counting their swaps transactions to see if they reach an $8 billion threshold, which tags them as a “swap dealer.” Such firms face the toughest rules, like capital requirements to back trades.

But firms that have only $25 million in total swaps trading with public utilities also get tagged. The aim of this lower threshold was to protect public utilities, by toughening up oversight of banks that deal with them.

But the lawmakers raised concerns voiced by utilities that the threshold will deter banks from trading with them at all, limiting their ability hedge risk and forcing them to pass higher costs on to consumers.

“These new rules will harm America’s economic engine by impairing many of the companies that provide vital financing to consumers and American businesses,” they wrote.

Sources familiar with the matter say the CFTC is reviewing this and other issues posed by the Oct. 12 deadline.

If you want to eliminate public markets, insist on making them safe. It’s a bit like demanding cool sunlight and dry rain. If there are egregiously punitive fines for naughtiness in the course of certain business … that business will not be done at all, for the bosses know that man is born to trouble as the sparks fly upward.

It was a strong day for the Canadian preferred share market, with PerpetualPremiums up 15bp, FixedResets winning 22bp and DeemedRetractibles gaining 12bp. Volatility was average, which is surprising given the size of the move. Volume was below average.

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

Values are provisional and are finalized monthly
Index Mean
(at bid)
Mod Dur
Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 0.0379 % 2,457.0
FixedFloater 4.24 % 3.57 % 33,923 18.23 1 1.7257 % 3,794.0
Floater 2.98 % 3.01 % 66,024 19.72 3 0.0379 % 2,652.9
OpRet 4.62 % -1.32 % 63,217 0.62 4 0.7671 % 2,574.2
SplitShare 5.42 % 4.99 % 72,240 4.51 3 0.3573 % 2,829.4
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.7671 % 2,353.8
Perpetual-Premium 5.29 % -1.06 % 87,544 0.25 27 0.1583 % 2,305.3
Perpetual-Discount 5.02 % 4.92 % 46,218 15.48 4 0.0514 % 2,575.3
FixedReset 4.97 % 3.00 % 183,088 3.84 73 0.2211 % 2,442.7
Deemed-Retractible 4.93 % 3.50 % 118,569 1.01 47 0.1206 % 2,382.4
Performance Highlights
Issue Index Change Notes
Maturity Type : Call
Maturity Date : 2013-06-01
Maturity Price : 25.75
Evaluated at bid price : 26.89
Bid-YTW : -1.32 %
SLF.PR.G FixedReset 1.19 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.60
Bid-YTW : 3.47 %
VNR.PR.A FixedReset 1.22 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-10-15
Maturity Price : 25.00
Evaluated at bid price : 26.52
Bid-YTW : 3.05 %
BAM.PR.G FixedFloater 1.73 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2042-10-16
Maturity Price : 22.85
Evaluated at bid price : 22.40
Bid-YTW : 3.57 %
Volume Highlights
Issue Index Shares
IFC.PR.A FixedReset 52,803 TD crossed 49,700 at 25.36.
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.35
Bid-YTW : 3.61 %
ENB.PR.P FixedReset 48,540 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2042-10-16
Maturity Price : 23.21
Evaluated at bid price : 25.37
Bid-YTW : 3.71 %
ENB.PR.N FixedReset 44,517 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2018-12-01
Maturity Price : 25.00
Evaluated at bid price : 25.55
Bid-YTW : 3.80 %
RY.PR.P FixedReset 42,113 TD bought 11,100 from Nesbitt at 26.60, then crossed 20,000 at the same price.
Maturity Type : Call
Maturity Date : 2014-02-24
Maturity Price : 25.00
Evaluated at bid price : 26.60
Bid-YTW : 2.13 %
PWF.PR.P FixedReset 30,986 TD crossed 20,600 at 25.10.
Maturity Type : Limit Maturity
Maturity Date : 2042-10-16
Maturity Price : 23.37
Evaluated at bid price : 25.09
Bid-YTW : 3.00 %
BNS.PR.T FixedReset 27,048 TD crossed 20,000 at 26.50.
Maturity Type : Call
Maturity Date : 2014-04-25
Maturity Price : 25.00
Evaluated at bid price : 26.53
Bid-YTW : 1.98 %
There were 26 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
BMO.PR.P FixedReset Quote: 27.00 – 27.89
Spot Rate : 0.8900
Average : 0.4876

Maturity Type : Call
Maturity Date : 2015-02-25
Maturity Price : 25.00
Evaluated at bid price : 27.00
Bid-YTW : 2.25 %

RY.PR.X FixedReset Quote: 27.06 – 27.40
Spot Rate : 0.3400
Average : 0.2181

Maturity Type : Call
Maturity Date : 2014-08-24
Maturity Price : 25.00
Evaluated at bid price : 27.06
Bid-YTW : 2.22 %

FTS.PR.F Perpetual-Premium Quote: 26.09 – 26.35
Spot Rate : 0.2600
Average : 0.1574

Maturity Type : Call
Maturity Date : 2012-12-01
Maturity Price : 25.75
Evaluated at bid price : 26.09
Bid-YTW : -1.06 %

TD.PR.G FixedReset Quote: 26.48 – 26.67
Spot Rate : 0.1900
Average : 0.1261

Maturity Type : Call
Maturity Date : 2014-04-30
Maturity Price : 25.00
Evaluated at bid price : 26.48
Bid-YTW : 2.14 %

PWF.PR.M FixedReset Quote: 25.83 – 26.10
Spot Rate : 0.2700
Average : 0.2117

Maturity Type : Call
Maturity Date : 2014-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.83
Bid-YTW : 3.18 %

MFC.PR.C Deemed-Retractible Quote: 23.81 – 23.94
Spot Rate : 0.1300
Average : 0.0797

Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.81
Bid-YTW : 5.23 %

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