December 12, 2012

IIROC has published a study of HFT titled The HOT Study: Phases I and II of IIROC’s Study of High Frequency Trading Activity on Canadian Equity Marketplaces:

Despite the absence of a clear definition, HFT is of concern to many stakeholders in the Canadian equity marketplace:
• Retail investors complain that their bids and offers are often continuously bettered by the minimum tick size, forcing them to cross the spread by entering market orders to execute a trade;

So retail investors attempting to get paid for supplying liquidity to the marketplace find out that somebody else can supply it cheaper. BooHooHoo.

• Institutional investors, and inventory traders providing liquidity to them, are concerned that algorithms with a technological advantage prey on their large orders, negatively impacting their transaction prices and trading costs;

So market participants with brains manage to out-trade salesmen with big smiles. BooHooHoo.

• Traditional market makers complain they are unable to compete with high frequency electronic liquidity providers (“ELP”);

So the buggy-whip boys can’t compete with nerdy little geeks who didn’t even go to the right schools. BooHooHoo.

• Regulators are concerned with the heightened possibility of spoofing, layering, quote stuffing and other potentially manipulative activity; and

Finally! A point that might, possibly, in some alternate universe, be of concern. You can’t spoof or manipulate somebody who trades on fundamentals – in fact, any attempt to do so is just as likely to provide a fundamental trader with an opportunity as otherwise. Why are the regulators so concerned about protecting idiots who don’t trade on fundamentals? Why are the regulators so upset that sometimes the gamers get outgamed?

• Participants are impacted by increased messaging rates incurring costs for processing and storing data.

Well, that’s the participants’ problem, isn’t it? Just part of that nasty little thing called “competition”, that the regulators are determined to stamp out so the financial marketplace can become a cooperative game where we all help each other, just like in kiddy-school. At any rate, if the exchanges consider it to be a problem (or a potential source of competitive advantage) they can always start charging for each order placed, regardless of whether or not it’s filled.

IIROC, eh? They’re good at awarding single-source contracts to insiders … at thinking things through, not so much.

The Press Release highlights the findings:

Key Findings of Phases I and II — Trading by the Study Group
  • • HOT traders:
    • o represent 11% of User IDs
    • o account for 22% of trading volume, 32% of dollar value, 42% of trades and 94% of all order messages sent
    • o trade 36% of all Canadian share volume traded in US inter-listed securities
    • o trade 60% of all Canadian trading in ETFs and ETNs
  • • HOT users trade:
    • o a larger percentage of total dark activity than displayed market activity
    • o anonymously more often than other market participants
    • o passively approximately 66% of the time
    • o over 90% of their activity through seven IIROC Dealer Members
    • o 23% of their volume within the same broker1 – generally more than retail users and less than other users (excluding retail)
    • o predominantly liquid TSX-listed securities priced over $1.00
    • o more in TSX 60 Index securities than in other TSX-listed securities
    • o primarily outside of the Opening or Market on Close trading sessions
  • • HOT Users earned $250,000 more per day in rebates than they paid in fees. All other participants earned more rebates than HOT Users; however these other participants paid $462,000 more per day in fees than they earned in rebates.
  • • 40% of HOT Users were identified as DMA (as opposed to non-DMA).
  • • HOT DMA Users:
    • o were responsible for the majority of trading by all HOT Users
    • o that were categorized as “Fast” (44% of HOT DMA Users) were responsible for 91% of HOT DMA Users’ share volume
    • o have lower order-to-trade ratios when compared with non-DMA HOT Users
  • • Average order-to-trade ratio is higher in ETF trading for all HOT Users, but particularly for the non-DMA groups.
  • • By all measures, HOT clients (DMA and non-DMA) are more active in common shares and HOT non-DMA (inventory and other) are more active in ETFs/ETNs.

The FOMC statement was interesting:

To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. The Committee views these thresholds as consistent with its earlier date-based guidance. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.

The Canadian preferred share market drifted slightly upwards today, with PerpetualPremiums and DeemedRetractibles gaining 2bp and FixedResets winning 6bp. Volatility was minimal. Volume was average, but made notable by significant trading in the BAM floaters.

PerpetualDiscounts now yield 4.87%, equivalent to 6.33% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.25%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 210bp, a slight (and perhaps spurious) decline from the 215bp reported December 5.

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 -0.0083 % 2,478.1
FixedFloater 4.11 % 3.46 % 29,202 18.35 1 0.6090 % 3,917.7
Floater 2.80 % 2.99 % 57,383 19.76 4 -0.0083 % 2,675.7
OpRet 4.62 % 1.81 % 35,823 0.51 4 0.0569 % 2,599.7
SplitShare 4.65 % 4.71 % 62,597 4.41 2 0.0405 % 2,864.3
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0569 % 2,377.2
Perpetual-Premium 5.25 % 2.14 % 73,055 0.38 30 0.0187 % 2,320.2
Perpetual-Discount 4.86 % 4.87 % 134,646 15.61 4 0.0139 % 2,631.4
FixedReset 4.94 % 2.95 % 230,818 4.34 77 0.0640 % 2,449.9
Deemed-Retractible 4.91 % 3.17 % 115,934 0.68 46 0.0230 % 2,407.2
Performance Highlights
Issue Index Change Notes
GWO.PR.N FixedReset -1.90 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.22
Bid-YTW : 3.86 %
Volume Highlights
Issue Index Shares
Traded
Notes
MFC.PR.J FixedReset 281,692 Recent new issue.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2018-03-19
Maturity Price : 25.00
Evaluated at bid price : 25.25
Bid-YTW : 3.82 %
BAM.PR.K Floater 172,050 Nesbitt crossed 150,000 at 17.50.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2042-12-12
Maturity Price : 17.36
Evaluated at bid price : 17.36
Bid-YTW : 3.02 %
BAM.PR.B Floater 160,822 Nesbitt crossed 150,000 at 17.50.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2042-12-12
Maturity Price : 17.50
Evaluated at bid price : 17.50
Bid-YTW : 2.99 %
RY.PR.T FixedReset 136,250 RBC crossed 119,800 at 26.75.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-08-24
Maturity Price : 25.00
Evaluated at bid price : 26.76
Bid-YTW : 2.22 %
SLF.PR.G FixedReset 103,828 Desjardins crossed 95,800 at 24.30.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.27
Bid-YTW : 3.51 %
BMO.PR.M FixedReset 96,184 National crossed 70,000 at 24.76.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.81
Bid-YTW : 3.19 %
There were 29 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
BAM.PR.K Floater Quote: 17.36 – 18.10
Spot Rate : 0.7400
Average : 0.5562

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2042-12-12
Maturity Price : 17.36
Evaluated at bid price : 17.36
Bid-YTW : 3.02 %

FTS.PR.E OpRet Quote: 27.12 – 27.50
Spot Rate : 0.3800
Average : 0.2807

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-06-01
Maturity Price : 25.75
Evaluated at bid price : 27.12
Bid-YTW : -5.98 %

GWO.PR.N FixedReset Quote: 23.22 – 23.45
Spot Rate : 0.2300
Average : 0.1307

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.22
Bid-YTW : 3.86 %

CIU.PR.B FixedReset Quote: 26.64 – 26.90
Spot Rate : 0.2600
Average : 0.1626

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-06-01
Maturity Price : 25.00
Evaluated at bid price : 26.64
Bid-YTW : 2.31 %

HSE.PR.A FixedReset Quote: 25.78 – 26.03
Spot Rate : 0.2500
Average : 0.1529

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2042-12-12
Maturity Price : 23.58
Evaluated at bid price : 25.78
Bid-YTW : 2.92 %

HSB.PR.D Deemed-Retractible Quote: 25.82 – 26.10
Spot Rate : 0.2800
Average : 0.1838

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-01-30
Maturity Price : 25.50
Evaluated at bid price : 25.82
Bid-YTW : -6.20 %

One Response to “December 12, 2012”

  1. […] PerpetualDiscounts now yield 4.88%, equivalent to 6.34% interest at the standard equivalency factor of 1.3x. Long corporates yield just under 4.3%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 205bp, a slight (and perhaps spurious) decline from the 210bp reported December 12. […]

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