It turned out to be an interesting day today, with RBC executing some frenetic trading (with an assist from Goldman Sachs Canada) that had a major impact on price volatility and volumes.
TXPR was up a miniscule 0.08% on the day, while TXPL gained +0.40%, so it would appear that all these trades were (probably!) more or less cash neutral and constituted a rejigging of somebody’s (or several somebodies’) portfolio.
The following table is a souped-up version of the regular performance highlights table, which displays all those members of the HIMIPref™ subindices that had a change in their bid price in excess of 1% (up or down) from the close Friday to the close Monday.
I have attempted to differentiate “real” from “unreal” movements based on where trades were executed, rather than where the bid price closed the day; I have also attempted to isolate those issues which were actually involved in the trading programme from those that were volatile simply because they felt like it.
The performance table has been souped up with data collected manually, with immense labour, from the TMX Money website (and therefore ignores potentially valuable information regarding trading at other exchanges): I have used the time of the last 25 trades to help differentiate between “trading programme” and “random” price movements.
It looks like all the excitement was generated by trades executed through RBC, with an assist from Goldman.
The huge number of executions leads me to believe that the trades were executed algorithmicly, and I must give a tip of the hat to the algorithms authors. In at least one of the big movers, it became clear that a pounce algorithm was being used, but it was a relatively smart pounce algorithm. When a counter-flow order was entered inside the market, it didn’t get filled instantly, as is the case with a regular pounce; there was a delay of a some time (up to about a minute, by my estimate) before the order got filled … nice way to catch predatory traders who may assume that not getting filled within 50ms (maybe 20ms?) means that a pounce is not operating at that level.
| Performance Highlights: Modified Version | ||||
| Issue | Index | Change | Range Last Trades Dealer |
|
| MFC.PR.C | Deemed-Retractible | -2.62 % | 24.01-90 25 trades after 3:40pm 20/25 = RBC seller |
|
| MFC.PR.H | FixedReset | -2.50 % | ||
| GWO.PR.I | Deemed-Retractible | -2.29 % | 23.86-24.90 25 trades after 3:34pm 13/25 = Goldman Seller |
|
| NA.PR.L | Deemed-Retractible | -2.23 % | 24.72-58 25 trades after 3:59pm 25/25 = RBC seller |
|
| BAM.PR.N | Perpetual-Discount | -2.10 % | 23.91-80 25 trades after 3:59pm 25/25 = RBC seller 19/25 = RBC buyer |
|
| BMO.PR.L | Deemed-Retractible | -2.10 % | 26.38-10 25 trades after 3:20pm 20/25 = RBC Seller |
|
| SLF.PR.D | Deemed-Retractible | -2.02 % | 24.20-78 25 trades after 3:27pm 25/25 = RBC seller |
|
| BNS.PR.L | Deemed-Retractible | -1.96 % | 25.01-26.02 25 trades after 3:52pm 10/25 = Goldman Seller |
|
| SLF.PR.B | Deemed-Retractible | -1.86 % | 24.82-32 25 trades after 3:21pm 16/25 = Anonymous Seller |
|
| PWF.PR.F | Perpetual-Premium | -1.78 % | 24.50-40 25 trades after 3:42pm 15/25 = RBC seller |
|
| BMO.PR.Q | FixedReset | -1.76 % | 24.52-11 25 trades after 3:32pm 22/25 = RBC seller |
|
| POW.PR.G | Perpetual-Premium | -1.68 % | 26.25-86 25 trades after 3:39pm 25/25 = RBC seller |
|
| SLF.PR.C | Deemed-Retractible | -1.58 % | Not real | |
| BNS.PR.M | Deemed-Retractible | -1.54 % | 25.58-04 25 trades after 3:22pm 20/25 = RBC seller |
|
| POW.PR.D | Perpetual-Premium | -1.43 % | 24.66-26 25 trades after 3:27pm 20/25 = RBC seller |
|
| TRP.PR.C | FixedReset | -1.40 % | 25.30-75 25 trades after 3:35pm 25/25 = RBC seller 25/25 = RBC buyer |
|
| MFC.PR.B | Deemed-Retractible | -1.40 % | 24.75-03 25 trades after 3:24pm 16/25 = Nesbitt Buyer |
|
| BMO.PR.J | Deemed-Retractible | -1.38 % | 25.50-13 25 trades after 3:20pm 15/25 = RBC seller |
|
| BAM.PR.M | Perpetual-Discount | -1.34 % | 24.30-81 25 trades after 3:01pm 15/25 = TD seller |
|
| VNR.PR.A | FixedReset | -1.21 % | Not real | |
| SLF.PR.A | Deemed-Retractible | -1.20 % | 24.53-10 25 trades after 3:33pm 22/25 = RBC seller |
|
| BMO.PR.M | FixedReset | 1.03 % | 25.23-97 25 trades after 3:39pm |
|
| BAM.PR.G | FixedFloater | 1.13 % | Not real | |
| FTS.PR.G | FixedReset | 1.15 % | Not real | |
| RY.PR.I | FixedReset | 1.20 % | 25.91-41 25 trades after 3:41pm 23/25 = RBC buyer |
|
| SLF.PR.I | FixedReset | 1.37 % | 26.20-27.68 25 trades after 3:18pm 14/25 = RBC buyer |
|
| TD.PR.K | FixedReset | 1.43 % | 26.58-23 25 trades after 3:32pm 23/25 = RBC buyer |
|
| ENB.PR.P | FixedReset | 1.46 % | 25.41-09 25 trades after 3:37pm 23/25 = RBC buyer |
|
| SLF.PR.H | FixedReset | 1.58 % | Not real | |
| BNS.PR.Q | FixedReset | 1.60 % | 24.96-70 25 trades after 3:39pm 18/25 = RBC buyer |
|
| CM.PR.K | FixedReset | 2.06 % | 26.20 – 27.28 25 trades after 3:03pm 21/25 = RBC buyer |
|
| MFC.PR.I | FixedReset | 2.27 % | 26.40-38 25 trades after 3:27pm 18/25 = RBC buyer |
|
| PWF.PR.R | Perpetual-Premium | 2.99 % | 26.73-27.99 25 trades after 3:43pm 17/28 = RBC buyer |
|
| IAG.PR.G | FixedReset | 3.82 % | 26.20-27.56 25 trades after 3:47pm 13/25 = Goldman buyer |
|
Analysis of the above table allows us to construct the following summary (using only those large changes considered to be “real”):
| Market Movers 2013-1-14 “Real” Changes Only Aggregated by Type |
||
| Sector | Winners | Losers | Deemed-Retractible | 0 | 12 | PerpPrem | 1 | 3 | PerpDis | 0 | 2 | FixedReset | 9 | 2 |
As this table makes clear, whatever was going on was basically selling Straight Perpetuals and buying FixedResets, although there were a couple exceptions to these rules.
Looking more closely at the FixedResets involved, we see that the two losers, BMO.PR.Q and TRP.PR.C, have Issue Reset Spreads of 115bp and 154bp, respectively, leading one to suspect that this is another outbreak of aversion towards the low-spread FixedResets. However, three of the nine winning FixedResets have spreads of less than 200bp (BMO.PR.M, RY.PR.I and BNS.PR.Q) and only one has a spread in excess of 300bp (TD.PR.K at +433). So while I think it’s fair to say an overall trend has been identified, it is clear that the selection process has details within it that are currently unknown.
We’ll see what tomorrow brings, but my first reaction is that this is simply a piece of incompetent trading, for all that I admire the sophistication of the algorithmic tool used. Based on the information currently available, it seems like somebody rebalanced his portfolio – or several portfolios – in such a manner as to attract enormous transaction costs. This conclusion must remain tentative pending more data – or the lack of it! – tomorrow.
Update, 2013-1-15: Assiduous Reader PL writes in and says:
Your comment ” Based on the information currently available, it seems like somebody rebalanced his portfolio – or several portfolios – in such a manner as to attract enormous transaction costs. “. I assume you do NOT mean RBC was trying to generate transaction cost revenue for themselves. ?
No – despite what the regulators want you to believe, commission expense is a negligible part of transaction costs, vastly outweighed by the bid-ask spread and – particularly in this case – market impact costs.
The fact that this was done after 3PM is interesting. Was it to keep retail buyers/sellers out of what is going on. Or to force what retail buyers were watching to make a fast decision before 4PM. Eg. did someone find out something that may be announced after 4PM so I better sell what has gone down and buy what has gone up? I do not think retail investors were the target. There are not enough of us active enough to make it worth while as can be seen from the volumes. So probably trying to see what other ALGOS would do when some volatility kicked in to our sleepy preferred market.
Never ascribe to cunning what can be described as stupidity. I have no idea why this was done so late in the day, and with such insistence on getting such large (for this market) trades done before the close. Maybe the portfolio management company had their weekly meeting just after lunch on Monday and decided to press the button. A possible aggravating factor is the presence of ‘operational silos’ in most portfolio management companies – where portfolio management decisions are distinct from trading decisions: the PM writes a ticket, gives it to his trading desk and immediately loses all control over the order; it is executed by individuals who have completely different priorities and are evaluated by completely different metrics.
The fact that on many issuers the buyers and sellers were RBC definitely needs some investigating. It will be interesting to see if the regulators who you often criticize respond to yesterday.
I don’t see why the regulators should get involved. Whoever initiated these trades clearly has the resources to make a Great Big Stink if he feels that execution was negligent.
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