August 27, 2013

Is there high-closing in the FX market?

In the space of 20 minutes on the last Friday in June, the value of the U.S. dollar jumped 0.57 percent against its Canadian counterpart, the biggest move in a month. Within an hour, two-thirds of that gain had melted away.

The same pattern — a sudden surge minutes before 4 p.m. in London on the last trading day of the month, followed by a quick reversal — occurred 31 percent of the time across 14 currency pairs over two years, according to data compiled by Bloomberg. For the most frequently traded pairs, such as euro-dollar, it happened about half the time, the data show.

The recurring spikes take place at the same time financial benchmarks known as the WM/Reuters (TRI) rates are set based on those trades. Now fund managers and scholars say the patterns look like an attempt by currency dealers to manipulate the rates, distorting the value of trillions of dollars of investments in funds that track global indexes.

Because they receive clients’ orders in advance of the close, and some traders discuss orders with counterparts at other firms, banks have an insight into the future direction of rates, five dealers interviewed in June said. That allows them to maximize profits on their clients’ orders and sometimes make their own additional bets, according to the dealers, who asked not to be identified because the practice is controversial.

A large proportion of trading at that time is generated by index funds, which buy and sell stocks or bonds to match an underlying basket of securities, the traders said.

Banks that have agreed to make transactions for funds at the 4 p.m. WM/Reuters close need to push through the bulk of their trades during the window where possible to minimize losses from market movements, the traders said. That leads to a surge in trading volume, which can intensify any moves.

Fund managers rarely complain about getting a bad deal because they’re assessed on their ability to track an index rather than minimize trading costs, according to consultants hired by companies and investors to help execute trades efficiently.

“Where possible, I would always advise clients not to trade at the fix — but minimizing tracking error is so important to them,” said Russell’s [head of foreign exchange Michael] DuCharme. “That doesn’t seem to be the right attitude to take when you have a fiduciary duty to seek the best execution for pension holders.”

Hurrah for Mr. Ducharme who, unlike most market participants, appears to have retained the brains he was born with. It seems to me that there’s an opening for a market player to run a trade matching service on a subscription basis … orders are put in by subscribers throughout the day, all net imbalances are disclosed (to subscribers only!), all matching orders are filled at the benchmark rate based on time-stamp, all non-matching orders are cancelled. There would have to be a few rules to enforce all this, but it could work…

The portfolio managers have my sympathies – investing or generating significant amounts of cash to meet client orders can have a huge effect, given that indices are calculated at the close. Perhaps what’s needed is indices and portfolio valuations based on VWAP rather than closes … but that’s only going to work in very liquid markets.

It was a modestly good day for the Canadian preferred share market, with PerpetualDiscounts winning 13bp, FixedResets gaining 7bp and DeemedRetractibles up 10bp. There’s a surprisingly lengthy Performance Highlights table, totally disproportionate to the market move. Volume was very high.

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 -0.0098 % 2,614.3
FixedFloater 4.25 % 3.55 % 36,368 18.22 1 1.3158 % 3,903.1
Floater 2.57 % 2.91 % 68,011 19.91 5 -0.0098 % 2,822.7
OpRet 4.66 % 3.71 % 71,284 0.80 3 0.2463 % 2,610.5
SplitShare 4.73 % 4.42 % 55,184 3.86 6 -0.1202 % 2,953.1
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.2463 % 2,387.0
Perpetual-Premium 5.80 % 5.92 % 115,810 13.98 12 0.1947 % 2,235.8
Perpetual-Discount 5.65 % 5.77 % 152,994 14.19 25 0.1332 % 2,283.9
FixedReset 4.96 % 3.88 % 246,036 3.88 85 0.0722 % 2,442.3
Deemed-Retractible 5.23 % 5.23 % 202,029 6.95 43 0.0963 % 2,318.6
Performance Highlights
Issue Index Change Notes
BNS.PR.Y FixedReset -2.13 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.92
Bid-YTW : 4.36 %
HSB.PR.D Deemed-Retractible -2.00 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.56
Bid-YTW : 5.41 %
CU.PR.F Perpetual-Discount -1.67 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-27
Maturity Price : 21.14
Evaluated at bid price : 21.14
Bid-YTW : 5.35 %
FTS.PR.J Perpetual-Discount -1.55 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-27
Maturity Price : 21.25
Evaluated at bid price : 21.53
Bid-YTW : 5.53 %
BNS.PR.Z FixedReset -1.28 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.05
Bid-YTW : 4.58 %
IFC.PR.C FixedReset -1.14 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-09-30
Maturity Price : 25.00
Evaluated at bid price : 25.21
Bid-YTW : 4.16 %
VNR.PR.A FixedReset -1.14 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-10-15
Maturity Price : 25.00
Evaluated at bid price : 25.21
Bid-YTW : 4.29 %
FTS.PR.F Perpetual-Discount -1.14 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-27
Maturity Price : 21.75
Evaluated at bid price : 21.75
Bid-YTW : 5.67 %
IFC.PR.A FixedReset -1.09 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.49
Bid-YTW : 4.20 %
PWF.PR.O Perpetual-Premium -1.05 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-27
Maturity Price : 24.13
Evaluated at bid price : 24.60
Bid-YTW : 5.94 %
GWO.PR.H Deemed-Retractible 1.01 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.11
Bid-YTW : 6.43 %
BAM.PR.N Perpetual-Discount 1.05 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-27
Maturity Price : 20.23
Evaluated at bid price : 20.23
Bid-YTW : 5.98 %
ENB.PR.P FixedReset 1.05 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-27
Maturity Price : 22.76
Evaluated at bid price : 24.02
Bid-YTW : 4.40 %
BAM.PF.A FixedReset 1.06 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-27
Maturity Price : 23.12
Evaluated at bid price : 24.90
Bid-YTW : 4.71 %
ENB.PR.Y FixedReset 1.07 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-27
Maturity Price : 22.57
Evaluated at bid price : 23.65
Bid-YTW : 4.39 %
GWO.PR.I Deemed-Retractible 1.13 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.45
Bid-YTW : 6.39 %
IAG.PR.F Deemed-Retractible 1.24 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-03-31
Maturity Price : 25.00
Evaluated at bid price : 25.31
Bid-YTW : 5.88 %
ENB.PR.H FixedReset 1.26 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-27
Maturity Price : 22.49
Evaluated at bid price : 23.39
Bid-YTW : 4.25 %
ENB.PR.D FixedReset 1.27 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-27
Maturity Price : 22.81
Evaluated at bid price : 24.00
Bid-YTW : 4.33 %
FTS.PR.H FixedReset 1.28 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-27
Maturity Price : 21.36
Evaluated at bid price : 21.36
Bid-YTW : 4.04 %
PWF.PR.S Perpetual-Discount 1.30 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-27
Maturity Price : 22.35
Evaluated at bid price : 22.65
Bid-YTW : 5.34 %
BAM.PR.G FixedFloater 1.32 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-27
Maturity Price : 22.67
Evaluated at bid price : 22.33
Bid-YTW : 3.55 %
SLF.PR.G FixedReset 1.40 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.15
Bid-YTW : 4.30 %
W.PR.J Perpetual-Discount 1.48 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-27
Maturity Price : 23.69
Evaluated at bid price : 24.00
Bid-YTW : 5.91 %
CU.PR.E Perpetual-Discount 1.50 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-27
Maturity Price : 22.08
Evaluated at bid price : 22.37
Bid-YTW : 5.49 %
ENB.PR.T FixedReset 1.56 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-27
Maturity Price : 22.77
Evaluated at bid price : 24.07
Bid-YTW : 4.39 %
MFC.PR.F FixedReset 1.86 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.02
Bid-YTW : 4.45 %
ENB.PR.N FixedReset 1.87 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2018-12-01
Maturity Price : 25.00
Evaluated at bid price : 24.55
Bid-YTW : 4.40 %
Volume Highlights
Issue Index Shares
Traded
Notes
BMO.PR.L Deemed-Retractible 81,370 RBC crossed blocks of 25,000 and 21,000 at 25.70.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-05-25
Maturity Price : 25.00
Evaluated at bid price : 25.73
Bid-YTW : 4.97 %
BAM.PF.D Perpetual-Discount 80,300 RBC bought three blocks from Scotia, of 31,4000 shares, 11,100 and 15,600, all at 21.00.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-27
Maturity Price : 21.10
Evaluated at bid price : 21.10
Bid-YTW : 5.93 %
BMO.PR.R FixedReset 60,525 Recently exchanged issue.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2018-08-25
Maturity Price : 25.00
Evaluated at bid price : 24.96
Bid-YTW : 2.60 %
MFC.PR.C Deemed-Retractible 55,707 Scotia crossed 10,600 at 21.05. RBC crossed blocks of 14,000 and 10,000, both at 21.00.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 20.95
Bid-YTW : 6.54 %
TD.PR.R Deemed-Retractible 54,241 RBC crossed 11,600 at 25.60.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-04-30
Maturity Price : 25.00
Evaluated at bid price : 25.60
Bid-YTW : 5.03 %
FTS.PR.E OpRet 50,750 TD crossed blocks of 40,000 and 10,000, both at 25.60.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-06-01
Maturity Price : 25.50
Evaluated at bid price : 25.70
Bid-YTW : 3.71 %
There were 60 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
ELF.PR.H Perpetual-Discount Quote: 23.63 – 24.80
Spot Rate : 1.1700
Average : 0.7411

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-27
Maturity Price : 23.30
Evaluated at bid price : 23.63
Bid-YTW : 5.89 %

MFC.PR.F FixedReset Quote: 23.02 – 23.59
Spot Rate : 0.5700
Average : 0.4063

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.02
Bid-YTW : 4.45 %

PWF.PR.O Perpetual-Premium Quote: 24.60 – 24.98
Spot Rate : 0.3800
Average : 0.2190

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-27
Maturity Price : 24.13
Evaluated at bid price : 24.60
Bid-YTW : 5.94 %

BNA.PR.C SplitShare Quote: 23.91 – 24.38
Spot Rate : 0.4700
Average : 0.3230

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2019-01-10
Maturity Price : 25.00
Evaluated at bid price : 23.91
Bid-YTW : 5.30 %

ELF.PR.G Perpetual-Discount Quote: 20.60 – 21.15
Spot Rate : 0.5500
Average : 0.4153

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-27
Maturity Price : 20.60
Evaluated at bid price : 20.60
Bid-YTW : 5.85 %

TCA.PR.X Perpetual-Discount Quote: 48.40 – 48.90
Spot Rate : 0.5000
Average : 0.3890

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-27
Maturity Price : 47.85
Evaluated at bid price : 48.40
Bid-YTW : 5.84 %

2 Responses to “August 27, 2013”

  1. mpisni says:

    Hi James, Market manipulation by bankers ? Tell me it aint so , my faith in thier ability to treat clients with respect and to look after the clients interest before themselves is shaken to the core.
    I am POSITIVE that our revered Canadian banks do not take this approach and that they put our interests first. James , I am surpised, that you do not hold banks in the same level of high esteem that they hold themselves.

    I can now get my tongue out of my cheek !

    Regards,

    Mike

  2. jiHymas says:

    I don’t think it’s as clearcut as all that.

    The dealers will use their knowledge of pending flows to shape their inventory accumulation throughout the day. This could be called front-running (that’s what the regulators will certainly call it) but … the banks will be acting as principal, not as agent, which means it can’t be front-running as it is usually understood. And, in fact, the banks will be doing exactly what the portfolio managers expect of them. That is why the PMs put in a ‘Market on Close’ order … because if you have to buy a billion CAD (to take an extreme example) and you want to do it at the closing price, then you are almost certainly better off telling your guy about it at 8am rather than 3:59 pm.

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