It would appear that Parakeet Poluz was instructed to say some upleasant things at Wednesday’s aborted press conference:
Our outlook for the global economy continues to show stronger momentum in 2015 and 2016, but the profile has been downgraded since July. The good news for Canada is that the U.S. economy is gaining traction, particularly in sectors that are beneficial to Canada’s exports.
And our exports do appear to be responding, with some additional help from a lower Canadian dollar. Our conversations with exporters indicate that they are seeing a better export outlook from the ground.
However, it is clear that our export sector is less robust than in previous cycles. Last spring, as you may recall, we identified which non-energy subsectors could be expected to lead the recovery in exports, and which would not.
We have since investigated in more detail the subsectors that have been underperforming. After sifting through more than 2,000 product categories, we have found that the value of exports from about a quarter of them has fallen by more than 75 per cent since the year 2000. Had the exports of these products instead risen in line with foreign demand, they would have contributed about $30 billion in additional exports last year.
By correlating these findings with media reports, we could see that many were affected by factory closures or other restructurings. In other words, capacity in these subsectors has simply disappeared. This analysis helps us understand a significant portion of the gap in export performance.
Our research also tells us that most of the sectors expected to lead the non-energy export recovery still have some excess capacity. Our Business Outlook Survey (BOS) interviews indicate that while companies plan to invest in new machinery and equipment, few are planning to expand their capacity, at least so far. This helps explain why business investment might be delayed relative to what would be expected in a normal cycle.
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Another important building block of our policy framework is the neutral rate of interest. Carolyn discussed this in an important speech last month; there is also a discussion paper about it, and a box in this MPR. The neutral rate, too, is uncertain. We estimate that it now lies between 3 and 4 per cent, which is well below pre-crisis levels. But since the difference between current rates and the neutral rate is our best estimate of monetary stimulus, understanding the risks around this is also important.After weighing these considerations, it is our judgment at this time that the risks around achieving our inflation objective over a reasonable time frame are roughly balanced. Accordingly, we believe that the current level of monetary stimulus remains appropriate.
Some of you may be wondering why we aren’t being more specific about the likely future stance of monetary policy. Let me answer by saying that forward guidance remains a key element of the policy tool kit – but one that we will reserve for times when we believe there are net benefits to its use. There will no doubt come a day when we will offer forward guidance again – but not this day.
David Parkinson of the Globe is impressed:
Bank of Canada Governor Stephen Poloz has just sat Canadians down and given us a national the-dog-has-died talk. The country lost some things in the Great Recession that ain’t never coming back.
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Until recently, opening remarks for MPR press conferences were word-for-word regurgitations of the bank’s interest-rate-setting statements released at the same time as the MPR. That all changed in July, when Mr. Poloz used his opening statement to provide a detailed explanation of how the bank was interpreting inflation risks. He has now followed this up with October’s frank statement.
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For people (including me) who have gone through years and multiple Bank of Canada governors playing “find the hidden meaning” in cryptic central-bank speak, this may take some getting used to. But Mr. Poloz is a pretty folksy guy, at least as far as central bank bosses go. Expect him to continue to pull us aside as a nation once in a while for these friendly and plain-spoken chats, even if the message is sometimes hard to hear.
The Toronto Stock Exchange has issued a corporate plan titled Reshaping Canada’s Equities Trading Landscape:
Today, we again find ourselves at a point where industry challenges require decisive action to preserve the efficiency and integrity of our markets. There are three significant issues that require our attention and action:
- • Canadian order flow is migrating to the United States (U.S.)
- • Technology-driven markets are not optimized to serve all
- • Market complexity is on the rise
We have examined each of these issues at great length and through extensive consultation with our clients and a broad group of other market participants. After careful analysis we are now proposing bold steps to tackle each one.
Huh. It was consultation and deep thought that have led to the current practice of selling Last Quotes instead of Closing Quotes. So their claim of consultation, in and of itself, does not impress me.
The first section is titled Canadian order flow is migrating to the U.S.:
In the U.S., market structure allows wholesalers and other intermediaries to offer attractive options to Canadian securities dealers. In return for the order flow of certain types of natural investors in the most active Canadian securities, dealers receive executions with more favourable economics.
However, the same model cannot be replicated in Canada within the existing regulatory framework including rules governing fair access, banning payment for order flow between dealers and setting minimum standards for price improvement when trading with dark orders.
As a result, some Canadian dealers are considering – or have already begun – changing their order routing practices to execute immediately tradable (active) Canadian retail and institutional flow with U.S. wholesalers, rather than on our domestic public markets. This movement of liquidity to the U.S. represents a serious risk to the quality and vibrancy of Canada’s capital markets as a whole, and may have irreversible consequences.
They’re talking about market orders of retail clients. It’s nice to see some recognition that the regulatory environment is harmful to Canadian interests.
In June 2015, we plan to introduce an innovative trading model on Alpha that will significantly improve the economics and quality of execution for active natural order flow, while improving trading conditions for liquidity providers willing to commit to a minimum order size.
The new Alpha model is built on the premise that most active institutional and retail order flow values certainty and size of execution over speed, and that dealers executing those orders seek to minimize trading costs while meeting best execution obligations.
The superior execution will be achieved by applying an order processing delay (a “speed bump”) for orders that have the potential to remove liquidity from the order book, enforcing a minimum size for liquidity providing orders and providing rebates for active flow.[Footnote: TSX has filed a patent application]
…A speed bump will be imposed on orders that have the potential to trade with passive liquidity – specifically, all orders not designated as Post Only. The speed bump will be applied equally to these orders of all participants – natural investors and others – and is expected to be set between 5 and 25 milliseconds.Post Only liquidity providing orders will not be subject to a processing delay, allowing liquidity providers to effectively manage their risk.
The speed bump will discourage latency sensitive active strategies, but will not deter active natural order flow for which a delay in milliseconds is insignificant. This means that providers of passive liquidity will have an increased likelihood of interacting with active orders of natural investors, while being protected against opportunistic, latency sensitive active strategies.
Increased interaction with natural investors combined with the ability to bypass the speed bump when managing passive orders will encourage liquidity provision, better visible prices and an increase in displayed volume, resulting in better execution for natural order flow.
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In return for bypassing the speed bump, all Post Only orders will be subject to minimum size requirements.The size threshold will ensure that liquidity providers post sufficient volume against which active orders can execute, contributing to higher average trade sizes, as well as improved fill quality and fill rates for natural active order flow.
This, in turn, will minimize the signaling of liquidity bound for other markets and will reduce market impact. Recognizing that securities exhibit a variety of liquidity profiles, the minimum volume requirement may differ across symbols.
An inverted maker/taker fee model will provide a rebate for active orders, reducing trading fees for retail and institutional dealers and any other non-latency sensitive liquidity taking strategies.
It’s not clear to me whether or not the speed bump will apply to a limit order meeting the Post Only minimum size requirements that can interact with existing resting orders; e.g., what happens if I post a limit order to buy at 25.11 when there’s an extant resting offer at 25.10? And does it matter if my buy is for larger or smaller size than the offer? How about if it’s more than double the size of the offer, so the net change in resting orders would be positive after execution?
The second section is titled Technology-driven markets are not optimized to serve all:
As we embrace this change in technology-driven capital markets, it has become clear that in an environment where some participants increasingly compete on speed, others are challenged and concerned about compromised quality of execution and market integrity.
Specifically, apprehensions around excessive short-term intermediation, the technology race to zero latency and the disenfranchising of the human trader have eroded some participants’ confidence in a market that is meant to balance the needs of all stakeholders.
“disenfranchising of the human trader”, I bet! Prep School weenies can’t cut it in the new meritocracy. And that kindergarten level drivel about ‘a market that is meant to balance the needs of all stakeholders’ is ridiculous. It’s a market. You buy things, you sell things. If you’re good, you do well. If you’re an ignorant bag of dirt, you whimper to the regulators and hope that one of them’s a relative of a friend of Daddy’s.
In Q4 2015, TSX and TSXV plan to implement changes which will enhance the quality of execution for natural investors and their dealers – both retail and institutional – by rewarding those willing to commit liquidity to the book for a period of time by using the new Long Life 2 order type.
Long Life orders will be committed to a minimum resting time in the book – measured in seconds – and cannot be cancelled during that time. In return for providing committed liquidity, these orders will receive priority over orders at the same price that are not subject to the minimum resting time. Trade allocation therefore becomes Price/Broker/Long Life/Time rather than the current Price/Broker/Time matching sequence.
By choosing to use the Long Life order type, natural investors, their dealers and other non-latency sensitive participants will be able to more effectively and confidently participate in the markets without having to compete on speed.
This is somewhat similar to the concept of minimum order exposure times (MOET), which was discussed extensively on April 3, 2014, although in this case the MOET will be both voluntary and set by the exchange, which is greatly preferable to a mandatory MOET set by regulators. To refresh your memory of that spring discussion:
In fact, I have learned from a paper by Charles M. Jones of Columbia Business School titled What do we know about high-frequency trading? that:
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He also points out – bless the man – that:Minimum order exposure times: Under these proposals, submitted orders could not be cancelled for at least some period of time, perhaps 50 milliseconds. This would force large changes in equity markets and could severely discourage liquidity provision. The economic rationale here is particularly suspect, as the overriding goal in market design should be to encourage liquidity provision.
Securities transaction taxes: The evidence indicates that these taxes reduce share prices, increase volatility, reduce price efficiency, worsen liquidity, increase trading costs, and cause trading to move offshore.
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He is referring to frequent batch auctions, which were discussed on PrefBlog on March 19. It was also given a brief mention in the CFTC Concept Release on Risk Controls and System Safeguards for Automated Trading Environments, which also asked a question dear to Assiduous Reader PL’s heart:96. Should exchanges impose a minimum time period for which orders must remain on the order book before they can be withdrawn? If so, should this minimum resting time requirement apply to orders of all sizes or be restricted to orders smaller than a specific threshold? If there should be a specific threshold, how should that threshold be determined?
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99. Would batched order processing increase the number of milliseconds that are necessary for correlations among related securities to be established? If so, what specific costs would result from this change and how do those costs compare to the potential benefits described in recent research?The comment period on this concept release was extended to Valentine’s Day; fifty-seven comments have been published on the CFTC website. I simply do not have time to comb through all these things, especially since it would seem that this is viewed as simply a preliminary skirmish in a long war, but I did read a comment by Thomas McCabe of One Chicago LLC:
Market participants should be free to enter, cancel, or cancel/replace their orders at will, as they assume the risk of execution or non-execution. Exchanges are in a unique position to understand the strain on their systems caused by orders and should be allowed to independently govern throughput into those systems. Accordingly, we oppose the Commission mandating that exchanges impose minimum time periods for orders.
Anyway, with respect to the Toronto Stock Exchange proposals, the first problem I can see is that “Long Life” orders will go stale. Stale on a time-frame of milliseconds, but still stale; they will therefore find themselves predated by nimbler HFT firms who will make a practice of arbitraging small ticks in highly correlated stocks. Whether or not that will offset the benefits is something I don’t know, although I suspect not.
Another issue, probably minor, is that cash management may become more difficult, because having more limit orders on the board than you actually need to execute in order to achieve your cash objectives may lead to more situations in which you overshoot your target because you can’t cancel quickly enough.
The third section of the Toronto Exchange proposals is titled Market complexity is on the rise:
We plan to close TMX Select and decommission Alpha IntraSpread in June 2015.
With this change, we will reduce complexity, fragmentation and dealer costs without compromising on choice. The mandate
to provide a premium destination for active retail order flow, previously maintained by Alpha IntraSpread and TMX Select,
will now be fulfilled by the new Alpha model.
So this section is just a joke; the bank-owned exchange taking advantage of the monopoly for which it is paying the regulators.
Boyd Erman of the Globe points out:
Because the TMX is heavily regulated, all the changes will require both regulatory review and comment from market users. That will take months, and so [head of the TMX equity trading businesses ] Mr. [Kevan] Cowan said the company is hoping to have the changes in place by June.
I will be most interested in the comment letters. One thing that puzzles me at this point is the distribution of orders by the exchange itself. Say a market buy order comes into Alpha (sender expecting a rebate) and the best offer is on the TMX (limit order placer expecting a rebate). Who gets paid? How will uncertainty over payment factor into the various decisions? Game theory, here we come!
Finally, equities continued bouncing:
U.S. stocks rallied, recovering from yesterday’s loss, as earnings from Caterpillar (CAT) Inc. to 3M Co. exceeded analysts’ estimates and data signaled stronger growth in the European economy.
Benchmark indexes pared gains following a New York Post report that a doctor who had been treating Ebola patients in Africa was rushed to a New York hospital with symptoms of the virus. The paper cited unnamed sources.
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The S&P 500 gained 1.2 percent to 1,950.82 at 4 p.m. in New York after earlier surging as much as 1.8 percent. The index recouped losses from yesterday, when it slid 0.7 percent.
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The S&P 500 has risen five times in the past six days, pushing the gauge up 4.7 percent since Oct. 15 and recouping about half the losses from a selloff that began in mid-September. The equity benchmark is still down 3 percent from a record.Economic data today suggested the euro-area economy may have moved one step away from another recession. A Purchasing Managers’ Index showed manufacturing in the region unexpectedly grew this month, while Spain’s economy showed signs of a further recovery, with third-quarter unemployment dropping to the lowest level since 2011. In Germany, factories rebounded from a slump in September.
Fewer Americans filed applications for unemployment benefits over the past month than at any time in 14 years as an improving economy prompted employers to hold on to staff. The four-week average of jobless claims, a less-volatile measure than the weekly figure, dropped to 281,000, the lowest since May 2000, from 284,000 the week before, a Labor Department report showed.
It was a good day for the Canadian preferred share market, with PerpetualDiscounts up 14bp, FixedResets gaining 12bp and DeemedRetractibles winning 15bp. Volatility was low. Volume was extremely low, with the highlights comprised entirely of FixedResets.
| 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 | 3.15 % | 3.14 % | 20,063 | 19.35 | 1 | 0.1681 % | 2,653.7 |
| FixedFloater | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -1.0972 % | 3,944.1 |
| Floater | 3.03 % | 3.14 % | 64,145 | 19.38 | 4 | -1.0972 % | 2,648.3 |
| OpRet | 4.04 % | 1.42 % | 100,999 | 0.08 | 1 | 0.0788 % | 2,737.9 |
| SplitShare | 4.29 % | 3.91 % | 81,619 | 3.81 | 5 | -0.0159 % | 3,152.0 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.0788 % | 2,503.5 |
| Perpetual-Premium | 5.48 % | -0.24 % | 71,727 | 0.08 | 18 | 0.0583 % | 2,458.8 |
| Perpetual-Discount | 5.30 % | 5.14 % | 95,824 | 15.15 | 18 | 0.1381 % | 2,604.8 |
| FixedReset | 4.22 % | 3.61 % | 166,874 | 16.73 | 75 | 0.1202 % | 2,554.5 |
| Deemed-Retractible | 5.02 % | 2.11 % | 101,617 | 0.34 | 42 | 0.1480 % | 2,566.1 |
| FloatingReset | 2.55 % | -6.10 % | 58,635 | 0.08 | 6 | 0.0327 % | 2,546.3 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| PWF.PR.A | Floater | -4.00 % | Moderately real. There were some trades at 19.50. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-10-23 Maturity Price : 19.20 Evaluated at bid price : 19.20 Bid-YTW : 2.72 % |
| CIU.PR.C | FixedReset | 1.96 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-10-23 Maturity Price : 20.80 Evaluated at bid price : 20.80 Bid-YTW : 3.46 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| NA.PR.W | FixedReset | 70,905 | Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-10-23 Maturity Price : 23.09 Evaluated at bid price : 24.85 Bid-YTW : 3.63 % |
| TRP.PR.E | FixedReset | 34,090 | TD crossed 25,000 at 25.21. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-10-23 Maturity Price : 23.23 Evaluated at bid price : 25.20 Bid-YTW : 3.71 % |
| BMO.PR.T | FixedReset | 20,550 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-10-23 Maturity Price : 23.31 Evaluated at bid price : 25.43 Bid-YTW : 3.58 % |
| BAM.PF.G | FixedReset | 20,159 | Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-10-23 Maturity Price : 23.16 Evaluated at bid price : 25.10 Bid-YTW : 4.20 % |
| ENB.PF.A | FixedReset | 19,525 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-10-23 Maturity Price : 23.20 Evaluated at bid price : 25.13 Bid-YTW : 4.05 % |
| TRP.PR.A | FixedReset | 16,178 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-10-23 Maturity Price : 21.50 Evaluated at bid price : 21.50 Bid-YTW : 3.92 % |
| There were 13 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| PWF.PR.A | Floater | Quote: 19.20 – 20.50 Spot Rate : 1.3000 Average : 1.1155 YTW SCENARIO |
| NEW.PR.D | SplitShare | Quote: 32.65 – 33.13 Spot Rate : 0.4800 Average : 0.3627 YTW SCENARIO |
| PVS.PR.B | SplitShare | Quote: 24.81 – 25.12 Spot Rate : 0.3100 Average : 0.1959 YTW SCENARIO |
| CGI.PR.D | SplitShare | Quote: 25.24 – 25.80 Spot Rate : 0.5600 Average : 0.4530 YTW SCENARIO |
| ELF.PR.F | Perpetual-Discount | Quote: 24.20 – 24.47 Spot Rate : 0.2700 Average : 0.1738 YTW SCENARIO |
| BNS.PR.P | FixedReset | Quote: 25.30 – 25.51 Spot Rate : 0.2100 Average : 0.1313 YTW SCENARIO |