Category: Market Action

The Bloomberg editorial board wants more paperwork:

The Securities and Exchange Commission last month took a half-step by requiring markets to build a $4.1 billion system that can generate audit trails of all transactions. The trouble with this system is that trading data won’t be generated until the next day, a feature the industry insisted on. Day-old data might not help regulators much when they are called upon the instant a market blows up. (It took five months to confirm the cause of the flash crash.) Nor is it clear that the system will be able to pinpoint the identity of every party in a transaction.
…
The SEC and stock exchanges should also require major trading firms to demonstrate that their software programs are reliable before letting them go live. Now, firms are simply urged to adhere to an industry-recommended set of best practices. Unleashing a flawed program, as Knight seems to have done, is unacceptable.

Market apologists have said Knight’s errant trades caused no harm to anyone other than Knight and its shareholders, who saw the value of their investment shrink by about $600 million in a few hours. Yet who can be so certain the next bug-infested program won’t inflict much more damage? And what might have happened if Knight, which handled about 11 percent of all U.S. stock trading before the errors, had shut down?

Plus, the argument that Knight only hurt itself is bogus: Investors withdrew $127 billion from stock mutual funds in the 12 months ended in June. Repeated computer-trading misfires — not to mention the financial crisis of 2008 — erode confidence in U.S. markets. At some point, regulators and Wall Street have to decide whether the quest for speed is worth the chaos that can result.

$4.1-billion for a trade tracking system. You can put a Mars buggy on Mars for less than that. Has anybody, anywhere, ever seen a cost-benefit analysis for increased regulation? As far as I can tell, the attitude is – this might be worth something, so we should build it no matter what the cost.

As are most calls for increased regulation, Bloomberg’s argument depends upon dizzying leaps of logic and extremely vague fear-mongering:

• Yet who can be so certain the next bug-infested program won’t inflict much more damage?: Just, what, exactly, are you afraid of?
• And what might have happened if Knight, which handled about 11 percent of all U.S. stock trading before the errors, had shut down?: Golly, I don’t know. The end of the universe, maybe?
• Investors withdrew $127 billion from stock mutual funds in the 12 months ended in June. Repeated computer-trading misfires — not to mention the financial crisis of 2008 — erode confidence in U.S. markets.: Just what, if any, connection is there between these two sentences? How is confidence in US markets eroded? What is the effect of this loss of confidence?

Assiduous Reader beluga alleges:

I placed a limit order for YLO.PR.C at 43 cents today at 10am. Got two partial fills with a 100 shares left at the end of the day. I then noticed YLO.PR.C closed at 40 cents and there were trades at 0.425 and 0.40 just before 3pm.

Called to find out what happened. My order was routed to Alpha and after the partial fills didn’t go back to TSX.

This is contrary to my understanding of the National Best-Bid-and-Offer rules. Does anybody have any other ideas?

Interesting staffing kerfuffle at AGF:

AGF Management Ltd. is suing a former star manager and a U.S. investment firm, alleging they engineered the departure of most of AGF’s emerging markets team and cost the Canadian firm millions in lost business.

Patricia Perez-Coutts, who oversaw the top-performing AGF Emerging Markets mutual fund and related institutional accounts, left AGF with four members of her team in May to run money for Dallas-based Westwood Holdings Inc.

Two lessons there:

• That’s why you’ve got to give your star managers a piece of the action
• That’s why fundcos don’t promote star managers any more

I liked the Michael Osborne’s op-ed on TMX / Maple:

The approval of the Maple deal bears all the hallmarks of the creation of a “Canadian champion.” Proponents argue that we should accept reduced competition at home, in order to create Canadian champions that have the resources to take on the world. The problem is that monopolies become bloated and inefficient, and unable to compete in world markets. Instead of a Canadian champion, we get an uncompetitive Canadian backwater ripe for foreign takeover.

Ripe for foreign takeover indeed, unless the feds decide it is in the national interest for one group of Canadians to stick it to another group of Canadians. As they have done.

It was a mildly negative day for the Canadian preferred share market, with PerpetualPremiums losing 5bp, FixedResets off 3bp and DeemedRetractibles down 2bp. Volatility was mild. Volume was low.

Good news! The CEO of RBS says LIBOR rigging isn’t his fault:

Royal Bank of Scotland confirmed for the first time on Friday it had dismissed staff over an interest rate rigging scandal but the bank gave no indication whether it might settle soon with investigators.

Reporting a drop in first-half operating profit, RBS said it was co-operating with governments and regulators which are investigating the role of a number of banks in the setting of Libor and other inter-bank lending rates.

“I think that the regulators must decide how they want to deal with the situation. We will stand up and take any punishment that comes our way,” Chief Executive Stephen Hester said. He said he believed the Libor issue had been a result of “wrongdoing by individuals” rather than a “systemic problem” within the industry.

“The Libor situation is a stark reminder of the damage that individual wrongdoing and inadequate systems and controls can have in terms of financial and reputational impact.”

The inadequate systems and controls aren’t his fault, either. Me, I blame society.

There’s an interesting piece in the Globe about corporate cash in Canada:

“Corporate businesses are flush with cash, which they still seem hesitant to deploy, presumably due to the uncertain economic outlook,” said David Madani, Canadian economist for the London-based research firm [Capital Economics]. “This obviously leaves scope for firms to increase dividends, which could boost personal income and consumption significantly.”

In a recent research note, Mr. Madani said Canada’s non-financial-sector corporate cash balances stood at $526-billion at the beginning of 2012 – up 42 per cent since the recession ended in mid-2009. Since the Canadian economy is roughly one-tenth the size of our U.S. neighbour, this Canadian cash pile, in relative terms, dwarfs the roughly $1.3-trillion (U.S.) in cash held by U.S. corporations.

The US had a better than expected jobs number, albeit not “good”:

The payrolls increase of 163,000 followed a revised 64,000 gain in June, Labor Department figures showed today in Washington. The median estimate of 89 economists surveyed by Bloomberg called for a gain of 100,000. The jobless rate, based on a separate survey of households, climbed to a five-month high of 8.3 percent

I don’t understand all this anger management stuff:

A survey published in American Journal of Nursing in 2002, reported that 90 percent of hospital workers, including doctors and nurses, reported “yelling,” “abusive language” as well as “condescension” and “berating colleagues.” A quarter of the 1,200 people surveyed said they witnessed such behavior weekly.

“There isn’t a doctor alive who hasn’t seen it,” says William Norcross, executive director of a program at the University of California at San Diego that uses anger management to treat irascible physicians.

Medical professionals present [anger management guru George] Anderson with unique challenges. Their hours are brutal, the stakes are high, and the threat of malpractice suits is ever-present. The life-or-death nature of the work wears at steely nerves even on the best days, Anderson says.

If things have got to the point where you have to yell at your staff, the sensible thing to do is fire them instead. If you don’t have the authority to fire them … well, then you don’t have the authority to yell at them either, do you?

This sort of prima-donna behaviour was one of the things that took down RT Capital Management back in about 2000 – big-shot portfolio managers yelling at the back-office. Why is there “a program at the University of California at San Diego that uses anger management to treat irascible physicians”?

I’ve got a better idea: you yell at my staff, you’re fired. No matter how good you are at your tiny little specialty, you’re no good at all without good support staff … right down to the janitor who keeps the washroom clean, and if the support staff hates their jobs, they’re not going to do them very well. Sorry, buddy, but your hospital privileges are withdrawn. These guys indulge in their temper tantrums for the same reason bratty five-year-olds do: because there are no repercussions.

So, I finally got everything working again, with the proviso that I’m back to where I started and the conversion of the HIMIPref™ Web Services from Visual C++ 2002 to Visual C++ 2010 has been delayed. What a total nightmare. Everything worked just fine under VC 2002 … but VC 2002 won’t run under Windows 7.

Like everybody else, I have a love-hate relationship with Microsoft … some of their design decisions drive me nuts, but whenever I compare one of their products to its competitor, they almost always come out on top. Spreadsheets … C++ compilers … operating systems … the only exception I can remember is Rapid Application Development software, in which I consider Visual Basic to be pretty horrible – and that’s almost certainly because they insist that it be usuable throughout their entire suite of software.

So their tools are first class, but they’ve got a problem: there is, as far as I can tell, an institutional culture that supposes that because they do development in teams numbering in the hundreds – and because they guys they talk to also have huge development teams – that’s the way it works everywhere. It doesn’t. Lots of programming gets done in small shops (like mine!). I don’t need ultra-finicky version control! I can do all my version control on the back of an envelope! I don’t have a full time staff member in charge of compiling, who has daily meetings with the guy who does version control! But they think I do, so there are all kinds of finicky adjustments to be made to compiler settings and version control that all have to agree with each other or the damn thing blows up. And there’s no “Turn Off Version Control” setting on the damn compiler.

Such is life.

It was a slightly negative day for the Canadian preferred share market, with PerpetualPremiums down 4bp, and both FixedResets and DeemedRetractibles off 2bp. Volatility was muted. Volume was ridiculously low – there’s usually more volume on Christmas Eve!

There’s some jostling over the YLO reorg:

Law firm McMillan, counsel for the company’s lenders, said Wednesday the lenders, who weren’t specified, are owed a principal amount of $369-million by Yellow Media as of Sept. 28, 2011.
…
“The company put forward the proposed CBCA plan without notice to or prior consultation with the lenders or most of its other stakeholders,” McMillan said in a news release.

“The lenders have invited the company to withdraw the proposed CBCA plan forthwith and to engage in a more open and transparent consultation process with its stakeholders to see if an acceptable plan can be achieved.”

The lenders intend to bring a motion on Aug. 6 to protect their legal rights in the reorganization proceeding initiated by Yellow Media under the CBCA.

Goldman Sachs has developed a new kind of investment:

Under the Goldman Sachs-funded initiative, inmates aged 16 to 18 will receive education, training and counseling intended to reduce the likelihood of them reoffending after their release.
…
City officials said Goldman would provide a $9.6-million loan to pay for the program at the Rikers Island jail complex. If recidivism drops by 10 per cent, the firm will get back the $9.6-million. If it drops even more, Goldman could make as much as $2.1-million in profit. If recidivism doesn’t drop by at least 10 percent, Goldman will lose as much as $2.4-million.

Nearly half of the adolescents who leave city jails currently return within one year.

Social impact bonds, also called pay-for-success bonds, were first used in Britain and are being explored in Australia and in the U.S.

Massachusetts is negotiating with two nonprofit groups to finance juvenile justice and homelessness programs with the promise of repayment only if the programs work.

I don’t know why it’s called a “bond” rather than “an investment in a micro-cap that has a government contract”, but I suppose it helps sell the things.

As of September 28, 2011? That was the date the banks tightened the screws and DBRS slashed the rating. But why it’s being used as a reference date for the challengers’ holdings is something I don’t know.

Testing software is boring:

Knight Capital Group Inc. (KCG) said losses from yesterday’s trading breakdown are $440 million, almost quadruple its 2011 net income and more than some analysts had estimated, and the firm is exploring strategic and financial alternatives. Its stock has lost 66 percent in two days.

Knight said it will continue its trading and market-making today as it considers its options. Yesterday’s issue was related to the installation of trading software and resulted in the company sending “numerous erroneous orders,” the Jersey City, New Jersey-based firm said today. The stock tumbled 50 percent to $3.46 at 9:36 a.m. New York time today.
…
The errors were caused by a malfunction in a trading algorithm, according to a person at Knight who asked to remain anonymous because the matter hasn’t been publicized.

Apparently there’s some regulatory concern over the problem:

Yesterday’s problem shows regulation is “broken” and a study group should be convened to review technology and market structure, Arthur Levitt, former chairman of the Securities and Exchange Commission, said in an interview. Regulators would have been able to stop incidents such as yesterday’s breakdown if they didn’t face a lack of resources, he said.

“The ability of regulators to do their job has never been weaker than it is today because of the failure of the oversight process,” Levitt, 81, said today in an interview. “Congress has a greater responsibility for what we’re seeing today than any regulator or any particular part of the industry. They’ve allowed this to happen.”

Kevin Callahan, a spokesman with the SEC, said in an e-mail that regulators are “closely monitoring the situation and in continuous contact with the NYSE and other market participants.”

I don’t understand this. A poorly-run company gave a $440-million gift to investors. Why is this a problem?

In related news, a bug was discovered at Hymas Investment Management today:

Click for big

Company officials were quoted as saying “Now stop screwing around and do some damn work.”

ING Bank Canada is for sale:

The sale process for ING Bank Canada has already kicked into high gear, and rival Canadian banks are heavily interested in scooping up their online-focused competitor.

I understand that central banks are using Google searches as indicators:

The Federal Reserve and the central banks of England, Italy, Spain and Chile have followed up with their own studies to see if search volumes track trends in the economies they oversee.
…
It all started with a hunch in Mountain View, California. On the heels of developing a new website reporting how often users searched for certain keywords, Hal Varian, Google Inc.’s chief economist, said he wondered whether this data could foreshadow what traditional economic reports would show later. So he ran the numbers.

“The ‘aha moment’ was, gee, this actually works,” Varian said in an interview.

The result was a 23-page paper he co-wrote in April 2009, demonstrating how data reported on the Google Trends service improved forecasts of auto and home sales and retail spending in the U.S.

If they’re paying attention to my Google searches, banknotes will soon feature “scarlett johansson nude” in place of dead politicians. But other pornography is good too!

***********************
Sorry, folks, the daily report will be delayed.

I have been in Microsoft Version Hell for about ten-and-a-half hours now … and ain’t nuthin’ workin’.

Update, 2012-8-3: Finally!

Soon!

It was a black day for Canadian capital markets:

Maple Group Acquisition Corp. has won control of TMX Group Inc., with 91 per cent of shares tendered to its takeover offer worth about $3.8 billion.

A new Maple board of directors has already been appointed.

And along similar lines … when is a bank not a bank? When it’s a money-market mutual fund:

The 10 biggest money-fund managers and the Investment Company Institute trade group reported combined lobbying spending of $16 million in the first half of 2012 and $31.6 million last year in disclosures that reference money-market mutual funds, according to a review of documents by Bloomberg News. That compares with $16.7 million in all of 2010.

The companies are seeking to block new rules championed by Securities and Exchange Commission Chairman Mary Schapiro that are headed for a vote before a divided commission as soon as this month. The proposal would force funds to abandon their fixed $1 share price or introduce withdrawal limits and capital buffers. Schapiro can count on only one supporting vote from the other four commissioners, even as Federal Reserve officials have said that failure to enact tougher rules will leave the $2.5 trillion industry vulnerable to investor runs and threaten global credit markets.

The FOMC statement was gloomy:

Information received since the Federal Open Market Committee met in June suggests that economic activity decelerated somewhat over the first half of this year. Growth in employment has been slow in recent months, and the unemployment rate remains elevated. Business fixed investment has continued to advance. Household spending has been rising at a somewhat slower pace than earlier in the year. Despite some further signs of improvement, the housing sector remains depressed. Inflation has declined since earlier this year, mainly reflecting lower prices of crude oil and gasoline, and longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects economic growth to remain moderate over coming quarters and then to pick up very gradually. Consequently, the Committee anticipates that the unemployment rate will decline only slowly toward levels that it judges to be consistent with its dual mandate. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee anticipates that inflation over the medium term will run at or below the rate that it judges most consistent with its dual mandate.

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.

This libel suit amuses me:

Daniels repeatedly questioned Molo about statements from the book that are alleged to be libelous, including Lewis’s comments that Chau had worked for “sleepy” insurance companies for much of his career before managing CDOs and that CDO managers didn’t work hard.

“Most of your argument is based on the implications of certain statements, not on the actual statements,” the judge told Molo. “There’s no proof you can offer to a jury whether an insurance company is ‘sleepy.’ That is hyperbole. That is opinion.”
…
Chau’s firm managed about $20 billion worth of CDOs in 2007, making it the fourth largest in that category, according to court papers. Investors in Harding’s CDOs included UBS AG and Deutsche Bank AG, according court filings. CDO sales collapsed in 2007 along with the subprime-mortgage market.

There are certainly very many portfolio managers out there who are totally unqualified. Usually they just underperform. Sometimes they get hired by enormous companies with equally incompetent advisors.

It was another good, solid day for the Canadian preferred share market, with PerpetualPremiums winning 12bp, FixedResets up 5bp and DeemedRetractibles gaining 9bp. Volatility was muted. Volume was pathetically low.

The PerpetualDiscount sub-index got cut in half with the July month-end rebalancing, losing CIU.PR.A to Scraps on volume concerns, while ELF.PR.F and PWF.PR.K migrated to the PerpetualPremium index. The remaining constituents are BAM.PR.M, BAM.PR.N and ELF.PR.G.

PerpetualDiscounts, all three of them, now yield 4.96%, equivalent to 6.45% interest at the standard equivalency factor of 1.3x. Long Corporates now yield about 4.25% (maybe a little more) so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 220bp, unchanged from July 25.

Pragma Trading provides an interesting perspective on high frequency trading:

Market making is an important function in the smooth operation of markets. In theory, there should be a natural equilibrium: market makers will compete only to the point that they can no longer profit by quoting more aggressively. This means they will trade at times or prices that directional traders will not, narrowing spreads and improving market quality.

However, the existence of ultra-long queues suggests that this equilibrium is out of whack. Market makers compete en masse where there is already deep liquidity and no opportunity for price improvement because of the tick size. From a market structure perspective, the concern is that there is no practical way to opt out of interacting with these superfluous market makers, and because of the take fees charged by exchanges, directional traders are effectively forced to subsidize HFTs even though there are other directional traders they could interact with directly. This effect is most pronounced where the spread size is very large despite fundamental liquidity, i.e. for low-priced, high-volume stocks. As demonstrated by the preponderance of ultra-long queues in lower-priced stocks and the total absence of ultra-long queues in stocks priced below $1, it appears that the penny tick size and the liquidity rebates paid by exchanges in the maker/taker model effectively subsidize HFTs in a way that is essential to much of their profitability, and are the root causes of this market distortion.

Bloomberg’s Matthew Philips did some more digging:

The question is whether the benefits speed traders bring to the market outweigh these added costs and trade-offs. Even if slightly longer wait times are costing long-term investors billions a year, having a more liquid market with tighter spreads has saved them that much, if not more, says Rick Cooper, a professor of finance at the Illinois Institute of Technology’s Stuart School of Business. Cooper used to work for long-term investors, building early algorithms and quant models for State Street Global Advisors. He doubts they want to go back to the old days where they were beholden to a small, clubby group of broker dealers serving as market makers. “Back in the day, when demand spiked, they would widen out the spread on you,” says Cooper. “It used to take us days to execute some of our big trades so we wouldn’t move the price.”

These days, any time a market-maker tries to widen out the spread, an electronic market maker usually jumps in and tightens it up again.

There’s some colour on the Facebook fiasco:

UBS’s admission that it lost nearly $356-million on the botched Facebook IPO puts pressure on Nasdaq OMX Group Inc. and raises questions about how quickly the exchange can put this problem behind it.
…
UBS handles most of the order flow from Charles Schwab Corp., one of the biggest U.S. brokerages, with about $1.8-trillion in client assets. It also takes orders from other retail brokerages, including TD Ameritrade and Fidelity.

But that alone may not account for the massive loss. UBS also said that, as a result of “multiple operational failures by NASDAQ, UBS’s pre-market orders were not confirmed for several hours” rather than in the usual milliseconds. That triggered its internal systems to re-enter orders multiple times, it said.

When the confirmations finally came through, UBS and other market makers were left owning large amounts of unwanted Facebook stock, which led to losses as the stock plunged.

“As a result of system protocols that we had designed to ensure our clients’ orders were filled consistent with regulatory guidelines and our own standards, orders were entered multiple times before the necessary confirmations from Nasdaq were received and our systems were able to process them,” UBS said. “Nasdaq ultimately filled all of these orders, exposing UBS to far more shares than our clients had ordered.”

No failsafes on the order-reentry algorithms, eh? Well, it’s nice that they saved a few thousand on programming.

The Canadian preferred share market closed the month on a happy note, with PerpetualPremiums up 3bp, FixedResets gaining 4bp and DeemedRetractibles winning 7bp. Volatility was muted. Volume was low.

It was a good day for the Canadian preferred share market, with PerpetualPremiums winning 12bp, FixedResets up 3bp and DeemedRetractibles gaining 2bp. Volatility was average. Volume was very low.

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums off 2bp, FixedResets up 11bp and DeemedRetractibles gaining 8bp. Volatility was minor. Volume was extremely low.

It was a solidly positive day for the Canadian preferred share market, with PerpetualPremiums winning 12bp, FixedResets up 4bp and DeemedRetractibles gaining 8bp. Volatility was non-existent. Volume was average.

It was a very uneventful day for the Canadian preferred share markets, with PerpetualPremiums gaining 1bp, FixedResets flat and DeemedRetractibles off 1bp. Volatility was almost non-existant. Volume was average.

PerpetualDiscounts now yield 4.93%, equivalent to 6.41% interest at the standard equivalency factor of 1.3x. Long corporates now yield 4.2% so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now 220bp, continued very slow widening from the 215bp reported July 18.

Capital Power Corporation, proud issuer of CPX.PR.A, has been confirmed at Pfd-3(low) by DBRS:

DBRS has today confirmed Capital Power Corporation’s (CPC or the Company) Preferred Shares rating at Pfd-3 (low) with a Stable trend. CPC’s rating is based on the credit quality of its subsidiary, Capital Power L.P. (CPLP; rated BBB by DBRS). CPC’s rating is notched downward relative to CPLP’s rating to reflect its structural subordination to the debt obligations at CPLP.
…
CPC has no debt issued at the parent level and is not expected to issue any debt in the foreseeable future. The Company has $122 million of preferred shares outstanding as of March 31, 2012. Preferred shares, as a percentage of common equity, are within the 20% threshold (defined as the percentage of preferred shares outstanding divided by total equity excluding preferreds). For the three months ended March 31, 2012, CPC distributed $1 million to its preferred shareholders and $19 million to its common shareholders ($6 and $51 million to preferred and common shareholders, respectively, in 2011).

It was an uneventful day for the Canadian preferred share market, despite all the excitement for equities: PerpetualPremiums gained 6bp, FixedResets were flat and DeemedRetractibles gained 8bp. Volatility was almost non-existent. Volume was above average.