Category: Market Action

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.

Greece is in the headlines again:

Greece retakes its position at the heart of the European debt crisis this week as its creditors assess how far off course the country is from bailout targets, raising again the specter of its exit from the euro.

Greece’s troika of international creditors — the European Commission, the European Central Bank and the International Monetary Fund — will arrive in Athens tomorrow amid doubts the country will meet its commitments and reluctance among euro-area states to put up more funds should it fail.

“If Greece doesn’t fulfill those conditions, then there can be no more payments,” German Vice Chancellor Philipp Roesler told broadcaster ARD yesterday, adding that he is “very skeptical” Greece can be rescued and that the prospect of its exit from the monetary union “has long ago lost its terror.”

When in doubt, ban short sales:

Europe was plunged into fresh market turmoil as the first call for bailout aid by a Spanish region sent borrowing costs surging, while Spain and Italy reinstated a ban on betting on stock declines.

Stocks and the euro fell as Catalonia joined a list of Spanish regions that may tap aid from the central government, spurring 10-year yields to rise to a euro-era record
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The Washington-based IMF has signaled to European officials that it will stop paying further rescue aid to Greece, bringing the country closer to insolvency in September, Der Spiegel magazine cited unidentified European Union officials as saying in this week’s edition, published yesterday. It’s “already clear” to the troika that Greece won’t reach the 120 percent target, Spiegel said.

The fund responded to the Der Spiegel report, saying today in a statement it is “is supporting Greece in overcoming its economic difficulties.”

Missing the targets means Greece would need between 10 billion euros and 50 billion euros in additional aid, a potential outcome that the IMF and several unidentified euro- area states are not prepared to accept, Spiegel said.

All the excitement had an effect:

Government bond yields in the U.S., U.K. and Germany fell to records, while stocks dropped and the euro traded below its lifetime average against the dollar on concern the region’s debt crisis is deepening. Commodities slid as a Chinese central-bank adviser said growth may slow further.

The yield on the 10-year U.S. Treasury note declined to 1.43 percent at 2:22 p.m. New York time after reaching an all- time low of 1.40 percent. Two-year German yields slumped to as low as minus 0.08 percent and Spanish and Italian yields jumped. The Standard & Poor’s 500 Index slid 1 percent. The euro fell for a fourth day, sliding 0.3 percent to $1.2122. Oil fell 3.7 percent in New York. Credit-default swaps on Spain rose as much as 31 basis points to an all-time high of 636.

Sorry this is a day late! TMX Datalinx did not have closing data available prior to midnight last night.

The Bank of England knew that the BBA was taking a lackadaisical approach to LIBOR reform:

The Bank of England favored having its name removed from the 2008 review of Libor by the British Bankers’ Association over concern its improvement of governance didn’t go far enough.

The view was contained in 80 pages of correspondence between the central bank and the BBA and the New York Federal Reserve on the London interbank offered rate. The documents were published today after a request earlier this week from U.K. lawmakers investigating the scandal over the global rate.

“On governance, what the BBA say they will do seems broadly incrementally sensible as far as it goes, although we have concerns that they may not go far enough,” Bank of England official Michael Cross said in a note to colleagues. “Given this, we might want to have direct and indirect references to the Bank (and the Fed) removed.”

The note is dated June 4, 2008, a week before the BBA published a consultation document on its review of Libor. In a response the same day, a memo says Bank of England Governor Mervyn King “agrees the BOE references should be removed and replaced with ‘all interested parties.’” King had said in a note dated May 31 that the BBA’s initial proposals seemed “wholly inadequate.”
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Contained into today’s release was an internal Bank of England document sent to Tucker on May 22, 2008, stating that the BBA, which oversees the setting of Libor, warned banks to submit honest rates on April 16, 2008. The spread between three- month dollar Libor and the overnight indexed swap rate widened 12 basis points in the three days following the warning, according to the note.

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums up 10bp, FixedResets off 2bp and DeemedRetractibles gaining 7bp. Volatility was normal.

And now I’m caught up with the market reports! Sorry for the recent lateness.

A story on the potential for LIBOR lawsuits:

Plaintiffs would face difficulties, such as proving how much money they lost, said Roy Smith, a finance professor at New York University’s Stern School of Business and a former Goldman Sachs partner. Because Libor rates excluded some of the highest and lowest estimates, it may be hard to calculate which firms were culpable for influencing the outcome, he said.

Regulators may also have known that banks were fixing Libor and neglected to stop it, which could make a court case yet more complex, Smith said. U.K. lawmakers have been questioning Bank of England Governor Mervyn King and his deputy Paul Tucker on their roles in the scandal. The Federal Reserve Bank of New York last week released documents showing it knew Barclays underreported rates and recommended changes to Libor.

“It makes it even more complicated when the regulators appear to have known about it and not have objected to it, which means it wasn’t illegal,” Smith said. “All I can say is, ‘Good luck with your lawsuit.’”

Meanwhile, in news of the Great Financial Repression:

The Treasury sold $15 billion in 10- year inflation-indexed notes at a record negative yield as investors sought a hedge against rising consumer prices amid speculation the Federal Reserve will add more stimulus.

The Treasury Inflation Protected Securities, or TIPS, were sold at a so-called high yield of negative 0.637 percent, the fourth consecutive auction of the securities where investors were willing to pay the U.S. to hold their principal. Five-year TIPS have also been sold at negative yields at the past five auctions of the securities.

Will wonders never cease? Asset managers are competing on price:

Federated Investors Inc. (FII) will replace Fidelity’s Pyramis Global Advisors in providing management services for the Massachusetts Municipal Depository Trust, which oversees money for the state and about 290 local governments, state Treasurer Steven Grossman announced today. Pyramis has managed the funds for the trust since it was created in 1977, he said.

The new contract will cut costs by 34 percent, or almost $8.2 million, over three years through lower investment fees, Grossman said in a statement. Federated, based in Pittsburgh, has also committed to expanding its Boston office and the three- year contract can be extended for two years, he said.

Of course, there’s such a thing as doing asset management too cheaply!

Here’s yet another revolving door:

Air Canada says a senior aide to Prime Minister Stephen Harper will become the airline’s vice-president for corporate strategy and government affairs, starting in September.

Derek Vanstone is currently Harper’s deputy chief of staff and was previously chief of staff to Finance Minister Jim Flaherty from 2007 to 2010.

TMX DataLinx had collywobbles last night when I attempted to retrieve prices, so this report is a day late. Sorry!

Better late than never!

PerpetualDiscounts now yield 4.93%, equivalent to 6.41% 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 215bp, a slight (and perhaps spurious) widening from the 210bp reported July 11.