Category: Market Action

The BoC left the overnight rate unchanged:

The economic outlook for Canada has changed. The Bank expects the economic recovery to be more gradual than it had projected in its July Monetary Policy Report, with growth of 3.0 per cent in 2010, 2.3 per cent in 2011, and 2.6 per cent in 2012. This more modest growth profile reflects a more gradual global recovery and a more subdued profile for household spending. With housing activity declining markedly as anticipated and household debt considerations becoming more important, the Bank expects household expenditures to decelerate to a pace closer to the rate of income growth over the projection horizon.
…
The recent moderation in core inflation is consistent with the persistence of significant excess supply and a deceleration in the growth of unit labour costs. The Bank judges that the output gap is slightly larger and that the economy will return to full capacity by the end of 2012 rather than the beginning of that year, as had been anticipated in July.
…
At this time of transition in the global recovery, with a weaker U.S. outlook, constraints beginning to moderate growth in emerging-market economies, and domestic considerations that are expected to slow consumption and housing activity in Canada, any further reduction in monetary policy stimulus would need to be carefully considered.

The Basel Committee has released its The Basel Committee’s response to the financial crisis: report to the G20:

Several of the capital requirements introduced by the Committee to mitigate the risks arising from firm-level exposures among global financial institutions will also help to address systemic risk and interconnectedness. These include:

• capital incentives for banks to use central counterparties for over-the-counter derivatives;
• higher capital requirements for trading and derivative activities, as well as complex securitisations and off-balance sheet exposures (eg structured investment vehicles);
• higher capital requirements for inter-financial sector exposures; and
• the introduction of liquidity requirements that penalise excessive reliance on short term, interbank funding to support longer dated assets.

For the third point, I believe they mean intra- rather than inter-, but never mind. While such a step is long overdue, I’m not sure what the specifics of this point has been; I don’t think there has been any change in the absurd risk-weighting of bank paper according to the sovereign.

The use of “gone concern” contingent capital would increase the contribution of the private sector to resolving future banking crises and thereby reduce moral hazard. The Committee recently published a proposal that would require the contractual terms of capital instruments to include a clause that will allow them – at the discretion of the relevant authority – to be written off or converted to common shares if the bank is judged to be non-viable by the relevant authority or if it received a public sector capital injection (or equivalent support) without which it would have become non-viable.

The Committee also is reviewing the potential role of “going concern” contingent capital and bail-in debt as a further way to strengthen the loss absorbency of systemic banks. The objective here is to decrease the probability of banks reaching the point of non-viability and, if they do reach that point, to help ensure that there are additional resources that would be available to manage the resolution or restructuring of banking institutions.

Note that the minimal conditions for BIS-compliant contingent capital will do nothing to avert a crisis – at best, they will merely mitigate a crisis once it has arisen. Additionally, the emphasis on regulatory triggers will probably make it harder, not easier, for a troubled bank to raise capital, while the “bail-in debt” (which I take to mean senior debt that will be written down on the regulators’ say-so) simply represents bureaucratic ursurpation of the role of bankruptcy courts.

Bloomberg picked up on the story that introduction of the bank liquidity rules will not be as stringent as previously thought:

Banks will have until 2015 to fully implement rules on how much cash and liquid securities they must hold to gird against a funding shortage in a crisis, the Basel Committee on Banking Supervision said.

The rules are part an overhaul of bank capital requirements the Basel Committee is working on to prevent another financial crisis. Banks rallied in European trading after the committee, the global financial standard setter, also said it would review the rules to make sure they aren’t too onerous.

“The committee is confirming that it’s backing away from implementing a stringent liquidity rule in the foreseeable future,” said Carlos Egea, a banking analyst at Morgan Stanley in London. “If the initial proposals had been adopted, it would have been very difficult for many European banks to sustain the size of their balance sheets and therefore their current business models.”

The issue of repo financing is back on the front burner:

A Standard & Poor’s plan to change the way it rates the credit risk of counterparties in repurchase agreements will boost costs for broker-dealers who draw cash through the arrangements and shrink the pool of liquid assets for money funds, according to industry participants.

Today is the final day in a one-month public comment period on S&P’s proposal to view unrated broker-dealers serving as counterparties in repos to rated money funds as having “high credit risk.” S&P now assigns to an unrated counterparty that’s at least half-owned by a rated entity the parent company’s risk level.
…
“There are a lot of issues that go on if something goes wrong with the counterparty,” said Peter Rizzo, senior director of fund services at S&P in New York, in an interview. “That is not a risk we want to see in our rated funds. While we are not ignorant to the fact that our criteria may change behavior, we need to apply and develop criteria that we feel is best suited for AAA standard.”

There is certainly a lot of sloppiness in the repo market. The Task Force on Tri‐Party Repo Infrastructure, part of the New York Fed’s Payments Risk Committee, reported in May:

In many cases, Cash Investors were unprepared to cope with the consequences of a Dealer default, in particular the potential need to manage and liquidate collateral securing a defaulted repo position. In some cases, Cash Investors financed assets that they would not normally hold outright.

… which shows a degree of dumbness breathtaking in its implications.

CIBC had done an AUD Covered Bonds.

Westcoast Energy (W.PR.H, W.PR.J) was confirmed at Pfd-2(low) by DBRS.

Barry Critchley of the Post writes a column on Canadian mortgage bonds:

The latest example plays out on Friday when Royal Bank of Canada closes its inaugural $600-million issue, the sale of National Housing Act mortgage-backed securities to institutional buyer.
…
On this deal, the coupon was 2.17%, the yield to maturity was 2.29% and the spread was 51 basis points above comparable Canada bonds.
…
But the securities sold in the six issues so far differ from Canada Mortgage Bonds in one major way: They amortize over the term of the issue. Accordingly, investors receive a combination of principal and interest on a monthly basis. (The exact mix of principal and interest is not known ahead of time.)
…
And because of the amortizing nature of the securities, and in a low interest-rate world, holders need a higher yield as a compensation. (The reason: The yield to maturity calculation assumes the interest payments are reinvested at the original yield.)

“Investors need a higher spread because of the prepayment risk and the pain factor [of not being able to reinvest at the original yield],” said one participant.

The explanation of the need for higher yield doesn’t make a whole lot of sense, but never mind.

The Canadian Civil Liberties Association has urged PC Adam Josephs to withdraw his childish lawsuit, fearing libel chill. Frankly, I don’t think the lawsuit stands a chance in court; it’s simply needless aggravation, just like so many of the G-20 arrests. The next time the press or the Toronto Police Service wants to bleat about the public’s lack of cooperation with, and distrust of, the police – I suggest the writer look at the video of Officer Bubbles’ conduct during the G-20 protests linked yesterday.

There are, of course, the usual chorus of ignorant opinions regarding privacy rights – sorry, Bubbly-poo has every right to find out who posted the comments. That is the first step, but by no means a guarantee, to collecting on a defamation suit. You post – you’re liable. If you don’t want to be liable, don’t say it, because freedom of speech does not mean freedom to defame. If I should tell my girlfriend that XYZ is a pederast … that’s fine, if we’re in private. If I shout it to her across a crowded restaurant … guess what? I’m liable. What makes this so interesting is the privacy commissioner running amok:

Google Inc. violated Canadian privacy law by collecting personal information from unsecured wireless networks across the country for its Street View service, Canada’s Privacy Commissioner said Tuesday.

For the life of me, I don’t understand how this can be construed as an invasion of privacy. They were BROADCASTING the damn stuff! Over unsecured networks! They could have chosen to secure their networks, they could have chosen not to use an unsecured network … but they didn’t. They chose to broadcast their eMails, etc., over an unsecured network. Does the privacy commissioner’s stance mean that I can shout across a crowded restaurant that XYZ is a pederast, free from all liability provided I claim that I was having a private conversation? It’s going to take a while for the laws to become clear on this.

The Canadian preferred share market was dealt a setback today on exploding volume, with PerpetualDiscounts down 16bp and FixedResets losing 6bp.

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	-0.2910 %	2,176.6
FixedFloater	0.00 %	0.00 %	0	0.00	0	-0.2910 %	3,297.3
Floater	2.87 %	3.20 %	83,545	19.24	3	-0.2910 %	2,350.2
OpRet	4.93 %	4.11 %	83,462	0.76	9	0.0173 %	2,362.3
SplitShare	5.87 %	-27.67 %	64,541	0.09	2	0.2027 %	2,399.6
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	0.0173 %	2,160.1
Perpetual-Premium	5.71 %	5.13 %	144,384	5.36	19	-0.2678 %	2,008.0
Perpetual-Discount	5.44 %	5.46 %	237,282	14.70	58	-0.1551 %	2,004.0
FixedReset	5.27 %	3.08 %	343,358	3.26	47	-0.0602 %	2,271.4

Performance Highlights
Issue	Index	Change	Notes
BAM.PR.R	FixedReset	-2.62 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-10-19 Maturity Price : 23.32 Evaluated at bid price : 25.66 Bid-YTW : 4.30 %
HSB.PR.C	Perpetual-Discount	-2.04 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-10-19 Maturity Price : 23.27 Evaluated at bid price : 23.51 Bid-YTW : 5.47 %
MFC.PR.C	Perpetual-Discount	-1.22 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-10-19 Maturity Price : 19.51 Evaluated at bid price : 19.51 Bid-YTW : 5.84 %
PWF.PR.K	Perpetual-Discount	-1.18 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-10-19 Maturity Price : 22.51 Evaluated at bid price : 22.69 Bid-YTW : 5.47 %
MFC.PR.D	FixedReset	-1.04 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2014-07-19 Maturity Price : 25.00 Evaluated at bid price : 27.53 Bid-YTW : 3.86 %
BAM.PR.I	OpRet	1.19 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2011-07-30 Maturity Price : 25.25 Evaluated at bid price : 25.55 Bid-YTW : 4.30 %

Volume Highlights
Issue	Index	Shares Traded	Notes
BMO.PR.J	Perpetual-Discount	141,238	Scotia crossed 29,400 at 22.34; Nesbitt crossed blocks of 30,000 and 50,000 at the same price. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-10-19 Maturity Price : 22.21 Evaluated at bid price : 22.35 Bid-YTW : 5.11 %
RY.PR.E	Perpetual-Discount	76,725	Nesbitt crossed 50,000 at 22.00. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-10-19 Maturity Price : 21.88 Evaluated at bid price : 21.99 Bid-YTW : 5.19 %
CM.PR.I	Perpetual-Discount	59,929	TD crossed blocks of 14,700 and 11,100 at 22.30. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-10-19 Maturity Price : 22.09 Evaluated at bid price : 22.22 Bid-YTW : 5.30 %
BNS.PR.P	FixedReset	59,026	Nesbitt crossed 45,000 at 26.50. YTW SCENARIO Maturity Type : Call Maturity Date : 2013-05-25 Maturity Price : 25.00 Evaluated at bid price : 26.48 Bid-YTW : 2.50 %
RY.PR.A	Perpetual-Discount	55,655	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-10-19 Maturity Price : 21.65 Evaluated at bid price : 22.00 Bid-YTW : 5.12 %
TD.PR.M	OpRet	52,842	Desjardins crosse 49,500 at 25.90. YTW SCENARIO Maturity Type : Call Maturity Date : 2010-11-18 Maturity Price : 25.75 Evaluated at bid price : 25.88 Bid-YTW : -3.37 %
There were 78 other index-included issues trading in excess of 10,000 shares.

Trichet’s recent comments on fiscal discipline illustrate the number one problem with regulation:

European Central Bank President Jean-Claude Trichet called for “more ambitious” rules to force member countries to maintain fiscal discipline and punish those who don’t.

“For the euro area, more ambitious reforms are needed to ensure the smooth functioning of monetary union,” Trichet said in a speech at the World Policy Conference in Marrakech. There must be “greater automaticity, accelerated timelines and reduced room for discretion in procedures.”

European Union finance ministers meet in Luxembourg on Oct. 18 to consider European Commission proposals to fix budget management and avoid runaway deficits that led to Greece’s near- default this year. France is balking at calls for the faster imposition of sanctions on deficit-ridden governments, putting it at odds with Germany and the ECB over how to prevent a repeat of the debt crisis.

Greece’s problems vis a vis the EU did not result from any lack of rules. There were lots of rules, and there was lots of knowledge about what Greece was doing. The problem was political wilfull blindness and lack of enforcement; more rules will not alter the human condition.

Espen Gaarder Haug shares my views on the Norwegian day-traders:

“Robot trading always involves a risk of weakness in the algorithm,” Haug points out.

“It is therefore important to monitor whether such risks pops up, so that these algorithms can be adjusted, or turn off. If you choose to let the robot run without supervision, you take an unnecessary, additional risk,” says Haug.

The ongoing court case in Oslo have revealed that the two charged day traders was able to exploit the same weakness over and over again.

Timber Hill (who is a part of the Interactive Broker Group) was not aware of this before the Oslo Stock Exchange contacted them on March 14th this year.

Testifying before the court on Tuesday, Thomas Borchgrevink, manager of market surveillance at the Oslo Stock Exchange, said: “I felt that they were not aware of this. They were not on the ball.”

Timber Hill closed down, temporarily, the robot in question when the Oslo Stock Exchange made them aware of the error, and has since modified the algorithms.

As noted on October 14 the Norwegian day traders have been convicted on charges of shouting that the emperor has no clothes.

John Hempton of Bronte Capital reports that Universal Travel Group has suffered the resignation of its auditor. The company seems to go through auditors rather quickly … Issues with Universal Travel Group were last reported here on September 28. The Motley Fool published a blanket recommendation of the company on September 20.

Reaching for yield is having a noticable effect:

The incentive for companies to reward shareholders at the expense of bondholders is on the rise as the benefits of maintaining high ratings disappears, signaling that two years of improved creditworthiness may be peaking.

Non-financial companies rated A by Standard & Poor’s have a cost of capital 0.1 percentage point more than those rated one tier lower at BBB, according to Morgan Stanley analysts, diminishing the value of the higher credit grade and erasing their 0.3 percentage point advantage 18 months ago.

Reuters has published a survey on some of the big shops’ willingness to invest in CoCos. The related article makes it appear that write-ups / write-downs (a la Rabobank) are currently favoured:

Other European banks are looking at bonds with write-down and write-up features that do not convert to equity. Italian bank Intesa SanPaolo’s hybrid Tier 1 bond issue last month had some of these elements.

Barclays is working on a new bond with a write-down and write-up structure that has no equity conversion.

I am not in favour of the write-down/write-up structure. It’s not a bond, it’s an insurance policy and, in Rabobank’s case, there was not necessarily any first loss protection. The prices of these things will become wildly volatile when close to the line and there is the potential for purchasers of new capital to get diluted instantly, which will make it harder – not easier! – to issue this new capital.

Jonathan Brogaard of Northwester University has written a paper titled High Frequency Trading and its Impact on Market Quality:

This paper examines the impact of high frequency traders (HFTs) on the U.S. equity market. I analyze a unique data set to study the strategies utilized by HFTs, their profitability, and their relationship with characteristics of the overall market, including liquidity, price discovery, and volatility. The 26 high frequency trading (HFT) firms in my dataset participate in 74% of all trades and make up a larger percent of large market capitalization firms. I find the following key results: (1) HFTs tend to follow a price reversal strategy driven by order imbalances, (2) HFTs make approximately $3 billion annually, (3) HFTs do not seem to systematically front run non-HFTs, (4) HFTs rely on a less diverse set of strategies than do non-HFTs, (5) HFTs trading level changes only moderately as volatility increases, (6) HFTs add substantially to the price discovery process, (7) HFTs provide the best bid and offer quotes for a significant portion of the trading day, but only around one-fourth of the book depth as do non-HFTs, and (8) HFTs do not seem to increase volatility and may in fact reduce it.
…
Froot, Scharfstein, and Stein (1992) find that short-term speculators may put too much emphasis on short term information and not enough on fundamentals. The result is a decrease in the informational quality of asset prices.

Vives (1995) obtains the result that the market impact of short term investors depends on how information arrives. The informativeness of asset prices is impacted differently based on the arrival of information, “with concentrated arrival of information, short horizons reduce final price informativeness; with diffuse arrival of information, short horizons enhance it” (Vives, 1995). The theoretical work on short horizon investors thus suggests that HFT may be benefit or may harm the informational quality of asset prices.

The Froot reference is the reason why all value investors should vigourously support HFT. The less information quality, the more chance to apply information profitably. I regret that I do not yet understand the Vives quote, but suspect it may be relevant to the behaviour of long bond prices in the ten minutes surround the release of the US jobs number.

I haven’t read it yet, but intend to when things calm down a little … maybe forty years? Themis Trading doesn’t like it:

The study’s author weighted the 120 stocks by market cap to approximate the amount of profits HFT earns in the industry. More important,however, is extrapolating results by actual trading volume. Doing that, the estimate of profits jump to $6 billion, and not $3 billion.
…
Finally, as with another study that was pro-HFT recently, it calls any HFT originating order that is a limit order Passive, and any HFT order that takes the other side Aggressive. I guess HFT does not exist in wide-spread mid and small cap stocks. If I place a bid in one of those stocks, and an automated HFT strategy places a limit order ahead of mine, because it is a limit order it is Passive, and not Aggressive, and predatory.

As this data is provided to the author of the study by an exchange, who in their for-profit model caters quite extensively to HFT firms, how can anyone place any credence in its conclusions ( HFT only makes $3 billion, HFT dampens volatiltity, and tightens spreads)?

Six Billion estimated profit? No wonder the entitled frat boys of the establishment are up in arms about somebody eating their lunch. Price improvement is predatory? Tell that to the player on the other side, who’s getting a better price. But if Themis can’t do better than an ad hominem attack on the data source, that’s rather telling in and of itself.

One way or another, the emphasis on price-reversal strategies is reminiscent of What Happened to the Quants in August 2007?.

Barrie McKenna had a column in today’s Globe titled Ottawa takes another shot at getting R&D on right track:

The government announced in its March budget that it was reviewing its R&D efforts. It took seven months just to pick six people to sit on the panel. Now it will take another 12 months to come up with recommendations, which history suggests will quickly be put on a shelf and left there.

In case anyone is counting, this marks at least the fifth time in less four years the government has launched a review of some aspect of the program. And almost nothing, innovative or otherwise, has yet come of it all.
…
Larger, public companies want access to the generous 35 per cent refundable tax credits that now go exclusively to private companies. Small and medium-sized companies worry that large public companies would quickly suck up most of the credits if the rules are loosened.
…
Even the accounting business has a lot riding on the review. The country’s major accounting firms earn steep “success fees” for securing credits for their clients. It is not unusual for an accountant to pocket $300,000, or 30 per cent, on a $1-million credit.

Well, there’s the problem right there, isn’t it? The objective is not to innovate, the objective is to funnel government welfare cheques to companies of the politically correct size. And, as the accountants can tell you (joining the chorus of Air Canada executives and dairy farmers, inter alia), why bother innovating when it’s much less hassle to suck the government tit?

Meanwhile the Globe squared its rot for a good boohoohoo about a recent arbitration award:

Martin Teplitsky, a prominent arbitrator and civil litigation lawyer, said in his decision that he would appear to be “a minion of government” if he took into account the university’s ability to pay. The inevitable result will be that the university must cut elsewhere to reward the professors, who are described in the arbitration case as “top-of-the-market”; they are certainly not among the wretched of the Earth, summoned to rise up in the socialist song The Internationale.

The award may be defensible under the abstract criteria of arbitration law – in this instance “a replication model of interest arbitration.” Fortunately the award is effective only until June 30, 2011. That gives some time for more legislation. Dalton McGuinty, the Premier of Ontario, and other first ministers across Canada, need to think hard about giving the force of law to more of their budgetary policies – turning labour arbitrators into their minions, if necessary.

Angela Hildyard, UofT’s Vice-President, Human Resources & Equity, explains:

The University and UTFA commenced discussions in January, 2009. Early in the process we agreed to ask Mr. Teplitsky to act as both mediator and, if necessary, arbitrator in the event we were unable to reach mutual agreement.

So the University gave up its ability to lock out the staff, and gave up its right to take its ability to pay into consideration when negotiating staff salaries. All the union had to do was to be stubborn and “ability to pay” would be taken off the table – and they were told this early in the process. Gee, isn’t it mysterious how they were unable to reach agreement?

So the university agrees – blindly – to an agreement they can’t afford, and the Globe bleats that politicians should change the rules, instead of demanding to know who got fired? Does the Globe really want to know why Canada has a productivity problem? Reason #1 is because stupid people don’t get fired.

Constable Adam Josephs, serving with 52 Division of the Toronto Police has disgraced himself, is emblematic of all that wrong with the police response to the G-20 protests, and is fully deserving of ridicule, scandal and contempt both personally and as a member of the Toronto Police Service.

Another blog has published what purports to be a screenshot of Officer Bubbles’ facebook page that shows an employment description consistent with his behaviour as seen on video: it would be interesting to have this screenshot confirmed or denied.

I do not feel safer on Toronto streets knowing that Adam Josephs has police authority. I do not feel any civic pride knowing the manner in which Adam Josephs represents me. And the funny thing is – if it hadn’t been for this ill-advised, crybaby lawsuit, I never would have heard of him! I’ve seen the cartoons at issue (published elsewhere) – they’re no worse than juvenile.

It was another strong day for the Canadian preferred share market, with PerpetualDiscounts up 9bp and FixedResets gaining 12bp, on continued heavy volume.

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	-0.1453 %	2,183.0
FixedFloater	0.00 %	0.00 %	0	0.00	0	-0.1453 %	3,307.0
Floater	2.86 %	3.20 %	78,405	19.24	3	-0.1453 %	2,357.0
OpRet	4.93 %	3.91 %	80,173	1.93	9	-0.0087 %	2,361.9
SplitShare	5.88 %	-26.70 %	64,813	0.09	2	0.2846 %	2,394.7
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	-0.0087 %	2,159.7
Perpetual-Premium	5.70 %	5.03 %	144,791	5.36	19	0.1258 %	2,013.4
Perpetual-Discount	5.43 %	5.46 %	235,015	14.72	58	0.0919 %	2,007.1
FixedReset	5.26 %	3.06 %	335,889	3.27	47	0.1198 %	2,272.7

Performance Highlights
Issue	Index	Change	Notes
BAM.PR.R	FixedReset	1.31 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2021-07-30 Maturity Price : 25.00 Evaluated at bid price : 26.35 Bid-YTW : 4.30 %
RY.PR.H	Perpetual-Premium	1.51 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2017-06-23 Maturity Price : 25.00 Evaluated at bid price : 26.19 Bid-YTW : 4.99 %

Volume Highlights
Issue	Index	Shares Traded	Notes
CM.PR.J	Perpetual-Discount	174,301	TD crossed 25,000 at 21.60 and 30,000 at 21.63. Desjardins crossed blocks of 28,700 shares, 49,500 and 25,000, all at 21.63. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-10-18 Maturity Price : 21.33 Evaluated at bid price : 21.60 Bid-YTW : 5.21 %
RY.PR.L	FixedReset	93,400	RBC sold 14,600 to Nesbitt at 27.25 and crossed 65,400 at 27.20. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-03-26 Maturity Price : 25.00 Evaluated at bid price : 27.19 Bid-YTW : 3.09 %
TD.PR.M	OpRet	78,975	Desjardins crossed three blocks of 25,000 each, all at 25.90. YTW SCENARIO Maturity Type : Call Maturity Date : 2010-11-17 Maturity Price : 25.75 Evaluated at bid price : 25.90 Bid-YTW : -4.44 %
PWF.PR.K	Perpetual-Discount	76,396	RBC crossed 50,000 at 23.00. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-10-18 Maturity Price : 22.76 Evaluated at bid price : 22.96 Bid-YTW : 5.40 %
RY.PR.R	FixedReset	63,433	RBC crossed blocks of 20,000 and 26,000, both at 27.85. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-03-26 Maturity Price : 25.00 Evaluated at bid price : 27.86 Bid-YTW : 3.03 %
RY.PR.A	Perpetual-Discount	62,337	Scotia crossed 35,000 at 22.00. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-10-18 Maturity Price : 21.65 Evaluated at bid price : 22.00 Bid-YTW : 5.12 %
There were 54 other index-included issues trading in excess of 10,000 shares.

I see that commodity ETF promoters have had good idea – and the boohoohoo brigade is in full cry:

Plans by ETF Securities and others to launch a range of base metal exchange-traded funds (ETFs) backed by metal in LME-registered warehouses rather than futures contracts have been met with a mix of skepticism and fear.
…
Returns on futures funds have disappointed because the cost of rolling expiring contracts forward in a contango, or where the futures price is higher, has offset gains in spot prices. Physical ETFs are unlikely to perform better because fund owners will be charged fees to cover the cost of storing the metal, which could be as high as 6 percent per year.

But there is fear too that if physical ETFs actually did become popular they would disrupt the normal flow of raw materials from producers to consumers that lies at the heart of the industrial economy.

If consumers want some physical metal, they can buy ETFs and cash them in. They’ll be in a better position to negotiate now, because they have another vendor – which will reduce the influence of the oligopolies.

As predicted, there is a movement from prop-trading into hedge funds:

UBS AG, the largest Swiss bank, said it has been in talks with “dozens” of proprietary traders from firms worldwide who may start their own hedge funds as banks seek to comply with new U.S. rules aimed at curbing risk.
…
Some traders are teaming up to form groups, said [UBS’s global head of prime brokerage Stuart] Hendel, who is based in New York and was in Singapore to attend UBS’s annual hedge fund conference. Managers will also leave existing hedge-fund firms that haven’t reached their high-water mark, or the historical peak net asset value of a hedge fund, he said.

“Funds with poor performance will splinter,” he said.

It will be harder to raise assets as investors need managers to put in place the necessary infrastructure and risk management platforms before putting their money into hedge funds, he said.

“The bar is going up,” Hendel said. “You can’t start with three people in a garage anymore on your Mastercard.”

I agree – regulation is crushing entrepreneurialism. Is this a good thing or a bad thing? Who knows, who cares, nobody’s ever bothered to think it through.

It seems that Countrywide’s Angelo Mozilo did nothing wrong – he merely attracted the attention of extortionists:

Former Countrywide Financial Corp. Chief Executive Officer Angelo Mozilo agreed to pay a record $67.5 million to settle U.S. Securities and Exchange Commission allegations that he misled investors.

Mozilo, 71, will pay a $22.5 million penalty and disgorge $45 million in gains from the sale of shares at inflated prices under the terms of the settlement read today at a hearing in federal court in Los Angeles. Former Chief Financial Officer Eric Sieracki and former Chief Operating Officer David Sambol also reached settlements. None of the men, who had been scheduled to go on trial Oct. 19, admitted wrongdoing.

The Canadian preferred share market was down today on continued heavy volume, with PerpetualDiscounts losing 12bp and FixedResets off 5bp.

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	-0.1632 %	2,186.2
FixedFloater	0.00 %	0.00 %	0	0.00	0	-0.1632 %	3,311.8
Floater	2.86 %	3.19 %	76,123	19.27	3	-0.1632 %	2,360.5
OpRet	4.93 %	3.91 %	77,548	0.12	9	-0.3967 %	2,362.1
SplitShare	5.90 %	-28.07 %	63,546	0.09	2	-0.2838 %	2,387.9
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	-0.3967 %	2,159.9
Perpetual-Premium	5.71 %	5.10 %	144,684	4.84	19	-0.0742 %	2,010.9
Perpetual-Discount	5.44 %	5.42 %	236,394	14.69	58	-0.1217 %	2,005.3
FixedReset	5.27 %	3.08 %	338,963	3.27	47	-0.0517 %	2,270.0

Performance Highlights
Issue	Index	Change	Notes
BAM.PR.I	OpRet	-3.42 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2012-07-30 Maturity Price : 25.00 Evaluated at bid price : 25.11 Bid-YTW : 5.41 %
PWF.PR.I	Perpetual-Premium	-1.55 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2011-05-30 Maturity Price : 25.25 Evaluated at bid price : 25.35 Bid-YTW : 4.91 %
RY.PR.G	Perpetual-Discount	-1.21 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-10-15 Maturity Price : 21.90 Evaluated at bid price : 22.01 Bid-YTW : 5.18 %
BNS.PR.L	Perpetual-Discount	-1.17 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-10-15 Maturity Price : 21.54 Evaluated at bid price : 21.89 Bid-YTW : 5.14 %
BAM.PR.P	FixedReset	-1.12 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2014-10-30 Maturity Price : 25.00 Evaluated at bid price : 27.30 Bid-YTW : 4.56 %
RY.PR.A	Perpetual-Discount	-1.08 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-10-15 Maturity Price : 21.58 Evaluated at bid price : 21.90 Bid-YTW : 5.14 %

Volume Highlights
Issue	Index	Shares Traded	Notes
CM.PR.A	OpRet	116,600	Called for redemption. Desjardins bought 100,000 from Nesbitt at 24.98. YTW SCENARIO Maturity Type : Call Maturity Date : 2010-11-30 Maturity Price : 25.00 Evaluated at bid price : 24.97 Bid-YTW : 4.45 %
BNS.PR.Y	FixedReset	86,517	TD crossed 25,000 at 25.25. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-10-15 Maturity Price : 25.08 Evaluated at bid price : 25.13 Bid-YTW : 3.03 %
TD.PR.O	Perpetual-Discount	53,675	RBC crossed 25,000 at 23.60. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-10-15 Maturity Price : 23.33 Evaluated at bid price : 23.57 Bid-YTW : 5.15 %
BMO.PR.O	FixedReset	50,250	RBC crossed 20,000 at 28.49. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-06-24 Maturity Price : 25.00 Evaluated at bid price : 28.45 Bid-YTW : 2.82 %
BNS.PR.K	Perpetual-Discount	49,760	TD crossed 36,300 at 23.20. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-10-15 Maturity Price : 22.82 Evaluated at bid price : 23.03 Bid-YTW : 5.22 %
BNS.PR.Q	FixedReset	49,472	TD crossed 30,000 at 26.40. YTW SCENARIO Maturity Type : Call Maturity Date : 2013-11-24 Maturity Price : 25.00 Evaluated at bid price : 26.38 Bid-YTW : 2.97 %
There were 55 other index-included issues trading in excess of 10,000 shares.

It looks like the Flash Crash will be simply an excuse:

Data firm Nanex LLC has since questioned regulators’ finding, suggesting Waddell’s algorithm actually did factor in price because data show a slowdown in selling by Waddell during the market’s steepest decline.

CFTC Economist Andrei Kirilenko on Tuesday left open the possibility that the algorithm didn’t completely ignore prices.

The staff is “not aware of any specific price limit that was built into the algorithm,” he told CFTC Chairman Gary Gensler. But just because there wasn’t a price limit didn’t mean the algorithm didn’t “take into account prices and quantities,” he added.

OK – so the Flash Crash report is now highly suspect. Intellectual dishonesty is running rampant. But why would they be dishonest?

Commodity Futures Trading Commission enforcement attorney Bob Pease said the agency is eyeing the use of trading algorithms and a practice known as “quote stuffing” as possible areas that could be deemed disruptive under a provision in the Dodd-Frank financial law enacted in July.
…
Mr. Pease, the CFTC lawyer, said the agency is looking to see if automated algorithms are “inherently disruptive” and if market players should have certain responsibilities in how they execute these orders.

Well, because you’ve got two-bit Napoleons like Bob Pease anxious to lump use of trading algorithms in the same category as quote-stuffing to push a regulatory agenda in which everything is regulated.

Speaking of algorithms, the two Norwegians discussed October 5 have been convicted on charges of smart trading:

Two Norwegian day traders have been handed suspended prison sentences for market manipulation after outwitting the automated trading system of a big US broker.

The two men worked out how the computerised system would react to certain trading patterns – allowing them to influence the price of low-volume stocks.
…
Prosecutors said Mr Larsen and Mr Veiby “gave false and misleading signals about supply, demand and prices” by manipulating several Norwegian stocks through Timber Hill’s online trading platform.

Anders Brosveet, lawyer for Mr Veiby, acknowledged that his client had learnt how ­Timber Hill’s trading algorithm would behave in response to ­certain trades but denied this amounted to market manipulation. “They had an idea of how the computer would change the prices but that does not make them responsible for what the computer did,” he told the Financial Times. Both men have vowed to appeal against their convictions.

Precisely. While I suspect that this is one of those cases where the keys to the puzzle are too complex to make it into the newspaper, I cannot fathom how exploiting an idiotic algorithm – using only arm’s length trades between willing counterparties – can possibly be seen as a crime.

CFTC Chairman Gary Gensler has been criticized on PrefBlog – but there can be no doubt he is a fine regulator:

Gensler has asked Congress to increase the agency’s budget by 69 percent next year to $286 million and predicts the agency’s budgeted staff of about 650 will need to grow to more than 1,000 to meet its new demands.

There are rumours that the capital surcharge talks are in trouble:

Leaders of the world’s largest economies, divided over how to curb risk-taking by their biggest banks, will likely fail to agree on a capital surcharge.

Instead, the Financial Stability Board, which is weighing measures to prevent such institutions from causing another economic crisis, will recommend a range of options without setting a level of extra capital to be imposed globally, said members of the group who declined to be identified because the discussions are private. The FSB will meet in Seoul next week.

The fissures running through the group are similar to those that split the Basel Committee on Banking Supervision when it considered tighter capital requirements for all banks this year. Germany, France and Japan are resisting a surcharge for big lenders, as are lobbyists for those firms, while the U.K., U.S. and Switzerland advocate the approach, members say. That camp agreed to soften some of the Basel capital rules with the understanding that more would be done to restrain the largest banks through the FSB.
…
France, Japan and Germany are opposing capital surcharges for big lenders because they say their banking systems are different from those in the U.S., U.K. and Switzerland, where the largest blow-ups occurred during the crisis, members say. U.S. regulators have been skeptical of contingent and bail-in capital as alternatives to straightforward surcharges, arguing that they’re untested mechanisms that might not fulfill their intended purposes during the next crisis.

“We can’t rely on them yet,” Sheila Bair, chairman of the Federal Deposit Insurance Corp., said in a telephone interview last week. “There’s not much of a market for them. Triggering them could end up destabilizing the bank and the markets. We just got rid of TruPS because they did not provide loss absorption in the crisis. We could end up with the same problem with these new instruments.”

Low US mortgage rates are having an effect – just not the intended effect, that’s all:

Rates for 30-year fixed loans declined to 4.19 percent in the week ended today from 4.27 percent, Freddie Mac said in a statement. It is the lowest rate since the McLean, Virginia- based company began tracking the data in 1971. The average 15- year rate tumbled to 3.62 percent from 3.72 percent.

A six-month decline in mortgage rates has spurred a surge in refinancing while doing little to increase property demand as U.S. unemployment hovers near 10 percent. Sales of existing homes were the second-lowest on record in August, the National Association of Realtors in Washington said Sept. 23.

The Canadian preferred share market had another strong day on extremely heavy volume, with PerpetualDiscounts up 22bp and FixedResets gaining 6bp.

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	0.0907 %	2,189.7
FixedFloater	0.00 %	0.00 %	0	0.00	0	0.0907 %	3,317.2
Floater	2.86 %	3.18 %	77,065	19.30	3	0.0907 %	2,364.3
OpRet	4.91 %	3.53 %	77,631	0.13	9	-0.0905 %	2,371.5
SplitShare	5.88 %	-28.27 %	64,448	0.09	2	0.4684 %	2,394.7
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	-0.0905 %	2,168.5
Perpetual-Premium	5.70 %	5.09 %	146,736	4.84	19	0.0495 %	2,012.4
Perpetual-Discount	5.43 %	5.42 %	238,044	14.71	58	0.2222 %	2,007.7
FixedReset	5.27 %	3.07 %	337,204	3.28	47	0.0619 %	2,271.2

Performance Highlights
Issue	Index	Change	Notes
BAM.PR.R	FixedReset	-2.26 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-10-14 Maturity Price : 25.95 Evaluated at bid price : 26.00 Bid-YTW : 4.36 %
BNA.PR.C	SplitShare	1.04 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2019-01-10 Maturity Price : 25.00 Evaluated at bid price : 22.33 Bid-YTW : 6.12 %
BNS.PR.L	Perpetual-Discount	1.05 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-10-14 Maturity Price : 22.03 Evaluated at bid price : 22.15 Bid-YTW : 5.09 %
TD.PR.P	Perpetual-Discount	1.06 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-10-14 Maturity Price : 24.62 Evaluated at bid price : 24.86 Bid-YTW : 5.28 %
GWO.PR.J	FixedReset	2.26 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2014-01-30 Maturity Price : 25.00 Evaluated at bid price : 27.20 Bid-YTW : 3.26 %

Volume Highlights
Issue	Index	Shares Traded	Notes
CM.PR.A	OpRet	168,500	Called for redemption. RBC crossed 80,000 at 24.98; Desjardins bought 80,000 from Nesbitt at the same price. YTW SCENARIO Maturity Type : Call Maturity Date : 2010-11-30 Maturity Price : 25.00 Evaluated at bid price : 24.98 Bid-YTW : 4.04 %
CM.PR.E	Perpetual-Discount	146,131	Scotia crossed 25,000 at 25.25. RBC crossed three blocks, of 30,000 shares, 10,000 and 59,800, all at 25.52. YTW SCENARIO Maturity Type : Call Maturity Date : 2012-11-30 Maturity Price : 25.00 Evaluated at bid price : 25.25 Bid-YTW : 4.99 %
RY.PR.C	Perpetual-Discount	113,838	Scotia crossed 100,000 at 22.55. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-10-14 Maturity Price : 22.37 Evaluated at bid price : 22.52 Bid-YTW : 5.18 %
BMO.PR.K	Perpetual-Discount	112,501	TD crossed two blocks of 50,000 each, both at 24.89. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-10-14 Maturity Price : 24.58 Evaluated at bid price : 24.81 Bid-YTW : 5.36 %
RY.PR.R	FixedReset	107,820	TD crossed 25,000 at 27.85. RBC crossed 30,000 at 27.85 and 42,000 at 27.90. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-03-26 Maturity Price : 25.00 Evaluated at bid price : 27.85 Bid-YTW : 3.03 %
RY.PR.E	Perpetual-Discount	66,388	Scotia crossed blocks of 25,000 and 10,000 at 22.10. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-10-14 Maturity Price : 21.94 Evaluated at bid price : 22.06 Bid-YTW : 5.17 %
There were 72 other index-included issues trading in excess of 10,000 shares.

The CFTC will step up its efforts to ensure markets are a cooperative game in which everybody wins:

The top U.S. commodity regulator will review algorithmic trading and other practices such as “spoofing” and “quote stuffing” as part of the largest rewrite of Wall Street rules since the 1930s.
…
Pease said the agency’s staff is examining strategies in which traders submit and then cancel thousands of orders in milliseconds. CFTC investigators want to know whether the practice is a form of “spoofing” in which market participants try to trick other computers into making decisions that can be exploited for profit, Pease said.

The Dodd-Frank financial overhaul, named for Massachusetts Representative Barney Frank and Connecticut Senator Christopher Dodd, both Democrats, attempts to relieve the commission of the burden of proving a trader intended to manipulate prices. Instead, the CFTC will have to show the trading was “reckless.”

He wants to see a reckless trade? Well, any market order is reckless. Any stop-loss order is reckless and stupid. Any Technical Analysis is reckless, stupid and … I can’t think of a suitable epithet. Anyway, those three categorizations should be enough to get them started.

OSFI has published more boxtickingwork for banks, titled Internal Capital Adequacy Assessment Process (ICAAP) for Deposit-Taking Institutions.

A top contender for “Most Ridiculous Fund of 2010” closed today:

Connor, Clark & Lunn Capital Markets Inc. (the “Manager”) is pleased to announce the closing of the initial public offering of HBanc Capital Securities Trust (the “Fund”). The Fund raised gross proceeds of $147,572,325 from the sale of 5,797,393 Class A Units, Series 1 and 105,500 Class A Units, Series 2, respectively, at a price of $25 per Unit. These amounts include the Class A, Series 1 Units issued in respect of the over-allotment option which was exercised in full. The Fund also raised gross proceeds of U.S. $26,332,225 from the sale of 1,042,724 Class U Units, Series 1 and 10,565 Class U Units, Series 2, respectively, at a price of U.S. $25 per Unit. These amounts include 171,035 Class U Units, Series 1 and 2,165 Class U Units, Series 2 that were issued pursuant to the exchange option. The Class A Units, Series 1 are listed on the Toronto Stock Exchange under the symbol HSC.UN. Class A Units, Series 2 and Class U Units will not be listed on a stock exchange but may be converted into Class A Units, Series 1 on a weekly basis.

The Fund was established to provide investors with high levels of stable, tax-advantaged distributions through exposure to Capital Securities issued by HSBC Holdings plc, a conservatively positioned and strongly capitalized global bank.

I am often struck by how much money gets raised for products like this, while I find that selling my own fund is more like pulling teeth. I wonder if this has anything to do with it?

Nahhhh … I must be missing something.

A mixed day on heavy volume for the Canadian preferred share market with PerpetualDiscounts gaining 19bp and FixedResets losing 5bp.

PerpetualDiscounts now yield 5.42%, equivalent to 7.59% interest at the standard equivalency factor of 1.4x. Long corporates now yield about 5.2%, so the pre-tax interest-equivalent spread now stands at about 240bp, as slight (and perhaps meaningless) tightening from the 245bp reported on October 6.

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	0.0545 %	2,187.7
FixedFloater	0.00 %	0.00 %	0	0.00	0	0.0545 %	3,314.2
Floater	2.86 %	3.19 %	77,631	19.28	3	0.0545 %	2,362.2
OpRet	4.91 %	3.23 %	78,507	0.13	9	-0.1162 %	2,373.6
SplitShare	5.91 %	-28.47 %	63,809	0.09	2	-0.2033 %	2,383.6
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	-0.1162 %	2,170.4
Perpetual-Premium	5.70 %	5.14 %	146,226	5.37	19	0.1735 %	2,011.4
Perpetual-Discount	5.44 %	5.42 %	225,308	14.71	58	0.1907 %	2,003.3
FixedReset	5.27 %	3.09 %	323,279	3.28	47	-0.0532 %	2,269.8

Performance Highlights
Issue	Index	Change	Notes
GWO.PR.J	FixedReset	-2.21 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2014-01-30 Maturity Price : 25.00 Evaluated at bid price : 26.60 Bid-YTW : 4.01 %
BAM.PR.P	FixedReset	-1.21 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2014-10-30 Maturity Price : 25.00 Evaluated at bid price : 27.66 Bid-YTW : 4.18 %
ELF.PR.G	Perpetual-Discount	1.01 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-10-13 Maturity Price : 20.01 Evaluated at bid price : 20.01 Bid-YTW : 5.97 %
CM.PR.D	Perpetual-Premium	1.07 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2010-11-12 Maturity Price : 25.50 Evaluated at bid price : 25.61 Bid-YTW : -2.97 %
IAG.PR.A	Perpetual-Discount	1.37 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-10-13 Maturity Price : 21.39 Evaluated at bid price : 21.39 Bid-YTW : 5.43 %

Volume Highlights
Issue	Index	Shares Traded	Notes
CM.PR.A	OpRet	208,000	Called for redemption. Nesbitt crossed 200,000 at 24.98. YTW SCENARIO Maturity Type : Call Maturity Date : 2010-11-30 Maturity Price : 25.00 Evaluated at bid price : 24.97 Bid-YTW : 4.26 %
CM.PR.J	Perpetual-Discount	102,616	CIBC crossed blocks of 20,200 and 52,100, both at 21.50. TD crossed 10,000 at 21.65. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-10-13 Maturity Price : 21.34 Evaluated at bid price : 21.62 Bid-YTW : 5.20 %
HSB.PR.E	FixedReset	72,645	RBC crossed 50,000 at 28.10. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-07-30 Maturity Price : 25.00 Evaluated at bid price : 28.06 Bid-YTW : 3.25 %
BAM.PR.R	FixedReset	66,408	Scotia crossed 48,100 at 26.70. YTW SCENARIO Maturity Type : Call Maturity Date : 2021-07-30 Maturity Price : 25.00 Evaluated at bid price : 26.60 Bid-YTW : 4.16 %
MFC.PR.B	Perpetual-Discount	64,100	Scotia crossed 43,800 at 20.30. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-10-13 Maturity Price : 20.20 Evaluated at bid price : 20.20 Bid-YTW : 5.82 %
MFC.PR.C	Perpetual-Discount	63,715	Scotia bought 13,900 from TD at 19.75; TD crossed 34,000 at the same price. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-10-13 Maturity Price : 19.75 Evaluated at bid price : 19.75 Bid-YTW : 5.76 %
There were 53 other index-included issues trading in excess of 10,000 shares.

In astonishing news, deficit financing is here to stay:

Canada will have endured seven years of budget deficits before it returns to a surplus position, the federal government said Tuesday in its fall fiscal update.
…
The anticipated 2015-16 surplus would mean seven years of deficit financing, beginning in the 2008-09 fiscal year when the financial crisis erupted. Prior to that, the country posted 11 consecutive annual budget surpluses.

Maybe they should cut taxes again! That will increase revenues, absolutely for sure, unless it doesn’t.

In more interesting news:

McDonald’s Corp.’s yuan bond sale, the first by a foreign company in Hong Kong, may pave the way for a new global debt market as China seeks to capitalize on its status as the engine of the world’s economic recovery.

McDonald’s, which opened its first 1,000 restaurants in China faster than any other country outside the U.S., sold 200-million yuan (US$29-million) of 3% notes due in September 2013.
…
“There are a lot of companies expressing interest in issuing yuan bonds,” said Per Nordstrom, head of EMTNs Asia at Standard Chartered Plc, who worked on the sale. “I’m expecting the renminbi offshore market to be very popular.”

I’m not sure if these things have a cool name yet, like Maple, Yankee and Samurai. You can’t have cross-border bonds without a cool name! It just isn’t done!

The Canadian preferred share market had another good day on strong volume, with PerpetualDiscounts up 14bp and FixedResets gaining 20bp.

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	0.7500 %	2,186.6
FixedFloater	0.00 %	0.00 %	0	0.00	0	0.7500 %	3,312.4
Floater	2.86 %	3.18 %	78,644	19.31	3	0.7500 %	2,360.9
OpRet	4.90 %	3.15 %	81,228	0.13	9	0.1422 %	2,376.4
SplitShare	5.89 %	-29.82 %	64,607	0.09	2	0.0814 %	2,388.4
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	0.1422 %	2,173.0
Perpetual-Premium	5.71 %	5.08 %	135,279	5.37	19	0.2340 %	2,007.9
Perpetual-Discount	5.45 %	5.45 %	225,965	14.69	58	0.1378 %	1,999.5
FixedReset	5.27 %	3.08 %	314,192	3.28	47	0.1992 %	2,271.0

Performance Highlights
Issue	Index	Change	Notes
PWF.PR.P	FixedReset	1.02 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-10-12 Maturity Price : 23.38 Evaluated at bid price : 25.81 Bid-YTW : 3.38 %
NA.PR.K	Perpetual-Premium	1.15 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2010-11-11 Maturity Price : 25.50 Evaluated at bid price : 25.51 Bid-YTW : -1.24 %
BAM.PR.K	Floater	1.71 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-10-12 Maturity Price : 16.61 Evaluated at bid price : 16.61 Bid-YTW : 3.18 %

Volume Highlights
Issue	Index	Shares Traded	Notes
BNS.PR.N	Perpetual-Discount	115,525	Nesbitt crossed 100,000 at 24.50. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-10-12 Maturity Price : 24.36 Evaluated at bid price : 24.59 Bid-YTW : 5.34 %
MFC.PR.C	Perpetual-Discount	100,938	RBC crossed 85,000 at 19.65. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-10-12 Maturity Price : 19.60 Evaluated at bid price : 19.60 Bid-YTW : 5.81 %
BNS.PR.Q	FixedReset	76,762	RBC bought 10,000 from National at 26.26 and crossed 25,000 at 26.30. Desjardins crossed 14,200 at 26.30. YTW SCENARIO Maturity Type : Call Maturity Date : 2013-11-24 Maturity Price : 25.00 Evaluated at bid price : 26.29 Bid-YTW : 3.08 %
TD.PR.R	Perpetual-Premium	66,086	RBC crossed 50,000 at 25.50. YTW SCENARIO Maturity Type : Call Maturity Date : 2017-05-30 Maturity Price : 25.00 Evaluated at bid price : 25.45 Bid-YTW : 5.26 %
RY.PR.B	Perpetual-Discount	65,038	Nesbitt crossed 50,000 at 22.77. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-10-12 Maturity Price : 22.57 Evaluated at bid price : 22.74 Bid-YTW : 5.24 %
PWF.PR.D	OpRet	59,334	Nesbitt crossed 54,300 at 25.36. YTW SCENARIO Maturity Type : Soft Maturity Maturity Date : 2012-10-30 Maturity Price : 25.00 Evaluated at bid price : 25.35 Bid-YTW : 4.36 %
There were 39 other index-included issues trading in excess of 10,000 shares.

Not much time to write, but here are a couple of quick links: Market structure is causing the IPO crisis — and more and Equity Trading in the 21st Century. That should keep you guys busy for a while!

More nonsense about the Flash Crash – this time from Barron’s:

HERE’S WHERE THE REGULATORS’ story starts to fall apart. CME Group, owner of the exchange where the E-minis trade, said the sell order was consistent with market practices. Furthermore, only half the order had been entered as the market fell. And it had been broken up into small orders—nine out of every 100 coming into the market. In any event, this one trade couldn’t have spooked investors because the market is anonymous. Traders didn’t see a single, large seller. What they saw was continuous action.

What this proves is that the writer, Jim McTague, hasn’t the slightest concept of how market-makers make money.

Yes, the traders didn’t see a single, large seller. If they had, they might have bought more, knowing that it was only one cowboy with an itchy trigger finger causing the price change. What they saw was, in fact, that their position limits had been reached and they were losing money. So they decided to eat the loss – your first loss is your best loss – and square their positions. There is nothing nefarious about that.

The brokerage firms’ behavior was particularly galling, though by no means illegal. They stopped automatic execution of customer orders, also known as internalization, which on most days accounts for nearly 100% of retail trades.
…
On May 6 when the market fell out of bed, the report says blandly, some of these players reduced executions of sell orders but continued to execute buy orders. In other words, they’d sell stock to a retail customer but wouldn’t buy stock from a retail customer. They wanted to get rid of their own inventories, not accumulate more shares. So they sent the customer sell orders onto the swamped stock exchanges.

I fail to see anything nefarious about this. It is not the job of market makers to take everything that’s thrown at them, even if it costs them billions of dollars and sinks their firms, requiring Son of TARP to repair the damage.

If Jim McTague every opens a brokerage firm, remind me not to put any money in it.

Nest time a politician or one of his robo-parrots pontificates about productivity, I’ll remember this:

The UAE has complained that its two airlines have only six flights a week to Toronto, ferrying passengers from Dubai and Abu Dhabi. And with 27,000 Canadians living in the UAE, al Ghafli has argued there is a need for greater air service between the two countries.

Air Canada, however, has protested expanding the landing rights of UAE carriers, arguing that few people fly from the UAE over to Canada. Air Canada claims that UAE carriers are taking Canadians to other places, while making stopovers in Dubai and Abu Dhabi.

Canadians are among the most productive and energetic whiners and lobbyists in the world! So much so that the Ontario Health Ministry has declared it a core competency for hospitals and demanded the function be brought in-house!

This post is very late because of (i) PrefLetter and (ii) downtime on the TMX Electric Abacus. Sorry about that!

It was a good day for the Canadian preferred share market, with PerpetualDiscounts up 14bp and FixedResets winning 9bp. Volumer was merely OK.

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	0.1099 %	2,170.3
FixedFloater	0.00 %	0.00 %	0	0.00	0	0.1099 %	3,287.7
Floater	2.88 %	3.23 %	78,742	19.19	3	0.1099 %	2,343.3
OpRet	4.91 %	3.22 %	76,549	0.14	9	0.0431 %	2,373.0
SplitShare	5.90 %	-33.25 %	65,201	0.09	2	0.1222 %	2,386.5
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	0.0431 %	2,169.9
Perpetual-Premium	5.73 %	5.21 %	129,579	5.38	19	0.1659 %	2,003.2
Perpetual-Discount	5.46 %	5.45 %	227,475	14.67	58	0.1380 %	1,996.7
FixedReset	5.28 %	3.15 %	317,006	3.29	47	0.0926 %	2,266.5

Performance Highlights
Issue	Index	Change	Notes
NA.PR.L	Perpetual-Discount	1.23 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-10-08 Maturity Price : 22.79 Evaluated at bid price : 23.00 Bid-YTW : 5.26 %

Volume Highlights
Issue	Index	Shares Traded	Notes
TRP.PR.A	FixedReset	100,690	RBC crossed three blocks, of 50,000 shares, 25,000 and 20,000, all at 26.26. YTW SCENARIO Maturity Type : Call Maturity Date : 2015-01-30 Maturity Price : 25.00 Evaluated at bid price : 26.22 Bid-YTW : 3.42 %
SLF.PR.D	Perpetual-Discount	56,685	Nesbitt crossed 50,000 at 20.30. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-10-08 Maturity Price : 20.27 Evaluated at bid price : 20.27 Bid-YTW : 5.53 %
RY.PR.P	FixedReset	55,960	RBC bought 21,100 from Canaccord at 27.70, then crossed 25,000 at 27.72. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-03-26 Maturity Price : 25.00 Evaluated at bid price : 27.75 Bid-YTW : 3.11 %
SLF.PR.C	Perpetual-Discount	50,600	Nesbitt crossed 50,000 at 20.30. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-10-08 Maturity Price : 20.25 Evaluated at bid price : 20.25 Bid-YTW : 5.54 %
BNS.PR.N	Perpetual-Discount	50,377	Nesbitt crossed 19,700 at 24.50. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-10-08 Maturity Price : 24.27 Evaluated at bid price : 24.50 Bid-YTW : 5.36 %
TRP.PR.B	FixedReset	46,100	RBC crossed 20,000 at 25.35 and bought 18,000 from TD at the same price. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-10-08 Maturity Price : 25.20 Evaluated at bid price : 25.25 Bid-YTW : 3.29 %
There were 33 other index-included issues trading in excess of 10,000 shares.

BIS has released a working paper by Ben Craig and Goetz von Peter titled Interbank tiering and money center banks:

This paper provides evidence that interbank markets are tiered rather than flat, in the sense that most banks do not lend to each other directly but through money center banks acting as intermediaries. We capture the concept of tiering by developing a core-periphery model, and devise a procedure for fitting the model to real-world networks. Using Bundesbank data on bilateral interbank exposures among 1800 banks, we find strong evidence of tiering in the German banking system. Econometrically, bank-specific features, such as balance sheet size, predict how banks position themselves in the interbank market. This link provides a promising avenue for understanding the formation of financial networks.
…
The first column of Table 1 reports the simplest regression using bank size as the sole explanatory variable. The log of total bank assets is highly significant; a marginal increase in size from the average balance sheet of &eur;230 million raises the probability of belonging to the core by a sixth of a percent. Indeed, size is a fairly reliable classifier. The average size of banks in the core is 51 times that of banks in the periphery. Hence, large banks tend to be in the core, while small banks are found in the periphery of the interbank network.
…
Systemic importance is highly correlated with a bank’s network position: it is extremely unlikely that a systemically important bank would not be in the core, as indicated by the low rate of false core predictions, Prob(c|P). But the moderate fit also suggests that a bank’s position in the network is something that goes beyond its systemic importance.

The success of “Balance Sheet Size” in predicting network placement supports my contention that surcharges for systemically important banks should be based on a balance sheet variable – either gross assets or risk-weighted assets, I’m not particular – rather than upon a regulator’s determination that such-and-such bank is systemically important.

One thing I would like to see addressed is an examination of how increasing the risk-weighting of interbank assets would change the model. It is far too cheap, in terms of capital, for a bank to hold another bank’s paper; this increases the chance for contagion.

It was a day of readjusting prices on continued heavy volume today, with PerpetualDiscounts losing 8bp and FixedResets picking up 8bp.

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	0.1835 %	2,167.9
FixedFloater	0.00 %	0.00 %	0	0.00	0	0.1835 %	3,284.1
Floater	2.88 %	3.22 %	75,161	19.20	3	0.1835 %	2,340.8
OpRet	4.91 %	3.21 %	77,017	0.15	9	0.0647 %	2,372.0
SplitShare	5.91 %	-29.65 %	65,579	0.09	2	0.0000 %	2,383.6
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	0.0647 %	2,168.9
Perpetual-Premium	5.74 %	5.25 %	130,476	5.38	19	0.0083 %	1,999.9
Perpetual-Discount	5.47 %	5.46 %	226,842	14.70	58	-0.0784 %	1,994.0
FixedReset	5.28 %	3.18 %	325,957	3.29	47	0.0778 %	2,264.4

Performance Highlights
Issue	Index	Change	Notes
HSB.PR.C	Perpetual-Discount	-1.62 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-10-07 Maturity Price : 23.46 Evaluated at bid price : 23.71 Bid-YTW : 5.41 %
NA.PR.L	Perpetual-Discount	-1.22 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-10-07 Maturity Price : 22.53 Evaluated at bid price : 22.72 Bid-YTW : 5.32 %
NA.PR.M	Perpetual-Premium	-1.14 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2017-06-14 Maturity Price : 25.00 Evaluated at bid price : 26.00 Bid-YTW : 5.21 %
IAG.PR.A	Perpetual-Discount	1.39 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-10-07 Maturity Price : 21.22 Evaluated at bid price : 21.22 Bid-YTW : 5.46 %
GWO.PR.J	FixedReset	1.39 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2014-01-30 Maturity Price : 25.00 Evaluated at bid price : 27.02 Bid-YTW : 3.46 %

Volume Highlights
Issue	Index	Shares Traded	Notes
HSB.PR.E	FixedReset	84,546	RBC crossed blocks of 17,700 and 25,000, both at 28.10. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-07-30 Maturity Price : 25.00 Evaluated at bid price : 28.09 Bid-YTW : 3.20 %
MFC.PR.A	OpRet	83,119	Nesbitt crossed blocks of 20,000 and 50,000, both at 25.50. YTW SCENARIO Maturity Type : Soft Maturity Maturity Date : 2015-12-18 Maturity Price : 25.00 Evaluated at bid price : 25.39 Bid-YTW : 3.83 %
BNS.PR.N	Perpetual-Discount	74,655	National sold two blocks of 10,000 each to anonymous, both at 24.45. Desjardins crossed 15,000 at the same price. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-10-07 Maturity Price : 24.23 Evaluated at bid price : 24.46 Bid-YTW : 5.37 %
RY.PR.A	Perpetual-Discount	61,740	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-10-07 Maturity Price : 21.59 Evaluated at bid price : 21.91 Bid-YTW : 5.13 %
RY.PR.X	FixedReset	56,800	T crossed 35,000 at 28.05. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-09-23 Maturity Price : 25.00 Evaluated at bid price : 28.05 Bid-YTW : 3.18 %
BNS.PR.X	FixedReset	40,225	RBC crossed 25,000 at 27.60. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-05-25 Maturity Price : 25.00 Evaluated at bid price : 27.55 Bid-YTW : 3.18 %
There were 45 other index-included issues trading in excess of 10,000 shares.

Japan is rumoured to be considering a capital surcharge on systemically important banks, but details and confirmations are scarce:

Japan’s financial regulator is considering forcing the country’s largest banks to hold more capital than required under Basel III rules, a person with direct knowledge of the matter said.

The Financial Services Agency will start internal discussions soon on whether to apply a capital surcharge to systemically important lenders such as Mitsubishi UFJ Financial Group Inc., the person said, declining to be identified because the matter is confidential.
…
The Swiss panel said UBS AG and Credit Suisse should hold almost double the capital required under the Basel III proposals announced last month. By 2019, the lenders would need to hold at least 10 percent of capital in common equity, compared with 7 percent required under Basel.

The possibility of a global capital surcharge of around 2 percent for the world’s most important banks “cannot be ruled out,” Shinichi Ina, a Tokyo-based analyst at Credit Suisse, wrote in a report this week.

This is regulation in a nut’s hell. I support a progressive surcharge on Risk Weighted Assets. I am quite aware that RWA is, at best, an imperfect measure of a bank’s systemic importance; but I assert that singling out a group of “Top Tier” banks is worse.

Bad news for Ireland:

Ireland got an unwelcome jolt Wednesday as Fitch Ratings cut its sovereign credit rating to the lowest level of any of the major agencies, citing the heavy burden of bailing out the country’s banking sector.

Fitch cut Ireland’s long-term foreign- and local-currency ratings to A+ from AA-. Moody’s Investors Service, which warned Tuesday that it was reviewing the country for a possible downgrade, and Standard & Poor’s both rate Irish debt higher.

The move “reflects the exceptional and greater-than-expected fiscal cost associated with the government’s recapitalization of the Irish banks, especially Anglo Irish Bank,” Chris Pryce, Fitch’s director of sovereign ratings said in a statement.

The Bank of Canada has released a Working Paper by James Chapman, Jonathan Chiu, and Miguel Molico titled Central Bank Haircut Policy:

We present a model of central bank collateralized lending to study the optimal choice of the haircut policy. We show that a lending facility provides a bundle of two types of insurance: insurance against liquidity risk as well as insurance against downside risk of the collateral. Setting a haircut therefore involves balancing the trade-off between relaxing the liquidity constraints of agents on one hand, and increasing potential inflation risk and distorting the portfolio choices of agents on the other. We argue that the optimal haircut is higher when the central bank is unable to lend exclusively to agents who actually need liquidity. Finally, for an unexpected drop in the haircut, the central bank can be more aggressive than when setting a permanent level of the haircut.

The TMX has a new page showing Bond Market Data. The data from today (labelled July 19, 2010), showing $20.04-billion face nominal Canadas being traded vs. $0.01-billion face RRBs, should illustrate the points I have made at various time regarding the relative liquidity of the latter! I presume – but do not know – that they get their trading statistics from the same data set used for their prices, which are major Canadian dealers.

The Canadian preferred share market showed continued strength on continued high volume, with PerpetualDiscounts gaining 17bp and FixedResets up 10bp.

PerpetualDiscounts now yield 5.47%, equivalent to 7.66% interest at the standard conversion factor of 1.4x. Long corporates now yield 5.2% so the pre-tax interest-equivalent spread (also called the Seniority Spread) now stands at about 245bp, a sharp decline from the 260bp reported on September 30.

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	0.1102 %	2,163.9
FixedFloater	0.00 %	0.00 %	0	0.00	0	0.1102 %	3,278.1
Floater	2.89 %	3.24 %	74,699	19.17	3	0.1102 %	2,336.5
OpRet	4.91 %	3.10 %	76,913	0.15	9	0.0457 %	2,370.4
SplitShare	5.91 %	-31.75 %	66,246	0.09	2	0.1836 %	2,383.6
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	0.0457 %	2,167.5
Perpetual-Premium	5.74 %	5.30 %	125,143	4.86	19	0.0921 %	1,999.8
Perpetual-Discount	5.46 %	5.47 %	223,552	14.68	58	0.1676 %	1,995.5
FixedReset	5.29 %	3.20 %	321,372	3.30	47	0.1029 %	2,262.6

Performance Highlights
Issue	Index	Change	Notes
ELF.PR.G	Perpetual-Discount	-1.59 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-10-06 Maturity Price : 19.85 Evaluated at bid price : 19.85 Bid-YTW : 6.01 %
GWO.PR.L	Perpetual-Discount	-1.05 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-10-06 Maturity Price : 24.30 Evaluated at bid price : 24.51 Bid-YTW : 5.80 %
TRP.PR.C	FixedReset	1.06 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-10-06 Maturity Price : 25.63 Evaluated at bid price : 25.68 Bid-YTW : 3.60 %
MFC.PR.E	FixedReset	1.32 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2014-10-19 Maturity Price : 25.00 Evaluated at bid price : 26.93 Bid-YTW : 3.60 %
HSB.PR.D	Perpetual-Discount	1.34 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-10-06 Maturity Price : 23.29 Evaluated at bid price : 23.52 Bid-YTW : 5.34 %

Volume Highlights
Issue	Index	Shares Traded	Notes
SLF.PR.C	Perpetual-Discount	120,790	RBC crossed 89,100 at 20.25. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-10-06 Maturity Price : 20.27 Evaluated at bid price : 20.27 Bid-YTW : 5.53 %
BNS.PR.T	FixedReset	95,566	RBC crossed blocks of 50,000 and 10,000, both at 27.55. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-05-25 Maturity Price : 25.00 Evaluated at bid price : 27.55 Bid-YTW : 3.16 %
BAM.PR.B	Floater	91,262	Nesbitt crossed 88,000 at 16.35. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-10-06 Maturity Price : 16.30 Evaluated at bid price : 16.30 Bid-YTW : 3.24 %
RY.PR.I	FixedReset	59,453	RBC crossed 49,900 at 26.66. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-03-26 Maturity Price : 25.00 Evaluated at bid price : 26.60 Bid-YTW : 3.15 %
IAG.PR.F	Perpetual-Discount	46,291	Desjardins crossed 30,000 at 25.00. YTW SCENARIO Maturity Type : Option Certainty Maturity Date : 2040-10-06 Maturity Price : 25.00 Evaluated at bid price : 25.00 Bid-YTW : 5.95 %
BNS.PR.M	Perpetual-Discount	38,548	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-10-06 Maturity Price : 21.45 Evaluated at bid price : 21.77 Bid-YTW : 5.16 %
There were 54 other index-included issues trading in excess of 10,000 shares.

The European stress tests are encountering renewed criticism:

The health check, undertaken by the Committee of EuropeanBankingSupervisors (CEBS), tested sovereign debt holdings in short-term trading books but turned a blind eye to the longer-term banking books. Then it emerged that the so-called “gross disclosures” weren’t gross at all. The latest Irish bank bailout has now revealed a third flaw.

The tests were supposed to reassure global investors by showing that systemically important eurozone banks could survive what was perceived as their biggest threat — a sovereign default. But the tests skirted around the Irish situation in two ways. First, Ireland’s banks have failed due to an immense property crash, not a sovereign crisis. Second, the biggest disaster zone — Anglo Irish Bank — was not even stress-tested.

Jerome Kerviel, the SocGen trader who was in the position of a drug mule caught at customs, has been sentenced to three years in jail:

Former Societe Generale (SOGN.PA) trader Jerome Kerviel was sentenced to three years in jail by a Paris court on Tuesday for his role in a trading scandal and ordered to pay the French bank 4.9 billion euros ($6.8 billion).

The verdict came as a victory for SocGen, which always maintained Kerviel acted alone and without the sanction of his managers at the bank. It had sought payment of damages for the money it lost unwinding the trader’s risky market bets in 2008.
…
The payment to SocGen equates to 3.2 percent of France’s central government deficit for 2010, the GDP of Monaco or 16 percent of the French bank’s market value. Kerviel is currently paid 2,300 euros a month as a technology consultant.

Kerviel was last discussed on PrefBlog on May 3. There is no indication that any of those actually responsible have even been charged.

Moody’s warns on Ireland:

Moody’s Investors Service said Tuesday it may cut Ireland’s debt rating again, citing the increased cost to the government of repairing the stricken banking system, weak economic growth and rising borrowing costs.

A further downgrade could push Ireland’s borrowing costs higher and make it more difficult for the government to meet its debt repayments without seeking help from the European Union’s European Financial Stability Fund.

“Me, too!”, shouts DBRS. The EU bureaucrats will have to take decisive action, as discussed October 1.

Norwegian police are feverishly attempting to make the markets safe for the incompetent:

Two day traders have been arrested by Norwegian police for allegedly cracking an algorithm of U.S. brokerage firm Timber Hill, in order to manipulate the stock prices of three companies listed on the Oslo Stock Exchange.

The two day traders, Svend Egil Larsen and Peder Veiby, have been charged with “market manipulation” and face up to six years in jail if convicted. Timber Hill is a subsidiary of Interactive Brokers and acts as its market maker.
…
Norwegian police claim that between March 2007 and March 2008, the two traders conducted more than 2,200 purchase and sale orders which were “ not real” and jacked the price of the shares in three Norwegian companies up or down before taking a profit Bottom line: the two day traders outsmarted Timber Hill’s algorithm and made money in the process. The three Norwegian companies were Hafslund, Wilh. Wilhelmsen and Odfjell.

Veiby earned 250,000 Norwegian kroner ($40,698) in the alleged scam while Larsen earned 160,000 Norwegian kroner ($26,056). Timber Hill did not return Securities Technology Monitor’s call seeking comment by press time.
…
“In our view it is a deliberate manipulation against the computer they’ve been trading against so that the system changed the prices and they were able to earn money,” said Christian Steinberg with the Norwegian National Authority for Investigation and Prosecution of Economic and Environmental Crime in an interview with the Norwegian newspaper Dagens Naeringsliv.

The newpaper report said that Larsen declined to comment and Veiby denied any wrongdoing on the grounds he did “not act with the intent to commit price manipulation in the legal sense.” The alleged scam was uncovered by the Oslo Stock Exchange, which reported it to the Norwegian National Authority and Prosecution of Economic and Environmental Crime.

I don’t see that anything wrong was done at all. Willing buyer, willing seller, arm’s length … what’s the problem? Trades “not real”? I don’t see it. They owned the stock, they had the risk, there was transfer of risk … if Timber Hill can’t programme its algorithms better than that, the individuals charged have done a service to the market by taking capital away from those unable to deploy it with competence. Timber Hill’s only possible excuse is that the amounts were so small (less than $100,000 total profit for a year) that the efect was lost as a rounding error … but that’s a pretty flimsy excuse.

However, according to the Google translation of a story in Norwegian titled Klart dette er greit, the story is more complex than reported above – naturally enough:

The two exploited a weakness in the computer algorithm in the near half a year without Hill Timberlake discovered it. This week in Oslo District Court has been discussed in court if the two ran the illegal market manipulation, or whether they simply were smarter than any other market player.

– It is obvious that what they have done is okay, says Jan Erik Meidell.

Meidell was employee number three when he started in Timber Hill in 1994. He helped build the brokerage house’s position in market making in Europe, and was one of two managers for their trading in Europe. Meidell ruled the so-called share the robots, and he claims to know the Timber Hills algorithms and trading strategies in detail. Today Meidell PhD student at NHH and co-owner of the investment fund NorthSeaGem.

He believes it is “nonsense” that the two persons now sitting accused of having exploited a weakness in Timber Hills algorithms.

– Timber Hill has chosen a strategy that involves risk and acknowledge that it sometimes will lead to losses, “says Meidell to dn.no
…
– What do you think that people take advantage of the robot’s weakness when the opportunity occasionally arises?

– Sure it’s okay. Whoever is to play, must withstand the roast, “says Meidell.

The most important point is that Timber Hill is fully aware that they can not have full control over all shares always mean Meidell. It is not so important – the overall strategy is in fact profitable strategy for Timber Hill.

– They think that what they lose in one stock, it will win them back in others. Does the strategy in more than 50 percent of cases, so you earn bucks, and it’s just that Timber Hill, says Meidell.
…
Timber Hill has been absent in the trial which is now in the Oslo City Court, and they have not wanted to respond to Dagens Næringsliv inquiries.

– I think Timber Hills reaction ultimately had been “awesome, you managed to crack our algorithm. Perhaps they had even offered them jobs, “says Meidell.

So .. who knows? However, it does look a little as if the Norwegian regulator is attempting to ensure that incompetent traders are protected, and that the stock market is a nice little place where children play nicely.

Another strong day on heavy volume for the Canadian preferred share market, with PerpetualDiscounts up 30bp and FixedResets tagging along for a 9bp gain.

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	-0.2747 %	2,161.5
FixedFloater	0.00 %	0.00 %	0	0.00	0	-0.2747 %	3,274.5
Floater	2.89 %	3.25 %	75,797	19.15	3	-0.2747 %	2,333.9
OpRet	4.90 %	2.99 %	77,452	0.15	9	0.1982 %	2,369.4
SplitShare	5.92 %	-30.42 %	66,814	0.09	2	0.4921 %	2,379.2
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	0.1982 %	2,166.6
Perpetual-Premium	5.71 %	5.30 %	124,470	5.31	19	-0.0041 %	1,997.9
Perpetual-Discount	5.46 %	5.50 %	220,892	14.68	58	0.2970 %	1,992.2
FixedReset	5.27 %	3.20 %	318,578	3.29	47	0.0863 %	2,260.3

Performance Highlights
Issue	Index	Change	Notes
ELF.PR.G	Perpetual-Discount	-1.56 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-10-05 Maturity Price : 20.17 Evaluated at bid price : 20.17 Bid-YTW : 5.92 %
BAM.PR.B	Floater	-1.28 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-10-05 Maturity Price : 16.25 Evaluated at bid price : 16.25 Bid-YTW : 3.25 %
RY.PR.C	Perpetual-Discount	1.08 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-10-05 Maturity Price : 22.25 Evaluated at bid price : 22.39 Bid-YTW : 5.20 %
BNA.PR.C	SplitShare	1.10 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2019-01-10 Maturity Price : 25.00 Evaluated at bid price : 22.00 Bid-YTW : 6.32 %
IAG.PR.C	FixedReset	1.26 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2014-01-30 Maturity Price : 25.00 Evaluated at bid price : 27.35 Bid-YTW : 3.24 %
MFC.PR.C	Perpetual-Discount	1.29 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-10-05 Maturity Price : 19.60 Evaluated at bid price : 19.60 Bid-YTW : 5.80 %
HSB.PR.C	Perpetual-Discount	1.34 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-10-05 Maturity Price : 23.85 Evaluated at bid price : 24.12 Bid-YTW : 5.31 %

Volume Highlights
Issue	Index	Shares Traded	Notes
BNS.PR.N	Perpetual-Discount	67,860	Desjardins bought 10,000 from National at 24.51. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-10-05 Maturity Price : 24.16 Evaluated at bid price : 24.38 Bid-YTW : 5.38 %
TD.PR.K	FixedReset	54,850	TD crossed 40,000 at 28.08. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-08-30 Maturity Price : 25.00 Evaluated at bid price : 28.06 Bid-YTW : 3.22 %
BNS.PR.M	Perpetual-Discount	44,644	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-10-05 Maturity Price : 21.39 Evaluated at bid price : 21.69 Bid-YTW : 5.18 %
BNS.PR.X	FixedReset	41,425	TD bought 12,600 from anonymous at 27.55. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-05-25 Maturity Price : 25.00 Evaluated at bid price : 27.51 Bid-YTW : 3.22 %
NA.PR.M	Perpetual-Premium	39,120	YTW SCENARIO Maturity Type : Call Maturity Date : 2017-06-14 Maturity Price : 25.00 Evaluated at bid price : 26.60 Bid-YTW : 5.05 %
BNS.PR.K	Perpetual-Discount	37,910	TD crossed 10,000 at 22.80. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-10-05 Maturity Price : 22.47 Evaluated at bid price : 22.65 Bid-YTW : 5.30 %
There were 49 other index-included issues trading in excess of 10,000 shares.