PrefBlog

I mentioned on April 4 that Charles Schwab, Inc., had come out against High Frequency Trading (HFT). Assiduous Readers have been on tenterhooks all day, wondering when Schwab will reveal the secrets of the universe and the golden key to riches through equity investment. Today, we got an answer:

“When you’re at record high levels, people start to get a little tentative going into weekends,” Randy Frederick, managing director of trading and derivatives at Charles Schwab Corp. which manages $2.2 trillion in client assets, said in a phone interview. “Taking a few profits off the table going into the weekend is probably not a bad strategy.”

What a thoroughly asinine remark, illustrative of Big Broker culture: ‘Go with the flow and avoid thinking’.

Meanwhile, another firm has been victimized for not being kind to stupid people:

The Securities and Exchange Commission today charged the owner of a Holmdel, N.J.-based brokerage firm with manipulative trading of publicly traded stocks through an illegal practice known as “layering” or “spoofing.”

The SEC also charged the owner and others for registration violations. Two firms and five individuals agreed to pay a combined total of nearly $3 million to settle the case.

In layering, the trader places orders with no intention of having them executed but rather to trick others into buying or selling a stock at an artificial price driven by the orders that the trader later cancels. An SEC investigation found that Joseph Dondero, a co-owner of Visionary Trading LLC, repeatedly used this strategy to induce other market participants to trade in a particular stock. By placing and then canceling layers of orders, Dondero created fluctuations in the national best bid or offer of a stock, increased order book depth, and used the non-bona fide orders to send false signals to other market participants who misinterpreted the layering as true demand for the stock.

“The fair and efficient functioning of the markets requires that prices of securities reflect genuine supply and demand,” said Sanjay Wadhwa, senior associate director of the SEC’s New York Regional Office. “Traders who pervert these natural forces by engaging in layering or some other form of manipulative trading invite close scrutiny from the SEC.”

Well, if technical analysts want to play around attempting to measure “true demand” for any particular stock, let them. But the fair and efficient functioning of the markets actually requires that the prices of securities reflect, to as close a degree as possible, the fundamental value of those securities. That’s how you get the best results in capital allocation, both by issuers getting clear signals about what their businesses are worth, and by investors being rewarded according to the accuracy of their estimates of fundamental value.

I will also point out that this spoofing strategy can get very expensive if somebody starts running a pounce algorithm.

By keeping markets safe for the stupid, the regulators are encouraging bubbles and hindering sustainable expansion of the economy.

There was a pretty good US jobs number today:

Companies powered the U.S. job market past a milestone in March as private employment exceeded the pre-recession peak for the first time, showing the kind of progress Federal Reserve officials look for to maintain their current policy course.

Payrolls excluding government agencies rose by 192,000 workers after a 188,000 gain in February that was larger than first estimated, the Labor Department reported today in Washington. That brought the job count to 116.1 million, beating the January 2008 high of 116 million. The jobless rate held at 6.7 percent even as almost half a million people entered the workforce.

… but Pew Research reminds us that there is a lot of catching up to do:

Because more people are entering the labor force each month, merely replacing all the jobs lost during the recession won’t bring employment back to its pre-crisis level.

Under the most optimistic scenario — the economy adds 472,000 jobs a month, the highest single-month rate in the 2000s — it would still take until October 2015 for employment to regain its pre-recession level. If the economy replicates its performance in 2005 (the best year since 2000) and adds about 208,000 jobs a month, it would take until September 2018. And if the economy continues to add jobs at the rate it has since late 2010 — an average of 182,000 a month — the employment gap won’t be closed till August 2019.

It was another positive day for the Canadian preferred share market, with PerpetualDiscounts up 5bp, FixedResets winning 10bp and DeemedRetractibles gaining 3bp. Volatility was minimal. Volume was well below average.

Assiduous Reader PL writes in and says:

I know that getting and correctly interpreting market reaction to information quicker whether one minute or one second than the other players will always be an advantage. And though I think there should be a small transaction tax on all of us to reduce this madness I know this may never happen in North America, even though it is happening in Europe I believe.

HOWEVER the one HFT practice that should be stopped is the fake orders. Any bid or offer should be required to stay in for one minute during trading hours. If they want to enter BS orders then let them do them before market opens.

I never buy or sell anything in the first half hour anyway. Your thoughts on eliminating fake deliberately deceptive orders.?

I disagree with your characterization of short-duration orders as “fake”. They may not be posted on the exchange for very long (as little as a few milliseconds), but for the entire time they’re up, they may be executed against.

This is a controversial subject – Panther Energy Trading LLC was victimized by the CFTC for spoofing:

According to the Order, Coscia and Panther made money by employing a computer algorithm that was designed to unlawfully place and quickly cancel orders in exchange-traded futures contracts. For example, Coscia and Panther would place a relatively small order to sell futures that they did want to execute, which they quickly followed with several large buy orders at successively higher prices that they intended to cancel. By placing the large buy orders, Coscia and Panther sought to give the market the impression that there was significant buying interest, which suggested that prices would soon rise, raising the likelihood that other market participants would buy from the small order Coscia and Panther were then offering to sell. Although Coscia and Panther wanted to give the impression of buy-side interest, they entered the large buy orders with the intent that they be canceled before these orders were actually executed. Once the small sell order was filled according to the plan, the buy orders would be cancelled, and the sequence would quickly repeat but in reverse – a small buy order followed by several large sell orders. With this back and forth, Coscia and Panther profited on the executions of the small orders many times over the period in question.

David Meister, the CFTC’s Enforcement Director, said, “While forms of algorithmic trading are of course lawful, using a computer program that is written to spoof the market is illegal and will not be tolerated. We will use the Dodd Frank anti-disruptive practices provision against schemes like this one to protect market participants and promote market integrity, particularly in the growing world of electronic trading platforms.”

I take the view that you can’t cheat an honest man. If somebody is spoofed into taking the ‘wrong’ side of the market in this way, he has only himself to blame. The markets exist for the formation and movement of long term capital – these short-term games are basically irrelevant to this purpose, but to the extent they do exist, they narrow spreads for real-money players. Speculators – such as HFT, traditional brokerages and fools – should be of interest to policy makers only to the extent that they provide liquidity to real money. We should not be doing a damn thing to protect traders whose Big Idea is ‘buy things when they start to go up’. As I said on May 7, 2010:

The way to eliminate stupid dumb trading is to ensure that stupid dumb traders lose all their money, go bankrupt and die.

The CFTC – under Dodd-Frank – takes the view that these are simply short-term versions of pump-and-dump, despite the fact that no execution actually occurred. If Panther had executed wash trades through separate accounts, giving rise to actual volume, they would have a better case for this … but with pump-and-dump, I also take the view that the law is merely molly-coddling of incompetent fools. If 21.50 is too much to pay for XZY stock … then don’t buy XZY at 21.50. It’s as simple as that.

I cancelled an order today within one minute of placing it. I’ll use fake numbers to illustrate: there was a bid for 500 shares at 21.50; the next bid was at 21.40. The offer was at about 21.60. I wanted to sell 1,000 shares and I thought 21.50 was a good price, so I hit the bid and got done for 500, which left me on the offer side of the market. But the offer behind me was at 21.60! Why should I improve the quote – using client money – by ten cents? So I modified the offer on the 500 shares remaining on my order to 21.58. Selling at 21.50 was good, but selling at 21.58 would be better. Selling at 21.50 with execution certainty is one thing; offering the entire world an option to buy them at 21.50 is another.

I don’t understand why you want to jail me for that.

It should also be noted that although Nanex is a firm I respect – they did excellent work on the Flash Crash – their conclusions regarding algorithmic behaviour have been challenged:

Nanex regularly misunderstands what it sees in market data and is fueling misconceptions that damage investor confidence, according to Manoj Narang, founder and chief executive officer of HFT firm Tradeworx Inc. in Red Bank, New Jersey. He compared Nanex to the “truthers” who doubt the official explanation of the Sept. 11 terrorist attacks.

There are usually benign explanations for what look to Nanex like attempts to manipulate prices through what it calls “quote stuffing,” he said. For example, he said, bursts of quotes could be trading algorithms reacting when the difference between the best bid to buy and the best offer to sell grows to more than a penny. The programs automatically cancel the orders after exchanges modify them to avoid markets where bids equal offers, according to Narang, resulting in “inadvertent repetitive behavior” by algorithms.

Assiduous Reader PL’s support for a Tobin Tax is one that keeps resurfacing like a lump of decomposing sewage:

Still, proponents of stricter regulation said they see the debate over the [Michael Lewis] book [Flash Boys] as a catalyst for possible future changes.

“The simplest approach and most direct approach is with a transaction tax,” said [ Democrat Representative Peter ] DeFazio, whose legislation would impose what he described as a “miniscule” 3-basis-point levy on the sell side of transactions.

However, it is quite apparent that Tobin taxes harm market quality. One possibility where the AR PL and I might have a meeting of minds is the potential for an exchange to impose a fee for the placement of an order – generally, once you’re permitted to place orders on the exchange, the only fees remaining are charged for executed transactions.

Schwab is upset about the number of orders:

High-frequency trading pumped out over 300,000 trade inquiries each second last year, up from just 50,000 only seven years earlier. Yet actual trade volume on the exchanges has remained relatively flat over that period. It’s an explosion of head-fake ephemeral orders – not to lock in real trades, but to skim pennies off the public markets by the billions.
…
Added systems burdens, costs and distortions of rapid-fire quote activity: Ephemeral quotes, also called “quote stuffing,” that are cancelled and reposted in milliseconds distort the tape and present risk to the resiliency and integrity of critical market data and trading infrastructure. The tremendous added costs associated with the expanded capacity and bandwidth necessary to support this added data traffic is ultimately borne in part by individual investors.

There are solutions. Today there is no restriction to pumping out millions of orders in a matter of seconds, only to reverse the majority of them. It’s the life-blood of high-frequency trading. A simple solution would be to establish cancellation fees to discourage the practice of quote stuffing. The SEC and CFTC floated the idea last year. It has great merit. Make the fees high enough and they will eliminate high-frequency trading entirely.

However, I would support a charge for order entry (or simply order cancellation, assuming that executed orders get charged by other means) only to the extent that it is imposed by the exchanges to recover costs or as a source of competitive advantage. If, once you count amortization of all the required infrastructure, it costs $1 to process 1,000,000 orders, then by all means, charge $0.000001 to process an order. If you want to make a profit and the market will bear it, then by all means, charge $0.000002 to process an order. If your customers complain that they have to process all these orders too, then by all means offer them a kiddie feed at reduced price, transmitting orders only when they have been extant for 10 milliseconds.

But don’t start imposing fees with grandiose visions of Better Living Through Higher Taxation. We all know where that ends up.

In fact, I have learned from a paper by Charles M. Jones of Columbia Business School titled What do we know about high-frequency trading? that:

Order cancellation or excess message fees: If bandwidth and data processing requirements are overwhelming some trading venue customers, it may be appropriate for trading venues to set prices accordingly and charge the participants who are imposing those costs on others. Nasdaq is currently imposing these fees in the U.S.; it is too soon to measure the effects. However, order cancellation fees will almost certainly reduce liquidity provision away from the inside quote, reducing market depth. The current initiatives should be studied carefully before broader-based message fees are considered.

He also points out – bless the man – that:

Minimum order exposure times: Under these proposals, submitted orders could not be cancelled for at least some period of time, perhaps 50 milliseconds. This would force large changes in equity markets and could severely discourage liquidity provision. The economic rationale here is particularly suspect, as the overriding goal in market design should be to encourage liquidity provision.

Securities transaction taxes: The evidence indicates that these taxes reduce share prices, increase volatility, reduce price efficiency, worsen liquidity, increase trading costs, and cause trading to move offshore.

At the cost of severe personal trauma – which I hope you guys appreciate – I have actually gone to the extent of watching a video titled ‘Michael Lewis: Programmers have Replaced Traders’. My God, but I hate watching TV and listening to lectures! Anyway, the video makes it plain that the big thing that is really at issue is the replacement of the old time smiley-boys by geeks who can actually do things, like programme these here computer whatchamacallits. Brad Katsuyama, who was discussed on PrefBlog on April 2, was on it … just another smiley boy, having his lunch eaten by people who know what they’re doing. Yawn.

Meanwhile, Schneiderman wrote an op-ed for the Daily News titled The need for speed is costing billions:

Some high-frequency trading firms engage in a practice called “latency arbitrage” — a technical euphemism that hides a threat to the integrity of our markets.

This is what we should be talking about. This is what I am investigating.

Put simply, latency arbitrage describes the trading strategy whereby high-frequency traders gain access to market prices before regular investors.

Armed with what amounts to knowledge of the future, these traders execute tens of thousands of trades in milliseconds with essentially zero risk — driving up the cost for other purchasers of stock.

Here is how it works: When traditional investors buy or sell stocks, they often use what’s called the “consolidated feed” to gather market data and determine the best bid or offer in the nation. This is particularly so in private trading venues, where regular investors like pension funds often trade.

Because high-frequency trading firms receive market prices before traders relying on the consolidated feed, they are able to see the prices early, jump in and take the best one in the blink of an eye. Regular investors are left in the dark.

Well, BooHooHoo. OK, Schneiderman, make it a law that the only market data feed allowed is the Schneiderman Consolidated Feed. Fine. I’ll co-locate with the feed provider. If that’s illegal, I’ll rent a room across the street. You’re in an argument with physics here and you ain’t gonna win.

He goes on:

That is also why I am calling for market reforms like the one put forward by experts at the University of Chicago.

He is referring to frequent batch auctions, which were discussed on PrefBlog on March 19. It was also given a brief mention in the CFTC Concept Release on Risk Controls and System Safeguards for Automated Trading Environments, which also asked a question dear to Assiduous Reader PL’s heart:

96. Should exchanges impose a minimum time period for which orders must remain on the order book before they can be withdrawn? If so, should this minimum resting time requirement apply to orders of all sizes or be restricted to orders smaller than a specific threshold? If there should be a specific threshold, how should that threshold be determined?
…
99. Would batched order processing increase the number of milliseconds that are necessary for correlations among related securities to be established? If so, what specific costs would result from this change and how do those costs compare to the potential benefits described in recent research?

The comment period on this concept release was extended to Valentine’s Day; fifty-seven comments have been published on the CFTC website. I simply do not have time to comb through all these things, especially since it would seem that this is viewed as simply a preliminary skirmish in a long war, but I did read a comment by Thomas McCabe of One Chicago LLC:

Market participants should be free to enter, cancel, or cancel/replace their orders at will, as they assume the risk of execution or non-execution. Exchanges are in a unique position to understand the strain on their systems caused by orders and should be allowed to independently govern throughput into those systems. Accordingly, we oppose the Commission mandating that exchanges impose minimum time periods for orders.

Well, yeah. I looked around a bit for critiques of batched order processing and found one on a blog by somebody claiming to have a good resume. The post is titled Beware Discrete Auctions:

But, I was intrigued by the idea of batch auctions, because I’ve heard people who think discrete auctions are better than continuous ones. I think they are not very good, and a simple example is an extreme of this, one can look at the performance of closing vs. opening prices. One is at the end of continuous trading, one where there’s no trading. What happens?

Well, I looked at over 1000 stocks, from 2000 to today. I excluded really small, low-priced stocks. The Open-Open returns have slightly higher volatility (2% higher), but more importantly, there’s a lot more ‘mean reversion’. The graph below shows the future returns(O-O or C-C), sorted each day into deciles by the immediate prior return (O-O or C-C, respectively), then averaged over all those days.

Basically, markets open at extremes that are quickly erased, allowing the market makers to pocket nice premiums for these temporary imbalances (you can’t make money off this if you aren’t a specialist). Continuous trading takes such trades away from monopolists, and allows competition to work.

Click for Big

… and a comment to that post …

Our U Chicago Colleagues are delusional: They are trying to solve a problem that doesn’t exist.

People just need to stop using “market” orders. Would you buy a house on the “market” price, by telling your Realtor that you’ll agree to ANY price the seller wants? Probably not. And there’s no reason to do that with stocks either.

Of course, one reason to use market trades is because the trader is too lazy to figure out limits. In that case, the trader pays for that convenience.

Regarding “clogging bandwidth” there is no evidence that flash orders are causing dissarray in the exchange. Even if they were, that would just be a technical issue of the exchange, and should be handled like any DOS attack.

Third, their solution won’t work. Batching by 1 second would lead to people timing the system, and figuring out how do direct orders into one auction or another to optimize trading. It would actually add complexity into the market that would give an advantage to the HFTs. The authors should try their proposed solution at Kovler Cafe, and see if it makes getting lunch more orderly.

One problem I see with batched processing is swap orders – or paired orders that have that intent. Say I want to sell A and buy B. In such a case, when I get one side filled, I want to execute the other as quickly as possible, so I can make or exceed my spread target. Batching interferes with that.

Another problem is when I’m spending or raising X dollars on behalf of a client. If I am a good little Portfolio Manager, genuinely trying to do the best for my client, I’ll put in a bunch of orders totalling (say) 2X. As some get filled, I’ll cancel others and – with no more than average luck – be able to raise or spend X dollars at good prices on the market. Again, batched processing will make that cancellation process a bit more chancy, causing me to reduce my over-ordering, reducing liquidity in the market place and making real-money trading more expensive.

Yet another problem is for dealers executing crosses, which may or may not be contingent on other stuff (e.g., pairs trades and, in the futures market, exchange for physicals). At present, there is a quote with a spread in continuous time, with executions in discrete time; therefore, there will always be a quote and the cross can be executed anywhere inside that quote. With batching, there’s the potential for the market to be locked at inconvenient prices for lengthy periods; another obstacle to trading by real-money traders.

The Australians had this to say about latency arbitrage:

We do not regard the fact that market participants can co-locate to obtain a speed advantage as inherently unfair. Speed of access to the market has always been contestable, from the days of physical proximity on the floor, when an open outcry system operated. We recognise that not all market operators choose to operate at the co-location site with the lowest latency, but for those who do, our concern is to ensure that the facilities for doing so are made available to them on a fair basis and on transparent terms.

Our assessment is that access to these services is fair. Market operators offer economically reasonable and transparent pricing, inclusive of ongoing fee costs, that is publicly available and access to these services is available on a non-discriminatory basis. Network connections within co-location facilities are precisely measured, and all participants within the facility receive their data feed with exactly the same latency as any other participant running the same options.
…
However, market operators are required to provide market data on a fair, transparent and non-discriminatory basis. No trader is capable of detecting any submitted market message before acceptance by that operator. Many of the complaints about latency received and reviewed by ASIC appear to arise from the complainants’ misunderstanding of participant SORs.

390 Many market participants will find that the routing options and time taken by their SORs to break, and route, orders between operators is considerably longer than the reaction times of many highly automated traders. If this happens they may find that when an order reaches market A and, before the related order reaches market B, another system has generated an order for market B possibly in response to the order on market A. Market participants need to take this factor into account when programming decision logic for their SORs.

… but the Australians don’t like market rebates:

We have previously stated (e.g. in Report 237 Response to submissions on Consultation Paper 145 Australian equity market structure: Proposals (REP 237) and CP 168) that we would be concerned if pricing incentives influence behaviour in a way that is not in the best interests of clients and wider market integrity. We believe there is sufficient evidence to conclude that maker–taker models, where the market operator pays a rebate, do not promote market quality or market integrity.

Intriugingly:

Another sign of Australia’s success in limiting HFT is that fewer orders go unfilled due to a charge on orders. High-frequency strategies are usually defined by the use of computers to post and cancel orders in times measured in thousandths and even millionths of seconds. In the six years through the end of 2013, the average order-to-trade ratio in Australia was 4.2, less than half that of the NYSE, according to data compiled by Sydney-based research firm Capital Markets CRC Ltd.

I can’t find any more information on that.

So, Assiduous Reader PL, my conclusion is: You are being manipulated by the Smiley-Boys. Cancellations and resting times are simply not an issue to real money fundamental traders.

There is widespread frustration over Canada’s inadequate housing data:

The issue came to the forefront Thursday after Canadian Imperial Bank of Commerce economist Benjamin Tal released a strongly worded note, titled “Flying Blind,” in which he said “the gap between the importance of the real estate market to the economy and the lack of publicly available information on it is mind-boggling.”

His laundry list of information that’s missing includes the share of foreign investors in the condominium market, the distribution of mortgages by credit score and the average down-payment.
…
“It would be useful to have more information about personal debt and the mortgage market,” says Toronto-Dominion Bank chief economist Craig Alexander. “If we think that Canada has a problem with excessive personal debt, you need the data to actually assess the vulnerability and what the associated risks are. But the reality is we actually have quite limited information.”
…
“Because there is a bit of a void on housing data we do have a lot of ill-considered opinions on the real estate market, and it’s hard to completely refute some of the wild talk we’ve had in recent years because the data set is limited,” says BMO Nesbitt Burns chief economist Douglas Porter.

He cautions, however, that more information is not a panacea. Deeper U.S. data did not prevent a housing boom and crash in that country.

I think a good first step would be for the Bank of Canada to stop lying about 5-year mortgage rates, but I’m just a grouch.

Great-West Lifeco has announced a deal:

Great-West Lifeco Inc. today announced that its U.S. subsidiary Great-West Financial® has reached an agreement to acquire the J.P. Morgan Retirement Plan Services large-market recordkeeping business. Upon completion of the acquisition, Great-West Financial will become the second-largest retirement services provider by participants in the U.S. defined contribution market, with nearly 6.8 million participants and US$387 billion in recordkeeping assets. Terms of the transaction were not disclosed.

The J.P. Morgan Retirement Plan Services business comprises 200 clients with approximately 1.9 million participants and US$167 billion in retirement plan assets. As part of the transaction more than 1,000 staff and management affiliated with J.P. Morgan Retirement Plan Services will join Great-West Financial.

The transaction is scheduled to close in the third quarter of 2014, subject to regulatory approval in the U.S.

Jacqueline Nelson of the Globe reports:

“Great-West’s business has been more focused on the small to mid-sized market, so the JP Morgan transaction is highly complementary,” Mr. [Paul] Mahon [chief executive officer of Great-West Lifeco] said. The large market is classified as defined-contribution plans with more than $25-million (U.S.) in assets under administration, wrote analyst Peter Routledge. But JP Morgan’s plans are far larger, with average assets of $835-million, he noted.

Being in the larger market is helpful for two reasons, Mr. Mahon said. First, it lends credibility that a company can do business with the Fortune 100 employers. JP Morgan is the largest bank in the U.S. by assets, so it’s brand name has carried far with clients. If the deal boosts Great-West’s profile in the U.S. it could help the company sell other major products, such as asset management services and insurance products.

Second, and even more importantly to Mr. Mahon, different sized corporations have different requirements from plan managers. Large corporations often demand greater flexibility and technology capabilities. The acquisition allows Great-West to offer some of those advanced systems to its smaller clients.

DBRS comments:

DBRS views the transaction as a positive development and consistent with the Company’s strategy to grow its U.S. retirement services businesses. There are no changes to the ratings.
…
There is some integration risk given the very large size of these DC plans. It will be important for GWF to manage client retention well. However, switching plan record keepers is costly and time consuming for plan sponsors, so there would need to be a very significant inducement, be it positive or negative, for a plan departure to occur. DBRS views favourably the potential for incremental profits and future product placement synergies with the rest of the Company and views the financial impact of this acquisition as diminutive compared to the overall size of GWL’s balance sheet.

It was a good day for the Canadian preferred share market, with PerpetualDiscounts winning 16bp, FixedResets gaining 4bp and DeemedRetractibles up 7bp. Volatility was minimal. Volume was very low.

The latest news on the High Frequency Trading media frenzy is amusing:

Brad Katsuyama, a young Canadian working at RBC Capital Markets in New York, is the hero of [Michael] Lewis’s book [Flash Boys: A Wall Street Revolt]. He creates a tool called Thor, which is designed to protect investors from the rest of Wall Street.

When RBC, a smaller player in the U.S. market, couldn’t get traction with the tool, Katsuyama left to set up his own stock exchange IEX Group.

As it happens, I discussed Thor in the market report of December 13, 2012:

And look what passes for brilliant innovation among the old-money crowd! As mentioned on 2012-2-8, RBC received a good dose of breathless adoration for it’s THOR execution product. And what does THOR do, one might ask? According to the product sheet:

Latency normalization is an important factor in securing liquidity and obtaining best execution.
• THOR’s synchronization logic compensates for timing differentials across North America, minimizing cancellation windows for high-frequency trading algorithms; this significantly reduces information leakage, leading to higher fill rates.

So the programme staggers the sending times to minimize the difference in the exchange’s receiving times, thereby minimizing the window in which the Evil HFT Layerer can cancel his misdirecting order. May I be excused for thinking that this idea is a teensy-weeny little bit obvious? As well as resulting from a simple reverse-engineering investigation, rather than breaking new ground?

Is there anything quite so revealing of the intellectual bankruptcy of HFT opponents and their hangers-on as this? OK, so Katsuyama – or his team, whatever – developed an approach to compensate for differential latency. OK, fine, sounds like it’s probably a good thing (although we now learn that RBC ‘couldn’t get traction’ with the tool), but honestly, is this really all that impressive? It’s nothing original, just reverse-engineering a trading strategy that is eating your lunch in a very, very simple manner and coming up with compensation. Just another day at the office … but very impressive to the old money club, enough to make him a “hero”.

There was an interesting letter circulated by the FDIC today:

Highlights:

• DDoS attacks are continuing against financial institutions’ public-facing Web sites.
• Financial institutions that experience DDoS attacks may face a variety of risks, including operational and reputation risks.
• DDoS attacks may be a diversionary tactic by criminals attempting to commit fraud.
• Financial institutions are expected to address DDoS readiness as part of their ongoing business continuity and disaster recovery plans and to take certain specific steps, as appropriate, to detect and mitigate such attacks.
• The attached statement includes references to guidance and publications to assist institutions in mitigating the risks from DDoS attacks.

Suggested Distribution:

• FDIC-Supervised Banks (Commercial and Savings)

The attached statement states:

In the latter half of 2012, an increased number of DDoS attacks were launched against financial institutions by politically motivated groups. These DDoS attacks continued periodically and increased in sophistication and intensity. These attacks caused slow website response times, intermittently prevented customers from accessing institutions’ public websites, and adversely affected back-office operations. In other cases, DDoS attacks served as a diversionary tactic by criminals attempting to commit fraud using stolen customer or bank employee credentials to initiate fraudulent wire or automated clearinghouse transfers.
…
In addition to the FFIEC guidance, several other publications are available to help organizations mitigate the risks from DDoS attacks. The Department of Homeland Security’s National Cybersecurity and Communications Integration Center published a DDoS Quick Guide on January 29, 2014. This Quick Guide provides useful information on attack possibilities and traffic types and should be shared with an institution’s IT department and the institution’s online banking service provider, if applicable. The Quick Guide is available at www.uscert.
gov/sites/default/files/publications/DDoS%20Quick%20Guide.pdf

Ooh! That looks interesting! A guide on DDos issued by Homeland Security! I bet that’s rigorous!

References
http://www.prolexic.com/knowledge-center-dos-and-ddos-glossary.html
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http://webcyber.co.uk/?p=128
https://www.cisco.com/web/ME/exposaudi2009/assets/docs/layer2_attacks_and_mitigation_t.pdf
http://www.prolexic.com/knowledge-center-dos-and-ddos-glossary.html
http://www.ddosattacks.biz/ddos-101/glossary/proxy/
http://www.prolexic.com/news-events-pr-end-of-quarter-ddos-attacks-itsok.html
http://www.us-cert.gov/ncas/alerts/TA13-088A

Blogs? Wikipedia? Gimme a break, please. This is a high-school essay. I’m all in favour of government instruction books containing links to authoritative sources, but not … blogs. Not … Wikipedia. Couldn’t they have got somebody who really knew his stuff to write something with real references?

We might have an entertaining turf battle in the States:

Recently, however, the Commission’s authority in the mutual fund industry—an industry in which the SEC has capably served as the primary regulator for almost 75 years—has been undercut by the activities of the Financial Stability Oversight Council (“FSOC”) and its research arm, the Treasury Department’s Office of Financial Research (“OFR”).
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However, rather than continuing to discuss the merits of the research and analysis—or lack thereof—in OFR’s report, I would simply note that there needs to be a mechanism by which the full Commission, not just the Chair and SEC staff, provide meaningful input and coordinate with the leadership of FSOC and OFR. The Dodd-Frank Act envisions such coordination; for instance, the Dodd-Frank Act contemplates that federal agencies, including the Commission, would assist OFR on its work upon request. I do not think that assistance should be limited to one representative of the Commission, or limited to the SEC’s staff. Clearly, the expertise and judgment that the securities laws imbues in the presidentially appointed, Senate-confirmed Commissioners is undercut when there is an end-run around the Commissioners tasked with running the SEC.

Let me be clear, the work of FSOC and OFR to identify and mitigate systemic risk is important. However, there is real danger in that work being compromised if the full five-member Commission is cut out of the process. The SEC and our fellow regulators should assist FSOC’s efforts in a thorough and objective manner. My interest is in making sure that the full expertise and judgment of the Commission—and all the Commissioners—is being utilized, and that our authority and expertise are not being undercut. For the protection of our economy, financial regulators across the U.S. federal government have to work together to address risks and threats to the stability of our financial markets.

Before leaving the subject of the OFR report, I note that just last Friday, the Department of the Treasury announced that FSOC will hold a conference in May on the asset management industry and its activities. While I welcome the effort to better understand the asset management industry, this does not address the issues arising from the criticisms of the OFR report’s quality, research, and analysis, or the issues that arise when the SEC’s decision makers are excluded from the process. FSOC and OFR should acknowledge the Commission’s—and, in particular, the Commissioners’—role as the primary regulator of the asset management industry.

There are two lunar eclipses this year – April 15 and October 8. Mark your calendars!

It was a fine day for the Canadian preferred share market, with PerpetualDiscounts winning 23bp, FixedResets up 11bp and DeemedRetractibles gaining 7bp. Volatility was minimal. Volume was below average.

PerpetualDiscounts now yield 5.48%, equivalent to 7.12% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.5%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 260bp, unchanged from March 26.

The Old Boys Club is making good progress in the war against innovation:

Federal agents are investigating whether high-frequency trading firms break U.S. laws by acting on nonpublic information to gain an edge over competitors.

The Federal Bureau of Investigation’s inquiry stems from a multiyear crackdown on insider trading, which has led to at least 79 convictions of hedge-fund traders and others. Agents are examining, for example, whether traders abuse information to act ahead of orders by institutional investors, according to an FBI spokesman. Even trades based on computer algorithms could amount to wire fraud, securities fraud or insider trading.

It is, of course, simply a politically motivated fishing expedition:

Federal agents are making an unusual public plea for the financial industry to bare its secrets.

The Federal Bureau of Investigation has openly solicited traders and stock-exchange workers to blow the whistle on possible front-running and manipulation via high-speed computers.

Even so, they’re losing the war:

Goldman Sachs Group Inc. (GS) is seeking a buyer for its New York Stock Exchange designated market-making business acquired through the 2000 purchase of Spear, Leeds & Kellogg, a person briefed on the matter said.
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The NYSE, purchased in November by Atlanta-based IntercontinentalExchange Group Inc., relies on traders known as designated market markers, or DMMs, to facilitate buying and selling. The firms help run the opening and closing auctions of NYSE-listed stocks.

They used to be known as specialists, and there were dozens of them. Reduced profits from equity trading dwindled their ranks during the past decade. London-based Barclays Plc (BARC) and Jersey City, New Jersey-based KCG Holdings Inc. are the biggest DMMs, followed by Goldman Sachs, according to a person with direct knowledge of the matter.
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Even if Goldman Sachs gives up its spot on the NYSE floor in Manhattan, that doesn’t mean it will stop making markets in U.S. stocks. Almost all American equity trading is done electronically, and banks are among those that provide liquidity on computerized platforms such as NYSE Arca, the Nasdaq Stock Market and the four exchanges owned by Bats Global Markets Inc. Goldman Sachs is among the owners of Bats.

It’s always nice to see market timers get their comeuppance:

Lenders from JPMorgan Chase & Co. to Bank of America Corp. warned that corporate-bond buyers were in for another year of rising yields that would erode returns. China, the polar vortex and Vladimir Putin are upending those forecasts.

Bonds of companies worldwide tracked by Bank of America Merrill Lynch indexes returned 2.7 percent in the first quarter through March 31, compared with a 1.42 percent gain for the MSCI World Index of stocks, the first time the debt beat equities since the second quarter of 2012. The gain follows a 1.45 percent loss for debt investors last year as shareholders reaped a 27 percent windfall.

“It wasn’t perhaps the one-way bet that people thought it was,” said Andrew Chorlton, a New York-based money manager for a Schroders Plc unit that oversees more than $90 billion. Bonds beating stocks is “contrary to what virtually every investment bank you care to mention had on their outlooks for 2014.”

The Ontario Legislature’s Standing Committee on Social Policy has released its report titled DILUTED CHEMOTHERAPY DRUGS, regarding the screw-up with cancer drug concentrations discussed on PrefBlog on August 8, 2013:

The Standing Committee notes that it was also the [Medbuy] pharmacy committee that failed to notice the contract’s lack of clarity with respect to the need for concentration-specific formats for gemcitabine and cyclophosphamide.
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Although appreciative of what was provided, the Committee remains concerned about the lack of transparency with respect to the receipt of rebates and how they are used, by hospitals and by Medbuy alike. Large amounts of public money are involved in these transactions, all of which are conducted without public oversight.
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Contrary to what the Committee had heard, value-adds were included in Medbuy’s 2011 RFP. They were not a mandatory requirement but were encouraged and included in the score. Like Marchese, Baxter chose to participate in Schedule B; Gentès & Bolduc did not.
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The Committee believes the above responses were inappropriate and are evidence of a lack of due diligence on the part of health care professionals. It sees these communications as more missed opportunities to catch the need for concentration-specific admixtures and avoid the circumstances of March 20, 2013 and their negative impact on 1,202 patients.

But all of this is simply the lead-up to what I’ve been saying all along:

Committee members are perplexed by the fact that pharmacists and pharmacy assistants/technicians at WRH, LHSC, and Lakeridge Health failed to notice the inconsistencies discovered by the staff at PRHC when preparing for the initial use of MHS gemcitabine.
The Committee is concerned about the professional conduct of pharmacists connected to this incident, including those employed by Medbuy and sitting on its pharmacy committee. This concern is so significant that the Committee has written to the Registrar of the Ontario College of Pharmacists (OCP) requesting an investigation. Copies of letters sent by the Committee to the OCP are found in Appendix D.
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[extract from Appendix D] During the hearings the Committee heard testimony from a number of Pharmacists from Marchese Health Care, Medbuy Corporation and the purchasing hospitals involved. The Committee is concerned that the diluted chemotherapy treatments went unnoticed by all of the pharmacists directly involved, for an extended period of time (February 2012-March 2013) without one of them bringing the matter forward.
The Committee has asked me to bring this to the attention of the Ontario College of Pharmacists and for you to launch an investigation.

The more I learn about health care in Ontari-ari-ari-o, the more amazed I am that so many of us remain alive.

The Canadian preferred share market opened the new quarter with mixed performance, with PerpetualDiscounts gaining 12bp, FixedResets off 2bp and DeemedRetractibles up 14bp. There was a full contingent of Floaters but not much else in the Performance Highlights table, which is notable for being comprised entirely of winners. Volume was slightly below average.

Looks like the public bond market in Russia is sending a message … so turn it off!

Russia is selling notes directly to pension funds and banks for the first time in 1 1/2 years, sidestepping the bond market after four failed auctions since President Vladimir Putin’s incursion into Crimea.

The Finance Ministry is offering 100 billion rubles ($2.8 billion) of non-tradeable securities today, with half due March 2015 at a 7.73 percent yield and the rest maturing in February 2016 at 8.25 percent, it said on its website on March 26. The yield on government ruble bonds due January 2016 rose 190 basis points since the start of the year and was at 8.25 percent the day before the sale was announced.

By offering almost three times the amount auctioned this year in one day, Russia may be signaling it doesn’t foresee investor sentiment being restored anytime soon, according to BCS Financial Group and GHP Group. Russian borrowing costs rose to a record after Putin’s annexation of Ukraine’s Crimea peninsula sparked the worst standoff with the U.S. since the Cold War.

Yellen is showing her dovish side:

Federal Reserve Chair Janet Yellen said “considerable slack” in the labor market is evidence that the central bank’s unprecedented accommodation will still be needed for “some time” to put Americans back to work.

Large numbers of partly unemployed workers, stagnant wages, lower labor-force participation and longer periods of joblessness show that Fed officials must continue their easing, Yellen said today in remarks prepared for a speech in Chicago.

“This extraordinary commitment is still needed and will be for some time, and I believe that view is widely shared by my fellow policymakers at the Fed,” Yellen said in her remarks to a Fed community development conference. “The scars from the Great Recession remain, and reaching our goals will take time.”

I knew that mobile eMoney transactions were catching on in Africa … but I didn’t realize it was this big:

All the talk of bitcoin in recent years has overshadowed the real e-finance revolution: In Africa, India and now Eastern Europe, a service called M-Pesa has replaced banking for millions of people who don’t have or, in fact, even need a bank account.

Safaricom, Kenya’s leading mobile operator, majority-owned by a subsidiary of France’s Orange and operated by the U.K.’s Vodafone, introduced M-Pesa — mobile money in Swahili — in 2007. Soon the system had an agent in just about every village and every corner of Nairobi’s vast Kibera slum. Locals came to the agents with their phones — just plain old Nokias, not fancy smartphones — signed up and received a new menu from the operator, allowing one to transfer money to another mobile number. M-Pesa could be cashed at an agent’s — by sending a text message and receiving money then and there — and, eventually, at automated-teller machines, without the need for a debit card. Sending money to family in a remote part of the country or paying at a market stall was suddenly as easy as texting. Nobody was sending wads of Kenyan shillings on buses, hoping they would make it to relatives in Mombasa or Kitale, or carrying much cash around. M-Pesa was cheaper then a bank, and it was everywhere, with hand-painted signs for agents popping into view in the unlikeliest places.
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About 43 percent of Kenya’s $40 billion gross domestic product flows through the system. And, speaking of Bitcoin, M-Pesa is far, far ahead of the fashionable digital currency in transaction numbers.

Brookfield Renewable Energy Partners L.P. had its outlook raised to ‘Positive’ by S&P:

• •We are revising our outlook on Brookfield Renewable Energy Partners L.P. (BREP) to positive from stable.
• •The outlook revision reflects the increasing amount of parent-only cash flow that the partnership is generating combined with a relatively modest level of parent only recourse debt.
• •We are also affirming our ratings on BREP and subsidiaries Brookfield Renewable Power Equity Inc. and BRP Finance ULC, including our ‘BBB’ long-term corporate credit rating on BREP.

Standard & Poor’s Ratings Services today said it revised its outlook on Brookfield Renewable Energy Partners L.P. (BREP) to positive from stable. At the same time Standard & Poor’s affirmed its ratings on BREP and subsidiaries Brookfield Renewable Power Equity Inc. and BRP Finance ULC, including its ‘BBB’ long-term corporate credit rating on BREP.

Brookfield Renewable Power Pref Eqty Inc is the proud issuer of BRF.PR.A, BRF.PR.C, BRF.PR.E and BRF.PR.F. S&P does not go so far as to say there is 100% correspondence between the parent company and its preferred issuer subsidiary, but I’d call it a pretty good bet.

The Canadian preferred share market closed the month on a happy note, with PerpetualDiscounts winning 10bp, FixedResets gaining 3bp and DeemedRetractibles up 4bp. Volatility was minimal. Volume was below average.

And that’s it for another quarter!

Placeholder won’t interfere with mortgage rates:

In contrast, when Mr. Oliver spoke to [BMO CEO] Mr. [Bill] Downe this week, he told the bank CEO that the government wants to be less involved in the mortgage market, and gave him the tacit go-ahead to cut rates.

Mr. Oliver went so far as to tell reporters in Ottawa Thursday that he would not be concerned if other banks followed suit, suggesting it was a private sector decision.

“There’s a market, and the bank made its decision,” he said.

“The chief executive officer of the Bank of Montreal informed me about it. I listened to his explanation, his reasons. I reiterated what I just stated, which is the government is gradually reducing its involvement in the mortgage market.”

Assiduous Readers will be used to, and perhaps even tired of, my complaints about SEDAR – a bank-owned (via the Canadian Depository for Securities) outfit that has been granted a monopoly on the publication of public documents that issuers are required to file, and which abuses that monopoly to an appalling extent with the smiling approval of the Canadian Securities Administrators.

But I don’t care if you’re tired of my complaints! I recently had occasion to require some information on CI Income Fund … and turned to SEDAR. So, the first thing on the document list found after a preliminary search is:

Jan 3 2014 16:06:24 ET Amended and restated final fund facts – English

So, let’s look at the precious Fund Facts, shall we? The wise securities administrators keep chanting about how vital and important Fund Facts are, so let’s start off by taking a peek at them.

Open the file and what do we find? There are actually quite a few:

• CI Canadian Dividend Growth Fund (Class A units): Fund Facts
• CI Canadian Dividend Growth Fund (Class D units): Fund Facts
• CI Canadian Dividend Growth Fund (Class F units): Fund Facts
• CI Canadian Dividend Growth Fund (Class I units): Fund Facts
• CI Canadian Dividend Growth Fund (Class O units): Fund Facts
• CI U.S. Dividend Growth Fund (Class A units): Fund Facts
• CI U.S. Dividend Growth Fund (Class AT6 units): Fund Facts
• CI U.S. Dividend Growth Fund (Class D units): Fund Facts
• CI U.S. Dividend Growth Fund (Class F units): Fund Facts
• CI U.S. Dividend Growth Fund (Class I units): Fund Facts
• CI U.S. Dividend Growth Fund (Class O units): Fund Facts

Nothing – not a single damned thing – about CI Income Fund. Well done!

It was a good, if mixed, day for the Canadian preferred share market, which some might consider surprising because TMXMoney reports that TXPR was off 12bp and TXPL was down 17bp. A lot of issues went ex-dividend today … maybe somebody forgot to accrue? Anyway, PerpetualDiscounts were up 21bp, FixedResets were off 1bp and DeemedRetractibles gained 7bp. The Performance Highlights table is of average length, but notable for the inclusion of both Westcoast issues, which went ex-dividend but didn’t lose much bid. Volume was low, but block trading held up well.