PrefBlog

The offshore yuan market seems to be a success:

Banks are paying about 30 percent less interest on yuan-denominated debt sold in Hong Kong than they pay in Shanghai as faster currency appreciation fuels overseas demand for the securities.

The average yield in the city is 1.77 percent, according to data from the Treasury Markets Association, which tracks 19 outstanding issues that have maturities of no more than four years. That includes bonds sold by state-controlled lenders including China Development Bank and Bank of China Ltd. The average rate in China for one- to three-year bonds issued by government-linked companies is 2.60 percent, according to Bank of America Merrill Lynch’s China Quasi-Government Index.

China is encouraging domestic lenders to sell debt in Hong Kong to broaden the appeal of holding its currency overseas as it seeks to reduce reliance on the dollar for international trade and finance. Yuan deposits in the city more than doubled to a record 130 billion yuan ($20 billion) in the first eight months of 2010.
…
In the same way that yuan bonds command a premium in Hong Kong, so too does the currency. The spot rate in the city’s offshore market was 6.4745 yesterday, 2.6 percent more than the onshore rate. That’s the biggest gap since Bloomberg began tracking the rate two months ago. Overseas entities can only buy yuan on the mainland if they have investment proposals or trade transactions approved by Chinese regulators.

There’s a draconian budget in the UK:

“Today’s the day when Britain steps back from the brink,” Osborne told lawmakers in the House of Commons in London today as he outlined plans to virtually eliminate a 156 billion-pound ($245 billion) budget deficit with average cuts in government departments of 19 percent.
…
Total spending would fall by 0.7 percent a year after inflation, according to a June outline. Under Margaret Thatcher, 85, who was known as the Iron Lady during her 11 years as premier that ended in 1990, spending rose by an annual 1.2 percent.

Legislation to impose a permanent levy on banks will be published tomorrow, Osborne said.

“We neither want to let banks off making their fair contribution, nor do we want to drive them abroad,” he said. “Our aim will be to extract the maximum sustainable tax revenues from financial services. We will assess what those maximum revenues could be — not just in one year, but over a period of years.”

Now that simplified prospectuses have been bloated to the point where they are no longer read, and the summary of terms at the beginning of the simplified prospectus has become so detailed that it’s no longer read either, the Canadian Securities Administrators have taken the next logical step and released the 145 page Notice of Amendments to National Instrument 81-101 Mutual Fund Prospectus Disclosure, Form 81-101F1 and 81-101F2 and Companion Policy 81-101CP Mutual Fund Prospectus Disclosure and Related Amendments:

We have not carried forward the requirement that the Fund Facts be written at a grade level of 6.0 or less on the Flesch-Kincaid grade level scale because we were told there is no French language equivalent to the scale. However, the Fund Facts is still required to be prepared using plain language and in a format that assists in readability and comprehension.

We have added guidance in the Companion Policy that the CSA will generally consider a grade level of 6.0 or less on the Flesch-Kincaid grade level scale to demonstrate that the Fund Facts is written in plain language.

Should I ever start a public bond index-plus fund, I may require some help explaining convexity-matching at the grade 6 level in under four pages. Note, however, that the document specifies only the number of double-sided pages; it does not specify font size, so I may use a 1-point font. One way or another, if you consider yourself gifted at technical writing and are looking for work, watch this space! I’m considering making book on how long it will be until it becomes a requirement to prepare and distribute the “Simplified Fund Facts” … do you think this works better if I allow betting by individual year in a parimutual system, or an over/under setup? Maybe both?

Those of an academic bent might be interested to learn that this post so far, when analyzed by MS-Office 2003 from the beginning to “Maybe both?” in the paragraph above, with HTML formatting removed, has a Flesch Reading Ease of 36.3 and a Flesch-Kincaid Grade Level of 15.0. This will be gratifying news for any hard-core indexers out there … when you reach the point in your sermon at which you claim that “People who buy mutual funds are retarded!”, you may now also note that the Canadian Securities Administrators agree with you.

The Canadian preferred share market bounced back today on continued heavy volume with PerpetualDiscounts gaining 25bp and FixedResets winning 9bp. The market was very well-behaved, with only one entry in the performance highlights.

PerpetualDiscounts now yield 5.45%, equivalent to 7.63% interest at the standard equivalency factor of 1.4x. Long corporates now yield 5.2% – maybe a hair over – so the pre-tax interest-equivalent spread (also called the Seniority Spread) is now at about 240bp, about the same as reported October 13.

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	0.1459 %	2,179.8
FixedFloater	0.00 %	0.00 %	0	0.00	0	0.1459 %	3,302.1
Floater	2.87 %	3.19 %	83,372	19.26	3	0.1459 %	2,353.6
OpRet	4.92 %	3.85 %	83,666	0.11	9	0.2208 %	2,367.5
SplitShare	5.88 %	-20.72 %	69,706	0.09	2	-0.2832 %	2,392.8
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	0.2208 %	2,164.8
Perpetual-Premium	5.71 %	5.10 %	145,024	5.35	19	0.0165 %	2,008.4
Perpetual-Discount	5.43 %	5.45 %	240,824	14.69	58	0.2495 %	2,009.0
FixedReset	5.26 %	3.07 %	345,038	3.26	47	0.0869 %	2,273.3

Performance Highlights
Issue	Index	Change	Notes
RY.PR.A	Perpetual-Discount	1.36 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-10-20 Maturity Price : 22.16 Evaluated at bid price : 22.30 Bid-YTW : 5.06 %

Volume Highlights
Issue	Index	Shares Traded	Notes
RY.PR.L	FixedReset	228,920	Dundee sold four blocks to anonymous, three of 25,000 shares each and one of 12,400 shares, all at 27.31. Dejsardins crossed 61,000 at 27.30. RBC crossed three blocks, of 10,000 shares, 15,000 and 70,000, all at 27.20. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-03-26 Maturity Price : 25.00 Evaluated at bid price : 27.28 Bid-YTW : 2.99 %
CM.PR.A	OpRet	199,340	Called for redemption. Desjardins bought three blocks from Nesbitt, one of 90,600 and two of 50,000 each, all at 24.98. YTW SCENARIO Maturity Type : Call Maturity Date : 2010-11-30 Maturity Price : 25.00 Evaluated at bid price : 24.98 Bid-YTW : 4.63 %
CM.PR.I	Perpetual-Discount	185,784	RBC crossed blocks of 45,000 and 107,800, both at 22.25. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-10-20 Maturity Price : 22.18 Evaluated at bid price : 22.32 Bid-YTW : 5.28 %
RY.PR.E	Perpetual-Discount	75,745	Scotia sold 28,900 to anonymous at 22.10. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-10-20 Maturity Price : 21.96 Evaluated at bid price : 22.08 Bid-YTW : 5.17 %
BNS.PR.T	FixedReset	66,095	RBC crossed 58,000 at 27.92. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-05-25 Maturity Price : 25.00 Evaluated at bid price : 27.90 Bid-YTW : 2.80 %
TD.PR.K	FixedReset	49,570	Nesbitt crossed 20,000 at 27.87; Desjardins crossed 11,300 at the same price. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-08-30 Maturity Price : 25.00 Evaluated at bid price : 27.88 Bid-YTW : 3.03 %
There were 55 other index-included issues trading in excess of 10,000 shares.

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.