PrefBlog

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Nahhhh … I must be missing something.

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

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

In astonishing news, deficit financing is here to stay:

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

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

In more interesting news:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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