PrefBlog

Gensler’s testimony regarding the May 6 Bungee Jump is available:

CME Globex has stop logic functionaility that protects against cascading stop orders – the domino effect of one stop order triggering others. Globex’s stop logic functionality pauses trading for five to ten secons – five seconds in the case of the E-Mini contract – when the trading engine recognizes that it has a series of resting stop orders that could lead to a cascade and move the market up or down beyond a specified amount. On May 6, the stop logic functionality occurred on two currency futures contracts and when the E-Mini contract hit bottom.
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On May 6, trading volume was very high. Usually, high volume indicates high liquidity. On this day, however, high volume could have been a misleading indicator of liquidty to market participants and their pre-programmed algorithms. Higher trading volume, when it is associated with high price change, may not be a good indicator of liquidity because many orders could have been executed at falling prices. This particular high trading volume was accompanied by significant fluctuations in trading volume. Further, the daily trading activity did not result in a significant number of futures contracts held by market participants at the end of May 6. This implies many investors participated in the market intraday, but on balance few investors increased their positions by the close of trading.
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The two other measures of liquidity we reviewed – the bid offer spread and the depth of the limit order book – suggest that liquidity was dislocated. When the CME’s stop logic functionality took effect on the E-Mini contract, the bid ask spread had widened significantly. This means the liquidity was lower and the transaction costs were higher.

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One of the top ten most active trading accounts by gross volume between 2:00pm and 3:00pm only entered orders to sell. That trader entered the market at around 2:32pm and finished trading at roughly 2:51pm. The trader sold just less than half of its contracts as the market went down and just more than half as the price level rose.

We understand that this particular market participant sought to hedge its stock portfolio in the futures market by selling a pre-determined amount of futures through an executing broker’s automated execution system. In this circumstance, we further understand that the trade was executed through an executing broker’s algorithm that was meant to limit market impact by limiting volume at an average of nine percent of the volume traded during the period.
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From 2:30 pm to 3:00 pm, however, this market had 10 times higher volume than the average daily trading volume for the same intraday time period over the previous month, without the concurrent increase in liquidity. On May 6, it took about 21 minutes for the participant to execute their sell order. In markets with average volume, it would have taken significantly longer – perhaps hours.

The Canadian preferred share market had a day of low volume, especially when compared with levels of the past two months. Sell in May and pay and pay? PerpetualDiscounts were up 2bp and FixedResets gained 6bp.

You know who the smartest people in the world are? Harvard grads are the smartest people in the world:

When Larry Estrada graduates from Harvard Business School next week, he’ll begin work at Goldman Sachs Group Inc. He’ll do so only after taking an oath.

Estrada, 30, joined about 150 fellow business school students and faculty worldwide to campaign for the acceptance of an MBA ethics pledge modeled on the Hippocratic Oath taken by doctors. The aim is to get as many as 6,000 graduates at 50 MBA programs to swear they won’t put personal ambitions before the interests of their employers or society.

See how smart they are? They know what’s in the best interests of society. I consider myself lucky if I know what’s in my own best interests – but then, I’m not smart enough to go to Harvard.

It is possible that the carried interest loophole in US tax law may be plugged – finally!:

Managers of investment partnerships typically are paid 2 percent of fund assets as an annual management fee and 20 percent of the profit earned for investors above certain levels. While the management fee is taxed as income, the share of profit, known as carried interest, is taxed at the lower capital-gains rate, currently 15 percent and slated to rise to 20 percent in 2011.

A summary of the still-unreleased legislation said it would allow carried interest that reflects return on invested capital to continue to be taxed at capital gains rates.

For other funds, “the bill would require investment fund managers to treat 75 percent of the remaining carried interest as ordinary income,” the summary said.

Common equities had a bad day:

The Standard & Poor’s 500 Index plunged 3.9 percent to 1,071.59 at 4 p.m. in New York, its biggest drop since April 2009. The Stoxx Europe 600 Index lost 2.2 percent and the S&P GSCI Index of commodities tumbled to the lowest since October. The losses accelerated even as the euro rallied as much as 1.5 percent to $1.2598 after earlier flirting with a four-year low. Ten-year Treasury yields sank to the lowest level of the year, down 15 basis points at 3.22 percent.

The Canadian preferred share market continued its slow slide on relatively (by recent standards) modest volume, with PerpetualDiscounts down 11bp and FixedResets losing 8bp.

More on Basis Alpha:

The Basis fund’s main contention is that the fund’s managers were misled by Goldman when it purchased two $50 million tranches of Timberwolf, a $1 billion CDO that Goldman took to market in March 2007, according to Mapley and other people familiar with the situation.

The Basis fund sank money into Timberwolf in June 2007, after the one-time $500 million fund claims it got assurances from Goldman’s mortgage trading desk that the market for CDOs had stabilized after falling sharply.
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Mapley said he has been told Goldman sold the Timberwolf securities to the hedge fund at a significantly higher price than what similar mortgage-linked securities were selling for at the time. Basis’ managers were not aware that Goldman’s mortgage trading desk was actively shorting CDOs and other subprime mortgage-linked securities at the time of the Timberwolf deal, he said.

That’s it? That’s the basis of the complaint? These guys are clowns.

The German attempt to distort markets hasn’t got much political support:

The euro is at risk and Europe may be facing its greatest challenge since the founding of the European Union, [German Chancellor Angela Merkel] said. The consequences are “incalculable” if leaders fail to act.

For all that, a Europe-wide ban on naked short-selling is “doubtful,” Eddy Wymeersch, Europe’s top market regulator, said in a telephone interview. The Netherlands and Finland said they have no plans to implement similar measures to Germany.

France, which lined up with Germany on market regulation before the last two G-20 summits, doesn’t plan to follow Germany in banning the use of contracts to speculate on European sovereign debt, Finance Minister Christine Lagarde said.

“We haven’t envisioned doing it,” Lagarde told reporters in Paris. France has banned “naked short sales” on equity markets since September 2008. Portugal’s financial regulator said it was keeping its restrictions on naked short selling that date back to 2008.

It is important that member states act together and that we design a European regime to avoid regulatory arbitrage and fragmentation,” EU Financial Services Commissioner Michel Barnier said in an e-mailed statement.

A ban in Germany alone will likely be ineffective, former U.K. Finance Minister Nigel Lawson said in an interview with Bloomberg Television.

“People will find ways of getting round it, move to other jurisdictions,” Lawson said. “It can only be workable for a very, very short time.”

What’s worse, there are fears that Lucas van Praag, Worlds’ Greatest Corporate Spokesman, is losing his touch.

Volume on the Canadian preferred share market was merely elevated today and volatility was muted as PerpetualDiscounts were up 2bp and FixedResets were down by the same figure.

The yield on PerpetualDiscounts is now 6.39%, equivalent to 8.95% interest at the standard equivalency factor of 1.4x. Long Corporates now yield about 5.65%, so the pre-tax interest-equivalent spread is now about 330bp, a mild (and perhaps spurious) increase from the 325bp recorded May 12.