PrefBlog

The SEC has released statements regarding the Dark Pool debate discussed yesterday.

Chairman Schapiro says:

Transparency is a cornerstone of the U.S. securities market. That is why I asked the staff earlier this year to begin a comprehensive review of dark pools, as well as other types of dark liquidity.

We should never underestimate or take for granted the wide spectrum of benefits that come from transparency. In particular, transparency plays a vital role in promoting public confidence in the honesty and integrity of financial markets.

Although dark liquidity always has existed in one form or another in the equity markets, the Commission must assure that the public markets and non-public trading venues operate within a balanced regulatory framework. This means that as markets evolve, the Commission must continually seek to preserve the essential role of the public markets in promoting efficient price discovery and investor confidence.

Commissioner Aguilar says:

With this responsibility in mind, I turn to the proposals before us today. As our proposing release notes, some dark pools share order information selectively with certain market participants. This concerns me, because it may create two-tiered access to information that is neither fair nor transparent. That’s why, today, I support proposing rules to require that actionable indications of interest be publicly displayed as quotations and to lower the volume threshold that triggers an ATS’s order display and execution access obligations.

I also, however, recognize the interest of large institutional investors, such as the pension funds and mutual funds that represent many individual investors, to be able to trade large blocks of securities without tipping their hand and allowing other traders to take advantage of them. For that reason, I support the staff’s proposal to balance this interest with the general goal of improved price discovery by providing a limited exception to display requirements for orders of substantial size, i.e., those orders of $200,000 or more.

Commissioner Paredes says:

Markets are complex systems comprised of numerous components and features that must work together to ensure a well-functioning “whole.” I am concerned that by taking steps now to regulate particular aspects of market structure, the Commission will frustrate its ability to undertake a more constructive comprehensive review of market structure. I am concerned that considering particular features of dark pools in isolation increases the risk of unintended adverse consequences and will not yield the best results for our markets. The release acknowledges that, in the relatively near term, the Commission is expected to consider a concept release covering numerous aspects of market structure. As an initial step in considering reforms that may be warranted, perhaps the dark pool issues before the Commission today should be deferred and instead addressed in the concept release.
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The demand for non-displayed liquidity presumably will continue, despite any regulatory changes that may be adopted. If the regulatory regime significantly impinges dark pools, what type of trading activity might replace current dark pool trading? Where might current non-displayed trading interest go? To foreign markets? As I already suggested, it may not be correct to presume that it becomes displayed.

I suggest that the most likely sink for non-displayed trading interest will be private equity. We have certainly seen how, for instance, a decline in dealer trading profits due to TRACE has led to increased private issuance and the explosion of the CDS market … why shouldn’t the same mechanism apply to equities?

Canadian bond investors will appreciate that the beloved regulators have protected them to such an extent that on-line offerings of corporate bonds to retail are … somewhat skimpy.

Back to the usual grind today, with PerpetualDiscounts down 5bp and FixedResets losing 9bp. PerpetualDiscounts now yield 6.05%, equivalent to 8.47% interest at the standard equivalency factor of 1.4x. Long Corporates are now yielding a little under 6.0%, so the pre-tax interest-equivalent spread is now about 250bp, a continued widening from the 240bp reported on October 14.

Volume was quite strong today, with 52 index-included issues trading 10,000 shares while still falling short of the volume highlights table, while the six top issues were all FixedResets trading more than 50,000 shares. On the other hand, the market showed its thinness with blocks of HSB.PR.E and CM.PR.M changing hands at well below the closing bid. Market impact costs will always kill the cowboys in the end!

Here’s a scary thought from Comrade Peace Prize:

Obama administration advisers said U.S. banks bailed out with taxpayer funds have responsibility to support the president’s effort to overhaul the rules for Wall Street and avoid future financial crises.

White House officials say they are frustrated that major financial firms are fighting President Barack Obama on the regulatory overhaul after taxpayer bailouts helped firms restore profits and near-record compensation for executives.
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“The American people have a right to be frustrated and angry,” Chief of Staff Rahm Emanuel said on CNN’s “State of the Union” yesterday. Banks receiving aid are “literally going and fighting the very type of regulations and reforms that are necessary to prevent, again, a crisis like this happening.”

After reading the promise that this legislation will tame the business cycle, do you have to read any more? I wouldn’t link to a blog that made that claim … but this is the White House Chief of Staff who’s being quoted!

I haven’t studied the legislation in any detail – but if the best supporting argument they can come up with is ‘You guys screwed up last time, therefore this is right” then it must be pretty bogus.

The SEC is proposing to restrict dark pool trading:

The commission will propose lowering the amount of daily volume in a company’s shares that can be executed in private on any of the networks to 0.25 percent from 5 percent at a hearing tomorrow in Washington, said the people, who declined to be identified because the discussions weren’t public. John Nester, an SEC spokesman, declined to comment.

The rule change may curtail the number of transactions on dark pools, off-exchange platforms run by firms such as Goldman Sachs Group Inc. and Getco LLC that have drawn scrutiny from Democratic Senators Ted Kaufman of Delaware and Charles Schumer of New York. The systems usually shut down trading in a security when they approach the current 5 percent limit.

I’m not sufficiently familiar with dark pools to have a definite opinion on the matter, but my knee-jerk reaction is that this is simply the established exchanges using the current ‘Regulation = Good’ hysteria to advance their interests. The OSC has highlighted a CSA / IIROC Request for Comments on the topic. Interestingly, support for giving the regulators a blank cheque is waning:

A poll conducted for Public Strategies and Politico found that 32 percent of voters support new regulations, while 68 percent say better enforcement of existing regulations is the best approach.
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The top pollster for the survey, David Iannelli, said a previous poll conducted in December during the height of the Wall Street meltdown found that 67 percent of those surveyed believed more regulations were needed.
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The poll can be found at www.pstrategies.com.

State Street is alleged to have been naughty:

The case was originally filed under seal by whistleblowers – “Associates Against FX Insider Trading,” who alleged that State Street added a secret and substantial mark-up to the price of interbank foreign currency trades. The interbank rate is the price at which major banks buy and sell foreign currency.

Subsequently, Brown launched an independent investigation into the allegations.

Brown’s investigation revealed that State Street was indeed overcharging the two funds. Despite being contractually obligated to charge the interbank rate at the precise time of the trade, State Street consistently charged at or near the highest rate of the day, even if the interbank rate was lower at the time of trade.

So my question is: who was authorizing the FX trades on the pension fund side? who was checking the trades on the pension fund side? Have they been fired? If nobody was checking and portfolio managers are executing really cool trades without nailing down the FX conversion, has the CEO been fired? This isn’t “the latest example of how clever financial traders violate laws and rip off the public trust”; given that it’s been happening routinely for eight years, its just the latest example of brain-dead portfolio managment.

Red letter day today, as PerpetualDiscounts were up … a whole half bp! FixedResets gained 7bp; there wasn’t much price volatility, but volume was good, with the volume highlights table being entirely FixedResets.

CIT has amended its restructuring plan:

The amended terms of the restructuring plan include, among others:

• A comprehensive cash sweep mechanism to accelerate the repayment of the new notes;
• The shortening of maturities by six months for all new notes and junior credit facilities;
• An increased amount of equity offered to subordinated debt holders reflecting agreements with holders of the majority of its senior and subordinated debt;
• The inclusion of the notes maturing after 2018 that had previously not been solicited as part of the exchange offer or plan of reorganization;
• An increase in the coupon on Series B Notes, to 9% from 7%, being issued by CIT Delaware Funding; and
• Provided preferred stock holders contingent value rights in the plan of reorganization, and modified the allocation of common stock in the recapitalization after the exchange offers, as part of an agreement with the United States Department of Treasury.

CreditSights has condemned the amendments to the CIT restructuring:

CIT “has done very little to meaningfully enhance the offer” to the majority of senior unsecured bondholders of the holding company, said Adam Steer, an analyst at CreditSights Inc. in New York.

Under the revised terms, maturities on new notes issued in exchange for existing bonds will be shortened by six months, CIT said Oct. 16. The New York-based company will also boost the amount of equity offered to subordinated debt holders and include notes due after 2018 that previously weren’t part of the exchange offer or reorganization plan that was announced Oct. 1.
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CreditSights continues to question why holders of longer- dated senior unsecured bonds would prefer the exchange over the prepackaged bankruptcy offer, Steer said.

And Carl Icahn says he can give the company a better deal:

Billionaire investor Carl Icahn offered CIT Group Inc. a $6 billion loan as an alternative to what he called an “incompetent and unconscionable” proposal by the board of directors to avert collapse.

Icahn, who said he is CIT’s largest creditor, offered to underwrite a loan to the New York-based company that he said would save as much as $150 million in fees compared with the bank’s proposed financing.
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Bondholders should reject any offer less than 90 cents on the dollar, according to analysts at Egan-Jones Ratings Co. in Haverford, Pennsylvania.

“Forget Icahn, forget the exchange,” the analysts said in a report today. “Neither Icahn’s offer nor the revised exchange (which reduces maturities by six months) provides the best value to creditors.”

“Icahn’s letter is in line with our view that the best way of maintaining value is by running off CIT’s book and gracefully winding down the portfolio over time,” said Adam Steer, an analyst at CreditSights Inc. in New York. “The proposed change or prepack plan does not leave the company with a lot of hope for running the company viably.”

Same old same old for the preferred share market today, as PerpetualDiscounts lost 22bp while FixedResets gained 5bp. Volume was off a bit, but still entirely respectable; almost all FixedResets.

The New York Times considers the sale of Philbro to be a public policy success:

Bankers will surely say “we told you so.” Citigroup’s sale of its profitable energy trading unit Phibro is exactly the kind of unintended consequence that the nation’s financiers warned us would happen when the Obama administration set out to limit their pay.

We see it as a public policy success. Phibro is a high-risk, high-reward hedge fund. It has no place on the books of one of the nation’s too-big-to-fail banks. If a policy to cap bankers’ pay forces all banks to get rid of their hedge funds, it will be a winning policy.

I’m a simple kind of guy. I figure, if the real problem is highly leveraged hedge funds within banks, then the regulators should concentrate their attention on highly leverage hedge funds within banks. But I guess that kind of fuzzy thinking is getting a little old fashioned in these modern times.

Investments can be a really dirty business:

A fund associated with TPG is exploiting an unintended wrinkle in the $650 billion market for CDOs by asking holders of the riskiest portions to allow asset sales in exchange for millions of dollars in fees. While equity holders have the right to decide which assets the CDOs sell because they’re first in line for losses, they may no longer have the incentive to ensure that assets are sold at fair value because their investments have been wiped out by the worst financial crisis since the Great Depression.
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TPG Credit, a Minneapolis-based firm founded by former Cargill Inc. executive Rory O’Neill and associated with private equity firm TPG, has offered in the past week to buy $470.8 million of bank trust preferred securities from seven different CDOs for 5 cents on the dollar, according to trustee reports obtained by Bloomberg News. TPG Credit will pay holders of so- called equity portions another $23.5 million in fees to allow the sales, the documents say.

The slide continued today, with PerpetualDiscounts down 17bp and FixedResets losing 6bp, on slightly lower volume dominated by FixedResets.