PrefBlog

Profits from High Frequency Trading are getting harder to come by:

Revenues at HFT firms from U.S. equities trading were an estimated $1.1 billion last year, down from $7.2 billion in 2009, according to research firm Tabb Group.
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Such strategies are more successful when markets are volatile, because big price swings offer traders more opportunities to capture profits. But volatility has come down drastically since the years just after the global financial crisis. The CBOE Volatility Index, or VIX, a measure of U.S. stock market volatility, has averaged just 11.6 so far this year, down from 24.2 in 2011, according to the WSJ Market Data Group.
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It is an expensive arms race. When many high-speed traders got their start in the 2000s, the leading technology for transmitting data was fiber-optic cable.

But starting in 2010, the speediest firms began to use microwave networks, shaving milliseconds off the time it takes to transmit information on routes such as the Chicago-New York corridor. Upgrading to microwave networks—and later millimeter-wave and laser technology—added to the costs, traders say. All this hurt HFT firms’ bottom lines just as slumping volatility was eroding their top-line revenues.
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HFT firms also grumble about mounting costs for the market data they buy from operators like the New York Stock Exchange and Nasdaq Inc., as well as for co-location, the practice of putting a computer server directly in the exchange’s data center to cut down the time it takes to execute trades.

PerpetualDiscounts now yield 5.21%, equivalent to 6.77% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.05%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread” is now about 270bp, a significant widening from the 260bp reported March 15.

There’s a new investment structure testing the waters … interval funds are an attempt to bridge the liquidity gap between investors and illiquid underlying investments:

Most of these portfolios are so-called interval funds, a quirky structure offered through financial advisers that allows investors to buy daily but sell only once per quarter. ​

Fees are stiff, generally running at least 2.5% annually.​
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Such interval funds offer to buy shares back from investors at predetermined dates and amounts — typically at least 5% of their shares four times a year. The idea is to offer enough liquidity for investors to get some of their money back over time, but not enough for them to yank it all back at one time.
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And how these funds value their shares, in the absence of a public market for much of their assets, is a departure from the traditional techniques of mutual funds.

These portfolios rely on quarterly valuations by appraisers provided by the property pools they invest in.
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But most of the interval funds are younger; several are too new to have weathered the storm of 2007-2009.

They use different techniques to bridge the awkward gap between quarterly appraisals on the underlying private properties and daily valuations of the funds’ shares.

Mr. Kamfar of Bluerock says his fund uses internal models and “daily observable inputs” to estimate interim values. Bluerock then reviews the daily pricing after actual valuations come in at quarter end. Mr. Kamfar says approximately 90% of the time, any adjustments are no more than one penny per share.

John Snowden, portfolio manager of the $230 million Resource Real Estate Diversified Income Fund, says the fund takes the forecast of the coming month’s pricing on commercial property as estimated by Green Street Advisors, a research firm, and divides it by the number of days in the month. The resulting number is added or subtracted to the fund’s daily net asset value. The share price is later adjusted as appropriate when actual values become available. Any adjustments rarely exceed a fraction of a percent, says Mr. Snowden.

Such pricing techniques might hold up fine in a downturn, but we won’t know for certain until one hits.

Interesting article in the WSJ regarding the changing life insurance business:

Prudential Financial Inc. is about to become the largest life insurance company in America by assets. But U.S. life insurance sales aren’t the biggest source of its profits.

Today, many Americans say they fear outliving their savings more than the premature death of a major breadwinner. And industry sales of individual life-insurance policies are down sharply since the mid-1980s. As a result, Prudential has transformed itself into an investing giant focused heavily on retirement-related products and services.
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Up next, PGIM is making its first foray into ETFs, according to people familiar with the matter. The firm aims to start with two types of ETFs: actively managed fixed-income products, and so-called smart beta equity ETFs, which track the performance of non-market-capitalization-weighted indexes, these people said.
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The industry shift away from life insurance is in part the result of the proliferation of mutual funds in the 1980s, which opened the door to stock-market investing by middle-income households through tax-advantaged savings plans. Before then “whole life insurance,” combining a death benefit with a tax-advantaged savings account, was a common way to save.

Basic term-life policies picked up some of the slack as savings plans proliferated. But many agents quit the business because commissions were relatively small, further depressing sales.

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And there are housing woes even outside Canada:

In places such as New York and San Francisco, which offer the greatest array of high-paying jobs, rents and home prices have shot up beyond the reach of many young workers. The squeeze has even affected the Bay Area’s amply compensated technology workers, whose salaries often aren’t enough to offset the rapidly rising rents and housing costs.

Technology workers who own a home in Seattle, by contrast, can expect to have about $2,000 more of disposable income left over each month after paying housing costs and taxes than those who live in San Francisco, according to a new analysis by Zillow and LinkedIn Corp. released Thursday.

Seattle tech workers who own their homes keep an average of 59% of their incomes after housing and tax costs, while Bay Area tech workers pocket just 37%, according to the study. In Austin, workers hold on to 54% of their incomes if they rent and 62% if they own.

But Ontario is mulling the destruction of the condominium business, given the success of rent control in destroying the apartment market:

Ontario is developing “substantive rent control reform,” the housing minister said Thursday, as the provincial NDP push for tenants in newer units to have the same protections as all other renters.

Currently, annual rent increase caps only apply to residential buildings or units constructed before November 1991. This year the rent for those tenants could be increased by up to 1.5 per cent without the landlord applying to the Landlord and Tenant Board.
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Ontario Housing Minister Chris Ballard said it’s “unacceptable” that many Ontarians are seeing dramatically increasing housing costs.

“My staff are already developing a plan to address unfair rises in rental costs by delivering substantive rent control reform in Ontario as part of an ongoing review of the Residential Tenancies Act,” Ballard said in a statement.

“In the days ahead, we’ll share more details about a transformative plan that will allow Ontarians, no matter their budget or community, to realize their dream of having an affordable place to call home.”

Today’s big news was the FOMC release:

In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 3/4 to 1 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation.

However, Yellen was dovish after the meeting:

Speaking to reporters after the Fed’s quarter percentage-point move on Wednesday, Yellen said the central bank was willing to tolerate inflation temporarily overshooting its 2 percent goal and that it intended to keep its policy accommodative for “some time.”

“The simple message is the economy’s doing well. We have confidence in the robustness of the economy and its resilience to shocks,” she said.

As a result, the Fed is sticking with its policy of gradually raising interest rates, Yellen said. In their first forecasts in three months, Fed policy makers penciled in two more quarter-point rate increases this year and three in 2018, unchanged from their projections in December.

Today’s decision “does not represent a reassessment of the economic outlook or of the appropriate course for monetary policy,” the Fed chief said.
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Asked about the potential for a fiscal boost, Yellen made clear the Fed is still waiting for more concrete policy plans to emerge from the Trump administration before adapting monetary policy in reaction.

“There is great uncertainty about the timing, the size and the character of policy changes that may be put in place,” Yellen said. “I don’t think that’s a decision or set of decisions that we need to make until we know more about what policy changes will go into effect.”

It’s clear that markets were expecting exciting hawkishness:

The yield on 10-year Treasury notes held at 2.49 percent after tumbling 11 basis points on Wednesday.

PerpetualDiscounts now yield 5.21%, equivalent to 6.77% interest at the standard conversion factor of 1.3x. Long corporates now yield about 4.15%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 260bp, significantly narrower than the 270bp reported March 8.