PrefBlog

Commodity Futures Trading Commission Democratic Commissioner Bart Chilton’s recent speech contained some ominous points:

Here’s the thing: our futures markets were never established to be gaming at gambling houses. Leave that to Amarillo Slim and Poison Ivey Phil (that’s still not his name, but I like it). Leave the gaming to the poker players and the gamblers—thank you very much. How smooth was that transition? See, I did have a point. But there’s more: A new car! No, not that. These markets were established to discover prices to benefit consumers and manage risk. We can’t overlook that. Once we forget that, we have lost our way.

As I never tire of pointing out, risk cannot be eliminated, only transformed or shifted. Any time you have a capital asset – perhaps your own house – that has benefits to be realized in the future, there is risk. You can transfer the risk of fire to the insurance company. You can transfer the risk of price declines to the bank, with a low deposit, non-recourse mortgage. But the risk is constant.

I agree that futures markets were established to manage risk (I’m not so sure about the “benefit consumers” part!). A commodities market will benefit ultimate buyers and ultimate sellers by allowing them to fix a price. But these terminal users won’t conveniently arrive at the market at the same time, or share the same views on what price is appropriate when they do … so these ultimate transactions are mediated by speculators, aka gamblers.

I confess I got sidetracked by this part of the speech:

At one point, it sort of brought to mind the Sabre Dance. Remember that one (written by Armenian composer Aram Khachaturian in 1942)? It’s that plate-spinning song where an act spins a large number of plates on teeny tiny poles (the world record in 108 plates). Can’t ya just hear it?

Huh? So I found Sabre Dance on YouTube. Ah! I know that song – how can you possibly not know that song? Wikipedia informs me that it is from the ballet Gayane, which I will have to make a point of seeing some day. But plate spinning? Aha! Mr. Chilton is showing his age!

Brenn was a master at the art of plate spinning, a classic circus act that relies on the gyroscopic effect. Brenn’s routine consisted of spinning five glass bowls on four foot-long sticks all the while spinning eight plates on the tables holding the spinning glass bowls. Seem like too much? Intermittently, he also managed to balance a tray carrying glasses and eggs and in one swoop would remove one of the trays causing an egg to fall into each glass.

Aiming to keep the audience at the edge of their seats, he would also carry a separate tray lined with glasses and spoons in front of them. With a simple flip, every spoon would magically fall into a glass.
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His act was almost always performed to Khachaturian’s “Sabre Dance,” a piece of music that is now identified by many people with the skill of multi-tasking.

Sadly, I could not find a video of Brenn’s act with the Sabre Dance music. I wonder how much household crockery got broken after each of his appearances? Maybe his show was sponsored by a large crockery company.

Boy, this “Internet” thingy is a real time sink. Back to our regularly scheduled snarky comments on regulators’ speeches – Mr. Chilton wants the ability to approve or forbid market prices based on whether or not he can rationalize them:

Since 2008, I’ve been working to get these limits in place because, and this is supported with many studies, excessive speculation can push prices around. Nobody can rationalize nearly $150 a barrel oil in 2008 based solely upon supply and demand. It cannot be done. Well, Dodd-Frank required that we implement limits to curtail excessive speculation that can lead to unfair prices.

Sadly, he did not share the results of his interviews with buyers of oil at near $150/bbl in 2008, nor did he provide any hints of responses obtained when he asked people who were long but did not sell. However, this is mere idle curiosity. He’s a regulator, you know, part of the team of adult supervisors, and if he doesn’t know the rational price of a market instrument, who does?

He wants lots and lots of regulation:

There are some things, however, that we should do and promptly. Cheetahs—HFTs—were not even mentioned in Dodd-Frank. There was not one word about them. The new law was passed and signed just shortly after the Flash Crash in May of 2010. By then it was too late to put any techno-language in the law. Heck, we didn’t even yet know all of the ramifications of the Flash Crash.

Nevertheless, we need some market protections and a balanced approach to seeking safer markets while not going all in. Here’s my list:

1. Cheetah Registration: They need to be registered. That’s sort of a pedestrian first step. Can you believe they aren’t even mandated to be registered with us? If they are not registered, we can’t command their books and trading records. They gotta be registered.

2. Testing: They should be required to test their programs before they are unleashed in a live production trading environment. Most of the big cheetahs do this already.

3. Kill Switches: It should be compulsory to have kill switches in the event that cheetah programs go feral. I am pleased that the Securities and Exchange Commission (SEC), some exchanges and my Agency are working on that.

4. Wash Blocker Technology: Cheetahs should also be required to create pre-trade risk controls with available wash blocker technology to prevent wash—or cross—trading (that’s trading with themselves). After all, those trades are illegal in the United States. But, as it stands now, things are moving so fast in this gizmo-gadget trading world that some cheetahs claim they don’t even know when wash trades occurs—if their dancing with their self. That’s not a fantastical answer when regulators start asking questions.

5. Compliance Reports: I’ve also recommended that there be periodic compliance reports from the cheetahs and that the senior executives sign their names and are held accountable for any false or misleading information. The days of “he said, she said” responsibility in financial markets needs to end.

6. Penalties: Finally, and this goes to accountability, also. If there is another flash crash where people are damaged (they lose money) due to a rogue cheetah, I think there need to be steep consequences. And when I say consequences, I’m talking not just for the firm, but for individuals at the firm. If the cheetahs want to be involved in the high-flying, incomprehensible gambling world, okay, but if you cause harm to markets and consumers, we shouldn’t stand for it.

The only “consumers” hurt during the Flash Crash were those idiots who implemented their own little algorithm – a stop loss order. Why is Chilton so bent on protecting the the users of idiotic trading algorithms?

The sternest measure Chilton et al. have taken recently is to protect public utilities from themselves since, naturally, mere public utilities can’t be expected to have a clue about what they’re doing. This protection is forseen to have the usual consequence:

Among the toughest rules that are scheduled to kick in next week is one that requires traders to begin counting their swaps transactions to see if they reach an $8 billion threshold, which tags them as a “swap dealer.” Such firms face the toughest rules, like capital requirements to back trades.

But firms that have only $25 million in total swaps trading with public utilities also get tagged. The aim of this lower threshold was to protect public utilities, by toughening up oversight of banks that deal with them.

But the lawmakers raised concerns voiced by utilities that the threshold will deter banks from trading with them at all, limiting their ability hedge risk and forcing them to pass higher costs on to consumers.

“These new rules will harm America’s economic engine by impairing many of the companies that provide vital financing to consumers and American businesses,” they wrote.

Sources familiar with the matter say the CFTC is reviewing this and other issues posed by the Oct. 12 deadline.

If you want to eliminate public markets, insist on making them safe. It’s a bit like demanding cool sunlight and dry rain. If there are egregiously punitive fines for naughtiness in the course of certain business … that business will not be done at all, for the bosses know that man is born to trouble as the sparks fly upward.

It was a strong day for the Canadian preferred share market, with PerpetualPremiums up 15bp, FixedResets winning 22bp and DeemedRetractibles gaining 12bp. Volatility was average, which is surprising given the size of the move. Volume was below average.

Statistics Canada has revised estimated productivity growth substantially downwards:

The latest revisions mean the Canada-U.S. gap is now wider – 0.8 percentage points per year from 1981 to 2012, up from 0.7 per cent.

Fortunately, this is not expected to affect milkfare, subsidies of pulp mills, Ontario’s solar energy programme or regulation.

In a startling development, common shareholders are still allowed to vote on corporate business:

In Telus’s case, the company is up against Mason Capital, which owns almost one-fifth of the company’s voting stock. Mason has also sold short millions of [non-voting] shares, leaving it a very slim net long interest. Mason is using the votes on the shares it owns to fight Telus’s plan to consolidate the two classes of stock into a single class on a one-for-one basis. Mason wants a ratio that favours the voting stock.

Telus argues that Mason has no real interest in the overall health of the company, making Mason an empty voter. Mason, of course, disagrees. It has on its side one of the people who coined the term, who points to the fact that Mason has an economic interest in the share collapse’s success or failure.

The Court of Appeal for British Columbia ruled Friday that “there is no indication that it [Mason] is violating any laws, nor is there any statutory provision that would allow the court to intervene on broad equitable grounds. To the extent that cases of ‘empty voting’ are subverting the goals of shareholder democracy, the remedy must lie in legislative and regulatory change.”

I can’t understand why any common shareholder would vote in favour of this, diluting their vote with no compensation and I quite agree that Mason cannot logically be described as an empty voter in this instance.

To my mind, a much more serious problem is owners of common who also have a long position in the non-voting shares. In the bond world, this is known as debt decoupling, where as bondholder you vote for a bad deal so that your Credit Default Swaps will pay more.

It was a negative day for the Canadian preferred share market, with PerpetualPremiums losing 8bp, FixedResets off 2bp and DeemedRetractibles down 7bp. Volatility picked up, with Floaters jumping up and insurance-related issues getting hit …. but it was not the world’s biggest deal. Volume was low.

Surprisingly, a business-hostile government isn’t getting much help from business:

French companies aren’t investing much at home these days.

A no-growth economy had already damped spending when President Francois Hollande’s government late last month unveiled a budget that slaps companies with 10 billion euros ($13.1 billion) of tax increases for next year. Executives are returning the favor by suspending investments.

Perhaps Lapdog Carney could go over and give them some pointers.

Assiduous Reader AA sent me a link to a NYT article titled A Hard Landing for University Endowments:

Today, it’s hard to find a college or university that stuck with the older and far simpler allocation between stocks and bonds. Hedge funds alone currently have what is estimated at over $2 trillion in assets, much of it from large institutions.
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Even more startling, data compiled by the National Association of College and University Business Officers for the 2011 fiscal year (the most recent available) show that large, medium and small endowments all underperformed a simple mix of 60 percent stocks and 40 percent bonds over one-, three-and five–year periods. The 91 percent of endowments with less than $1 billion in assets underperformed in every time period since records have been maintained. Given the weak results being reported this year, that underperformance is likely to be even more pronounced when the fiscal year 2012 results are included.

I don’t think it’s necessary to resort to fancy arguments like “first-mover advantage” and “changing market” to explain this. I suggest that some smart guys who knew what they were doing had the idea and did very well. Then the salesmen moved in …

DBRS confirmed NA at Pfd-2:

National’s asset quality metrics, with respect to its lending operation, outperformed most of its peers through the recession and continue to do so. National’s capital metrics have declined slightly over the first nine months of 2012 largely as a result of the application of IFRS, increased risk-weighted assets driven by organic loan growth and the acquisition of a 35% interest in Fiera Capital Corporation. However, the Bank’s tangible common equity and Tier 1 ratios still remain within the middle of the Canadian bank peer group and compare favourably relative to international peers, at 9.5% and 12.7%, respectively.

National’s long-term deposits and senior debt rating at AA (low) is composed of an Intrinsic Assessment of A (high) and a Support Assessment of SA2 (reflecting the expectation of systemic and timely external support by the Government of Canada), which results in a one notch increase from the Intrinsic Assessment to the Issuer Rating, Deposits and Senior Debt and Subordinated Debt ratings.

It was another mildly positive day for the Canadian preferred share market, with PerpetualPremiums up 6bp, FixedResets flat and DeemedRetractibles gaining 5bp. Volatility was minor. Volume was very low.

Red letter day! There was an intelligent quote about high frequency trading in the papers:

Murray Leith, director of investment research at Vancouver-based Odlum Brown Ltd., agrees that markets should be policed properly to eliminate flash crashes and maintain investor confidence.

But, he says, he’s interested in finding investments that are undervalued but will rise to their true value in the long term, as opposed to the minute machinations that high-frequency traders are interested in.

“If I see something that I like at the right price, I buy it. If it’s not at the right price, I don’t. It’s as simple as that.”

He adds that there can even be a bright side of volatility – “it potentially creates opportunity that may not otherwise exist.”

Naturally, this was balanced by something moronic:

Opponents cite increased volatility in the markets, which makes pricing less efficient, as well as the erosion of investor confidence – especially because of a few unsettling, extreme events in which high-frequency trading played a role. One of those occurred in August, when Knight Capital Group Inc. lost $440-million (U.S.) after an upgrade to its computerized trading system went awry, causing share prices on the New York Stock Exchange to fluctuate wildly after Knight put out a huge number of buy and sell orders.

The Knight Capital Group whoopsy had nothing to do with High Frequency Trading. Nothing.

And something a little puzzling…

To really understand high-frequency trading, investors have to grasp three concepts about markets, [professor at the University of Toronto’s Rotman School of Management who also holds the John H. Watson chair in value investing] Prof. [Eric] Kirzner says.
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The third is that there are two basic types of traders, high-frequency and slow-moving. For the latter, think mutual-fund companies, pension funds and everyday retail investors.

Happy to agree that everyday retail investors are slow-moving. But by and large, HFT helps them by narrowing the spread; retail is very fond of market orders.

But slow-moving mutual-fund companies and pension funds? Why are they slow moving? Do they not charge high enough fees to compete properly? If their incompetence is having a measurable effect on performance, why aren’t they fired?

There’s some noticable capital flight from Greece:

Coca-Cola Hellenic Bottling SA, (EEEK) the world’s second-largest Coca-Cola bottler, plans to move its main stock listing from Athens to London as Greece’s largest company by market value flees the epicenter of Europe’s debt crisis.

The move will make it eligible for inclusion in the benchmark FTSE 100 Index. A new company established in Switzerland by one of the bottler’s main shareholders will make a share-exchange offer for Coca-Cola Hellenic and seek a primary listing in London, according to an Athens bourse filing today. Coca-Cola HBC AG will also seek to list in New York.
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Coca-Cola HBC operates in 28 countries across three continents and employs more than 40,000 people, generating sales last year of 6.9 billion euros ($8.9 billion). Ninety-five percent of its business and shareholders are outside Greece.

Switzerland was chosen as the location for the new company because of its stable economy and regulatory environment and the ease of doing business there, according to the statement. The country is among the existing markets of the business.

Here’s why we need space exploration: one-hundred bazillion carats!

New research suggests that a massive, star-scorched planet in the Cancer constellation, not far from our solar system, is made in large part of diamonds, opening new vistas on the way scientists understand how planets are created.

The planet, 55 Cancri e, is twice the size of Earth and so rich in carbon that it holds at least three times our planet’s mass in diamonds, according to a new paper that has been accepted for publication in the journal Astrophysical Journal Letters.
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“We’re talking about a rocky planet. Not much gas, almost entirely solid. The outermost layer is at an extremely high temperature … There could also be a lot of diamonds on the surface because of the geophysical movements in the interior. The diamonds could come to the surface very easily,” Dr. [Nikku] Madhusudhan [a fellow at Yale University’s Center for Astronomy & Astrophysics] said in an interview.

“But just below the surface there is a very thick layer, about a third of the whole radius [of the planet], just in diamonds.”

It was a mildly positive day for the Canadian preferred share market, with PerpetualPremiums up 5bp, FixedResets flat and DeemedRetractibles gaining 2bp. Volume was low, despite the closing of two new issues, GWO.PR.R and BRF.PR.C.