PrefBlog

It was a black day for Canadian capital markets:

Maple Group Acquisition Corp. has won control of TMX Group Inc., with 91 per cent of shares tendered to its takeover offer worth about $3.8 billion.

A new Maple board of directors has already been appointed.

And along similar lines … when is a bank not a bank? When it’s a money-market mutual fund:

The 10 biggest money-fund managers and the Investment Company Institute trade group reported combined lobbying spending of $16 million in the first half of 2012 and $31.6 million last year in disclosures that reference money-market mutual funds, according to a review of documents by Bloomberg News. That compares with $16.7 million in all of 2010.

The companies are seeking to block new rules championed by Securities and Exchange Commission Chairman Mary Schapiro that are headed for a vote before a divided commission as soon as this month. The proposal would force funds to abandon their fixed $1 share price or introduce withdrawal limits and capital buffers. Schapiro can count on only one supporting vote from the other four commissioners, even as Federal Reserve officials have said that failure to enact tougher rules will leave the $2.5 trillion industry vulnerable to investor runs and threaten global credit markets.

The FOMC statement was gloomy:

Information received since the Federal Open Market Committee met in June suggests that economic activity decelerated somewhat over the first half of this year. Growth in employment has been slow in recent months, and the unemployment rate remains elevated. Business fixed investment has continued to advance. Household spending has been rising at a somewhat slower pace than earlier in the year. Despite some further signs of improvement, the housing sector remains depressed. Inflation has declined since earlier this year, mainly reflecting lower prices of crude oil and gasoline, and longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects economic growth to remain moderate over coming quarters and then to pick up very gradually. Consequently, the Committee anticipates that the unemployment rate will decline only slowly toward levels that it judges to be consistent with its dual mandate. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee anticipates that inflation over the medium term will run at or below the rate that it judges most consistent with its dual mandate.

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.

This libel suit amuses me:

Daniels repeatedly questioned Molo about statements from the book that are alleged to be libelous, including Lewis’s comments that Chau had worked for “sleepy” insurance companies for much of his career before managing CDOs and that CDO managers didn’t work hard.

“Most of your argument is based on the implications of certain statements, not on the actual statements,” the judge told Molo. “There’s no proof you can offer to a jury whether an insurance company is ‘sleepy.’ That is hyperbole. That is opinion.”
…
Chau’s firm managed about $20 billion worth of CDOs in 2007, making it the fourth largest in that category, according to court papers. Investors in Harding’s CDOs included UBS AG and Deutsche Bank AG, according court filings. CDO sales collapsed in 2007 along with the subprime-mortgage market.

There are certainly very many portfolio managers out there who are totally unqualified. Usually they just underperform. Sometimes they get hired by enormous companies with equally incompetent advisors.

It was another good, solid day for the Canadian preferred share market, with PerpetualPremiums winning 12bp, FixedResets up 5bp and DeemedRetractibles gaining 9bp. Volatility was muted. Volume was pathetically low.

The PerpetualDiscount sub-index got cut in half with the July month-end rebalancing, losing CIU.PR.A to Scraps on volume concerns, while ELF.PR.F and PWF.PR.K migrated to the PerpetualPremium index. The remaining constituents are BAM.PR.M, BAM.PR.N and ELF.PR.G.

PerpetualDiscounts, all three of them, now yield 4.96%, equivalent to 6.45% interest at the standard equivalency factor of 1.3x. Long Corporates now yield about 4.25% (maybe a little more) so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 220bp, unchanged from July 25.

Pragma Trading provides an interesting perspective on high frequency trading:

Market making is an important function in the smooth operation of markets. In theory, there should be a natural equilibrium: market makers will compete only to the point that they can no longer profit by quoting more aggressively. This means they will trade at times or prices that directional traders will not, narrowing spreads and improving market quality.

However, the existence of ultra-long queues suggests that this equilibrium is out of whack. Market makers compete en masse where there is already deep liquidity and no opportunity for price improvement because of the tick size. From a market structure perspective, the concern is that there is no practical way to opt out of interacting with these superfluous market makers, and because of the take fees charged by exchanges, directional traders are effectively forced to subsidize HFTs even though there are other directional traders they could interact with directly. This effect is most pronounced where the spread size is very large despite fundamental liquidity, i.e. for low-priced, high-volume stocks. As demonstrated by the preponderance of ultra-long queues in lower-priced stocks and the total absence of ultra-long queues in stocks priced below $1, it appears that the penny tick size and the liquidity rebates paid by exchanges in the maker/taker model effectively subsidize HFTs in a way that is essential to much of their profitability, and are the root causes of this market distortion.

Bloomberg’s Matthew Philips did some more digging:

The question is whether the benefits speed traders bring to the market outweigh these added costs and trade-offs. Even if slightly longer wait times are costing long-term investors billions a year, having a more liquid market with tighter spreads has saved them that much, if not more, says Rick Cooper, a professor of finance at the Illinois Institute of Technology’s Stuart School of Business. Cooper used to work for long-term investors, building early algorithms and quant models for State Street Global Advisors. He doubts they want to go back to the old days where they were beholden to a small, clubby group of broker dealers serving as market makers. “Back in the day, when demand spiked, they would widen out the spread on you,” says Cooper. “It used to take us days to execute some of our big trades so we wouldn’t move the price.”

These days, any time a market-maker tries to widen out the spread, an electronic market maker usually jumps in and tightens it up again.

There’s some colour on the Facebook fiasco:

UBS’s admission that it lost nearly $356-million on the botched Facebook IPO puts pressure on Nasdaq OMX Group Inc. and raises questions about how quickly the exchange can put this problem behind it.
…
UBS handles most of the order flow from Charles Schwab Corp., one of the biggest U.S. brokerages, with about $1.8-trillion in client assets. It also takes orders from other retail brokerages, including TD Ameritrade and Fidelity.

But that alone may not account for the massive loss. UBS also said that, as a result of “multiple operational failures by NASDAQ, UBS’s pre-market orders were not confirmed for several hours” rather than in the usual milliseconds. That triggered its internal systems to re-enter orders multiple times, it said.

When the confirmations finally came through, UBS and other market makers were left owning large amounts of unwanted Facebook stock, which led to losses as the stock plunged.

“As a result of system protocols that we had designed to ensure our clients’ orders were filled consistent with regulatory guidelines and our own standards, orders were entered multiple times before the necessary confirmations from Nasdaq were received and our systems were able to process them,” UBS said. “Nasdaq ultimately filled all of these orders, exposing UBS to far more shares than our clients had ordered.”

No failsafes on the order-reentry algorithms, eh? Well, it’s nice that they saved a few thousand on programming.

The Canadian preferred share market closed the month on a happy note, with PerpetualPremiums up 3bp, FixedResets gaining 4bp and DeemedRetractibles winning 7bp. Volatility was muted. Volume was low.

It was a good day for the Canadian preferred share market, with PerpetualPremiums winning 12bp, FixedResets up 3bp and DeemedRetractibles gaining 2bp. Volatility was average. Volume was very low.

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums off 2bp, FixedResets up 11bp and DeemedRetractibles gaining 8bp. Volatility was minor. Volume was extremely low.