PrefBlog

The Bloomberg editorial board wants more paperwork:

The Securities and Exchange Commission last month took a half-step by requiring markets to build a $4.1 billion system that can generate audit trails of all transactions. The trouble with this system is that trading data won’t be generated until the next day, a feature the industry insisted on. Day-old data might not help regulators much when they are called upon the instant a market blows up. (It took five months to confirm the cause of the flash crash.) Nor is it clear that the system will be able to pinpoint the identity of every party in a transaction.
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The SEC and stock exchanges should also require major trading firms to demonstrate that their software programs are reliable before letting them go live. Now, firms are simply urged to adhere to an industry-recommended set of best practices. Unleashing a flawed program, as Knight seems to have done, is unacceptable.

Market apologists have said Knight’s errant trades caused no harm to anyone other than Knight and its shareholders, who saw the value of their investment shrink by about $600 million in a few hours. Yet who can be so certain the next bug-infested program won’t inflict much more damage? And what might have happened if Knight, which handled about 11 percent of all U.S. stock trading before the errors, had shut down?

Plus, the argument that Knight only hurt itself is bogus: Investors withdrew $127 billion from stock mutual funds in the 12 months ended in June. Repeated computer-trading misfires — not to mention the financial crisis of 2008 — erode confidence in U.S. markets. At some point, regulators and Wall Street have to decide whether the quest for speed is worth the chaos that can result.

$4.1-billion for a trade tracking system. You can put a Mars buggy on Mars for less than that. Has anybody, anywhere, ever seen a cost-benefit analysis for increased regulation? As far as I can tell, the attitude is – this might be worth something, so we should build it no matter what the cost.

As are most calls for increased regulation, Bloomberg’s argument depends upon dizzying leaps of logic and extremely vague fear-mongering:

• Yet who can be so certain the next bug-infested program won’t inflict much more damage?: Just, what, exactly, are you afraid of?
• And what might have happened if Knight, which handled about 11 percent of all U.S. stock trading before the errors, had shut down?: Golly, I don’t know. The end of the universe, maybe?
• Investors withdrew $127 billion from stock mutual funds in the 12 months ended in June. Repeated computer-trading misfires — not to mention the financial crisis of 2008 — erode confidence in U.S. markets.: Just what, if any, connection is there between these two sentences? How is confidence in US markets eroded? What is the effect of this loss of confidence?

Assiduous Reader beluga alleges:

I placed a limit order for YLO.PR.C at 43 cents today at 10am. Got two partial fills with a 100 shares left at the end of the day. I then noticed YLO.PR.C closed at 40 cents and there were trades at 0.425 and 0.40 just before 3pm.

Called to find out what happened. My order was routed to Alpha and after the partial fills didn’t go back to TSX.

This is contrary to my understanding of the National Best-Bid-and-Offer rules. Does anybody have any other ideas?

Interesting staffing kerfuffle at AGF:

AGF Management Ltd. is suing a former star manager and a U.S. investment firm, alleging they engineered the departure of most of AGF’s emerging markets team and cost the Canadian firm millions in lost business.

Patricia Perez-Coutts, who oversaw the top-performing AGF Emerging Markets mutual fund and related institutional accounts, left AGF with four members of her team in May to run money for Dallas-based Westwood Holdings Inc.

Two lessons there:

• That’s why you’ve got to give your star managers a piece of the action
• That’s why fundcos don’t promote star managers any more

I liked the Michael Osborne’s op-ed on TMX / Maple:

The approval of the Maple deal bears all the hallmarks of the creation of a “Canadian champion.” Proponents argue that we should accept reduced competition at home, in order to create Canadian champions that have the resources to take on the world. The problem is that monopolies become bloated and inefficient, and unable to compete in world markets. Instead of a Canadian champion, we get an uncompetitive Canadian backwater ripe for foreign takeover.

Ripe for foreign takeover indeed, unless the feds decide it is in the national interest for one group of Canadians to stick it to another group of Canadians. As they have done.

It was a mildly negative day for the Canadian preferred share market, with PerpetualPremiums losing 5bp, FixedResets off 3bp and DeemedRetractibles down 2bp. Volatility was mild. Volume was low.

Good news! The CEO of RBS says LIBOR rigging isn’t his fault:

Royal Bank of Scotland confirmed for the first time on Friday it had dismissed staff over an interest rate rigging scandal but the bank gave no indication whether it might settle soon with investigators.

Reporting a drop in first-half operating profit, RBS said it was co-operating with governments and regulators which are investigating the role of a number of banks in the setting of Libor and other inter-bank lending rates.

“I think that the regulators must decide how they want to deal with the situation. We will stand up and take any punishment that comes our way,” Chief Executive Stephen Hester said. He said he believed the Libor issue had been a result of “wrongdoing by individuals” rather than a “systemic problem” within the industry.

“The Libor situation is a stark reminder of the damage that individual wrongdoing and inadequate systems and controls can have in terms of financial and reputational impact.”

The inadequate systems and controls aren’t his fault, either. Me, I blame society.

There’s an interesting piece in the Globe about corporate cash in Canada:

“Corporate businesses are flush with cash, which they still seem hesitant to deploy, presumably due to the uncertain economic outlook,” said David Madani, Canadian economist for the London-based research firm [Capital Economics]. “This obviously leaves scope for firms to increase dividends, which could boost personal income and consumption significantly.”

In a recent research note, Mr. Madani said Canada’s non-financial-sector corporate cash balances stood at $526-billion at the beginning of 2012 – up 42 per cent since the recession ended in mid-2009. Since the Canadian economy is roughly one-tenth the size of our U.S. neighbour, this Canadian cash pile, in relative terms, dwarfs the roughly $1.3-trillion (U.S.) in cash held by U.S. corporations.

The US had a better than expected jobs number, albeit not “good”:

The payrolls increase of 163,000 followed a revised 64,000 gain in June, Labor Department figures showed today in Washington. The median estimate of 89 economists surveyed by Bloomberg called for a gain of 100,000. The jobless rate, based on a separate survey of households, climbed to a five-month high of 8.3 percent

I don’t understand all this anger management stuff:

A survey published in American Journal of Nursing in 2002, reported that 90 percent of hospital workers, including doctors and nurses, reported “yelling,” “abusive language” as well as “condescension” and “berating colleagues.” A quarter of the 1,200 people surveyed said they witnessed such behavior weekly.

“There isn’t a doctor alive who hasn’t seen it,” says William Norcross, executive director of a program at the University of California at San Diego that uses anger management to treat irascible physicians.

Medical professionals present [anger management guru George] Anderson with unique challenges. Their hours are brutal, the stakes are high, and the threat of malpractice suits is ever-present. The life-or-death nature of the work wears at steely nerves even on the best days, Anderson says.

If things have got to the point where you have to yell at your staff, the sensible thing to do is fire them instead. If you don’t have the authority to fire them … well, then you don’t have the authority to yell at them either, do you?

This sort of prima-donna behaviour was one of the things that took down RT Capital Management back in about 2000 – big-shot portfolio managers yelling at the back-office. Why is there “a program at the University of California at San Diego that uses anger management to treat irascible physicians”?

I’ve got a better idea: you yell at my staff, you’re fired. No matter how good you are at your tiny little specialty, you’re no good at all without good support staff … right down to the janitor who keeps the washroom clean, and if the support staff hates their jobs, they’re not going to do them very well. Sorry, buddy, but your hospital privileges are withdrawn. These guys indulge in their temper tantrums for the same reason bratty five-year-olds do: because there are no repercussions.

So, I finally got everything working again, with the proviso that I’m back to where I started and the conversion of the HIMIPref™ Web Services from Visual C++ 2002 to Visual C++ 2010 has been delayed. What a total nightmare. Everything worked just fine under VC 2002 … but VC 2002 won’t run under Windows 7.

Like everybody else, I have a love-hate relationship with Microsoft … some of their design decisions drive me nuts, but whenever I compare one of their products to its competitor, they almost always come out on top. Spreadsheets … C++ compilers … operating systems … the only exception I can remember is Rapid Application Development software, in which I consider Visual Basic to be pretty horrible – and that’s almost certainly because they insist that it be usuable throughout their entire suite of software.

So their tools are first class, but they’ve got a problem: there is, as far as I can tell, an institutional culture that supposes that because they do development in teams numbering in the hundreds – and because they guys they talk to also have huge development teams – that’s the way it works everywhere. It doesn’t. Lots of programming gets done in small shops (like mine!). I don’t need ultra-finicky version control! I can do all my version control on the back of an envelope! I don’t have a full time staff member in charge of compiling, who has daily meetings with the guy who does version control! But they think I do, so there are all kinds of finicky adjustments to be made to compiler settings and version control that all have to agree with each other or the damn thing blows up. And there’s no “Turn Off Version Control” setting on the damn compiler.

Such is life.

It was a slightly negative day for the Canadian preferred share market, with PerpetualPremiums down 4bp, and both FixedResets and DeemedRetractibles off 2bp. Volatility was muted. Volume was ridiculously low – there’s usually more volume on Christmas Eve!

There’s some jostling over the YLO reorg:

Law firm McMillan, counsel for the company’s lenders, said Wednesday the lenders, who weren’t specified, are owed a principal amount of $369-million by Yellow Media as of Sept. 28, 2011.
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“The company put forward the proposed CBCA plan without notice to or prior consultation with the lenders or most of its other stakeholders,” McMillan said in a news release.

“The lenders have invited the company to withdraw the proposed CBCA plan forthwith and to engage in a more open and transparent consultation process with its stakeholders to see if an acceptable plan can be achieved.”

The lenders intend to bring a motion on Aug. 6 to protect their legal rights in the reorganization proceeding initiated by Yellow Media under the CBCA.

Goldman Sachs has developed a new kind of investment:

Under the Goldman Sachs-funded initiative, inmates aged 16 to 18 will receive education, training and counseling intended to reduce the likelihood of them reoffending after their release.
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City officials said Goldman would provide a $9.6-million loan to pay for the program at the Rikers Island jail complex. If recidivism drops by 10 per cent, the firm will get back the $9.6-million. If it drops even more, Goldman could make as much as $2.1-million in profit. If recidivism doesn’t drop by at least 10 percent, Goldman will lose as much as $2.4-million.

Nearly half of the adolescents who leave city jails currently return within one year.

Social impact bonds, also called pay-for-success bonds, were first used in Britain and are being explored in Australia and in the U.S.

Massachusetts is negotiating with two nonprofit groups to finance juvenile justice and homelessness programs with the promise of repayment only if the programs work.

I don’t know why it’s called a “bond” rather than “an investment in a micro-cap that has a government contract”, but I suppose it helps sell the things.

As of September 28, 2011? That was the date the banks tightened the screws and DBRS slashed the rating. But why it’s being used as a reference date for the challengers’ holdings is something I don’t know.

Testing software is boring:

Knight Capital Group Inc. (KCG) said losses from yesterday’s trading breakdown are $440 million, almost quadruple its 2011 net income and more than some analysts had estimated, and the firm is exploring strategic and financial alternatives. Its stock has lost 66 percent in two days.

Knight said it will continue its trading and market-making today as it considers its options. Yesterday’s issue was related to the installation of trading software and resulted in the company sending “numerous erroneous orders,” the Jersey City, New Jersey-based firm said today. The stock tumbled 50 percent to $3.46 at 9:36 a.m. New York time today.
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The errors were caused by a malfunction in a trading algorithm, according to a person at Knight who asked to remain anonymous because the matter hasn’t been publicized.

Apparently there’s some regulatory concern over the problem:

Yesterday’s problem shows regulation is “broken” and a study group should be convened to review technology and market structure, Arthur Levitt, former chairman of the Securities and Exchange Commission, said in an interview. Regulators would have been able to stop incidents such as yesterday’s breakdown if they didn’t face a lack of resources, he said.

“The ability of regulators to do their job has never been weaker than it is today because of the failure of the oversight process,” Levitt, 81, said today in an interview. “Congress has a greater responsibility for what we’re seeing today than any regulator or any particular part of the industry. They’ve allowed this to happen.”

Kevin Callahan, a spokesman with the SEC, said in an e-mail that regulators are “closely monitoring the situation and in continuous contact with the NYSE and other market participants.”

I don’t understand this. A poorly-run company gave a $440-million gift to investors. Why is this a problem?

In related news, a bug was discovered at Hymas Investment Management today:

Click for big

Company officials were quoted as saying “Now stop screwing around and do some damn work.”

ING Bank Canada is for sale:

The sale process for ING Bank Canada has already kicked into high gear, and rival Canadian banks are heavily interested in scooping up their online-focused competitor.

I understand that central banks are using Google searches as indicators:

The Federal Reserve and the central banks of England, Italy, Spain and Chile have followed up with their own studies to see if search volumes track trends in the economies they oversee.
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It all started with a hunch in Mountain View, California. On the heels of developing a new website reporting how often users searched for certain keywords, Hal Varian, Google Inc.’s chief economist, said he wondered whether this data could foreshadow what traditional economic reports would show later. So he ran the numbers.

“The ‘aha moment’ was, gee, this actually works,” Varian said in an interview.

The result was a 23-page paper he co-wrote in April 2009, demonstrating how data reported on the Google Trends service improved forecasts of auto and home sales and retail spending in the U.S.

If they’re paying attention to my Google searches, banknotes will soon feature “scarlett johansson nude” in place of dead politicians. But other pornography is good too!

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Sorry, folks, the daily report will be delayed.

I have been in Microsoft Version Hell for about ten-and-a-half hours now … and ain’t nuthin’ workin’.

Update, 2012-8-3: Finally!

Soon!