PrefBlog

SEC Commissioner Daniel M. Gallagher mused on the tangled web of supervisory responsibility:

And although securities firms have been generally increasing the amount of resources they devote to compliance matters, compliance budgets have increased in a linear manner while the demands faced by compliance officers have increased exponentially. A member of the House Financial Services Committee, citing a study issued by the Committee,[1] stated, “It will take over 24 million man hours to comply with Dodd-Frank rules per year. It took only 20 million to build the Panama Canal.”[2] On the plus side, at least Dodd-Frank has caused fewer deaths by malaria or yellow fever.
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The Commission’s ability to impose sanctions for failures to supervise is a valuable part of our regulatory toolkit, encouraging a broker-dealer or investment adviser’s managers and executives to proactively monitor subordinate employees’ compliance with laws and regulations. We must make sure, however, that our rules establishing failure to supervise liability do not act as a deterrent to in-house legal and compliance officers, discouraging them from departing from their clearly delineated roles.

After all, we don’t want compliance officers or in-house attorneys spending their days drafting policies and sending out memoranda while avoiding interaction with the individuals governed by those policies or the recipients of those memos out of fear of being deemed a supervisor and subjecting themselves to liability. Indeed, we want to encourage such personnel to bring their expertise to bear in addressing important, real-world compliance issues and in providing real-time advice for concrete problems the firms and their employees face.

Clearly, what is necessary is a new department to be called “Compliance Compliance”, in which Compliance Compliance Professionals can ensue that Compliance Professionals are doing their jobs correctly. They can be regulated in the U.S. by the Securities and Exchange Commission Commission.

Remember the highly politicized SEC report on the Flash Crash? The regulator who wrote it thinks we should hire more regulators:

High-speed trading in U.S. futures markets is being dominated by a small number of firms that should be forced to register with regulators to ensure adequate oversight, the Commodity Futures Trading Commission’s former chief economist will tell lawmakers.

The firms, which can account for more than half of trading volume in some markets, should face new record-keeping rules and be required to have consistent policies and safeguards, according to Andrei Kirilenko, who left the CFTC in 2012 after he led a study of high-speed trading following the May 2010 flash crash.
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Kirilenko is the co-author of a study that concludes high-frequency traders earn consistent profits, often at the expense of smaller and retail participants. The research, released again last month, was based on proprietary transaction-level data collected at the CFTC about trading in the E-mini S&P 500 futures contract from August 2010 through August 2012.

The researchers concluded that a small number of firms are consistently profitable and benefit by trading faster than their rivals. The small number of firms competing for ever-faster trades can lead to inefficient investments in technology by “driving an arms race” and warding off new participants in the market, according to Kirilenko, who said regulators should investigate why the industry is concentrated among so few firms while new participants struggle to compete.

The study referred to is by Matthew Baron, Jonathan Brogaard and Andrei Kirilenko, titled The Trading Profits of High Frequency Traders:

Small traders are defined as firms that trade less than a median of 20 contracts a day of all the days that firm is active. This is the majority of traders, with 21,761 participants in August 2010. … More precisely, for each trader, we calculate the end-of-day profits as the cumulative cash received from selling short positions minus the cash paid from buying long positions, plus the value of any outstanding positions at the end-of-day, marked to the market price at close: … Small traders in particular suffer the highest short-term losses to HFTs on a per contract basis: $3.49 per contract to Aggressive HFTs compared to $1.92 for Fundamental traders and $2.49 for Opportunistic traders, for a contract valued at approximately $50,000. … Retail investors are thought to be noise traders and so under the uninformed hypothesis we expect them to incur significant losses to HFTs (e.g. Hvidkjaer, 2008; Kaniel, Saar, and Titman, 2008; Barber, Odean, and Zhu, 2009). … The results also support the hypothesis that Small (retail) traders are noise traders who incur the largest effective transaction costs per contract.

So, yeah, the paper does indicate that HFTs make money from retail (as defined). What it does not do is estimate how much money retail would lose in the absence of HFT. Market making is a service; one generally pays for services.

The Bank of Canada has published a paper by Jonathan Brogaard, Corey Garriott and Anna Pomeranets titled High-Frequency Trading Competition:

When an HFT firm begins trading a stock, it disturbs the trading environment and leads incumbent HFT firms to change their behaviour. Part of the incumbents’ volume share is lost to the entrant. Competition in providing liquidity leads incumbents to tighten their spreads. Entry results indicate that incumbent HFT price predictability decreases, consistent with markets becoming more efficient. The culmination is that revenues fall with competition. The influence of both Passive and Aggressive entrants diminishes with each subsequent entry.

The approach in this paper helps to isolate the role of competition from the role of speed and aims to understand the channel by which competition affects markets. Our findings complement papers on HFT market quality. We show that competition among HFT firms, not just speed, plays a role in how they behave in the market and consequently may be partially responsible for the documented relationships between HFT and market quality.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts up 10bp, FixedResets off 29bp and DeemedRetractibles gaining 1bp; it may be that the Enbridge new issue had an effect on the market! Or maybe it was profit taking. Possibly concerns over the Ukraine. How should I know? Enbridge issues certainly got whacked pretty hard; the Performance Highlights table is comprised entirely of Enbridge FixedReset losers. Could it be that the market is getting saturated with Enbridge and that investors are getting tired of their advisors passing gas all the time? Stay tuned! I won’t know next year, either! Enbridge issues also captured the top four spots on the Volume Highlights table on what was, overall, a day of average volume. Maybe a tad on the low side.

Two stories today made me laugh about how 20th century structures are irrelevant to modern technology. The first was about taxis:

London’s taxis are planning a 10,000-cab protest next month, as professional drivers across Europe demonstrate growing opposition to Uber Technologies Inc.’s app.
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The controversial app, which helps private drivers and professionals charge for rides, has met with protests in several markets from the taxi industry, whose drivers often pay steep fees for licenses and permits and complain that San Francisco-based Uber’s cars are given an unfair advantage.
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Uber markets itself as a way for drivers to start their own businesses, showing profiles of top drivers on its website who include a student who used the app to make money on weekends, a single mother who started her own business and a man who quit his job to drive passengers around San Francisco. That means it can draw drivers from outside of the professional chauffeuring industry who may hold different licenses or qualifications. That’s a key difference from similar apps like Hailo, which recruit taxi drivers.

Cars in Brussels that use the app will be subject to a 10,000-euro ($13,863) fine after a local court ruled against Uber cars last month. European Commission Vice President Neelie Kroes called the ban “crazy” and anti-competitive.

In Berlin, the taxi association said that Uber hurt competition by violating rules that force limousine drivers to return to a base after delivering customers. In April, a court banned taxi services that use the app, though the injunction wasn’t enforced at the time.

Microjobs are coming. Deal with it. The second example was about guns:

Yoshitomo Imura, a 27-year-old Japanese man, has been arrested for allegedly possessing a collection of guns made with a 3D printer, according to The Japan Times.

Police say that two of the five recovered handguns are capable of firing, though no bullets were discovered at the man’s home in Kawasaki, south of Tokyo.

Imura, an employee of Shonan Institute of Technology in Fujisawa, is reported to have made the weapons using a commercial 3D printer he bought online for 60,000 yen (£349/$590) in conjunction with plans he downloaded from file-sharing sites.

Decentralized manufacturing is also coming. Deal with that, too.

Ian Lee provides us with a good reason to avoid Carleton University’s Sprott School of Business. His contribution to the so-called debate over voter ID and vouching may be summed up as:

This empirical research reveals that multiple federal and provincial government agencies are required by law to record and often monitor citizens in multiple overlapping digital identification databases – with identity cards numbering well in excess of 200 million for 18 million voters (excluding millions of monthly utility bills) – from health care cards to driver’s licenses to student ID cards to employee cards to birth certificates to passports to SIN cards to auto ownership cards to library cards to debit cards to credit cards to Aboriginal ID cards to title deeds to tenancy agreements.

His argument is that since 200-million cards have been issued – not all of which are valid identification under the current act, but never mind that – for 18-million voters, therefore every voter actually possesses valid ID. To my relief, he’s being ripped apart in the comments, showing that not all Canadians are completely incapable of formulating an actual argument.

I don’t have any opinion on voter ID, by the way. I have very little interest in the topic anyway, and when I do stumble across some reference to the so-called debate, it’s all pure garbage such as Ian Lee’s article.

Speaking of incompetent educators:

The Alberta task force noted that in 10 years, not one teacher has lost his or her job because of ineffectiveness – this, in a province that employs 35,000 full-time K-12 educators. That is a mind-boggling statistic and an indictment of both the government and the union. It’s not much different in most Canadian provinces. In British Columbia, just 16 teachers have been terminated or resigned in the past decade over incompetence-related issues. The province employs more than 30,000 K-12 teachers.

Talk to any teacher and they’ll identify at least one or two colleagues who shouldn’t be instructing kids for a living. That shouldn’t come as a great surprise. The teaching profession isn’t immune from the basic rules of the working world; 5 to 10 per cent of those making up any work force should probably be doing something else for a living. In the private sector, it’s much easier to push these people out the door and toward another direction. (And often, the departed are later happy they did.) In a unionized environment, where the mandate is frequently to protect the status quo, it’s much more difficult.

David Parkinson in the Globe comments on Canada’s bleak employment situation:

But the fact is that jobs have now declined in three of the past five months – during which time the Canadian labour market has actually lost nearly 8,000 jobs. If anything looks like a statistical outlier here, is was the big March gain, not the April fall.

Consider other disturbing details in the April report. All the job losses were concentrated in full-time positions (indeed, at 31,000, it was more than all of them, offset by a 2,000 job gain in part-time employment). The private sector shed 29,000 jobs while governments shed another 17,000; the only thing propping the job count from an even worse fate was a 17,000-job increase in self-employment, a dubious sign for job quality.

Gee, I wonder what could be driving this. Could it be idiotic energy policies?

“I doubt we’ll add any more plants in Canada,” Magna chief executive officer Don Walker told shareholders Thursday at the company’s annual meeting in Toronto.

The auto parts giant is competitive in Canada, invests about $150-million (U.S.) annually in its existing plants here and has benefited from the recent drop in the value of the Canadian dollar, Mr. Walker noted.

He is worried, however, about the level of vehicle production in Canada, rising electricity costs in Ontario and high transportation costs.

In the last Ontario election, two of the three main candidates knocked on my door personally; I told them both that nobody had my support because not one of the three parties had an electricity policy that made the slightest bit of sense at all. Looks like I’ll be saying the same thing this time ’round; actually, it may be worse because the opposition parties are blathering about a paltry $1-billion gas plant cancellation, which is basically a rounding error:

Solar energy – one of the key pillars of the Green Energy and Economy Act (GEEA) – is casting a dark cloud over Ontario electricity bills and is a big factor in recent and future bill increases. In 2013, solar projects caused electricity bills to be about $550-million higher than they would otherwise have been. For a typical homeowner, this works out to $47 per year. Ontario will have an estimated 1,100 MW of solar installed by year-end and roughly 900 MW will be added in 2014. This addition will cause 2014 electricity bills to increase by another $435-million – equal to a typical homeowner increase of $37 per year. By the end of 2014, solar will be costing Ontarians $1.25-billion per year – while generating a paltry 2% of Ontario’s total electricity requirement.

The TSX is rolling out a new system:

And as with many upgrades in trading technology, there is a debate. There is the usual grousing from Bay Street about the costs to connect to a new system, which requires testing and upgrades by users.

But the bigger question is, who will benefit?

TMX says everybody will, because the market will be faster, spreads will be tighter and speeds will be more consistent.
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However, critics say that the real beneficiaries will be high frequency traders. That’s because some work that used to be done in the TMX trading engine will now have to be done by users.

The anonymous critics are missing a trick there. According to the Exchange:

Who will be impacted by the TMX Quantum XA upgrade? Anyone with a direct
connection to TSX, TSX Venture, or TMX Select with a certified order entry
application will be impacted and required to make changes as a result of the TMX
Quantum XA upgrade. This includes, but is not limited to:

• Service Bureau vendors
• Participating Organizations, Members, or Subscribers with in-house proprietary systems
• Software providers
• DMA customers supporting direct connections

So in other words, barriers to entry are increasing. So, in other words, a big beneficiary of the change will be the big banks. Who also own the Exchange. The changes, in total, may be good; they may be bad; as is usual in Canada, there is no informed debate either way; in large part because associate professors at business schools in Ottawa get more mileage out of spouting utter nonsense to further their political ambitions than in actually analyzing business. But there’s certainly no surprise that one division of the Big Banks is making system changes that will favour other divisions of the Big Banks.

I stumbled across a listing of nascent technologies:

7. Paper-Thin, Flexible Computers and Phones

How would you feel if your smartphone or tablet was as thin as paper and capable of exhibiting the same level of flexibility? Would feel pretty awesome, no? The future has such gadgets for you in store. As of now projects are underway to come up with smartphones and tablets, which will be fully functional yet look just like paper. Papertab was showed in CES 2013 and a collaborative effort is being made by two Canadian and American universities and the project is being called; ‘Paperphone’. Dr. Roel Vertegaal from Queens University says; ‘This is the future. Everything is going to look and feel like this within five years.

Now, this would be useful. Before I buy my first e-Book, or give up on my printed newspaper subscriptions, I want a device that will
i) allow me to read normally
ii) fit in my pocket

There’s a two year old status report available, but there’s a recent newspaper article:

The Human Media Lab is unveiling its revolutionary foldable smartphone technology “Paperfold” in Toronto today at the ACM CHI Conference on Human Factors in Computing Systems.

Queen’s professor Roel Vertegaal and student Antonio Gomes will be demonstrating the smartphone’s ability to fold open up to three flexible displays that allows extra screen space when needed. The three detachable electrophoretic displays allow the compact phone to be connected into a variety of arrangements that can mimic both a notebook computer format or a foldout map.

I’m not too enthusiastic about the 3-D remodelling; but if something like this can be produced for $500, I’m all for it!

The rally in the Canadian preferred share market paused today, with PerpetualDiscounts and DeemedRetractibles both off 6bp, while FixedResets gained 4bp. Hmmm … let’s see … down a bit after a rally … on a Friday … Profit taking! Must be profit taking! That will be $1,000, please. Volatility was muted. Volume was low.

And now it’s time for PrefLetter!

The possibility of Saskatchewan entering the national securities regulation framework has led to calls for Nova Scotia to join the happy throng:

Nova Scotia treats its regulator as a bit of a cash cow. It takes in $15.8 million in yearly revenue and spends $2.7 million on programs. Finance Minister Diana Whalen has cited loss of this revenue, and of provincial control, as reasons for Nova Scotia not joining the voluntary initiative by Ottawa, Ontario and B.C. to set up a co-operative regulator after the courts said Ottawa could not do it alone.

These are parochial reasons to deny Nova Scotians better investor protection and to stymie creation of stronger national safeguards against system-wide risks.

We will surely have more real influence if we are early participants in this initiative. It can be designed to provide a share of fee income and appropriate regulation for local initiatives like Nova Scotia’s Community Economic Development Investment Funds. Nova Scotia should get on board and play a role in ensuring first-rate national regulation is also sensitive to local and regional needs.

But:

Andrew Preeper, a spokesman for the province’s Finance Department, said “the possibility of taking part in a co-operative regulator is being discussed and considered, but no decision has been made.” He said that Nova Scotia Finance and Treasury Board Minister Diana Whalen wants to have more talks with industry stakeholders.

Meanwhile, in Europe:

European Central Bank president Mario Draghi surprised the markets by saying the bank’s governing council is “comfortable” in launching measures next month to fight falling inflation and the rising euro, a strong signal that the ECB thinks the euro zone recovery is in jeopardy if no action is taken.

While the ECB, as expected, left the benchmark interest rate intact at a record low of 0.25 per cent, Mr. Draghi repeatedly highlighted the dangers of falling inflation and the rising euro. In his press conference, he said: “The strengthening of the exchange rate in the context of low inflation is cause for serious concern in the view of the governing council.”

But Mr. Draghi did not say which easing measures the ECB is prepared to take to tackle disinflation and the rising euro. Options include forms of quantitative easing tailored to the European markets, negative interest rates (charging banks to park funds at the ECB) or a cut that would take rates to zero. The ECB could also intervene in the foreign exchange markets to put downward pressure on the euro.

Many will be interested in the recent Economist article titled Maple, resting on laurels, but unfortunately it’s slap-dash bilge. They say, for instance:

the World Economic Forum anointed Canada’s banking system the soundest in the world

Bullshit. They obviously have not read my post What the WEF Report Really Says about Canadian Banks. They also repeat the claim…:

The latest calculations from The Economist suggest that house prices in Canada are overvalued by 76% and 31% when measured against long-term average rents and incomes respectively.

… without addressing the methodological problems discussed in How to Dissect a Housing Bubble. It’s very disappointing so see such crap spouting out of the Economist.

You want to see some layoffs? Barclays Bank can show you some layoffs:

Britain’s Barclays reined in its ambitions to be a Wall Street powerhouse on Thursday and signalled a return to its retail roots with a plan to hive off much of its investment bank and axe one in four jobs at the division.

Chief Executive Antony Jenkins, in his second strategic review in as many years, will cut 19,000 jobs in the next three years, 7,000 of them at the investment bank, and park 400 billion pounds of assets in a new “bad bank”.

Some bond ETFs are benefitting from price reductions:

The cost of owning an ETF tracking the S&P/TSX composite index has fallen from 0.27 per cent to 0.05 per cent this year, and U.S. and international fund fees have fallen significantly as well. But, with only a couple of exceptions, bond ETFs have for the most part been exempt from this price competition.

One of those exceptions is the iShares High Quality Canadian Bond Index ETF (CAB), which holds a portfolio that is 60 per cent weighted to government bonds and 40 per cent weighted to corporate bonds. All bonds in the portfolio have a credit rating of A or higher, which is where the “high quality” name for this ETF comes from. The fee for CAB has fallen to 0.12 per cent from 0.3 per cent, which makes it a low-cost leader for ETF investors. Other broad Canadian bond ETFs have fees in the 0.23 to 0.33 per cent range.

Another bond fund to benefit from fee cuts is the BMO Short Corporate Bond Index ETF (ZCS), which falls to 0.12 per cent from 0.30 per cent. The previous floor for this type of ETF had been about 0.15 per cent.

And … in one of PrefBlog’s least surprising links … Canadian banks are extending their hegemony over the financial system:

DBRS has today confirmed the Issuer Rating, Medium-Term Notes and Debentures ratings of Canadian Tire Corporation, Limited (CTC or the Company) at BBB (high), and its Commercial Paper rating at R-2 (high), all with Stable trends. This rating action follows CTC’s announcement earlier today of a far-reaching strategic partnership with Scotiabank, under which Scotiabank will acquire 20% of the equity interest in Canadian Tire’s financial services business for $500 million in cash (the Transaction).

Julie Dickson gave a self-congratulatory valedictory. She did not mention OSFI’s botching of the Life Insurance Regulatory Framework, that she has kicked down the road to her successor.

The Canadian preferred share market reignited today, with PerpetualDiscounts winning 32bp, FixedResets gaining 3bp and DeemedRetractibles up 17bp. Volatility was muted. Volume was above average.

We can hope that Saskatchewan’s flirtation with the national securities regulator gets consummated:

The federal government is close to signing up a third province for its voluntary national securities regulator, with Saskatchewan’s government now “optimistic” that it can reach an agreement to join Ontario and British Columbia.
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And now, Saskatchewan is poised to become the next province, giving needed momentum to the project by adding a province that had long held a neutral stance regarding the idea.

“We are still working on it, and believe we will come to an agreement,” Saskatchewan government spokeswoman Kathy Young said in response to questions, adding, “we are certainly optimistic.”

The Canadian preferred share market kept the rally going – barely! – today, with PerpetualDiscounts gaining 1bp, FixedResets up 8bp and DeemedRetractibles flat. Floaters did very well, dominating the good part of the Performance Highlights table. Volume was slightly above average.

PerpetualDiscounts now yield 5.32%, equivalent to 6.92% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.4% (maybe just a smidgen over) so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 250bp, a slight (and perhaps spurious) widening from the 245bp reported April 30.