September 1, 2010

Donald C. Langevoort made a good point about trade-throughs in his paper U.S. SECURITIES REGULATION AND GLOBAL COMPETITION:

Gadinis points out that U.S. and European regulation is similar in one strategy—trying to force trading interest into public view in the form of limit order quotes so that the price can reflect available supply and demand at increments a little higher or lower than the last sale. Reg NMS goes one step further, however, by forcing the trade-through of orders to the market with the best displayed price, so long as that market has fast (that is, fully automated) execution capacity. This is required for two reasons: first, to give protection to and thereby encourage the display of quotations and limit orders; second, as a mechanism to try to ensure that brokers offer their customers best execution. In contrast, European market regulation does not have a trade-through regime, and leaves best execution to negotiation between broker and customer. For obvious reasons, many institutional investors feel hampered by Reg NMS, and many investors, brokers, and trading sites have taken advantage of exceptions in the regulation to accommodate so-called “dark pools”—undisclosed trading interest—and trading that is based on non-price preferences.

The differences in approach are not hard to understand. The national market system in the United States is a legacy of public markets wherein retail investors are protected not only from the abuses of monopolistic trading sites but also from being elbowed aside by large traders in an increasingly institutional marketplace. Europe has little direct retail participation, and so that legacy is not present. What Gadinis describes there is precisely what one would expect from markets that have been built in recent years almost entirely for the benefit of the institutional trade.

U.S. institutional investors have ways of moving trading abroad when the domestic regulatory burdens are too much. As a result, Reg NMS is probably quite unstable. To date, the SEC has conditioned the cross-border mergers of exchanges (for example, New York Stock Exchange and Euronext) on keeping them separate for purposes of compliance with domestic market regulation. But that is inefficient, and probably hopeless in the long run. The right vision is no longer of a national market system but a global market system, and there is simply no way the SEC can impose its retail investor legacy extraterritorially. One suspects that it is simply a matter of time before the SEC does in this area what it did with IFRS: abandon exceptionalism in an effort to gain greater influence over market structure evolution around the world.

The issue of trade-throughs was discussed on August 27.

BIS has released preliminary results from its survey of FX and OTC derivatives:

•Activity in OTC interest rate derivatives grew by 24%, with average daily turnover of $2.1 trillion in April 2010. Almost all of the increase relative to the last survey was due to the growth of forward rate agreements (FRAs), which increased by 132% to reach $601 billion

The Bank of Canada has published its specific contribution, with the nugget:

Similarly, as an approximation, the three execution methods—(i) customer direct (over the telephone), (ii) multi-bank dealing systems, and (iii) single bank proprietary platforms—can be viewed as being execution methods primarily for customers. On that basis, 77 per cent of all customer trades in Canada are undertaken directly with the customer over the telephone, and 23 per cent are executed through either multi-bank or single-bank electronic trading systems.

In possibly the most amazing news story in the history of the universe, Bloomberg advises that Hong Kong i-bankers are competing on fees:

Hong Kong bankers are charging the lowest fees on record to arrange initial public offerings as firms vie for deals in a market where IPOs are raising more than in the U.S. and U.K. combined.

Initial sales by 37 companies in Hong Kong have paid average fees of 2.2 percent in 2010, the lowest level since Bloomberg began tracking the data in 1999. While companies going public raised $18.7 billion, 64 percent more than American IPOs, banks earned about 43 percent less underwriting in the territory, the data show.

Goldman Sachs Group Inc., JPMorgan Chase & Co. and Deutsche Bank AG are leading Wall Street in reducing fees and winning sales where Chinese companies go public to help finance the fastest growth among the world’s biggest economies. The firms are facing more competition from mainland banks that have boosted their share by 50 percent since the start of the financial crisis.

We won’t be seeing that here in hurry!

It looks like there’s a bit of capital flight from Greece:

Withdrawals by cash-strapped customers such as Efthymiou, as well as by Greeks moving money out of the country, helped push deposits at the nation’s banks down by 9 percent since the end of 2009.

Business and household deposits in June fell for a sixth straight month to 216.5 billion euros ($277.3 billion) from 238 billion euros at the end of 2009, according to figures from the Bank of Greece.

The reporter, the politicians and the banks are emphasizing the ‘draw-down of savings to offset government payment reduction’ idea, but Greece’s GDP is USD 356-billion. So that’s about 6% of GDP in reduced bank deposits. I vote for capital flight and eagerly await compelling evidence and incisive arguments proving me wrong.

PrefBlog’s Strange Funds Department has come up with another exhibit:

Connor, Clark & Lunn Capital Markets Inc. (the “Manager”) is pleased to announce that a preliminary prospectus for HBanc Capital Securities Trust (the “Fund”) has been filed

The Fund was established to provide investors with high levels of stable, tax-advantaged distributions through exposure to Capital Securities issued by HSBC Holdings plc, a conservatively positioned and strongly capitalized global bank.

CC&L is best known for packaging multi-name Credit Default Swaps as preferred shares and thereby vaporizing a lot of client money. More than once. However, I am confident that the time spent developing and managing these products will be properly accounted for as “experience” in the prospectus for the new fund.

Mayoral candidate Joe Pantalone has presented his vision of doing business in the city:

“I have no problem with people finding loopholes, if they’re good people,” says councillor Joe Pantalone, who spearheaded the moratorium.

“I know Albino well and I can’t say enough about what a good Torontonian he is.”

I have no idea how one gets to be a “good Torontonian”, but presumably it involves cash and being a friend of Joe Pantalone.

The Canadian preferred share market continued to gain today, with both PerpetualDiscounts and FixedResets up 9bp. Volume was good, but volatility was subdued, with the performance highlights table being empty.

PerpetualDiscounts now yield 5.78%, equivalent to 8.09% interest at the standard equivalency factor of 1.4x. Long Corporates now yield 5.3%, so the pre-tax interest equivalent spread is now 280bp, a significant rebound from the 265bp reported at August 31; however, note that in the interim there has been a migration of high-coupon, high-yield issues from PerpetualDiscounts to PerpetualPremiums, which has artificially reduced the yield on the PerpetualDiscount index.

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices

Values are provisional and are finalized monthly
Index Mean
(at bid)
Mod Dur
Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 -0.0944 % 2,034.6
FixedFloater 0.00 % 0.00 % 0 0.00 0 -0.0944 % 3,082.1
Floater 2.73 % 3.24 % 58,756 19.07 3 -0.0944 % 2,196.8
OpRet 4.89 % 3.38 % 102,632 0.24 9 0.1419 % 2,355.2
SplitShare 6.07 % -25.07 % 65,334 0.09 2 0.3361 % 2,318.5
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.1419 % 2,153.6
Perpetual-Premium 5.75 % 5.60 % 136,501 5.54 14 -0.0113 % 1,969.5
Perpetual-Discount 5.70 % 5.78 % 187,584 14.19 63 0.0868 % 1,908.7
FixedReset 5.27 % 3.13 % 273,729 3.35 47 0.0948 % 2,255.5
Performance Highlights
Issue Index Change Notes
No individual gains or losses exceeding 1%!
Volume Highlights
Issue Index Shares
RY.PR.Y FixedReset 107,310 TD crossed 100,000 at 28.15.
Maturity Type : Call
Maturity Date : 2014-12-24
Maturity Price : 25.00
Evaluated at bid price : 27.91
Bid-YTW : 3.25 %
RY.PR.X FixedReset 105,395 TD crossed 100,000 at 28.05.
Maturity Type : Call
Maturity Date : 2014-09-23
Maturity Price : 25.00
Evaluated at bid price : 28.00
Bid-YTW : 3.15 %
RY.PR.I FixedReset 102,885 TD crossed 99,300 at 26.63.
Maturity Type : Call
Maturity Date : 2014-03-26
Maturity Price : 25.00
Evaluated at bid price : 26.75
Bid-YTW : 2.89 %
BNS.PR.O Perpetual-Premium 90,650 TD crossed 50,000 at 25.15; Nesbitt crossed 30,000 at the same price.
Maturity Type : Call
Maturity Date : 2017-05-26
Maturity Price : 25.00
Evaluated at bid price : 25.15
Bid-YTW : 5.63 %
BAM.PR.H OpRet 64,803 RBC crossed two blocks of 25,000 each, both at 25.77.
Maturity Type : Call
Maturity Date : 2010-10-30
Maturity Price : 25.25
Evaluated at bid price : 25.80
Bid-YTW : -1.75 %
NA.PR.O FixedReset 61,154 TD crossed two blocks of 30,000 each, both at 27.83.
Maturity Type : Call
Maturity Date : 2014-03-17
Maturity Price : 25.00
Evaluated at bid price : 27.85
Bid-YTW : 3.28 %
There were 34 other index-included issues trading in excess of 10,000 shares.

One Response to “September 1, 2010”

  1. […] the Seniority Spread) now stands at 270bp, a significant tightening from the 280bp reported on September 1, as PerpetualDiscount yields and long corporate yields made small moves in opposite […]

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