Stub quotes will be butted out:
NYSE Euronext, Nasdaq OMX Group Inc. and Bats Global Markets sought permission from regulators yesterday to eliminate stub quotes, or bids and offers as low as pennies or as high as thousands of dollars provided by market makers that were blamed for worsening the May 6 crash.
…
Stub quotes are placeholders provided by market makers at prices as low as 1 cent to satisfy a regulatory obligation to submit both bids and offers. Transactions aren’t meant to occur at those levels.
I don’t understand why stub quotes were ever allowed in the first place. As some HFT firms have pointed out:
In exchange for meeting stricter obligations, market makers are generally given advantages over other market participants, which act like subsidies,” RGM, Hudson River, Allston and Quantlab said in their letter. “These advantages have typically involved preferential access to the markets, lower fees and informational advantages. These advantages come at a substantial cost for all investors as they degrade competition and raise barriers to entry for new participants.”
Why market makers would be permitted to pay for these presumably valuable privileges with stub quotes is quite beyond me.
The pointless nature of financial journalism was well illustrated by two stories published back to back. The first was Fed Will Retain Policy on Assets, Low-Rate Pledge, Survey Shows:
The Federal Reserve next week is likely to affirm its pledge to keep interest rates low for an “extended period” and maintain the floor on its holdings of securities, say economists surveyed by Bloomberg News.
The Fed’s Open Market Committee at its Sept. 21 meeting will hold off from expanding the balance sheet by purchasing securities, according to 60 of 64 analysts surveyed Sept. 16-17. Fifty-four of 63 economists said the Fed will leave unchanged a sentence saying high unemployment and low inflation warrant “exceptionally low” rates for an “extended period.”
… and the second was Treasury Notes Gain on Bets Fed’s Statement Will Signal More Accommodation:
Treasury 10-year notes rose for the first time in four weeks as traders speculated the Federal Reserve will be more accommodative in its policy statement next week as the economic recovery showed signs of stalling.
A rally in two-year notes pushed yields down this week the most since May after the central bank bought shorter-maturity government debt and as investors bet that Japan’s purchases of securities will favor the front end of the U.S. yield curve after it sold the yen to weaken its currency. Notes climbed before the Sept. 21 Fed meeting as the annual rate of inflation excluding food and energy stayed at a 44-year low.
There’s a negative CDS basis in bank bonds:
Gaps between credit-default swaps and bonds have widened to 25 basis points from less than 2 basis points about three months ago, according to Citigroup Inc. Pimco, the manager of the world’s largest bond fund is finding as much as 1 percent of extra yield even after paying to insure bank debt, said Mark Kiesel, a managing director at the Newport Beach, California- based firm.
A rally that started in June may gain momentum as the divergence between swaps and yields gives investors extra incentive to own corporate debt. The increase in the so-called negative basis is attracting buyers that seek to profit by buying the debt while also purchasing credit swaps.
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The 100-basis-point gaps Pimco is identifying in bank bonds and 25 basis points in the broader market compare with the average difference of more than 250 basis points after the bankruptcy of Lehman Brothers Holdings Inc. two years ago, just before bonds posted a record rally. The all-time wide gaps emerged as credit markets seized up, causing bond spreads to soar while demand for swap protection failed to keep up.“When capital is scarce, the basis becomes more negative,” said Alberto Gallo, a New York-based strategist at Goldman Sachs Group Inc. He said the basis should narrow as monetary policy and regulation reduce risk in the financial system and stabilize funding costs.
Negative-basis CDS spreads were discussed in Canadian Bond Liquidity Premia
I have sent the following communication to Canada Post and True North Public Affairs, where James Roche, Chairman of the Canada Post Foundation for Mental Health, has his day-job:
Sirs,
One of your clerks advised me that you were “collecting for mental health” today while I was purchasing stamps and requested a donation.
I strongly object to being importuned by beggars while going about my business and wish to advise you that I will have my first class mail serviced by your competitors in future.
I have often observed that precious little do-gooders tend to behave as thugs and therefore have a question: do you make it clear to your front-line staff that participation in this disgraceful exhibition of poor manners is entirely voluntary and there will be no repercussions on those who do not wish to humiliate themselves by begging? Or are they forced to participate as a condition of employment?
Sincerely,
Beggars! It’s enough to make a strong man go postal!
Hellzapoppin’ on the Canadian preferred share market today, with PerpetualDiscounts up 55bp and FixedResets gaining 12bp on heavy volume.
| HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly |
|||||||
| Index | Mean Current Yield (at bid) |
Median YTW |
Median Average Trading Value |
Median Mod Dur (YTW) |
Issues | Day’s Perf. | Index Value |
| Ratchet | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.6278 % | 2,108.1 |
| FixedFloater | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.6278 % | 3,193.5 |
| Floater | 2.89 % | 3.33 % | 74,914 | 18.92 | 3 | 0.6278 % | 2,276.2 |
| OpRet | 4.87 % | -0.20 % | 85,589 | 0.19 | 9 | -0.4130 % | 2,379.4 |
| SplitShare | 5.87 % | -27.57 % | 63,073 | 0.09 | 2 | -0.0809 % | 2,398.6 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.4130 % | 2,175.8 |
| Perpetual-Premium | 5.68 % | 5.29 % | 137,820 | 5.35 | 14 | 0.1649 % | 1,992.1 |
| Perpetual-Discount | 5.51 % | 5.60 % | 194,338 | 14.47 | 63 | 0.5511 % | 1,974.1 |
| FixedReset | 5.22 % | 2.96 % | 294,601 | 3.30 | 47 | 0.1158 % | 2,276.4 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| BAM.PR.I | OpRet | -4.15 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2010-10-20 Maturity Price : 25.50 Evaluated at bid price : 25.86 Bid-YTW : -13.04 % |
| BNS.PR.K | Perpetual-Discount | 1.01 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-09-20 Maturity Price : 22.86 Evaluated at bid price : 23.08 Bid-YTW : 5.27 % |
| BAM.PR.K | Floater | 1.04 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-09-20 Maturity Price : 15.52 Evaluated at bid price : 15.52 Bid-YTW : 3.38 % |
| PWF.PR.K | Perpetual-Discount | 1.04 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-09-20 Maturity Price : 22.15 Evaluated at bid price : 22.30 Bid-YTW : 5.63 % |
| RY.PR.D | Perpetual-Discount | 1.07 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-09-20 Maturity Price : 21.49 Evaluated at bid price : 21.81 Bid-YTW : 5.19 % |
| CU.PR.B | Perpetual-Premium | 1.10 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2010-10-20 Maturity Price : 25.50 Evaluated at bid price : 25.69 Bid-YTW : 0.53 % |
| PWF.PR.F | Perpetual-Discount | 1.13 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-09-20 Maturity Price : 23.01 Evaluated at bid price : 23.29 Bid-YTW : 5.71 % |
| BMO.PR.J | Perpetual-Discount | 1.13 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-09-20 Maturity Price : 22.17 Evaluated at bid price : 22.30 Bid-YTW : 5.09 % |
| PWF.PR.L | Perpetual-Discount | 1.15 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-09-20 Maturity Price : 22.72 Evaluated at bid price : 22.90 Bid-YTW : 5.65 % |
| POW.PR.C | Perpetual-Discount | 1.16 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2012-01-05 Maturity Price : 25.00 Evaluated at bid price : 25.35 Bid-YTW : 5.56 % |
| BAM.PR.B | Floater | 1.16 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-09-20 Maturity Price : 15.73 Evaluated at bid price : 15.73 Bid-YTW : 3.33 % |
| GWO.PR.H | Perpetual-Discount | 1.16 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-09-20 Maturity Price : 21.75 Evaluated at bid price : 21.75 Bid-YTW : 5.60 % |
| BNS.PR.M | Perpetual-Discount | 1.19 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-09-20 Maturity Price : 21.95 Evaluated at bid price : 22.06 Bid-YTW : 5.17 % |
| BNS.PR.L | Perpetual-Discount | 1.29 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-09-20 Maturity Price : 21.95 Evaluated at bid price : 22.06 Bid-YTW : 5.17 % |
| HSB.PR.D | Perpetual-Discount | 1.29 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-09-20 Maturity Price : 23.32 Evaluated at bid price : 23.55 Bid-YTW : 5.32 % |
| MFC.PR.C | Perpetual-Discount | 1.30 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-09-20 Maturity Price : 19.41 Evaluated at bid price : 19.41 Bid-YTW : 5.84 % |
| HSB.PR.C | Perpetual-Discount | 1.63 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-09-20 Maturity Price : 23.45 Evaluated at bid price : 23.70 Bid-YTW : 5.39 % |
| RY.PR.A | Perpetual-Discount | 1.92 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-09-20 Maturity Price : 22.11 Evaluated at bid price : 22.25 Bid-YTW : 5.05 % |
| POW.PR.D | Perpetual-Discount | 2.05 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-09-20 Maturity Price : 22.66 Evaluated at bid price : 22.85 Bid-YTW : 5.57 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| BNS.PR.Q | FixedReset | 212,890 | TD crossed 65,000 at 26.70; RBC crossed two blocks of 64,800 each, both at 26.65. YTW SCENARIO Maturity Type : Call Maturity Date : 2013-11-24 Maturity Price : 25.00 Evaluated at bid price : 26.65 Bid-YTW : 2.98 % |
| CM.PR.G | Perpetual-Discount | 78,219 | RBC bought 12,600 from Scotia at 24.64; TD crossed 29,200 at 24.61. Desjardins bought 12,000 from Scotia at 24.63. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-09-20 Maturity Price : 24.34 Evaluated at bid price : 24.62 Bid-YTW : 5.56 % |
| MFC.PR.B | Perpetual-Discount | 69,698 | RBC sold 11,100 to anonymous at 19.98; ITG Canada (who?) crossed 13,500 at 20.08. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-09-20 Maturity Price : 20.00 Evaluated at bid price : 20.00 Bid-YTW : 5.86 % |
| RY.PR.I | FixedReset | 59,500 | TD crossed 50,000 at 26.73. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-03-26 Maturity Price : 25.00 Evaluated at bid price : 26.70 Bid-YTW : 3.00 % |
| RY.PR.A | Perpetual-Discount | 55,145 | Scotia crossed 14,000 at 21.81. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-09-20 Maturity Price : 22.11 Evaluated at bid price : 22.25 Bid-YTW : 5.05 % |
| SLF.PR.F | FixedReset | 51,400 | Nesbitt crossed 49,900 at 27.65. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-07-30 Maturity Price : 25.00 Evaluated at bid price : 27.60 Bid-YTW : 3.09 % |
| There were 68 other index-included issues trading in excess of 10,000 shares. | |||
What, no comment on FixedResets breaking the 3% median YTW barrier? Woot, party time!
But seriously, all this autocorrelation of returns in preferred shares is starting to make a bit of a mockery of the efficient market hypothesis. Sure, we expect some positive autocorrlation in the TXPR index due to asynchronous trading but not to this extent. And as for your data, it uses bid prices rather than last trade prices so it shouldn’t be affected by this at all.
I postulate that the personality types attracted to technical analysis are opposite to those attracted to preferreds. So the trending in this market may be caused by an insufficient fraction of participants who believe in trending (who would then arbitrage it away).
Good thing no Technicians are reading this or we’d never hear the end of it.
What, no comment on FixedResets breaking the 3% median YTW barrier?
Posted while you were still typing! See FixedReset Index YTW Now Through 3.00% … but mind you, I’m posting this comment after your post on that thread!
But seriously, all this autocorrelation of returns in preferred shares is starting to make a bit of a mockery of the efficient market hypothesis.
I’ve been mocking the efficient market hypothesis for 18 years!
So the trending in this market may be caused by an insufficient fraction of participants who believe in trending (who would then arbitrage it away).
Maybe. My feeling is that the number of Technicians who believe in momentum is balanced by the ones who believe in reversion.
I’ve been mocking the efficient market hypothesis for 18 years!
Well yes and no… I believe in a weaker form of market efficiency in which unusual returns are possible but their capacity (in terms of how much money you can throw at it) is proportional to the amount of work and ingenuity required to achieve them. Clearly you achieve unusual returns but you also put in a tremendous amount of work. The missing piece of info in the equation is what is the capacity of your strategy? If the capacity is within one order of magnitude of the current AUM in your fund then your returns would not violate my version of the EMH.
On the other hand it would seem like trend following the preferred market would require comparatively little work and ingenuity and the capacity would presumably be larger than that of your relative value arbitrage approach.
Of course the real winners are the investors in your fund who get the unusual returns for zero work!
The EMH has never been able to explain market making. Market Makers llook to make 12-20% ROE year after year … one man’s market impact costs are another man’s market making gains.
If the capacity is within one order of magnitude of the current AUM in your fund then your returns would not violate my version of the EMH.
My guess is that capacity is well in excess of that … at least $50-million, probably over $100-million, and after that it’s just guessing at this point. I’d better get cracking on the sales to prove you wrong, eh?
The EMH has never been able to explain market making. Market Makers llook to make 12-20% ROE year after year … one man’s market impact costs are another man’s market making gains.
Indeed, another perfect example that if you “put work into it” you should be able to exceed normal market returns. But it’s just common sense that you should be compensated for your work and entrepreneurship. It’s no different than any other business. You expect to get a better ROE from a business you run than from a passive investment, otherwise why bother. Market making has small capacity to effort ratio, hence the ROE has to high to compensate.
But what shouldn’t exist are either opportunities that require virtually no work, or opportunities that allow excess returns on huge amounts of capital with moderate amounts of work.
So yes, pure EMH believers are just as silly as those who don’t understand that good investment opportunities have limited capacity.
Anyway, my sense is there’s plenty of room to scale your fund easily into the 10-20MM without harming returns. But certainly by the 100MM range I would expect to see a noticeable reduction in excess returns. But I’ll gladly standby as you prove me wrong!
I’m quite curious as to how much capital you manage outside the fund in managed accounts (I don’t expect an answer!). Because if I crunch the numbers it sure seems to me like you’re underpaid!