October 5, 2010

The European stress tests are encountering renewed criticism:

The health check, undertaken by the Committee of EuropeanBankingSupervisors (CEBS), tested sovereign debt holdings in short-term trading books but turned a blind eye to the longer-term banking books. Then it emerged that the so-called “gross disclosures” weren’t gross at all. The latest Irish bank bailout has now revealed a third flaw.

The tests were supposed to reassure global investors by showing that systemically important eurozone banks could survive what was perceived as their biggest threat — a sovereign default. But the tests skirted around the Irish situation in two ways. First, Ireland’s banks have failed due to an immense property crash, not a sovereign crisis. Second, the biggest disaster zone — Anglo Irish Bank — was not even stress-tested.

Jerome Kerviel, the SocGen trader who was in the position of a drug mule caught at customs, has been sentenced to three years in jail:

Former Societe Generale (SOGN.PA) trader Jerome Kerviel was sentenced to three years in jail by a Paris court on Tuesday for his role in a trading scandal and ordered to pay the French bank 4.9 billion euros ($6.8 billion).

The verdict came as a victory for SocGen, which always maintained Kerviel acted alone and without the sanction of his managers at the bank. It had sought payment of damages for the money it lost unwinding the trader’s risky market bets in 2008.

The payment to SocGen equates to 3.2 percent of France’s central government deficit for 2010, the GDP of Monaco or 16 percent of the French bank’s market value. Kerviel is currently paid 2,300 euros a month as a technology consultant.

Kerviel was last discussed on PrefBlog on May 3. There is no indication that any of those actually responsible have even been charged.

Moody’s warns on Ireland:

Moody’s Investors Service said Tuesday it may cut Ireland’s debt rating again, citing the increased cost to the government of repairing the stricken banking system, weak economic growth and rising borrowing costs.

A further downgrade could push Ireland’s borrowing costs higher and make it more difficult for the government to meet its debt repayments without seeking help from the European Union’s European Financial Stability Fund.

“Me, too!”, shouts DBRS. The EU bureaucrats will have to take decisive action, as discussed October 1.

Norwegian police are feverishly attempting to make the markets safe for the incompetent:

Two day traders have been arrested by Norwegian police for allegedly cracking an algorithm of U.S. brokerage firm Timber Hill, in order to manipulate the stock prices of three companies listed on the Oslo Stock Exchange.

The two day traders, Svend Egil Larsen and Peder Veiby, have been charged with “market manipulation” and face up to six years in jail if convicted. Timber Hill is a subsidiary of Interactive Brokers and acts as its market maker.

Norwegian police claim that between March 2007 and March 2008, the two traders conducted more than 2,200 purchase and sale orders which were “ not real” and jacked the price of the shares in three Norwegian companies up or down before taking a profit Bottom line: the two day traders outsmarted Timber Hill’s algorithm and made money in the process. The three Norwegian companies were Hafslund, Wilh. Wilhelmsen and Odfjell.

Veiby earned 250,000 Norwegian kroner ($40,698) in the alleged scam while Larsen earned 160,000 Norwegian kroner ($26,056). Timber Hill did not return Securities Technology Monitor’s call seeking comment by press time.

“In our view it is a deliberate manipulation against the computer they’ve been trading against so that the system changed the prices and they were able to earn money,” said Christian Steinberg with the Norwegian National Authority for Investigation and Prosecution of Economic and Environmental Crime in an interview with the Norwegian newspaper Dagens Naeringsliv.

The newpaper report said that Larsen declined to comment and Veiby denied any wrongdoing on the grounds he did “not act with the intent to commit price manipulation in the legal sense.” The alleged scam was uncovered by the Oslo Stock Exchange, which reported it to the Norwegian National Authority and Prosecution of Economic and Environmental Crime.

I don’t see that anything wrong was done at all. Willing buyer, willing seller, arm’s length … what’s the problem? Trades “not real”? I don’t see it. They owned the stock, they had the risk, there was transfer of risk … if Timber Hill can’t programme its algorithms better than that, the individuals charged have done a service to the market by taking capital away from those unable to deploy it with competence. Timber Hill’s only possible excuse is that the amounts were so small (less than $100,000 total profit for a year) that the efect was lost as a rounding error … but that’s a pretty flimsy excuse.

However, according to the Google translation of a story in Norwegian titled Klart dette er greit, the story is more complex than reported above – naturally enough:

The two exploited a weakness in the computer algorithm in the near half a year without Hill Timberlake discovered it. This week in Oslo District Court has been discussed in court if the two ran the illegal market manipulation, or whether they simply were smarter than any other market player.

– It is obvious that what they have done is okay, says Jan Erik Meidell.

Meidell was employee number three when he started in Timber Hill in 1994. He helped build the brokerage house’s position in market making in Europe, and was one of two managers for their trading in Europe. Meidell ruled the so-called share the robots, and he claims to know the Timber Hills algorithms and trading strategies in detail. Today Meidell PhD student at NHH and co-owner of the investment fund NorthSeaGem.

He believes it is “nonsense” that the two persons now sitting accused of having exploited a weakness in Timber Hills algorithms.

– Timber Hill has chosen a strategy that involves risk and acknowledge that it sometimes will lead to losses, “says Meidell to dn.no

– What do you think that people take advantage of the robot’s weakness when the opportunity occasionally arises?

– Sure it’s okay. Whoever is to play, must withstand the roast, “says Meidell.

The most important point is that Timber Hill is fully aware that they can not have full control over all shares always mean Meidell. It is not so important – the overall strategy is in fact profitable strategy for Timber Hill.

– They think that what they lose in one stock, it will win them back in others. Does the strategy in more than 50 percent of cases, so you earn bucks, and it’s just that Timber Hill, says Meidell.

Timber Hill has been absent in the trial which is now in the Oslo City Court, and they have not wanted to respond to Dagens Næringsliv inquiries.

– I think Timber Hills reaction ultimately had been “awesome, you managed to crack our algorithm. Perhaps they had even offered them jobs, “says Meidell.

So .. who knows? However, it does look a little as if the Norwegian regulator is attempting to ensure that incompetent traders are protected, and that the stock market is a nice little place where children play nicely.

Another strong day on heavy volume for the Canadian preferred share market, with PerpetualDiscounts up 30bp and FixedResets tagging along for a 9bp gain.

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 -0.2747 % 2,161.5
FixedFloater 0.00 % 0.00 % 0 0.00 0 -0.2747 % 3,274.5
Floater 2.89 % 3.25 % 75,797 19.15 3 -0.2747 % 2,333.9
OpRet 4.90 % 2.99 % 77,452 0.15 9 0.1982 % 2,369.4
SplitShare 5.92 % -30.42 % 66,814 0.09 2 0.4921 % 2,379.2
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.1982 % 2,166.6
Perpetual-Premium 5.71 % 5.30 % 124,470 5.31 19 -0.0041 % 1,997.9
Perpetual-Discount 5.46 % 5.50 % 220,892 14.68 58 0.2970 % 1,992.2
FixedReset 5.27 % 3.20 % 318,578 3.29 47 0.0863 % 2,260.3
Performance Highlights
Issue Index Change Notes
ELF.PR.G Perpetual-Discount -1.56 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-10-05
Maturity Price : 20.17
Evaluated at bid price : 20.17
Bid-YTW : 5.92 %
BAM.PR.B Floater -1.28 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-10-05
Maturity Price : 16.25
Evaluated at bid price : 16.25
Bid-YTW : 3.25 %
RY.PR.C Perpetual-Discount 1.08 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-10-05
Maturity Price : 22.25
Evaluated at bid price : 22.39
Bid-YTW : 5.20 %
BNA.PR.C SplitShare 1.10 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2019-01-10
Maturity Price : 25.00
Evaluated at bid price : 22.00
Bid-YTW : 6.32 %
IAG.PR.C FixedReset 1.26 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-01-30
Maturity Price : 25.00
Evaluated at bid price : 27.35
Bid-YTW : 3.24 %
MFC.PR.C Perpetual-Discount 1.29 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-10-05
Maturity Price : 19.60
Evaluated at bid price : 19.60
Bid-YTW : 5.80 %
HSB.PR.C Perpetual-Discount 1.34 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-10-05
Maturity Price : 23.85
Evaluated at bid price : 24.12
Bid-YTW : 5.31 %
Volume Highlights
Issue Index Shares
BNS.PR.N Perpetual-Discount 67,860 Desjardins bought 10,000 from National at 24.51.
Maturity Type : Limit Maturity
Maturity Date : 2040-10-05
Maturity Price : 24.16
Evaluated at bid price : 24.38
Bid-YTW : 5.38 %
TD.PR.K FixedReset 54,850 TD crossed 40,000 at 28.08.
Maturity Type : Call
Maturity Date : 2014-08-30
Maturity Price : 25.00
Evaluated at bid price : 28.06
Bid-YTW : 3.22 %
BNS.PR.M Perpetual-Discount 44,644 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-10-05
Maturity Price : 21.39
Evaluated at bid price : 21.69
Bid-YTW : 5.18 %
BNS.PR.X FixedReset 41,425 TD bought 12,600 from anonymous at 27.55.
Maturity Type : Call
Maturity Date : 2014-05-25
Maturity Price : 25.00
Evaluated at bid price : 27.51
Bid-YTW : 3.22 %
NA.PR.M Perpetual-Premium 39,120 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-06-14
Maturity Price : 25.00
Evaluated at bid price : 26.60
Bid-YTW : 5.05 %
BNS.PR.K Perpetual-Discount 37,910 TD crossed 10,000 at 22.80.
Maturity Type : Limit Maturity
Maturity Date : 2040-10-05
Maturity Price : 22.47
Evaluated at bid price : 22.65
Bid-YTW : 5.30 %
There were 49 other index-included issues trading in excess of 10,000 shares.

One Response to “October 5, 2010”

  1. […] of algorithms, the two Norwegians discussed October 5 have been convicted on charges of smart trading: Two Norwegian day traders have been handed […]

Leave a Reply

You must be logged in to post a comment.