PrefBlog

Assiduous Readers will recall that MAPF’s reported performance for December was measurably impacted by a bad closing quote on SLF.PR.E: the quote was 19.91-60, 2×27.

I noted that I had sent an email of inquiry to the TMX regarding this quote; they have finally answered (it only took ten days and one follow-up!). My eMail is in reguar font; the TMX’s responses are in italics:

i) Who is the market-maker for this security?

W.D. Latimer Co. Ltd.

Not the world’s most plugged-in dealer.

ii) Will the TMX be investigating the circumstances that led to the wide spread on this closing quotation?

The Quote widened due to a couple of bids being cancelled for a mere 7 seconds prior to the close.

So here the TMX is saying there is nothing wrong or unusual with a latency of 7,000 milliseconds, As long ago as 2007, Reuters reported:

“The standard now is sub-one millisecond,” said Philadelphia Stock Exchange CEO Sandy Frucher. “If you get faster than sub-one millisecond you are trading ahead.”

About eighteen months ago, the standard for executing a trade was around five milliseconds, he said. A millisecond is one-thousandth of a second.

I think we can conclude that there was plenty of time for WDLatimer to respond to the market, if they had felt like it.

iii) Will the TMX be announcing the results of such an investigation?

See ii)

What a great investigation that was.

iv) Will the TMX be implementing any sanctions against the market makerfor this security?

No. TSX Market Making Rules require Market Makers to monitor spreads and react in a reasonable time frame when a spread increases beyond an agreed upon spread goal. A 7 second time frame particularily right at the close would not warrant any sanctions. Market Makers are monitored for performance on a monthly basis in terms of Average Time Weighted Spread as compared to an agreed upon Spread Goal, and also for number of Spread Goal violations per month and average time of those violations. A habit of violating this performance parameters would certainly be caught and addressed.

‘Trust us! We’re the Exchange!’

In response, I have sent the following eMail to the TSX:

Thank you for your reply. It raises the following further questions:

i) You refer to the the time span of the closing quote for this issue as being “a mere seven seconds”, and claim that Market Makers are required to react in a “reasonable time frame when a spread increases beyond an agreed upon spread goal”. It is my understanding that seven seconds is sufficient time for an algorithm to analyze and react to thousands of such situations.

a) What is the current TSX standard for “reasonable” in this context?

b) When was the TSX Standard for “reasonable” last reviewed?

c) What is the “spread goal” for SLF.PR.E

ii) You deprecate the importance of closing quotations with your statement “A 7 second time frame particularily right at the close would not warrant any sanctions.”

a) Which times during the trading day are considered most important by the TSX in assessing Market Maker performance, and how does the importance of these times compare to the importance of the close?

b) As you may be aware, the CICA requires reporting in financial statements of the valuation of Funds according to the closing quote. Does the TSX take a view on the appropriateness of using the close, given its apparent deprecation when monitoring Market Maker performance?

iii) You claim that “Market Makers are monitored for performance on a monthly basis in terms of Average Time Weighted Spread as compared to an agreed upon Spread Goal, and also for number of Spread Goal violations per month and average time of those violations. A habit of violating this performance parameters would certainly be caught and addressed.”

a) Where are the results of the monitoring process published?

b) How does the Average Time Weighted Spread take account of the reduced importance of quotations near the close?

c) How many violations of the Market Maker performance parameters were caught and addressed in calendar 2010?

Thank you for your attention to this matter.

This entry was posted on Thursday, January 13th, 2011 at 3:42 pm and is filed under Miscellaneous News. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.