September 2, 2011

The SEC has a new policy: Prove you’re not a crook!:

U.S. securities regulators have taken the unprecedented step of asking high-frequency trading firms to hand over the details of their trading strategies, and in some cases, their secret computer codes.

The requests for proprietary code and algorithm parameters by the Financial Industry Regulatory Authority (FINRA), a Wall Street brokerage regulator, are part of investigations into suspicious market activity, said Tom Gira, executive vice president of FINRA’s market regulation unit.

“It’s not a fishing expedition or educational exercise. It’s because there’s something that’s troubling us in the marketplace,” he said in an interview.

It has alarmed some traders who are afraid their “secret sauce” — intellectual property sometimes developed over years and at great cost — could get into the wrong hands, especially when SEC and FINRA examiners leave for the private sector.

Having the code and insider knowledge of what works and what doesn’t will help the employment prospects of regulatory personnel, which is of course the whole purpose of regulation.

Now that the IMF and the ECB hold a lot of Greek bonds, there’s unprecedented concern about bondholder rights:

The International Monetary Fund opposes European plans to force Greece to put up collateral in its second rescue, said four people with direct knowledge of the matter.

The use of collateral, a concession to win Finland’s backing for 109 billion euros ($155 billion) of loans pledged by euro leaders in July, would deny the IMF priority creditor status and violate Greek bondholders’ rights, said the people, who declined to be named because the talks are in progress.

IMF objections threaten to snag Europe’s crisis-management effort after aid of 256 billion euros for Greece, Ireland and Portugal failed to restore order.

Greece’s predicament deepened today with the forecast of a worsening economic contraction and a two-week suspension of a European-IMF economic review mission to give the government time to plot a pro-growth course. Two-year Greek yields rose today above 47 percent, a euro-era record.

Banking in the US is more interesting than in Canada:

Mortgage rates near historic lows have sparked a refinancing boom that has U.S. lenders struggling to handle the surge.

The lending logjam extends to the nation’s biggest banks, which fired thousands of mortgage workers after interest rates rose in November through February, chilling refinancing demand. Now, the time needed to close a loan has as much as doubled to 60 days, according to Wilson and other bankers, and lenders are holding some mortgage rates higher than they could be to slow the torrent of customers, data show.

Refinancing applications are up 83 percent from this year’s low in February, according to an index compiled by the Mortgage Bankers Association, a Washington-based trade group. After topping 5 percent that month, the average rate on 30-year fixed loans fell two weeks ago to 4.15 percent, the lowest in surveys dating back to 1971 by Freddie Mac, the second-largest U.S. mortgage-finance company.

How about a double dip?

The Labor Department said U.S. payrolls were unchanged last month, the weakest reading since September 2010 and worse than the median economist forecast that called for growth of 65,000. Stocks sank and Treasuries surged in August as investors bet that the odds of a recession had increased. Markets reversed course toward the end of the month amid speculation the Federal Reserve would act to spur growth.

There’s more!

Bearish bets against the S&P 500 rose to a nine-month high as short sellers increased speculation stocks may decline. The proportion of S&P 500 shares outstanding sold short on Aug. 29 rose to 3.03 percent, the most since the end of November and up from 2.37 percent at the beginning of August, according to New York-based Data Explorers, which provides research on short sales and stock lending. Short selling of the gauge reached a three-year high of 5.52 percent in August 2008, before the index sank to a 12-year low in March 2009.

The yield curve, or the difference between two- and 30-year Treasury debt, narrowed to 312 basis points, the least in a year, as the jobless data bolstered the view that Fed Chairman Ben S. Bernanke will be inclined to take addition steps beyond the two previous rounds of debt buying, known as quantitative easing, or QE.

and even more!

Treasuries rose, pushing 10-year note yields below 2 percent, as the government’s payrolls report showed no jobs were added in August, stoking speculation that the Federal Reserve will increase its purchases of longer- maturity debt.

U.S. 30-year yields fell to the lowest in since January 2009 as U.S. employment data were the weakest reading since September 2010.

The 10-year note yield fell 14 basis points, or 0.14 percentage point, to 1.99 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. The price of the 2.125 percent security maturing in August 2021 rose 1 9/32, or $12.81 per $1,000 face amount, to 101 8/32. The yield touched 1.9806 percent.

Thirty-year bond yields fell 20 basis points to 3.30 percent and two-year note yields rose two basis points to 0.20 percent.

20bp on thirty-year paper? That’s like about maybe three bucks on price!

I think that at some point the regulators are going to have to do something about the more patronizing manipulation rules, by which I mean “repeal”. Tony Ianno got in trouble for high-closing:

In agreeing to the settlement, he now faces a range of sanctions from the regulator, including a five-year cease trading order that only allows him to conduct limited trading through his Registered Retirement Savings Plan.

He also faces a five-year ban on serving as a director or officer of a publicly-traded company and is also prohibited from serving as a company promoter during that time.

Additionally, Mr. Ianno has agreed to pay $50,000 toward the costs of the OSC investigation in addition to another voluntary payment of $50,000, OSC Senior Litigation Counsel Alexandra Clark Alexandra Clark told the hearing

I’m glad the extra $50,000 was voluntary, and not extorted from him or anything like that.

In March 2010, the OSC alleged the one-time parliamentarian broke securities laws by artificially inflating the share price of Covalon Technologies Ltd., a junior biotechnology firm. Mr. Ianno had purchased roughly 4 million of Covalon’s common shares in transactions worth $7.6-million at various times in 2007 and 2008.

The OSC has said the lion’s share of Mr. Ianno’s share purchases were made on margin, meaning they were purchased using credit provided by various brokerage firms. Those loans were then secured against the value of the shares.

According to the OSC’s original statement of allegations, Mr. Ianno purportedly engaged in inappropriate trading of Covalon shares as he faced some 27 margin calls from eight different brokerages.

Specifically, he was accused of making frequent end-of-day purchases through multiple brokerage accounts that often resulted in increases in Covalon’s stock price.

Well, the “multiple brokerage accounts” part is something of a red flag, but high-closing was always hard to police and nowadays it’s getting worse. You can expect professionals to know the rules, but now there are hundreds of thousands of retail guys with market access that’s only very lightly filtered.

High closing has no effect on the valuation of the stock and no effect on the long-term price of the stock. By taking it so seriously, the regulators are pandering to momentum players when in fact their efforts should be directed towards protecting value investors. If you want to do something about high closing, then (a) stop using closing prices for margin and valuation purposes and use the closing quote and (b) give retail access to algorithms so that if somebody puts in a high bid at 3:59:55, there’s a good chance it will be executed at 3:59:55.015

There were no new fillings on the YLO MTN buyback today, but the usual basket of preferred shares was reported by the TMX as insider purchases. There has been no response from the company to my inquiry regarding their apparent exceeding of the maximum annual limit on their NCIB.

The Canadian preferred share market was fairly quiet in advance of the long weekend, with PerpetualDiscounts up 2bp, FixedResets down 1bp and DeemedRetractibles winning 8bp. Volatility was low. Volume was almost non-existent.

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 -0.2089 % 2,158.2
FixedFloater 0.00 % 0.00 % 0 0.00 0 -0.2089 % 3,245.9
Floater 3.00 % 3.32 % 58,582 18.86 3 -0.2089 % 2,330.3
OpRet 4.82 % 2.93 % 67,825 1.68 8 0.2226 % 2,447.6
SplitShare 5.37 % 0.07 % 57,519 0.49 4 -0.1555 % 2,494.9
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.2226 % 2,238.1
Perpetual-Premium 5.63 % 4.75 % 129,009 1.11 16 0.0406 % 2,111.3
Perpetual-Discount 5.30 % 5.37 % 106,732 14.82 14 0.0150 % 2,240.6
FixedReset 5.15 % 3.14 % 214,693 2.66 59 -0.0129 % 2,327.7
Deemed-Retractible 5.06 % 4.67 % 252,635 7.89 46 0.0822 % 2,192.3
Performance Highlights
Issue Index Change Notes
HSB.PR.C Deemed-Retractible -1.10 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.06
Bid-YTW : 5.21 %
ELF.PR.F Perpetual-Discount 1.00 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-09-02
Maturity Price : 22.84
Evaluated at bid price : 23.13
Bid-YTW : 5.81 %
BMO.PR.K Deemed-Retractible 1.43 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-11-25
Maturity Price : 25.50
Evaluated at bid price : 26.20
Bid-YTW : 4.29 %
Volume Highlights
Issue Index Shares
RY.PR.A Deemed-Retractible 66,626 RBC crossed 50,000 at 24.97.
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.95
Bid-YTW : 4.51 %
RY.PR.D Deemed-Retractible 57,951 RBC crossed 50,000 at 24.75.
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.75
Bid-YTW : 4.66 %
IFC.PR.C FixedReset 42,275 Recent new issue.
Maturity Type : Call
Maturity Date : 2016-09-30
Maturity Price : 25.00
Evaluated at bid price : 25.03
Bid-YTW : 4.23 %
CM.PR.J Deemed-Retractible 34,765 National crossed 20,000 at 25.10.
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.02
Bid-YTW : 4.56 %
SLF.PR.H FixedReset 34,400 Recent new issue.
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.81
Bid-YTW : 3.98 %
SLF.PR.D Deemed-Retractible 33,180 Desjardins crossed 16,000 at 21.90; Scotia crossed 10,000 at 21.89.
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.88
Bid-YTW : 6.07 %
There were 13 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
BAM.PR.R FixedReset Quote: 25.61 – 25.96
Spot Rate : 0.3500
Average : 0.2638

Maturity Type : Limit Maturity
Maturity Date : 2041-09-02
Maturity Price : 23.36
Evaluated at bid price : 25.61
Bid-YTW : 4.10 %

BAM.PR.J OpRet Quote: 26.50 – 26.98
Spot Rate : 0.4800
Average : 0.3967

Maturity Type : Soft Maturity
Maturity Date : 2018-03-30
Maturity Price : 25.00
Evaluated at bid price : 26.50
Bid-YTW : 4.53 %

HSB.PR.C Deemed-Retractible Quote: 25.06 – 25.31
Spot Rate : 0.2500
Average : 0.1823

Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.06
Bid-YTW : 5.21 %

PWF.PR.O Perpetual-Premium Quote: 25.64 – 26.00
Spot Rate : 0.3600
Average : 0.2939

Maturity Type : Call
Maturity Date : 2018-10-31
Maturity Price : 25.00
Evaluated at bid price : 25.64
Bid-YTW : 5.49 %

BNS.PR.Z FixedReset Quote: 24.90 – 25.44
Spot Rate : 0.5400
Average : 0.4776

Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.90
Bid-YTW : 3.41 %

TRP.PR.C FixedReset Quote: 25.87 – 26.17
Spot Rate : 0.3000
Average : 0.2379

Maturity Type : Limit Maturity
Maturity Date : 2041-09-02
Maturity Price : 23.47
Evaluated at bid price : 25.87
Bid-YTW : 3.14 %

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