A Financial Times article titled Flash Crash Threatens to Return with a Vengeance leads me to a paper by Dave Cliff and Linda Northrop titled The Global Financial Markets: an Ultra Large Scale Systems Perspective. The jargon in the abstract is priceless:
We argue here that, in recent years, the global financial markets have become a complex adaptive ultra-large-scale socio-technical system-of-systems, and that this has important consequences for how the financial markets should be engineered and managed in future. The very high degree of interconnectedness in the global markets means that entire trading systems, implemented and managed separately by independent organizations, can rightfully be considered as significant constituent entities in the larger global super-system: that is, the global markets are an instance of what is known in the engineering literature as a system-of-systems (SoS). The sheer number of human agents and computer systems connected within the global financial-markets SoS is so large that it is an instance of an ultra-large-scale system, and that largeness-of-scale has significant effects on the nature of the system. Overall system-level behaviour may be difficult to predict, for two reasons. First, the constituent (sub-) systems may change their responses over time, either because they involve human agents as key “components” within the system (that is, the system is actually socio-technical), or because they involve software systems that evolve over time and “learn from experience” (that is, the system is adaptive). Second, even when given perfect knowledge of the constituent systems that combine to make up the SoS, the overall system-level behaviour may be difficult or impossible to predict; that is, the SoS may exhibit emergent behaviour. For these reasons, the global financial markets SoS can also rightly be considered as a complex adaptive system. Major failures in the financial markets SoS can now occur at super-human speeds, as was witnessed in the “Flash Crash” of May 6th 2010. Events such as the Flash Crash may become more commonplace in future, unless lessons are learned from other fields where complex adaptive socio-technical systems of systems have to be engineered for high-integrity, safety-critical applications. In this document we review the literature on failures in risky technology and high-integrity approaches to safety-critical SoS engineering. We conclude with an argument that, in the specific case of the global financial markets, there is an urgent need to develop major national strategic modelling and predictive simulation capabilities, comparable to national-scale meteorological monitoring and modelling capabilities. The intent here is not to predict the price-movements of particular financial instruments or asset classes, but rather to provide test-rigs for principled evaluation of systemic risk, estimating probability density functions over spaces of possible outcomes, and thereby identifying potential “black swan” failure modes in the simulations, before they occur in real life, by which time it is typically too late.
To my gratification, the authors highlight the inadequacy of the official SEC report:
The SEC/CFTC report was met with very mixed responses. Many readers concluded that it left more questions unanswered than resolved, and a subsequent much more detailed analysis of the time-series “tapes” of market event data conducted by Nanex Corp.1 offered an alternative story that many market practitioners found more plausible: see Meerman et al. (2010) and Easley et al. (2011) for further details of the extent to which the CFTC/SEC version of events is disputed.
The times they are a-changin’! The Meerman reference is:
M. Meerman, et al., (2011). Money and Speed: Inside the Black Box. Documentary produced by VPRO (Dutch public broadcaster), available as an iPad application. http://itunes.apple.com/us/app/money-speed-inside-black-box/id424796908?mt=8&ls=1#
I don’t recall ever seeing a citation of an iPad application in a scholarly text before! The Easely paper has been previously mocked on PrefBlog.
The Hungarians have nerve, whatever else might be the case!
Hungary’s chances of obtaining a bailout receded after lawmakers approved new central bank regulations that prompted the International Monetary Fund and the European Union to break off talks this month.
Parliament in Budapest stripped central bank President Andras Simor of his right to name deputies, expanded the rate- setting Monetary Council and created a position for a third vice president. A separate law approved earlier today makes it possible to demote the central bank president if the institution is combined with the financial regulator.
Hungary received its second sovereign credit downgrade to junk in a month when Standard and Poor’s followed Moody’s Investors Service in taking the country out of its investment grade category on Dec. 21. The forint has fallen 15 percent against the euro since June 30, making it the world’s worst- performing currency in the period.
…
The new central bank regulations “seriously harm” the country’s national interests, allow for political intervention in monetary policy and threaten economic stability, the Magyar Nemzeti Bank said today. The laws have led to the “indefinite postponement” of talks on a financial aid package, the central bank said in a statement posted on its website.While a possible Hungarian agreement with the IMF and the EU on an assistance package would boost confidence, the Cabinet can do without it, [Prime Minister Viktor] Orban told MR1 radio in an interview today.
“If we have an IMF safety net, then we face the coming period with greater self-confidence and greater security,” Orban said. “If we don’t reach an agreement, we’ll still stand on our own feet.”
It’s always helpful to have your own currency that can be devalued at will!
It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts losing 24bp, FixedResets up 5bp and DeemedRetractibles winning 27bp. Volatility was reasonable. Volume was pathetic.
PerpetualDiscounts now yield 5.12%, equivalent to 6.66% interest at the standard equivalency factor of 1.3x. Long Corporates now yield 4.6%, so the pre-tax interest-equivalent spread (also called the Seniority Spread) is now about 205bp, unsurprisingly unchanged from the figure reported December 28.
And that’s it for another year!
| 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 | 0.3040 % | 2,093.3 |
| FixedFloater | 4.87 % | 4.62 % | 38,521 | 17.04 | 1 | 0.0000 % | 3,163.2 |
| Floater | 3.18 % | 3.45 % | 68,894 | 18.62 | 3 | 0.3040 % | 2,260.2 |
| OpRet | 4.94 % | 1.68 % | 64,206 | 1.37 | 6 | 0.1164 % | 2,470.5 |
| SplitShare | 5.44 % | 2.10 % | 71,194 | 0.94 | 4 | 0.0257 % | 2,572.8 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.1164 % | 2,259.1 |
| Perpetual-Premium | 5.48 % | -4.07 % | 82,902 | 0.09 | 18 | 0.1124 % | 2,190.1 |
| Perpetual-Discount | 5.23 % | 5.12 % | 105,854 | 14.88 | 12 | -0.2374 % | 2,328.0 |
| FixedReset | 5.08 % | 2.85 % | 207,032 | 2.38 | 64 | 0.0538 % | 2,359.9 |
| Deemed-Retractible | 4.99 % | 3.70 % | 191,490 | 2.92 | 46 | 0.2664 % | 2,254.6 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| IAG.PR.A | Deemed-Retractible | -1.93 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.35 Bid-YTW : 5.49 % |
| CIU.PR.A | Perpetual-Discount | -1.57 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-12-30 Maturity Price : 24.17 Evaluated at bid price : 24.45 Bid-YTW : 4.74 % |
| SLF.PR.A | Deemed-Retractible | 1.01 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.07 Bid-YTW : 6.38 % |
| MFC.PR.C | Deemed-Retractible | 1.50 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.66 Bid-YTW : 6.37 % |
| RY.PR.H | Deemed-Retractible | 1.69 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2013-05-24 Maturity Price : 26.00 Evaluated at bid price : 27.15 Bid-YTW : 2.59 % |
| MFC.PR.B | Deemed-Retractible | 2.05 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.95 Bid-YTW : 6.36 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| BNS.PR.J | Deemed-Retractible | 27,101 | TD crossed 17,800 at 26.30. YTW SCENARIO Maturity Type : Call Maturity Date : 2013-10-29 Maturity Price : 25.00 Evaluated at bid price : 26.23 Bid-YTW : 2.25 % |
| BMO.PR.L | Deemed-Retractible | 26,079 | TD crossed 25,000 at 27.20. YTW SCENARIO Maturity Type : Call Maturity Date : 2013-05-25 Maturity Price : 26.00 Evaluated at bid price : 27.20 Bid-YTW : 2.60 % |
| TD.PR.O | Deemed-Retractible | 15,464 | YTW SCENARIO Maturity Type : Call Maturity Date : 2012-01-29 Maturity Price : 25.75 Evaluated at bid price : 26.23 Bid-YTW : -8.27 % |
| IFC.PR.C | FixedReset | 12,401 | YTW SCENARIO Maturity Type : Call Maturity Date : 2016-09-30 Maturity Price : 25.00 Evaluated at bid price : 25.30 Bid-YTW : 3.94 % |
| CM.PR.E | Perpetual-Premium | 11,601 | YTW SCENARIO Maturity Type : Call Maturity Date : 2012-01-29 Maturity Price : 25.25 Evaluated at bid price : 25.37 Bid-YTW : -6.23 % |
| SLF.PR.I | FixedReset | 11,600 | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-12-31 Maturity Price : 25.00 Evaluated at bid price : 24.00 Bid-YTW : 4.70 % |
| There were 3 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: 26.02 – 26.72 Spot Rate : 0.7000 Average : 0.5193 YTW SCENARIO |
| CIU.PR.A | Perpetual-Discount | Quote: 24.45 – 25.18 Spot Rate : 0.7300 Average : 0.5657 YTW SCENARIO |
| BAM.PR.G | FixedFloater | Quote: 19.50 – 20.00 Spot Rate : 0.5000 Average : 0.3671 YTW SCENARIO |
| BNS.PR.P | FixedReset | Quote: 25.77 – 26.13 Spot Rate : 0.3600 Average : 0.2520 YTW SCENARIO |
| PWF.PR.E | Perpetual-Discount | Quote: 25.25 – 25.65 Spot Rate : 0.4000 Average : 0.3018 YTW SCENARIO |
| BNS.PR.Q | FixedReset | Quote: 25.80 – 26.09 Spot Rate : 0.2900 Average : 0.2107 YTW SCENARIO |
[…] PerpetualDiscounts now yield 5.08%, equivalent to 6.60% interest at the standard conversion factor of 1.4x. 1.3x. Long corporates now yield about 4.65%, so the pre-tax interest-equivalent spread (also called the Seniority Spread) is now about 195bp, significantly narrower than the 205bp reported December 30. […]