Assiduous Reader KB writes in and says:
I’m confused about something that happens once in a while and maybe you can clear it up.
There are lots of illiquid preferred shares, and they often have wide spreads. That’s fine as long as everyone is behaving.
If I want to purchase some shares and there isn’t available size at the ask, I have found the shares usually appear if you meet the ask price. I assume the market maker offers up the shares that are required. Same situation on the sell side.
But once in a while like today, I was watching one of my preferred’s (IAG.PR.A) since yesterday it took a rather strange drop in value that you had commented on in the PrefBlog.
Today at 1:13 PM 34 shares changed hands at a reasonable $23.65. Then at 2:56 PM 700 shares traded at $21.71 and 50 shares at $21.66. That’s ridiculous.
My questions is: Where do these shares come from? National Bank bought and sold the 700 and Desjardins sold the remaining 50 to National Bank.
Do these shares come from the market maker or were there people actually willing to sell at that price? You’ve not touched on this subject in PrefLetter or in PrefBlog and the internet doesn’t reveal much, so I decided to ask you directly. Maybe you’re
just as confused as I am.
Actually, I’ve discussed it earlier in the post Fed Up with Shoddy Market-Making!. It was as a result of my frustration with the system that I started publishing the “Wide Spread Highlights” table every day and it was due to my complaints on the topic that I discovered the TMX Close != Last pricing data fiasco.
At vast expense, I have purchased the day’s “Trades and Quotes” file for IAG.PR.A from the TSX. From 9:30 until 4:00 there were 1,023 quotes and three trades.
Easy part first: National was the seller of an odd lot at the offering price and the buyer of an odd lot at the bid price. This almost certainly means that National is the Market Maker. As discussed in the post linked above, Market Makers are required to, among other things, service odd-lot orders at the quote, in exchange for which they receive certain privileges.
The action from 2:55:31 until 2:57:49 is of great interest:
| IAG.PR.A | ||||
| Time | Quote | Trade | ||
| 2:55:31 | 21.66-23.65, 1×2 | |||
| 2:56:19 | 21.66-94, 1×2 | |||
| 2:56:19 | 700 @ 21.71 (National Bank Cross) | |||
| 2:56:20 | 21.66-23.65, 1×2 | |||
| 2:56:20 | 50 @ 21.66 (National Bank purchase from Desjardins) | |||
| 2:57:49 | 22.00-23.65, 4×2 | |||
All day long the offer was at 23.65, with the exception of less than one second (time-stamping on the file available to me is precise only as to the second), at 2:56:19, when the offer suddenly declined to 21.94, making the spread 0.28. In the same second the trade of 700 shares occured, and in the next second the offer moved back to the 23.65 level, where it was for 6:29:59 of the trading day which lasted 6:30:00.
I must admit that I am very curious about this sequence of events and it does not seem credible that the sudden sharp decline of the offer price was entirely unrelated to the trade of 700 shares that occured during the same single second that the offer was so low. However, I am insufficiently knowledgable regarding the rules to know whether it is legal to front-run an incoming order by changing quote to make the fill seem more reasonable – certainly, if the quote had been 21.66-94 all day long, then a fill of a market order at 21.71 by an internal trade-matching algorithm would be quite reasonable and greatly appreciated.
It is unclear as to whether any front-running occurred at all, even if the change in quote and trade were related. It would be entirely rational for someone to place a limit order inside the quote (well inside the quote, in this case!) and then convert the order to a market order if not immediately filled – although the identity of the broker showing the 21.94 offer for one second is not available in the data I have, and the size was only 200 shares. It would be somewhat more normal for the offer to be allowed to stand for more than a second, as well. However, as became glaringly apparent during the Flash Crash, individual decisions made in the design of protocols and trading algorithms can start looking rather silly when conditions are different from those envisaged at design-time.
I will also point out that the data available to me reflect only the TMX data – I do not have a consolidated tape that would include quotations from Alpha, Pure, etc.
And finally, I will point out that I don’t really understand the relative identities of the buyers and sellers. It strains credulity to imagine that National’s cross of 700 shares was completely unrelated to the sale of 50 shares by Desjardins to National that occurred one second later; but definitive information regarding the precise order flow (back to the actual beneficial owner) is not available to me.
So I will leave it to those more familiar with the intricacies of UMIR and with more access to consolidated tapes to determine whether any jiggery-pokery occured.
All one can do is ask questions – the following eMail has been sent to the Exchange:
On 2012-6-7, the offer price reported by the TMX for IAG.PR.A was 23.65 for the entire day, except for one second commencing 14:56:19. In that second the offer price changed to 21.94 and a cross was executed at 21.71, which was down 1.87 from the closing price on 2012-6-6.
The time-weighted average spread for the full trading session was, according to my calculations using data supplied by the Toronto Stock Exchange, $1.47. The quoted spread exceeded this figure for over four hours in the course of the trading day (to be precise, 4:13:53) and was between $1.95 and $2.00 for nearly all this time (4:10:09).
Can you tell me:
i) Who is the market maker for this security?
ii) What commitments has the market maker made to the exchange regarding the bid-offer spread to be maintained for this security?
iii) When was the last review of the market-maker’s success in meeting the commitments made with respect to bid-offer spread?
iv) What were the results of the last review specified by (iii)?Sincerely,
The trade @ 21.71 came in while the spread was wide. The ask order @ 21.94 belonged to Desjardin (19) and came in very quickly (less than 10 ms) after the execution. A little over a second later Desjardin cancelled this order and instead routed a marketable sell order for 200 shares to Alpha (where the bid had just risen to 21.73) followed 20 milliseconds later with the remaining odd-lot portion (50 shares) being executed on TSX.
So it does not appear to be a conspiracy by the MM. More likely is that the 700 share sale by National Bank was an unfortunate use of a market order. The follow up sale of 250 shares by Desjardin was probably some kind of idiotic stop-loss algorithm.
The MM is indeed broker 80 (National Bank). The name and phone number of the individual at National Bank responsible for the stock are supplied in the TSX data feeds. I’ll refrain from posting it publicly. However if Mr Hymas is really keen on giving the guy a ring I’m happy to pass on the info as long as he provides us with an entertaining follow up story!
Actually, I got it somewhat wrong in the above. What really happened was that IAG.PR.A was in a “authorized frozen” state between 14:55:31.97 and 14:56:19.30. Once this state was removed there was a small backlog of orders that were processed. The first of which was the trade for 700 shares, followed by the non-marketable sell order by Desjardin @ 21.94. So the Desjardin order does not appear to be “in reaction” to the National Bank cross, so it wasn’t a Stop Loss type of affair (it did seem a bit too quick for it to be that).
Presumably the authorized frozen state was triggered automatically to prevent the sale @ 21.71 from occurring. The state was then probably cleared by a human about 40 seconds later.
I actually have no idea what an “authorized frozen” state means, but somehow it resulted in 734 shares being purchased at a very nice price (700 @ $21.71 and 50 @ $21.66).
Somehow this seems unfair to all the legitimate bids that were above the bid price of those 734 shares. It wasn’t long after those shares were traded when I took a look at a level II quote screen and saw a total of 4800 shares from 11 bids at or above a $22.00 price. I’ll bet those people would have liked some of that action @ $21.66. No such luck for the retail investor.
It’s these situations that makes me suspect of the entire process, and confident that my buy and hold strategy is the only sensible course. I take direction from PrefLetter backed up by my own investigations. I can’t compete in the world of todays algorithms or millisecond trading strategies. I have to wonder what kind of jiggery-pokey is going on.
KB
The 700 @21.71 did not trade through the CBBO (no bids above 21.71 on any lit market). The odd lot order does not interact with normal book.
The trade @ 21.71 came in while the spread was wide.
I’ll take your word for it. That’s not the order in which things appear in the “Trades and Quotes” file, but since the time stamps are identical there may have been a loss of order on data retrieval
More likely is that the 700 share sale by National Bank was an unfortunate use of a market order. The follow up sale of 250 shares by Desjardin was probably some kind of idiotic stop-loss algorithm.
That makes sense, given the data you have provided.
if Mr Hymas is really keen on giving the guy a ring
I don’t think anything would be gained by this.
What really happened was that IAG.PR.A was in a “authorized frozen” state between 14:55:31.97 and 14:56:19.30. Once this state was removed there was a small backlog of orders that were processed.
This muddies the waters considerably. The first explanation made more sense!
Presumably the authorized frozen state was triggered automatically to prevent the sale @ 21.71 from occurring. The state was then probably cleared by a human about 40 seconds later.
And, what’s more a TSX-employed human. Which raises an interesting question with respect to this mess: should the TSX have allowed a cross by the market-maker at a price well below the previous close at a time when (I presume) the spread was much wider than specified and had been for a considerable period? If I had seen an offer at 22, I would have backed up the truck – and so would the rest of the Street.
I actually have no idea what an “authorized frozen” state means
Here you go!
According to the TMX Select Subscriber Manual
It’s these situations that makes me suspect of the entire process, and confident that my buy and hold strategy is the only sensible course.
It is a sensible course, but not the only sensible course. All that’s happened to you is that you missed out on an outrageously profitable trade and things are back to normal now. The only losers are the guys who were on the sell side of the low-priced trades and – whether triggered by a stop-loss or not – they were simply punished for inputting a market order in a lousy market.
You can’t cheat an honest man!
Two more interesting facts for you:
1- The 21.71 pricing of the cross is not accidental. It was the best bid on both Alpha and TMX Select at the time (the order on the latter was for 10,000 shares!). Presumably National Bank prevented them from profiting from Mr Market Order by internalizing the flow instead and posting the cross on TSX.
2- IAG.PR.A was also in Frozen state between 14:01:53 and 14:02:47. After that state was cleared no trades or quotes occurred. A possible explanation (I’m really hypothesizing here) is that a marketable sell order came in at 14:01:53, triggered the Frozen state, and upon human review that order was rejected since it would have occurred at such a low price, and the market was allowed to resume. No new orders came in on the TSX until the market was re-frozen again at 14:55:31.
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