Bloomberg has an interesting bit of gossip about algorithmic trading:
Wall Street’s credit-derivatives traders, who before the financial crisis commanded $2 million of annual pay, are being replaced by machines as banks cut costs and heed new regulations.
UBS AG (UBSN), Switzerland’s biggest bank, fired its head of credit-default swaps index trading, David Gallers, last week, with no plan to fill the position, according to two people familiar with the matter. Instead, the bank replaced Gallers with computer algorithms that trade using mathematical models, said the people, who asked not to be identified because moves are private.
UBS joins Barclays Plc (BARC), Credit Suisse Group AG (CSGN) and Goldman Sachs Group Inc. (GS) in using computer programs to trade financial instruments that once generated some of their biggest fees. With regulators preparing rules under the 2010 Dodd-Frank financial reform that will push swaps toward exchange-like systems to improve transparency, credit dealers are going digital as automated trading makes humans too expensive.
What makes the trend so interesting is that there should be an equilibrium reached at some point. Most – not all – traders know nothing about the markets and they’re not paid to know anything about the markets. They’re paid to know lots of people who trade and who will give good old Bob the order because Bob made a really good point about that story in Wall Street Journal the other day.
But one thing that’s happening is the buy-side culture is shifting – slowly – to electronic execution. So the old-line salesmen are losing clients to the electronic execution vendors. There will be some disruption as all this plays out, but sales (as opposed to technical wizardry) will be as important in the future as it has been in the past.
I’ve complained in the past that the concept of “first mover advantage” as it relates to hedge fund returns is a red herring … there’s at least one guy who agrees with me:
Investors and other industry observers say that for perhaps the first time since the phrase hedge fund entered the lexicon, hot or gimmicky strategies aren’t worth investing in at all. It’s the manager that counts.
“It’s a return to the roots of the hedge-fund industry, when it was a small group of highly talented stockpickers and fundamental investors,” says John Bailey, founder and chief executive of Spruce Private Investors, which invests in 30 different hedge funds for foundations and endowments.
It’s not so much “first mover advantage” in this or anything else, really: it’s more that some smart guys found a niche, made stupid amounts of money … and were promptly copied by every glib smiley-boy in town.
It was stunning when European corporates started trading through sovereigns. This is gobsmackery on a grand scale:
Bonds of Exxon Mobil and Johnson & Johnson are trading with yields below those of comparable Treasurys, a sign that investors perceive them as a safer bet. It is a rare phenomenon that some market observers said could be the beginning of a new era for debt markets. It could ultimately mean some companies will borrow at lower rates than the U.S. government.
For now, just a handful of relatively short-term bonds yield less than comparable Treasury bonds.
The banks’ role as secret policemen is causing problems:
U.S. banks in Colorado and Washington state, where voters last week legalized recreational marijuana use, shouldn’t disregard federal laws that consider pot sales criminal, a bank regulator said today.
“I think institutions have to protect themselves,” said Daniel Stipano, acting chief counsel of the Office of the Comptroller of the Currency, at an anti-money laundering conference today run by the American Bankers Association. “The problem is that it remains a crime under federal law.”
The Bank Secrecy Act requires banks to file suspicious- activity reports if they suspect customer’s involvement in federal crimes. It’s meant as a protection against U.S. financial institutions being used to launder illegal gains from criminal activity.
It was another mixed day for the Canadian preferred share market, with PerpetualPremiums gaining 7bp, FixedResets up 6bp and DeemedRetractibles off 6bp. Volatility picked up a little, with IAG on the downside (although both issues made the “Wide Spreads” report and all trades were well above the closing bid) and PWF on the upside. Volume was ridiculously pathetic.
| 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 | 0.1470 % | 2,465.4 |
| FixedFloater | 4.20 % | 3.54 % | 32,652 | 18.24 | 1 | -1.7391 % | 3,827.9 |
| Floater | 2.80 % | 3.00 % | 55,741 | 19.68 | 4 | 0.1470 % | 2,662.0 |
| OpRet | 4.59 % | 0.12 % | 38,652 | 0.62 | 4 | 0.1043 % | 2,586.2 |
| SplitShare | 5.37 % | 4.67 % | 56,496 | 4.44 | 3 | -0.1173 % | 2,858.2 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.1043 % | 2,364.8 |
| Perpetual-Premium | 5.27 % | 1.36 % | 74,456 | 0.28 | 29 | 0.0721 % | 2,317.9 |
| Perpetual-Discount | 4.89 % | 4.93 % | 99,400 | 15.55 | 3 | 0.0275 % | 2,602.1 |
| FixedReset | 4.97 % | 2.99 % | 204,790 | 3.91 | 75 | 0.0634 % | 2,450.3 |
| Deemed-Retractible | 4.90 % | 3.49 % | 123,773 | 0.94 | 46 | -0.0558 % | 2,398.9 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| IAG.PR.F | Deemed-Retractible | -2.01 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 26.31 Bid-YTW : 5.31 % |
| IAG.PR.A | Deemed-Retractible | -1.81 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.45 Bid-YTW : 5.00 % |
| BAM.PR.G | FixedFloater | -1.74 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2042-11-12 Maturity Price : 22.98 Evaluated at bid price : 22.60 Bid-YTW : 3.54 % |
| PWF.PR.L | Perpetual-Premium | 1.02 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2014-10-31 Maturity Price : 25.25 Evaluated at bid price : 25.76 Bid-YTW : 4.08 % |
| PWF.PR.M | FixedReset | 1.23 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2014-01-31 Maturity Price : 25.00 Evaluated at bid price : 26.27 Bid-YTW : 1.93 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| NA.PR.Q | FixedReset | 48,070 | Recent new issue. YTW SCENARIO Maturity Type : Call Maturity Date : 2017-11-15 Maturity Price : 25.00 Evaluated at bid price : 25.41 Bid-YTW : 3.47 % |
| ENB.PR.H | FixedReset | 34,000 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2042-11-12 Maturity Price : 23.24 Evaluated at bid price : 25.40 Bid-YTW : 3.39 % |
| BNS.PR.T | FixedReset | 29,306 | TD crossed 13,200 at 26.55. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-04-25 Maturity Price : 25.00 Evaluated at bid price : 26.53 Bid-YTW : 2.08 % |
| RY.PR.P | FixedReset | 20,870 | TD crossed 20,600 at 26.28. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-02-24 Maturity Price : 25.00 Evaluated at bid price : 26.24 Bid-YTW : 2.17 % |
| TD.PR.S | FixedReset | 18,262 | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.99 Bid-YTW : 3.08 % |
| RY.PR.R | FixedReset | 16,200 | TD crossed 13,500 at 26.25. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-02-24 Maturity Price : 25.00 Evaluated at bid price : 26.25 Bid-YTW : 2.14 % |
| There were 6 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| HSB.PR.C | Deemed-Retractible | Quote: 25.79 – 26.50 Spot Rate : 0.7100 Average : 0.4805 YTW SCENARIO |
| BAM.PR.G | FixedFloater | Quote: 22.60 – 23.08 Spot Rate : 0.4800 Average : 0.3155 YTW SCENARIO |
| IAG.PR.A | Deemed-Retractible | Quote: 24.45 – 24.90 Spot Rate : 0.4500 Average : 0.2942 YTW SCENARIO |
| IAG.PR.F | Deemed-Retractible | Quote: 26.31 – 26.69 Spot Rate : 0.3800 Average : 0.2581 YTW SCENARIO |
| MFC.PR.A | OpRet | Quote: 25.64 – 25.95 Spot Rate : 0.3100 Average : 0.1886 YTW SCENARIO |
| NA.PR.K | Deemed-Retractible | Quote: 25.56 – 25.84 Spot Rate : 0.2800 Average : 0.1778 YTW SCENARIO |