SEC Commissioner Daniel M. Gallagher mused on the tangled web of supervisory responsibility:
And although securities firms have been generally increasing the amount of resources they devote to compliance matters, compliance budgets have increased in a linear manner while the demands faced by compliance officers have increased exponentially. A member of the House Financial Services Committee, citing a study issued by the Committee,[1] stated, “It will take over 24 million man hours to comply with Dodd-Frank rules per year. It took only 20 million to build the Panama Canal.”[2] On the plus side, at least Dodd-Frank has caused fewer deaths by malaria or yellow fever.
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The Commission’s ability to impose sanctions for failures to supervise is a valuable part of our regulatory toolkit, encouraging a broker-dealer or investment adviser’s managers and executives to proactively monitor subordinate employees’ compliance with laws and regulations. We must make sure, however, that our rules establishing failure to supervise liability do not act as a deterrent to in-house legal and compliance officers, discouraging them from departing from their clearly delineated roles.After all, we don’t want compliance officers or in-house attorneys spending their days drafting policies and sending out memoranda while avoiding interaction with the individuals governed by those policies or the recipients of those memos out of fear of being deemed a supervisor and subjecting themselves to liability. Indeed, we want to encourage such personnel to bring their expertise to bear in addressing important, real-world compliance issues and in providing real-time advice for concrete problems the firms and their employees face.
Clearly, what is necessary is a new department to be called “Compliance Compliance”, in which Compliance Compliance Professionals can ensue that Compliance Professionals are doing their jobs correctly. They can be regulated in the U.S. by the Securities and Exchange Commission Commission.
Remember the highly politicized SEC report on the Flash Crash? The regulator who wrote it thinks we should hire more regulators:
High-speed trading in U.S. futures markets is being dominated by a small number of firms that should be forced to register with regulators to ensure adequate oversight, the Commodity Futures Trading Commission’s former chief economist will tell lawmakers.
The firms, which can account for more than half of trading volume in some markets, should face new record-keeping rules and be required to have consistent policies and safeguards, according to Andrei Kirilenko, who left the CFTC in 2012 after he led a study of high-speed trading following the May 2010 flash crash.
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Kirilenko is the co-author of a study that concludes high-frequency traders earn consistent profits, often at the expense of smaller and retail participants. The research, released again last month, was based on proprietary transaction-level data collected at the CFTC about trading in the E-mini S&P 500 futures contract from August 2010 through August 2012.The researchers concluded that a small number of firms are consistently profitable and benefit by trading faster than their rivals. The small number of firms competing for ever-faster trades can lead to inefficient investments in technology by “driving an arms race” and warding off new participants in the market, according to Kirilenko, who said regulators should investigate why the industry is concentrated among so few firms while new participants struggle to compete.
The study referred to is by Matthew Baron, Jonathan Brogaard and Andrei Kirilenko, titled The Trading Profits of High Frequency Traders:
Small traders are defined as firms that trade less than a median of 20 contracts a day of all the days that firm is active. This is the majority of traders, with 21,761 participants in August 2010. … More precisely, for each trader, we calculate the end-of-day profits as the cumulative cash received from selling short positions minus the cash paid from buying long positions, plus the value of any outstanding positions at the end-of-day, marked to the market price at close: … Small traders in particular suffer the highest short-term losses to HFTs on a per contract basis: $3.49 per contract to Aggressive HFTs compared to $1.92 for Fundamental traders and $2.49 for Opportunistic traders, for a contract valued at approximately $50,000. … Retail investors are thought to be noise traders and so under the uninformed hypothesis we expect them to incur significant losses to HFTs (e.g. Hvidkjaer, 2008; Kaniel, Saar, and Titman, 2008; Barber, Odean, and Zhu, 2009). … The results also support the hypothesis that Small (retail) traders are noise traders who incur the largest effective transaction costs per contract.
So, yeah, the paper does indicate that HFTs make money from retail (as defined). What it does not do is estimate how much money retail would lose in the absence of HFT. Market making is a service; one generally pays for services.
The Bank of Canada has published a paper by Jonathan Brogaard, Corey Garriott and Anna Pomeranets titled High-Frequency Trading Competition:
When an HFT firm begins trading a stock, it disturbs the trading environment and leads incumbent HFT firms to change their behaviour. Part of the incumbents’ volume share is lost to the entrant. Competition in providing liquidity leads incumbents to tighten their spreads. Entry results indicate that incumbent HFT price predictability decreases, consistent with markets becoming more efficient. The culmination is that revenues fall with competition. The influence of both Passive and Aggressive entrants diminishes with each subsequent entry.
The approach in this paper helps to isolate the role of competition from the role of speed and aims to understand the channel by which competition affects markets. Our findings complement papers on HFT market quality. We show that competition among HFT firms, not just speed, plays a role in how they behave in the market and consequently may be partially responsible for the documented relationships between HFT and market quality.
It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts up 10bp, FixedResets off 29bp and DeemedRetractibles gaining 1bp; it may be that the Enbridge new issue had an effect on the market! Or maybe it was profit taking. Possibly concerns over the Ukraine. How should I know? Enbridge issues certainly got whacked pretty hard; the Performance Highlights table is comprised entirely of Enbridge FixedReset losers. Could it be that the market is getting saturated with Enbridge and that investors are getting tired of their advisors passing gas all the time? Stay tuned! I won’t know next year, either! Enbridge issues also captured the top four spots on the Volume Highlights table on what was, overall, a day of average volume. Maybe a tad on the low side.
| 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 | -0.4382 % | 2,445.6 |
| FixedFloater | 4.57 % | 3.80 % | 31,090 | 17.83 | 1 | 0.1927 % | 3,759.4 |
| Floater | 2.98 % | 3.10 % | 52,121 | 19.44 | 4 | -0.4382 % | 2,640.6 |
| OpRet | 4.35 % | -6.76 % | 33,855 | 0.14 | 2 | 0.0774 % | 2,712.3 |
| SplitShare | 4.77 % | 4.04 % | 66,447 | 4.17 | 5 | 0.0395 % | 3,108.5 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.0774 % | 2,480.1 |
| Perpetual-Premium | 5.50 % | -9.46 % | 95,782 | 0.09 | 15 | 0.0313 % | 2,404.5 |
| Perpetual-Discount | 5.28 % | 5.35 % | 116,348 | 14.89 | 21 | 0.1029 % | 2,551.6 |
| FixedReset | 4.51 % | 3.49 % | 208,147 | 4.27 | 75 | -0.2937 % | 2,566.2 |
| Deemed-Retractible | 4.97 % | -6.61 % | 139,613 | 0.12 | 42 | 0.0057 % | 2,531.4 |
| FloatingReset | 2.65 % | 2.32 % | 172,692 | 4.05 | 6 | -0.0593 % | 2,495.1 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| ENB.PR.J | FixedReset | -1.67 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-05-12 Maturity Price : 23.27 Evaluated at bid price : 25.30 Bid-YTW : 4.13 % |
| ENB.PR.H | FixedReset | -1.52 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-05-12 Maturity Price : 22.84 Evaluated at bid price : 24.03 Bid-YTW : 3.94 % |
| ENB.PR.N | FixedReset | -1.29 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2018-12-01 Maturity Price : 25.00 Evaluated at bid price : 25.21 Bid-YTW : 4.00 % |
| ENB.PR.D | FixedReset | -1.28 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-05-12 Maturity Price : 23.17 Evaluated at bid price : 24.72 Bid-YTW : 4.00 % |
| ENB.PR.F | FixedReset | -1.28 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-05-12 Maturity Price : 23.15 Evaluated at bid price : 24.74 Bid-YTW : 4.11 % |
| ENB.PR.Y | FixedReset | -1.21 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-05-12 Maturity Price : 22.96 Evaluated at bid price : 24.50 Bid-YTW : 4.05 % |
| ENB.PF.A | FixedReset | -1.17 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-05-12 Maturity Price : 23.22 Evaluated at bid price : 25.30 Bid-YTW : 4.19 % |
| ENB.PR.B | FixedReset | -1.15 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-05-12 Maturity Price : 23.36 Evaluated at bid price : 24.96 Bid-YTW : 3.98 % |
| ENB.PR.T | FixedReset | -1.04 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-05-12 Maturity Price : 23.06 Evaluated at bid price : 24.72 Bid-YTW : 4.09 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| ENB.PR.N | FixedReset | 200,453 | RBC bought 10,000 from Scotia at 25.40 and crossed 50,000 at 25.38, then crossed another 22,200 at 25.36. Scotia crossed 50,000 at 25.38. YTW SCENARIO Maturity Type : Call Maturity Date : 2018-12-01 Maturity Price : 25.00 Evaluated at bid price : 25.21 Bid-YTW : 4.00 % |
| ENB.PR.B | FixedReset | 101,275 | Scotia crossed 30,000 at 25.25; RBC crossed 24,100 at 24.97. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-05-12 Maturity Price : 23.36 Evaluated at bid price : 24.96 Bid-YTW : 3.98 % |
| ENB.PR.Y | FixedReset | 95,748 | RBC crossed 70,000 at 24.53. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-05-12 Maturity Price : 22.96 Evaluated at bid price : 24.50 Bid-YTW : 4.05 % |
| ENB.PF.A | FixedReset | 78,915 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-05-12 Maturity Price : 23.22 Evaluated at bid price : 25.30 Bid-YTW : 4.19 % |
| BMO.PR.M | FixedReset | 78,847 | Nesbitt crossed 74,000 at 25.42. YTW SCENARIO Maturity Type : Call Maturity Date : 2018-08-25 Maturity Price : 25.00 Evaluated at bid price : 25.39 Bid-YTW : 2.98 % |
| SLF.PR.F | FixedReset | 68,092 | Scotia crossed 65,000 at 25.34. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-06-30 Maturity Price : 25.00 Evaluated at bid price : 25.33 Bid-YTW : 1.17 % |
| There were 28 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| BAM.PR.G | FixedFloater | Quote: 20.80 – 21.23 Spot Rate : 0.4300 Average : 0.3034 YTW SCENARIO |
| CU.PR.F | Perpetual-Discount | Quote: 22.35 – 22.70 Spot Rate : 0.3500 Average : 0.2630 YTW SCENARIO |
| IAG.PR.E | Deemed-Retractible | Quote: 26.01 – 26.23 Spot Rate : 0.2200 Average : 0.1382 YTW SCENARIO |
| GWO.PR.P | Deemed-Retractible | Quote: 25.58 – 25.87 Spot Rate : 0.2900 Average : 0.2168 YTW SCENARIO |
| VNR.PR.A | FixedReset | Quote: 25.75 – 25.95 Spot Rate : 0.2000 Average : 0.1271 YTW SCENARIO |
| CIU.PR.C | FixedReset | Quote: 21.27 – 21.91 Spot Rate : 0.6400 Average : 0.5699 YTW SCENARIO |