May 22, 2014

Bank of America is closing its internal market-making unit:

Bank of America Corp. is dismantling an electronic market-making unit created last year to serve the lender’s Merrill Lynch wealth-management division, said two people with knowledge of the decision.

Increased regulatory scrutiny of U.S. equity markets and managers’ concerns for the potential perception of a conflict of interest killed the project, said the people. The desk advanced to a testing phase before being abandoned in recent weeks and two executives hired to run it, Jonathan Wang and Steven Sadoff, were told to seek new jobs within the firm, the people said, requesting anonymity because the matter is private.

Businesses such as the shuttered Bank of America unit usually execute equity orders internally, rather than sending them to the public stock market. Critics including Kor Group LLC’s Dave Lauer say the practice may cause harm by keeping some supply and demand private, distorting prices. Bank of America’s decision coincides with a renewed examination by regulators of whether trading in the $22 trillion U.S. stock market is fair.

For Bank of America, “this is either not a profitable business anymore or they don’t want to deal with the regulatory scrutiny that’s coming,” said Joe Saluzzi, co-head of equity trading at Themis Trading LLC in Chatham, New Jersey. “It definitely tells you they’re concerned and maybe they’re hearing things we haven’t.”

Kor Group LLC’s Dave Lauer’s argument is, essentially:

This structure is not dissimilar to something called Payment for Order Flow (PFOF), in which a wholesaler (such as Knight Getco or Citadel) will pay a retail broker for its order flow and then either internalize that flow or send it along to the broader market. In the case of PFOF, it is very profitable for the wholesalers to buy retail order flow and lucrative for brokers to sell this flow – so much so that it is generally referred to as “uninformed” or even “juicy” order flow. These terms describe the willingness of retail traders to pay the spread and the associated fees without a short-term view as to what will happen to the stock price over the next few milliseconds and seconds because of their long-term investment outlook or for swing/day-trading. For wholesalers, the profits from trading against this flow more than offset the fees that they pay to the retail brokers.

However, the PFOF model does a disservice to the market at large, as removing this order flow can theoretically inhibit price discovery, discouraging market makers from posting orders if they know that the only orders that make it to the exchange are the so-called “toxic” or “professional” flow. Internalizers and wholesalers are free-riding the public quote, and in essence “queue jumping” (a loaded term, to be sure) orders on lit exchanges that may have price-time priority from an absolute perspective.

So why can’t we count on the market and competitive forces to fix these issues? Because maker-taker creates a fundamental conflict of interest and a puts exchanges between a rock and a hard place. It makes no difference to an exchange’s revenue what its rebates/fees are – as the exchange makes money on the difference between the two. However, exchanges are unable to lower their rebates and fees because doing so would chase away resting orders to those exchanges that do not lower their rebates.

This is why regulatory intervention is required, and the Notre Dame study quantitatively shows that. In order to move forward, this intervention should be in the form of a pilot study – as advocated by Royal Bank of Canada (RBC) and others – that eliminates rebates in a set of symbols, and requires the trade-at rule in those names, as Canada and Australia do. This rule simply states that in order to execute a trade of less than 5,000 shares off-exchange (in a dark pool or internalization system), there must be significant price improvement (at least a tick, or half a tick if the spread is a tick wide). High-frequency trading (HFT) proponents explain, quite reasonably, that maker rebates are necessary to compensate them for adverse selection (as explained earlier, only the “toxic” flow actually makes it to exchanges now). The trade-at rule will reduce adverse selection and improve price discovery on public venues, ultimately benefitting all investors and providing compensation to market makers.

He also used as evidence the study by Robert Battalio, Shane Corwin, and Robert Jennings, Can Brokers Have It All?, referred to here on April 21, 2014. Seems to me that if the spread’s too wide, there’s money to be made by improving it.


The world’s biggest bond dealers, including JPMorgan Chase & Co. (JPM) and Morgan Stanley, failed to properly report trades to the industry’s price-tracking system more than 11,000 times. JPMorgan’s penalty: About three minutes of its annual profit.

Fines levied in settlements disclosed last month by the Financial Industry Regulatory Authority amounted to a fraction of what the two New York-based firms generated from trading debt during the two-year reviews. JPMorgan’s $95,000 penalty was the biggest imposed by Finra as it cited at least three other dealers in the past five months for similar types of violations.

Regulators are seeking to uphold the integrity of the bond-price reporting system known as Trace, the biggest window into a market that’s grown about 78 percent since 2008 as investors poured money into debt securities. Holding back information on trades can give Wall Street dealers an advantage over customers seeking a fair price, undermining Finra’s stated goal of equal access for all participants to real-time data.

JPMorgan racked up the most Trace-related violations disclosed this year, the result of five separate reviews, according to a settlement released in April. The bank, which ranks as the biggest bond trader and top underwriter of corporate debt, neglected to post trades or missed deadlines in at least 6,300 instances from March 2010 through May 2012, at times omitting a quarter of required reporting, Finra said.

In one review, Finra found the violations accounted for almost 20 percent of corporate debt transactions the bank was required to report over three months in 2011. In another, JPMorgan didn’t report 24 percent of new-issue offerings over five months, the regulator said.

Sometimes the bank didn’t report the correct volume, time or date of transactions, and the firm inadequately supervised compliance, according to the documents.

Moody’s sounded a warning on the provinces:

Both parties should take note of the latest from Moody’s, which puts [Ontario] net debt as a percentage of revenue at 237.7 in the 2014-15 fiscal year, the highest in the country.

Not only the highest, actually, but far and away above the next in line, Quebec, at 189.5.

The lowest is Alberta, at 31.9.

Alberta and British Columbia are alone among the provinces in holding a triple-A rating with Moody’s, the former deemed “stable” and the latter “negative.”

“Most Canadian provinces maintained their ratings and stable credit outlook through the financial crisis and subsequent slow recovery,” Moody’s said in its report.

“However, the continued accumulation of debt and difficulty in returning to balanced budgets is increasing negative credit pressure for some provinces.”

Revenue-to-debt, I can’t help with. But there’s a a good idea for improving debt-to-GDP!

Italy will include prostitution and illegal drug sales in the gross domestic product calculation this year, a boost for its chronically stagnant economy and Prime Minister Matteo Renzi’s effort to meet deficit targets.

Drugs, prostitution and smuggling will be part of GDP as of 2014 and prior-year figures will be adjusted to reflect the change in methodology, the Istat national statistics office said today. The revision was made to comply with European Union rules, it said.

Renzi, 39, is committed to narrowing Italy’s deficit to 2.6 percent of GDP this year, a task that’s easier if output is boosted by portions of the underground economy that previously went uncounted.

The administrators of the website got back to me this morning about the problem with the pricing data, as discussed on May 20 and May 21


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In other words … ‘Shee-it, man, if we had a clue we wouldn’t have to work for a bank!’ Well, it was worth a try! Thanks to all those who voted for the suggestion.

Assiduous Reader GA writes in and says:

AMBest withdrew their rating of CCS.PR.C and CCS.PR.D

IS this an indication that shares will be called for redemption by the end of the month? CCS.PR.D should certainly be redeemed and they have until the end of the month to announce it!

So, first of all, it’s true: A.M. Best Affirms Ratings of Co-operators General Insurance Company, Its Subsidiary and Co-operators Life Insurance Company:

A.M. Best has affirmed the financial strength rating (FSR) of A- (Excellent) and issuer credit ratings (ICR) of “a-” of Co-operators General Insurance Company (Co-operators General) and its subsidiary, The Sovereign General Insurance Company (Sovereign) (Alberta).

In addition, A.M. Best has affirmed the FSR of A (Excellent) and ICR of “a” of Co-operators Life Insurance Company (Co-operators Life) (Saskatchewan). The outlook for all ratings is stable.

Concurrently, A.M. Best has withdrawn the debt ratings of “bbb-” of the preferred shares of CAD 100 million 5% non-cumulative redeemable Class E preference shares, Series C [TSX: CCS.PR.C] and CAD 115 million 7.25% non-cumulative five-year reset Class E preference shares, Series D [TSX: CCS.PR.D] issued by Co-operators General.

But I think that it indicates only that Cooperators is tired of paying for ratings that don’t really make a lot of difference to their ability to sell preferred shares. Only ratings by DBRS and S&P are important; during the crisis it looked as if Moody’s was going to become a third player, but there doesn’t seem to be much of a rush for three ratings other than the initial handful of banks and insurers.

I continue to visit the Cooperators media page regularly to check whether they’ve finally pulled the trigger on the expected CCS.PR.D redemption (redeemable on 2014-6-30; Issue Reset Spread of 521bp) but it hasn’t happened yet.

It was a good day for the Canadian preferred share market, with PerpetualDiscounts winning 17bp, FixedResets gaining 4bp and DeemedRetractibles up 11bp. Volatility would have been low if it had not been for fine performance from the (generally very volatile) Floaters. Volume was very low, considering the boost that should have resulted from the two new issues settling today.

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 1.6750 % 2,529.3
FixedFloater 4.51 % 3.75 % 33,076 17.90 1 -0.1422 % 3,806.4
Floater 2.88 % 2.99 % 50,251 19.70 4 1.6750 % 2,730.9
OpRet 4.37 % -12.00 % 33,077 0.11 2 0.0777 % 2,717.4
SplitShare 4.81 % 4.15 % 59,265 4.19 5 0.0557 % 3,110.9
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0777 % 2,484.8
Perpetual-Premium 5.51 % -9.85 % 93,663 0.09 15 0.0052 % 2,404.4
Perpetual-Discount 5.29 % 5.31 % 107,938 14.91 21 0.1721 % 2,547.4
FixedReset 4.53 % 3.50 % 196,232 4.38 76 0.0363 % 2,560.0
Deemed-Retractible 4.98 % -3.79 % 146,140 0.09 43 0.1147 % 2,529.5
FloatingReset 2.66 % 2.34 % 155,771 4.03 6 -0.0659 % 2,494.1
Performance Highlights
Issue Index Change Notes
BAM.PR.C Floater 1.14 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-05-22
Maturity Price : 17.69
Evaluated at bid price : 17.69
Bid-YTW : 2.99 %
ELF.PR.G Perpetual-Discount 1.27 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-05-22
Maturity Price : 21.87
Evaluated at bid price : 22.28
Bid-YTW : 5.37 %
BAM.PR.K Floater 1.39 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-05-22
Maturity Price : 17.53
Evaluated at bid price : 17.53
Bid-YTW : 3.02 %
BAM.PR.B Floater 1.56 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-05-22
Maturity Price : 17.62
Evaluated at bid price : 17.62
Bid-YTW : 3.00 %
PWF.PR.A Floater 2.51 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-05-22
Maturity Price : 20.00
Evaluated at bid price : 20.00
Bid-YTW : 2.63 %
Volume Highlights
Issue Index Shares
ENB.PF.C FixedReset 1,260,098 New issue settled today.
Maturity Type : Limit Maturity
Maturity Date : 2044-05-22
Maturity Price : 23.13
Evaluated at bid price : 25.04
Bid-YTW : 4.14 %
GWO.PR.S Deemed-Retractible 753,041 New issue settled today.
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.10
Bid-YTW : 5.23 %
CU.PR.C FixedReset 303,665 RBC crossed 294,500 at 25.70.
Maturity Type : Call
Maturity Date : 2017-06-01
Maturity Price : 25.00
Evaluated at bid price : 25.65
Bid-YTW : 3.07 %
BMO.PR.S FixedReset 108,865 Recent new issue.
Maturity Type : Call
Maturity Date : 2019-05-25
Maturity Price : 25.00
Evaluated at bid price : 25.55
Bid-YTW : 3.60 %
ENB.PR.J FixedReset 81,798 Nesbitt crossed 70,000 at 25.12.
Maturity Type : Limit Maturity
Maturity Date : 2044-05-22
Maturity Price : 23.20
Evaluated at bid price : 25.07
Bid-YTW : 4.07 %
BAM.PR.N Perpetual-Discount 36,728 RBC probably did something. The public TMX reports aren’t clear.
Maturity Type : Limit Maturity
Maturity Date : 2044-05-22
Maturity Price : 21.82
Evaluated at bid price : 21.82
Bid-YTW : 5.53 %
There were 18 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
FTS.PR.F Perpetual-Discount Quote: 23.75 – 24.23
Spot Rate : 0.4800
Average : 0.2821

Maturity Type : Limit Maturity
Maturity Date : 2044-05-22
Maturity Price : 23.48
Evaluated at bid price : 23.75
Bid-YTW : 5.16 %

RY.PR.A Deemed-Retractible Quote: 25.71 – 25.89
Spot Rate : 0.1800
Average : 0.1054

Maturity Type : Call
Maturity Date : 2014-06-23
Maturity Price : 25.25
Evaluated at bid price : 25.71
Bid-YTW : -15.82 %

RY.PR.E Deemed-Retractible Quote: 25.89 – 26.10
Spot Rate : 0.2100
Average : 0.1379

Maturity Type : Call
Maturity Date : 2014-06-21
Maturity Price : 25.50
Evaluated at bid price : 25.89
Bid-YTW : -13.86 %

PWF.PR.K Perpetual-Discount Quote: 23.53 – 23.84
Spot Rate : 0.3100
Average : 0.2416

Maturity Type : Limit Maturity
Maturity Date : 2044-05-22
Maturity Price : 23.24
Evaluated at bid price : 23.53
Bid-YTW : 5.30 %

PWF.PR.E Perpetual-Premium Quote: 25.22 – 25.45
Spot Rate : 0.2300
Average : 0.1621

Maturity Type : Call
Maturity Date : 2014-06-21
Maturity Price : 25.00
Evaluated at bid price : 25.22
Bid-YTW : -1.17 %

CU.PR.G Perpetual-Discount Quote: 22.12 – 22.35
Spot Rate : 0.2300
Average : 0.1691

Maturity Type : Limit Maturity
Maturity Date : 2044-05-22
Maturity Price : 21.81
Evaluated at bid price : 22.12
Bid-YTW : 5.09 %

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