Looks like there’s another politicized white-washing on the way:
U.S. officials have concluded that high-frequency trading contributed to the Treasury market’s wild ride last October, a finding that will probably add to regulatory scrutiny of the industry.
While a soon-to-be-published government report won’t point to just one cause, it will cite speed traders as playing a key role, according to a person with direct knowledge of the study. Treasury yields plunged the most in five years on Oct. 15, 2014, before recovering, fueling a months-long debate over whether something has fundamentally changed in a $12.7 trillion market that most investors consider a safe haven.
One alteration is that almost half the trading in Treasuries is now electronic, according to a 2014 survey from financial research firm Greenwich Associates. Treasury Secretary Jacob J. Lew is among U.S. officials who’ve drawn a link between traders using computers to buy and sell securities at lightning-fast speeds, and changes in volatility and liquidity.
And yes, the report came out today and guess who’s being scapegoated?:
High-frequency trading firms are among the factors “driving markets toward smaller trade sizes,” according to Treasury official Antonio Weiss, a counselor to Lew. These firms are playing a much bigger role as market intermediaries, replacing banks and brokers that pulled back after suffering losses during the crisis, Weiss wrote Monday in a Wall Street Journal opinion piece.
The report details potential hazards from an increase in automated trading, such as risks to operations, liquidity, transmission and clearing activities. It said speed trading accounted for much of the imbalance in aggressive flows on Oct. 15. Automation can also give traders new tools to engage in unlawful conduct such as spoofing, the practice of placing and then canceling orders to give a misleading impression of the market.
The spike in trading volume and volatility coincided with bank-dealers exiting from the offer side of the cash market for brief periods, according to the report.
The report itself is titled Joint Staff Report: The U.S. Treasury Market on October 15, 2014. It’s very clearly biased against automated trading, skimming over the notion that a thin, brittle market is the logical and frequent consequence of increased transparency, but there was one thing I found interesting:
Around 9:39 ET, the sudden visibility of certain sell limit orders in the futures market seemed to have coincided with the reversal in prices. Recall that only 10 levels of order prices above and below the best bid and ask price are visible to futures market participants. Around 9:39 ET, with prices still moving higher, a number of previously posted large sell orders suddenly became visible in the order book above the current 30-year futures price (as well as in smaller size in 10-year futures). The sudden visibility of these sell orders significantly shifted the visible order imbalance in that contract, and it coincided with the beginning of the reversal of its price (the top of the price spike). Most of these limit orders were not executed, as the price did not rise to their levels.
Meanwhile, HFT traders are eagerly wooed by exchanges:
Despite the often explosive debate over this kind of trading in the U.S., bourses in Mexico, Turkey, South Africa and beyond are trying to lure HFT types to boost business.
The message is clear: whatever the perceived risks, algorithmic robot traders — algobots — are marching steadily across the globe.
“We are welcoming foreign investors, and that includes HFT firms,” says Muammer Cakir, managing director at Borsa Istanbul.
…
The Tokyo Stock Exchange is taking similar steps. TSE officials last month visited New York to let the HFT industry know about upgrades due in September to its Arrowhead trading engine. Arrowhead already matches orders more than 1,000 times faster than was possible five years ago.
…
In Mexico, the bourse is trying to attract more high-frequency traders to boost volumes, said Luis Carballo, the top information technology official at the Bolsa Mexicana de Valores SAB, which operates the exchange.
…
JSE Ltd., the company that operates the Johannesburg Stock Exchange, opened a co-location facility in May 2014 that cut the time it takes for data to travel from a trader to its servers and back to 150 microseconds, from 2,550 microseconds. Stock transactions rose 19 percent last year at the exchange and in October it had a record month, with daily average volume close to 400,000, about a third higher than its previous best.
…
Perhaps the last big obstacle to high-frequency trading achieving global dominance is China, where tight government rules, a stamp duty on stock trades and market inefficiency have so far kept out the algobots. There may be signs of opening up, though: Doug Cifu, CEO of Virtu Financial Inc., one of the world’s biggest computer trading firms, said on an earnings call in May that Virtu was having “very significant preliminary discussions” about entering the Chinese markets.
It proved to be a quiet day overall for the Canadian preferred share market, with PerpetualDiscounts gaining 2bp, FixedResets off 7bp and DeemedRetractibles down 16bp, but the Performance Highlights table demonstrates that volatility on the issue level remains very high. Volume was average.
For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.
Remember that all rich /cheap assessments are:
» based on Implied Volatility Theory only
» are relative only to other FixedResets from the same issuer
» assume constant GOC-5 yield
» assume constant Implied Volatility
» assume constant spread
Here’s TRP:
Click for Big
TRP.PR.E, which resets 2019-10-30 at +235, is bid at 21.76 to be $0.27 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.39 cheap at its bid price of 15.80.
Click for Big
Most expensive is MFC.PR.F, resetting at +141bp on 2016-6-19, bid at 17.02 to be $0.95 rich, while MFC.PR.L, resetting at +216bp on 2019-6-19, is bid at 20.61 to be $0.59 cheap.
Click for Big
The cheapest issue relative to its peers is BAM.PF.B, resetting at +263bp on 2019-3-31, bid at 20.03 to be $0.84 cheap. BAM.PF.E, resetting at +255bp on 2020-3-31 is bid at 21.26 and appears to be $0.88 rich.
Click for Big
FTS.PR.K, with a spread of +205bp, and bid at 21.21, looks $0.38 expensive and resets 2019-3-1. FTS.PR.M, with a spread of +248bp and resetting 2019-12-1, is bid at 22.66 and is $0.31 cheap.
Click for Big
The change of scale on the chart means there are no outliers today!
Investment-grade pairs predict an average three-month bill yield over the next five-odd years of exactly 0.00% (which seems a little extreme!).
Click for Big
Shall we just say that this exhibits a high level of confidence in the continued rapacity of Canadian banks?
| 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 | 1.5568 % | 2,161.0 |
| FixedFloater | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 1.5568 % | 3,778.4 |
| Floater | 3.58 % | 3.59 % | 61,260 | 18.33 | 3 | 1.5568 % | 2,297.3 |
| OpRet | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.5395 % | 2,768.8 |
| SplitShare | 4.59 % | 4.89 % | 69,675 | 3.21 | 3 | 0.5395 % | 3,244.9 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.5395 % | 2,531.8 |
| Perpetual-Premium | 5.51 % | 3.82 % | 66,260 | 0.30 | 13 | 0.0579 % | 2,513.9 |
| Perpetual-Discount | 5.43 % | 5.43 % | 93,389 | 14.79 | 21 | 0.0207 % | 2,638.4 |
| FixedReset | 4.68 % | 3.83 % | 223,044 | 15.83 | 88 | -0.0691 % | 2,246.9 |
| Deemed-Retractible | 5.03 % | 4.86 % | 112,169 | 3.14 | 34 | -0.1569 % | 2,613.3 |
| FloatingReset | 2.53 % | 3.23 % | 53,645 | 6.06 | 10 | -0.1460 % | 2,277.7 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| MFC.PR.K | FixedReset | -3.72 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.20 Bid-YTW : 5.43 % |
| FTS.PR.M | FixedReset | -3.53 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-13 Maturity Price : 22.11 Evaluated at bid price : 22.66 Bid-YTW : 3.82 % |
| GWO.PR.N | FixedReset | -3.47 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 16.12 Bid-YTW : 7.53 % |
| IFC.PR.A | FixedReset | -2.63 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 18.51 Bid-YTW : 6.87 % |
| PWF.PR.P | FixedReset | -2.21 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-13 Maturity Price : 17.25 Evaluated at bid price : 17.25 Bid-YTW : 3.53 % |
| PWF.PR.T | FixedReset | -1.63 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-13 Maturity Price : 22.95 Evaluated at bid price : 24.10 Bid-YTW : 3.38 % |
| BNS.PR.Z | FixedReset | -1.55 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.80 Bid-YTW : 3.85 % |
| SLF.PR.E | Deemed-Retractible | -1.55 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.25 Bid-YTW : 6.09 % |
| FTS.PR.K | FixedReset | -1.35 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-13 Maturity Price : 21.21 Evaluated at bid price : 21.21 Bid-YTW : 3.64 % |
| HSE.PR.C | FixedReset | -1.18 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-13 Maturity Price : 21.55 Evaluated at bid price : 21.85 Bid-YTW : 4.68 % |
| POW.PR.B | Perpetual-Discount | -1.16 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-13 Maturity Price : 24.47 Evaluated at bid price : 24.71 Bid-YTW : 5.43 % |
| IAG.PR.G | FixedReset | -1.13 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.41 Bid-YTW : 4.13 % |
| FTS.PR.H | FixedReset | -1.12 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-13 Maturity Price : 16.81 Evaluated at bid price : 16.81 Bid-YTW : 3.47 % |
| BNS.PR.M | Deemed-Retractible | -1.10 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2015-08-26 Maturity Price : 25.25 Evaluated at bid price : 25.26 Bid-YTW : 2.31 % |
| HSE.PR.G | FixedReset | -1.09 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-13 Maturity Price : 22.55 Evaluated at bid price : 23.51 Bid-YTW : 4.66 % |
| MFC.PR.B | Deemed-Retractible | -1.05 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.66 Bid-YTW : 6.03 % |
| PWF.PR.E | Perpetual-Premium | 1.01 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2015-08-12 Maturity Price : 25.00 Evaluated at bid price : 24.95 Bid-YTW : 4.69 % |
| TD.PF.C | FixedReset | 1.08 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-13 Maturity Price : 21.45 Evaluated at bid price : 21.45 Bid-YTW : 3.74 % |
| ENB.PR.B | FixedReset | 1.11 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-13 Maturity Price : 16.36 Evaluated at bid price : 16.36 Bid-YTW : 5.09 % |
| ENB.PR.D | FixedReset | 1.16 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-13 Maturity Price : 16.50 Evaluated at bid price : 16.50 Bid-YTW : 5.06 % |
| BMO.PR.T | FixedReset | 1.21 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-13 Maturity Price : 21.41 Evaluated at bid price : 21.74 Bid-YTW : 3.72 % |
| BAM.PR.K | Floater | 1.33 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-13 Maturity Price : 13.75 Evaluated at bid price : 13.75 Bid-YTW : 3.65 % |
| PVS.PR.B | SplitShare | 1.38 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2019-01-10 Maturity Price : 25.00 Evaluated at bid price : 24.96 Bid-YTW : 4.56 % |
| POW.PR.D | Perpetual-Discount | 1.42 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-13 Maturity Price : 23.35 Evaluated at bid price : 23.64 Bid-YTW : 5.30 % |
| ENB.PR.F | FixedReset | 1.51 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-13 Maturity Price : 16.80 Evaluated at bid price : 16.80 Bid-YTW : 5.17 % |
| IFC.PR.C | FixedReset | 1.60 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.25 Bid-YTW : 5.06 % |
| ELF.PR.G | Perpetual-Discount | 1.63 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-13 Maturity Price : 21.59 Evaluated at bid price : 21.85 Bid-YTW : 5.45 % |
| MFC.PR.M | FixedReset | 1.63 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.85 Bid-YTW : 5.29 % |
| ENB.PR.H | FixedReset | 1.67 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-13 Maturity Price : 15.86 Evaluated at bid price : 15.86 Bid-YTW : 4.97 % |
| MFC.PR.L | FixedReset | 1.98 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 20.61 Bid-YTW : 5.88 % |
| BAM.PR.C | Floater | 2.72 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-13 Maturity Price : 13.97 Evaluated at bid price : 13.97 Bid-YTW : 3.59 % |
| MFC.PR.N | FixedReset | 5.77 % | An entirely reasonable closing bid; all of the last 25 trades were at or above the quoted figure. This represents only a reversal of Friday‘s silliness. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.80 Bid-YTW : 5.25 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| GWO.PR.R | Deemed-Retractible | 65,060 | TD crossed 44,600 at 24.00. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.90 Bid-YTW : 5.45 % |
| BNS.PR.Q | FixedReset | 40,100 | TD sold 10,000 to Raymond James at 25.30, then crossed 20,000 at 25.29. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 25.17 Bid-YTW : 2.95 % |
| BMO.PR.T | FixedReset | 33,400 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-13 Maturity Price : 21.41 Evaluated at bid price : 21.74 Bid-YTW : 3.72 % |
| TRP.PR.D | FixedReset | 33,188 | RBC crossed 23,200 at 21.55. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-13 Maturity Price : 21.49 Evaluated at bid price : 21.49 Bid-YTW : 3.89 % |
| MFC.PR.B | Deemed-Retractible | 31,713 | RBC crossed 20,000 at 22.66. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.66 Bid-YTW : 6.03 % |
| BNS.PR.Z | FixedReset | 31,213 | Scotia crossed 15,000 at 22.75. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.80 Bid-YTW : 3.85 % |
| There were 33 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| CU.PR.D | Perpetual-Discount | Quote: 23.25 – 24.27 Spot Rate : 1.0200 Average : 0.6552 YTW SCENARIO |
| PWF.PR.T | FixedReset | Quote: 24.10 – 24.80 Spot Rate : 0.7000 Average : 0.5202 YTW SCENARIO |
| IAG.PR.G | FixedReset | Quote: 24.41 – 24.77 Spot Rate : 0.3600 Average : 0.2260 YTW SCENARIO |
| FTS.PR.K | FixedReset | Quote: 21.21 – 21.66 Spot Rate : 0.4500 Average : 0.3463 YTW SCENARIO |
| TRP.PR.F | FloatingReset | Quote: 18.30 – 18.95 Spot Rate : 0.6500 Average : 0.5568 YTW SCENARIO |
| HSB.PR.D | Deemed-Retractible | Quote: 24.92 – 25.35 Spot Rate : 0.4300 Average : 0.3466 YTW SCENARIO |