July 28, 2009

A bit more on Flash Order controversy:

But critics, notably Charles Schumer, a senior Democrat on the Senate banking panel, contend that flash orders are not being shown to all investors at the same time, creating a two-tier market. This, they say, favours traders with faster and more powerful trading systems.

But calls to ban flash orders have met resistance from Direct Edge, a leading market provider. William O’Brien, chief executive of Direct Edge, said: “If these types of programs are banned, it will drive liquidity away from exchanges and perpetuate a two-tier market.” The Direct Edge system was available to any brokerage that wished to participate, he said.

BATS also said any trading firm could submit flash orders with its system and it was “ready to participate in an industry review of potential issues associated with them, including the possibility that they create a two-tier market”.

Imagine, a system that favours sellers of trading systems who offer their clients fast, powerful trading systems! Scandalous!

There’s an article on Bloomberg giving a defense of HFT:

About 46 percent of daily volume is handled through high- frequency strategies, according to estimates by NYSE Euronext, the world’s largest owner of stock exchanges. The transactions are made by about 400 of the 20,000 firms trading stocks in the U.S., according to Tabb Group LLC, a New York-based financial services consultant. Each makes bets in hundredths of a second to exploit tiny price swings in equities and discrepancies in futures, options and exchange-traded funds.

The firms compete for $21.8 billion in annual profits, according to Tabb. Among the largest are hedge funds Citadel Investment Group LLC, D.E. Shaw & Co. and Renaissance Technologies Corp., as well as the automated brokerages Getco LLC, Hudson River Trading LLC and Wolverine Trading LLC. Rapid- fire strategies helped equity volume more than double in the U.S. since 2006 to a record 10.8 billion shares a day last year, Nasdaq OMX Group Inc. data show.

High-frequency programs look for patterns in securities markets. A typical strategy is based on the likelihood that a stock that rose over the past 20 hours will pare its gain, said Irene Aldridge, managing partner at Toronto-based Able Alpha Trading Ltd., a high-speed proprietary trading firm. Others sift through thousands of quotes to calculate the probability of a shift in the market.

$21.8-billion! Assiduous Readers will note that all these trades are nothing more than an attempt to provide liquidity to the markets better, cheaper and faster than other attempts. Liquidity is good; liquidity means that Joe Retail can buy at 21.05 rather than the 21.15 he’d have to pay without it.

There’s a story by Ivy Schmerken on Advanced Trading:

Nasdaq is offering a second order type, called the INET-Only Flash, which exposes the order to participants for execution, without routing out to the public markets. “This will give customers the ability to get very aggressive and flash an order out to our ITCH participants or (market data) vendors, (i.e., Bloomberg or Reuters) and stay there for up to 500 milliseconds. If there is no execution, it will most likely cancel back to them,” according to Hyndman.

But the topic of flash orders is sparking considerable debate in the industry over whether holding these orders for fractions of a second and showing them to a large class of market participants and market data vendors is fair to investors. In a letter filed with the SEC on Friday, NYSE Euronext, operator of the New York Stock Exchange, opposed the practice, and asked the regulator to intervene in Nasdaq’s and BATS’s plans.

In the letter, NYSE Euronext argues that the Nasdaq Stock Market and BATS Exchange filings, “each propose to modify their respective routing strategies to provide preferential treatment for their own market participants before routing orders to away markets. “

However, Hyndman rejects the notion that orders are being flashed via a private network. “It’s not a private network, because anyone can become an ITCH participant if they choose it,” said Hyndman.

On the general topic of trade mechanics, the NYSE has announced fee changes:

The New York Stock Exchange will charge a fee of at least 5 cents per 100 shares for trades executed during the opening and closing auctions starting next month. Opening trades, which were previously executed at no cost, will have a fee cap of $10,000 a month, the exchange said in an e-mailed notice to clients.

The Big Board will also reduce its trading fees for customers that handle at least 130 million shares a month. Those clients will pay a transaction fee of 17 cents per 100 shares, down 1 cent from before.

I admit to being perplexed by the special charges on opening and closing transactions. If anybody has insight, let me know!

Remember Jerome Kerviel? He was last mentioned on PrefBlog on April 29 – he’s the guy who was left holding SocGen’s incompetent management hot potato when everything blew up and is now being scapegoated. Anyway, a decision is imminent regarding whether or not he will go to trial:

The defense’s response is the final step before investigating judges Renaud Van Ruymbeke and Francoise Desset decide early September whether Kerviel should stand trial. Any trial wouldn’t be before 2010. The probe began less than a week after Societe Generale disclosed the loss on Jan. 24, 2008, after selling his positions.

“In 2007, he was making money and they let him go on,” Metzner said. “In 2008, it all went bad, the machine was exposed, they unwound the positions in a panic and they created losses.”

The FDIC’s proposals on rules regarding private-equity purchases of banks, discussed on July 3, have drawn fire from a player:

“I assure you that my firm will never again bid if the proposed policy statement is adopted in its present form,” he wrote in a letter to the FDIC as part of the regulator’s public- comment process for the rules issued July 2. Ross’s firm was among the buyers of failed BankUnited Financial Corp. in May.

Terms proposed by the FDIC include requiring banks bought by private-equity firms to maintain a Tier 1 capital ratio of 15 percent, almost twice the level usually required for a startup bank. Tier 1 capital is a measure of a bank’s ability to absorb losses. The agency would also require the firms to hold onto their investments for at least three years.

Private-equity managers including Ross are balking at the higher capital requirement, saying it will lower the price they’re willing to pay or cause them to pass on transactions. The Private Equity Council, a Washington-based industry trade group, said July 2 the guidelines may curtail investors’ interest.

Ross, 71, teamed up with Blackstone Group LP, Carlyle Group and Centerbridge Capital Partners LLC to buy the assets of BankUnited Financial after the Florida lender was seized by the FDIC. The buyers agreed to a capital ratio of about 8 percent and told regulators they wouldn’t sell their interests in the bank for 18 months.

Sensing which way the wind is blowing, and with a very good idea of which side their bread is buttered on, the CFTC has decided speculators are evil:

The Commodity Futures Trading Commission will next month say speculators played a role in driving changes in crude oil prices, the Wall Street Journal reported citing an interview with Commissioner Bart Chilton.

The report will reverse findings from last year that attributed volatile oil price movements to supply and demand, the Journal reported. That analysis was based on “deeply flawed data,” the newspaper said, citing Chilton.

I’ve just completed an essay titled Preferred Shares and GICs, which I intend to use for advertising purposes. If anybody would care for a review copy – by which I mean, I would appreciate pre-publication comments – please eMail me. Note that this essay is aimed at relatively unsophisticated investors and has the objective of emphasizing that fixed income doesn’t begin and end with 5-year GIC ladders.

PerpetualDiscounts roared ahead today in the Canadian preferred market on heavy volume. For a wonder, FixedResets were entirely locked out of the volume highlights table!

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 1.4782 % 1,195.4
FixedFloater 7.34 % 5.50 % 36,463 16.64 1 -1.2000 % 2,092.8
Floater 3.19 % 3.81 % 75,238 17.82 3 1.4782 % 1,493.4
OpRet 4.94 % -0.35 % 137,070 0.09 15 0.0986 % 2,235.8
SplitShare 5.92 % 6.83 % 98,874 4.13 3 0.9555 % 1,959.1
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0986 % 2,044.4
Perpetual-Premium 0.00 % 0.00 % 0 0.00 0 0.4212 % 1,825.1
Perpetual-Discount 6.08 % 6.13 % 161,223 13.70 71 0.4212 % 1,680.9
FixedReset 5.51 % 4.09 % 585,235 4.20 40 -0.0194 % 2,093.7
Performance Highlights
Issue Index Change Notes
CM.PR.K FixedReset -2.18 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-08-30
Maturity Price : 25.00
Evaluated at bid price : 26.01
Bid-YTW : 4.45 %
BMO.PR.H Perpetual-Discount -1.96 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-07-28
Maturity Price : 22.09
Evaluated at bid price : 22.55
Bid-YTW : 5.97 %
TD.PR.P Perpetual-Discount -1.50 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-07-28
Maturity Price : 22.85
Evaluated at bid price : 23.00
Bid-YTW : 5.73 %
BNS.PR.R FixedReset -1.28 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-02-25
Maturity Price : 25.00
Evaluated at bid price : 25.52
Bid-YTW : 4.49 %
BAM.PR.G FixedFloater -1.20 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-07-28
Maturity Price : 25.00
Evaluated at bid price : 14.82
Bid-YTW : 5.50 %
GWO.PR.J FixedReset -1.10 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-01-30
Maturity Price : 25.00
Evaluated at bid price : 26.95
Bid-YTW : 4.22 %
SLF.PR.B Perpetual-Discount 1.00 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-07-28
Maturity Price : 19.15
Evaluated at bid price : 19.15
Bid-YTW : 6.35 %
BAM.PR.J OpRet 1.02 % YTW SCENARIO
Maturity Type : Soft Maturity
Maturity Date : 2018-03-30
Maturity Price : 25.00
Evaluated at bid price : 22.75
Bid-YTW : 6.91 %
BMO.PR.L Perpetual-Discount 1.02 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-07-28
Maturity Price : 24.43
Evaluated at bid price : 24.65
Bid-YTW : 5.99 %
HSB.PR.C Perpetual-Discount 1.05 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-07-28
Maturity Price : 21.12
Evaluated at bid price : 21.12
Bid-YTW : 6.12 %
IAG.PR.C FixedReset 1.17 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-01-30
Maturity Price : 25.00
Evaluated at bid price : 26.91
Bid-YTW : 4.46 %
BAM.PR.H OpRet 1.19 % YTW SCENARIO
Maturity Type : Soft Maturity
Maturity Date : 2012-03-30
Maturity Price : 25.00
Evaluated at bid price : 25.56
Bid-YTW : 5.06 %
BAM.PR.P FixedReset 1.39 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-10-30
Maturity Price : 25.00
Evaluated at bid price : 27.06
Bid-YTW : 5.46 %
BNA.PR.D SplitShare 1.43 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2014-07-09
Maturity Price : 25.00
Evaluated at bid price : 25.56
Bid-YTW : 6.83 %
SLF.PR.A Perpetual-Discount 1.50 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-07-28
Maturity Price : 18.99
Evaluated at bid price : 18.99
Bid-YTW : 6.34 %
PWF.PR.I Perpetual-Discount 1.57 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-07-28
Maturity Price : 23.60
Evaluated at bid price : 23.90
Bid-YTW : 6.31 %
W.PR.J Perpetual-Discount 1.64 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-07-28
Maturity Price : 22.07
Evaluated at bid price : 22.30
Bid-YTW : 6.33 %
NA.PR.K Perpetual-Discount 1.74 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-07-28
Maturity Price : 23.67
Evaluated at bid price : 23.97
Bid-YTW : 6.11 %
MFC.PR.B Perpetual-Discount 1.80 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-07-28
Maturity Price : 19.25
Evaluated at bid price : 19.25
Bid-YTW : 6.13 %
ELF.PR.G Perpetual-Discount 2.35 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-07-28
Maturity Price : 17.40
Evaluated at bid price : 17.40
Bid-YTW : 6.90 %
TRI.PR.B Floater 2.52 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-07-28
Maturity Price : 16.30
Evaluated at bid price : 16.30
Bid-YTW : 2.43 %
PWF.PR.G Perpetual-Discount 4.02 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-07-28
Maturity Price : 23.27
Evaluated at bid price : 23.57
Bid-YTW : 6.29 %
W.PR.H Perpetual-Discount 4.15 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-07-28
Maturity Price : 21.35
Evaluated at bid price : 21.35
Bid-YTW : 6.51 %
Volume Highlights
Issue Index Shares
Traded
Notes
ACO.PR.A OpRet 210,120 Desjardins crossed three blocks, 53,000 shares, 50,000 and 106,100, all at 26.50.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2009-08-27
Maturity Price : 26.00
Evaluated at bid price : 26.35
Bid-YTW : -0.35 %
PWF.PR.H Perpetual-Discount 139,679 RBC crossed 134,000 at 22.95.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-07-28
Maturity Price : 22.71
Evaluated at bid price : 22.95
Bid-YTW : 6.30 %
SLF.PR.D Perpetual-Discount 48,174 RBC crossed 38,100 at 18.40.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-07-28
Maturity Price : 18.26
Evaluated at bid price : 18.26
Bid-YTW : 6.17 %
RY.PR.G Perpetual-Discount 44,145 Anonymous crossed (?) 12,000 at 19.23.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-07-28
Maturity Price : 19.19
Evaluated at bid price : 19.19
Bid-YTW : 5.88 %
CM.PR.H Perpetual-Discount 42,198 RBC crossed 20,000 at 19.50.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-07-28
Maturity Price : 19.48
Evaluated at bid price : 19.48
Bid-YTW : 6.20 %
SLF.PR.A Perpetual-Discount 39,176 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-07-28
Maturity Price : 18.99
Evaluated at bid price : 18.99
Bid-YTW : 6.34 %
There were 52 other index-included issues trading in excess of 10,000 shares.

4 Responses to “July 28, 2009”

  1. […] been very pleased with the response to yesterday’s plea for reviews of my essay on Preferred Shares and GICs. There is definitely more work to […]

  2. trade extension ladders…

    You not only need the best ladders for the job nut also the safest… meeting all regulatory requirements. Without making sure of safety you could leave yourself open to claims and legal action….

  3. […] This issue was last discussed on PrefBlog on July 28. […]

  4. […] Kerviel, the SocGen trader last discussed on PrefBlog on July 28, 2009, has written a book: The five-billion-Euro rogue trader Jerome Kerviel will claim in a book this […]

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