March 19, 2014

Jonathan Weil of Bloomberg decries regulatory extortion:

New York Attorney General Eric Schneiderman is out again with another reminder that he doesn’t like the way high-frequency traders operate. He believes they have unfair advantages, and that it’s a bad idea for stock exchanges to sell them special services that cater to their wants. For that matter, so do I. So on that we can agree.

But Schneiderman also says there’s something about these arrangements that might be illegal, without saying what it is. If that’s true, he ought to spell it out. Instead, he’s back to his old ways of threatening to investigate companies and maybe sue them for fraud unless they change their practices in a way that he deems acceptable. No matter how noble his intentions, this isn’t how a law-enforcement officer should operate.

Sadly, extortion works:

Marketwired, a company that publishes and distributes corporate earnings and other market-moving news releases, said on Wednesday that it will no longer sell directly to high-frequency trading companies.

The action comes amid a wide-ranging probe by New York Attorney General Eric Schneiderman to end early access to information by technologically sophisticated traders, and follows a similar decision last month by Berkshire Hathaway’s Business Wire.

Marketwired said it would no longer provide its distribution service to high-frequency trading firms to “eliminate any perceived advantages gained through technology by certain customers,” according to a statement.

Naturally, there is a little reaction:

Mark Gorton knows what will happen on the day high-frequency traders’ computers get kicked out of the New York Stock Exchange.

“All you’re going to do is have a data center that’s across the street,” said Gorton, founder of the Lime Wire LLC music-sharing service and managing director of Tower Research Capital LLC, one of the most prolific equity traders in America. “Everyone’s going to want to put their computers there.”

During a panel discussion yesterday following Schneiderman’s speech, Chad Johnson, chief of the New York Investor Protection Bureau in the attorney general’s office, said his boss doesn’t “pine for the days before electronic trading,” and recognizes there were issues in the past.

“The focus of our initiative is on the abusive practices, the latency arbitrage and the like,” Johnson said yesterday. “The strategies are ultimately extracting from the capital markets enormous sums of money and not providing benefit that makes that worthwhile,” he added. “You don’t necessarily have to get rid of the bad and toss the good — if there is good — at the same time.”

At issue is a model that regulators have permitted for years. Firms pay to place their systems in the same data centers as the exchanges, letting them directly plug in their companies’ servers and trade thousandths or even millionths of a second faster. They also purchase proprietary data feeds, which are faster and more detailed than the stock-trading information available on the public ticker.

The fact is that the market structure rewards speed. So there’s going to be competition for speed. I don’t see that there’s any way around that, even supposing that a rational person would want to get around that. The best that the regulators can do – assuming they are stupid enough to do it – is create a forest of totally arbitrary rules, which people will then devote vast resources to getting around. Sheer craziness. But Gorton’s last point is best:

“It’s true that grandma is not putting a computer in the data center to execute her orders,” Gorton said. “But when she routes her orders through a brokerage firm, that firm has an order and now actually the computer at the brokerage firm and the computer of the professional traders are on an exact level playing field.”

Exactly. It’s called competition. Why is Schneiderman so eager to protect the incompetent?

The article referenced a paper by Eric Budish†, Peter Cramton and John Shim titled The High-Frequency Trading Arms Race: Frequent Batch Auctions as a Market Design Response:

We argue that the continuous limit order book is a flawed market design and propose that financial exchanges instead use frequent batch auctions: uniform-price sealed-bid double auctions conducted at frequent but discrete time intervals, e.g., every 1 second. Our argument has four parts. First, we use millisecond-level direct-feed data from exchanges to show that the continuous limit order book market design does not really “work” in continuous time: market correlations completely break down at high-frequency time horizons. Second, we show that this correlation breakdown creates frequent technical arbitrage opportunities, available to whomever is fastest, which in turn creates an arms race to exploit such opportunities. Third, we develop a simple new theory model motivated by these empirical facts. The model shows that the arms race is not only socially wasteful – a prisoner’s dilemma built directly into the market design – but moreover that its cost is ultimately borne by investors via wider spreads and thinner markets. Last, we show that frequent batch auctions eliminate the arms race, both because they reduce the value of tiny speed advantages and because they transform competition on speed into competition on price. Consequently, frequent batch auctions lead to narrower spreads, deeper markets, and increased social welfare.

The FOMC announced more tapering:

The Committee currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions since the inception of the current asset purchase program, the Committee decided to make a further measured reduction in the pace of its asset purchases. Beginning in April, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $25 billion per month rather than $30 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $30 billion per month rather than $35 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee’s sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee’s dual mandate.

Mexico is issuing long bonds:

When a French utility completed its sale of 100-year bonds denominated in pounds in January, Mexico took note.

Four years after becoming just the second country to sell dollar debt due in 100 years, Mexico last week issued 1 billion pounds ($1.66 billion) of securities that mature in 2114, becoming the only nation with two century bonds. U.K. investors accounted for 84 percent of buyers in the March 12 offering, said Alejandro Diaz de Leon, Mexico’s public debt chief. The sale by Electricite de France SA in January underscored the pent-up demand for longer-dated debt in pounds, according to Barclays Plc, which helped underwrite both deals.

“Mexico historically has distinguished themselves from other sovereigns in terms of always looking at creative ways of getting more efficiency in terms of their debt management strategy,” Raul Martinez-Ostos, head of Mexican operations at Barclays, said by phone from Mexico City. “Here it was really driven by real-money institutional accounts in the U.K.”

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts off 6bp, FixedResets up 10bp and DeemedRetractibles gaining 5bp. Volatility was low. Volume was low.

PerpetualDiscounts now yield 5.54%, equivalent to 7.20% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.45%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 275bp, a significant widening from the 265bp reported March 12.

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 -0.4560 % 2,420.9
FixedFloater 4.70 % 4.30 % 37,533 17.73 1 0.5475 % 3,608.5
Floater 3.01 % 3.11 % 52,019 19.46 4 -0.4560 % 2,613.9
OpRet 4.65 % -0.79 % 92,641 0.25 3 0.0905 % 2,685.2
SplitShare 4.82 % 4.33 % 66,192 4.32 5 -0.1669 % 3,075.6
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0905 % 2,455.3
Perpetual-Premium 5.63 % -1.00 % 92,548 0.08 11 0.0608 % 2,354.3
Perpetual-Discount 5.45 % 5.54 % 120,070 14.51 26 -0.0599 % 2,437.5
FixedReset 4.70 % 3.52 % 216,182 6.81 79 0.1006 % 2,508.7
Deemed-Retractible 5.06 % 2.40 % 155,611 0.18 42 0.0472 % 2,467.6
FloatingReset 2.57 % 2.58 % 195,613 7.09 5 0.0885 % 2,441.7
Performance Highlights
Issue Index Change Notes
ELF.PR.F Perpetual-Discount -1.06 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-03-19
Maturity Price : 23.15
Evaluated at bid price : 23.41
Bid-YTW : 5.75 %
MFC.PR.C Deemed-Retractible 1.11 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.80
Bid-YTW : 6.17 %
ELF.PR.G Perpetual-Discount 1.17 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-03-19
Maturity Price : 21.70
Evaluated at bid price : 21.70
Bid-YTW : 5.57 %
Volume Highlights
Issue Index Shares
Traded
Notes
BAM.PF.E FixedReset 137,177 Recent new issue.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-03-19
Maturity Price : 22.91
Evaluated at bid price : 24.45
Bid-YTW : 4.23 %
TRP.PR.B FixedReset 98,918 RBC crossed two blocks of 10,000 each, both at 20.05. Nesbitt crossed 75,000 at 20.00.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-03-19
Maturity Price : 19.98
Evaluated at bid price : 19.98
Bid-YTW : 3.67 %
RY.PR.W Perpetual-Discount 82,491 Nesbitt crossed 75,000 at 25.08.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-03-19
Maturity Price : 24.84
Evaluated at bid price : 25.07
Bid-YTW : 4.92 %
MFC.PR.L FixedReset 73,842 Recent new issue.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.40
Bid-YTW : 4.15 %
RY.PR.Z FixedReset 60,588 RBC crossed 50,000 at 25.45.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-03-19
Maturity Price : 23.29
Evaluated at bid price : 25.44
Bid-YTW : 3.66 %
SLF.PR.G FixedReset 57,200 RBC crossed 37,700 at 22.12.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.17
Bid-YTW : 4.48 %
There were 20 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
POW.PR.C Perpetual-Premium Quote: 25.46 – 25.72
Spot Rate : 0.2600
Average : 0.1452

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-04-18
Maturity Price : 25.00
Evaluated at bid price : 25.46
Bid-YTW : -4.07 %

MFC.PR.K FixedReset Quote: 24.66 – 24.97
Spot Rate : 0.3100
Average : 0.1992

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.66
Bid-YTW : 3.97 %

VNR.PR.A FixedReset Quote: 25.41 – 25.80
Spot Rate : 0.3900
Average : 0.2842

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-10-15
Maturity Price : 25.00
Evaluated at bid price : 25.41
Bid-YTW : 4.11 %

ENB.PR.A Perpetual-Premium Quote: 25.33 – 25.56
Spot Rate : 0.2300
Average : 0.1523

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-04-18
Maturity Price : 25.00
Evaluated at bid price : 25.33
Bid-YTW : -7.07 %

PWF.PR.K Perpetual-Discount Quote: 23.12 – 23.35
Spot Rate : 0.2300
Average : 0.1538

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-03-19
Maturity Price : 22.85
Evaluated at bid price : 23.12
Bid-YTW : 5.42 %

BAM.PR.B Floater Quote: 16.80 – 17.00
Spot Rate : 0.2000
Average : 0.1241

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-03-19
Maturity Price : 16.80
Evaluated at bid price : 16.80
Bid-YTW : 3.12 %

Leave a Reply

You must be logged in to post a comment.