This is the story of one high-frequency trading firm suing one or more others and giving detailed credence to everything that has been said over the last year or so by those who bemoan the rise of HFT firms.
The first half-hour return of the S&P 500 ETF predicts the last half-hour return of the same trading day rather well. Why isn't this effect arbitraged away and a random walk restored?
The international push to mandate central clearing has expanded the clearinghouses "well beyond levels the market has ever seen," Greenwich Associates reminds us in a new report. This is an experiment, and there remains some grounds for uncertainty about the outcome.
Commenters successful pressed for certain changes in this massive new rule during its years of gestation. For example, the rule incorporates a T + 24 approach for the reporting of block trades. But warned, though, blizzards in NYC don't stop the ticking of that 24 hour clock.
To the extent that high-frequency trading is analogized to 'insider trading,' it may be in trouble with securities regulators but still in the clear with commodities regulators. After all, the latter do allow hedgers to use non-public material information to protect themselves. But Gregory Scopino doesn't believe pinging and related HFT practices should be in the clear with the CFTC at all.
A December 15 opinion by the SEC limits the significance of a Supreme Court decision of three years ago, and so at least pending appeal it broadens the applicability of the basic anti-fraud rule 10b-5 to the employees of an investment adviser.
Alan Rechtschaffen quotes two definitions of "moral hazard" in this book. The first, from Ben Bernanke, seems to get the book off to a rather awkward start. The second, from Zachary Gubler much later on, represents something of a recovery.
The Manhattan bankruptcy court has now granted individual defendants in the MF Global matter, including Jon Corzine, access to funds from their D&O insurance. But it wasn't easy for them to get here, and therein lies our moral.
The SEC's new rules for asset backed securities require asset level disclosures both at the time of offering and later, on an ongoing basis. The disclosures are required to appear in a standardized XML format.
The clearing-for-everything parade continues. Christopher Faille reviews three representative comments among those just released by ESMA, elicited by its consultation paper on the new clearing obligation for interest-rate swaps.
Let's not make clearinghouses too big to fail. Or if, through, Dodd-Frank, we already have, let's turn back and reconsider that decision. That's how not to end up bailing them out or nationalizing them in due course.
If such institutions as the ECB keep rewarding indebtedness, then over time they get their way. They'll get a lot of deal making, even if it amounts to a frenzy. Then investors will demand funds that play to that frenzy.
It does appear that speed is helpful in generating alpha. How is it helpful? Here there are two views, and the less HFT-friendly of these views has received some scholarly/empirical support.
"Isn't there anything good to be said for the practice of historical cost accounting, especially when the cost figures are higher than the mark-to-market figures? Well ... no. It's reality avoidance."
ESMA defines HFT as “a special class of algorithmic trading in which computers make decisions to initiate orders based on information that is received electronically, before human traders are capable of processing the information they observe and of taking a decision in relation thereto.” It then decides that needs further definition.
In the recriminations that followed the demise of Enron in 2001, the whole idea of mark-to-market accounting acquired a taint. A lot has changed since then, but fair value debates we will always have with us.
But Basel is still part of the multinational push to fit the peg of credit derivatives into the square hole of standardized contracts and central clearing. Is the peg going to fit?
After a lengthy CFTC deliberation and some controversy, the SEF system, with a "made available to trade" component, has gotten itself up and running. Some early observations from Celent.
Financial firms still have people manually implementing Excel spreadsheets in connection with various mandated stress tests, a fact that suggests to a Celent research director that Fred Flintstone runs the back office.
The multi-state, multi-national law firm Pillsbury Winthrop Shaw Pittman has offered its clients, especially the banking entities among them, a guide to the principal elements of the newly finalized Volcker Rule, and it touches upon several significant concerns that industry participants have expressed.
In January 2013 the Council of the European Union agreed to allow 11 member states to institute a sweeping financial transaction tax as a matter of "enhanced cooperation." Now, a year later, the EU's tax commissioner, a one-time enthusiast of the idea, is signaling compromise.
A recent paper on "Option Implied Volatility, Skewness, and Kurtosis and the Cross-Section of Expected Stock Returns" finds a positive relationship between each of the three listed characteristics of a distribution on the one hand and ex ante expected returns on the other. In the case of skewness in particular, this finding struck me as a bit odd.
A contractual provision for the mandatory repurchase of loans affected by a misrepresentation was supposed to be the alternative remedy, keeping disputes between the parties out of the courts. In the matter of ACE Securities, that didn't work.
Judge Rakoff has hit a nerve with his contention that criminal cases in connection with the late mortgage derivatives bubble aren't being brought in large part due to "the government's own involvement in the underlying circumstances that led to the financial crisis."
A new youtube video that seems aimed at building public sentiment for preserving section 716 of the Dodd-Frank Act intact, is actually after bigger game. And the bigger game is a far better target. But the word "derivatives" is not really that tricky to pronounce.
In the Endicott case, the Tax Court adopted the Internal Revenue Commissioner's view against the taxpayer. But on the central interpretive question involved, there remains no bright line test.
Consider TMX index futures: volume and open interest were both heading up sharply in the period 2005-06. But OI peaked in 2006, while volumes continued up for another two years. Going forward, too, the two are not expected to move in tandem.
A big story came with Beijing and London datelines on Tuesday, October 15: a deal that may make the City of London a major trading hub in the Chinese yuan, while making life easier for British investors who want to invest directly in China. What does this mean for the U.S. dollar?
A decision by Judge Nathan on a case arising from the failure of two Bear Stearns branded hedge funds in the spring and summer of 2007 involves a remarkably aggressive application of Daubert, the standard for accepting the testimony of scientific experts.
A forthcoming paper suggests that the old risk premium in crude oil futures has essentially disappeared, at least as averaged out over (rather modest) spans of time, and proposes commodity index funds as an explanation of the disappearance.
We asked Shai Heffetz, managing director for InterTrader, about the difference between spread betting on the one hand and trading CFDs on the other. Spoiler Alert: In involves the capital gains tax. And it cuts both ways.
Buried in the midst of a wide-ranging report, we have found the news that the old-fashioned FIX protocol is still a vital force, unlikely to be replaced by the flashier open-source FpML.
CFOs' answers to survey questions from Deloitte show that many companies see economic conditions in North America as on the upswing, but that their approaches to the improving condition of this continent will be measured and methodical.
A year ago the CFTC published its "final exemptive order regarding compliance with certain swap regulations." That order was to last for one-year, and thereby set a clock ticking. Negotiations became frantic in recent weeks as the alarm approached. Nobody wanted to hear it ring.
Summary/excerpt: If Clark-Joseph is wrong in his worries about the "exploratory trading" of high frequency traders, he should be shown to be wrong with the use of facts and reason. He shouldn't be shushed, directly or indirectly.
Three scholars find a very real possibility that there is a cause and effect relationship between index flows in the derivatives markets, at least the agricultural index markets, on the one hand and price moves in the underlying commodity on the other.
Under the Dodd-Frank Act, and the implementing rules now approved by the CFTC, trades that aren't "large notional swaps" are to be reported more rapidly and thoroughly than those that are. This of course makes the definition of a large notional swap (a/k/a a block trade) an important matter.
A new SEC proposal, promulgated May 1, would provide that Dodd-Frank requirements regarding swaps apply if a transaction is entered into by a U.S. person or conducted within the U.S. but that an entity operating outside the U.S. may be able to substitute foreign regulatory requirements for the U.S. requirements if the extraterritorial party's home system produces comparable regulatory outcomes.
IOSCO's new draft report says that regulators ought to do a lot of "monitoring" of the consequences of changes in market structure. A little less predictably: it goes into some detail on the diversity of regulatory systems that bear on the question of fragmentation.
The benchmarking consultation paper from ESMA/EBA has produced intriguing responses from, among others, the International Swaps and Derivatives Association and the EDHEC-Risk Institute.
Just as one buys bourbon from a retailer who buys it from a distributor who buys it from the manufacturer, so in the world of stocks someone desiring a share of Apple will call a broker who will often go through an exchange which matches him with the broker for a seller. But in a networked world, one can disintermediate.
Lehman's adversary proceeding may yet raise the important issues of risk management that arise out of the relationships among the major Wall Street players at times of crisis. But the latest 'Blame the whale' request by the bankruptcy lawyers involved is a blatant distraction and diversion.
This is the second of a two-part discussion of a paper jointly issued by Basel and IOSCO on margin requirements for non-centrally cleared derivatives. The new paper solicits feedback on the phase-in timeline it proposes, a phase-in designed to provide flexibility so the affected markets can meet "operational and logistical challenges" by which they might otherwise be stymied.
This is the first of a two-part discussion of a paper jointly issued by Basel and IOSCO on margin requirements for non-centrally cleared derivatives. The new paper solicits feedback on only four still-open issues, and the list of issues itself illustrates the near finality they claim for this paper.
Think of betting on black or red at the roulette table. If red comes up a lot, some people will be tempted to start putting all their chips on black.
As one authority puts it, 'the tectonic plates are shifting' in the world of derivatives exchanges and clearing. How can institutions keep their balance during the earthquakes? The Basel Committee may just have offered some help.
As the reforms come on line, or as the asset management industry makes its adjustments in anticipation thereof, the initial margin requirements will be a big hurdle, in part because CCPs are quite restrictive about what assets are eligible as collateral. This may set the industry up for a collateral crunch.
A number of U.S. centered studies before this, such as one by Robert Daigler and Laura Rossi in 2006, had found that adding a long volatility position to an underlying equity portfolio has a significant diversification effect. But the authors of the new EDHEC paper wanted to determine whether the same benefits can be found in European data.
In a presentation about Malaysian derivatives trading, the issue of capital controls, and memories of the late 1990s, briefly came to the fore. Assume that a foreign investor considers Malaysia a promising place to invest. Will this investor be confident that if he does so he’ll be in a position to repatriate at his own choosing?
As a recent paper from four scholars at the Universidad de Santiago de Compostela, in Spain, observes, the extra flexibility risk managers gain from using credit derivatives comes with drawbacks. Perhaps the most obvious of drawbacks is that it creates counter-party risk. Still, the authors: Luis Otero González, Luis Ignacio Rodriguez Gil, Sara Cantorna Agra, and Pablo Durán Santomil, have written “Banking Risk and Credit Derivatives,” in order to take an empirical look at the balance of pros and cons.