April 27,2015

April 27th, 2015

I talked about my fascination with the Amazon drone proposal on April 13 and it turns out that one Assiduous Reader is involved with the project up to his neck! Now some more details have been released:

In its most detailed public disclosure about a proposed service called Prime Air, Amazon is arguing that cargo drones should be allowed to take flight if the online retailer can show they’re not going to collide with planes or crash to the ground.

The drones, still in development, would mostly fly at least 200 feet off the ground, relying on sensors and computers to select a route to customers’ doors and avoid hazards, Amazon said in a request Friday to the Federal Aviation Administration seeking leniency on pending drone regulations. One Amazon employee would operate many drones simultaneously, according to the request letter.

The FAA’s proposed rules would block Amazon’s plans. The agency proposal wouldn’t allow drones to carry commercial cargo and would require they only be flown within sight of an operator, prohibiting flights of 10 miles (16 kilometers), or longer, envisioned by Amazon.

Instead of flatly prohibiting such flights, the FAA needs to set up criteria to allow them if Amazon or other companies can demonstrate they’re safe and reliable, Misener said.

The Small UAV Coalition, a trade group representing companies including Amazon and Google Inc., and the Association for Unmanned Vehicle Systems International, another trade group for the drone industry, filed similar comments as Amazon.

AUVSI said the FAA should drop its proposed ban of night drone flights if a user could demonstrate they were as safe as daytime operations.

It also highlights the cutting-edge robotics and computer technology underpinning what Amazon wants to do. If a drone loses radio contact with its operator, it must be capable of safely returning to base or landing without harming people or property, for example.

Amazon envisions using automated sensors to “sense-and-avoid” other drones and obstructions, according to its letter. Except for takeoff and landing, drones would stay in a zone of 200 feet to 500 feet from the ground. Most traditional planes and helicopters fly above 500 feet.

I confess to some surprise that the major courier companies are not members of the Small UAV Coalition, but while there are reports that they’re interested in drones, they’re more interested in big ones. Small ones are deprecated; but the Big FedEx Guy sounds a lot like the guys who thought the worldwide market for computers was maybe six units:

Speaking exclusively to IBTimes UK, David Binks, the President of EMEA at FedEx Express, confirmed that the company has “had some conversations” with drone manufacturers – as it does with other technological companies, such as the manufacturers of driverless cars – but that he can only envisage a time when the robots will take a “niche” place in the delivery sector.

“That’s a topic that comes up frequently. I think drones are an interesting tech in terms of what learning we can get out of them and what they facilitate in terms of future technology. We keep an eye on that, we work with the organisations who are developing those types of technology as we do with the automotive industry, who are working on driverless vehicles,” he added.

“I can see a time when perhaps they have a niche use. I don’t know whether that would become a widespread parcel delivery network. We’d have an awful lot of drones in the sky.

“It might be for a very specific delivery opportunity in a remote area where it’s very difficult to get to. I think that type of use might be interesting in the future.”

It will be fascinating to learn how all this shakes out over the next few years; I look forward to the day when I can order beer and pizza at 4am and pick it up from the helipad on the front porch!

Assiduous Reader JP sends me yet another great link (well done, JP!) from the Economist titled Frozen: Regulators have made banking safer. But has that made markets riskier?:

TO ENSURE that it meets the 750 new rules on capital imposed in the aftermath of the financial crisis, JPMorgan Chase employs over 950 people. A further 400 or so try to follow around 500 regulations on the liquidity of its assets, designed to stop the bank toppling over if markets seize up. A team of 300 is needed to monitor compliance with the Volcker rule, which in almost 1,000 pages restricts banks from trading on their own account.

The intention of all these rules is to prevent a repeat of the bankruptcies and bail-outs of 2008. But some observers, including JPMorgan’s boss, Jamie Dimon, and Larry Summers, a former Treasury secretary, argue that in their rush to make banks safer, regulators may have created a riskier financial system. By throttling the bits of banks that “make markets” in bonds, shares, currencies and commodities, the theory goes, watchdogs have made such assets less liquid. Investors may not be able to buy and sell them quickly, cheaply and without moving the price. The consequences in a downturn, when markets are less liquid anyway, could be severe.

The problem is the elimination of the ‘three pillars’ of the financial system: banks, insurers and securities dealers. First the banks were allowed to swallow up the securities sector (or, as in the case of Goldman Sachs, securities dealers were converted willy-nilly into banks). Then banks were no longer permitted to act as securities dealers. And all this has been done without anybody, even once, thinking about what they were doing.

I have no problem with forcing the banks out of the securities business; in fact, I support the idea. But really, something should be in place beforehand, don’t you think? We need to nurture the next generation of securities dealers – I suggest that hedge funds should be, generally speaking, happy to set up trading operations … but you can bet that should they start attempting to do this, they will be vilified by regulators and self-proclaimed “investor advocates” … particularly the ones who like to parade their ignorance by demanding that bonds be exchange traded.

It was a mixed but strong day for the Canadian preferred share market with PerpetualDiscounts gaining 3bp, FixedResets up 48bp and DeemedRetractibles off 1bp. ENB and TRP FixedResets were prominent on the winning side of a lengthy Performance Highlights table. Volume was on the high side of 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:

impVol_TRP_150427
Click for Big

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 23.30 to be $0.75 rich, while TRP.PR.B, resetting 2015-6-30 at +128, is $0.75 cheap at its bid price of 14.71.

impVol_MFC_150427
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Another excellent fit (despite a sharp increase in Implied Volatility today), but the numbers are perplexing. Implied Volatility for MFC continues to be a conundrum, although it declined substantially today. It is still too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule).

Most expensive is MFC.PR.M, resetting at +236 on 2019-12-19, bid at 23.50 to be $0.53 rich, while MFC.PR.L, resetting at +216bp on 2019-6-19, is bid at 21.44 to be $0.69 cheap.

impVol_BAM_150427
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The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 19.91 to be $0.59 cheap. BAM.PF.E, resetting at +255bp 2020-3-31 is bid at 22.70 and appears to be $0.63 rich.

impVol_FTS_150427
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FTS.PR.H, with a spread of +145bp, and bid at 16.35, looks $0.51 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, is bid at 21.58 and is $0.40 rich.

pairs_FR_150427
Click for Big

Investment-grade pairs now predict an average over the next five years of about 0.20%, but TRP.PR.A / TRP.PR.F is an outlier at -0.77% and the new BNS.PR.Y / BNS.PR.D pair is at +0.63%. The DC.PR.B / DC.PR.D pair retains its customary outlier status, with a breakeven rate of -1.69%0.

pairs_FF_150427
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 0.3204 % 2,165.0
FixedFloater 0.00 % 0.00 % 0 0.00 0 0.3204 % 3,785.4
Floater 3.35 % 3.54 % 56,374 18.42 4 0.3204 % 2,301.5
OpRet 4.42 % -3.69 % 41,508 0.10 2 0.0984 % 2,764.8
SplitShare 4.58 % 4.57 % 68,024 3.38 3 -0.0934 % 3,221.6
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0984 % 2,528.1
Perpetual-Premium 5.33 % 4.33 % 65,449 0.09 25 0.0920 % 2,515.9
Perpetual-Discount 5.13 % 5.26 % 140,526 15.01 9 0.0331 % 2,783.1
FixedReset 4.50 % 3.80 % 288,203 16.49 86 0.4823 % 2,353.9
Deemed-Retractible 4.92 % 2.95 % 112,950 0.32 36 -0.0111 % 2,646.0
FloatingReset 2.53 % 3.07 % 73,437 6.22 9 -1.8712 % 2,303.5
Performance Highlights
Issue Index Change Notes
CIU.PR.C FixedReset -1.88 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-27
Maturity Price : 15.63
Evaluated at bid price : 15.63
Bid-YTW : 3.77 %
MFC.PR.F FixedReset -1.37 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 18.00
Bid-YTW : 6.54 %
PWF.PR.P FixedReset -1.34 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-27
Maturity Price : 17.66
Evaluated at bid price : 17.66
Bid-YTW : 3.65 %
TD.PR.T FloatingReset -1.08 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.80
Bid-YTW : 3.02 %
SLF.PR.E Deemed-Retractible -1.06 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.25
Bid-YTW : 5.51 %
BAM.PR.Z FixedReset -1.04 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-27
Maturity Price : 22.95
Evaluated at bid price : 23.85
Bid-YTW : 4.14 %
ENB.PR.F FixedReset 1.03 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-27
Maturity Price : 19.60
Evaluated at bid price : 19.60
Bid-YTW : 4.53 %
BMO.PR.Q FixedReset 1.07 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.70
Bid-YTW : 4.10 %
HSE.PR.A FixedReset 1.07 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-27
Maturity Price : 16.07
Evaluated at bid price : 16.07
Bid-YTW : 4.23 %
ENB.PR.D FixedReset 1.09 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-27
Maturity Price : 19.41
Evaluated at bid price : 19.41
Bid-YTW : 4.40 %
ENB.PR.P FixedReset 1.10 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-27
Maturity Price : 20.14
Evaluated at bid price : 20.14
Bid-YTW : 4.42 %
SLF.PR.H FixedReset 1.15 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.19
Bid-YTW : 5.25 %
MFC.PR.K FixedReset 1.15 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.00
Bid-YTW : 5.01 %
BAM.PR.K Floater 1.16 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-27
Maturity Price : 13.90
Evaluated at bid price : 13.90
Bid-YTW : 3.61 %
MFC.PR.J FixedReset 1.27 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.00
Bid-YTW : 4.23 %
ENB.PR.T FixedReset 1.37 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-27
Maturity Price : 20.00
Evaluated at bid price : 20.00
Bid-YTW : 4.46 %
ENB.PR.B FixedReset 1.45 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-27
Maturity Price : 18.83
Evaluated at bid price : 18.83
Bid-YTW : 4.54 %
ENB.PF.G FixedReset 1.53 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-27
Maturity Price : 21.27
Evaluated at bid price : 21.27
Bid-YTW : 4.53 %
BNS.PR.R FixedReset 1.54 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.65
Bid-YTW : 2.92 %
TRP.PR.C FixedReset 1.57 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-27
Maturity Price : 17.50
Evaluated at bid price : 17.50
Bid-YTW : 3.56 %
IAG.PR.G FixedReset 1.69 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.71
Bid-YTW : 4.07 %
ENB.PR.J FixedReset 1.87 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-27
Maturity Price : 20.75
Evaluated at bid price : 20.75
Bid-YTW : 4.46 %
BAM.PR.X FixedReset 1.98 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-27
Maturity Price : 18.00
Evaluated at bid price : 18.00
Bid-YTW : 4.06 %
ENB.PR.N FixedReset 1.99 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-27
Maturity Price : 20.55
Evaluated at bid price : 20.55
Bid-YTW : 4.47 %
ENB.PF.E FixedReset 2.12 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-27
Maturity Price : 21.15
Evaluated at bid price : 21.15
Bid-YTW : 4.53 %
TRP.PR.E FixedReset 2.15 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-27
Maturity Price : 22.47
Evaluated at bid price : 23.30
Bid-YTW : 3.65 %
FTS.PR.H FixedReset 2.19 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-27
Maturity Price : 16.35
Evaluated at bid price : 16.35
Bid-YTW : 3.62 %
ENB.PF.A FixedReset 2.23 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-27
Maturity Price : 21.11
Evaluated at bid price : 21.11
Bid-YTW : 4.51 %
ENB.PR.H FixedReset 2.29 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-27
Maturity Price : 18.33
Evaluated at bid price : 18.33
Bid-YTW : 4.41 %
ENB.PF.C FixedReset 2.37 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-27
Maturity Price : 21.14
Evaluated at bid price : 21.14
Bid-YTW : 4.50 %
TRP.PR.A FixedReset 3.08 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-27
Maturity Price : 20.11
Evaluated at bid price : 20.11
Bid-YTW : 3.64 %
Volume Highlights
Issue Index Shares
Traded
Notes
HSE.PR.A FixedReset 262,493 RBC crossed 174,500 at 16.05, 32,000 at 16.09 and bought 10,200 from CIBC at 16.00.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-27
Maturity Price : 16.07
Evaluated at bid price : 16.07
Bid-YTW : 4.23 %
TD.PF.E FixedReset 134,940 Recent new issue.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-27
Maturity Price : 23.11
Evaluated at bid price : 24.93
Bid-YTW : 3.63 %
GWO.PR.M Deemed-Retractible 75,400 Nesbitt crossed 75,000 at 26.22.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-05-27
Maturity Price : 26.00
Evaluated at bid price : 26.22
Bid-YTW : 0.11 %
BMO.PR.M FixedReset 58,235 RBC crossed blocks of 28,900 and 20,000, both at 25.22.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.22
Bid-YTW : 2.92 %
ENB.PR.B FixedReset 50,540 Scotia crossed 10,000 at 18.72; RBC crossed 22,600 at the same price.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-27
Maturity Price : 18.83
Evaluated at bid price : 18.83
Bid-YTW : 4.54 %
RY.PR.D Deemed-Retractible 50,030 Scotia crossed 40,000 at 25.25.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-05-27
Maturity Price : 25.25
Evaluated at bid price : 25.23
Bid-YTW : 1.42 %
There were 37 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
ELF.PR.H Perpetual-Premium Quote: 25.50 – 26.00
Spot Rate : 0.5000
Average : 0.3155

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2020-04-17
Maturity Price : 25.25
Evaluated at bid price : 25.50
Bid-YTW : 5.28 %

CIU.PR.C FixedReset Quote: 15.63 – 16.60
Spot Rate : 0.9700
Average : 0.7925

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-27
Maturity Price : 15.63
Evaluated at bid price : 15.63
Bid-YTW : 3.77 %

BAM.PF.E FixedReset Quote: 22.70 – 23.26
Spot Rate : 0.5600
Average : 0.4338

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-27
Maturity Price : 22.10
Evaluated at bid price : 22.70
Bid-YTW : 4.03 %

BAM.PR.N Perpetual-Discount Quote: 22.60 – 22.95
Spot Rate : 0.3500
Average : 0.2357

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-27
Maturity Price : 22.15
Evaluated at bid price : 22.60
Bid-YTW : 5.29 %

SLF.PR.E Deemed-Retractible Quote: 23.25 – 23.56
Spot Rate : 0.3100
Average : 0.1994

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.25
Bid-YTW : 5.51 %

TD.PR.T FloatingReset Quote: 23.80 – 24.08
Spot Rate : 0.2800
Average : 0.1743

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.80
Bid-YTW : 3.02 %

BNS.PR.D: No Surprises On Debut

April 27th, 2015

As has been previously reported on PrefBlog, there was a 42% conversion of BNS.PR.Y into BNS.PR.D on its first Exchange Date.

BNS.PR.D is a FloatingReset 3MoBills+100bp. The issue traded 500 shares today (consolidated exchanges) in a range of 22.00-23.90 (!) before closing at 21.90-30.

Vital statistics are:

BNS.PR.D FloatingReset YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.90
Bid-YTW : 3.66 %

As may be seen on the Strong Pairs analysis …:

pairs_FR_150427
Click for Big

investment grade FixedReset/FloatingReset pairs have an average break-even three-month bill rate of about 0.20%; outliers are TRP.PR.A / TRP.PR.F (not shown) at -0.77%, and the BNS.PR.Y / BNS.PR.D pair at +0.63%.

Sarao Looking More Like a Hero All The Time!

April 25th, 2015

We will all remember that Navinder Singh Sarao has been elected Official Flash Crash Scapegoat by the US Department of Justice.

But the case continues to bring more questions than it purports to answer – even Flash Boys’ author Michael Lewis shows a grudging admiration for the man:

The people at the CFTC who decided to come forth, five years after the fact, with this new and improved explanation for the flash crash, must have known they would be creating a controversy with themselves at the center of it. It’s actually sort of brave of them.

They’ve been ridiculed in the news media and will no doubt soon be hauled before various congressional committees. They’ll have annoyed their colleagues at the Securities and Exchange Commission, who now look like even greater fools than they did before, for not bothering to mention in their report on the crash the various nefarious activities of algorithmic traders, and instead offering up as the primary cause of the crash a stupid mistake made by a money manager in Kansas. The authors of the SEC report either consciously ignored or did not bother to acquire from the CFTC a lot of accessible, and damning, information about what was happening in the U.S. stock markets the day of the flash crash. The world will now want to know why they did this.

Then there is the biggest question of all: How can a guy working from his parents’ house in suburban England whose only actionable orders were to BUY stock market futures cause such a sensational collapse in U.S. stocks? On the day of the flash crash, Sarao never actually sold stocks. He was trying to trick the market into falling so that he could buy in more cheaply. But whom did he fool with his trick? Whose algorithms were so easily gamed that they responded to phony sell orders by creating a crash? Stupidity isn’t a crime. Still, it would be interesting to know who, at this particular poker table, on this particular day, was the fool.

It would also be interesting to know how it occurred to Sarao that his trick might work. There’s a fabulous yet-to-be-told story here, about a smart kid in the U.K. who somehow figures out that the machines that execute the stock market trades of others might be gamed — and so he games them.

Eric Hunsader of Nanex takes time to point out that a recent spoofing penalty cost $50,000:

Pursuant to an offer of settlement in which Jonathan Brims (“Brims”) neither admitted nor denied the rule violations upon which the penalty is based, on January 20, 2015, a Panel of the CBOT Business Conduct Committee (“BCC” or “Panel”) found that it had jurisdiction over Brims pursuant to CBOT Rules 400 and 402 as the conduct occurred while Brims was an employee of a CBOT member firm. The Panel also found that during the time period from September 2011 through December 2012, Brims, on multiple occasions, entered large orders in the 5-Year Note, 10-Year Note, Bond, and Ultra Bond futures contract markets without the intent to trade. The Panel specifically found that Brims placed a small order to sell (buy) in the futures contract market on the CME Globex electronic trading platform (“Globex”). Brims subsequently entered multiple large-lot buy (sell) orders at or near the best bid (offer) on Globex to create the appearance of an imbalance in buy/sell pressure. Once the small order began trading, Brims canceled the large orders. The Panel further found that Brims entered the large orders for the purpose of inducing other market participants to trade against the small orders resting on the other side of the order book. The Panel concluded that Brims thereby violated CBOT Rules 432.B.2. and 432.Q.

Interestingly, Sarao provided information about (some of!) his algorithms to UK regulators, including a fascinating allegation:

I have traded using a basic TT for numerous years. Due to the fact that there were some individuals in the emini S&P who quite remarkably seemed to know WHERE 100% OF MY ORDERS WERE RESTING, even if they were over 90% partially filled !!! and hence made a concentrated effort to manipulate around those orders so they would not get filled, I decided to pay Edge Financial to build a program for me that would help disguise my orders more effectively. Initially I was told that the reason these individuals knew where all my orders were was because I traded so big and was as such ‘the elephant In the room’. However, It Is worth noting that further examination showed that their special manipulative activity occurred exactly the same if I did a 20 lot order or a 200 lot order.

I asked Edge to design 3 more functions specifically to help try and hide my orders from these people. I do not know If this can be described as HFT, to me It Is just giving me the ability to have some extra functions that my base trading software (TT) does not give me and It should be noted that I only use these functions Intermittently
and sometimes not at all. It Is called Navtrader, but it could be called anything and I was the only one who helped design it, albeit my design Ideas were 100% generated from what I had already seen other traders using already in the emini SP. Please note I believe I have only had this NavTrader since the beginning of 2013 at the very earliest

I decided that the only way I could mask my orders, was to place them as the market changed price so that they may not be seen In the ‘chaos’ of a price change. So I would have my orders pending to be placed as the market went from bid to offer or offer to bid.

The 3 main functions are as follows:
JOIN : These are pending orders that will be joined anywhere requested along the order book and become active when the price changed, Remarkably, these orders were still subject to the Insider trading I describe above, even when they are as small as a 50 lot !

SNAP: These are orders that are the same as JOIN but at the market best price ao that they become traded almost Immediately. I also have a function that lets you put In a minimum quantity so that the buy/sell SNAP order only becomes active when there Is a minimum of that number of contracts on the offer/bid. This worked rather beautifully when the mass manipulator of the e-mini sp was doing his normal manipulative activity at price 1800.00 on Friday 24th January circa 12.23pm. The fake bids he had placed were being removed too quickly for me to hit. If I had put a snap for 700 with 0 as minimum volume , It would not have been filled because as soon the bid was more than 1 lot bid the 700 would have been active. With my 699 then resting the normal forms of manipulation that occur on 100% of my orders EXCLUSIVELY would then have preceded to follow. So I put a 700 lot SNAP with a minimum volume of 600, et voila I got my full 700.

ICE: The Iceberg function on the CME Isn’t adequate for me, I hardly ever use it because It puts me at the back of the queue all the time. Hence, 2,000 needs to trade to get me out of 800 lots for example. My iceberg function is placed at a price and as soon as It Is bid/offered at the price the iceberg will take all contracts at the price up to and Including the number of my order. Again, there Is a minimum volume box, so for example I can put 50 Into it and put a sell ICE of 1,000 and then at that price every time the bid Is more than 50, the ICE will take all contracts out until 1,000 Is traded. This Is a good way of catching spoofers, and et voila I can trade 1.000 lots at one price (following on from the above example).

The other orders I sometimes place during the day are slightly away from the market price and move up and down as the market moves with It This Is to catch any blips up/down In the market so that I can make a small profit as the market comes back Into line(almost Immediately). These orders are placed rarely and only when I believe the market Is excessively weak or strong. Again, this was Inspired by other traders I could see doing the exact same thing.

Well … Assiduous Readers will be sympathetic, I hope, to my readiness to believe that one guy working alone with some occasional contract help can make the big guys look like fools. But these three functions seem perfectly straightforward to me and it will be most interesting to learn whether Sarao did in fact develop and use them and if they did in fact work as well as claimed.

Hunsader has produced a chart showing the January 24 spoofing/counter-spoofing battle:

NanexSaraoSpoofing
Click for Big

On the other hand, of course, there are some pretty damning affidavits; it seems clear that:

  • Sarao was spoofing
  • He was also engaged in anti-spoofing
  • spoofing rules are unenforceable and should be scrapped

April 24, 2015

April 25th, 2015

A story on Bloomberg brought to my attention a Morningstar study titled 2015 Fee Study: Investors Are Driving Expense Ratios Down:

  • Investors are paying less for fund management, largely as a matter of choice.
  • The asset-weighted expense ratio across all funds was 0.64% in 2014, down from 0.65% in 2013
    and 0.76% five years ago.
  • Investors are choosing low-cost funds. Over the past decade, 95% of all flows have gone into funds in the lowest-cost quintile. Passive funds have benefited disproportionately.
  • Investors continue to move away from load-based share classes while typically lower-cost share classes, such as Institutional shares, have gained favor.
  • Firms sponsoring lineups with lower asset-weighted expense ratios—most notably Vanguard—have gained market share during the past five years.
  • Over the past five years, 63% of the fund share classes and exchange-traded products in our universe reduced their expense ratio, but only about 24% of them saw their fee fall by more than 10%.
  • Meanwhile, 21% of the share classes we examined ratcheted up their takes.
  • Estimated industry fee revenue is at an all-time high, reaching $88 billion in 2014, up from $50 billion 10 years ago.
  • During that 10-year period, industry assets under management increased 143% while the asset weighted expense ratio declined 27% and industry fee revenue grew by approximately 78%.
  • Thus, the industry—rather than fund shareholders—has benefitted most from the increase in asset under management.


During the past decade, low-cost funds have been attracting far more inflows than their more expensive peers. This has helped to reduce the industry’s average asset-weighted expense ratio over time. Mutual funds and ETPs with expense ratios ranking in the least-expensive quintile of all funds attracted an aggregate $3.03 trillion of estimated net inflows during the past 10 years, compared with just $160 billion for funds in the remaining four quintiles. That is to say that 95% of all flows have gone into funds in the lowest-cost quintile. Passive funds (mutual funds and ETPs) have been prominent recipients of the capital flowing into low-cost funds. Compared with funds falling in cost quintiles 2 through 5, funds in the lowest-cost quintile are more likely to be index funds.

fundFlowsByExpenseQuintile
Click For Big

Note that in the US trailers are referred to as 12b-1 fees. The SEC is attemting to ensure that the paperwork associated with such fees is maximized.

Investor Advocates – generally more accurately referred to as “Increased Employment Of Regulators Advocates”, or “Paid Stalking Horses For Regulators” or simply as “Blowhards Without Brains, Knowledge Or Mandate” – will be horrified at the notion that investors are migrating to lower-cost funds without the benefit of increased regulation.

BNS Split Corp. II, proud issuer of BSC.PR.B, has been confirmed at Pfd-2 by DBRS:

The dividends received from the Portfolio are used to pay a fixed cumulative quarterly distribution of $0.2003 per share to holders of the Class B Preferred Shares, yielding approximately 4.25% annually on the initial issue price of $18.85. The current yield on the Portfolio shares fully covers the Class B Preferred Share dividends, providing dividend coverage (net of expenses) of approximately 2.5 times. The Class A Capital Shares receive all excess dividend income after the Class B Preferred Share distributions and other expenses of the Company have been paid.

The performance of the Company has been somewhat volatile since the last rating action. However, downside protection did increase to 68.2% on April 16, 2015, compared with 67.5% on April 10, 2014. A recent increase in dividend distributions from the Bank of Nova Scotia helped boost the dividend coverage ratio. As a result, the rating of the Class B Preferred Shares has been confirmed at Pfd-2.

It was a violently mixed day for the Canadian preferred share market, with PerpetualDiscounts down 33bp, FixedResets gaining 81bp and DeemedRetractibles off 4bp. The Performance Highlights table is, predictably, stuffed full of winning FixedResets, with ENB, BAM and TRP issues well represented. 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:

impVol_TRP_150424
Click for Big

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 22.81 to be $0.51 rich, while TRP.PR.B, resetting 2015-6-30 at +128, is $0.49 cheap at its bid price of 14.69.

impVol_MFC_150424
Click for Big

Another excellent fit (despite a sharp increase in Implied Volatility today), but the numbers are perplexing. Implied Volatility for MFC continues to be a conundrum, although it declined substantially today. It is still too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule).

Most expensive is MFC.PR.M, resetting at +236 on 2019-12-19, bid at 23.40 to be $0.45 rich, while MFC.PR.L, resetting at +216bp on 2019-6-19, is bid at 21.44 to be $0.70 cheap.

impVol_BAM_150424
Click for Big

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 19.76 to be $0.61 cheap. BAM.PF.E, resetting at +255bp 2020-3-31 is bid at 22.68 and appears to be $0.71 rich.

impVol_FTS_150424
Click for Big

FTS.PR.H, with a spread of +145bp, and bid at 16.00, looks $0.67 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, is bid at 21.40 and is $0.42 rich.

pairs_FR_150424
Click for Big

Investment-grade pairs now predict an average over the next five years of about 0.40%, but TRP.PR.A / TRP.PR.F is an outlier at -0.09% The DC.PR.B / DC.PR.D pair retains its customary outlier status, with a breakeven rate of -1.41%0.

pairs_FF_150424
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 -0.6534 % 2,158.1
FixedFloater 0.00 % 0.00 % 0 0.00 0 -0.6534 % 3,773.3
Floater 3.36 % 3.57 % 56,571 18.37 4 -0.6534 % 2,294.2
OpRet 4.43 % -1.55 % 40,480 0.10 2 -0.0197 % 2,762.1
SplitShare 4.57 % 4.61 % 66,590 3.39 3 0.0267 % 3,224.6
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.0197 % 2,525.6
Perpetual-Premium 5.34 % 3.25 % 65,701 0.09 25 -0.0539 % 2,513.6
Perpetual-Discount 5.13 % 5.10 % 139,637 15.00 9 -0.3251 % 2,782.2
FixedReset 4.55 % 3.89 % 299,839 16.48 86 0.8061 % 2,342.6
Deemed-Retractible 4.92 % 3.46 % 111,549 0.82 36 -0.0365 % 2,646.3
FloatingReset 2.58 % 2.94 % 72,209 6.22 8 -0.1121 % 2,347.5
Performance Highlights
Issue Index Change Notes
BAM.PR.K Floater -1.72 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-24
Maturity Price : 13.74
Evaluated at bid price : 13.74
Bid-YTW : 3.65 %
PWF.PR.T FixedReset 1.06 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-24
Maturity Price : 23.23
Evaluated at bid price : 24.87
Bid-YTW : 3.32 %
IFC.PR.A FixedReset 1.08 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 19.71
Bid-YTW : 6.05 %
ENB.PR.Y FixedReset 1.10 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-24
Maturity Price : 19.30
Evaluated at bid price : 19.30
Bid-YTW : 4.50 %
ENB.PR.P FixedReset 1.12 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-24
Maturity Price : 19.92
Evaluated at bid price : 19.92
Bid-YTW : 4.46 %
FTS.PR.H FixedReset 1.20 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-24
Maturity Price : 16.00
Evaluated at bid price : 16.00
Bid-YTW : 3.68 %
ENB.PF.A FixedReset 1.23 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-24
Maturity Price : 20.65
Evaluated at bid price : 20.65
Bid-YTW : 4.60 %
ENB.PR.J FixedReset 1.29 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-24
Maturity Price : 20.37
Evaluated at bid price : 20.37
Bid-YTW : 4.54 %
ENB.PF.C FixedReset 1.32 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-24
Maturity Price : 20.65
Evaluated at bid price : 20.65
Bid-YTW : 4.60 %
TRP.PR.E FixedReset 1.33 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-24
Maturity Price : 22.19
Evaluated at bid price : 22.81
Bid-YTW : 3.74 %
CIU.PR.C FixedReset 1.40 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-24
Maturity Price : 15.93
Evaluated at bid price : 15.93
Bid-YTW : 3.68 %
TD.PF.A FixedReset 1.40 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-24
Maturity Price : 22.73
Evaluated at bid price : 23.83
Bid-YTW : 3.37 %
BAM.PF.A FixedReset 1.41 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-24
Maturity Price : 22.78
Evaluated at bid price : 23.72
Bid-YTW : 4.08 %
ENB.PR.F FixedReset 1.41 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-24
Maturity Price : 19.40
Evaluated at bid price : 19.40
Bid-YTW : 4.56 %
PWF.PR.P FixedReset 1.42 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-24
Maturity Price : 17.90
Evaluated at bid price : 17.90
Bid-YTW : 3.58 %
FTS.PR.G FixedReset 1.43 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-24
Maturity Price : 21.32
Evaluated at bid price : 21.32
Bid-YTW : 3.74 %
TD.PF.C FixedReset 1.51 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-24
Maturity Price : 22.56
Evaluated at bid price : 23.50
Bid-YTW : 3.41 %
ENB.PR.D FixedReset 1.53 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-24
Maturity Price : 19.20
Evaluated at bid price : 19.20
Bid-YTW : 4.44 %
MFC.PR.N FixedReset 1.54 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.10
Bid-YTW : 4.55 %
BAM.PF.G FixedReset 1.61 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-24
Maturity Price : 22.79
Evaluated at bid price : 24.05
Bid-YTW : 4.01 %
CM.PR.P FixedReset 1.62 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-24
Maturity Price : 22.75
Evaluated at bid price : 23.90
Bid-YTW : 3.33 %
MFC.PR.K FixedReset 1.64 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.75
Bid-YTW : 5.14 %
TRP.PR.B FixedReset 1.66 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-24
Maturity Price : 14.69
Evaluated at bid price : 14.69
Bid-YTW : 3.69 %
BAM.PF.E FixedReset 1.70 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-24
Maturity Price : 22.09
Evaluated at bid price : 22.68
Bid-YTW : 4.03 %
FTS.PR.K FixedReset 1.86 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-24
Maturity Price : 21.40
Evaluated at bid price : 21.40
Bid-YTW : 3.70 %
BAM.PF.F FixedReset 2.24 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-24
Maturity Price : 22.91
Evaluated at bid price : 24.21
Bid-YTW : 3.97 %
HSE.PR.A FixedReset 2.25 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-24
Maturity Price : 15.90
Evaluated at bid price : 15.90
Bid-YTW : 4.26 %
BAM.PR.R FixedReset 2.38 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-24
Maturity Price : 19.76
Evaluated at bid price : 19.76
Bid-YTW : 4.21 %
ENB.PR.H FixedReset 2.63 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-24
Maturity Price : 17.92
Evaluated at bid price : 17.92
Bid-YTW : 4.50 %
BAM.PR.T FixedReset 2.90 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-24
Maturity Price : 20.22
Evaluated at bid price : 20.22
Bid-YTW : 4.13 %
BAM.PR.Z FixedReset 3.21 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-24
Maturity Price : 23.07
Evaluated at bid price : 24.10
Bid-YTW : 4.07 %
BAM.PF.B FixedReset 3.50 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-24
Maturity Price : 21.80
Evaluated at bid price : 22.16
Bid-YTW : 4.12 %
TRP.PR.C FixedReset 3.80 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-24
Maturity Price : 17.23
Evaluated at bid price : 17.23
Bid-YTW : 3.60 %
MFC.PR.F FixedReset 4.29 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 18.25
Bid-YTW : 6.35 %
Volume Highlights
Issue Index Shares
Traded
Notes
TD.PF.E FixedReset 547,300 New issue settled today.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-24
Maturity Price : 23.10
Evaluated at bid price : 24.91
Bid-YTW : 3.62 %
FTS.PR.H FixedReset 498,240 RBC crossed blocks of 244,400 and 244,200, both at 15.96.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-24
Maturity Price : 16.00
Evaluated at bid price : 16.00
Bid-YTW : 3.68 %
TRP.PR.B FixedReset 169,011 TD crossed two blocks of 80,000 each, both at 14.72.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-24
Maturity Price : 14.69
Evaluated at bid price : 14.69
Bid-YTW : 3.69 %
TRP.PR.C FixedReset 127,500 TD crossed two blocks of 52,200 each, both at 16.80.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-24
Maturity Price : 17.23
Evaluated at bid price : 17.23
Bid-YTW : 3.60 %
SLF.PR.G FixedReset 83,050 Desjardins crossed 48,100 at 16.45.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 16.50
Bid-YTW : 7.25 %
TRP.PR.D FixedReset 74,275 Desjardins crossed 65,000 at 22.95.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-24
Maturity Price : 22.13
Evaluated at bid price : 22.65
Bid-YTW : 3.72 %
There were 36 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
PWF.PR.A Floater Quote: 17.55 – 18.34
Spot Rate : 0.7900
Average : 0.6129

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-24
Maturity Price : 17.55
Evaluated at bid price : 17.55
Bid-YTW : 2.83 %

BAM.PF.E FixedReset Quote: 22.68 – 23.13
Spot Rate : 0.4500
Average : 0.2955

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-24
Maturity Price : 22.09
Evaluated at bid price : 22.68
Bid-YTW : 4.03 %

ENB.PR.F FixedReset Quote: 19.40 – 19.87
Spot Rate : 0.4700
Average : 0.3210

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-24
Maturity Price : 19.40
Evaluated at bid price : 19.40
Bid-YTW : 4.56 %

CU.PR.C FixedReset Quote: 24.50 – 24.93
Spot Rate : 0.4300
Average : 0.2812

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-24
Maturity Price : 23.36
Evaluated at bid price : 24.50
Bid-YTW : 3.36 %

IFC.PR.C FixedReset Quote: 24.10 – 24.47
Spot Rate : 0.3700
Average : 0.2304

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.10
Bid-YTW : 4.13 %

MFC.PR.H FixedReset Quote: 25.34 – 25.78
Spot Rate : 0.4400
Average : 0.3065

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.34
Bid-YTW : 4.03 %

TD.PF.E Settles: A Little Soft On Moderate Volume

April 25th, 2015

TD.PF.E, a FixedReset, 3.70%+287, announced April 15 has settled. It will be tracked by HIMIPref™ and has been assigned to the FixedReset subindex.

The issue traded 832,925 shares today (consolidated exchanges) in a range of 24.79-93 before closing at 24.91-92.

Vital statistics are:

TD.PF.E FixedReset YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-24
Maturity Price : 23.10
Evaluated at bid price : 24.91
Bid-YTW : 3.62 %

The calculation for Implied Volatility is a mess with a very poor fit, but this is due to the presence of two NVCC non-compliant issues that are, quite correctly, priced by the market using a different paradigm than the five NVCC compliant issues:

impVol_TD_150424
Click for Big

The fit is greatly improved when only NVCC-compliant issues are used for the calculation:

impVol_TD_150424_compliantOnly
Click for Big

However, as was found at the time of announcement, it is clear that the Implied Volatility of the TD series of FixedResets is unreasonably high and that we have reason to fear severe underperformance by the lower-spread issues, should spreads increase sufficiently to give pause to those who feel that any TD issue will be near par forever, regardless of its terms.

April 23, 2015

April 23rd, 2015

Assiduous Reader JP (who always sends me interesting links, unlike most of you) sent me a link a while ago about metals demand in China:

China’s steel and metals markets, a barometer of the world’s second-biggest economy, are “a lot worse than you think,” according to a Bloomberg Intelligence analyst who just completed a tour of the country.

What he saw: idle cranes, empty construction sites and half-finished, abandoned buildings in several cities. Conversations with executives reinforced the “gloomy” outlook.

“China’s metals demand is plummeting,” wrote Kenneth Hoffman, the metals analyst who spent a week traveling across the country, meeting with executives, traders, industry groups and analysts. “Demand is rapidly deteriorating as the government slows its infrastructure building and transforms into a consumer economy.”

This has been reflected in other statistics …:

A Chinese manufacturing gauge fell to a 12-month low in April, suggesting government efforts to cushion a slowdown are yet to revive the nation’s factories.

The preliminary Purchasing Managers’ Index from HSBC Holdings Plc and Markit Economics was at 49.2, missing the median estimate of 49.6 in a Bloomberg survey, which was also March’s final reading. Numbers below 50 indicate contraction.

The first reading of the economy’s health in April may deepen concern over a slowdown after first-quarter data showed the weakest economic expansion since 2009. Policy makers have stepped up efforts to halt the slide, cutting banks’ reserve requirements by 1 percentage point this week.

and in default rates:

The true cost of the debt that China’s real estate developers peddled to eager international investors during a five-year property boom is now becoming clear.

Having found themselves shut out of local bond and loan markets seven years ago, a band of developers began looking elsewhere for funds. First an initial public offering, and then a dollar bond sale. It became a well-trodden path. By 2010, a core group of four — Kaisa Group Holdings Ltd., Fantasia Holdings Group Co., Renhe Commercial Holdings Co., Glorious Property Holdings Ltd. — raised a total of $5.6 billion. On Monday, Kaisa buckled under $10.5 billion of debt and defaulted.

China’s home builders became the single biggest source of dollar junk debt in Asia amid government measures to prevent a property bubble. Developers already funneled $78.8 billion from international equity and bond markets into an industry that’s grown to account for one third of the world’s second-biggest economy. Most of the first rush of dollar offerings, in 2010, falls due in the next two years.

In fact, manufacturing data globally is no great shakes:

Manufacturing Purchasing Managers Indexes disappointed everywhere today.

Japan, China, France, Germany and the U.S. all had PMI reports out today that missed expectations. Japan, China and France had readings below 50, signifying contraction.

It is a continuation of a 2015 downward trend for Japan and China, a continuation of sub-50 numbers for France and a reversal for Germany and the U.S., which had been producing some great numbers so far this year.

Deutsche Bank was subjected to yet another round of regulatory extortion:

Deutsche Bank AG was ordered to pay a record $2.5 billion fine and fire seven employees to settle U.S. and U.K. investigations into its role in rigging Libor.

Deutsche Bank must terminate six London employees and one in Frankfurt who engaged in wrongful conduct, according to New York’s Department of Financial Services, which was among the international regulators involved in the settlement announced Thursday. While the DFS didn’t identify them by name, one is a managing director, four are directors and two are vice presidents. A U.K. unit agreed to plead guilty to a wire-fraud charge as well.

“Deutsche Bank employees engaged in a widespread effort to manipulate benchmark interest rates for financial gain,” DFS Superintendent Benjamin Lawsky said in a statement. “We must remember that markets do not just manipulate themselves: It takes deliberate wrongdoing by individuals.”

Geez, if I commit fraud, fraud so blatant that somebody thinks they can actually prove it in an actual court, I may well go to jail. Those guys are lucky they worked for a firm willing to help lower tax rates in their host countries.

But, in the end, who cares?

In a way it’s a shame that the Libor settlements are mostly about collecting and typesetting embarrassing instant messages. The interesting question in Libor manipulation is whether it caused a net harm: Did Bank X push Libor up while Bank Y pushed it down in ways that mostly reflected and equilibrated underlying interest-rate market dynamics? Or did the banks mostly work together in a way that systematically enriched them as a group at the expense of their clients as a group?

This seems like a very hard question, but also one that is of curiously little interest to the regulators. Among those regulators, the U.K. FCA has the most detailed mechanism for determining penalties; it is explicitly supposed to consider “the amount of benefit gained or loss avoided.” It completely shrugged off that determination for Deutsche Bank:

Deutsche Bank sought to manipulate LIBOR and EURIBOR submissions in order to improve the profitability of its trading positions. The Authority has not determined the amount of benefit gained.

Isn’t that question — for Deutsche Bank, and for the Libor-manipulating banks as a whole — the important one? Shouldn’t the Libor manipulating banks be assessed on the economic impact of their manipulation, and not just on who had the most bad quotes?

Eric Scott Hunsader of Nanex has released two charts showing Sarao’s (alleged, at this point) spoofing on Flash Crash Day:

SaraoSpoof_1
Click for Big

SaraoSpoof_2
Click for Big

He also states (in three separate tweets):

I now believe Nav Sarao may have been screen trading – though each click would result in placing/cancelling many orders

I don’t think Sarao used an automated trading system and could in fact have been trading as he claims (I was wrong yesterday)

Actually, I’m going with a hybrid – the spoofing algo was automated and running background, while Sarao click traded positions

Getting back to my main point in all this – that anti-spoofing rules are clearly unenforceable by regulatory measures and should be scrapped – we can allow ourselves to wonder just how fast the spoofing detection algorithm used to produce those two charts is; whether it could run in anything close to real time; and how many false-positives and false-negatives it might be expected to produce. If it could be done in real-time with reasonable accuracy, that would be a very good thing for HFT. Of course, there’s not much time:

Spoof_3
Click for Big

Look at the time scale on the X-axis! The spoofs last less than a second.

From Alberta to Australia, politicians all look the same:

Even for a country with a history of commodity booms, this one was gargantuan.

Over the decade to 2013, Australia racked up $1 trillion in extra exports from the previous 10 years, thanks largely to China’s once-insatiable demand.

Despite the opportunity of funding infrastructure to meet the needs of millions of new citizens, the nation largely blew the extra cash on month-to-month spending. The added A$300 billion ($232 billion) in government revenue generated from the boom went to things like tax cuts and subsidies.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts off 10bp, FixedResets up 49bp and DeemedRetractibles gaining 1bp. ENB, BAM and TRP FixedResets are all prominent on the Performance Highlights table, which is comprised exclusively of winners. Volume was high.

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:

impVol_TRP_150423
Click for Big

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 22.51 to be $0.39 rich, while TRP.PR.B, resetting 2015-6-30 at +128, is $0.56 cheap at its bid price of 14.45.

impVol_MFC_150423
Click for Big

Another excellent fit, but the numbers are perplexing. Implied Volatility for MFC continues to be a conundrum, although it declined substantially today. It is still too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule).

Most expensive is MFC.PR.M, resetting at +236 on 2019-12-19, bid at 23.50 to be $0.77 rich, while MFC.PR.K, resetting at +222bp on 2018-9-19, is bid at 21.40 to be $0.73 cheap.

impVol_BAM_150423
Click for Big

This fit has deteriorated.

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 19.30 to be $0.66 cheap. BAM.PF.E, resetting at +255bp 2020-3-31 is bid at 22.30 and appears to be $0.81 rich.

impVol_FTS_150423
Click for Big

FTS.PR.H, with a spread of +145bp, and bid at 15.81, looks $0.69 cheap and resets 2015-6-1. FTS.PR.M, with a spread of +248bp and resetting 2019-12-1, is bid at 24.22 and is $0.48 rich.

pairs_FR_150423
Click for Big

Investment-grade pairs now predict an average over the next five years of about 0.40%, but TRP.PR.A / TRP.PR.F is an outlier at -0.27% The DC.PR.B / DC.PR.D pair retains its customary outlier status, with a breakeven rate of -1.47%.

pairs_FF_150423
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 -0.4005 % 2,172.2
FixedFloater 0.00 % 0.00 % 0 0.00 0 -0.4005 % 3,798.1
Floater 3.34 % 3.54 % 57,211 18.44 4 -0.4005 % 2,309.3
OpRet 4.43 % -2.24 % 38,178 0.11 2 0.0000 % 2,762.6
SplitShare 4.57 % 4.54 % 65,865 3.39 3 -0.2530 % 3,223.7
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0000 % 2,526.1
Perpetual-Premium 5.33 % 2.22 % 66,168 0.09 25 -0.0476 % 2,514.9
Perpetual-Discount 5.11 % 5.11 % 140,004 15.05 9 -0.0989 % 2,791.3
FixedReset 4.60 % 3.93 % 296,315 16.31 85 0.4902 % 2,323.9
Deemed-Retractible 4.92 % 3.30 % 110,094 0.82 36 0.0100 % 2,647.3
FloatingReset 2.58 % 2.94 % 72,878 6.23 8 0.1712 % 2,350.1
Performance Highlights
Issue Index Change Notes
ENB.PR.Y FixedReset 1.01 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-23
Maturity Price : 19.09
Evaluated at bid price : 19.09
Bid-YTW : 4.55 %
TD.PF.C FixedReset 1.09 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-23
Maturity Price : 22.37
Evaluated at bid price : 23.15
Bid-YTW : 3.48 %
TD.PF.A FixedReset 1.12 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-23
Maturity Price : 22.57
Evaluated at bid price : 23.50
Bid-YTW : 3.43 %
TRP.PR.E FixedReset 1.12 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-23
Maturity Price : 22.01
Evaluated at bid price : 22.51
Bid-YTW : 3.80 %
ENB.PF.E FixedReset 1.18 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-23
Maturity Price : 20.52
Evaluated at bid price : 20.52
Bid-YTW : 4.66 %
ENB.PR.D FixedReset 1.39 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-23
Maturity Price : 18.91
Evaluated at bid price : 18.91
Bid-YTW : 4.51 %
SLF.PR.I FixedReset 1.40 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.67
Bid-YTW : 3.93 %
PWF.PR.T FixedReset 1.40 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-23
Maturity Price : 23.13
Evaluated at bid price : 24.61
Bid-YTW : 3.37 %
TRP.PR.A FixedReset 1.55 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-23
Maturity Price : 19.60
Evaluated at bid price : 19.60
Bid-YTW : 3.73 %
BAM.PF.A FixedReset 1.56 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-23
Maturity Price : 22.61
Evaluated at bid price : 23.39
Bid-YTW : 4.15 %
BAM.PF.F FixedReset 1.63 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-23
Maturity Price : 22.67
Evaluated at bid price : 23.68
Bid-YTW : 4.08 %
ENB.PR.B FixedReset 1.71 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-23
Maturity Price : 18.46
Evaluated at bid price : 18.46
Bid-YTW : 4.61 %
TRP.PR.D FixedReset 1.76 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-23
Maturity Price : 22.03
Evaluated at bid price : 22.50
Bid-YTW : 3.75 %
TRP.PR.C FixedReset 1.90 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-23
Maturity Price : 16.60
Evaluated at bid price : 16.60
Bid-YTW : 3.74 %
ENB.PF.G FixedReset 1.94 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-23
Maturity Price : 21.00
Evaluated at bid price : 21.00
Bid-YTW : 4.58 %
TD.PF.B FixedReset 2.09 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-23
Maturity Price : 22.59
Evaluated at bid price : 23.50
Bid-YTW : 3.43 %
MFC.PR.M FixedReset 2.17 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.50
Bid-YTW : 4.40 %
BAM.PF.E FixedReset 2.53 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-23
Maturity Price : 21.85
Evaluated at bid price : 22.30
Bid-YTW : 4.11 %
BAM.PR.X FixedReset 5.25 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-23
Maturity Price : 17.63
Evaluated at bid price : 17.63
Bid-YTW : 4.13 %
Volume Highlights
Issue Index Shares
Traded
Notes
TRP.PR.C FixedReset 97,975 RBC crossed 55,600 at 16.30.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-23
Maturity Price : 16.60
Evaluated at bid price : 16.60
Bid-YTW : 3.74 %
BNS.PR.Z FixedReset 68,230 Scotia crossed 60,800 at 22.10.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.17
Bid-YTW : 4.35 %
SLF.PR.G FixedReset 63,805 Desjardins crossed 47,400 at 16.50.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 16.42
Bid-YTW : 7.30 %
HSE.PR.A FixedReset 59,445 RBC crossed 49,700 at 15.60.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-23
Maturity Price : 15.55
Evaluated at bid price : 15.55
Bid-YTW : 4.35 %
RY.PR.J FixedReset 58,826 RBC crossed 50,000 at 24.77.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-23
Maturity Price : 23.09
Evaluated at bid price : 24.81
Bid-YTW : 3.50 %
BNS.PR.L Deemed-Retractible 55,756 RBC crossed 50,000 at 25.28.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-04-27
Maturity Price : 25.00
Evaluated at bid price : 25.25
Bid-YTW : 3.41 %
There were 50 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
ENB.PF.G FixedReset Quote: 21.00 – 22.30
Spot Rate : 1.3000
Average : 0.7404

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-23
Maturity Price : 21.00
Evaluated at bid price : 21.00
Bid-YTW : 4.58 %

TRP.PR.E FixedReset Quote: 22.51 – 23.30
Spot Rate : 0.7900
Average : 0.5615

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-23
Maturity Price : 22.01
Evaluated at bid price : 22.51
Bid-YTW : 3.80 %

BAM.PF.G FixedReset Quote: 23.67 – 24.20
Spot Rate : 0.5300
Average : 0.3200

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-23
Maturity Price : 22.62
Evaluated at bid price : 23.67
Bid-YTW : 4.10 %

TD.PF.A FixedReset Quote: 23.50 – 23.98
Spot Rate : 0.4800
Average : 0.3210

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-23
Maturity Price : 22.57
Evaluated at bid price : 23.50
Bid-YTW : 3.43 %

BAM.PF.B FixedReset Quote: 21.41 – 21.78
Spot Rate : 0.3700
Average : 0.2463

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-23
Maturity Price : 21.41
Evaluated at bid price : 21.41
Bid-YTW : 4.29 %

PWF.PR.A Floater Quote: 17.55 – 18.09
Spot Rate : 0.5400
Average : 0.4188

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-23
Maturity Price : 17.55
Evaluated at bid price : 17.55
Bid-YTW : 2.83 %

April 22, 2015

April 22nd, 2015

There are a few new tidbits of information coming out about the arrest of Navinder Singh Sarao, but nothing worth a complete post. I have updated the posts Scapegoat for Flash Crash Isolated! and Flash Crash: Incompetence, Position Limits, Retail. Seems to me to be a case of stupid people attempting to enforce stupid rules in a stupid manner and ending up with a severe case of stupid. So, yeah, the obvious solution is to toss some petty little clown in jail for thirty years or so. That’s justice.

FRBNY President William Dudley gave a speech Monday titled The U.S. Monetary Policy Outlook and its Global Implications which Bloomberg sumamarizes as ‘inflation will pick up due to oil, rent, jobs and expectations’. I was more interested in his endorsement of mission-creep, which I complained about yesterday:

A second area in which we can and must collectively do better is safeguarding global financial stability. Simply put, we failed to act both early enough and decisively enough to stem the credit excesses that spawned the financial crisis and the Great Recession. While the U.S. was not alone in this shortcoming, given our position in the global financial system we especially should have done a better job. We’ve taken important steps through new legislative mandates and a broader effort to rethink our regulatory and supervisory framework. In particular, systemically important banking organizations must now hold higher amounts of capital and liquidity that are better aligned with their risk profiles and the official sector is making progress in ensuring no financial firm will be too-big-to-fail.

Although this remains very much a work in progress, these efforts should help us to avoid repeating the mistakes of the recent past, and enable us to be more proactive in mitigating potential future vulnerabilities. Of course, we at the Fed are not alone here. Since the recent financial crisis, central banks worldwide have been engaged in a broad rethinking of how to better fulfill their mandates.

So it looks like all the central bankers of the world are going to have to go to stockbroker school: ‘Yes, it looks at first glance as if I’ve made some pretty horrible recommendations that have lost you a lot of money. But if you hadn’t done this and then that had happened, it would have been worse!’ Isn’t risk wonderful? There’s always a worse-case scenario you can point at.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts up 8bp, FixedResets gaining 6bp and DeemedRetractibles off 18bp. The Performance Highlights table continues to show extreme volatility. Volume was high.

PerpetualDiscounts now yield 5.11%, equivalent to 6.64% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 3.7%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 295bp,, a slight (and perhaps spurious) uptick from the 290bp reported April 8.

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:

impVol_TRP_150422
Click for Big

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 22.26 to be $0.41 rich, while TRP.PR.B, resetting 2015-6-30 at +128, is $0.39 cheap at its bid price of 14.42.

impVol_MFC_150422
Click for Big

Another excellent fit, but the numbers are perplexing. Implied Volatility for MFC continues to be a conundrum, although it declined substantially today. It is still too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule).

Most expensive is MFC.PR.I, resetting at +286 on 2017-9-19, bid at 25.06 to be $0.46 rich, while MFC.PR.K, resetting at +222bp on 2018-9-19, is bid at 21.36 to be $0.69 cheap.

impVol_BAM_150422
Click for Big

This fit is actually quite good.

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 19.15 to be $0.50 cheap. BAM.PF.G, resetting at +284bp 2020-6-30 is bid at 23.50 and appears to be $0.59 rich.

impVol_FTS_150422
Click for Big

FTS.PR.H, with a spread of +145bp, and bid at 15.73, looks $0.80 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, is bid at 21.01 and is $0.32 rich.

pairs_FR_150422
Click for Big

Investment-grade pairs now predict an average over the next five years of about 0.30%. The DC.PR.B / DC.PR.D pair has reversed yesterday‘s nonsense and has returned to its customary outlier status, with a breakeven rate of -1.41%.

pairs_FF_150422
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 -0.7088 % 2,181.0
FixedFloater 0.00 % 0.00 % 0 0.00 0 -0.7088 % 3,813.4
Floater 3.33 % 3.51 % 56,651 18.50 4 -0.7088 % 2,318.5
OpRet 4.43 % -2.18 % 39,675 0.11 2 -0.0197 % 2,762.6
SplitShare 4.56 % 4.52 % 64,456 3.40 3 0.0533 % 3,231.9
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.0197 % 2,526.1
Perpetual-Premium 5.33 % 1.42 % 66,751 0.09 25 -0.0079 % 2,516.1
Perpetual-Discount 5.11 % 5.11 % 144,618 15.05 9 0.0801 % 2,794.0
FixedReset 4.62 % 3.95 % 282,657 16.14 85 0.0568 % 2,312.6
Deemed-Retractible 4.92 % 3.52 % 109,690 0.83 36 -0.1800 % 2,647.0
FloatingReset 2.58 % 2.94 % 74,026 6.23 8 0.0053 % 2,346.1
Performance Highlights
Issue Index Change Notes
BAM.PR.Z FixedReset -1.69 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-22
Maturity Price : 22.66
Evaluated at bid price : 23.31
Bid-YTW : 4.24 %
IFC.PR.A FixedReset -1.58 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 19.35
Bid-YTW : 6.28 %
GWO.PR.N FixedReset -1.50 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 17.10
Bid-YTW : 6.79 %
BAM.PR.C Floater -1.40 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-22
Maturity Price : 14.10
Evaluated at bid price : 14.10
Bid-YTW : 3.56 %
BAM.PR.K Floater -1.27 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-22
Maturity Price : 14.01
Evaluated at bid price : 14.01
Bid-YTW : 3.58 %
FTS.PR.J Perpetual-Premium -1.26 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-22
Maturity Price : 23.80
Evaluated at bid price : 24.20
Bid-YTW : 4.96 %
BAM.PR.B Floater -1.24 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-22
Maturity Price : 14.30
Evaluated at bid price : 14.30
Bid-YTW : 3.51 %
CM.PR.O FixedReset -1.05 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-22
Maturity Price : 22.59
Evaluated at bid price : 23.50
Bid-YTW : 3.49 %
PWF.PR.T FixedReset -1.02 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-22
Maturity Price : 23.00
Evaluated at bid price : 24.27
Bid-YTW : 3.44 %
ENB.PR.Y FixedReset 1.02 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-22
Maturity Price : 18.90
Evaluated at bid price : 18.90
Bid-YTW : 4.60 %
ENB.PR.H FixedReset 1.10 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-22
Maturity Price : 17.44
Evaluated at bid price : 17.44
Bid-YTW : 4.62 %
BAM.PF.F FixedReset 1.13 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-22
Maturity Price : 22.48
Evaluated at bid price : 23.30
Bid-YTW : 4.17 %
SLF.PR.G FixedReset 1.23 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 16.50
Bid-YTW : 7.24 %
RY.PR.H FixedReset 1.27 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-22
Maturity Price : 22.79
Evaluated at bid price : 23.93
Bid-YTW : 3.34 %
ENB.PF.G FixedReset 1.28 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-22
Maturity Price : 20.60
Evaluated at bid price : 20.60
Bid-YTW : 4.67 %
CU.PR.G Perpetual-Discount 1.38 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-22
Maturity Price : 23.16
Evaluated at bid price : 23.49
Bid-YTW : 4.84 %
BAM.PR.X FixedReset 1.95 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-22
Maturity Price : 16.75
Evaluated at bid price : 16.75
Bid-YTW : 4.35 %
BAM.PF.E FixedReset 2.11 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-22
Maturity Price : 21.46
Evaluated at bid price : 21.75
Bid-YTW : 4.23 %
TRP.PR.B FixedReset 2.20 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-22
Maturity Price : 14.42
Evaluated at bid price : 14.42
Bid-YTW : 3.76 %
MFC.PR.M FixedReset 2.22 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.00
Bid-YTW : 4.67 %
Volume Highlights
Issue Index Shares
Traded
Notes
BNS.PR.A FloatingReset 376,415 RBC crossed 372,100 at 24.30.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.30
Bid-YTW : 3.12 %
TRP.PR.B FixedReset 218,749 TD crossed blocks of 100,000 and 111,400, both at 14.30.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-22
Maturity Price : 14.42
Evaluated at bid price : 14.42
Bid-YTW : 3.76 %
TRP.PR.F FloatingReset 129,100 Scotia crossed blocks of 70,000 and 46,600, both at 18.00.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-22
Maturity Price : 18.00
Evaluated at bid price : 18.00
Bid-YTW : 3.54 %
FTS.PR.H FixedReset 90,100 TD sold 17,400 to RBC at 15.70, then crossed 41,300 at the same price.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-22
Maturity Price : 15.73
Evaluated at bid price : 15.73
Bid-YTW : 3.74 %
BAM.PR.T FixedReset 87,416 RBC crossed 77,800 at 19.58.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-22
Maturity Price : 19.55
Evaluated at bid price : 19.55
Bid-YTW : 4.27 %
ENB.PR.B FixedReset 67,812 RBC crossed 50,000 at 18.10.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-22
Maturity Price : 18.15
Evaluated at bid price : 18.15
Bid-YTW : 4.69 %
There were 47 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
BNS.PR.C FloatingReset Quote: 24.10 – 24.71
Spot Rate : 0.6100
Average : 0.4216

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.10
Bid-YTW : 3.08 %

IAG.PR.A Deemed-Retractible Quote: 24.15 – 24.53
Spot Rate : 0.3800
Average : 0.2697

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.15
Bid-YTW : 5.11 %

PWF.PR.H Perpetual-Premium Quote: 25.35 – 25.60
Spot Rate : 0.2500
Average : 0.1496

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-05-22
Maturity Price : 25.00
Evaluated at bid price : 25.35
Bid-YTW : -12.32 %

TRP.PR.F FloatingReset Quote: 18.00 – 18.43
Spot Rate : 0.4300
Average : 0.3321

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-22
Maturity Price : 18.00
Evaluated at bid price : 18.00
Bid-YTW : 3.54 %

GWO.PR.N FixedReset Quote: 17.10 – 17.49
Spot Rate : 0.3900
Average : 0.2971

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 17.10
Bid-YTW : 6.79 %

CU.PR.G Perpetual-Discount Quote: 23.49 – 23.80
Spot Rate : 0.3100
Average : 0.2177

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-22
Maturity Price : 23.16
Evaluated at bid price : 23.49
Bid-YTW : 4.84 %

DF.PR.A To Get Bigger

April 22nd, 2015

Quadravest has announced:

Dividend 15 Split Corp. II (the “Company”) is pleased to announce it has filed a preliminary short form prospectus in each of the provinces of Canada with respect to an offering of Preferred Shares and Class A Shares of the Company. The offering will be co-led by National Bank Financial Inc., CIBC, RBC Capital Markets and will also include Scotia Capital Inc., TD Securities Inc., BMO Capital Markets, GMP Securities L.P., Canaccord Genuity Corp., Dundee Securities, Raymond James, Desjardins Securities Inc., Mackie Research Capital Corporation and Manulife Securities Incorporated.

The Preferred Shares will be offered at a price of $10.00 per Preferred Share to yield 5.25% on the issue price and the Class A Shares will be offered at a price of $8.60 per Class A Share to yield 13.95% on the issue price. The closing price on the TSX of each of the Preferred Shares and the Class A Shares on April 21, 2015 was $10.20 and $8.96, respectively.

Since inception of the Company, the aggregate dividends paid on the Preferred Shares have been $4.40 per share and the aggregate dividends paid on the Class A Shares have been $9.20 per share, for a combined total of $13.60 unit. All distributions to date have been made in tax advantage eligible Canadian dividends or capital gains dividends.

The net proceeds of the offering will be used by the Company to invest in an actively managed portfolio of dividend yielding
common shares which includes each of the 15 Canadian companies listed below:

Bank of Montreal Enbridge Inc. TELUS Corporation
The Bank of Nova Scotia Manulife Financial Corp. Thomson-Reuters Corporation
BCE Inc. National Bank of Canada The Toronto-Dominion Bank
Canadian Imperial Bank of Commerce Royal Bank of Canada TransAlta Corporation
CI Financial Corp. Sun Life Financial Inc. TransCanada Corporation

The Company’s investment objectives are:
Preferred Shares:
i. to provide holders of the Preferred Shares with fixed, cumulative preferential monthly cash dividends in the amount of $0.04375 per Preferred Share to yield 5.25% per annum on the original issue price; and
ii. on or about December 1, 2019, to pay the holders of the Preferred Shares the original issue price of those shares.

Class A Shares:
i. to provide holders of the Class A Shares with regular monthly cash dividends currently targeted to be $0.10 per Class A; and
ii. on or about December 1, 2019, to pay the holders of Class A Shares at least the original issue price of those shares.

The sales period of this overnight offering will end at 9:00 a.m. (EST) on April 23, 2015.

It’s nice work if you can get it! The NAVPU on April 21 was $16.51!

DF.PR.A was last mentioned on PrefBlog when it got bigger in September, 2014. DF.PR.A is tracked by HIMIPref™ but is relegated to the Scraps index on credit concerns.

Update, 2015-04-23: The offering did quite well:

Dividend 15 Split Corp. II (the “Company”) is pleased to announce it has completed the overnight marketing of up to 2,700,000 Preferred Shares and up to 2,700,000 Class A Shares of the Company. Total proceeds of the offering are expected to be approximately $50.2 million.

The offering is being co-led by National Bank Financial Inc., CIBC, RBC Capital Markets and will also include Scotia Capital Inc., TD Securities Inc., BMO Capital Markets, GMP Securities L.P., Canaccord Genuity Corp., Dundee Securities, Raymond James, Desjardins Securities Inc., Mackie Research Capital Corporation and Manulife Securities Incorporated.

The sales period of the overnight offering has now ended.

April 21, 2015

April 21st, 2015

It is becoming increasingly fashionable to ascribe another mandate to central bankers:

“Society has given our central bankers worldwide the responsibility for macro-prudential risk, all the risk in the system, not just the risk in the banking system,” Fink said at the Credit Suisse Global Megatrends conference. “I don’t think there is enough talk about what are the costs of the low rate environment to the other components of our global society — pension funds, retirees, savers, and insurance companies.”

[Axa SA’s Henri] De Castries in 2013 called central bank policies a form of “financial repression” that forced savers to rescue the banking system.

A spokesman for Canada’s Ministry of Finance recently endorsed the idea:

Specifically, we use more and better data to assist our financial system monitoring, backed by deeper conversations and models where appropriate, to make more informed judgments about financial stability risks. We’ve added other potential sources of vulnerability, such as the balance sheets of households, companies and banks, to our macroeconomic models.

We’re also making progress toward a better understanding of how monetary policy actions influence risk taking. For example, when a central bank cuts interest rates to cushion the economy from a shock, the hope is that people will borrow more at that lower interest rate and spend more money. What this means is that financial imbalances are a necessary by-product of monetary policy action, especially if the action is prolonged, so these additional adjustment dynamics must be fully taken into account when conducting policy.

Clearly, though, incorporating financial stability into our monetary policy framework remains a work in progress. As a practitioner, it still feels to me like we are adding various rooms onto a house we love, rather than creating a new, elegant and coherent structure. We need to make sure there’s enough flexibility and clarity about the role of financial stability in our monetary policy framework. We need to better understand how macroprudential policies – such as mortgage insurance rules – that are aimed at promoting financial stability interact with monetary policy.

The Bank has been setting policy with a view to balancing the risks facing both the outlook for returning inflation sustainably to its target, and the risks to financial stability such as those posed by the indebtedness of Canadian households. The sudden drop in global oil prices has increased both risks. The oil-price shock is an important setback in our progress toward full capacity, full employment and stable inflation because it is a net negative for economic growth. And because lower oil prices mean lower Canadian income, the shock will worsen the debt-to-income ratio of Canadian households, thereby increasing financial stability risks.

This is absurd mission-creep, which will lead to yet another layer of unaccountable bureaucrats stifling innovation and competition while bloating the financial system and collecting large pay-cheques.

For example, the reincarnation of King Canute rules in Denmark, holding back the tides of speculators responding to economic reality:

Denmark halted government bond auctions on Jan. 30 as part of a series of steps designed to deter investors from pouring into AAA-rated krone assets. Speculation the central bank may need to abandon its currency peg soared after Switzerland dropped its euro cap on Jan. 15. The International Monetary Fund has since declared Denmark triumphant in its battle against speculators, and said the central bank’s handling of the matter added to its credibility.

The central bank’s acknowledgment that Denmark’s bond market may need some liquidity support follows criticism from some of the country’s biggest institutional investors. PFA A/S, Denmark’s largest commercial pension fund, has said the suspension of bond sales is killing liquidity and creating an “unsustainable situation.”

Meanwhile, the Canadian government cemented the structural deficit:

Canada cut its projected surpluses by C$18 billion ($14.7 billion) over the next five years as the federal government copes with the impact of lower oil prices and seeks to finance new tax cuts ahead of an October election.

Canada’s federal government will post a surplus of C$1.4 billion for the fiscal year that began April 1, ending a seven-year run of deficits, aided by the sale of shares in General Motors Co. and by reducing its buffer for emergencies. Surpluses will grow to as high as C$4.8 billion by 2019 as government income recovers.

Harper’s almost decade-long, three-term record of wholesale tax cuts has been marred by the run-up of debt totaling almost C$150 billion since the 2008-2009 recession.

Wow, $4.8-billion! I guess the take-away is that we only expect a recession every thirty years or so. Good times!

It was a moderately good day for the Canadian preferred share market, with PerpetualDiscounts winning 31bp, FixedResets gaining 3bp and DeemedRetractibles up 5bp. Volatility continued to be high, as reported on the Performance Highlights table, with FixedResets making up large complements of both winners and losers. Volume was very high, with TRP issues prominent.

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:

impVol_TRP_150421
Click for Big

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 22.30 to be $0.48 rich, while TRP.PR.B, resetting 2015-6-30 at +128, is $0.59 cheap at its bid price of 14.11.

impVol_MFC_150421
Click for Big

Another excellent fit, but the numbers are perplexing. Implied Volatility for MFC continues to be a conundrum, although it declined substantially today. It is still too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule).

Most expensive is MFC.PR.I, resetting at +286 on 2017-9-19, bid at 25.05 to be $0.43 rich, while MFC.PR.K, resetting at +222bp on 2018-9-19, is bid at 21.55 to be $0.48 cheap.

impVol_BAM_150421
Click for Big

This fit is actually quite good.

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 19.13 to be $0.42 cheap. BAM.PF.G, resetting at +284bp 2020-6-30 is bid at 23.40 and appears to be $0.54 rich.

impVol_FTS_150421
Click for Big

This is just weird because the middle is expensive and the ends are cheap but anyway … FTS.PR.H, with a spread of +145bp, and bid at 15.65, looks $0.78 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, is bid at 21.01 and is $0.32 rich.

pairs_FR_150421
Click for Big

Investment-grade pairs now predict an average over the next five years of about 0.30%. The DC.PR.B / DC.PR.D pair is just a dumb number, since the Toronto Stock Exchange reports a bid of 15.00 for the latter issue, despite the fact that there were no trades today and the close Monday was 20.14. It is not clear whether the idiotic quote is due to the TSX’s peculiar reporting practices or their inadequate supervision of market makers.

pairs_FF_150421
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 0.6154 % 2,196.6
FixedFloater 0.00 % 0.00 % 0 0.00 0 0.6154 % 3,840.6
Floater 3.30 % 3.47 % 57,249 18.61 4 0.6154 % 2,335.1
OpRet 4.43 % -2.13 % 41,319 0.11 2 0.0394 % 2,763.2
SplitShare 4.56 % 4.58 % 63,978 3.40 3 0.1334 % 3,230.2
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0394 % 2,526.6
Perpetual-Premium 5.33 % 1.73 % 65,918 0.09 25 0.0263 % 2,516.3
Perpetual-Discount 5.11 % 5.10 % 145,822 15.10 9 0.3119 % 2,791.8
FixedReset 4.63 % 3.95 % 278,838 16.13 85 0.0290 % 2,311.3
Deemed-Retractible 4.91 % 3.48 % 108,589 0.68 36 0.0453 % 2,651.8
FloatingReset 2.58 % 2.94 % 74,599 6.23 8 -0.0287 % 2,346.0
Performance Highlights
Issue Index Change Notes
ENB.PF.G FixedReset -2.45 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-21
Maturity Price : 20.34
Evaluated at bid price : 20.34
Bid-YTW : 4.73 %
BAM.PF.B FixedReset -1.58 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-21
Maturity Price : 21.16
Evaluated at bid price : 21.16
Bid-YTW : 4.34 %
TRP.PR.F FloatingReset -1.37 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-21
Maturity Price : 18.00
Evaluated at bid price : 18.00
Bid-YTW : 3.54 %
NA.PR.W FixedReset -1.34 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-21
Maturity Price : 22.58
Evaluated at bid price : 23.56
Bid-YTW : 3.42 %
BAM.PR.R FixedReset -1.19 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-21
Maturity Price : 19.13
Evaluated at bid price : 19.13
Bid-YTW : 4.35 %
ENB.PR.P FixedReset -1.05 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-21
Maturity Price : 19.70
Evaluated at bid price : 19.70
Bid-YTW : 4.51 %
FTS.PR.G FixedReset -1.03 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-21
Maturity Price : 21.11
Evaluated at bid price : 21.11
Bid-YTW : 3.78 %
BAM.PF.F FixedReset -1.03 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-21
Maturity Price : 22.33
Evaluated at bid price : 23.04
Bid-YTW : 4.22 %
BAM.PR.X FixedReset -1.02 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-21
Maturity Price : 16.43
Evaluated at bid price : 16.43
Bid-YTW : 4.44 %
CM.PR.P FixedReset -1.01 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-21
Maturity Price : 22.56
Evaluated at bid price : 23.51
Bid-YTW : 3.40 %
FTS.PR.M FixedReset 1.05 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-21
Maturity Price : 22.80
Evaluated at bid price : 24.00
Bid-YTW : 3.62 %
ENB.PR.H FixedReset 1.05 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-21
Maturity Price : 17.25
Evaluated at bid price : 17.25
Bid-YTW : 4.67 %
FTS.PR.H FixedReset 1.16 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-21
Maturity Price : 15.65
Evaluated at bid price : 15.65
Bid-YTW : 3.76 %
MFC.PR.B Deemed-Retractible 1.20 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.50
Bid-YTW : 4.99 %
PWF.PR.P FixedReset 1.21 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-21
Maturity Price : 17.60
Evaluated at bid price : 17.60
Bid-YTW : 3.64 %
PWF.PR.A Floater 1.51 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-21
Maturity Price : 17.52
Evaluated at bid price : 17.52
Bid-YTW : 2.87 %
PWF.PR.T FixedReset 1.57 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-21
Maturity Price : 23.10
Evaluated at bid price : 24.52
Bid-YTW : 3.39 %
TRP.PR.C FixedReset 1.63 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-21
Maturity Price : 16.26
Evaluated at bid price : 16.26
Bid-YTW : 3.81 %
MFC.PR.F FixedReset 2.00 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 17.35
Bid-YTW : 6.98 %
TRP.PR.B FixedReset 2.32 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-21
Maturity Price : 14.11
Evaluated at bid price : 14.11
Bid-YTW : 3.84 %
MFC.PR.N FixedReset 2.94 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.75
Bid-YTW : 4.74 %
Volume Highlights
Issue Index Shares
Traded
Notes
BNS.PR.M Deemed-Retractible 150,834 Scotia sold 15,500 to Canaccord at 25.27, then three blocks of 10,000 each to RBC, all at 25.25. RBC crossed 50,000 at 25.28; TD crossed 40,000 at 25.28.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-07-27
Maturity Price : 25.00
Evaluated at bid price : 25.28
Bid-YTW : 3.51 %
PWF.PR.R Perpetual-Premium 65,660 Nesbitt crossed 35,000 at 26.33.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2021-04-30
Maturity Price : 25.00
Evaluated at bid price : 26.27
Bid-YTW : 4.53 %
TRP.PR.B FixedReset 61,297 TD crossed 45,000 at 14.16.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-21
Maturity Price : 14.11
Evaluated at bid price : 14.11
Bid-YTW : 3.84 %
TRP.PR.C FixedReset 54,177 RBC crossed 38,000 at 16.21.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-21
Maturity Price : 16.26
Evaluated at bid price : 16.26
Bid-YTW : 3.81 %
TRP.PR.E FixedReset 45,003 Scotia crossed 40,000 at 22.40.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-21
Maturity Price : 21.87
Evaluated at bid price : 22.30
Bid-YTW : 3.85 %
CM.PR.Q FixedReset 38,798 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-21
Maturity Price : 23.05
Evaluated at bid price : 24.72
Bid-YTW : 3.60 %
There were 54 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
BNS.PR.Y FixedReset Quote: 21.80 – 22.53
Spot Rate : 0.7300
Average : 0.4284

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.80
Bid-YTW : 4.05 %

PWF.PR.S Perpetual-Premium Quote: 24.34 – 24.69
Spot Rate : 0.3500
Average : 0.2240

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-21
Maturity Price : 23.94
Evaluated at bid price : 24.34
Bid-YTW : 4.93 %

RY.PR.H FixedReset Quote: 23.63 – 24.03
Spot Rate : 0.4000
Average : 0.3048

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-21
Maturity Price : 22.65
Evaluated at bid price : 23.63
Bid-YTW : 3.39 %

CIU.PR.C FixedReset Quote: 15.71 – 16.29
Spot Rate : 0.5800
Average : 0.4952

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-04-21
Maturity Price : 15.71
Evaluated at bid price : 15.71
Bid-YTW : 3.74 %

PVS.PR.C SplitShare Quote: 25.33 – 25.58
Spot Rate : 0.2500
Average : 0.1883

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2017-12-10
Maturity Price : 25.00
Evaluated at bid price : 25.33
Bid-YTW : 4.58 %

ENB.PR.A Perpetual-Premium Quote: 25.37 – 25.75
Spot Rate : 0.3800
Average : 0.3200

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-05-21
Maturity Price : 25.00
Evaluated at bid price : 25.37
Bid-YTW : -3.10 %

Scapegoat For Flash Crash Isolated!

April 21st, 2015

Assiduous Readers will remember the highly politicized SEC Flash Crash Report. It’s taken five years, but they’ve finally isolated a scapegoat who spends his spare time rubbing his hands together and cackling about the triumph of evil:

NAVINDER SINGH SARAO was a futures trader
who operated from his residence in the United Kingdom and who traded primarily through his company, Nav Sarao Futures Limited.

“Layering” (a type of “spoofing”) was a form of manipulative, high speed activity in the financial markets. In a layering scheme, a trader places multiple, bogus orders that the trader does not intend to have executed-for example, multiple orders to sell a financial product at different price points-and then quickly modifies or cancels those orders before they are executed. The purpose of these bogus orders is to trick other market participants and manipulate the product’s market price (in the foregoing example of bogus sell orders, by creating a false appearance of increased supply in the product and thereby depressing its market price). The trader seeks to mislead and deceive investors by communicating false pricing signals to the market, to create a false impression of how market participants value a financial product, and thus to prevent legitimate forces of supply and demand from operating properly. The trader does so by creating a false appearance of market depth, with intent to create artificial price movements. The trader could then exploit this layering activity by simultaneously executing other, real trades that the trader does intend to have executed, in an attempt to profit from the artificial price movements that the trader had created. Such layering and trading activity occurs over the course of seconds, in multiple cycles that the trader repeats throughout the trading day. Given the speed and near simultaneity of market activity in a successful layering scheme, such schemes are aided by custom programmed, automated trading software.

Beginning in or about June 2009, SARAO sought to enrich himself through manipulation of the market for E-Minis. By placing multiple large-volume orders on the CME at different price points, SARAO created the false appearance of substantial supply in order to fraudulently induce other market participants to react to his deceptive market information. SARAO thus artificially depressed EMini prices. With the aid of an automated trading program, SARAO was able to all but eliminate his risk of unintentionally executing these orders by modifying and ultimately canceling them before execution. Meanwhile, he exploited his manipulation to reap large trading profits by executing other, real orders.

Matt Levine of Bloomberg – who I respect greatly as a reporter who really puts a lot of intelligence and sweat to work when writing his columns – writes a wonderful column regarding the indictment:

So straightforward that one of the biggest puzzles here is why it took so long — and the help of a whistleblower — for regulators to figure it out. They came tantalizingly close:
As reflected in correspondence with both SARAO and an FCM he used, the CME observed that, between September 2008 and October 2009, SARAO had engaged in pre-opening activity — specifically, entering orders and then canceling them — that “appeared to have a significant impact on the Indicative Opening Price.” The CME contacted SARAO about this activity in March 2009 and notified him, via correspondence dated May 6, 2010, that “all orders entered on Globex during the pre-opening are expected to be entered in good faith for the purpose of executing bona fide transactions.” The CME provided a copy of the latter correspondence to SARAO’s FCM, which suggested to SARAO in an email that he call the FCM’s compliance department if he had any questions. In a responsive email dated May 25, 2010, SARAO wrote to his FCM that he had “just called” the CME “and told em to kiss my ass.”

Emphasis added because come on: The futures exchange wrote to Sarao on the day of the flash crash, telling him to stop spoofing, and he called them back “and told em to kiss my ass.” And then regulators pondered that reply for five years before deciding that they’d prefer to have him arrested in London and extradited to face criminal spoofing charges. One conclusion here might be that rudeness to regulators really works.

It’s a tempting idea!

The CFTC claims that Sarao basically started his spoofing career by causing the flash crash, and then went ahead and kept spoofing for another five years without much interruption. I guess he got more subtle at it? Not very subtle though; he was a consistently large trader, “placing, repeatedly modifying, and ultimately canceling multiple 200-, 250-, 300-, 400-, 500-, 550-, 600-, and 900-lot sell orders,” versus an average order size of seven contracts. He also seems to have had some patterns (like putting in orders for exactly 188 or 289 contracts that never executed) that you’d think would make him easier for regulators or exchanges to spot.6 If regulators think that Sarao’s behavior on May 6, 2010, caused the flash crash, and if they think he continued that behavior for much of the subsequent five years, and if that behavior was screamingly obvious, maybe they should have stopped him a little earlier?

Also, I mean, if his behavior on May 6, 2010, caused the flash crash, and if he continued it for much of the subsequent five years, why didn’t he cause, you know, a dozen flash crashes?

And Mr. Levine closes with the key point:

I have always been impressed and puzzled that low-tech spoofers have much success ripping off whomever they rip off. It’s such a minimal fraud; it’s just saying that you want to sell when you don’t want to sell.10 It’s always surprising that that could have a major effect on markets. John Arnold has argued here at Bloomberg View that spoofing only hurts front-running high-frequency traders, while others point out that “algorithmic trading tools are used by a wide class of traders,” including long-term investors like Waddell & Reed who use algorithms to try to avoid the front-running HFTs. But the FBI’s and CFTC’s theory here is far more troubling: It suggests that existing algorithms are not just dumb enough to give spoofers some of their money, but dumb enough to give spoofers so much of their money that they destabilize the financial markets. It’s not especially confidence-inspiring to read that a guy with a spreadsheet can trick everyone into thinking that the market is crashing, and thereby cause the market to crash.

Well, if the extremely well-paid hard-nosed deep-thinking portfolio managers at Waddell & Reed have their naivety and incompetence exploited by someone who plays the game a little better than they do, you won’t find any tears here.

I hadn’t read the argument linked with “others point out” before, but it doesn’t impress me:

Even if we exclude cases such as this one and legalize the submission of spoofed orders with the proviso that they stay live for less than 100ms, there are plenty of unsophisticated market participants who would still be harmed. These days, algorithmic trading tools are used by a wide class of traders. There is an entire industry, possibly larger than that of vanilla HFT, focused on creating and marketing these tools. Tremendous volume is executed via algorithms on behalf of traditional long-term traders.[2] I’m not an expert on such algorithms, but my impression is that they tend to be much less sophisticated than a lot of vanilla HFT, and thus more likely to be tricked by spoofing. A basic example of one such execution algorithm would be a peg order, which is priced in a very simple fashion somewhere in between the best bid and ask. If a spoofer alters the best bid then a peg order will change its price in response, leaving the user open to losses.

The open question here is: why should anybody in his right mind care about unsophisticated market participants? If they show up at a gunfight with a boxing glove, that’s their problem; the sooner they go bankrupt and go on welfare, the better, as far as I’m concerned. If they are placing orders with no other thought than ‘Golly, I guess I’ll do whatever the rest of the market is doing’ then they are contributing to market inefficiency and harming the market’s price discovery function. So screw ‘em; give a medal to the guys who punish ‘em. Markets and market regulation should concentrate on the best interests of fundamental traders; any help, succor or encouragement given to techno-weenies is misplaced.

The other major argument in the linked objection is:

Say that you wanted to change this definition to allow spoofing with the intention of damaging order-anticipation strategies. Could you do so in a fashion that didn’t also allow other kinds of nasty manipulation? I don’t see how. Manipulation via self-trading is probably a behavior that everybody agrees should be prohibited. When a manipulator trades with themselves, they can do so risk-free at an arbitrary price, giving other traders a false sense of the market price.[3] Self-trading can be extremely damaging to market integrity. But which group, I wonder, is most hurt by self-trading? One could argue that so-called “front-runners” are. For example, say Apple stock is currently trading at $100, and a manipulator trades 10 million shares with themselves at $90. There could be order-anticipation algorithms, ‘predicting’ selling to come, that react to this and sell Apple stock.[4] There could also be strategies that take this as a signal that there will soon be selling across the entire sector, and sell stocks in related companies. These algorithms fall under Arnold’s definition of “front-running,” and would be expected to lose money when the manipulator decides it’s time to push Apple stock back to $100. Does that mean we should celebrate the manipulator? No.[5]

That’s a big leap of logic in the last word there! I will certainly celebrate the manipulator: he’s punished a few stupid rat-turds who aren’t trading on fundamentals. Good for him!

To his credit, the guy at Mechanical Markets does address my view in his footnote:

[5] If you’re a long-term investor, this scenario seems great, right? You can buy Apple stock at a $10 discount. So, if you thought the stock had an intrinsic value of $105, you’re getting a real bargain. In practice though, I’d imagine that you would hesitate to start buying stock in such a scenario. At least until you had confirmed that the price wasn’t plummeting because of some news that you hadn’t heard yet. By the time you could rule out any news, the manipulator would have pushed the price back to $100.

He who hesitates is lost! Many limit orders entered by fundamental traders during the manipulation phase will be executed prices more attractive than would otherwise be the case. In the long run, fundamental traders who pursue incredibly sophisticated strategies like “paying what they consider a fair price for their purchases” will scoop up all kinds of money from the empty-headed game-players.

But, of course, the Boo-Hoo-Hoo Brigade is in full cry:

“It’s incumbent upon regulators not to be asleep at the switches,” said Donald Selkin, who helps manage about $3 billion as chief market strategist at National Securities Corp. in New York. “They have been, time and time again.”

“Things like this don’t build a lot of confidence,” said Timothy Ghriskey, the chief investment officer at Solaris Asset Management LLC in New York, who helps manage about $1.5 billion. “It’s a risk that regulators are always going to be a step behind. That’s why they should be more aggressive.”

“It’s ridiculous, it’s the government at its best — inept,” Rick Fier, director of equity trading at Conifer Securities LLC in New York, said in a phone interview. “It really is just another one of many things to deal with, it’s extremely frustrating. We’ve seen flash crashes and we’ll see them again and it’s definitely disconcerting.”

“The [high-frequency trading] term’s just become meaningless at this point; it’s just a boogie-man,” said Dave Lauer, president of Kor Group, a market structure lobbying and research firm.

“There are high-frequency market-makers, there are high-speed proprietary traders who don’t care about making markets and I do think there are predatory high-speed traders and manipulative high-speed traders,” Lauer said. “What this guy was doing was using computers in a manipulative, high-order-volume manner.”

no more than 20 trading days when volatility was high.

“On the surface, the headline isn’t comforting, but perhaps it provides the avenue to prevent something of this nature from happening again,” said Walter Todd, who oversees about $1 billion as chief investment officer for Greenwood, South Carolina-based Greenwood Capital. “I’m glad we know definitively how it happened, but at the same time, the headline isn’t a great thing.”

Go have lunch with a client, guys, if that’s all you’re good for.

Update: Here’s more argument in favour of ditching the completely artificial spoofing and layering rules – look at just just who Navinder Singh Sarao is and how he did it:

Sarao, 36, has no record of having worked at a major financial firm in the U.S. or the U.K. At the time of the flash crash, Sarao was renting space from a proprietary-trading firm in the City of London and clearing his transactions through MF Global Holdings Ltd., the now-defunct firm headed by Jon Corzine, said a person with knowledge of the matter.

That picture, according to U.S. authorities, belies a years-long history of lightening-quick computer trading that netted Sarao $40 million in illicit profits.

By all accounts, the flash crash was more than a mere technical glitch. It raised fundamental questions about how vulnerable today’s complex financial markets are to the high-speed, computer-driven trading that has come to dominate the marketplace.

Sarao’s computer screen almost always flashed futures data tied to the Standard & Poor’s 500 Index and his interactions were typically limited to workers installing new trading algorithms, said the person, who spoke on the condition of anonymity.

When he started his allegedly manipulative trading in 2009, Sarao used off-the-shelf software that he later asked to be modified so he could rapidly place and cancel orders automatically. At one point, he asked the software developer for the code, explaining that he wanted to play around with creating new versions, according to regulators.

So he wasn’t an expert trader, using his years of industry experience to exploit infinitesimal little bugs in standardized software, or his deep knowledge of trade-matching and clearing to exploit some bizarre mismatch in the interface between various systems.

He was one guy, using slightly modified off-the-shelf software, who broke one rule. And a rule, by the way that I feel is probably bent many, many times per day despite a very expensive army of regulators devoted to enforcing the silly thing.

If the US financial system is so vulnerable to one guy breaking one silly rule then we’ve got a problem that will not be fixed by doubling the number of regulators who check out trade cancellations and try to decide just what the intent was when each order was originally placed. If the rule is so vulnerable to exploitation and so unenforceable: get rid of it. Unleash the real players in the industry to detect and enforce a level playing field, with spoofing algorithms, spoofing detection and counter-exploitation algorithms, spoofing cloaking algorithms, anti-spoofing-cloaking algorithms … the whole nine yards. And bring some sanity back to the world.

Update, 2015-4-22: Zero Hedge is irritated:

While we eagerly await for the SEC to retract its official 104 page report summarizing the “Findings regarding the market events of May 6, 2010″ in light of “recent developments”, and as we follow the shift in the official narrative to the outright bizarre, in which the entire Flash Crash is now blamed on just one man (as opposed to just Waddell & Reed as per the previous narrative), we learn that the latest scapegoat for a broken, fragmented and manipulated market, Navinder Sarao, is not quite so eager to go to minimum security prison in the US for doing what leads to a slap on the wrist when someone like Citadel or Virtu does it, and will challenge the CFTC’s attempt to pin everything on him.

As previoisly reported, Sarao engaged in what every other HFT firms on a daily basis: namely spoofing. However, because he is a foreigner, he was easy prey for the US “justice” system, and as a result it is he that has been picked as a scapegoat (perhaps because the official investigation into Virtu, Citadel and the other HFT firms revealed something so dramatic it needed an easy and available cover up).

Eric Scott Hunsader of Nanex, whose work has been quoted admiringly on PrefBlog in the past, has posted a series of tweets:

If this futures trader *was* spoofing during Flash Crash, it means the CFTC completely missed what should have been easy to spot

Flash Crash Brit was just one of many #HFT ass-hats in the market on 5/6 contributing to a fragile system

We spotted the Flash Crash Brit years ago – red/yellow on this eMini chart is from his algo on 5/6

What Singh Sarao is being accused of is as common as Oxygen. I can’t stress this enough.

It is wrong to say Sarao caused flash crash. He contributed to causing it, yes, but it was Barclay’s leak that sent it down

Why didn’t the CME say anything about Sarao for what.. 5 years now?

How did Andrei Kirilenko (CFTC) miss Sara’s spoofing while analyzing a week’s worth of AUDIT TRAIL DATA??

Why is Sarao (DOJ flash crash spoofer) being singled out from so many other #HFT spoofing algos?

When I 1st saw Sarao’s algo in Summer 2010, I thought it was Tradebot because it stopped when Cummings said they pulled the plug

“Exploratory Trading” – another #HFT strategy used by top firms to manipulate eMini’s $ES_F http://www.nanex.net/aqck2/4136.html

What really caused Flash Crash: Someone LEAKED that a mutual fund was selling 75K eMini’s via participation algo. Wall St pounced

Sarao turned off his algo at 14:40:12. The market flash crash began 2 minutes 32 seconds later at 14:42:44 – an eon in market time

Detailed forensic evidence on the flash crash: http://www.nanex.net/aqck2/4650.html

FT Alphaville has some harsh words:

In a series of moves variously known as “layering” or “spoofing,” Sarao allegedly created the appearance of substantial supply in the market which didn’t actually exist — sparking a short-lived 600 point fall over in the Dow Jones Industrial Average in the space of five minutes.

Except you know, instinctively, that this is nonsense. It’s pure financial keystone cop-ery. This is a laughable piece of regulatory grand-standing from the Americans, which the British authorities look like fools for going along with.

The S&P futures market, across its various guises, is colossal. It is dominated by robot traders and other, highly capitalised professionals. The simple idea that a chap in West London, playing around at home with an off-the-shelf algo programme on his PC while his parents are off at the gurdwara, can up-end the entire US equity market is comical.

Or rather, if there’s any truth here at all, the guys under arrest should be those at the top of the CME and other key pieces of US market infrastructure.