Tagged: Dodd-Frank

Swapping the Future

Whole swaths of stocks moved 3% yesterday. You might thank Dodd-Frank for it, even if David Tepper gets credit (if you heard the Appaloosa Management founder’s interview you know what I mean).

To understand how, ever heard of a Rube Goldberg Machine? It’s an unnecessarily complex device for doing something simple. Cartoonist Reuben “Rube” Goldberg turned his own name into a rubric for obtuse machination with humorous creations like the self-operating napkin.

So your stock rose sharply for no apparent reason. Some will say it’s because David Tepper, who made $2 billion last year on a belief in strong equities, said on CNBC that “shorts should get out the shovels because they’ll be buried.”

But the answer to why your stock and maybe your sector yesterday moved, and how Dodd-Frank is a factor may be more like a Rube Goldberg Machine. MSCI global indexes rebalance today, and ahead of that we’ve seen surging high-frequency trading, telling us money is benchmarking ahead to equity indexes at newly higher rates. Options expire tomorrow and Friday, with VIX volatility instruments lapsing May 22, giving arbitragers better opportunity to pairs-trade.

And Dodd-Frank’s deadlines on swap-clearing rules take effect in June, so this is the last pre-central-swap-clearing options-expirations period, which set dates for swaps too.

Ever heard of single-stock futures? It’s a way to go long or short shares without buying or borrowing. There’s even an exchange called OneChicago owned by the Chicago Board Options Exchange, CME Group, and Interactive Brokers, for electronically trading these contracts where two parties agree to exchange a set number of shares of a given stock in the future at a price determined today. Also popular are Narrow-Based Indexes – futures contracts on a small set of securities, say, from an industry or subsector. (more…)

Moving Averages

What if we forecasted the weather on temperature moving-averages?

It would seem silly. After all, ENIAC ran the first mathematical computations for a weather model in 1950. ENIAC is not an Icelandic singer. It’s the first true computer and was built by University of Pennsylvania professors in 1946 with funding from the United States Army.

Now, TV weather departments use models that consume data about jet streams, moisture, temperature fluctuations, topography and other factors to project outcomes. For instance, those models say it’ll snow in Denver tonight after 80-degree temperatures the past three days. Chances are they’re right. It’s a significant predictive advance over the old method, the Native American Rock model, in which a rock was hung on a string outdoors. If the rock was wet, it was raining. And so on.

Humans use mathematical models in many predictive ways today. In a subset of weather-forecasting, models anticipate the development and trajectory of hurricanes. We track seismic activity to forecast earthquakes with some measure of warning.

In one of the most interesting applications of mathematical modeling, scientists searching outer space for planets like ours have now identified at least one in a solar system beyond our own. How? With instruments so precise that they can measure differences in light as fine as turning a flashlight on and off on the moon. Slight dimming in measurable light is evidence of a shadow being cast along a path – proof of planets. (more…)

The Great Debate

The Great Debate is upon us.

No, not the presidential one tonight. The other one, about equity markets. The SEC’s technology summit yesterday aimed at finding ideas for preventing another Aug 1 Knight Capital debacle from ever happening again included mostly the folks who huddled after the 2010 Flash Crash to prevent glitches from…ever happening again.

Since the Knight glitch came after efforts to prevent glitches from, yes, ever happening again, and since glitches and one-off flash crashes are routine now, reflected in continual halts and erroneous trades (including two yesterday early, even as the SEC summit was commencing), understandably hopes for change are dim.

We’ve gotten many questions in recent days. How do we control technology? Is technology the problem? Are markets too complex?

And the simplest one: Why can’t we shut the hummer down when it goes haywire? Right? Common sense tells us it can’t be too hard if it involves electricity. Pull the plug. Yank the doohickey or whatever out of the machine.

We’ll get a “kill switch,” sure. But HFT won’t end soon because structure depends on it. The major exchanges are averaging about 4.6 billion shares of trading volume, down from over 7 billion daily in 2009, when incidentally Dodd-Frank was crafted. Add 30% more in dark pools and volume is about 6 billion shares each day now.

If we divide that into what’s Navigational – moving stuff around – and what’s Fundamental (real buyers and sellers meeting), it’s about an 85%/15% split. We’re left with 900 million shares of “real” volume, with the rest from HFT, ETF arbitrage, automated market-making and so on. This is the glitch-infested stuff.

What happens if all 85% of it disappears? Nothing, if you’re Berkshire Hathaway’s Class A shares trading 400 shares daily with no navigational volume. For exchanges selling data and services to drive profits, it’s doomsday. The largest broker-dealers would leave equity markets. So would the 50-odd large high-frequency firms. (more…)

The Facts

Mark Twain said, “Get your facts first and then you can distort them as much as you please.”

The 1959 annual review of Mark Twain’s accounts by his successors in Redding, CT, found that his IBM shares, perhaps once units of the International Time-Recording Co. formed in the 19th century, were worth $148,000.

That’s a little-known fact. By wading through fine print for years, we’ve not only passed on nuggets about humorists, but we’ve also found nifty facts proving trading markets have fundamentally altered the IR job.

We found a couple this week that may surprise you. The 2012 SEC budget reveals that the agency collected about $1.3 billion in “Section 31” fees in 2011.

Every trade earns the SEC a fee. Since 1933, the SEC Act (now US Code, Title 15, Sections 77 and 78) has allocated Section 6(b) fees for securities offerings, 13(e) fees on corporate stock repurchases, and 14(g) fees on proxy solicitation to “recover the costs to the government of the securities registration process…”

Don’t get lost in the b’s, e’s and g’s. Stay with me here. (more…)

You Can Change the World

At county fairs when I was a kid you could buy a “Shoshoni Weather Gauge,” which hawkers said could forecast the weather like an American Indian.

It was a rock tied with a leather strand to a wooden stand. The instructions said: “If rock is wet, it’s raining. If rock is dry and hot, it’s sunny. If rock is cold and covered with fluffy white layer, it’s snowing.”

Similarly, I saw this in a recent Bloomberg article: “The best way to keep pace with the S&P last year would have been a strategy that rotated between sectors based on the macro headlines,” said David Spika, fund manager at Westwood Holdings in Dallas.

That sounds a lot like “if rock is wet, it’s raining.” The elegance of simplicity notwithstanding, how do you distinguish the IR chair and your company’s shares in a market moving on whether the rock is wet or not?

One argument says you change your focus. Deemphasize the capital markets and instead get baptized in Dodd-Frank, proxy evolution, say-on-pay and myriad others rules and regulations oozing like molasses through public capital markets. Become a compliance concierge. Well and good. But you’ll be competing with internal and external legal counsel for thought leadership, and I find that the advantage lawyers have is they have law degrees. (more…)