Monday, July 6, 2009

Catch Them if You Can

Bulge bracket banks are getting back to business and re-inventing some of their old tricks in a bid to convince themselves and us that they are whole and healthy again. Banks are slippery fellas, twisting and turning to squirm from the grasp of regulators and spinning like mad to avoid the critical eye of the average investor. The words 'old dogs' and 'new tricks' come to mind, because today's tricks are not new at all. One way they are minting new money is from the ever more popular rebate spinning. Themis' Joe Saluzzi reckons that 60% of equity volume comes from high frequency trading. And these traders are taking advantage of the rebates on offer. Exchanges including NYSE Euronext and Nasdaq, and ECNs such as Turquoise, BATS and Direct Edge are offering higher and higher rebates to attract business. The latest one-upmanship comes from Direct Edge which is now offering $0.0032 per share rebates to customer trading over 100 million shares per day. Now this doesn't sound like much on the surface, but if you actually trade 100m shares with Direct Edge you would get back $320,000 per day. This equates to over $76 million per year in rebates. This is on top of whatever you made doing the actual share trading. This is not chump change even for the bulge bracket. The next old trick is securitisation. Today's FT says Goldman Sachs and Barclays are pooling assets from several clients and turning them into securities that they can sell on. This helps them to lower the capital required to do the business. Wait a minute! This sounds suspiciously like something they did with mortgages that got them into mega-hot water! I call this laughing all the way to the bank.

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