An Exercise in Frustration

I was preparing a comment on today's Congressional panel on dark pools and HFT etc. when I noticed an article on Reuters saying that Goldman Sachs had sent a memo on the subject to the SEC. The memo was "posted on the SEC website", said Reuters. As a diligent reporter I followed up and went to the SEC's website where I then tried to locate said memo. A frustrating hour later I had no more information than I would have had if I'd stood in the street and shouted "What is in the Goldman Sachs memo?" to passersby. With all the banging on the regulators are doing about transparency, the SEC's own website is the most egregious example of opacity I have ever seen. It is an impenetrable collection of officious-looking government documents and EDGAR filings (always a riveting read). To even find a press contact a journalist has to know exactly what the SEC calls the press office (Office of Public Affairs) and where to find the phone number (under contacts, not to be seen anywhere in press releases or news which is customary on websites). A phone call ensued to ask Public Affairs where to find said memo. He was not surprised that I was having trouble and kindly walked me through it. Six clicks later and still not obvious, there it was - at the bottom of another internal memo. It would have been easier to cadge the information from Reuters or Zerohedge (which had it first, I believe). So, Ms. Schapiro, when you next opine about transparency, maybe you should look inward. Information is key when trying to catch criminals and control clever bankers. And if anyone has to mine the information out of the SEC website, the criminals will be laughing all the way to the Cayman Islands before anyone knew they existed. (The memo, BTW, looks like a presentation I saw at Goldman's about a year ago - slightly doctored with its own 'recommendations' for the SEC. Surprise, surprise it favors the status quo for HFT and dark pools. But the banks is down at least on naked sponsored access (DMA), which it thinks could pose systemic risks.)

My Favorite Things

The front page of today's Financial Times was so full of alliteration that it inspired me to write a song. Feel free to sing along to the tune of "My Favorite Things" from the Sound of Music:
           Benchmarks on bonuses,
                 New rules on risk-taking,
           Demolishing dark pools
                 and banning book-baking,
           Snitches and wiretaps a prison cell brings,
                  These are a few of my favorite things.
           When the Fed bites,
                  when Feebies sting,
           When you're dealing bad....
                  It pays to remember my favorite things
            And reel in the greed a tad.........

         

Dark Puddles

The SEC has finally cracked down on dark pools, limiting the amount of trading that can be kept quiet to 0.25 percent of a company's shares, from the 5 percent previously. This is a good first step. It means that traded prices have to be made public sooner. There have been calls for greater transparency for dark pools since their beginnings. Some of the largest pools are owned by investment banks where they began as internalization engines. While this saves millions in brokerage and exchange fees for the banks and their customers, it also means that no one else can play. Some of the banks have allowed other dark pools to integrate with their own. Last year Morgan Stanley signed bilateral deals with Goldman Sachs and UBS to do just that. But access remains limited to a few chosen partners. Broker-owned dark pools and crossing engines have been struggling for years to get the banks to cooperate and allow mutual access. To add murkiness on top of opacity, volumes in dark poolshave been reported in two different ways. The sellside pools often double-count the trade, whereas the independents usually count a trade once. Some pools allow trades of any size, some insist that a client do blocks of 70,000 shares or more. The disparity between, and secrecy from, many dark pool operators has kick-started the SEC's new campaign for transparency. The new chairman of the SEC, Mary Schapiro, seems to be doing what Gary Gensler's CFTC cannot - kicking ass. The SEC is not cowering from the task because the US exchanges or banks might lose business. And they might - Europe is gearing up its post-MiFID markets with several dark pools of its own. And quality volume in a sector can already be found in European pool, satifying an investor's every desire even if it isn't in a US listing. Maybe what it takes is a woman. When a woman is confronted by whiny little boys who want to keep potentially dangerous toys, she usually tells them to shut up and find some other toy to play with.  That the boys - investors, banks, etc. - may have to go overseas to find these toys is neither here nor there. She just doesn't want them doing it on her watch and in her patch.

CFTC Gets Cold Feet

Just when I thought I couldn't be any more disappointed in the weak-minded, lily-livered bodies that we call US 'regulators' I saw an article in the Financial Times this morning that made me want to scream. It appears that the CFTC is going to wimp out of trying to impose position limits on commodities, particularly oil. It is afraid that the US will lose business to other centers if it does. This is probably true. the UK is ready and waiting for more traffic through ICE, and the Dubai Merc is poised to take advantage of any US outflows. But the fact remains that the huge positions taken by non-oil entities in 2008 contributed to a massive oil price bubble. CFTC Commissioner Bart Chilton said as recently as July that the CFTC was not going to "minimize the role that speculators are playing." Now he is dancing around the subject stating that the regulator would "set the bar high" regading limits. Michael Dunn recommends offering "generous" limits. Jill Sommers prefers to err on the high side as well, but I get the feeling she is really focused on OTC issues. Only chairman Gary Gensler seems to be holding firm on the limits idea. It is new commissioner and unknown quantity Scott O'Malia who holds the wild card in my opinion. O'Malia was originally nominated by big-oil, big-car GW Bush and somehow slipped by President Obama's due diligence team. O'Malia was a hard-line lobbyist against environmental measures and for electricity deregulation. Unbelievably he worked for the now-bankrupt electricity company Mirant, which contributed greatly to the spectacular electricity meltdown (also involving Enron) in California in 2000-2001. After the crisis, CA attorney general Bill Lockyer, said that Mirant was "one of the worst offenders during the Energy Crisis. They told grid operators generating units were down when they weren't. They created bogus grid congestion, then received premium payments to relieve it. To avoid in-state price caps, they created the illusion of importing energy from out of state." O'Malia said at his confirmation hearing that this experience opened his eyes to the consequences of inadequate regulation. Let us hope so. I will be watching you Mr. O'Malia.

Beware the Bad News Bears

It is freaky Friday at the end of the a very strange week where bad news bears have been roaring about unemployment, foreclosures, and government debt while the Dow Jones Industrial Average touched 10,000. I say 'touched' because the DJIA has been dancing around 10,000 for a few days and when it did come near the magical number it pulled away like a finger touching a hot iron. It finally closed above 10,000 yesterday and the baseball caps trumpeting Dow 10,000 were flying around the NYSE trading floor. Icap's analyst Walter Zimmerman gave them the "Golden Pom-Pom Award" for for shameless displays of economic or financial cheerleading with no corresponding bullish technical indications.Themis' Joe Saluzzi tried to talk ebullient CNBC anchors down off of their high and failed. Meanwhile JP Morgan and Goldman Sachs are raking in the dosh thanks to interest-free credit from the Fed. Those banks with more exposure to the real world, i.e. mortgages and credit cards, are bleeding money in the third quarter. The housing market is not recovering, just the opposite. We must not forget that it was the housing market that toppled this house of cards. We went from dot com bubble to the housing bubble to the commodities bubble and now the stock market bubble. All led by a Federal government (whatever the party) who cannot bear to give the American public bad news. But the bad news bears are beginning to overwhelm even the cheerleaders at CNBC. Zimmerman warns that this rally to 10,000 is: "giving bearish RSI divergence sell signals on both daily and weekly charts". If oil prices continue their path back to $100 it may once again be the straw that breaks the bubble's back. I think I'll stick to bricks and mortar. Albeit without Chinese drywall (the next problem for the housing market).

Be back soon

I am knee-deep in a project that is taking all of my time. Blog will be restored next week!

Wretched Excess Filters Through to the Dollar

The weak US dollar does not come as a surprise to anyone who trades FX or watches the economic barometers that have been flagging trouble for a few years. The wretched excesses of the consumer, aided and securitized by the banks and nurtured by successive US governments are finally coming home to roost. George Soros said at the World Economic Forum that this is "basically the end of a 60-year period of continuing credit expansion based on the dollar as the world's reserve currency."
For a while there a perky (some say too perky) stock market was the placebo. But when the dollar started creeping lower again reality hit. The gigantic budget deficit, the US Treasury printing money, and a general slowdown in FX trading are all contributing to the lack of support. (Data from six of the world's FX committees showed average daily FX turnover down nearly 25% from Apr 2008 to Apr 2009, according to Profit & Loss Magazine.) Secret meetings among oil-producing and consuming nations to try and figure out a new reserve currency have been widely reported. The almighty dollar's dominance is under threat. But I have a trick that anyone is welcome to use in trading or hedging the dollar. With alarming regularity the dollar seems to hit its yearly lows when I am abroad. I had the deeply unpleasant experience of paying $1.80 for a euro in April 2008 in Paris (the print was at about $1.60 at the time). I am planning a trip to London early in November, so expect the dollar to be hammered down further at that point. Only to rebound when I am back in the USA.
BTW, I was way off on Phibro. It went to Occidental in the end, which is a good fit - E&P meets trading and speculation. Oxy only paid a bit more than 1X net earnings for Phibro, which I found odd. But as a source pointed out Phibro owns nothing but bums on seats. And brains, hopefully. Maybe Andy Hall is having the staff unpack?

The Duh Factor

Call me gobsmacked. The SEC has just now called for access to real-time data for OTC swaps and derivatives. The SEC said that the absence of this data "hampered its efforts to investigate potential fraud and market manipulation in OTC derivatives markets" during last year's crisis, according to Securities Industry News. Big Duh. There has been a massive gap in coverage for OTC derivatives for quite some time. Services such as Markit and Reuters were trying to close some of the gap by offering derived or calculated prices, but so many instruments were customized and one-offs that it would be impossible to get data on them. One of the ways to get better access to OTC prices and deals would be to automate them and send them through a clearing house. This was going to be one of the major foundations of new post-crisis regulation. But wait... Barney Frank, the chairman of the U.S. House of Representatives Financial Services Committee said Wednesday he does not expect Congress will require all end-users of OTC derivatives to use central clearinghouses. He said that anyone using derivatives for 'risk management' purposes should be exempt. This means no one WON'T be exempt. CFTC Chairman Gary Gensler told reporters after Wednesday's hearing: “As just about all swaps could be defined as being used for risk management purposes, we’re concerned that unintentionally the category of ‘major swap participant’ could have been narrowed so significantly, or even to a null set." Banks 1, US Government 0.  The pressure from the banks' lobbyists must have been more than Mr. Frank could handle. If anyone was in any doubt who really runs this country, doubt no more.

Prophesizing Phibro's Future

The Financial Times today clinches what many industry-watchers have foreseen: that Citi is trying to sell its oil-trading unit Phibro. It is no surprise given the clamor that arose when CEO Andy Hall's pay packet was revealed. Although a $100m bonus seems ludicrous to most people, it seems Hall deserves it. Phibro has made Citi around $2bn in profits over the last five years, using little of the bank's cash for leverage. Trading and hedging physical oil is not for the faint-hearted, nor for the inexperienced - especially in the oil price climate we have witnessed over the past two years. Hall has not lost money in over 15 years, sources tell me, which is pretty good going in any business. So, after reading some of the blogs on Hall and talking to my favorite oil biz source, here are my predictions. 1.) Trafigura or Glencore will buy Phibro. They have stacks of cash, no fear of doing business in - ahem - sensitive countries, and retain the maverick spirit that Phibro had pre-Salomon Smith Barney/Citi. OR: 2.) Andy Hall is hired by one of the above or another high-roller trading company or hedge fund. Why buy the cow when you can buy just the milk supply? Fox Business News (that paragon of quality financial markets information) said in August that Hall had already told his CT household staff to pack up for London. I have doubts that Hall would move to London, however, in the midst of the FSA's crack down on executive compensation. My bet is Geneva.

There is no 'V' in Recovery

Economist Nouriel Roubini told CNBC today that the recovery is not going to be 'V' shaped, rather a long, slow 'U' shape. He hinted that the "wall of liquidity"created by the government's stimulus package is causing a run on assets and boosting the stock market. The danger in this is that it may also be boosting food commodities and oil prices. It is clear to most interested onlookers that the massive infusion into the financial services companies gave them the opportunity to make some fast cash. What is less clear is whether the 'virtual recovery' caused by the stimulus is strong enough to weather the storm. (Fox News even suggests that there is talk of a third stimulus package.) Oil prices seem stuck at or around $70 bbl fuelled in part by an increase in consumer spending in August and in part by glowing, bullish reports from certain investment banks that seem to miraculously appear  when the prices dip. My take on consumer spending - at least in New England - is that the weather was so awful until August that no one went on vacation until then. When they did, it was sunny and gorgeous and it was a crime not to buy lobster rolls when they were so cheap. Vacations aside, there is little indication that Americans are rushing back to their profligate ways. The latest Dilenschneider Group report put it this way: "Regardless of when the downturn ends, expect the recovery to be very slow." Both Dilenschneider and Roubini are concerned that unemployment will prove to be the straw that breaks the camel's-back of the recovery. Throw in higher oil prices as investors grow increasingly exhuberant and you could see a double dip after all.

Heads I Lose Tails You Win

Looking at the financial press this week has been like trying to talk to a schizophrenic with two equally dominant personalities. The bearish side is absolutely convinced that the 50% market rally since March is about to implode, leaving Grandma even more destitute that she was a year ago. The bullish side quotes 'money on the sidelines' and V-shaped recoveries as evidence that the worst is over. The Financial Times today has a bearish article about Q3 earnings right next to a column saying that we are now in recovery from the recession. Now, as I have said, I am a terrible trader. But there is one thing I am pretty sure of having noticed it a few times in the past 30 years. That is: when a majority of brokers and traders agree on the market direction the market is sure to turn and do the opposite. And YouDevise's Trade Idea Monitor (TIM) weekly report says that total new long ideas (as a percentage of all new ideas sent this past week to investment managers in real time through TIM) increased 3.50 points to a bullish 65.55% .  (Over 50 is bullish; 50 is neutral; under 50 is bearish.)  A year ago the TIM was 66.95% - also a year ago the DJIA was at 10,831. It then plummeted over the next 6 months to around 6,500. How bullish is that? 

Hormones Versus Bonuses

Women and middle-aged men might make better traders than testorone-fueled younger men, says an article in this week's Securities Industry News. It seems the presence of too much of the male hormone leads to excessive risk-taking on the trading floor. John Coates, a research fellow at the University of Cambridge, has done a couple of studies on the subject. Coates tells Securities Industry News that having more women on the trading floor might limit market swings, as women tend to be more risk averse. (I am not so sure that being risk averse makes a good trader, though. I am pretty risk-averse and can honestly say that I am one of the worst traders I know.)  I wonder if Coates and others (the MBA students at U. Chicago and Northwestern are also looking at the role testerone plays in business) have looked at the correlation between bonuses and risk taking. Because even the most risk-averse, hormone-lite woman or middle-aged man might just make a major punt in the market if they thought they could take home a multi-million dollar bonus. However, the news that the UK is going to curtail bonuses along G20 guidelines might bode well for women and older men getting trading jobs. Today's Financial Times says that these guidelines require that a "substantial portion... such as 40-60%" of bonuses be paid over a three year period or more. This may appeal more to risk-averse traders than to the testerone-rich crowd.