High Speed Trading Under Scrutiny
Financial stability of the markets is under scrutiny of the Financial Stability
Oversight Council - a multi-agency panel charged with identifying risks to the
economy to Congress - regarding high-speed computerized trading, money-market
funds and bank vulnerabilities in today’s low-interest rate environment. The
FSOC is considering a formal recommendation that the Securities and Exchange
Commission take action to impose tougher rules on money-funds. Top SEC officials
say reform of the industry, considered by many to be systemically risky, is at
the top of their agenda, a result of pressure from the FSOC. The impact of
computerized high-speed trading and expansion of dark pools - trading systems
not openly available to the public where buyers and sellers submit orders
anonymously - will be the focus of the FSOC pertaining to the systemic market
structure issues. Additional risks to be reviewed by the FSOC in the report,
risks associated with mortgage REITs, money-market funds and large financial
institutions. Publicly traded mortgage REITs include American Capital Agency (AGNC),
Annaly Capital Management (NLY) and Newcastle Investment Corp. (NCT). Top
money-market fund providers include Charles Schwab (SCHW), Federated Investors
(FII) and Goldman Sachs. The left-leaning advocacy group Americans for Financial
Reform policy director Marcus Stanley said the report from FSOC is likely to
focus on concerns that financial institutions are having a tough time managing
risk in today’s low-interest rate environment. Incentives to reach further for
yields and get into more exotic products, is a result of the current low
interest rate environment. The report is expected to look closer at riskier
products such as high-yield bonds, leveraged loans and mortgage REITs, Stanley
said. Exit strategies for institutions will be under review by the council, for
the time when interest rates finally do rise. “How will they sell off bonds in a
way that you don’t see bond prices drop across the board, driving a disorderly
rush for the exit in the bond market?” Stanley asked. Some firms, in addition to
banks that are systemically risky, will be designated by the council and subject
to gradually increasing capital levels, lower leverage limits and more
liquidity. These potentially designated firms may consist of the following:
American International Group (AIG), BlackRock (BK), GE Financial, a unit of
General Electric (GE), Pimco, a unit of Allianz (DE:ALV) and Prudential (PRU).
The report from the FSOC is also likely to discuss the issue of whether U.S.
banks also should hold a form of so-called “contingent capital" - a special kind
of capital that would act like a bond in good times but convert automatically
into loss-mitigating common equity in a crisis. The form of capital, also known
as “bail-in capital,” would force the institution to give itself an injection of
common equity during a crisis, thereby potentially avoiding the need for a
taxpayer funded capital infusion.
Chicago Board Options Exchange opening was delayed on Thursday due to system
problems. Several plans to reopen were cancelled, as the problems continued for
CBOE. The outage meant that two critical tools for hedging stock-market risk -
options on the S&P and VIX indexes -were unavailable to banks, institutions and
trading firms for much of Thursday morning. CBOE delayed opening affected floor
and electronic trading and caused business in options on key market indexes
including the CBOE Volatility Index - the VIX - and options on the Standard &
Poor’s 500-stock index, to be postponed.
Many sophisticated computers associated with automated or algorithmic trading,
react to a host of words or terms that activate alerts for trading, by scanning
news streams and social media then, proceed to initiate buy or sell actions in a
matter of nano seconds. Computers at the office of the Associated Press sprang
into action when the words “explosions” and “White House” popped up, on Tuesday,
from its Twitter account. Moments later, the AP posted a rebuttal saying the
Twitter post was a hoax and that their Twitter account had been hacked.
Dataminr, a firm founded in 2009, located in New York City specializes in
extraction of valuable data from social media for clients in finance and
government sectors. On Tuesday, after the alert was released from the AP's
Twitter account, computers at Dataminr quickly submitted alerts to their
clients, informing them that the news may not be legitimate. Dataminr’s computer
algorithms noticed quickly that there was no corroboration in the story and,
alerted customers to another tweet from a reporter at the White House,
confirming the report appeared to be a false alarm. Ted Bailey, chief executive
and founder of Dataminr said the recent decision by the Securities and Exchange
Commission to allow companies to release material information via Twitter had
“legitimized” the strategy. Bailey said the firm is “making a lot of headwind”
with large hedge funds and government clients. Dataminr’s program works by
processing hundreds of millions of daily tweets, to find credible and actionable
information that they share with clients. Important variables including
influence of the user, geographical location the tweet is sent from and how
tweets are clustered together. The firm has developed a broad suite of modular
desktop and API products that transform social media streams into actionable
signals. Dataminr's strategic partnership with Twitter includes real-time access
to the full Twitter 'Firehose' of Public Tweets. The Firehose returns all public
tweets, consisting of billions each month. The firm was recently selected as a
Certified Product at the launch of Twitter's new Certified Products Program.
U.S. Labor Department reported on Thursday that the number of people who applied
for new unemployment benefits last week fell by 16,000 to 339,000, marking the
lowest level in a month and a half. The average of new claims over the past
month - which smoothes out weekly volatility - dropped by 4,500 to 357,500 to
the lowest level in three weeks. In the week ended April 13, continuing jobless
claims decreased by 90,000 to a seasonally adjusted 3.0 million.
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April 25, 2013