Today's Top Stories Also Noted: Kaseya News From the Fierce Network:
Today's Top News1. Strange saga of long-running trading scheme
Bloomberg offers an insider account of the 17-year insider trading ring recently broken up the SEC. The biggest "get" for prosecutors was lawyer Matthew Kluger, who trolled the computer networks at the string of prestigious law firms at which he worked, looking for information about impending deals. He would then pass the information to an old friend, who in turn passed on the information to a day trader, who would place the trade. The funny thing about this case--if there is one--is that Kluger got a mere sliver of the profits. Kluger thought the three participants were splitting the profits. Instead, the day trader, Garrett Bauer, kept nearly all the profits. Over the 17-year life of the insider trading rung, Bauer made $32 million, while Kluger made less than one million dollars. The middle man didn't fare much better. The case was cracked when the middle man, Kenneth Robinson, decided to start trading himself on tips provided by Kluger -- a move that did them all in. The SEC, which had been investigating but getting nowhere, soon discovered that Kluger and Robinson had the same source, most likely inside Wilson Sonsini. That ultimately led to Kluger. Ironically, the middle man quickly became a state witness and ended up receiving a 27 months in jail. Bauer was sentenced to nine years. Kluger took the cake, as he was sentenced to 12 years in jail, the longest sentence ever for an insider trader. Raj Rajaratnam only got 11 years. For more: Related articles:
Read more about: insider trading, SEC
2. Perspective on Bank of America's putback woes
Bank of America second-quarter earnings announcement held a surprise. The volume of putback demands from mortgage-bond investors and insurers surged more than 40 percent, surpassing $22 billion. The news did not go over well and left analysts scrambling for more information. Bloomberg reports that the bulk of the new claims stem not from Countrywide-related mortgages, but rather from mortgages originated by Bank of America and Merrill Lynch. Unsettled claims from private investors rose 77 percent to $8.6 billion in the second quarter, mostly from trustees of mortgage-bond pools that weren't included in an $8.5 billion settlement announced last year. In addition, outstanding claims from government-sponsored enterprises rose to $11 billion from $8.1 billion. The bank has reserved more than $40 billion to resolve disputes on faulty loans and foreclosures, but that figure may head higher. "Bank of America has been anticipating a rise in claims from private investors and building repurchase reserves, Chief Financial Officer Bruce Thompson has said. Ultimate losses from that group will be 'well below $1 billion." Indeed, the bigger worry is the GSE mortgages. The developments on that front hasn't been all bad. While the relationship between Fannie Mae and Bank of America remains estranged, they are back to negotiating about the putback claims, though they remain far apart on the issues. For more:
Read more about: Bank of America, mortgages 3. Spotlight on the NYSE retail liquidity program
Knight Capital CEO Thomas Joyce has been adamant that the software problems that his firm is now suffering was the firm's fault, not that of the NYSE, whose new retail liquidity program triggered Knight's aggressively new software rollout. While the NYSE's program cannot be blamed, it's worth discussing in this context. It was a huge event when the SEC approved a one-year pilot program at the NYSE to establish the Retail Liquidity Program, which aims to improve prices for retail investors and return some retail volume back to the exchange from the wholesalers that tend to internalize these orders. NYSE Euronext activated the RLP on both the NYSE and NYSE MKT on August 1. The program established two new classes of market participants. The first class is Retail Liquidity Providers, or RLPs, which would be required to provide price improvement in the form of interest that is better than the best protected bid or the best protected offer. As with other dedicated liquidity provider programs, RLPs would receive payments and other benefits. The second class is Retail Member Organizations, which would be eligible to submit orders. The intent was to give retail orders a dark pool-like leg up when it came to executions. Knight Capital, in its haste to connect with the RLP, ended up rolling out some proprietary software, which was buggy enough to cause disaster on the system. The RLP remains one of the more interesting market structure experiments now underway. For more: Related articles: Read more about: retail investors, NYSE 4. Knight Capital running out of time
The issue for market maker Knight Capital is to find enough working capital to remain afloat, but the prospect of that happening has been dimming with every passing hour. Bloomberg notes a report from CLSA, which notes that Knight had $365 million of cash as of the end of June, with about $70 million in its revolving credit line. There is also a huge risk that entities holding $375 million of Knight convertible notes will demand repayment, given the "fundamental change" clause that might be invoked. The biggest owners of the notes are Goldman Sachs, Oaktree Capital Management, Invesco and Citadel Advisors, according to Bloomberg. Yields have soared since the trading snafu stuck the company with $440 million in losses, which wiped out at least two years of earnings. Unfortunately, the firm seems to be having trouble finding a White Knight. The firm has retained Goldman Sachs and Sandler O'Neill as advisors. The list of companies taking a peek under the hood include Bank of Ameriica, Citadel, Virtu, and others. The trading firm has also reached out to JPMorgan and other banks for financing. As of now, the broker dealer subsidiary remains in compliance with net capital requirements, but the massive hit to the parent company's balance sheet is keeping would-be customers away. Time is short. For more: Related articles: Read more about: Market Makers 5. What can be done about algo problems?
In the opinion of many, today's stock market seems all too vulnerable to the whims of computer programs. That's an understandable conclusion, and the Flash Crash of May 2010 was certainly a wake-up call. The incident led to a lot of reforms and some new regulations, such as circuit breakers, the coming limit up/limit down measures and the 15c3-5, which requires broker dealers to impose some risk checks on customers that access the markets through them. A significant milestone was hit recently when the SEC approved plans to build a consolidated audit trail mechanism, which will allow for greater monitoring of the entire stock market. Despite these measures, the Knight Capital algorithmic implosion has once again raised the issue of whether the technology of trading has run away with the market. The public remains wary of the markets, and most assume that high-frequency trading is the big reason. But what can be done? Can a regulatory entity require companies to do better job release software that impacts the market? Is that realistic or will it stifle innovation to a punitive degree? Even 15c3-5essentially imposes voluntary requirements. There really is not good answer right now. Once again, the industry would be well-served by solving this issue on its own. Is there a way to ensure higher quality code via industry efforts? For more: Related articles:
Read more about: Flash Crash, Algorithmic Trading Also Noted
SPOTLIGHT ON... Update: Knight Capital lines up financing Knight Capital may have given itself a temporary reprieve. Media reports hold that it has informed employees and customers that it has lined up one-day financing, though this hardly means the company is in the clear. Customers will likely remain wary until a definitive solution has been reached, if that is even possible at this point. Bankruptcy is still an option. Article Company News: And Finally…Tough times for municipalities. Article
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Monday, August 6, 2012
| 08.06.12 | Spotlight on the NYSE retail liquidity program
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