What you don’t hear very often (and we are as guilty of this as anyone) is that the Fed data of “corporate securities held by primary dealers” is tainted with some assets that don’t look very much like corporate bonds. Those would be private-label residential mortgage-backed securities (RMBS), commercial MBS (CMBS) and commercial paper (CP).
The Fed, perhaps in an effort to better examine the inventory issue, began breaking out the data by security type in the spring of this year. Read more
The world is becoming intimately acquainted with the technical ins-and-outs of the Bloomberg LP empire.
There is Bloomberg’s bread-and-butter business of selling sophisticated data terminals to thousands of banking, hedge fund and regulatory authorities around the world. There is also the well-respected news wire run by Matt Winkler. Read more
Via Marc Ostwald at Monument Securities on Friday, credit factoid du jour (if not de l’année):
Total dealer positions in corporate bonds fell to $58.5b as of Aug 29 vs $60b the previous week. It was the lowest level since $55.1b March 13, 2002. Read more
Tabb’s latest statistics on US equity volumes are really raising some eyebrows, and not just because of the share of trade heading to the old bogey man the “dark pool”.
Nope. We’re talking about the share being gobbled up by banks and broker dealers direct. Something known as “internalisation”, and discussed at length on FT Alphaville before — something we’ve referred to as dark inventory. Read more
Another interesting snippet from the BIS quarterly review regarding the role played in the recent funding crisis by the deteriorating operational capacity of broker dealers:
Traditionally, these have not been collateralised. Short-dated CDS premia increased sharply for US and European dealers in September and November (Graph 6, left-hand panel). The November increase came after the failure of MF Global highlighted the importance of sovereign risks. As their own funding conditions deteriorated, securities dealers tightened terms on securities financing and reduced their market-making activities. A Federal Reserve survey of 20 large securities dealers, published in October, already showed that financing asset-backed securities, corporate bonds and equities had recently become more expensive and required more collateral (Graph 6, centre panel). Read more
It’s universally accepted that the moment you drive a car out of a showroom, it will be worth less than what you bought it for.
It’s one reason why ‘car finance’ makes dealers so much money. They offer you the cash to buy the new car outright, but when it’s time to change cars, the customer discovers they owe the dealer more than what the car is actually worth in the secondary market. Read more
The estimated hole in MF Global’s customer accounts has doubled in size to $1.2bn, astonishing traders as the investigation into the broker’s failure enters its fourth week, the FT reports. The new figure, from the bankruptcy trustee for MF Global’s US brokerage, is equivalent to almost a quarter of the $5.45bn in client funds that the company was required to hold separately from its own funds. The shortfall has blemished futures markets and left thousands of traders with insufficient margin deposits. Failure to separate customer and house funds is a violation under US law. “It’s as serious a situation as one can imagine in these markets,” said Mario Cometti, a lawyer representing MF Global customers. “If such an incredibly tremendous shortfall could have occurred, then there’s obviously huge problems with oversight.” Estimates of the shortfall have fluctuated since the broker-dealer filed for bankruptcy on October 31 after failing to douse fears over its exposure to European sovereign debt. The Commodity Futures Trading Commission was first told the deficit totalled about $900m, but more recently put it at $600m.
MF Global broke rules on keeping customer money separate from its own trading accounts, according to the CME Group, which acted as self-regulatory body to the collapsed broker-dealer as well as hosting its trades, the FT reports. According to people familiar with the situation on Tuesday, the Commodity Futures Trading Commission was investigating MF Global’s accounting – after regulators discovered an alleged shortfall in client funds of several hundred million dollars – and the Federal Bureau of Investigation was looking into the matter. MF Global declined to comment. But a lawyer for MF Global told a New York court on Tuesday that “to the best knowledge of management, there is no shortfall”. Kenneth Ziman told the bankruptcy court that most of MF Global’s US assets were held at its brokerage unit. Regulators have not ruled out the possibility that all the clients’ funds will ultimately be accounted for as the firm’s positions are unwound but believe MF Global has, at the least, broken rules on segregating funds. For more on the off-balance sheet trades which prompted MF Global’s sudden need for cash see FT Alphaville.
A block trade, born in a US-based pension fund, is traveling the electronic execution highway.
The trade — let’s call him Benny — is sent to the fund’s broker for execution. That broker, now sitting in his office in New York, has a number of options when it comes to Benny. He can send Benny to an exchange like the NYSE or attempt the trade over-the-counter. Or he can send it to another division of the brokers’ own firm, to be filled using the company’s own inventory. He can internalise little Benny. Read more
We spell ‘unequalizer’ with a ‘z’ in the title as an homage to Edward Woodward, (naturally).
Although, in this case, we’re actually referring to the new breed of internalising institutions on Wall Street and in Europe, which make a point of only redirecting orders to exchanges and alternative dark pools which have been unmatched internally. Read more
Themis Trading’s Sal Arnuk picks up on a really important point from the SEC-CFTC’s joint flash crash report published last Friday.
That being: the clear and demonstrable non-role played by broker-dealer/large market maker internalisation desks on May 6. Read more
While the issue of dark pools and electronic communication networks (ECNs) has fetched a fair share of attention in the media, a little less scrutiny has befallen the SEC’s other area of concern — the practice of broker-dealer internalisation. Public comment on the topic, however, has been increasingly focusing on the issue of internalisation and sub-pennying, reports FT Alphaville. Read more