Academic research on short-selling has for years flirted with the theory that fails-to-deliver represent a binding constraint which prevents informed short-selling in the underlying stock, which thus leads to stock overvaluation.
Without the capacity to short-sell efficiently, stocks become illiquid, volatile and overpriced. Or so the theory goes.
Thomas Stratman and John W. Welborn, both of George Mason University, beg to differ. In a new piece of research in the Journal of Empirical Finance, they suggest the exact opposite may be true precisely because the capacity to fail-to-deliver can be used as a proxy for naked short-selling. Read more
So you bought an EM fund. Maybe it was an ETF, or maybe it was just a regular fund?
Either way it gave you exposure to EM. And it was great. You could trade in and out of your EM fund as often as you wanted. There was proper unrestricted liquidity. It was awesome.
And then some random EM country decided to suspend its stock market. But hey, it was still great for you, because you could continue to trade in and out of your fund as if nothing ever happened. Read more
What role did margin calls play in the Chinese market in recent weeks? In particular, margin calls against shares pledged as collateral by controlling shareholders, unleashing a wealth destroying vicious circle?
Following on from our previous post attempting to answer those questions, we bring you a chart, by way of Pravit Chintawongvanich, derivatives strategist at Macro Risk Advisors:
The latest BIS Annual Report, released on Sunday, cites numerous concerns about the unseen damage being caused to financial stability on account of ultra-low interest rates.
Key among those concerns: how liquidity-guaranteeing ETFs in the bond sector may be contributing to a global liquidity illusion, disguising the true state of the ability to trade positions on the bond market — a topic very close to FT Alphaville’s heart. Read more
A truth from Barclay’s Jeffrey Meli…
When short-term assets are scarce, non-traditional alternatives emerge to meet the need…
A truth which should be read alongside Robin Wiggleworth’s latest summary of liquidity fear and the emergence of mutual funds and ETFs as its newest proof. Read more
When it comes to bond market liquidity paranoia, it’s not the dealers we should be worried about but long-term value investors.
So at least says Bloomberg’s Matt Levine in his daily round-robin of what’s going on in the market:
The risk, if there is one, has to be located in what I’ve loosely called the value investors — the people who provide the ultimate bid for assets. Here there are obvious reasons for worry, which frankly I do not understand well enough to have any clear views. But the biggest worries revolve around the possibility of herding among bond investors and around those investors’ funding models. The worry is that there is one dominant model of bond investing, in which giant mutual funds and exchange-traded funds buy and hold every newly issued bond that comes along. Those funds offer their investors the ability to withdraw money pretty much any time they want. But if bond prices crash, investors will want to take their money out, the funds will need to sell, and all those giant bond funds that provided the bid for bonds on the way up will turn into sellers on the way down.
The exciting thing about negative rates in the current context is that they make the fundamental ETF, MMF and repo-type structure that lies at the core of central banking much more obvious.
In a negative rate regime the “central bank ETF” essentially clips your rights to the underlying collateral that it holds on your behalf, often, beyond the arbitrage spread a primary dealer can secure. It’s easy for a regular ETF to enforce such a management fee because all its units are electronically registered. All costs, as a result, are distributed equally. If the managing fee is too great, meanwhile, customers would just go elsewhere. Read more
People have several ways to bet that interest rates might rise. One method has been falling out of favour for most of this year.
The obvious approaches are 1) selling interest rate futures or 2) borrowing bonds in the repo market to sell them for cash. The main advantage of these techniques is that they let you pick which specific interest rates you want to bet on while leaving the others alone. For example, you might think that the one-year sovereign interest rate three years from now implied by the prices of three-year and four-year notes is unreasonably low but every other interest rate on the curve seems about right. You should short the four-year note and buy the three-year note. Read more
“Why, all the better to see and hear you coming with my dear!”
Little Red Riding Hood is the cautionary tale of what happens to the naive and gullible if they trust or listen to strangers. Specifically, it’s the story of a little girl who gives away too much information to the Big Bad Wolf who then uses it to create a situation where he can much more easily eat her up for lunch — by masquerading as her loving grandmother — out of sight of the regulatory oversight of the local woodcutter enforcement committee.
Or, as the Charles Perrault version of the story goes:
As she was going through the wood, she met with a wolf, who had a very great mind to eat her up, but he dared not, because of some woodcutters working nearby in the forest. He asked her where she was going. The poor child, who did not know that it was dangerous to stay and talk to a wolf, said to him, “I am going to see my grandmother and carry her a cake and a little pot of butter from my mother.”
Bank “trading” is all about flow. And in Europe there has never been a bigger flow monster than Deutsche Bank.
But as has been well reported, FICC flow profits are beginning to wane.
So it is with some interest we note the following charts from Morgan Stanley’s European Banking team: Read more
John Gapper has an excellent column on Thursday about art auctions, focusing on the degree to which they are fixed or obfuscated by insiders and long-standing established practices.
As he notes, the auction market is a duopoly geared towards protecting and serving vested interests through a system of guaranteed bids and sales incentives, which to some degree obscure public price discovery.
Herein lies the similarity with modern market structure more generally. By providing the means to disguise the hands of “informed” players, the duopoly of Sotheby’s and Christie’s behaves like a dark pool system within a wider market which has no public alternative to cross check prices against. Read more
Do ETFs impact the volatility of the underlying stocks they are based on?
A new paper by Itzhak Ben-David, Francesco Franzoni and Rabih Moussawi suggests they do. Read more
We’ve been harping on about the rise and importance of the central execution desk and internalisation practices more generally for a long while.
But we haven’t touched the topic recently because, well, banks and concerned parties tend not to enjoy discussing it very much. Read more
They are billed as a quick and easy way for investors to gain access to higher-yielding assets while still providing some protection if interest rates start to rise. They are ETFs which track portfolios of (floating-rate) bank loans.
And they are on fire. Read more
Blackrock posted its latest ETF fund flow data, as compiled by IndexUniverse, for June 2013 and there were two stand-out points:
If you don’t trust Blackrock sponsored data, the message was very similar from Credit Suisse’ June ETP Trends note, which found: Read more
That’s a SEC filing for the Winklevoss twins’ brand-new Bitcoin exchange-traded fund. For realz. Read more
Interesting. Blackrock has issued an open letter in the spirit of investor
reeducation about its products, no doubt in response to the terrible reporting that’s been going on about its err… recent NAV discounts.
You can read the full open letter (complete with lots of bolding emphasis by Blackrock just to make sure you get the point) but a critical extract we think is the following (Blackrock’s emphasis). Read more
‘Twas not a good day for anyone in the market on Thursday.
It was a particularly bad day for the listed ETF/fund providers:
Anyone who bought gold in 2008 is probably more than tempted to cash in their profits right about now.
Reflecting the scale of the change in sentiment — and confirming that there was indeed something of a choke level for gold at around the $1,908 mark — is the following chart from Macro Risk Advisors which neatly sums up the degree to which investors have been liquidating gold ETF positions. Read more
It’s come to our attention that the precious metals investing community has been rendered a little “worried” by a sudden and sizable accumulation of inventory in the iShares physical Trust, the SLV for short. (H/T Kid Dynamite)
According to ZeroHedge, 572 tonnes were added to the trust in just one day. And while that does not represent a record for the fund, it is “the biggest one day addition of physical silver to SLV in ordinary course operations”. Or so, at least, ZeroHedge says (though we haven’t double checked the numbers ourselves at this point). Read more
Definitely a turn-around for the books in the Kweku Adoboli case.
From the FSA on Monday, emphasis FT Alphaville’s (and the whole release really is worth a read): Read more
The following is a transcript of Kweku Adoboli’s last recorded phone call at UBS with members of the bank’s back office accounting team.
Not only does it reveal that Adoboli may have used Blackrock and SocGen as faux counterparties for hiding losses but that the “back-office genius” seemingly had difficulty grasping the difference between an asset and a liability (at least in public). Scrutiny of the bank’s unsettled trades, meanwhile, seems to be what prompted his eventual confession. Read more
The great UBS vs Kweku Adoboli trial has finally come to an end.
The verdict: Adoboli was sentenced to seven years for fraud related to a $2.3bn loss, but found not guilty of four counts of false accounting. Read more
Gordon Brown is set to ring the opening bell at the New York Stock Exchange on Tuesday.
Which makes it an almost perfect day to reveal that the Flash crash of May 6, 2010 may have had a European angle. Read more
At a time when traditional dealers are being squeezed by growing regulatory burdens — think Basel, TRACE and the Volcker rule — the incentive to hold market inventory is diminishing.
Not only is it expensive and risky to manage bonds, equities or commodities, there’s the fact that the old models push the boundaries of what’s acceptable in terms of principal risk and proprietary trading. Read more
We wrote about Kenya’s M-pesa mobile money model on Wednesday, which we think is a really innovative and encouraging development in the world of money supply.
The point we were trying to make at the time is that there are some interesting parallels between Safaricom’s role in the M-pesa e-money market and the role of central banks in conventional money markets. Read more
In our previous post, we made the point that if the old goldbug accusation that central banks and bullion banks were suppressing the gold price by selling or lending gold into the market is true, then in the current cash-for-gold universe — which features negative gold lease rates — the opposite must apply.
That is, the very same entities may now, if anything, be supporting prices in the market. Read more
Tough love from Data Explorers on Monday:
Truly talented investors do not whinge during a ‘risk off’ environment like now. Instead, they find a place where the risk vs. reward pay-off is slanted in their favour.
From “The LTROs have saved Europe and US jobs are coming back!” to “Never mind, we might be even closer to econo-tastrophe than we were last year” in just five months — via Credit Suisse Trading Strategy: