Are you as puzzled as I am by the mild brouhaha over the CFTC’s new swap execution facility rules? Basically the rules require that most swaps be traded on pseudo-exchange-y-type things called “swap execution facilities,” which are run either by an order-book system or a “request for quote” system. The RFQ system would require anyone wanting to trade to send an RFQ to at least 3 (2 for “an initial phase-in period”) potential counterparties. The original proposal was for that to be five counterparties. The revised proposal has caused a striking amount of rage, as various people have confused themselves into thinking that of course it’s obvious that every transaction should be an auction among five potential counterparties. Presumably few of those people orient their daily life that way. I don’t, anyway; I get lunch at Chipotle every day because it’s next door to Dealbreaker HQ.1
On the other hand people who think that customers should choose how many quotes to get don’t like the 3-quote compromise either. Here’s a SIFMA guy whining about it, and he doesn’t seem all that wrong:
SIFMA’s Asset Management Group continues to believe that any minimum-bid requirement will tie the hands of portfolio managers who already have a fiduciary obligation to serve the best interests of their clients. Requiring portfolio managers to broadcast their trading position more widely than they would otherwise choose could negatively impact the prevailing price of their trades, making it more expensive and difficult to hedge their clients’ risk. SIFMA strongly believes that professional investment managers, and not the government, should determine appropriate trading strategy.
The thing that trading is is, deciding how broadly to expose your order. Wider exposure gets you more and potentially better bids, but at the risk of getting front-run or picked off or otherwise abused.2 I realize that I won’t persuade everyone by quoting a trading textbook but here: Read more »
If Congress won’t act to curb derivatives speculation (and fund his own agency) with a transaction fee, Bart Chilton will. Read more »
Finally, boys and girls, I want to tell you a bit about a children’s story. Once upon a time in a faraway land there lived a sweet young maid named Little Red Riding Hood—yeah, her. … Now, ye of little faith, before you think I’ve stopped carrying on your wayward son from futures, markets, Massive Passives and technology, hold your horses, or cheetahs or wolves of a color of your choice. Whatever they are, just hold ‘em a cotton-picking, or corn, bean or rice-picking minute! Maybe it is Minute Rice—I forget. The rice guys can help me out later. Read more »
The last of the UBS Libor settlements to come out was the U.S. one and it has some of the best quotes. There’s the yen swaps trader who said “I live and die by these libors, even dream about them.” There’s … I mean, there is the life and career of Bart Chilton, in toto; here is a thing he said:
“A Conscience Isn’t Nonsense”
Statement of Commissioner Bart Chilton on UBS Settlement
December 19, 2012
Every so often, folks wonder if some in the financial sector believe that having a business conscience is nonsense. Financial sector violations are hurtling toward us like a spaceship moving through the stars. All too often, penalties have been a simple cost of doing business. That needs to change.
Particularly good are the exhibits to the criminal complaint against Tom Hayes and Roger Darin. We’ve previously met Hayes, cleverly disguised as Trader A; he was the senior yen swaps trader at UBS in Tokyo. Darin was the short-term rates trader “in Singapore, Tokyo, and Zurich,” though probably not all at once; he and his team submitted yen Libors for UBS. You can guess what happened when they got together!
But you don’t have to guess because there are lots of transcripts of their chats in the exhibits.1 Here is a problematic one: Read more »
What do you think of the big HFT study? It’s this big HFT study that CFTC chief economist Andrei Kirilenko conducted on S&P 500 e-mini futures at the CME, and it’s already inspired a metaphor from CFTC commissioner and all-purpose spinner of metaphors Bart Chilton:
Mr. Chilton said that the study would make it easier for regulators “to put forth regulations in a streamlined fashion. It’s a key step in the process and it should fuel-inject the regulatory effort going forward.”
Not his best effort, fine. Anyway, the study: I’m not sure I’ve earned the right to have an opinion, both because (1) that, generally, and (2) my model of high frequency traders as micro-mini-market-makers is a bit upended by the fact that the bulk of the HFTs in this study seem to be taking, rather than providing, liquidity.1 It’s possible that the e-mini market is not the best place to measure the overall effects of HFT, either for fundamental reasons (its use for hedging etc.) or more crassly because it lacks the liquidity rebates that drive a lot of HFT in other markets.
That said what I like about this study is that instead of measuring transaction costs in naive ways like “bid/ask spread,” it measures transaction costs in sensible ways like “in a series of zero-sum transactions, how much money do HFTs suck out in profits.” Though the measure of profitability is sort of kooky:
The profits calculated in Table 3 are the implied short-term profits: we calculate the marked-to-market profits of each trader on 1 minute frequencies2 and reset the inventory position of each trader to zero after each of these 1 minute intervals. Then, we sum up all the 1 minute interval profits to get a measure of daily profits. Therefore, we capture the short-term profits of traders and not gains and losses from longer-term holdings.
What this means is that if your model of market-making is “buy at 99.9, wait five minutes, and sell at 100.1,” then your profits might end up showing as 0.2 or -0.2 or zero or something else on that calculation.3 So regular old market making may look bad, while HFT market making – designed to move quickly – looks much better. And so you get this table: Read more »
One of the joys of structuring financial products is that, when a regulatory door is closed, a window / chimney / possibility of sawing through a non-load-bearing wall is opened, and you get to look for it, and if you find it you get rich.* So I for one look forward to the response to this:
On Monday, the Commodity Futures Trading Commission rejected a plan for so-called political event contracts, wary that mixing politics and trading would create a dangerous cocktail. The agency ruled, in part, that such trading amounts to gambling — and that it could unduly influence election results.
“This is a very slippery slope here,” said Bart Chilton, a Democratic member of the commission. “We need to be supercareful about handing part of our electoral process over to the trading pits.”
So now you can’t go on NADEX and buy presidential futures – have I mentioned that all my money is in Rick Perry futures? I will sell them to you at cost if you’d like – but you have, I suppose, some other options. You can buy mine, of course, or whatever else is kicking around on Intrade, and if you’d like more size you could probably go to our Anonymous Sports Book Manager, if you can find him. Read more »
Late last week, as Jon Corzine attempted to sell MF Global, it was reported that that probably wasn’t going to happen on account of the fact that those who’d taken a look at MF’s books weren’t comfortable with the approximately $600 million in customer funds that had gone “missing.” Days later, despite a manhunt for the money and a false alarm at JPMorgan, the cash still has not yet turned up. For his part, Bart Chilton, a commission at the CFTC, is pretty pissed. “We shouldn’t have to go on this magical mystery tour looking for the loot. It shouldn’t have taken this long,” he said at an energy-trading conference in Houston. “For us, job one is always–no excuses–to ensure that customer funds are held sacrosanct. In this case, as the Stones sing, we ‘got no satisfaction.’” Possibly tripping on magic, Chilton, pictured at left, concluded that: “It’s a distinct possibility, some would say probability, that somebody has done something with the money, and that it’s not going to be ‘all of a sudden discovered’ with an innocent explanation.”
So….okay. We’ll play along. Where is the “loot” and what was “done” to it? Read more »
Treasury Secretary Hank Paulson’s “blueprint” for revamping the financial regulatory system is already coming under fire from powerful agency heads. As early as Friday, even before the details of the plan were widely-known, the plan was lambasted by John Reich, the director of the Office of Thrift Supervision, which oversees the savings and loan industry. Immediately after Paulson’s speech this morning, Commodity Futures Trading Commission big shot Bart Chilton released a colorful and blisteringly critical statement describing the plan as “moving boxes around in Washington DC.”
Paulson’s plan would combine the Securities and Exchange Commission, which regulates equities and debt markets, with the Commodity Futures Trading Commission, which that regulates the exchanges trading commodities and financial futures. The two commissions have very different regulatory approaches, with the SEC favoring direct regulation and a rules-based approach and the CFTC favoring a principles based approach that relies heavily on self-regulation by commodities and futures exchanges. SEC head Chris Cox has been described as being disposed to supporting the plan.
After the jump, we delve into the dirty, metaphor-strewn past of the CFTC commissioner.
Read more »