Of course, NYSE says it will never give up its two-century-plus old system. But it will be making those floor traders potentially redundant. And it’s never good to be the last of any legacy business. Read more »
The IntercontinentalExchange really, really wants the Liffe. Oh yea, and the New York Stock Exchange, too. Sure. But it’s really, really worried that those damned antitrust bureaucrats are going to screw them, as they are wont to do.
This time, the problem is the consolidated tape, which provides trade data. Seems it went out for about an hour at the New York Stock Exchange yesterday, making it tough to see in anyone had traded in 165 unimportant securities like State Street Corp. stock. And NYSE’s snafu follows a consolidated tape screw-up at Nasdaq last week; while NYSE’s server error only messed with some of its stocks, Nasdaq’s consolidated tape feed went totally blank on Thursday. Read more »
The standard illustration of the efficient markets hypothesis is the thing about the economists and the $20 bill on the ground, but it is so old and stale at this point that Matt Yglesias had to invent a new version this week, and it’s something like “if you find a penis-enlarging injection on the ground, don’t pick it up, because if a penis-enlarging injection actually existed then Pfizer would already have picked it up, and so this one will kill you of exploding penis, QED.” You could take this advice overly literally as an argument against all human effort, and perhaps you should, but in fact someone didn’t take it literally enough, or at all, and so died of exploding penis.
“If it works someone’s getting paid for it” of course doesn’t imply the converse “if someone’s getting paid for it it works” – particularly not in the penile-enlargement field – and I suppose neither does EMH; if anything it just implies “nothing works and nobody gets paid.” Still, there is at least some weak intuitive support for the belief that if lots of sophisticated financial market participants pay for something, they’re getting some value back in return.
Why is the SEC mad at the New York Stock Exchange? I am puzzled; the SEC’s quotes on the matter seem to be refutable on first principles. Here is Robert Khuzami in the SEC’s press release:
“Improper early access to market data, even measured in milliseconds, can in today’s markets be a real and substantial advantage that disproportionately disadvantages retail and long-term investors,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “That is why SEC rules mandate that exchanges give the public fair access to basic market data. Compliance with these rules is especially important given exchanges’ for-profit business interests”
The Knight Capital convertible preferred documents are a mess. The basic structure is quite nice: Knight’s new investors are getting a preferred stock that, eliding the details below, pays a 2% dividend, converts into common at $1.50 a share, automatically converts once the common has traded above $3 for 60 days, and can be converted earlier at the holder’s option. Sensible enough: the holders get a liquidation preference if the company goes belly-up in the next few weeks; otherwise they get common that they can get out of quickly via an already-filed registration statement.
But that’s not quite right, since the investors are actually getting two sorts of preferred stock, A-1 and A-2, the first of which are convertible now and the second of which won’t be until, um, Saturday. The NYSE has rules saying that you can’t sell more than 20% of your common stock at below market prices without shareholder approval – to prevent you from screwing shareholders by selling control of the company to someone at sweetheart prices. This was a problem because Knight needed to raise more than their market cap, selling 73% of the company for $400mm. To do this, they took advantage of a NYSE rule that once looked quaint but has since oh say 2007 become all the rage in certain capital markets circles, Rule 312.05, which provides an exception to the shareholder approval requirement “upon application to the Exchange when (1) the delay in securing stockholder approval would seriously jeopardize the financial viability of the enterprise and (2) reliance by the company on this exception is expressly approved by the Audit Committee of the Board.”
But even that doesn’t get them out of the woods, because it requires the company to mail a letter about the stock issuance to shareholders and wait 10 days before issuing the common stock. This part still looks quaint – a letter! 10 days! – and its purpose is a little unclear to me, since stockholders can’t really do anything with this notice but silently fume at the series of mistakes that led them to receive it. I guess they can sue. Shareholders like to sue. And since this rule would otherwise be a good way for companies to screw shareholders by selling control at sweetheart prices, there’s no harm in giving shareholders ten days to get together and sue to block a bad deal. Read more »
Yesterday I and others pointed out that, while UBS was not alone in getting screwed by Nasdaq failures on Facebook, it was alone in losing 10x as much as other, more competent market makers like Knight Capital, and ha ha ha. This apparently had a jinxing effect:
Knight Capital Group Inc., one of the largest trading firms, told brokerages to send their orders elsewhere and was probing a software problem, according to people involved in the matter. U.S. exchanges said they were examining potentially erroneous trading in more than 100 securities that saw big price swings or unusually high volume. Knight saw a fifth of its own market value wiped out. …
The system error and reports of irregular trading stoked suspicions that trades had been accidentally duplicated via computer algorithms, rather than the problem being contained to one server, as has happened in the past, traders said.
Knight is down ~21%, vs. ~4% yesterday for UBS and its costly Facebook fail, a useful reminder that focusing on perfecting your market-making business may make you less likely to fuck it up, but when you do fuck it up it goes far worse for you. That’s maybe some sort of a metaphor for high-frequency electronic market-making generally, which it will not surprise you to learn is coming in for some flak today.* Algorithmic high frequency trading makes it more likely that your small trade will be executed quickly and cheaply, but it also makes it more likely that larger orders will go horribly awry as prices move away from them.
Which is why this coincidence (?) pointed out by the Journal is kind of tantalizing: Read more »