Blog, Advanced Trading

JPMorgan Chase to Close Proprietary Trading Unit, Rivals May Follow Suit

September 01, 2010 @ 12:34 PM | By Justin Grant

JPMorgan Chase is getting a head start on the Volcker Rule's controversial stipulation banning banks from trading their own money, and is shutting down its proprietary commodity trading segment. Although the new regulation gives banks two years to shut down such operations, the firm opted to act now since the troubled markets have dampened investor appetite for commodities risk, The Financial Times reports.

Although financial institutions have years to comply with the law, banks including Goldman Sachs and Morgan Stanley have hinted that they will shut down their proprietary trading desks much earlier. Like its rivals, JPMorgan is believed to be looking also at closing its equity and fixed-income proprietary trading units.
The decisions could lead to hundreds of layoffs among traders at a time when choppy market conditions have significantly reduced the portion of earnings banks derive from trading.

Proprietary trading typically accounts for a small percentage of banks’ earnings but can be a very profitable activity because it can yield high returns on relatively small amounts of capital.

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Infinium's Oil Trading Fiasco Bound to Fuel Backlash Against HFT

August 26, 2010 @ 12:00 PM | By Justin Grant

The news that Infinium Capital Management may face charges from U.S. regulators over a February incident in which one of its computers malfunctioned and caused a spike in oil prices, is likely to turn a brooding public even further against high frequency trading.

High frequency trading has garnered a fair share of negative press in recent months, particularly in the aftermath of the May 6 “Flash Crash” in which the Dow Jones Industrial Average endured a 1,000 point nosedive in less than a half-hour before recovering nearly just as quick from its largest ever intraday plunge.

For while the practice has boosted the amount of displayed liquidity in the marketplace, ultimately reducing spreads and generating better prices for investors, the latest headlines will further cement the view that high-speed trading has essentially turned the stock market into a quick strike casino.

Earlier this year Sen. Ted Kaufman, one of high frequency trading’s loudest critics, reportedly said the strategy may be planting seeds for the next financial crisis.

The controversy now enveloping Infinium will only serve to generate similar cries from Capitol Hill.

According to a Reuters report, Chicago-based Infinium deployed an algorithm that was less than a day old to execute a “lead/lag” strategy between the exchange-traded fund United States Oil Fund, which tracks oil prices, and the U.S. crude benchmark, West Texas Intermediate.

Citing legal documents, Reuters learned that shortly before the New York Mercantile Exchange closed on Feb 3., the algorithm started uncontrollably buying oil futures. The binge caused a brief 1.3 percent spike in oil prices from $76.60 to $77.60 before they settled in at $76.98. Meanwhile trading volume jumped nearly eight-fold in less than a minute, Reuters reported.

The following day oil prices fell some five percent, their largest one-day drop in nearly 6 months. And on Feb. 5, oil prices fell even further, down to $71 a barrel, while trading volumes soared, Reuters added.

Regulators now suspect that high-speed, algorithmic trading was the catalyst for the brief mayhem in the oil market over that three-day period. According to Reuters, the alleged incident eventually drove futures exchange operator CME Group Inc. to conduct a six-month probe of Infinium, which may soon have civil charges to contend with.

But while this latest incident adds yet another layer of bad press to high-speed trading, the reality is that it’s here to stay and has by all measurable means improved the way the markets function. The industry simply needs to do a better job of educating the public on this, although that remains a daunting challenge in the wake of the broader market’s continued malaise, and the widespread ill will caused by the financial crisis.

This year’s “Flash Crash,” and the crashes of 1962 and 1987 show that there will always be moments when the market mechanisms become overwhelmed and cause dislocations. But the time has come for high frequency trading firms to step out of the shadows and bring the strategy’s benefits to light.

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Topics: Algorithms
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Was Cyberwarfare the Cause of the Flash Crash?

August 24, 2010 @ 11:51 AM | By Ivy Schmerken

The clues to the causes of the mysterious May 6 flash crash are evidently buried in the trading data. Yesterday the New York Times reported that a small, obscure data analysis company, Nanex, located outside of Chicago, has discovered strange patterns in the stock trading data, which it calls crop circles. [See the NYT story: “Ominously, Flash Crass Still Baffles”.

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Topics: data and infrastructure
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Wall Street Movies: Looking Behind the Crisis

July 26, 2010 @ 04:19 PM | By Ivy Schmerken

With summer blockbusters playing in movie theaters, it’s hard to imagine that plots about Wall Street’s role in the financial crisis will be a hot ticket. But there are several Wall Street movies in the works suggesting that screenwriters are attempting to bring the behind-the-scenes drama of the financial crisis to the silver screen and cash in on the psychological plot twists.

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Is The SEC's Circuit Breaker Inviting Rogue Traders?

July 07, 2010 @ 11:27 AM | By Justin Grant

The test run of a market-wide circuit breaker instituted last month by the U.S. Securities and Exchange Commission has been well-received across Wall Street, but could it open a Pandora’s Box of rogue behavior as currently constructed?

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Topics: Regulations
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New Pecking Order in Derivatives?

June 29, 2010 @ 09:59 AM | By Ivy Schmerken

Exchanges and clearinghouses are expected to win big from the new derivatives rules in the financial reform bill that passed last week. In a video interview with CNBC yesterday, Jon Najarian, co-founder of Optionmonster.com, said the new rules for derivatives are a game changer for the exchanges and a buying opportunity for investors.

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Topics: credit derivatives
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Regulatory Revolving Door Raises Ethics Questions

June 17, 2010 @ 12:44 PM | By Ivy Schmerken

Last week, Elizabeth King, a long-time regulator at the Securities and Exchange Commission, joined GETCO on theelectronic market making firm’s regulatory staff, raising questions about the ethics of such a move. The news generated several stories about the “revolving door” regulators, a familiar pattern whereby regulators leave their agencies and accept a position in a firm they previously regulated.

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Topics: Regulations
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Bank Pay Under Scrutiny As FinReg Nears Final Phase

June 10, 2010 @ 12:24 PM | By Ivy Schmerken

With lawmakers hammering out the final phase of financial reform impacting the nation's major banks, executive compensation is back in the headlines. Even though Wall Street’s bonus season is six months away, US Pay Czar Kenneth Feinberg is scrutinizing the compensation practices of the 25 highest earners at banks that received TARP money between October of 2008 and February of 2009. Treasury collected the data and Feinberg is reviewing it over the next few weeks.

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Topics: bonuses
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Polar Opposites Debate High Frequency Trading

June 03, 2010 @ 11:28 AM | By Ivy Schmerken

There’s no topic more polarizing in U.S. capital markets right now than the value of high frequency trading. As the SEC Roundtable took place yesterday examining U.S. equity market structure, CNBC moderated a debate between two panelists on the question of whether high frequency trading should be slowed down.

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Topics: HFT
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Derivatives Provisions in FinReg Under Fire

May 27, 2010 @ 11:30 AM | By Ivy Schmerken

The U.S. Senate passed the financial reform bill last Thursday, though I’m not sure that there are any champagne corks popping on Wall Street. Though some bankers are reportedly relieved that the measures aren’t as Draconian as they could have been, the bill reigns in OTC derivatives, threatens proprietary trading desks and forces hedge funds to register with the SEC.

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Topics: credit derivatives
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More On 'Flash Crash': Why Pick 5-Minute Circuit Breakers?

May 20, 2010 @ 11:24 AM | By Ivy Schmerken

With the May 6th 'flash crash' of 14 days ago melting into the past, regulators are still investigating the causes, while pilot 5-minute circuit breakers were announced a few days ago. CNBC’s Bob Pisani cornered Joe Mecane, EVP and co-head of cash markets at the New York Stock Exchange on the NYSE floor yesterday to get his reaction to the pilot-5-minute circuit breakers and the SEC-CFTC’s draft report on what caused the market's sudden dive of nearly 1,000 points.

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Topics: Regulations
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Update on the 'Flash Crash:' Fat Finger or Perfect Storm?

May 13, 2010 @ 11:22 AM | By Ivy Schmerken

The precise cause of last Thursday’s 20-minute ‘flash crash’ is still a mystery to most people on Wall Street and Main Street. In the course of a week, many factors have been explored. Whether it was a Black Swan event precipitated by Universa Investments LP, a hedge fund executing 50,000 index options contracts, or a large trade in the e-mini-futures on the Chicago Mercantile Exchange, is still unknown.

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Topics: Regulations
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Theories Abound On Market Meltdown

May 07, 2010 @ 01:40 PM | By Ivy Schmerken

Was it a “fat finger" error by a manual trader, a rogue algorithm or a nervous reaction to the Greece-European debt crisis that caused the market meltdown in stocks yesterday?

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Topics: Regulations
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Why Are Rating Agencies Off the Hook?

May 06, 2010 @ 11:37 AM | By Ivy Schmerken

With all the efforts to reform financial regulation and get to the root of the credit crisis, one question that boggles the mind is why the rating agencies are being allowed to get away with cloaking sub-prime debt in triple A-ratings?

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Topics: Regulations
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Wall Street Buzzes about Goldman's Senate Testimony

April 29, 2010 @ 11:25 AM | By Ivy Schmerken

After their public grilling by U.S. senators, how did Goldman Sachs executives fare at the hearing on Capitol Hill? Called to talk about its mortgage-linked investment, Goldman faced brutal questioning from senators, but have been criticized for coming across as evasive and arrogant.

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Topics: Regulations
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Obama Visits Wall Street, With Goldman Case As Backdrop

April 22, 2010 @ 11:03 AM | By Ivy Schmerken

After a week of anger inflamed by the SEC's case against Goldman Sachs, President Obama is taking his message to Wall Street today on the need to limit risk, and not to expect a bailout from the U.S. taxpayer again. Obama is scheduled to deliver a speech late this morning at Cooper Union college, near Wall Street, the sight of the first speech he gave two years ago laying out his financial reform agenda.

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Topics: Regulations
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Wall Street's Hiring Turnaround

April 14, 2010 @ 03:52 PM | By Ivy Schmerken

Wall Street is hiring again, and the demand is for risk managers, and specialists in distressed debt. That's what I learned when I listened to Joe Connolly, a Wall Street Journal reporter who broadcasts a report on WCBS News Radio88. He said financial firms are hiring risk managers and specialists in distressed debt and making them part of management to ensure that they don’t repeat the reckless mistakes of the past.

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Topics: bonuses
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Kaufman Vows to Go After Wall Street Fraud

March 31, 2010 @ 11:17 AM | By Ivy Schmerken

In response to Lehman Brothers' "Repo 105" accounting gimmick to shift debt off its balance sheet, Senator Ted Kaufman (D-Del.) vows to weed out fraud on Wall Street. In a recent video interview with Yahoo! Finance Tech Ticker, Kaufman asserts: "You can't have two laws in the land."

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Topics: fraud
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Status of Financial Reform Bill

March 22, 2010 @ 12:55 PM | By Ivy Schmerken

Now that health care reform has passed, what's the latest on financial reform? The debate over financial reform is heating up today, as the banking committee begins amending Sen. Christopher Dodd's (D-Conn.) bill today. Here's a CNBC video in which Sen. Bob Corker (R-Tenn.), who has been working with Dodd on negotiating a bipartisan bill, conveys there's no mark up happening in the committee. Corker predicted the financial reform bill would pass along party lines tonight.

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Topics: Regulations
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Repo 105: No Laughing Matter

March 18, 2010 @ 10:57 AM | By Ivy Schmerken

The SEC is investigating whether other Wall Street firms employed the deceptive accounting practice, used by Lehman Brothers in 2007 and into the second quarter of 2008, to mask its financial condition, according to a DealBook report in the New York Times.

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Topics: Regulations
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New Book Delves Into Algo Trading, DMA Strategies

March 15, 2010 @ 01:59 PM | By Cristina McEachern Gibbs

A new algorithmic trading book by Barry Johnson recently hit the shelves. “Algorithmic Trading and DMA: an Introduction to Direct Access Trading Strategies,” offers a detailed guide to the theory and practice of trade execution through algorithms and DMA access.

“The book should serve as a guide for anyone in the buy or sell-side who is interested in execution or trading strategies,” explains Johnson. “It works from the ground up, introducing all the relevant concepts. For the more experienced, there are also chapters on topics such as portfolio and multi-asset trading strategies.”

He adds that coverage includes all major asset classes and markets, from stocks and bonds to foreign exchange and derivatives.

In order to best take advantage of trading algorithms and DMA to enhance execution, Johnson says that at a high level this means, “appreciating the significance of transaction costs, getting the balance right between market impact and timing risk, and so using the most appropriate algorithm or strategy.”

On a more focused level, the book aims to help readers understand the mechanisms for various orders and how to best use them. “There are also chapters on how to enhance strategies, using short-term forecasting, and adapting to special events and news, and on implementation considerations,” notes Johnson. “The book draws on the phenomenal amount of empirical research which has been carried out, using many examples to help bridge the gaps between market microstructure theory and actual execution.”

Johnson explains that having spent more than 12 years in software development at U.S. and European investment banks, he has seen how systems are built and used. “The book evolved out of my desire to understand the theory, and see how market microstructure could be applied to create more efficient trading algorithms,” he says. “There's a lot of information out there, but there wasn't a single book which brought this all together in one place.”

For more personal reasons Johnson is also using the book to spread awareness of multiple myeloma, or cancer of the plasma cells, which took the life of his mother last summer. The net proceeds from the book will be donated to myeloma research.

More information on the book is available here.

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Topics: Algorithms
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European Leaders Blame Greece's Crisis on CDS Speculators

March 09, 2010 @ 10:49 AM | By Ivy Schmerken

Credit default swaps have returned to the headlines as European politicians blame the derivatives for exacerbating Greece's economic crisis. This morning, Bloomberg News is reporting that German Chancellor Angela Merkel is calling for urgent regulation of credit default swaps to protect the euro zone countries.
Greece’s political leaders are blaming speculative trading in credit default swaps—CDS—for driving up the cost of borrowing and making Greece’s economic crisis worse.

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Topics: Regulations
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The Proposed Volker Rule Prompts Spin Outs of Prop Desks

February 26, 2010 @ 03:20 PM | By Ivy Schmerken

With the Obama Administration moving forward on the so-called Volcker Rule to limit banks from conducting proprietary trading, suppliers of trading technology are already noticing an increase in bank spin offs to form new hedge funds.

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Topics: Regulations
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Fidelity Launches Liquidity Seeking Algos

February 23, 2010 @ 12:14 PM | By Kerry Massaro

Jeff Brown, Senior Vice President of Electronic Brokerage Services at Fidelity Capital Markets Services, stopped by our offices today to chat about some of his firm’s new areas of focus. The newest innovations are three liquidity-seeking algorithms. (Back in June, I had written that these were in development when I covered the launch of Fidelity's new New York trading floor. (If you missed it, check out the photos.)

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Topics: Algorithms
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Don't Expect FinReform Legislation This Week

February 23, 2010 @ 11:01 AM | By Ivy Schmerken

CNBC is reporting that Senator Chris Dodd, Chairman of the Senate Banking Committee, is unlikely to unveil financial reform legislation this week, so that he can negotiate with Republican Sen. Bob Corker, (Rep-Tenn), who is a member of the Senate banking committee has been asked to hammer out a bipartisan deal.

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Topics: Regulations
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