Levine on Wall Street: Dark Pool Problems and Spreadsheet Errors

Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.
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Stocks.

It's just not a good look for a trading venue to turn away orders because volume and volatility are too high. When volume and volatility are too high, that's exactly when you want to trade! But Goldman, Credit Suisse, and UBS "told some clients to temporarily stop sending orders" to their respective dark pools yesterday as volume surged, and "a U.S. stock exchange run by Bats Global Markets Inc. had a malfunction that prompted other trading platforms to briefly stop sending orders there." So like a B+ day for the U.S. equity markets yesterday, even aside from the Athena thing. And Wells Fargo announced that it is closing its dark pool, because (1) who needs this and (2) Wells Fargo had a dark pool?

Elsewhere in equity markets, they are nuts. Here is Josh Brown: "on days like yesterday, you had to earn your equity risk premium." And equity market volatiity may "Portend a Freeze in Deal Circles," since you don't want to buy a company or do an initial public offering if no one knows what companies are worth from day to day.

Bonds.

In bond markets, the story that you'd sort of expect to happen seems to be happening: Dealers have been chastened by the Volcker Rule and increased capital requirements, so they're less interested in making markets. In stable markets they can match up buyers and sellers on an agency basis, but in falling markets when no one else is buying, neither are the dealers:

Take junk bonds, which have lost 2 percent in the past month. Dealers, which traditionally used their own money to take bonds off clients desperate to sell during sinking markets, sold about $2 billion of the securities during the period,

It may be too soon to tell, though; bank trading activity is picking up, and "the strange, violent market movements yesterday led to the most activity ever on some desks with Goldman’s clients." So perhaps dealing isn't entirely dead. In other bond liquidity news: "When it comes to high-risk bonds, the asset management giant Pimco has pretty much cornered the global market," with big positions in a lot of issuers' debt that worry some worriers because "an accumulation of hard-to-trade, risky bonds by a small group of fund companies could turn a bond market hiccup into a broader rout, in light of how illiquid many of these securities have become." On the other hand:

Firms from Pacific Investment Management Co. to Blackstone Group LP say they are poised to scoop up speculative-grade corporate bonds after yields rose to the highest levels in more than a year.

I suppose if Pimco is willing to buy when yields go up and sell when they go down then maybe you don't need dealers?

Hedge funds.

Point72, Steve Cohen's no-longer-hedge fund, is picking up right where it left off. I mean that it's making a lot of money, with a "year-to-date gross profit of about $1.8 billion" after starting with $10 billion in the spring. I don't mean that it's insider trading. No matter how cynical you are about Steve Cohen or SAC Capital or the pervasiveness of insider trading generally, surely Point72 isn't insider trading this year. But it's still killing it. Which means that Cohen and his employees have non-insider-trading skills to fall back on.

Another hedge fund destroyed by insider trading is Galleon Group, whose former boss Raj Rajaratnam is in prison for insider trading. It has not rebounded as well as SAC, and its former employees "are bitter about the experience because life after Galleon is not nearly as sweet as it was when they were at the fund." Ha that's how it goes, though I feel like ex-Galleon trader Turney Duff is still having fun.

Mergers.

This story is not as dumb as it sounds, but it sounds so dumb that there's plenty of dumb left over for what it is. Basically a company called Vista was buying a company called Tibco, and in finalizing the deal someone produced a spreadsheet showing Tibco's capitalization, and the spreadsheet double-counted some restricted shares as both "equity awards" and "common stock." They had already agreed on a price of $24 per share at this point, but the wrong share count fed into little things like the fairness opinion and the press release. So the press release announced a $4.3 billion enterprise value transaction, but, nope, it was $4.2 billion. And Goldman Sachs, Tibco's adviser, based its fairness opinion on the higher enterprise value. When they caught the error everyone sheepishly revised everything, but the deal, the fairness opinion, and the board's recommendation didn't change. On the one hand, the $24 a share price was already agreed based, apparently, on something other than the fully diluted share count, so it's not quite accurate to say that this mistake cost Tibco shareholders $100 million. On the other hand, I mean, sure, the lesson of this story is that Vista was willing to pay the extra $100 million, so maybe Tibco should have pushed to keep, like, half of it when it realized that it had fewer shares than it had thought.

Financial regulation.

Here's the Securities and Exchange Commission's review of its fiscal year 2014 enforcement actions, and I am just a sucker for people who measure real-world activity in fiscal years, it is so pleasingly bland and corporate. Anyway here are some numbers and stuff:

In the fiscal year that ended in September, the SEC filed a record 755 enforcement actions covering a wide range of misconduct, and obtained orders totaling $4.16 billion in disgorgement and penalties, according to preliminary figures. In FY 2013, the Commission filed 686 enforcement actions and obtained orders totaling $3.4 billion in disgorgement and penalties. In FY 2012, the Commission filed 734 enforcement actions and obtained orders totaling $3.1 billion in disgorgement and penalties.

The agency’s enforcement actions also included a number of first-ever cases, including actions involving the market access rule, the “pay-to-play” rule for investment advisers, an emergency action to halt a municipal bond offering, and an action for whistleblower retaliation.

Here's a boiler room operator who lost an SEC trial yesterday. Here's Matthew Teeple, who somehow got five years in prison yesterday for really not very much insider trading. And there's a new working group on T+2 settlement, get excited.

Apple.

Apple did a thing yesterday; I don't really know what it was -- an operating system or whatever -- but here are two mostly fake liveblogs of the event, and I feel like within five years America's main cultural product will be ironic Apple liveblogs.

Things happen.

Credit Suisse has new co-heads of the investment bank. Eike Batista has a new bankruptcy. "Government auditors are investigating exclusive contracts held by Bank of America Corp. and JPMorgan Chase & Co. to provide financial services inside federal prisons"; the contracts are awarded without competitive bidding and, you know, the prisoners don't get the best deal. FBI Chief: Pendulum on Privacy 'Has Swung too Far.' "The McRib always makes a grand entrance on our menus and we don't want to steal its thunder -- so stay tuned." Just Larry Silverstein and Bob Stern, chattin' about luxury. Monaco Murders Reveal Six Hidden Real Estate Billionaires. "Does Lysol work on Ebola??" The Winklevoss Twins Have A New App 'WinkDex' That Lets You Monitor The Price Of Bitcoin In Real Time.

  1. I mean, not me, and not as normative matter, just as a descriptive one.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Matthew S Levine at mlevine51@bloomberg.net

To contact the editor on this story:
Zara Kessler at zkessler@bloomberg.net