Glitches, Knitting and Conference-Call Jokes

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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NYSE.

Yesterday the New York Stock Exchange took a long unscheduled lunch break. I wrote about it here. It wasn't that big a deal. You could still trade stocks pretty normally. People did. It was fine. Thad was on it. It seems to have been caused by "a software update that went awry," because the NYSE runs on my iPhone apparently. Of course the Securities and Exchange Commission is investigating, because fining exchanges for failed software updates is looooow-hanging fruit. Here how the NYSE's floor traders reacted:

One floor trader started shouting, “My handheld’s down! My handheld’s not working!” He and other traders hurried over to a ramp on the trading floor where NYSE executives usually meet with them to explain any problems. Not today. Three hours later, still nothing. Everyone was just standing around.

Imagine relying on humans to trade stocks. Felix Salmon advised readers not to panic. Gawker advised readers to panic. Zero Hedge ... you know.

One thing I mentioned yesterday is that, while the intraday NYSE price isn't particularly important for your ability to buy and sell stocks, it does seem to be used to calculate the values of some major stock indexes, which means that the outage had weird effects on index levels. Here is a 2011 Themis Trading white paper on the subject:

We have confirmed in writing with representatives from Dow Jones Indexes, S&P, NASDAQ, and Russell that these indices are calculated using only primary market data. Nowadays, in a world of microsecond trading, these indexes have become phantoms -- they reflect some trades involving their components, but not the majority of them.

This situation raises serious questions about the reliability of index-based trading products.

But does it? Here's how I think about it. You need your index to be "right" at the end of the day; that's what people are benchmarking to. So the official index price, at the end of the day, uses the official closing auction on NYSE (for NYSE stocks, on Nasdaq for Nasdaq stocks, etc.) to calculate its closing prices. That's the right price to use: You want the closing auction at the primary market, not the last price on some other exchange. So you use the primary market to calculate your closing price after 4 p.m. At like 11 a.m., I mean, sure, why not, use the primary market price: It doesn't matter. The intraday index price is purely informational; nothing turns on it. As we saw yesterday, index exchange-traded funds seem perfectly able to find the "right" price themselves, based on composite trading, without worrying about little glitches like a NYSE shutdown.

Elsewhere in stock halts.

Meanwhile in China, the stock halts actually matter: You can't sell a halted stock anywhere, and 72 percent of the market is halted. As of yesterday you also can't sell a stock -- even in the other 28 percent, or once the halts end -- if you're a director, executive or more than five percent holder of the company. That ban is supposed to last for six months. There is a certain fairness to the ban: If you're the controlling shareholder of a company whose price soared on bubbly retail buying, maybe let those bubbly retail buyers sell first before you get out. Of course the ban also "suggests desperation," but to be fair, so would any desperate measure; that's how desperation works. In any case, the Shanghai and Shenzhen indexes were up today, so that's nice, though the whole saga has been a setback for China's efforts to liberalize its financial system.

One fact of the Chinese stock market is that a lot of companies, and controlling shareholders of companies, have taken out loans secured by their own stock; a popular theory is that many of those companies have asked to halt their trading to avoid margin calls. Yesterday I idly wondered if the ban on sales by controlling shareholders might actually protect those shareholders against margin calls: If you own more than five percent of a stock, can the bank foreclose, or would that constitute a now-illegal sale? And even if the bank can foreclose, now it owns more than five percent, so can it sell?

Yesterday I also said that restrictions on selling typically discourage buying: Why buy a stock now when you know that lots of other people are lined up to sell it as soon as they can? But a reader e-mailed to point out that that's not quite what's happening in China: Arguably a halt on three-quarters of the market forces selling in the other quarter, making for a buying opportunity:

Imagine you own 4 Chinese stocks and 3 of them aren't tradable. And, of course, you're scared. I think you sell more of your one tradable stock than you would if all 4 stocks are open, because it's your only way to reduce risk, raise cash, etc. (sell what you can). I don't know of anything that would make a person wait to sell the one stock that is still trading, until other stocks open back up. So there's no people lined up to sell that stock, maybe in fact closer to the opposite.

So if you want to buy, and can't buy the halted stocks, sure, why not, buy the other ones.

Stock analysts have fun.

Here's a story about departing Barclays chief executive officer Antony Jenkins:

As a joke, analysts covering the bank would sometimes ask Mr. Jenkins tough questions about numbers at the bank that they knew he couldn’t answer, according to one analyst. 

So ... the joke was that ... on bank earnings calls ... the analysts would ... ask the CEO questions ... about ... the ... bank's ... earnings? If you've spent a lot of time looking at Barclays earnings transcripts, please send me some financial questions that you think are jokes. Bonus points if the transcript has a notation like "[suppressed giggling from other analysts]" after the question. 

In what I hope is related news, "It’s a very hot debate about whether the financial analyst community is going to be decimated by algorithms," which have been put to work writing all sorts of Wall Street boilerplate ("corporate summaries on thousands of companies," mutual fund investment summaries), and which might be coming for sell-side research reports next. But:

Research experts say computers still have trouble processing the qualitative information central to most analysts’ jobs. Analysts, for instance, work to maintain relationships with company executives and clients, and look for nuances in executives’ comments that an algorithm wouldn’t necessarily pick up.

I mean, could a computer joke around by asking a CEO a tough question about his company's finances? Actually yes that sounds like precisely the sort of joke that a computer would make. 

Bill Gross has fun.

Remember when Bill Gross said that the German bund was the "short of a lifetime" and then managed to lose money when he turned out to be right? He sort of did that again: "The Shenzhen Composite Index has fallen 38 percent since the famed Janus Capital Group Inc. money manager recommended shorting it last month," but Gross never actually shorted the Shenzhen, so he missed out:

“I was trying to stick to my knitting, and China wasn’t really my knitting,” Gross said in a telephone interview Wednesday. “Having been unrewarded, I guess, on the German bund, I decided to let the public know, but to pursue my standard knitting, which has worked pretty well for the last month-and-a-half. I’m making it back and I’m sort of happy.”

I guess I'd be kind of weirded out if my bond fund -- even my unconstrained bond fund -- was shorting Chinese equities, so this is perfectly fair. The lesson here is that some people are pretty good at making relative-value fixed income bets, and they become famous, and they go on TV and Twitter and write goofy investment outlooks and people look to them to explain which equity markets are overvalued, and then they end up making pronouncements about things that are way outside of their area of expertise and that they have no intention of acting on, and people go around taking those pronouncements seriously even though they are not meant particularly seriously. Of course sometimes they're right.

Meanwhile, Pimco wants to do more lending.

Greece.

On Monday, it had looked like the deadline to resolve Greece would be Tuesday or yesterday, but the new deadline of this weekend looks like one last tiny kick of the can for old times' sake. Here's Peter Spiegel with a timeline of deadlines along the way; it is stressful reading. Meanwhile the mood in Greece is not great, and "the euphoria some Greeks felt after Sunday’s 'no' vote on the last deal was fading fast." Here's Peter Eavis on Greece and the euro ("To be honest, the dream has died regardless of what happens with Greece, because that dream was just a fantasy," says an analyst). Here's Matt Yglesias on the euro without Greece (Policymakers "see the thrifty, eager Balts as the future of Europe and profligate Greeks as the past"). Here's J.W. Mason on the European Central Bank ("Every modern central bank — including the ECB with respect to every euro-area country except Greece — will go to heroic lengths, bending or ignoring rules as need be, to keep the payments system operating"). And, really, is there a problem that bitcoin can't solve? Yes, Greece, probably. Here's Izzy Kaminska

People are worried about bond market liquidity.

It was quiet on the liquidity front yesterday -- a reader suggested that "reporters have left their bond trading posts to cover the illiquidity of the stock market" -- but Barclays strategists did produce some research on "Declining liquidity in sovereign markets." They think that "greater herding and diminishing liquidity is a potent cocktail which heightens tail-risks" for sovereign bonds, though they also "find strong evidence that liquidity premium is priced quite rationally."

Things happen.

What candy bar would you demand to rig Libor? American corporations have too little competition. Basket options will be listed transactions for tax purposes (previously). The BIS on bank corporate governance, and the IMF on U.S. financial oversight. My Bloomberg View colleague Noah Feldman on Monday's Puerto Rico court ruling (previously). Here's the trailer for the Showtime/Andrew Ross Sorkin show "Billions," with I guess Paul Giamatti as Preet Bharara. Inside Magic City, the Atlanta Strip Club that Runs the Music Industry. Office bathrooms. Accidental beer pong shooting. "For concreteness, we apply our methods to the recent work of Donnellan et al. (in press) who conducted nine replication studies with over 3,000 participants and failed to replicate the phenomenon that lonely people compensate for a lack of social warmth by taking warmer baths or showers." (Via Sarah Butcher.) 

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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:
Matt Levine at mlevine51@bloomberg.net

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