A Market-Moving Parade and an Insider Trading Appeal

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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A sea of green.

The S&P 500 closed up 3.9 percent yesterday; Europe and futures are up as I look, and even Shanghai had its first up day in a week, closing up 5.3 percent on the day, though down 18.7 percent from last Wednesday and 40.3 percent from its June highs. Still it's progress. Shanghai's progress seems to have involved government intervention:

China’s government resumed its intervention in the stock market on Thursday and has been cutting holdings of U.S. Treasuries this month to support the yuan, according to people familiar with the matter.

Authorities want to stabilize equities before a Sept. 3 military parade celebrating the 70th anniversary of the World War II victory over Japan, said two of the people, who asked not to be identified because the move wasn’t publicly announced.  

This "is part of a broader effort to ensure nothing detracts from the parade, an event the government will use to demonstrate its rising military and political might." Nominally communist stock markets are fun. Meanwhile here in the U.S., "William C. Dudley, the influential president of the Federal Reserve Bank of New York, said at a news conference in New York that the case for raising interest rates had become 'less compelling' in recent weeks," which in its way is a sort of intervention.

In hedge-funds-that-hedge news, Caxton Associates and Odey Asset Management seem to have done well in August, at least through Monday. Others did less well. Pershing Square is down for the year.

Maybe the crash will be good for the tech industry? Here is Aswath Damodaran on how to survive a market crisis. Goldman Sachs (Shenzhen) Financial Leasing Company is a fake. And here is a chart showing the "correlation between the Shanghai Composite Index and a map of Virginia."

Insider trading.

If you're interested in insider trading, you are probably aware that the U.S. Court of Appeals for the Second Circuit issued a big decision last year in the case of Todd Newman and Anthony Chiasson, holding that to prosecute insider traders, the government must prove that the person who tipped them with inside information received some personal benefit for doing so, and that the traders knew about that benefit. You might also be aware that this decision was hugely controversial (even though it just repeats what the Supreme Court said in a 1983 case called Dirks) and that the government has asked the Supreme Court to review it. If these are the sorts of things you're interested in, you might want to read Newman's and Chiasson's briefs to the Supreme Court asking it to deny review. They strike me as ... more correct than the government's brief. As I've said before, even if you dislike the "personal benefit" requirement, this is a very strange case to use to fight over it, since Newman and Chiasson so clearly didn't know that they were using illegally obtained information. As Chiasson's brief argues, "if this Court is interested in the question presented, it should await a better vehicle—one in which the defendants’ utter lack of knowledge is not an independent basis for the judgment below." 

Elsewhere, here is a study that "uncovers a non-trivial role for exchange trading rules and surveillance in reducing the number of insider trading cases, but increasing average profits per case."

Fund problems.

I mentioned yesterday that people were worried about exchange-traded fund liquidity, as many ETFs traded well below their net asset values on Monday. That had something to do with the fact that some of the underlying stocks were halted, but a separate problem seems to be that "Bank of New York Mellon, whose computer systems are used to calculate the net asset values, or NAVs, of many funds, has been suffering problems since the start of the week because of a failed software upgrade by one of its suppliers." That is ... not a great time to have a failed software upgrade, I must say. On the other hand, the official NAV of an ETF is an interesting piece of information, but not a controlling one: You don't buy or sell an ETF at the NAV, you buy or sell it at the market price. And the market price is essentially set by market makers, who price the ETF based on arbitrage against the underlying stocks, and whose computers don't seem to have been broken. So this glitch is embarrassing, and had some effect on prices, but you shouldn't overstate it

Several traders said they were forced to calculate their own net asset value for ETFs and that they widened the spreads, or the difference, between listed buying and selling prices to accommodate for the higher risk of trading.

“We measure our edge in terms of subpennies,” one trader said. “We can’t afford to be off by a penny.”

Elsewhere in ETFs, here is a one-man fund shop that runs the PureFunds ISE Cyber Security ETF, a custom-indexed fund with the clever ticker HACK and the even cleverer timing of having launched 12 days before the Sony hack.

Margin calls.

I mentioned yesterday that stock market crashes tend to be less disastrous than, say, housing crashes because in the modern United States people tend not to borrow lots of money to buy stocks, so the knock-on effects of losing money in the market are contained. But they borrow some money to buy stocks, and some other money to buy boats:

In a securities-based loan, the customer pledges all or part of a portfolio of stocks, bonds, mutual funds and/or other securities as collateral. But unlike traditional margin loans, in which the client uses the credit to buy more securities, the borrowing is for other purchases such as real estate, a boat or education.

Securities-based loans surged in the years after the financial crisis as banks retreated from home-equity and other consumer loans. Amid a yearslong bull market for stocks, the loans offered something for everyone in the equation: Clients kept their portfolios intact, financial advisers continued getting fees based on those assets and banks collected interest revenue from the loans.

With the market down about 9 percent from its May highs, and with stock margin limited to 50 percent, this seems unlikely to have catastrophic consequences. "Even before Wednesday’s rally, some banks said they were seeing few margin calls because most portfolios haven’t fallen below key thresholds in relation to loan values." But securities-based lending probably looks a bit less attractive to both banks and borrowers than it did before the crash, and at least one analyst "believes profitability in banks’ wealth-management arms will fall in the coming quarters, in part due to an expected decline in their securities-lending businesses."

Ashley Madison.

Here is an analysis of the Ashley Madison hack database claiming that as few as "12,000 of the profiles out of millions belonged to actual, real women who were active users of Ashley Madison," and that the adultery site was "like a science fictional future where every woman on Earth is dead, and some Dilbert-like engineer has replaced them with badly-designed robots." The amazing thing is that before the hack, this company wanted to do an initial public offering. If this analysis is right, how exactly do you disclose that almost all of your female customers are fake or inactive? Very carefully, I suppose is the answer, and don't you feel a little bad for the securities lawyers who never got to challenge themselves writing this prospectus?

A New 'Liar's Poker'?

I mentioned this briefly yesterday, but I really must urge you to read Gary Sernovitz's double review of John LeFevre's "Straight to Hell" and Greg Smith's "Why I Left Goldman Sachs," which is brutal and hilarious and a terrific piece of writing. That said I want to quibble with its thesis, which is that there can never be another "Liar's Poker" because Wall Street sales and trading is in terminal decline:

But sales and trading, the classic and maybe best setting for the Wall Street memoir, is losing its financial—and cultural—importance, through the disregard of savvier clients, regulations following the financial crisis, and most of all its entrance, like the rest of us, into the Age of Technological Disintermediation.

I mean, Michael Lewis actually wrote a book about technologically disintermediated trading floors! Perhaps it wasn't as good as "Liar's Poker," but what is? Financial innovation has a sort of fractal quality: You do a thing, you find a way to automate and simplify the thing, doing the thing disappears as a way to make excess profits, but then you build a more complicated thing on top of the newly automated thing and get your excess profits from that. There will always be salespeople, whether they're selling stocks or stock derivatives or stock-derivative-trading algorithms. "Liar's Poker" itself was more interesting than previous stock-market memoirs in part because so much of it was about structured mortgage trading, not stock trading -- it was about complexity, not just equities in Dallas. There may never be another financial memoir that's as good as "Liar's Poker," but, for good and ill, I don't think that's because Wall Street will stop being interesting.

People are worried about bond market liquidity.

I know, right? I thought we'd killed it, what with the massive stock market crash that left bond markets relatively untroubled. But the worry has reappeared in a different form, so I wrote about 50 shades of bond market liquidity yesterday.

Elsewhere in bonds, it is maybe a little weird that Bill Gross keeps making prescient macro calls that don't quite translate into profitable positions. There was the German "short of a lifetime," and a negative call on China earlier this summer that didn't go anywhere. But now his Janus Global Unconstrained Bond Fund was down 3.2 percent over the last month, and while his occasional bearish statements might make you think that he predicted the recent crash, what he was actually betting on was mostly range-bound volatility. Which looks somewhat less prescient these days. The top bond manager this month seems to be Jeff Gundlach, whose DoubleLine Total Return Bond Fund was up 0.7 percent "by betting that interest rates would stay low and by avoiding minefields such as emerging market currencies and energy bonds."

Things happen.

Federal Reserve Increasing Scrutiny of Bank Payment Systems. Ukraine has a debt restructuring deal. Venezuela is adding zeros to its currency to deal with inflation. Judge Dismisses Lawsuit Inspired by ‘Flash Boys.’ Monsanto Abandons $47 Billion Takeover Bid for Syngenta. Bank regulators are considering excluding derivatives collateral received from bank leverage ratio calculations. Katie Baker on the MetsDictionary Stories. Peruvian police prevail in pursuit of plucky penguin.

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(Corrects spelling of Gary Sernovitz's name in sixth item.)

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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