House Staff and Flash Boys
Congress and insider trading.
I mentioned recently that securities law provides a sort of exception to the First Amendment, allowing prosecutors and regulators to investigate companies' political speech by connecting that speech to securities markets. It is less clear, though, that securities law lets regulators investigate congresspeople's political speech, or any speech, since the Constitution provides that "for any Speech or Debate in either House, they shall not be questioned in any other Place." But the Securities and Exchange Commission is investigating a House committee staffer who may have leaked information about a health-care policy change to someone who may have (passed it to someone who) traded on it. The committee has resisted providing documents and testimony to the SEC, arguing that those documents relate to its legislative function -- that is, its Speech or Debate -- and so no one involved can be questioned about them in any other Place. The SEC has argued that a staffer leaking information about an administrative agency decision (not even legislation) is surely not what the Constitution is supposed to protect.
The SEC recently won a round in that battle, with a New York federal judge ordering the committee to turn over most of the relevant documents. "If the underlying activity is legislative in nature, it is protected. If the underlying activity is not legislative in nature, it is not protected," says the opinion, unhelpfully. It also cites a Supreme Court case finding, rather optimistically, that "Taking a bribe is, obviously, no part of the legislative process or function; it is not a legislative act."
We've talked before about the application by IEX, the plucky upstart dark pool at the heart of "Flash Boys," to become a lit stock exchange. We've also talked about Citadel's and the New York Stock Exchange's efforts to stop it. Here is IEX's response to some objections to its application. It is persuasive! I am mostly interested in IEX's "magic shoebox," or "speed bump," which slows down orders by 350 microseconds by running them through a coil of wires in a box. People have objected that this seems to violate the Securities and Exchange Commission's requirement that a public exchange with protected quotes cannot intentionally delay orders. IEX pretty much lays waste to those arguments, pointing out that not only is the magic shoebox's delay "less than or not materially different than that currently involved in reaching various exchanges based on geographic factors" (like say trading on the Chicago Stock Exchange), but also that NYSE, Nasdaq and BATS all "coil cable within their data centers specifically to create equivalent latency for participants who have paid for the privilege of co-location." The letter quotes Nasdaq's chief executive officer describing his system:
"... in our data center, we call it a delay coil. So this is a – we took it out of the data center last night. If you’re 31 meters away from the matching engine, all right, you have this length of delay coil, right. And again, each foot is a billionth of a second differential. If you are – now this is if you’re closer, you have a longer delay coil."
Hmm yes sounds like a magic shoebox. Let he who has never coiled some wires to delay stock exchange quotes cast the first etc.
The other popular objections involve arguably unfair treatment of peg orders and of IEX's in-house router, and while a lot of people seem to get worked up about those objections, honestly they have never moved me that much one way or the other. IEX has answers for them, if you're interested. Here is Nathaniel Popper with more.
Today the U.K. Financial Conduct Authority "fined Mothahir Miah, a former Investment Analyst at Aviva Investors Global Services Limited (Aviva Investors), £139,000 and banned him" from the financial industry for cherry picking. Miah traded on behalf of several Aviva accounts, and he would make trades, wait a few hours, see how they did, and then allocate them to high-fee hedge fund accounts if they did well or low-fee long-only accounts if they did poorly. That is classic cherry picking, and you are not supposed to do that. He knew it:
Mr Miah knew that Cherry Picking was wrong and dishonest, but was motivated by a desire to prove to his colleagues that he was able to pick profitable trades. The culture within the Fixed Income business was heavily focused on performance and promotions tended to be based on reported investment performance. Mr Miah had seen a number of people who joined Aviva Investors after him being promoted to Fund Manager. He had not been promoted despite being at Aviva Investors for a number of years and felt demoralised, stressed and under pressure to prove his trading ability in order to be promoted. By Cherry Picking intra-day profitable trades for the Hedge Fund he believed he would prove his trading ability to his colleagues.
And now he's banned from the industry and will never get a chance to prove himself, poor guy. I have to say that I find the FCA's sympathetic psychologizing refreshing, and right, after reading so many U.S. SEC and criminal cases that just blame everything on "greed." "Greed" rarely has any explanatory power. Though "Mr Miah received £372,500 from the Hedge Fund Incentive Scheme in the period January 2010 to October 2012," so I suppose he had an economic motivation too.
American Realty Capital.
American Realty Capital "is one of the biggest sponsors of nontraded real estate investment trusts," and while I never give investment advice here, just, you know, Google "nontraded REITs" sometime. You get investor bulletins. American Realty Capital is also involved in the insane Massachusetts Securities Division case we talked about yesterday, in which an ARC affiliate was accused of faking proxy votes for another ARC affiliate. So it is not a great time for ARC right now. Which may be why it "said Monday that it would stop creating new investment products and close existing ones to new investors to focus on managing the $19 billion it has in current investments." Here is a sick burn from Michael Kitces of Pinnacle Advisory Group:
Regulators have proposed new fiduciary standards for advisers and mandated new disclosures on fees and costs that cut into investors’ principal. AR Capital seems to be saying, Mr. Kitces said, “now that the market is requiring transparency, we don’t think we can sell these any more.”
Happy 13F day.
People are worried about unicorns.
Did you know that, in Canada, one-horned billion-(Canadian)-dollar startups are called narwhals? Like unicorns, only colder and more realistic? I'm not sure that's actually true, but here (via reader Daniel Andru) is an infographic about narwhals. Elsewhere, is Uber "genuinely disruptive"?
People are worried about stock buybacks.
I have mentioned before that the 2016 U.S. presidential election will probably come down to stock buybacks, but Reuters points out that buybacks are a central issue not only of economic policy but also of national security:
“The U.S. is behind on production of everything from flat-panel TVs to semiconductors and solar photovoltaic cells,” said Gary Pisano, a professor at Harvard Business School and author of “Producing Prosperity: Why America Needs a Manufacturing Renaissance.”
If U.S. companies continue to dole out their cash to investors, he said, economic investment “will go where it can be used well. If a company in Germany, India or Brazil has something to do with the money, it will flow there, as it should, and create growth and activity there, not in the United States. It’s a scary scenario.”
Even national security could be threatened as a shrinking defense budget has made it more difficult for contractors to justify research spending.
That's right, one problem with stock buybacks is that they may cause the U.S. to fall behind in weapons technology.
People are worried about bond market liquidity.
If you'd like your bond market liquidity in podcast form, I enjoyed this Bloomberg "Odd Lots" podcast featuring Chris White talking about, among other things, liquidity as a natural resource versus liquidity as a service. If it's a natural resource, then you just need to structure your market in a way -- like an electronic trading platform or whatever -- that unlocks it. If it's a service that you have to pay for, then you need someone to provide it, and that someone needs to make money. There are pretty much no markets where liquidity is provided without the intervention of a profitable middleman, which is something to consider when people complain about high-frequency traders stealing from investors in the equity market.
Elsewhere, Bloomberg's Lisa Abramowicz calls bond market liquidity worries a "myth." On the other hand, even in this article about Wall Street pay, people are worried about bond market liquidity: "When Options Group asked what change would most improve the financial industry, the top response across businesses and job titles was lowering capital requirements for market making."
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