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HomeShedding Light on Dark Pools
Posted by Larry Doyle on October 20th, 2009 4:17 PM |
Kudos to Joe Saluzzi once again. While a number of people in the markets have been pushing for increased oversight of high frequency trading, in my opinion, nobody deserves more credit than Joe Saluzzi of Themis Trading. The pressure initiated by Joe and pushed by others is starting to bear real results. How so?
The highly predatory nature of ‘flash orders’ will likely be discontinued. Now we learn that trading activity in dark pools will also likely be seriously restricted. What are dark pools? Why should you care? If you have an interest in the markets, you should care. Let’s navigate.
I was honored to have Joe join me on August 2nd on No Quarter Radio’s Sense on Cents with Larry Doyle. From my review of that interview, we learned that dark pools have developed in the following manner:
– Originally launched by one or two exchanges for the purpose of allowing major money managers to cross large blocks of stock ‘off the floor’ and thus protect the buyers and sellers identities and the price of the transaction
– Now every dealer and exchange have developed dark pools resulting in more and more business occurring off exchanges and without any benefit of transparency. Who is disadvantged? Those without access to the dark pools.
– Dark pools initially had minimum size orders, but many dark pools have increasingly shifted away from a size requirement.
– Dark pools have developed in such a way that some market participants will abuse the intended purpose of the facility, that is to transact, and instead will look to discover information on pending orders through these dark pools. (more…)
Credit Card Holders Hearing, “I’m Sorry, This Card Does Not Seem To Work”
Posted by Larry Doyle on October 20th, 2009 11:16 AM |
Life is not fair.
While many topics could be placed into that all consuming category, the ongoing developments in the credit card industry certainly get top billing. Why?
High five to MC for once again pointing out the ever increasing and seemingly indiscriminate denial of consumer credit. Am I referring to creditworthy individuals applying for a credit card or other form of consumer credit? No!
I am referring to individuals who at point of purchase are discovering that their credit cards are being denied. These must be one off situations or for those already delinquent, correct? Not necessarily. As MSNBC highlights, Citi Starts Closing Mastercards Without Warning:
Shannon Burdette tried to pay with her Shell Mastercard after filling up her gas tank this weekend but found the card rejected.
Confused, she called the customer service line on the back of the card, issued by Citibank, and was told the account was closed because of something that appeared on her credit report. But when the Sykesville, Md., resident got a copy of her credit report online, the only negative thing she saw was “closed at credit grantor’s request” on the Shell MasterCard account.
“They said there was a routine review,” said Burdette, who maintained that she and her husband, Brian, used the card regularly and always paid the bill on time. (more…)
Fatal Character Flaws Bring Down Wall Street Titans
Posted by Larry Doyle on October 20th, 2009 8:49 AM |
Raj Rajaratnam
How is it that an individual with untold hundreds of millions of dollars in wealth could put himself in a position of risking it all?
Welcome to the world of Raj Rajaratnam, the owner of the hedge fund Galleon and the major kingpin arrested in the most recent insider trading scandal to rock Wall Street.
Who is Raj Rajaratnam and why would he take such professional risks? We learn about Rajaratnam from a London based financial site, Here Is The City:
He was born in Sri Lanka, attended S. Thomas’ Preparatory School, Kollupitiya, then moved to England to complete his schooling, and studied engineering at the University of Sussex. Rajaratnam earned an MBA from Wharton in 1983. He is married with three children.
Rajaratnam, a Tamil self-made billionaire hedge fund manager, is the 236th richest American according to Forbes (2009), with an estimated net worth of $1.8 billion.
The hedge fund manager started his career as an analyst at the investment banking boutique Needham & Co., where his focus was on electronics. In 1991, he became the President of the bank at the age of 34. At the company’s behest, he started a hedge fund, Needham Emerging Growth Partnership in March 1992, which he later bought and renamed ‘Galleon’.
Initially invested in technology stocks and healthcare companies, he says his best ideas come from frequent visits with companies and conversations with executives who invest in his fund.
He has made more than $20 million in charitable donations in the last five years. In September 2009, Rajaratnam pledged to donate $1m to help the Sri Lankan government with the rehabilitation of former LTTE combatants. He has also donated generously to clear land mines in the war-affected areas in Sri Lanka, and was also a contributor to various causes that promoted development in the Indian subcontinent and programs that benefited lower income South Asian youth in the New York area. (more…)
Let’s Listen to The Economist’s Zanny Minton Beddoes
Posted by Larry Doyle on October 19th, 2009 4:04 PM |
I always appreciate meeting, literally and figuratively, new people along our global economic landscape. Today I meet Zanny Minton Beddoes, editor of The Economist. Ms. Beddoes provides clear insights and perspectives on the challenges before us as we collectively navigate the economic landscape. The greatest challenge before the ‘wizards in Washington’ is when and how to exit the massive fiscal and monetary supports currently utilized to prop the economy and markets.
I hope you find Ms. Beddoes’ comments helpful in framing this critical question. I did.
LD
October 19, 1987 — October 19, 2009: Deja Vu All Over Again?
Posted by Larry Doyle on October 19th, 2009 1:43 PM |
TIME magazine cover December 1, 1986. What has really changed on Wall Street?
Twenty-two years ago today the equity markets crashed. The Dow Jones Industrial average cratered by a whopping 22%!!
Have our markets, economy, and financial regulatory oversight progressed, regressed, or is it merely “deja vu all over again?” Well, with the markets up 1% on the day and 50% off the lows in March of this year, clearly today is vastly different than 22 years ago, right? Honestly, I would maintain that from a grand perspective very little has changed. Why? How?
As much as we may have made technological progress on a number of fronts both on and off Wall Street, the fraud implicit in the illegal use of information is still very much central to the corruption that occurs on Wall Street.
Back in the mid to late ’80s, insider trading activity was rampant in a number of hedge funds and leveraged buyout activities. The so-called king of Wall Street at that time was Ivan Boesky. As it turns out, Boesky was nothing more than a common criminal involved in a massive insider trading scandal. When Boesky was confronted with the evidence of his criminal activities, he turned on his cronies and sang like a canary. In relatively short order, some of Wall Street’s titans fell like dominoes. Who were some of these titans? Dennis Levine, Robert Freeman, Martin Siegel, and Michael Milken. These masters of the universe were nothing more than white collar criminals.
Fast forward to 2009. The markets are rebounding and Wall Street is back to ‘business as usual.’ In a manner of speaking, the ‘business as usual’ is no different than the business that occurred back in the ’80s. What business is that? Insider trading.
The story that broke on Friday in which a number of individuals at a few hedge funds supported by corporate insiders at IBM and Intel is certainly only the tip of the iceberg of insider trading circa 2009. Bloomberg addresses this certainty in writing, U.S. Said to Target Waves of Insider-Trading Activities:
Federal investigators are gearing up to file charges against a wider array of insider-trading networks, some linked to the criminal case against billionaire hedge-fund manager Raj Rajaratnam that shook Wall Street last week, people familiar with the matter said.
The pending crackdown, based on at least two years of investigation, targets securities professionals including hedge- fund managers, lawyers and other Wall Street players, the people said, declining to be identified because the cases aren’t public. Some probes, like the one focused on Rajaratnam, rely on wiretaps. Others stem from a secret Securities and Exchange Commission data-mining project set up to pinpoint clusters of people who make similar well-timed stock investments.
I am sure there are individuals going home today wondering if their illicit activities will be, or already have been, detected.
Fraud driven by greed is a timeless activity made only more prevalent by an industry which has corrupted itself by diluting its regulatory oversight.
October 19, 2009 . . . deja vu all over again.
LD
The Great Divide: Wall Street versus Main Street
Posted by Larry Doyle on October 18th, 2009 3:30 PM |
Cartoon by Mike Luckovich
The Atlanta Journal-Constitution
No Quarter Radio’s Sense on Cents with Larry Doyle Welcomes Richard Greenfield, Sunday Night at 8PM EDT
Posted by Larry Doyle on October 17th, 2009 2:31 PM |
UPDATE: This episode of NQR’s Sense on Cents with Larry Doyle has concluded. You can listen to a recording of the episode in its entirety by clicking the play button on the audio player provided below. Once the audio begins, you can advance or rewind to any portion of the episode by clicking at any point along the play bar.
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The detonation of the bombs that have hit our economy may have been launched on Wall Street, but certainly the collateral damage has been experienced nationwide if not globally. While regulators were admittedly asleep at the wheel during these attacks, who in our country is now positioned to hold bankers and regulators accountable? The media? Please. Will regulators hold themselves truly accountable? Maybe on a going forward basis, at best. Then who?
Please join me this Sunday October 18th from 8-9pm EDT for No Quarter Radio’s Sense on Cents with Larry Doyle as I welcome Richard Greenfield for what will assuredly be a riveting conversation. Who is Richard Greenfield and what areas of expertise does his firm Greenfield and Goodman occupy? Why am I so excited to have him on my show?
Greenfield and Goodman concentrates its practice in complex financial litigation and, particularly, in corporate governance, banking, consumer rights and shareholder litigation. As a direct result of the efforts of the Firm and its predecessors, many millions of dollars have been recovered for defrauded investors and other persons injured by illegal corporate activities and obtained fundamental changes in corporate governance, particularly in the areas of control procedures and risk management. The Firm and its predecessors have also been responsible for obtaining a number of particularly noteworthy judicial opinions which have not only strengthened consumer and investor rights generally, but substantially aided in the prosecution of complex litigation to preserve such rights.
As for Mr. Greenfield himself, he has a resume that just won’t quit:
RICHARD D. GREENFIELD has been admitted to practice before the Supreme Court of the United States, the Courts of Appeals for the Second, Third, Fifth, Ninth and Eleventh Circuits, various federal district courts, as well as the Courts of the Commonwealth of Pennsylvania, the State of New York and the State of Maryland. Mr. Greenfield is a 1965 graduate of the Cornell Law School, where he was awarded a J.D. In addition, he has earned degrees in Accounting (B.S. Queens College) and Business Administration (M.B.A. Columbia University Graduate School of Business).
Mr. Greenfield is thoroughly experienced in banking, securities and consumer litigation, having served as Lead or Co-Lead Counsel for plaintiffs in shareholder class and derivative actions alleging violations of the federal securities laws and/or breaches of corporate governance standards, in class actions brought on behalf of trust beneficiaries against major trustee-banks as well as in a wide variety of banking and consumer fraud cases. Mr. Greenfield founded and was Senior Partner in a 48 lawyer Pennsylvania-based law firm that specialized in such litigation; it was disbanded in 1993.
Rather than listing the major periodicals and news outlets in which Mr. Greenfield has been featured, it would be easier to list those in which he has not.
In the midst of all of his other professional and philanthropic activities, Mr. Greenfield is currently representing Benchmark Financial, Standard Investment Chartered, and Amerivet Securities in complaints against the Wall Street self-regulatory organization FINRA.
In the spirit of continually pursuing transparency and integrity along our economic landscape, please join me this Sunday evening for what will assuredly be a fascinating discussion with Richard Greenfield.
This show, as with all of my shows, is taped and archived along with being available as a podcast on iTunes.
LD
October 17, 2009: Month to Date Market Review
Posted by Larry Doyle on October 17th, 2009 5:46 AM |
The dynamics at work in the economy, markets, on Wall Street, in Washington, and around the world continue to be very much the same. Economic signals are decidedly mixed. The consumer and savers remain challenged. Markets remain firm. The greenback remains weak. Commodities remain firm.
While many of the Washington wizards and market mavens focus on the positives and many bloggers and naysayers focus on the negatives, I hope readers at Sense on Cents feel they can get a full and honest assessment on all these topics. Please do not hesitate to tell me when you think I’m not being objective.
I thank you for reading my work, and now let’s collectively ‘navigate the economic landscape,’ the mission of Sense on Cents.
ECONOMIC DATA
> Retail Sales: declined 1.5% but less than the expected decline of 2.1%. The media gave no credence to the fact that the prior month’s figures were revised lower by .5 %. Over the last two months, retail sales are marginally positive but the coming holiday sales will be very challenging with heavy discounting still expected.
> Consumer Price Index: rose .2 versus an expectation of .1. While prices are currently well behaved with the recent weakening of the dollar and sharp move higher in commodities, we should expect food and gas prices to move higher.
> Jobless Claims: overall claims declined marginally again, but nobody is willing to bet that the employment situation is improving rapidly. The claims data is a sign that perhaps unemployment is stabilizing, albeit at very elevated levels.
> Philadelphia Fed Manufacturing Report: registered at 11.5 versus an expectation of 12.5 and a prior month 14.1 reading. Not a sign of a robust rebound in activity.
>Industrial Production: posted a surprisingly strong reading of a .7 increase against an expectation of a .2 increase.
> Consumer Confidence: against an expected reading of 74.0, this report registered a significant disappointment of 69.4. What happened? Consumers are very nervous about the overall economic outlook.
Add all of this economic data up and I focus on the last comment about consumer confidence. The consumer, which represents 70% of our economy, is nervous and the economy as a whole is as well.
Let’s move along to market performance. I would typically lead my review with focus on the equity and bond markets, but those sectors are actually following developments in the currency and commodity markets so let’s shift our focus accordingly.
The figures I provide are the weekly close and the month-to-date returns on a percentage basis:
U.S. DOLLAR
$/Yen: 90.87 versus 89.68, +1.3%
Euro/Dollar: 1.4894 versus 1.4635, +1.8%
U.S. Dollar Index: 75.58 versus 76.72, -1.5% !!!
Commentary: the overall U.S. Dollar Index continues to decline as the U.S. budget deficit for 2009 exploded to an astronomical $1.42 trillion. That figure is more than triple the 2008 level. The decline in the dollar continues to support the equity and commodity markets, while raising some concerns on the long end of the yield curve as a continuing decline in the dollar is inflationary which would push long maturity interest rates higher. The dollar actually did improve versus the Japanese yen while weakening versus the Euro. I recommend that readers focus on the dollar index which is why I link to it above. Track it and expect the index to move inversely to equities and commodities.
I reiterate my comments from last week. While I think Washington is not disappointed in a relatively weak dollar, although they should be (“Dollar Devaluation Is a Dangerous Game”), other countries are not overly keen about further dollar weakness. Why? A weak dollar puts those countries in a marginally less competitive position in international trade.
COMMODITIES
Oil: $78.67/barrel versus $70.39, +11.8% THE BIG MOVER THIS WEEK
Gold: $1055/oz. versus $1008.2, +4.6%
DJ-UBS Commodity Index: 134.32 versus 127.683, +5.2%
Commentary: Unless you grow your own crops or have your own source of energy, you should expect to get increasingly squeezed as prices at the supermarket and gas station are likely to head higher. While Washington will not address this development, these price moves are directly correlated with Washington’s weak dollar policy. The banks and others able to borrow cheap money for trading and investing benefit from the weak dollar. American consumers and savers get stuck with the bill.
The Baltic Dry Index did move higher this week following the upward moves in commodities, though, rather then leading the move.
I read these commodity tea leaves as a sign of inflationary expectations in these ‘inputs’ while we encounter deflationary pressures in wages and real estate.
EQUITIES
DJIA: 9996, +2.9%
Nasdaq: 212157, +1.6%
S&P 500: 1088, +2.9%
MSCI Emerging Mkt Index: 966, +5.8%
DJ Global ex U.S.: 200.56, +3.0%
Commentary: while the move by the Dow over 10, 000 did get a lot of attention and deservedly so, the number represents a psychological level more than any sort of meaningful fundamental development.
How about 3rd quarter earnings? More of the same. That is, generally speaking bottom line numbers are being generated to a greater extent by cost cutting than a real growth in sales and top line revenue. The weak dollar has supported those companies with a greater degree of international sales. Companies with pricing power should be able to benefit from the weaker dollar and improve their earnings. Those companies should outperform. Companies without pricing power will get squeezed and will continue to be forced to cut costs.
BONDS/INTEREST RATES
2yr Treasury: .96%, an increase of 1 basis point or .01%
10yr Treasury: 3.41%, an increase of 11 basis points
The yield curve steepened (longer maturities underperformed shorter maturities) a touch further again this week. I addressed my line of reasoning in the Currency Commentary. I continue to believe that we will have growing deflationary pressures (wages and real estate) offset by inflationary pressures (food, gas, health care). What’s an individual to do? Save, grow your own food, ride a bike, and don’t get sick!!
COY (High Yield ETF): 6.53, +2.0%
FMY (Mortgage ETF): 17.63, -1.0%
ITE (Government ETF): 57.80, -0.3%
NXR (Municipal ETF): 14.17, -1.9%
Commentary: while interest rates did move marginally higher over the week, overall they remain at remarkably low levels. The high-yield market remains very well bid while other sectors of the bond market have started to give ground as interest rates have started to ‘inch’ higher. Of note, the municipal bond market gave considerable ground as the reality of pressures in municipal finance increase.
Summary/Conclusion
I reiterate, the game continues. The disconnect between the overall domestic economy and the price action in the markets presents what one noted investor described as ‘the greatest experiment’ in modern finance. To the extent that people are putting money to work, I would focus on buying quality and utilizing ‘dollar cost averaging’ techniques.
Thanks for your support. If you like what you see here, please subscribe via e-mail, Twitter, Facebook, or an RSS feed.
Thoughts, comments, questions always appreciated.
Please join me this Sunday evening on BlogTalkRadio (8-9pm EDT) for what will assuredly be a fascinating dialogue with a high profile attorney, Richard Greenfield, who has three complaints ongoing versus the Wall Street regulatory organization, FINRA.
Have a great day and weekend.
LD
Report Indicates 1 in 5 Hedge Funds Have Lied or Misrepresented
Posted by Larry Doyle on October 16th, 2009 3:16 PM |
Trust but verify.
How does one verify representations for an industry that has traditionally been anything but transparent? Serious due diligence. Why should individuals be extremely cautious prior to investing in a hedge fund? The lack of transparency and the challenge of being able to employ real due diligence.
To that end, the hedge fund industry has largely operated on a trust basis and marketing which employs a lot of ‘word of mouth’ introductions. Against that backdrop, this corner of the investing universe is exceptionally challenging.
Without the ability to truly verify assertions made and returns generated by hedge funds, investors in hedge funds allocate capital with greater risk. In spite of these risks, the hedge fund industry has amazingly been able to operate under a fee structure in which investors annually pay 2% of assets and 20% of profits.
I know plenty of individuals who work at hedge funds. As with any undertaking, it would be irresponsible of me or anybody to impugn an entire industry. That said, I have always thought the lack of transparency and lack in the ability to truly verify investing styles and returns as being a significant reason not to invest.
From that standpoint, I was particularly interested to review a research report, Trust and Delegation, recently released by a number of graduate professors in finance:
Stephen Brown is the David S. Loeb Professor of Finance at New York University Stern School of Business; William Goetzmann is the Edwin J. Beinecke Professor of Finance and Management, Yale School of Management; Bing Liang is Professor of Finance, Isenberg School of Management, University of Massachusetts; Christopher Schwarz is Assistant Professor of Finance at the University of California at Irvine. We thank Bob Krause, Hossein Kazemi, and Andrew Lo for helpful comments. We are grateful to HedgeFundDueDiligence.com for providing their data for this research (http://www.hedgefundduediligence.com/).
What did this extensive research report highlight?
Due to imperfect transparency and costly auditing, trust is an essential component of financial intermediation. In this paper we study a comprehensive sample of due diligence reports from a major hedge fund due diligence firm. A routine feature of due diligence is an assessment of integrity. We find that misrepresentation about past legal and regulatory problems is frequent (21%), as is incorrect or unverifiable representations about other topics (28%). Misrepresentation, the failure to use a major auditing firm and the use of internal pricing are significantly related to legal and regulatory problems, indices of operational risk. Due diligence (DD) reports are costly and are only performed when a fund is seriously considered for investment. It is important to control for this conditioning which would otherwise bias cross-sectional analysis. We find that DD reports are typically issued on high return funds three months after the historical performance has peaked. DD reports are also issued at the point of highest cash flow into the fund. This pattern is consistent with return chasing behavior by institutional hedge fund investors.
Wow. Misrepresentations have occurred in 21% to 28% of the hundreds of hedge funds studied.
Honestly, I am not surprised. If hedge fund managers lie about one part of their business, do you think it is all that difficult to lie and misrepresent returns, investment valuations, and other critical parts of their business?
The inability to verify returns is always an opportunity for a hedge fund manager to fudge those returns when the numbers are not good.
This report may not be surprising, but it is enlightening. For those who would like a deeper view into this corner of our financial landscape, please click on the report below. ~LD
