Saturday, July 11, 2009
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My focus on various topics in the realm of program trading and market liquidity has engendered quite a few vitriolic responses, some of which have argued bitterly that Zero Hedge is on the wrong path in describing the somewhat vampiric qualities of liquidity extraction by recent artificial constructs, most notably those undertaken by the NYSE. I present to our readers an original paper by two BNY ConvergEx managing directors from 2007 which should provide some additional datapoints in the great debate on whether or not liquidity benefits at all from the recent domination of computers in the "open" market, and touches on other such highly contested issues as dark pool and dark liquidity value and execution.
I want to bring our readers' attention particularly to Exhibit 4 which indicates that from a liquidity standpoint, intra-day prop trading is the worst (Goldman Sachs domination anyone?) followed by black box algo and automated market making.
In essence these observations dovetail with the findings in a recent guest post by Joe Saluzzi.
I would also like to bring attention to the finding on page 27, according to which intra-day prop trading and black box trading is low quality because both compete with long and intermediate term traders for the best price. "From the portfolio manager’s and trader’s perspective, these are sources of low-quality liquidity that can be viewed as competition for buying or selling a stock at the best price." Maybe in this more theoretical light, it is useful to again readdress the very pertinent complaint that the NASDAQ launched against the NYSE SLP program which has as of yet still generated no response either by the exchange or by the Securities and Exchange Commission.
Hat tip RichardSphere: Related Content
And for a more advanced discussion of the Federal Reserve and whether or not Bernanke claim that the Fed has a constitutional claim to monetary policy independence is constitutional, the linked piece by Professor James Galbraith is a must read. Sphere: Related Content
The WSJ reporting that the lender to over 1 million small sized businesses has hired Skadden Arps in preparation of a bankruptcy filing. The formerly largest competitor to GE Capital for any and every semi- and fully-toxic loan imaginable, has been so far outright denied a bailout by an administration that has rarely professed a non-socialist approach to corporate demise. Unfortunately for the company, whose new HQ office lobby on 42nd street looks more like a club out of Meatpacking, flashing either a blue or deep purple colored decor, may be Obama's first Guinea pig in financial failure since Lehman.
CIT Group Inc., a lender to almost a million mostly small and midsize businesses across the country, is preparing for a possible bankruptcy filing after so far failing to win a government guarantee to help it borrow, said people familiar with the matter.
CIT declined to comment on whether it was preparing a filing or why it had retained Skadden Arps. But if CIT did file, the consequences could be considerable, because the 101-year-old company, as of March 31, had $68 billion of liabilities.
A bankruptcy filing by CIT could affect thousands of small borrowers, from Dunkin' Donuts franchisees to restaurant owners andclothing retailers. "If CIT were to go away, it would take a financing option away from franchisees who want to buy stores or expand their networks," said Kate Lavelle, chief financial officer of Dunkin' Brands, the which owns Dunkin' Donuts and has had a 50-year relationship with CIT.
On Friday, many CIT bonds slumped on heavy trading, and its stock tumbled to its lowest since the lender went public in 2002, further hurting its chances of raising capital from the private sector without more government aid. CIT bonds that mature in February 2010 were trading at 83.5 cents on the dollar and yielding over 40%, indicating that debt investors think it is unlikely they will be repaid in full. CIT shares sank 33 cents, or 18%, to $1.53, after dipping as low as $1.13 during the day.
According to confidential documents reviewed by The Wall Street Journal, CIT has in recent weeks tried to assess the consequences of a failure of the lender on Middle America. Among them: Companies would lose access to $4 billion in untapped credit lines and thousands of manufacturers could run into problems.
If "run into problems" isn't the most greenshoot colored euphemism for a virtual halt in credit line access for small and medium corporations (that nobody really even wants now in the first place), I don't know what is. However, as in the Lehman failure, the CIT bankruptcy will merely expose the thousands of unintended consequences that the government, in its newly minted centralized planning role, has no possible way of fully evaluating, and the pain could likely be as pervasive and acute as last September.Sphere: Related Content
On March 8, an anonymous blogger who goes by the alias Tyler Durden (the same name as Brad Pitt’s psychopathic character in the movie “Fight Club”) wrote an unflattering opinion of CFC securities in his blog “Zero Hedge.” The blog, which circulated across the Internet, complained that CFC’s credit default swaps (CDS) were trading too tightly to U.S. Treasuries, a sign of strength. [TD: Looks like the analysis the "circulated across the Internet" hit on a nerve or two, as investors were focused not so much on certain psychopathic characters but rather on the fundamental risk I had exposed, and the company's CDS exploded by 150% in a matter of minutes.]
“The blogger repeats the same old allegations made a few years ago, which are every bit as flawed today as they were then,” said Mike O’Brien, CFC vice president of Corporate Communications. “We do not believe the blogger’s report reflects an understanding of our financial condition or our results of operations, cashflow, ability to service our debt obligations or the strength of our loan portfolio.”
As the Company's CDS has flatlined at a level well over double where it was before Zero Hedge analyzed NRUC, I am not so sure just how flawed my allegations may have been. I will not recap my initial thesis here: interested readers can read the full analysis here (and follow up reports here, here, here and here) and decide for themselves just how ridiculously cheap the company's CDS is, even in a case when the US backstops every single asset in the history of utility cooperatives.
What is notable is that whereas no self-respecting PR department should care about Zero Hedge's deranged ramblings (not so sure about CDS traders), and only a real rating agency like Egan-Jones has NRUC rated objectively (single B), one of the "Big 3" woke up on Friday in an action that could pose substantial challenges to NRUC's PR department. Fitch, which rates NRUC's MTNs at A and its Sub Notes at A-, came out with a report in which it noted it was putting NRUC on Rating Watch Negative: basically a guarantee it will downgrade the company in a matter of weeks (Don't look for the report on the website's "ratings" section; somehow only the laudatory reports make it on NRUC's home page).
Here are the main issues that Fitch notes it is concerned about:
- National Rural’s funding profile has migrated towards a higher reliance on secured funding, thereby reducing the available collateral supporting unsecured creditors.
- National Rural’s leverage ratios remain elevated relative to historical measures.
- National Rural has a sizable ($1.2 billion) amount of debt maturing in August 2009.
And while NRUC immediately issued a retort to Fitch in which it did its best to spin all three points in a somewhat positive light, at this point it is conceivably far too late to change the impending downgrade. And as everyone knows, rating agencies do everything in groups, meaning the company must now hold its breath for comparable downgrade reviews by Moody's and S&P.
Now who cares about ratings: we all know the rating agencies are a joke, right? The problem is the avalanche of events that would ensue if even a Fitch were to give the company a several notch downgrade (best case study is AIG, whose collateral calls upon the RA downgrade almost destroyed the world). I paraphrase from my initial report:
This is where the NRUC story becomes eerily reminiscent of AIG's. The company is in many ways held hostage by its current rating under both Moody's, S&P and Fitch. This is manifest in three places:
1) The company's $3 billion REDLG notes (as already mentioned) have a rating agency trigger. As page 13 of the 10-Q notes:The $3.0 billion of notes payable to the FFB contain a rating trigger related to the Company's senior secured credit ratings from Standard & Poor's Corporation, Moody's Investors Service and Fitch Ratings. A rating trigger event exists if the Company's senior secured debt does not have at last two of the following ratings: (i) A- or higher from Standard & Poor's Corporation, (ii) A3 or higher from Moody's Investors Service, (iii) A- or higher from Fitch Ratings and (iv) an equivalent rating from a successor rating agency to any of the above rating agencies. If the Company's senior secured credit ratings fall below the levels listed above, the mortgage notes on deposit at that time, which totaled $3,811 million at November 30, 2008, would be pledged as collateral rather than held on deposit. At November 30, 2008, National Rural’s senior secured debt ratings were above the rating trigger threshold.It becomes obvious why the Rating Agencies are instrumental to the company's longevity: a 3 notch downgrade from the current senior secured rating of A/A1/A would severely limit the company to government funded liquidity in the form of the $3 billion in REDLG notes it has on the balance sheet currently.
2) As Moody's notes on page 11 of its report, NRUC has $9.2 billion notional amount in interest rate exchange agreements, which has rating triggers, this time based on the company's senior unsecured credit rating from Moody's or S&P:"If NRUC’s rating for senior unsecured debt from either agency falls below the level specified in the agreement, the counterparty may, but is not obligated to, terminate the agreement. Upon termination, both parties would be required to make all payments that might be due to the other party. If NRUC’s senior unsecured rating from Moody’s or S&P declines to Baa1 or BBB+, respectively, the counterparty may terminate agreements with a total notional amount of $1.919 bllion. If NRUC’s senior unsecured rating from Moody’s or S&P falls below Baa1 or BBB+, respectively, the counterparty may terminate the agreement on the remaining total notional amount of $7.314 billion."The prospect of having to terminate $9 billion in swap would likely have reverberations across both of NRUC's income and cash flow statements.
3) Lastly, the increasing reliance the company has on government funding in the form of CPFF borrowing, makes it critical that the company does not lose A-1/P-1/F-1 rating which is the cutoff for CPFF eligibility. As noted NRUC currently has over $1 billion in CPFF borrowings (a number that could grow by an additional $2.9 billion soon, see below) which it would have to find alternative ways to finance if two or more of the rating agencies turn hostile on the company.
So while NRUC is welcome to take pot shots at Zero Hedge, it may consider actually fixing its business, in which one would need a microscope to make a conclusive determination (and even then the answer would be quite surprising) of whether the cost of capital is lower than the return on capital. The fact that Fitch is finally waking up to this simple fact should be sufficiently alarming to the executives in the Herndon, Virginia headquarters. The rating agencies have recently embarked on an expiation campaign (well, S&P... Moody's not so much) and the race to the bottom downgrade could be one which leaves NRUC a in smoldering heap of electric and telephone poles (at four digit % LTVs no less) all the while its balance sheet records 37 cents in bad loans allowances.
Disclosure: no positions in any NRUC securities currently or in the past. Sphere: Related Content
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Friday, July 10, 2009
It seems just yesterday that Ben Bernanke was rehearsing for the role of the Alzheimer's patient antagonist in Joel Schumacher's latest mad scientist-becomes-insane global dictator B-grade movie, before the House Committee on Oversight and Government Reform, after firing back with a catatonic "I don't recall" after catatonic "I don't recall" when asked to remember even one of the events in what historians will likely one day consider among the most critical 24 hours for modern capitalism. Many thought that this spectacle was merely a way for politicians to score populist points in a McCarthesque witch hunt sequel of the villain de jour play. It seems they were wrong.
A letter submitted yesterday by members of Congress is now demanding an in-depth investigation into whether the "Federal Reserve has overstepped its authority and abused its power under current law (where it already wields considerable regulatory strength and broad authority)" especially now that the President, under the guidance of certain individuals of his financial advisory committee is hell bent on "concentrating extensive new power in the hands of one regulatory entity with little to no direct accountability to the public."
In a fashion comparable to the fate of HR1207, which started off as a small snowball (in hell, of all places) and has the potential to become an avalanche, so does this petition deserve the support of all the same cosponsors of the Audit The Fed bill. Zero Hedge applauds the initial efforts by the following members of Congress: Garrett, Carney, Grayson, Kaptur, Price, W. Jones, Duncan, Paul, McCotter, Blackburn, Burgess, Adrian, Smith, Bachmann, Gohmert, Burton, McHenry, and Posey; we are certain that hundreds more will eventually stand behind this petition. The Fed's time as an unaudited and unaccountable institution is at an end - it is now just a matter of time.
The President now faces a major choice: do the right thing, avoid the several conniving voices that whisper sweet manipulative nothings in his ear, and expose the Fed for the nebulous and crony mechanism it has become in the hands of a select few, or do nothing and let his successor be forever remembered in history for doing this one critical and righteous act.
Final Letter to Obama on Fed Reserve Authority 7-9--09 Sphere: Related Content
Why Institutional Investors Should Be Concerned About High Frequency Traders
By Sal L. Arnuk and Joseph Saluzzi
A Themis Trading LLC Mini White Paper
It is now generally understood that high frequency traders (HFTs) are dominating the equity market, generating as much as 70% of the volume.
HFTs are computerized trading programs that make money two ways, in general. They offer bids in such a way so as to make tiny amounts of money from per share liquidity rebates provided by the exchanges. Or they make tiny per share long or short profits. While this might sound like small change, HFTs collectively execute billions of shares a day, making it an extremely profitable business.
Why should institutional or retail investors care? After all, aren’t HFTs adding liquidity? That’s what they and the exchanges, who court their business, say.
There’s a lot to worry about.
1. HFTs provide low quality liquidity.
In the old days, when NYSE specialists or NASDAQ market makers added liquidity, they were required to maintain a fair and orderly market, and to post a quote that was part of the National Best Bid and Offer a minimum percentage of time. HFTs have no such requirements. They have no minimum shares to provide nor do they have a minimum quote time. And they could turn off their liquidity at any time. When an HFT computer spots a real order, the HFT is not likely to go against it and take the other side. The institution is then faced with a very tough stock to trade.
2. HFT volume can generate false trading signals.
This can cause other investors to buy at a higher price, or sell at a lower price, than they would otherwise. A spike in HFT volume can cause an institutional algorithm order based on a percentage of volume to be too aggressive. A spike can attract momentum investors, further exaggerating price moves. Seeing such a spike, options traders can start to build positions, which, in turn, can attract risk arbitrage traders who believe there’s potential news that could affect the stock.
3. HFT computer servers are faster than other trading systems.
Because most HFT servers are co-located at exchanges, they can beat out institutional or retail orders, causing them to pay more or sell for less than they should have for a stock.
Then there are the “what if” problems that could be created by HFTs.
1. What if a regulation like the uptick rule were enacted?
Volumes could implode and stocks that appeared highly liquid could become extremely difficult to trade with wide spreads and no depth in the quote.
2. What if a “rogue” algorithm entered the market?
Many HFTs are hedge funds that enter their orders into the market through a “sponsored access” arrangement with a broker. Many of these arrangements do not have any pre-trade risk controls since these clients demand the fastest speed. Due to the fully electronic nature of the equity markets today, one keypunch error could wreak havoc. Nothing would be able to stop a market destroying order once the button was pressed.
Gives new meaning to the term “mutually assured destruction?” Sphere: Related Content
Looking at historical data always gives a great sense of perspective (in this case, table 2.1 from the White House site). The graphic below represents the remarkable increase in spread between individuals and corporations when it comes to the burden of funding the federal government. This doesn't include other sources like social security payments, excise taxes and other sources - just plain consumers and businesses, Econ 101.
There are numerous points to take away but we want to highlight a couple:
- the individual curve is roughly parabolic while the corporate curve is roughly linear - painfully obvious but attempting to diagnose acts almost like an economic Rorschach test... give it a shot in the comments, see what comes out!
- the only dips in individual income tax burdens have come during the reign of W - other downturns have merely seen a flattening
- the hump in corporate income tax from 2003-2009 is almost comical as a representation of the effects of a leveraging bubble
-given that 2010 forward numbers are (obviously) forecasts, it is pretty clear that there is some combination of excessive economic optimism from the current administration, knowingly inflating the data a la the Chinese, or some tax hikes even while Obama champions to reduce the tax burden of the bottom 40% of the income range
Edit: ignore the TQ downswing in the mid 70s - some bad data in the federal data set... if you remove that datapoint, it smooths out nicely.
The most recent, presumably correct, data has been released by the NYSE: Goldman total principal program trading has declined by 60% from 1,336 million shares in the prior week to 571 million in the current. The end of the Russell rebalancing likely played a major role in the decline as overall NYSE program trading volume was also impacted by a comparable margin. Yet what was odd is that last week's Russell indexing action was the lowest volume rebalancing event in years.
Nonetheless, even with the material decline in overall program trading, it still accounted for 38% of the NYSE weekly volume, 12% higher than the running 52 week average. With the ever increasing dominance (I plan on summarizing the most recent three months' PT action early next week) of program trading, is it any wonder why all of a sudden even the MSM is expressing such persistent interest into not only peripheral personnel scandals associated with program trading but the core issues as well.Sphere: Related Content
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hat tip Dave
And quite a few potential investors these would be: being the smallest of the PPIP participants (by a big margin at that, which begs the question: where is Och Ziff, where is Highbridge, where is MatlinPatterson, where is SAC, where is Silver Point... actually never mind on Silver Point... all these bigger and more successful funds did not apply for PPIP or did not get selected... Inquiring minds would love to know why) you have to raise about 10% of your total AUM. Not only that, but one imagines the traditional LPs who got skewered on the Marathon's recent forays into "liquidating trusts" can not be all that excited about dumping more cash, even with the promise of "incredibly attractive" returns dangling like a skewered worm on a fish lure.
Of course, none of this is to say anyone here is to blame: when the government tells you, and in fact encourages you, to grab taxpayer cash with both hands and virtually guarantees profits you would have to be a fool not to get involved. Especially since these securities, as Bruce pointed out so astutely were "issued at LIBOR + 25 and are now trading with yields in the teens." How could one possibly lose money on that: now that is an arbitrage one could sink their teeth into.
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Critical disclosures by Bloomberg underway, but here is the Aleynikov server: http://www.xp-dev.com/
Xp-dev.com is registered to London resident Roopinder Singh, who describes himself on a blog linked to the site as a trading systems developer working in London’s financial services industry. The site offers “subversion hosting,” letting users track current and previous versions of programming code and other documents.
Singh told his customers in the blog yesterday that he’d been contacted by “local UK authorities,” who had seized his hard drives to examine them and shut his service down for 45 hours, beginning on July 6, two days after Aleynikov’s arrest.
“It turns out that some idiotic moron a user had uploaded data on to the service that he/she was not authorized to have,” he said, crossing out the words “some idiotic moron.” “This is your basic intellectual property theft case here.”
Oh Roopinder, if only it were that simple. More from Bloomberg:
Aleynikov told McSwain he used the server on other instances.
“I have uploaded files to svn.xp-dev.com on multiple occasions over the last couple months,” Aleynikov said in the FBI statement. The phrase, “over the last couple months” is crossed out.
It was unclear if he used the server to store Goldman software or other code.
“The files that are proprietary information of Goldman Sachs has not been shared with any individual or corporation,” Aleynikov repeated near the conclusion of the three-page statement.
In the statement, Aleynikov laid out what had happened from the downloading of the files to their transfer to the server and his retrieval of them from it. He said that on June 5 he “created a tarball in an effort to collect open source work on Goldman Sachs server to which I had an account.”
A tar file, which is sometimes called a tarball, is a compressed file.
“I had previously worked on the files,” he said.
He said he encrypted the files, then erased the encryption software and the tarball.
“I then erased the bash history,” he said, referring to a method of recalling commands used in previous computer sessions.
Goldman security measures prevent such deletions, which tipped the firm off to his activities, prosecutors said.
Aleynikov said in his statement that he downloaded the Goldman software to his home computer, his laptop computer and his thumb drive.
“The reason I uploaded to svn.xp-dev.com was because it was not blocked by Goldman Sachs security policy,” Aleynikov wrote. The phrase, “not blocked by Goldman Sachs security policy,” was crossed out and he added: “I wanted to inspect the work later in a more usable environment.”
And here is the story from Singh:
“Outage” - a word that comes with so much burden and disgust, especially nowadays with the advent of cloud computing, most users expect a full 24x7 uptime, regardless of the service. However, the reality of it is that even services like Google App Engine can go down. Most of these outages are down to very common events (and boy, we’ve heard our share of them!) like disk failures, security breaches, network outages and even data center fires. Hey - even lightning can strike the cloud, right ?
When XP-Dev.comdisappeared off the internet on 6th July 2009 at 15:20 BST, I immediately thought that it was one of the usual reasons. However, when I realised that allXP-Dev.com servers (we have a few of them) disappeared, I began to panic. For a moment, I thought that something really bad had happened – I mean, to the extent that it was the end of the internet as we knew it.
After trying to diagnose the situation for 30 minutes or so, I called up the service providers and they basically told me that they couldn’t tell me what had gone wrong. All they could say was that their infrastructure was working fine, but they had to disconnect my servers. Apparently, the only person that had the authority to tell me what was going on had gone back home for the day, and I had to wait till the morning. I found that really odd, and began to panic even further! Was it a security breach ? Was one of my processes doing something really sick and affecting others in the data centers ? Or maybe Goblins just came out and started eating away at the data center. I even re-read their Terms of Service and Policy Notes to double check that I had not done anything “out of the ordinary”.
At around 9pm BST, I get a call from the “local authorities” (I can’t say who they are right now, but rest assured that they are valid local UK authorities that have jurisdiction in UK) saying that they wanted to visit me at home to discuss XP-Dev.com. I just blew my mind at this point – what in the world happened on XP-Dev.com to make these guys visit me at home ?
It turns out that
some idiotic morona user had uploaded data on to the service that he/she was not authorised to have. This is your basic intellectual property theft case that we’re talking about here. The local authorities had to take all the server hard drives for examination, and I was told that someone will be in contact with me the following day (i.e. 7th July 2009).
The following day, I was on the phone trying to get them to speed things up, but to no avail. Apparently everyone was trying their very best. Later in the day, I did get a call that mentioned that the hard disks will only be returned to the data center the following day (i.e. today).
This morning at around 9am BST, the local authorities visited me at home. We got everything sorted out and the service was brought online at around 12noon BST.
The main issue here is that this case of IP theft is an ongoing investigation, and I really couldn’t tell you guys anything at all. In fact this whole blog post is the only amount of information I can let out even at this point.
Hell, I hate myself for doing that to you. It totally goes against every single grain of ethical business practices that I’ve grown to adhere to and love.
A 45 hour outage is inexcusable. But this is one of those WTF momentsthat I just have to take in and suffer with my beloved users. It is really uncommon for any service on the internet to go through this sort of “experience”. Having said that, any service on the internet is exposed to this risk where certain users upload/share information that they do not own.
There will be some changes to XP-Dev.com in the coming weeks to avoid the lengthy delays that the authorities took to return the hard drives. In fact at one point yesterday, I was contemplating to disable creation of new repositories for Free users, but then, two minutes later, immediately retracted from the idea thinking “Why should thousands upon thousands of users get affected due to one user's silly actions?”.
The one thing that I will definitely do is bringing the servers closer to home (UK). It will require purchasing some hardware and the co-location costs, but I think it will be a worthwhile investment – for you and for me. In fact, from the quotations that I’m looking at, the new servers should be faster (which is always a good plus point).
I do apologise for the prolonged outage, but I hope you do understand that a lot of it was out of my control – I just couldn’t pull off a Chuck Norris and get those hard drives back, now, could I ? :)
Everything should be back to when it was taken offline on 6th July 2009. If there are any questions, please do put them in the comments below, or just raise a support ticket.
More developments to be logged throughout the night.Sphere: Related Content
Karl - do what I did, and invite Dennis or whoever else to Market Ticker. I am still waiting for a response to my personal invitation. Maybe then you will have the opportunity to discuss the issues that truly concern you, and not have CNBC redirect to totally irrelevant concepts such as blogger anonymity, which the host subsequently spends another segment tryingto pin the issue on. No Dennis, that is not the issue, nor is it the solicitation of advertisers, although I am sure you are all too familiar with that (or lack thereof). There is a saying, "when facts speak, even the gods are silent"; alas when most of CNBC speaks, the heavenly laughter is near pain threshold levels.
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Thursday, July 9, 2009
The gloves are now completely off in the escalating program trading fiasco that was started by Goldman's former Sergey Aleynikov. Oddly, while Zero Hedge was fully expecting the Teza injunction to come from Goldman, it seems Griffin was more than happy to burden himself with that task. Hopefully Citadel is not faced with a case of reverse discovery and forced to document the 40% returns that it generated compliments of Malyshev when all its other groups on average lost around 50% in 2008. From Bloomberg:
Citadel Investment Group LLC, the $12 billion hedge fund firm founded by Ken Griffin, sued three former executives and the firm they founded, Teza Technologies LLC, claiming violation of non-competition agreements.
“This is a case of industrial espionage,” Citadel said today in a 25-page complaint. The firm seeks a court order barring the individual defendants from conducting any business through Teza or related entities that compete with Citadel, for the duration of the agreements.
Teza described itself in a July 6 e-mail as a “formative” firm that is neither trading nor investing. Named after a river in western Russia, the Chicago-based firm was co-founded by Misha Malyshev, Jace Kohlmeier and Matt Hinerfeld. All were named in the complaint.
“We didn’t violate any non-competes,” their attorney Chris Gair said today in a telephone interview. He said his clients took no trade secrets from Citadel.
Malyshev worked at Citadel for almos six years and until February was its head of high-frequency trading.
He was on the team that ran a $1.8 billion tactical trading fund that uses computer model to make trades every few seconds. The fund climbed 40 percent last year, while its main funds tumbled 55 percent.
U.S. agents arrested ex-Goldman Sachs Group Inc. computer programmer Sergey Aleynikov on July 3, one day after he started working for Teza, on charges he stole trading software from Goldman.
Teza said in the July 6 statement it suspended Aleynikov without pay after the arrest. The firm said it learned of the allegations on July 5.
“It had nothing to do with us,” Gair said of the Aleynikov matter.
The case is Citadel Investment Group LLC v. Teza Technologies LLC., 09CH22478,
Chancery Division, Cook County, Illinois, Circuit Court, (Chicago).
Zero Hedge is currently going through Chancery Court filings and will present when and if it discovers anything perticularly juicy.Sphere: Related Content
- Yields 4.303% vs. Exp. 4.292%
- Bid to cover 2.36 vs. Avg. 2.54 (Prev. 2.68)
- Indirects 50.2% vs. Avg. 47.73% (Prev. 49.09%), and who the hell knows if the fudged definition includes any interest from the Red Queen and other denizens of the Land of the Looking Glass.
- Allotted at high 67.88%Sphere: Related Content
Here is the link with all the prepared testimony.
Mr. Donald L. Kohn, Vice Chairman, Board of Governors of the Federal Reserve
Dr. Frederic Mishkin, Alfred Lerner Professor of Banking and Financial Institutions, Graduate School of Business, Columbia University
Dr. Laurence Meyer, Vice Chairman, Macroeconomic Advisers
Dr. James K. Galbraith, Lloyd M. Bentsen Jr. Chair in Government/ Business Relations and Professor of Government, LBJ School of Public Affairs, University of Texas
Dr. Richard Berner, Chief Economist, Morgan Stanley
Dr. John B. Taylor, Mary and Robert Raymond Professor of Economics, Stanford University
Dr. Allan Meltzer, The Allan H. Meltzer University Professor of Political Economy, Tepper School of Business, Carnegie Mellon University
And here is the link to jump straight into the webcast. Sphere: Related Content
Investment thesis: GS is arguably the most well-respected inv. bank, especially after deftly navigating the 07-08 credit crisis. We view GS as the best-diversified, most global franchise in the industry, with ample intl. growth prospects. The firm has consolidated its toptier position among Capital Markets firms, enabling it to generate strong through-cycle ROEs and book value growth.
Wow, not sure even where to start with Guy's opening salvo. If it was made a little clearer that a "inv. bank" has the implicit backing of the U.S. government for any and every blunder it may make, and the potentially explicit backing of all the collocation facilities at the 60 Hudson carrier hotel, maybe Guy's fascination would be a little more subdued. As to the "most well-respected" bit... well, Zero Hedge won't touch that topic. But Guy may consider adjusting the boilerplate investment thesis shortly.
More from the report:
2Q Trading conditions strong, U/W recovered markedly
Trading conditions remained favorable through 2Q. Buoyed by stable volumes as spreads tightened, fixed income markets continued to see wide bid/ask spreads on muted competition. Thus, we’ve again raised Trading forecasts. Also, cont’d asset price improvement (ICBC, equities and debt), offset by likely real estate losses, should drive increased Principal revs. In IB, M&A remained weak, but Equity and Debt U/W rallied significantly. 2Q could be a record quarter for GS in Equity U/W, though volume data is skewed by their own capital raises.
Comp. leverage could drive significant 4Q earnings boost
At current accrual rate (and assuming rev forecasts correct), GS appears on track to accrue significantly more comp than ‘08, despite little change in headcount. Even with 4Q accrual of 25%, comp would still be up 64% YoY by our estimate. In this scenario, ‘09E would reach $16.30, with ROE of 16%.
Buy: PO to $175 (from $144); 16%+ ROE achievable
PO increase reflects ‘09E/’10E ROE of 16%+, bringing BVPS to over $113 by the end of 2009 and $122 in 12-months. Based on this, ROE suggests 1.6x BV multiple or ~$175, after 10% “haircut” to account for market fluctuations. GS has consolidated its top-tier position among Capital Markets firms, combining front-rank Banking franchise with unmatched risk-taking/risk-management skills in a market that strongly rewards these because of decline in competitor risk appetite. Risk/reward appealing, with upside potential to 1.6x BV, downside unlikely below 1.1x BV.
Decline in competitor risk appetite? How about outright decline in competitors? And how about the unwillingness of competitors to directly engage GS in core fields in which the firm seems to have achieved a barrier to entry with a blessing as if from above? What is so difficult about calling up two firms to gauge investor interest in a REIT offering and then following through with one, if all it takes is a simple analyst upgrade and a brief stay on the Goldman Conviction Buy List (sorry, bad example, Merrill recently figured out just how simple it is to beat Goldman in its, allegedly, own game)... But fixed income sales and trading? At 40 bps bid/offer spreads for a 300 bps trading CDS or 1.5 points pick on a bond, a blind monkey with Down's syndroms would be rolling in cash. As for being a Supplemental Liquidity Provider? Well, why take the free money from Goldman and from the zillions in program traders who scalp each other for nickels per trade. Who would possibly want to do that. Not like being an SLP provides one with a plethora of implicit and explicit additional benefits.
No, all rhetoric aside, investors would be stupid not to buy into the Goldman hype - pretty soon it will be the only investment bank standing if LB's grand plan has its way. And there is nothing on the horizon to indicate otherwise. As for Goldman employees who are set to make a record $1 million in average comp this year - we all feel bad for them, knowing how hard they work scouring the web for pieces of rogue code or kibitzing on various websites checking on minute by minute updates of whether anyone has the temerity to write something negative about the mothership.
Sо why stop at $175 - go for a cool round number, like $1,000 or $1,000,000/share. At the current rate of dollar devaluation the latter has a very high probability of being achieved, nevermind that the investee would likely be happy to facilitate said devaluation as much as it can... And if oil were to somehow hit the same price/barrel, so much the batter. LB et al will be happy to show up at next year's investor meeting and discuss how Goldman managed to generate an ROI of infinity +1. Zero Hedge, with its 1 share of GS will be proudly there, clapping and cheering in a roofied daze, pre-vaseline administration, clutching the Goldman Sachs Ethics Manual, which has long ago replaced the Bible, Koran, Torra, the Bhagavad-Gita, and the Sermont on the Mount, among others, as our bedside soul cleansing material. Of course, if in the meantime the green shoots turn out to be green swans and the economy crumbles, one can bet that Goldman will be there, generating a cool 20% ROE. Sphere: Related Content
Dr. Paul Craig Reports: "He works for Goldman Sachs."
Hat Tip EW, Max Keiser and Mish. Sphere: Related Content
Some huge, hard-to-believe numbers coming from the Chinese - if I had a nickel for every time I wrote that... I could melt all those nickels, sell it on the spot market and buy enough gold to plate my new ZH decal.
But seriously - is anyone buying this? The story being put forward by the Chinese is that the government pumped in some stimulus which has been enough to get the crank rolling again and leads to statements like:
"China’s downward slide is clearly over,” said Wang Qingtao, an analyst at First Capital Securities Co. in Shenzhen.
We don't want to be the Debbie downers here but where is this demand coming from? Have Chinese consumers suddenly rationalized their government's stimuli against the precipitious declines in aggregate global demand, the drops in real income and the dismal employment picture and come up with a "buy" signal? Unless market psychology runs differently over there, we have to wonder how much stock to put in these numbers. Our frequent readers know that we typically will do a deep dive into the data but in this case, we're SOL for two reasons - 1) I don't read Chinese (raw data somewherehere) and 2) the next best thing, the Bloomberg article, is a little sparse on some of the details. For example, this little tidbit REALLY needs some explaining:
First-half sales jumped 18 percent to 6.1 million after the government cut some retail taxes and handed out vehicle subsidies in rural areas to spur demand.
Now, some retail tax cuts and vehicle subsidies to spur demand could be a harmless few percentage points here, a 0% APR or $1500 cash back there, but there is a slight possibility it could be quite a bit more drastic than that (especially in light of the strong political pressure to maintain the "all is well" message). The end message is: who really knows? Ultimately, this fails the sniff test. The "China bubble" theory is pretty well-established by this point even if the proponents have screamed themselves hoarse (your beloved correspondent included) as the SHFE runs a marathon with the bulls and this seems yet another data point to shake our heads at.
The other interesting message is that this growth in Chinese demand may have positive spillover effects into Western companies like Alcoa. Indeed, Alcoa CEO Klaus Kleinfield comments:
Alcoa, the largest U.S. aluminum producer, expects government stimulus spending in China and the U.S. to boost metal demand enough to help the company start generating cash again.
On this specific example, I would refer you to an excellent post by Macro Man who basically concludes that the better than expected news can mostly be attributed to aggressive cost cutting rather than any sustainable increase in revenue. The other alleged spillover industries are in similar straits so I won't belabor the point but suffice to say that GM is still not a good buy for the US taxpayer.
To be fair - there is a tremendous amount of latent demand in China. As the below graphic shows, Chinese demand has a long way to go before reaching an appropriate % of GDP (thanks to Brad Setser/Paul Swartz for the graphic).
However it's just too soon. This sort of macro shift cannot possibly be expected to happen in any given 3 month period and especially in the context of crappy ROW macro data (green shoots aside), it's tough to swallow. The long term story is definitely very bullish on China but only when the macro pieces are there - until then, it's a pretty tough pill.Sphere: Related Content
- What is good for the US apparently doesn't work for the UK: PIMCO refuses to buy BOE's gilts (Bloomberg) [Can PIMCO please be chosen to run a few TALF programs in the UK? Otherwise good luck having them bail out the BOE]
- And speaking of PIMCO, the "frequent flier miles accumulation facilitating" bond manager will not be in the PPIP: hopefully due to pressing conflicts of interest arising from participation in every other single alphabet soup ever created. (Bloomberg). All good though, Melissa Francis, whose only recent claim to fame has been to firmly prove that either she or Deutsche Bank's Chief Economist Joe Lavorgna has no clue what they talk about (If CNBC does not work out, Melissa can always teach Econ 101 at NYU), will be firmly represented in the PPIP camp, thanks to husband Wray Thorn who is a Managing Director at $6 billion Marathon Asset Management, which somehow managed to sneak in with such hundred billion + AUM behemoths as BlackRock. Does this mean Melissa will now need to provide a disclaimer every time she discusses the PPIP on CNBC; those Melissa-Wray dinner conversations must be scintillating - from the definition of inflation to taxpayer subsidized 14x leverage, the amount of data exchanged must need a SPARC computer to process (all you SPARC haters, this is tongue in cheek)
- One man's personal account of the UBS tax follies (Bruce Krasting)
- Chinese rioting subdued for now (Bloomberg)
- Even as Alcoa plays the China "depression recovery" joker (Bloomberg) [speaking of AA, $0.47 unadjusted loss, $0.26 adjusted, and 2009 EPS projections of $(0.80) at Q1 down to (1.03) currently. Beating increasing worse expectations by a thread on a $200 million top line beat is somehow supposed to indicate that the recession is over? Does anyone actually buy this garbage aside from Morningstar "analysts"? h/t Josh]
- And Chinese full scale intervention has resulted in a 48% jump in car sales. Oh yeah, and new loans have jumped five times since June. Can the world ever operate anymore witout a credit bubble somewhere? (Bloomberg)
- Miracle Gro for green shoots (Barron's, h/t IMA5U)
- And the one you've all been waiting for, he's baaaack (h/t Dave)
Wednesday, July 8, 2009
The powerful attack that overwhelmed computers at U.S. and South Korean government agencies for days was even broader than realized, also targeting the White House, the Pentagon and the New York Stock Exchange.
An early analysis of the malicious software used in the attack found its targets also included the National Security Agency, Homeland Security Department, State Department, the Nasdaq stock market and The Washington Post. Many of the organizations appeared to successfully blunt the sustained attacks.
The Associated Press obtained the target list from security experts analyzing the attack. It was not immediately clear who might be responsible or what their motives were.
The attack was remarkably successful. Some of the affected government Web sites -- such as the Treasury Department, Federal Trade Commission and Secret Service -- were still reporting problems days after it started during the July 4 holiday.
Obviously, especially as pertains to the capital markets, the greater the reliance on computer models and algos in our daily lives, the greater the risk that sooner or later someone will find a big gaping hole that the countermeasure experts haven't caught yet, and one can only imagine the possible abuse that would result. Visions of the Mac guy attempting to prevent a huge Firesale, however without Agent McLane at his side, emerge.
In other news, Morgan Stanley is hoping to take advantage of the short bus and irrational exuberance yet again, by repackaging a bunch of crappy loans into what will certainly be a doomed attempt at restarting the securitization bubble. From Bloomberg:
Morgan Stanley plans to repackage a downgraded collateralized debt obligation backed by leveraged loans into new securities with AAA ratings in the first transaction of its kind, said two people familiar with the sale.
Morgan Stanley is selling $87.1 million of securities that it expects to receive top AAA ratings and $42.9 million of notes graded Baa2, the second-lowest investment grade by Moody’s Investors Service, according to marketing documents obtained by Bloomberg News. The bonds were created from Greywolf CLO I Ltd., a CDO arranged in January 2007 by Goldman Sachs Group Inc. and managed by Greywolf apital Management LP, an investment firm based in Purchase, New York.
Not really much to say there: if investors into this "AAA" security are willing and eager to throw away their money, so be it. MS' persistence is impressive: if the offering is successful, expect the firm and other investment banks to take CDO^2 and repackage their "riskless" tranches into yet another conduit. While the paperwork is already likely in progress in the bowels of 1585 Broadway, the only question is what will this Frankensteinian aberration be named: CDO Quadratic sounds just a little better than CDO Square Squared. McKinsey is likely already providing its extensive appelation consulting skills... in exchange for a handsome fee. Probably the true name "Yet More Soon To Be Phenomenally Uber-Toxic Crap" has not surfaced quite yet.
Let's see what else - Meriwether has blown up his Nth hedge fund....the IMF keeps drinking the Kool Aid... and the market keeps going down. We now have a good 10% retracement from the highs. If Bob Pisani is right, this should be just the opportunity for all the quadrillions in cash on the sidelines to jump in. Many are not holding their breaths.
Lastly, and somewhat most peculiarly, Jean-Pierre Aguillard (together with his co-pilot), died in a freak glider accident over the weekend. Many have not heard of Aguilard: it may be surprising for people to learn that he is the French equivalent of Jim Simons, as his firm Capital Fund Management, with $2.7 billion in assets, is one of the largest French hedge funds and at the forefront of electronic and program trading. Curiously, CFM was in the news as recently as on April 22, 2009, CFM replaced its legacy market data distribution system with NYSE Technologies' Market Data Platform at its New York and Paris operations. In fact Automated Trader has quite an in depth article on what happened a mere two months ago in an article titled "Capital Fund Management selects NYSE Technologies for new electronic trading platform."
NYSE Technologies has announced that Capital Fund Management (CFM), the French private hedge fund, has licensed its high-speed real-time market data distribution and integration software.
CFM has replaced its legacy market data distribution system with NYSE Technologies' Market Data Platform at its New York and Paris operations. NYSE Technologies’ sub-millisecond feed handlers and high performance Middleware Agnostic Messaging API (MAMA) deliver data to CFM’s trading systems, which handle 100% of the firm’s order flow electronically.
Jacques Sauliere, Chief Operating Officer at CFM, commented, “Since we connect to all major US, European and Asian markets, NYSE Technologies was the clear choice considering the breadth of coverage available through its extensive range of feed handlers, its cutting-edge market data distribution platform and comprehensive value-added services.”
NYSE Technologie will provides CFM with connectivity to a mix of direct market data feeds including NYSE OpenBook, NYSE ARCA Options, NASDAQ ITCH and CME Multicast. This is complemented with connectivity to a vendor consolidated data feed. Sauliere explains, “The consolidated datafeed serves as a back-up, providing the optimal mix of resilience and coverage needed for CFM’s global trading operations.”
Sauliere adds, “During the implementation phase, NYSE Technologies provided us with the ability to work alongside our existing middleware vendor while we transitioned to our new low-latency platform. We were able to consolidate our use of APIs by using its middleware API and write all of our applications to MAMA with the ability to upgrade our middleware in line with technology advances.”
In addition, CFM also uses NYSE Technologies’ Data Access and Reporting Tools (DART) Entitlements to control user and application access to the market data feeds and report on unused or underused market data services. Other value-added services include performance monitoring and a real-time tick capture adapter that consumes data from any industry standard or ODBC database for post-processing of internal data.“CFM is a pioneer in the adoption of pure electronic trading systems generating value for their investors. Being trusted with their business in New York and Paris is something we’re extremely proud of and validates our strategy in serving the buy-side,” said Stanley Young, CEO of NYSE Technologies and Co-Global CIO of NYSE Euronext.
“CFM’s enterprise deployment firmly secures NYSE Technologies as the partner of choice for connectivity, transaction solutions and data management services at the world’s largest and most active trading firms and leading markets.” (highlights mine)
Zero Hedge extends its condolences to Aguilard's family. We, of course, hope that the fund's recent close entanglement with the NYSE for program trading facilitation and the loss of the fund's CEO are purely coincidental, especially in these difficult times for the integrity of program trading courtesy of Goldman Sachs' recently disclosed scandals.
hat tip Jeffrey and ewing2001 Sphere: Related Content
I have not seen as much activity from Goldman Sachs as I thought I would on
my little honey pot. This is all so far. Then again, this hasn’t even been up 24
126.96.36.199 2009-07-07 12:01:17
SEARCH ENGINE: Google (page: 1)*
KEYWORDS: Mr. Aleynikov strat
Other interesting visits:
Citadel Investment Group
188.8.131.52 2009-07-07 11:53:59
Referrer: Direct hit
InfoNgen is the first Discovery Engine for business, finance and information professionals that knows what’s critical to you. Extracts relevant and timely information buried on the web, within emails, in desktop documents or on network drives. Identifies trends and connections between topics, companies or products that might not otherwise be apparent. And delivers results in real time.
184.108.40.206 2009-07-07 05:12:58
Referrer: Direct hit
Batterymarch is a global equity specialist, investing in approximately 50 countries for clients around the world. Our unique quantitative strategies combine the power of technology with the wisdom of experienced fundamental investors.
220.127.116.11 2009-07-07 17:59:55
Referrer: Direct hit
18.104.22.168 2009-07-07 17:38:18
Referrer: Direct hit
22.214.171.124 2009-07-07 17:09:44
Referrer: From your blog
The Benefit Company
126.96.36.199 2009-07-07 16:20:15
Referrer: Direct hit
At ECBridge™, we know that information is the lifeblood of today’s business. Our experienced, international team helps clients plan, implement and manage innovative e-business solutions. We can help your firm gain competitive advantage, by extending the reach of your company’s information.
188.8.131.52 2009-07-07 16:12:14
Referrer: Direct hit
New York City Police Department
184.108.40.206 2009-07-07 12:49:12
Referrer: From your blog
City of Houston
220.127.116.11 2009-07-07 12:05:43
/?p=9712Referrer: From your blog
Note: U.S. Department of Homeland
Security is obsessed with this post, and with Cryptogon, today. There are at least a couple of DHS employees who read Cryptogon as a matter of routine, but the activity over the last 24 hours shows 10 visits, 43 page views from five different hosts/IPs:
Not sure how long Cryptogon will be able to keep this page up, so check it out while you can. And let other comparable games begin.
hat tip Dora Sphere: Related Content
My understanding is that Goldman Sachs realized that this was a problem based upon their review of those logs just a few days ago. The government was not contacted until Wednesday about this matter.
I think what Ms. Shroff is confusing is Goldman’s civil remedies, to the extent that it has any, and this criminal case. Maybe Goldman can go out and get whatever the German equivalent is of a TRO. But this is, in the government’s view, a crime that we have shown probable cause for, and therefore it is possible that the defendant may compound his crime and pose a danger to the community. And the bail statute allows the court to detain him if he is a danger.Shoff takes offense to this and makes the point that Goldman likely knew about the situation for over a month, delaying, for unknown reason, until striking when it did. Some derivative conspiracy theories could be derived from this. But in a nutshell, the math, according to the sworn testimony by the U.S. Attorney, is that it took less than 48 hours between Goldman realizing it had been compromised (on Wednesday) and the FBI arresting Sergey at Newark (on Friday).
And here is what seems to be the challenge for all hackers out there:
THE COURT: Well, what makes you think that it hasn’t already been transferred since you do now know whether other people have access to the Germany server? It’s already compromised, so the financial institution has to take steps now if you’ve made it aware of the compromise to adjust for the loss of its trading platform.So in a nutshell, here is Goldman's manifesto: Yesterday - Program Trading, Today - Germany, Tomorrow - The World.
MR. FACCIPONTE: Your Honor is correct. I could’ve been disseminated in this time. It does not mean, however, that if it has not been disseminated we should not take steps to prevent the defendant from disseminating information if it is not already out there.
THE COURT: If as you say, the material is on the server in Germany, if anyone can access the material through that server, that is to say it is not only the defendant who can access it; he might be able to provide other persons with information that would allow them to access it, if that’s so, then what difference does it make whether he’s detained or not if he can communicate that information?
MR. FACCIPONTE: Right now our understanding is that the server can only be accessed by someone who has his user name and password.
THE COURT: Who has what, sir?
MR. FACCIPONTE: His user name and password.
THE COURT: Okay. So if he gives that to you, you can access that, isn’t that correct?
MR. FACCIPONTE: That is correct, Your Honor.
THE COURT: So whether he’s detained or not doesn’t him from communicating that information to you or anyone else. And therefore the server could be accessed and the financial institutions and the markets compromised as you have described.
MR. FACCIPONTE: It would certainly be more difficult, Your Honor. And I don’t believe the public ought to bear the burden or the risk of that coming to past. In addition --
THE COURT: But if he’s detained, what prevents him from communicating the information? That’s what I don’t understand.
MR. FACCIPONTE: It would be a lot harder. He would have to at the very least enlist and accomplice.
THE COURT: Okay.
MR. FACCIPONTE: Which people may not want to be accomplices. [TD: not so sure about that one]
THE COURT: That’s true whether he’s detained or at liberty.
MR. FACCIPONTE: Okay. But if he’s at liberty he would not necessarily -- he would not need an accomplice. He could just pass it on to another server somewhere.
THE COURT: He may already have accomplices who may have the information that can access the server in Germany. Whether he’s detained or not, I still don’t understand why being detained means the information can’t be disseminated to access the server.
MR. FACCIPONTE: Because the server -- if the server had been in the United States, Your Honor, we would already be preparing process to free --
THE COURT: But it’s not.
MR. FACCIPONTE: The government needs a few days, given the holiday weekend, it would be difficult to do that. But the government needs a few days to consult with German authorities to take the steps to freeze that server.
So if the court is not prepared to detain the defendant on a general showing, the government would at least ask that the defendant be detained until such time as they can secure the server, which we are moving to do even as we speak now.
THE COURT: I still don’t understand why detaining him prevents him from communicating information so that someone can access the server. If you make that clear to me, then I understand more acutely why you’re arguing that he should be detained.
MR. FACCIPONTE: Well, he would --
THE COURT: If it just makes it difficult, lots of things are difficult, but not impossible.
MR. FACCIPONTE: If he were detained now, for example, I don’t believe he would have immediate access to telephone privileges at the NCC or MDC. I believe it takes days to set those accounts up. He would have to tell somebody physically. I don’t believe anybody would -- he would have to enlist a co-conspirator right now.
And I think when you weigh the probability of him engaging in that behavior and being able to pull that together, first is the potential risk of just letting him go, I believe he ought to be detained. Because he still has more burdens in prison to disseminate his information than he does if he’s out in the street.
So if he’s out in the street, he just needs access to a cell phone. In prison, he needs to get access to a phone which is not a right if he is detained. He would need to write a letter. A letter takes several days to get to where it needs to go.
In the meantime, we would have -- we would very likely have the server locked down at that point in time.
hat tip Reuters Sphere: Related Content