JP Morgan: "High Frequency Predator Traders Feast Upon The Signals Of Others"

When JP Morgan discusses high frequency trading, people listen. When the head of JP Morgan's algorithmic product desk Carl Carries says that high frequency trading is merely a form of parastic market making, people should run for the hills (not in the least due to JP Morgan's proficiency in transforming theory to practice especially as it pertains to various daily trading patterns in the SPY).

"The print that a Dark Pool leaves in its wake does not signal an aggressive buyer or seller as would a sweep, so the information leakage is reduced accordingly. Reduction of information leakage minimizes adverse price movement created by predators like high frequency traders who feast upon the signals of others."

And a few more questions to add to the ever increasing roster of queries for the NYSE (Mr. Pellecchia- maybe the time has come to provide at least some answers?): some dark pools have banned use of third party algorithms in accessing them in order to prevent harm to their institutional clients. Why is this good for dark pools, but not NYSE?

Trader Magazine reports Pipeline Trading banned third party algo's from accessing its dark pool. http://www.securitiesindustry.com/news/-23514-1.html "Algorithm Switching Engine was introduced in October 2007, six months after Pipeline Trading banned third-party algorithms from accessing its own electronic block trading market.... Pipeline claims to be more effective than competitors in finding block matches because of its 50,000-share average execution size; large block orders are executed automatically without the possibility of sniffing out institutional interest with a small probing order."

Trader Magazine reports that ITG has banned third party algo's from accessing its dark pool POSIT. http://www.tradersmagazine.com/issues/20_275/100083-1.html "Investment Technology Group, for the second time, has banned broker-dealers from accessing its POSIT crossing system via algorithms.... ITG chief executive and president Robert Gasser told analysts on the day of the decision that 'third-party dark aggregation has not been beneficial to our institutional POSIT constituency.'... Heckman told Traders Magazine that some brokers offering customers algorithmic access to POSIT appeared to give preference to their own or other liquidity through the algos. He said that adversely impacted the order flow POSIT received."

hat tip Richard

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Washington Mutual Sues JPMorgan To Recover $4 Billion In Deposits

WaMu has had enough and has filed a suit against JPM, trying to recover its $4 billion in deposits. WaMu, claims the money is being held by its former subsidiary, Washington Mutual Bank, which JPMorgan bought for $1.9 billion last year (not a bad deal if we may say so ourselves: you buy $1 for less than 50 cents on the dollar, with the FDIC guaranteeing any potential losses on the transaction). Seattle-based Washington Mutual has been trying to recover the money since filing for bankruptcy in September.

“JPMC has no basis to withhold the debtors’ funds and the funds are accruing interest at a rate significantly less than what the Debtors’ estates would otherwise be earning,” Washington Mutual said in the court filing attached below.

JPMorgan has declined to return the money, saying it may have a claim on the funds itself and that it cannot give Washington Mutual the money without receiving a so-called set-off right from the bankruptcy court, according to court papers filed by WaMu. The set-off would ensure JPMorgan is paid for any claims it has against WaMu.

Not only that, but the stealthy Sheila Bair has said it also may have a claim on the cash, at the expense of WaMu bondholders, who state that the withdrawal would be unfair without forcing WaMy to prove it owns the cash.

Bondholders have our sincerest sympathies and condolences.

(Check out page 24, not a bad balance to see in your bank statement).

Publish at Scribd or explore others:

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WaMu Credit Card Excess Spread Collapses

Some more credit card calamities compliments of Bond View. Unprecedented lows for Washington Mutual's credit card master trust excess spread: a collapse from 4.44% to 1.12% in 1 month, while the loss rate has ballooned to record levels.

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Exclusive: AIG Was Responsible For The Banks' January & February Profitability

Zero Hedge is rarely speechless, but after receiving this email from a correlation desk trader, we simply had to hold a moment of silence for the phenomenal scam that continues unabated in the financial markets, and now has the full oversight and blessing of the U.S. government, which in turns keeps on duping U.S. taxpayers into believing everything is good.

I present the insider perspective of trader Lou (who wishes to remain anonymous) in its entirety:

"AIG-FP accumulated thousands of trades over the years, all essentially consisted of selling default protection. This was done via a number of structures with really only one criteria - rated at least AA- (if it fit these criteria all OK - as far as I could tell credit assessment was completely outsourced to the rating agencies).

Main products they took on were always levered credit risk, credit-linked notes (collateral and CDS both had to be at least AA-, no joint probability stuff) and AAA or super senior portfolio swaps. Portfolio swaps were either corporate synthetic CDO or asset backed, effectively sub-prime wraps (as per news stories regarding GS and DB).

Credit linked notes are done through single-name CDS desks and a cash desk (for the note collateral) and the portfolio swaps are done through the correlation desk. These trades were done is almost every jurisdiction - wherever AIG had an office they had IB salespeople covering them.

Correlation desks just back their risk out via the single names desks - the correlation desk manages the delta/gamma according to their correlation model. So correlation desks carry model risk but very little market risk.

I was mostly involved in the corporate synthetic CDO side.

During Jan/Feb AIG would call up and just ask for complete unwind prices from the credit desk in the relevant jurisdiction. These were not single deal unwinds as are typically more price transparent - these were whole portfolio unwinds. The size of these unwinds were enormous, the quotes I have heard were "we have never done as big or as profitable trades - ever".

As these trades are unwound, the correlation desk needs to unwind the single name risk through the single name desks - effectively the AIG-FP unwinds caused massive single name protection buying. This caused single name credit to massively underperform equities - run a chart from say last September to current of say S&P 500 and Itraxx - credit has underperformed massively. This is largely due to AIG-FP unwinds.

I can only guess/extrapolate what sort of PnL this put into the major global banks (both correlation and single names desks) during this period. Allowing for significant reserve release and trade PnL, I think for the big correlation players this could have easily been US$1-2bn per bank in this period."

For those to whom this is merely a lot of mumbo-jumbo, let me explain in layman's terms:
AIG, knowing it would need to ask for much more capital from the Treasury imminently, decided to throw in the towel, and gifted major bank counter-parties with trades which were egregiously profitable to the banks, and even more egregiously money losing to the U.S. taxpayers, who had to dump more and more cash into AIG, without having the U.S. Treasury Secretary Tim Geithner disclose the real extent of this, for lack of a better word, fraudulent scam.

In simple terms think of it as an auto dealer, which knows that U.S. taxpayers will provide for an infinite amount of money to fund its ongoing sales of horrendous vehicles (think Pontiac Azteks): the company decides to sell all the cars currently in contract, to lessors at far below the amortized market value, thereby generating huge profits for these lessors, as these turn around and sell the cars at a major profit, funded exclusively by U.S. taxpayers (readers should feel free to provide more gripping allegories).

What this all means is that the statements by major banks, i.e. JPM, Citi, and BofA, regarding abnormal profitability in January and February were true, however these profits were a) one-time in nature due to wholesale unwinds of AIG portfolios, b) entirely at the expense of AIG, and thus taxpayers, c) executed with Tim Geithner's (and thus the administration's) full knowledge and intent, d) were basically a transfer of money from taxpayers to banks (in yet another form) using AIG as an intermediary.

For banks to proclaim their profitability in January and February is about as close to criminal hypocrisy as is possible. And again, the taxpayers fund this "one time profit", which causes a market rally, thus allowing the banks to promptly turn around and start selling more expensive equity (soon coming to a prospectus near you), also funded by taxpayers' money flows into the market. If the administration is truly aware of all these events (and if Zero Hedge knows about it, it is safe to say Tim Geithner also got the memo), then the potential fallout would be staggering once this information makes the light of day.

And the conspiracy thickens.

Thanks to an intrepid reader who pointed this out, a month ago ISDA published an amended close out protocol. This protocol would allow non-market close outs, i.e. CDS trade crosses that were not alligned with market bid/offers.

The purpose of the Protocol is to permit parties to agree upfront that in the event of a counterparty default, they will use Close-Out Amount valuation methodology to value trades. Close-Out Amount valuation, which was introduced in the 2002 ISDA Master Agreement, differs from the Market Quotation approach in that it allows participants more flexibility in valuation where market quotations may be difficult to obtain.

Of course ISDA made it seem that it was doing a favor to industry participants, very likely dictating under the gun.

Industry participants observed the significant benefits of the Close-Out Amount approach following the default of Lehman Brothers. In launching the Close-Out Amount Protocol, ISDA is facilitating amendment of existing 1992 ISDA Master Agreements by replacing Market Quotation and, if elected, Loss with the Close-Out Amount approach.

"This is yet another example of ISDA helping the industry to coalesce around more efficient and effective practices, while maintaining flexibility," said Robert Pickel, Executive Director and Chief Executive Officer, ISDA. "The Protocol permits parties to value trades in the way that is most appropriate, which greatly enhances smooth functioning of the market in testing circumstances."

And, lo and behold, on the list of adhering parties, AIG takes front and center stage (together with several other parties that probably deserve the microscope treatment).

So - in simple terms, ISDA, which is the only effective supervisor of the Over The Counter CDS market, is giving its blessing for trades to occur (cross) below where there is a realistic market bid, or higher than the offer. In traditional equity markets this is a highly illegal practice. ISDA is allowing retrospective arbitrary trades to have occurred at whatever price any two parties agree on, so long as the very vague necessary and sufficient condition of "market quotations may be difficult to obtain" is met. As anyone who follows CDS trading knows, this can be extrapolated to virtually any specific single-name, index or structured product easily. In essence ISDA gave its blessing for below the radar fund transfers of questionable legality. The curious timing of this decision and the alleged abuse of CDS transaction marks by and among AIG and the big banks, is striking to say the least.

This wholesale manipulation of markets, investors and taxpayers has gone on long enough.

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Is FDIC's Plan To Prop Up DIF In Jeopardy?

In a stark demonstration of how U.S. banks can potentially circumvent the FDIC's TLGP program and the agency's hopes of raising DIF reserves by charging new and higher fees, JP Morgan today successfully raised 2 billion euros in 5 year unsecured paper. The bonds priced at 375 over LIBOR. This was only the first debt issue for a U.S. bank outside of the TLGP program since the Lehman default in September, and a third for financial issuers, with the only other two examples being GS' 10 year bond pricing January 29 and a 30 year GECC bond pricing January 6, both due to term-paper demand. The JPM note, however, was not based on term demand as it only 1.25 years longer than the current overriding TLGP ultimate guarantee maturity of December 31, 2012.

As a reference point, JPM's 2.2% notes of June 2012 trade at LIBOR + 23.75. When one factors the 100 bps FDIC fee, the total cost to an issuer for identically comparable TLGP debt would come to 124 bps. The implication is that JPM is willing to pay 251 bps of additional interest to a) extend the maturity by less than 2 years and b) gradually shift away from having its new capital issues done under the TLGP, and thus the government's (with its populist constituency) umbrella.

As Zero Hedge had earlier speculated, the incremental costs associated with the TLGP program will make seeking alternative avenues to FDIC-backed issues much more attractive, especially in the eurodollar market. Furthermore, as next up on every bank's agenda is putting as much space between itself (as a private enterprise) and the government (just look at recent headlines disclosing the desire of banks such as GS and BAC to repay TARP as soon as possible), the refinancing of TLGP issues with unsecured paper will become the next prerogative, especially since the market seems to have forgotten that just a month ago the prevailing paradigm was that unsecured debt would see 25% haircuts.

This may have the unintended consequence of dramatically reducing the projected fees the FDIC had hoped to generate, as banks cease utilizing the TLGP for new capital raises. Ironically, by making the banking sector (seem) healthier, the administration has lost one of the major cash funding mechanisms for the replenishment of the Deposit Insurance Fund, putting the FDIC even more in bed with the Treasury, to whose dollar printing presses it will now have to look as the primary source of cash funding. Sphere: Related Content

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Is JP Morgan Buying A Private Jet Hangar?

Not if you believe Reuters, but where there is smoke there is usually fire. According to an earlier report by ABC News, the house of Dimon was fully intent on shaming Vik's Cititanic and his meager attempt to buy one lowly Dassault Falcon, by purchasing not only two Gulfstream 650 jets but also a hangar in which to house these new acquisitions at Westchester airport! The total cost: $138 million. JPM spokesman Joseph Evangelisti firmly denied that this was going to happen... at least until JP Morgan repaid all TARP funding. At that point, JPM will fully exploit its brand new garage space and load up on those 2 for 1 specials that Textron and all other desperate jet makers are clinging to these days.

Good to know whatever bankers remain at JPM will not only not have to take the tunnel to Tetterboro, but have two brand spanking new jets waiting to cart them off to the zero remaining corporate clients they have left. Sphere: Related Content

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Idiot Sends 65 "Anthrax" Letters To JPMorgan

In a page right out of the post Sept.11 anthrax scare, a disgruntled 47 year old New Mexican, Richard Leon Goyette, allegedly mailed out 64 letters to JP Morgan which contained a white powder and text claiming anyone who inhaled the powder would die within 10 days. Additionally the sender sent a personal love letter to Jamie Dimon which contained no powder, but instead warned of a "McVeighing" of the bank's Park avenue headquarters.

While the case is still developing, Goyette seems to have an old bone to pick with JPM after he lost $63,000 he had invested in WaMu and which as everyone knows was plucked out of liquidation by JPM.

If convicted the wannabe terrorist faces 330 years in jail and fines totalling $16.25 million.

Which brings us to Chris Flowers, whose $1.3 billion investment in WaMu is exactly 20,000 bigger than Goyette's. One would presume that based on Richard's insane logic, Flowers is somewhere right now printing out 1,300,000 enveloped labels and depositing sawdust, or alternatively preparing a massive CDS bear raid from somewhere deep in the bowels of the 48th and park intersection. Of course Flowers is doing neither, as he is currently broke, after constantly trying to time the bottom in financials only to soon realize it is actually at $0. Sphere: Related Content

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More Bank Bashing Fodder

When the execs of the biggest banks came to congress two weeks ago to be on the wrong end of some populist lynching, one of the questions asked was how much money had the banks earned by collecting underwriting fees by issuing FDIC-backed bank bonds, i.e. debt in which there is no risk. Intuitively this is a great question, as underwriters collect fees only when there is exposure risk, essentially they are paid to find buyers for a risky issue in which they are the primary purchasers. If there is no implicit risk, as in when they are issuing government backed debt and the bank is merely a pass thru of a government guarantee, it is mindboggling that banks should be compensated for this form of "underwriting."

The FT has done some investigative journalism into this topic. Turns out banks have pocketed nearly $1 billion in underwriting fees from placing government-backed debt. While European banks charge 0.15% on FDIC guaranteed bank bonds, their US counterparts demand twice as much or 0.3%. While at first glance this is a mere fraction of the fees that banks demand to issue Investment Grade and High Yield bonds, at 1% and 3% respectively, the numbers quickly start to add up when one considers the total size of the FDIC backed market. Morgan Stanley estimates that $634 billion worth of new bonds could be sold this year using European government guarantees. The situation in the US is likely comparable, implying over $1 trillion in FDIC debt is poised to come to market. If one assumes a blended 0.2% fee on this new debt, banks are set to pocket over $2 billion in fees for something which one can argue they should receive no fees for whatsoever, for two reasons: i) without these FDIC backed instruments, banks would likely not function at all as they would have no way to access the capital markets by traditional means and ii) the fees are going straight from the taxpayers' pockets to pad for bonuses for bond traders and salespeople in TARP-recipient banks, who are the largest underwriters of FDIC guaranteed bonds. Granted, the government does take a small portion off the top from banks selling guaranteed bonds, but it is nominal compared to the total potential and actual revenue stream.

The biggest abuser of this loophole is easily JP Morgan, which not only charges an arm and a leg for FDIC issuance, but also pockets fees for bonds that it itself issues! If there was ever a massive conflict of interest, this is it: apparently, the house of Dimon shared $123 million in fees with underwriters for raising $30 billion in debt. But as one bond banker said, the FDIC-backed asset class has become "one of the best fee-earners" for banks in recent months. It is likely that TARP recipients will fight tooth and nail from losing this one last remaining source of revenue against the worst underwriting and advisory investment banking climate of all time. Sphere: Related Content

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ISDA Open Sources CDS Model, Issues Challenge To White Hats Everywhere

In a historic event that went largely unnoticed, last night ISDA disclosed it is open sourcing JP Morgan's legendary CDS Standard Model which it got ownerships of on January 29, thereby issuing a challenge to the global community of financial white hats to decompile the code and figure out just what the voodoo is the wizards in JP Morgan's Quantitative Research group have put together over the ages.

The premise for open sourcing is "is to enhance transparency and to optimize use of standard technology for CDS pricing, thereby helping promote the development of the credit derivatives industry as a whole. We are very pleased to be able to provide this service freely to the entire industry." This occurs on the back of the decision to appoint Markit as administrator of the code, several weeks ahead of the March 20 transition of CDS trading as a standardized contract (i.e. pts upfront on every trade). ISDA has announced it will also disclose model inputs such as recovery value and yield curves in due course. Curiously, ISDA will also launch an "online discussion form, which will provide for community input."

That last bit should make people very, very nervous. ISDA is in effect disclosing the CDS model is imperfect, and likely has inaccuracies and inefficiencies. That would make sense: after all it was initially the rushed product of a few finance/math Ph.D. who with the input of a few credit traders had to cobble up something that they could use to give to accounts, who would in turn use it to trade CDS and pay JPM the bid/offer spread. Over time, overcaffeinated analysts had to make adjustments on the fly, likely with no second set of eyes supervising, due to the escalating complexity of the code. And as any first year IBanking analyst knows, taking a complex model and layering more complexity to it increases the likelihood of terminal errors in output delivery to a near certainty.

So white hats the world over are (or if they are not, should be) decompiling the code and trying to find where JPM goofed, in order to claim a stake in the financial hacker pantheon. After all the incentive to do so is huge - the most recent indication of the total gross notional size of CDS outstanding was roughly $25 trillion. Discovering an error that would lead to even a 1% mistake in CDS model output would imply a $250 billion correction to global P&Ls! And being all too aware of subconscious optimism bias, it is likely that the mistake will not be in the P category.

All those who can't wait to start going thru the code line by line can find it here.

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JP Morgan Cuts Dividend To $0.05, Provides Update on "Fortress" Balance Sheet

Previous dividend $0.38. Gives some amusing arguments about why dividend is getting whacked.

Also lots of chatter about JPM's "fortress balance sheet." Ahem, shorters are already crossing the moats.

Amusing highlights from investor presentation just posted on JPM's website:

• Given highly uncertain environment, we are acting with an abundance of caution in reducing quarterly dividend to $0.05 per share;


• For 1Q09 QTD, the Firm is solidly profitable, even after significant additions to reserves;


• Continue to feel great about future prospects of Company;


• Even in this highly stressed environment we would maintain our fortress balance sheet and continue to invest in our businesses;

And more such fluff. Full presentation below:


JP Morgan Presentation - Free Legal Forms

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