Thursday, August 26, 2010

Flash Crash--Fines imminent

The Financial Industry Regulatory Authority (FINRA) announced that they may impose fines on broker-dealers in response to the May 6, 2010 ‘flash crash’. The reason for the fine is stated as a failure to have proper risk-management control over firms they allow direct or sponsored access to the markets.

I was intrigued by these reports, primarily because there was no announcement on the FINRA website (that I was able to locate). I was also intrigued because the language was so vague and confusing. It seemed to me impossible that the broker-dealers (BD’s) did not know WHO they had given access to. Moreover, the flash crash has, from the beginning, been attributed to high-frequency, or computer/algorithmic trading, which to my knowledge does not violate any FINRA or NASDQ rules. It all seemed like more gobbledee-gook from the policy-wonks so I did a little looking into the rules. It produced some mildly interesting information.

In January of this year, the SEC in the US approved a NASDAQ stock market rule change to Nasdaq Rule 4611. This rule governs electronic access to the Exchange’s order execution system. Basically it is designed to ensure that participants in the Nasdaq Market Center are all knowable, monitored and that those giving access are responsible for those they give access too. Ultimately, the SEC is concerned with the protection from systemic risk and integrity of the marketplace. OR they are seeking additional fees in some way.

Participation in the Nasdaq Market Center is limited to Nasdaq market makers, Nasdaq ECN or Order Entry Firm with current registration with Nasdaq. Such participants are permitted to allow access to the Trading Center-Nasdaq or otherwise-to other firms or persons by allowing use of the member firms market participant identifier (MPID). Access is provided through a Sponsored Access System or a Member System. The first allows access directly to the markets while the latter filters orders through the member’s system first and then to the market. NASDAQ Rule 4611(d)(1-5) requires this arrangement to be supported by member firm supervision and monitoring to ensure that all users comply with federal securities laws and Exchange rules. The new rule does not become effective until January 2011.

This rule change approval came together with an SEC rule proposal. Proposed rule 15c3-5 would also require brokers providing access to the market to create financial risk management controls to prevent order entry exceeding credit limits, establish, document and maintain a system for reviewing the effectiveness of risk management controls among others. High-frequency traders may be the target of these new rules but the broad effect is to increase transparency full stop.

Currently, some market participants are able to access the exchanges and alternative trading systems (ATSs) without pre-trade risk assessments and no visibility to regulators or sponsoring firms. The new rules require these firms to be subject to self-regulatory organization regulations.

On the other hand, while transparency is good there is the argument that HFT’s provide much needed liquidity. Also, these new rules with be have a cost to implement. Some firms who made comments during the rule proposal period suggested that the rule be tested for several years before it is formally adopted.

There are several other interesting nuances to these rules regarding ATS’s and the like. I do not have time to learn about them just yet. I think the new rules and the regulators attempts to get on top of HFT’s is needed. HFT’s account for at least 40% of the daily volume of equities traded in the U.S markets and most likely much more than that on any given trading day. They are a significant market participant and should be understood and regulated…but not killed.

Monday, August 23, 2010

Query: How many hoops must I jump through?

I have been very fortunate to be able to work on my doctoral thesis because I love the topic. It has not gotten old and QM has been pretty good to me overall. I have met some interesting and boring people on my journey so far (mostly interesting). I have had so many adventures and not just because the topic is Africa and I travel there. Sometimes Holborn and Mile End can each be a wonderful adventure in their own special way. But my query is this...we all jump through hoops in life but when do we get to say enough is enough?

I love QM hoops. I could go through them all day long. I have served time in a long-term relationship so I understand those hoops. Also, I still do the Mommy hoops (with pleasure). But American Academic Journal hoops--when it really, really, really seems to me that they are just yanking my chain?? I am about to pull the plug.

I have had an article sitting and waiting to get published--so I thought. I was wondering why I had not heard from the Journal since the end of May when I sent my FINAL copy...stating that "....this was my final copy and further edits will just prove to me that this article does not fit with this journal and someone there should admit that and stop torturing me...." Well, I said as much. I did actually.

Alas, I JUST opened the email that said, "Here are the new revisions and after those, there will be a final edit." I know the wise thing would be to consider these revisions and not blog about my blood pressure....but, the blood pressure won out.

WT-frekin-F???? I saw red. And not like cherry red or strawberry red, but, like, actual blood red. I had to control myself when replying. I wanted to say something really bad, but they are just law students....and clearly so much smarter than I (or is it smarter than me).

The problem is, I just don't think my writing sucks quite that much. So there is someone who thinks this article could be "better" or "more." Honestly, upon reading it there are some sections that have been so over-edited they no longer even sound like me. I do not actually think this is an ego issue. I think that I had something to say and it has been so edited out I almost feel like the 'right' thing to do is kill it. That way my name will never be associated with it...because I am not sure what it is anymore. (see, Aliens 3 with Sigourney Weaver--cloning the Alien DNA with did not turn out well...!!!)

I understand hoop-jumping, I am female after all. We were born to jump the hoops. I excel at jumping hoops. But there has to be a purpose--a real reason that makes sense, at least to me. But this feels like hoop-jumping, for hoop-jumpings sake with very little benefit to me.

QUERY: When is it the time to say, "Take your Hoop and shove it???"

Thursday, August 19, 2010

SADC Heads of State Summit and 30 year Anniversary

SADC Heads of State meeting in Windhoek, Namibia postponed confronting Zimbabwe about non-compliance with the Tribunal’s ruling on land-reform for 6 months. Effectively, the decision is postponed until the next Summit meeting in 2011. In the meantime, the role of the SADC Tribunal will be reviewed.

The White farmers claimed that this is politics winning over justice. The entire situation is political however. Even the organization is political by its very nature but also specifically for historical reasons. SADC was previously the Front Line States, which was organised to coordinate liberation movements in Namibia and apartheid South Africa. August 17, 2010 was SADC Day and the Summit also celebrated the organisations 30th anniversary. Given that heritage it is could be considered amazing progress that the SADC Tribunal rendered the judgment it did in 2008, declaring the land reform program in Zimbabwe discriminatory based on race.

Furthermore, the Summit was an opportunity to recognise everything that has been accomplished by SADC in those 30 years. I do not have the time or inclination right now to gather the empirical evidence necessary (even if that evidence were available at all) to prove or disprove the accomplishments of SADC since its creation. Perhaps it was only ever effective as support for the liberation struggle. Perhaps 30 years is not actually enough time in ‘Africa time’. Perhaps the entire problem NOW with how the West views Southern Africa or sub-Saharan Africa is that both function at different speeds. Africa is making progress but it is not in a New York minute and the West may feel that an intervention of some kind will help to improve the velocity of the progress. But it doesn’t seem to work out like that. Instead, progress continues to be slow or slower and instead the West has intervened and created the industry of intervention called the donors and aid agencies. This industry is now a source of income for locals and not much progress happens. But the news and reports out of SADC are very positive, regardless.

SADC reported that HIV/Aids were on the decline in the region. It reported that there is peace and stability. SADC spent time during the Summit considering the situation in Madagascar and supported the call for the international community to stop the debilitating sanctions on Zimbabwe which have caused so much havoc for the economy. (tee hee) But still, SADC is trying to focus on attracting investment and this does seem to be the proper focus for our globalised economy …yada yada.

So everything is actually in order and how much should we really worry that the Tribunal is not respected in the region? The proper functioning of the SADC Tribunal may not really be a priority for anyone other than the White farmers……

Unfortunately, for those who think the Tribunal is not a priority there is a reality that can be observed which is demonstrated by the lack of certainty created when court rulings are discounted. Maybe courts are a neoliberal construction by the West , I don’t know.

I do know that a complete lack of certainty is bad whether it is legal, economic or social. As I have said before, fine don’t have a working legal system or a functioning government but at least get the women and children educated and healthy. Keep things simple and see if things improve.

I would love to see the Tribunal become a priority because it was not White judges who ruled against Zimbabwe and international sanctions don’t hurt anyone except the elite. I think all aid should stop and let things develop without intervention. But that can never be the reality either.

So, I am disappointed with the postponement of the discussion about the Tribunal. And, I am endeavouring to see things in the long term. Perhaps the SADC nations need 6 months to sort out that whole Tribunal protocol thing and in the meantime the judgments in South Africa allow the Zim properties there to be levied.

I think about my life, my PhD, my son and Africa and remember the Norah Jones song Broken,

“He's got a broken voice and a twisted smile,
Guess he's been that way now for quite awhile,
He's got blood on his shoes and mud on his brim,
Did he do it to himself or was it done to him?

He may move slow,
That don't mean he's going nowhere,
He may be moving slow,
That don't mean he's going nowhere.”,69a980f8-fe32-4677-ba8d-df27fc83f686.html

Wednesday, August 11, 2010

Kissing and Making up

As with a lover who is eventually forgiven for transgressions real or imagined, I spent last week flying all over the place on British Airways. I had previously sworn never to fly on BA following a rather dramatic serious of miscalculations in Nigeria in 2009. On my most recent trip to Africa, I committed several (more) very blonde-headed blunders with my booked flights. BA was there to save the day. They even upgraded me on one leg of my journey….how can I stay mad after sparkling wine followed by a delicious cheese plate before being served a full lunch, all on a flight that only lasted 1.5 hours?? My layover with BA in Joburg was tolerable but I was scolded once I got back to California for not purchasing a vuvuzela!! Where was my head?

During my visit last week to Southern Africa, I read in the paper that the Director General (DG) of the Nigerian Stock Exchange (NSE), Professor Ndi Okereke-Onyiu-ke, had been sacked for financial misappropriation. This was fascinating in and of itself, but equally because the African Stock Exchange Association meeting was just held in Abuja, Nigeria and the DG was visible everywhere.

There had been an ongoing dispute between the NSE President, Alhaji Aliko Dangote and the madam DG. The election of Mr. Dangote was nullified by a court (the details of this I do not have) and he responded with a petition to the SEC of Nigeria claiming that the madam DG had misappropriated NSE funds bringing the exchange to near bankruptcy. Mr. Dangote stepped down as NSE President in to the position of Vice-President pending the resolution of the various suits.

The SEC of Nigeria appointed an interim CEO of the exchange. It also appointed a law firm and accounting firm, KPMG, to investigate the allegations of financial mismanagement at the NSE. The investigations will focus on the oversight of the NSE by the Council of the Exchange.

In a related matter, the SEC of Nigeria announced on 10 August that it will arraign 260 persons and entities connected with a price manipulation and insider dealing on the NSE. The SEC will bring the matter before the Investment and Securities Tribunal (IST). I do not know much about theat tribunal but will try to learn more and share it here.

The madam DG is contesting the allegations against her. She was set to retire in December of this year.

It is all very interesting but I am not really sure what we learn from all of this. It seems to me that the function of an SEC in Africa is very different than its counterpart on the more established exchanges. The SEC in Africa is almost like an appendage that works infrequently but does a great deal of damage when it is put to use. This is not a criticism of African exchanges. Rather it is scepticism at the donor’s insistence on this appearance of governance without real governance. Simply establishing an SEC does very little and it might in fact encourage a kind of malfeasance.

I am increasingly of the opinion that exchanges should do all of their own policing in many African countries. At least exchanges have a self-preservation motivation. I will think a bit more about this.