The Evolving Exchange System

Georgetown's Angel credits the quality of the market trading systems, which were able to process 5 billion shares in a single day. "One of the great advantages of having multiple competing exchanges is it forces them to be on their toes to be able to handle volume when it comes in, or else they'll lose market share to their competitors."

In looking at other "bad market days," when the 30-stock Dow Jones industrial average is down 2% or more, dating back to October, 2002, Birinyi Associates found that trading volume topped the 50-day moving average only half of the time.

Chris Johnson, chief investment strategist with Johnson Research Group in Cincinnati, says he's not surprised by how few record-breaking-volume days there have been in recent years. That's because of the range of alternative trading venues that people have migrated to, siphoning off volume that previously would have been on the major exchanges.

Dark Pools Muddy the Waters

Big institutional players like brokerages, for example, that don't want to disclose their trades prefer to make a market for each other's bids and asks through internal networks known as dark pools. Johnson doesn't know how volume of trades done through dark pools compares with volume on the open market.
"A lot of institutional money is going through these dark pools. With hedge fund activity, dark pool activity has grown significantly," he says. "Hedge funds don't want to reveal trading strategies or holdings. If you're operating through the open market, that information can be pieced together."
No matter how the trades are done, if volatility stays strong as some experts predict, the major exchanges should benefit.

Survey of market risk trading.(

RMA surveyed 45 global institutions to capture the environment for market trading activities and counterparty credit risk. Participants related how their institutions approach organizational structure, data collection, measurement techniques and methodologies, valuation practices, scenario analysis, limits setting and reporting, actual risk measurement results, and capital allocation. Information gathered on counterparty risk include methodology, credit standards, netting, derivatives trading supported by collateral, derivatives trading with re-couponing, early-termination clauses, repo trading, and credit risk IT structure and architecture. The complete results of the survey were sent to the participants.

During the spring of 2006, RMA's Market Risk Council conducted RMA's first Trading Activities and Counterparty Risks Survey to determine the current state of practice and planned developments. The survey is part of an ongoing, long-term RMA effort to identify best practices and provide an ongoing benchmark to help RMA member institutions understand market risk. Forty-five large institutions based in North America, Europe, Australia and Asia participated in the Web-based survey, which resulted in a 330-page final report. Specifically, the study was designed to provide:

1. A benchmark by which participants can review the best practices of trading activities and counterparty risks.

2. A better picture of how institutions use technology to measure and monitor risk.

3. An aid to member institutions as they assess of the state of trading activities and counterparty risk metrics.

4. The basis for further exchange of information.

Market Risk Trading Activities

Information on market risk trading activities obtained from participants encompassed organizational structure, data collection, measurement techniques and methodologies, valuation practices, scenario analysis, limits setting and reporting, institutions' actual risk measurement results, and capital allocation.

Auto-Finance Bonds Thriving

The auto sector in the corporate bond market got a lift after Cerberus Capital Management L.P. said it planned to take an 80.1% stake in Chrysler Group, but many zeroed in on GMAC since it is also controlled by the investment firm.

Cerberus bought a 51% stake of GMAC from former parent General Motors Corp. last year.

So-called captive auto finance arms, which have been deeply tied to the auto makers for decades, have been a solid source of profitability for Detroit even as the core fundamentals of the auto industry have withered.

Exchanges Benefit from Record Volumes

Market volatility escalated and trading volumes set new record highs this week, totaling 10.59 billion shares on the three major stock exchanges on July 26 alone. That was 34% above the previous record from earlier this year and a sign of increasing skittishness among investors. The heightened volatility comes as investors digest mounting evidence of a credit crunch and deeper housing market woes that could spell trouble for the broader economy in the months ahead. The 4.9% drop this week in the Standard & Poor's 500-stock index was its biggest decline since September, 2002, while the NASDAQ composite index and Dow Jones industrial average logged their largest losses since March. However, bucking the downdraft were shares of major exchange companies such as Chicago Mercantile Exchange (CME), the New York Stock Exchange Euronext (NYX), and the InterContinental Exchange (ICE), which rose on July 27 on news of the record volumes.

HK's finance know-how benefits China

These days you cannot talk about global finance without talking about China. China is the world's fastest growing large economy, has the world's largest population, and is increasingly becoming more open and accessible to international business.

There are also a growing number of investors in the Mainland with a considerable appetite for making money. Many of these investors are looking further afield, many to Hong Kong, for the tools to make their next investment.
Hong Kong is already a global financial centre. We already have the institutional software, the market infrastructure, the knowledge bank, and the entrepreneurial flair to operate effectively on a local, regional and international level.

One example is our banking sector. Hong Kong has been a magnet for bankers for many years, and is now home to about 70 of the world's 100 largest banks. A high standard of transparency and disclosure, and zero tolerance towards corruption, are high on the list of reasons why banks like Hong Kong.

It is not just international banks that have a fondness for this city. Mainland banks have been hitting the headlines recently with some high-profile listings on our stock market. These include the Bank of China, the Bank of Communications and Industrial & Commercial Bank of China. They have tapped Hong Kong's market for capital and know-how. They are predominantly domestic banks now. They may well become global banks in the future.

Seeking Mutual Benefit and Common Development with Other Countries

China cannot develop independently without the rest of the world. Likewise, the world needs China if it is to attain prosperity. Following the trend of economic globalization, China is participating in international economic and technological cooperation on an ever larger scale, in wider areas and at higher levels in an effort to push economic globalization towards the direction of common prosperity for all countries. Today, the mainstream of international trade is to share successes, with all as winners. China adheres to its opening-up strategy for mutual benefit. For this, it has made conforming to China's own interests while promoting common development a basic principle guiding its foreign economic and trade work, develops its economic and trade relations with other countries on the basis of equality, mutual benefit and reciprocity, and makes constant contributions to the sustained growth of global trade.

China has been an active supporter of and participant in multilateral trade system. Since its accession to the WTO in December 2001, China has strictly kept its commitments to create more favorable conditions for international economic and technological cooperation. China has sorted out and revised some 3,000 laws, regulations and department rules, continually improved its foreign-related economic legal system, and enhanced the transparency of its trade policies. China has cut its customs tariffs step by step, as promised, and by 2005 its average tariffs had been reduced to 9.9 percent, and most non-tariff measures had been cancelled. Banking, insurance, securities, distribution and other service trade sectors have opened wider to the outside world. Of the 160-odd service trade sectors listed by the WTO, China has opened more than 100, or 62.5 percent, a level close to that of the developed countries. China has actively pushed ahead with a new round of multilateral trade negotiations, participated in talks on various topics, especially on agriculture, market access of non-farm products and the service trades, and played a constructive role in helping developing and developed members reduce disputes through talks. China, together with other WTO members, has done a lot of work to spur substantial progress to reach early agreement among the negotiators.

Record-Breaking Activity

The New York Stock Exchange measures market activity by the number of investor messages it processes in any given day, as opposed to the number of shares traded. On July 26, the NYSE processed 695 million messages, a 27% jump from its previous record of 548 million messages processed a day earlier. The NYSE Group, which includes the Archipelago Exchange it acquired last year, traded 5.1 billion shares on July 26, its second-most-active day after setting an all-time record of 5.19 billion shares on June 22.

The NASDAQ Stock Market reported 1.7 billion messages processed on July 26, up 42% from the prior record on Feb. 27, and it entered a record 326 million orders, a 59% jump from the previous high in February.

Cleveland Rueckert, a research analyst at Birinyi Associates in New York, believes volatility was the key contributor to the record trading volumes on July 26. "With the whole subprime thing, and the financial sector sort of falling apart, you have people who are getting nervous," he says.

Corporate earnings are affecting trading decisions, as is the approach of the end of the month, when mutual funds disclose performance information to investors. That's likely spurring portfolio managers to lock in profits by selling stocks they think have topped out, Rueckert says.

China rules out major currency moves ahead of Washington talks

BEIJING: Chinese officials on Tuesday ruled out major changes demanded by U.S. lawmakers in Beijing's currency controls ahead of a high-level meeting and called on critics in Congress not to politicize trade disputes. Beijing is making progress in allowing its currency to trade more freely, but acting on U.S. appeals to move more quickly could disrupt the economy, said the officials. They briefed reporters on next week's meeting in Washington on condition they not be identified by name.

"The government will not permit a backlash against financial markets and its 'harmonious society'," said a senior Finance Ministry official, using Beijing's term for efforts to spread China's new prosperity to its poor majority. He said Beijing introduced a more flexible exchange rate system in 2005 and "will not announce it again."

The May 23-24 talks are the second round of a "strategic economic dialogue" led by U.S. Treasury Secretary Henry Paulson and Chinese Vice Premier Wu Yi. They are meant to ease strains over China's swollen trade surplus, currency controls and other disputes that threaten one of the world's biggest trading relationships. The agenda includes opening China's service industries to more foreign investment and competition, energy and the environment, balanced economic development and innovation, the officials said.

A British firm that offered investors the chance to buy the life policies of terminally ill Americans was itself doomed

The death futures market, heavily promoted as an investment innovation guaranteeing high returns, is in disarray after the collapse of companies both in the UK and US.

One UK investment company that specialised in this bizarre sector is in liquidation, with British investors facing losses of up to $40m (£22m). The major US broker trading in these policies is also in receivership with losses of up to $1bn, and is beset with regulatory investigations, prosecutions for fraud and allegations of money laundering.

Shepherds Select Fund, which was based in the Isle of Man, invested solely in so-called traded life policies (TLPs), which are not regulated in the UK. Run by Mike Abraham, 61, Shepherds Select Funds bought its non-HIV-positive TLPs from a Florida-based company called Mutual Benefits Corporation.

But MBC went into receivership in May 2004 amid allegations of fraud and money laundering. With all 100 per cent of its investment in MBC, the Shepherds Select Fund itself went into liquidation last May, most of those who lost money in the fund were experienced wealthy investors and even independent financial advisers. Even so, some investors have lost their entire life savings.

Shepherds' liquidator, Mike Simpson of PricewaterhouseCoopers, says it is difficult to estimate how much money investors might eventually get back. "Shepherds has invested in fractional policies, which remain owned by MBC, rather than whole policies they would have owned themselves." He adds that how much and when money will be recouped from America is in the hands of MBC's receivers. Mr Abraham denied that there was any malpractice or that Shepherds had been negligent. "There had been problems with MBC going back to 1996. But if you know the American scene you would know this was nothing unusual."

He claims that MBC was a very good company that "made one big mistake" in angering a Florida politician. "Three days later the Securities and Exchange Commission arrived on MBC's doorstep and then closed them down." In a London High Court judgement given this month it was revealed that huge commissions from MBC were paid into an offshore company controlled by Mr Abraham. In the 2003 financial year alone, some $1.3m was paid from over $10m worth of business.

Mr Abraham denied that the commission rate was as high as 13 per cent. "I think it was more like 10.25 per cent," he said, claiming that there was nothing unusual about such rates. "This is all in the Shepherds accounts. Most of it went back into Shepherds to enhance marketing and only a small percentage went to pay me and cover my running costs." Mr Simpson, the Shepherds liquidator, was unable to confirm this. "I am still investigating where this money went," he said. Mr Abraham is now involved with a traded policy investment company called Indemnity First with an address in Marbella. Its publicity does not mention the collapse of Shepherds.

The Changing Nature of Trading

The record volumes aren't an indicator of volatility alone since the Dow industrials and S&P 500 reached new all-time highs last week. They also reflect a sea change in the way trading is done—through online trading programs used by a growing number of large institutional investors including mutual funds and hedge funds in the past five years.

"The days when humans traded with each other are gone. Now computers trade with each other," says James Angel, associate professor of finance at Georgetown University's McDonough School of Business. "Computerized systems are capable of handling big spikes in volume with minimal problems."

For Chris Concannon, executive vice-president of NASDAQ Transaction Services, heavy trading volume is an indication of the increasing efficiency with which the market is now able to execute trades, whether through online brokers or institutional investors using algorithms and electronic trading systems to place orders. Much of that has to do with technology, but it's also a function of much lower trading costs compared with 5 or 10 years ago. "If you can trade for $5, you may be inclined to trade in and out of positions on volatile days. There are very low costs for brokerage fees," he says.

Investors' ability to get in and out of positions all day owing to electronic trading programs means that record volume doesn't necessarily point to broader participation in the market. "Bigger institutional players like hedge funds that have that capability can bang in and out of the market a couple times a second," notes Rueckert. "Even though the same computer systems are trading back and forth, it's going to drive trading volume through the roof."

Special report: Insiders made nearly $50M trading a money-losing company's stock

Cyberonics says 4.2 million Americans' lives could improve with a medical implant device the company makes to treat severe depression and epilepsy. The FDA approved its product. But federal investigators are probing Cyberonics' compensation practices. This USA TODAY Special Report examines one company caught up in the nation's expanding stock-options scandals. The report explains how a few Cyberonics executives and directors made nearly $50 million in stock-trading profits while selling a money-losing device that remains controversial.
Cyberonics (CYBX) said Monday that its chief executive and chief financial officer had resigned after an internal investigation found that unnamed insiders had incorrectly reported the dates of company stock options for years.

Cyberonics general counsel David Wise said in a filing to the Securities and Exchange Commission that the company had under-reported its executive compensation expense by about $10 million and would have to restate its financial statements going back to 1999.

In June, Cyberonics said that it was one of the companies under investigation by the SEC and by the U.S. Attorney's office in Manhattan. The company also faces several options-related lawsuits by shareholders and is embroiled in a proxy fight with a large investor demanding substantial changes in the board's makeup and governance practices.

Cummins had been directing Cyberonics' drive to win Medicare reimbursement for its medical devices to treat severe depression, a decision that he said could open up a $1 billion sales market for the company. Medicare's administrators have not yet ruled on the application.

Earlier, in June, former Cyberonics chief financial officer Pamela Westbrook, who resigned Sunday, told investors that "all stock options" issued by the company "are granted the day of approval and are priced at fair market value on the date of the grant." Westbrook said the company "fully followed securities and accounting regulations."

A USA TODAY investigation reveals that Cyberonics' board has engaged in a series of questionable practices to reward Cummins, certain directors and some executives with stock and options almost from its inception as a public company in February 1993. Among its practices, the company frequently issued stock options just before market-moving events that insiders participated in, including merger talks, regulatory milestones and earnings advisories. It also repeatedly issued options at the lowest or second-lowest monthly trading price, SEC filings show. On one occasion, management, including Cummins, and a director who serves on the compensation committee, bought company stock at a discounted price in which Cummins represented himself both as the CEO selling the shares and as an individual buying them.

Over the past year, academic research at several major universities has identified widespread problems in dating of stock options granted to company insiders. A joint study at Harvard and Cornell universities published last week estimated that about 850 CEOs at 720 companies benefited from opportunistic timing. The study, "Lucky CEOs," said the findings reflect widespread governance problems.