TheTradeNew.com reports on a mini-crash last month:
Shortly after 1pm on Tuesday 23 April, a tweet from the verified Twitter account of US newswire Associated Press stated explosions at the White House had injured President Obama. Within minutes, the markets had bottomed out, with the Dow Jones Industrial Average sliding 145 points, or 1%, before rebalancing pre-drop, four minutes later.
These days, even Tweets and blog posts may be polled for market sensitive content in order to inform trading strategies:
Automated news reading services scan web-based news sources and social media for breaking news relevant to markets and specific securities. This can be fed via an application program interface (API), to a trading algorithm, which may act as a circuit breaker to stop trading or accelerate participation in a certain stock depending on the news.
TheTradeNews.com reports on a mini-crash last week:
On Friday, the price of Anadarko Petroleum Corporation – which has a market capitalisation of US$45 billion – slid from US$90 to a single penny in the space of seconds, before returning to its pre-drop level.
HFT Review posted this interview with John Lowery, who it seems was there right at the start of electronic trading.
we were probably the first ever firm to offer co-location, high speed market data and a high speed transport system. I remember it was a great day when we first broke the one second barrier for an execution, we did 900 milliseconds and thought that was amazing! We were certainly way faster than anybody else on the street at that point; most firms were taking 10-15 seconds.
Interesting retrospective from Traders Magazine, telling the stories of nine hot-shot traders that featured in a book 20 years ago and where they are now.
This is an excellent introduction to CDS’s, aimed at developers.
Now consider the case where we buy a General Motors bond. We then enter into a credit default swap to the maturity of the bond as well. This acts as insurance against General Motors defaulting on the bond. We receive interest from the General Motors bond, but pay some of it away in insurance on the credit default swap. Suppose the interest rate on a US Government bond is 5% and the interest rate on a General Motors bond of the same maturity is 8%. We’d expect the premium on a credit default swap on General Motors for the same period to be about 3%. Note that the 3% premium is also called the ‘spread’ on a credit default swap, since it is the spread between the government bond and the corporate bond interest rates.
In summary, a credit default swap is a contract where one party to the contract pays a small periodic premium to the other, in return for protection against a credit event (financial difficulty) of a known reference entity (company).
I wish there were more articles on financial products like this, written in plain English for non-Quants.
TheTradeNews.com reports that a trade input error caused an inflated sell order to be posted on Nasdaq OMX Stockholm, leading to ABN AMRO being fined this week.
The sponsored access client put in a negative value of -5,000 shares in the volume field for a sell order, which its own trading system erroneously converted to more than 294 million shares. This order, for shares in Swedish manufacturer SKF, was sent to the market despite constituting around 70% of outstanding SKF shares and resulted in the execution of 800,000 shares.
It’s amazing that this was a manually entered trade, yet didn’t have sufficient data validation, let alone pre-trade controls.
CNBC reports on an alleged case of insider trading:
The SEC says a trader purchased 2,500 out-of-the-money call options on shares of Heinz for $95,000 on Feb. 13. The options give the purchasers the right to acquire 250,000 shares at $65 each until June. The stock was trading at just over $60 a share at the time. The out-of-the-money call options weren’t very popular. On Feb. 12, only 14 $65 June call options were traded. On the day before, none at all.
When Berkshire Hathaway and 3G Capital Management announced a buyout, the stock rose to about $72. The price of the June 65 call options, now very much in the money, surged 1,700 percent. The $90,000 investment had been turned into $1.8 million.
The article points out that the SEC has frozen the Zurich-based trading account, leaving the beneficiary a dilemma – though their identity is confidential under Swiss-banking rules, they would have to go to court in the US to unfreeze the assets:
At that point, the SEC will likely publicly brand this person a securities fraud. If the trader doesn’t come forward by June, his investment goes to zero.