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Replies to post #322522 on Fannie Mae-No Politics (FNMA)
12/05/15 1:55 PM
The comments drew a rebuke from BATS Global Markets Chief Executive Chris Concannon, who also was on the panel and said it is "inappropriate" to give a human with a financial interest the power to decide when to open a stock, and at what price.
After a company chooses to list at the NYSE, it selects a market maker from among six firms. On its website the NYSE says "identifying your Designated Market Maker…is the beginning of an important partnership that perseveres well beyond listing day," adding that the market maker is responsible for maintaining "fair and orderly markets for your stock."
The Man Who Took KKR's Stock for a Ride
9-18-2015
Dow Jones News
In the five years since KKR & Co. listed on the New York Stock Exchange, the private-equity firm's executives have barely thought about the person on the trading floor who sometimes facilitates the buying and selling of its shares.
Now, this role has become a focal point at the company.
KKR is considering replacing its market-making firm, IMC Financial Markets. KKR says IMC failed to adequately explain its floor trader's decisions that on Aug. 24 briefly cut the private-equity firm's market value in half and momentarily wiped away about $1 billion from each of its founders' net worth, according to people familiar with the matter.
IMC, a Dutch trading firm, declined to comment and Donald Himpele, the trader who was responsible for KKR's stock that day, didn't respond to requests for comment.
The dispute between KKR and its market maker is the latest turn in the debate about the effectiveness of humans versus machines in handling moments of market volatility.
The exchange's designated market makers, with their colored vests, are a vestige of an earlier era of stock trading when all buy and sell orders were executed on the floor of the historic exchange building at 11 Wall Street. Market makers simultaneously offer to buy and sell securities to facilitate trading, and make money by pocketing the spread between those prices. The firms that are designated market makers for companies have additional responsibilities, including handling the opening auction and stepping in to assist when shares become volatile.
As the market became more electronic in recent years and completely automated competitors arose, NYSE created what is called a "hybrid" model of humans and technology. The appeal, officials have said, is that humans can take over in times of trouble and slow things down to damp price movements. After the 2010 flash crash, when the markets swung rapidly, the NYSE touted its model as the reason it didn't have to cancel a single trade.
At certain times, humans can exacerbate the swings because of their wide discretion to set the opening price of stocks, analysts and market participants say.
In anticipation of high volatility on Aug. 24, the NYSE invoked a rarely used rule that allows market makers extra leeway to decide on an opening price. The exchange delayed trading in KKR on its platform by three minutes and 15 seconds before Mr. Himpele opted to open shares of KKR at $10. That was about half the $19.55 at which they closed at the previous Friday, despite there being no significant news affecting the company. It was also below the $17-to-$18 range at which the stock was trading at on electronic exchanges in the preceding three minutes. It wasn't clear what information Mr. Himpele used to determine his opening price.
Over the next five seconds, about 476,000 shares changed hands at prices as low as $8. Trading pushed prices off that bottom and after two brief halts, the stock reached $17.50 just before 9:45 a.m., but not before 870,061 shares changed hands at the depressed prices, according to FactSet trading data. Shares ended the day at $18.69.
For a brief period, KKR's founding cousins and co-chief executives Henry Kravis and George Roberts saw their net worth drop by about $930 million and $1 billion, respectively.
The drop caused no lasting problems for the New York private-equity firm, but its executives aren't satisfied with the explanations they have received from IMC about why the stock was initially priced so low, according to people familiar with the matter. IMC had discretion to choose the price at which it would open the stock, so KKR's inquiries have been centered on how IMC chose the price it did, the people said.
The puzzling price moves were a stark example of the cracks in market structure that suddenly became evident when the Dow dropped more than 1,000 points shortly after opening that day.
The Securities and Exchange Commission is inquiring broadly into those issues, which plagued the opening of the market and led to large swings in prices, according to some of the people familiar with the situation. As part of that probe, the SEC is making inquiries about the actions of IMC and Mr. Himpele, the people said.
KKR's shares weren't the only ones that had dramatic swings. Shares of General Electric Co. and J.P. Morgan Chase & Co. dropped more than 20% before recovering most of the day's losses. Hospital operator HCA Inc., a top KKR holding, briefly lost 46%.
Market participants believe the same factors contributed to those drops, but they were less dramatic than KKR's and haven't come under the same scrutiny.
"Most of the time, people don't even pay attention to the floor traders," said Spencer Mindlin, an analyst at Aite Group. "But now the argument is being made that automated systems might have done better."
The NYSE Group, a unit of Intercontinental Exchange Inc., has defended its model in recent weeks, saying it ensures smooth openings by combining human judgment with technology. Thursday morning, NYSE Chief Operating Officer Stacey Cunningham said on a panel on market stability at Washington's Georgetown University the exchange delayed the opening of some shares beyond the 9:30 a.m. start of normal market hours on Aug. 24 as an effort to protect investors.
The comments drew a rebuke from BATS Global Markets Chief Executive Chris Concannon, who also was on the panel and said it is "inappropriate" to give a human with a financial interest the power to decide when to open a stock, and at what price.
After a company chooses to list at the NYSE, it selects a market maker from among six firms. On its website the NYSE says "identifying your Designated Market Maker…is the beginning of an important partnership that perseveres well beyond listing day," adding that the market maker is responsible for maintaining "fair and orderly markets for your stock."
KKR originally chose Goldman Sachs Group Inc. as its market maker, but the role was transferred to IMC when the Dutch company acquired the rights to Goldman's business on the exchange floor last year.
The NYSE gives designated market makers, including computerized trading firms such as IMC and Virtu Financial Inc., lower trading fees in exchange for them handling the opening auctions, stepping in during volatile moments and other responsibilities. Such firms tend to trade anywhere from hundreds of thousands to millions of times a day, so getting slightly cheaper prices to trade makes a difference.
The firms typically make little money from their floor-trading operations, but must maintain a presence and follow NYSE rules to receive discounts on their overall trading, people familiar with the matter said.
J.P. Morgan Plans to Fire Market Maker -- Update
Today : Saturday 5 December 2015
By Bradley Hope
J.P. Morgan Chase & Co. is planning to fire its market maker on the floor of the New York Stock Exchange in part for poor performance during the Aug. 24 market mayhem, according to people familiar with the matter, a blow to the idea that humans can step in and restore order to trading in times of stress.
J.P. Morgan recently informed the exchange that it was seeking to replace KCG Holdings Inc., the New Jersey-based trading firm that oversees the bank's shares, as its designated market maker, the people said. The NYSE sent an announcement to several of the exchange's designated market makers Monday informing them that the bank will be interviewing potential replacement traders Dec. 8, some of the people said.
KCG, the biggest market-maker on the floor, will have an opportunity to re-interview for the job, the people said.
Volatility spread across markets Aug. 24, but several stocks dropped much more than others without any significant news on the companies. Shares in KKR & Co. declined more than 50%, while those of J.P. Morgan and General Electric Co. dropped more than 20% before all three recovered most of the day's losses.
Analysts at the time blamed those extraordinary swings on some of the floor-based designated market makers who are supposed to take over for computers and smooth out bumps in choppy markets. KKR in September was considering replacing its market maker, IMC Financial Markets Inc., The Wall Street Journal previously reported. No decision has been reached, according to a person familiar with the matter.
NYSE rules give designated market makers the power to manually open trading of stocks when there is exceptional volatility. But with wild swings across the board Aug. 24, the market makers were tasked with manually opening hundreds of stocks.
Designated market makers, with their colored vests, are a vestige of an earlier era of the exchange when all trading was done by floor-based traders and brokers. From the floor of the exchange in the iconic NYSE headquarters at 11 Wall Street, they mostly handle the opening and closing auctions for their companies and step in during bouts of volatility.
They are also tasked with making a market in those stocks, meaning they place offers to buy and sell shares to help facilitate trading. Market makers aim to capture the "spread" between their bids or offers, the difference between the two prices. Almost all market making in the stock market is done by computers operated by the firms.
The Aug 24. problems, especially those at the NYSE, reignited a debate around the value of having human floor traders versus purely electronic systems. NYSE's markets had several messy openings in August.
Chris Concannon, head of NYSE rival BATS Global Markets Inc., said in September that he saw "very limited value" in the use of humans on the trading floor. NYSE shot back that its model was more reliable and reduced volatility most of the time.
BATS and Nasdaq Inc. operate purely electronic exchanges, while NYSE has what it calls a "hybrid" system that uses floor traders and brokers to try to bring order to trading at times of uncertainty.
Intercontinental Exchange Inc., which bought NYSE in 2013, is best known for its own purely electronic futures exchanges. It has shut down trading floors in New York and London after acquiring exchanges. Despite speculation it would move to shut down NYSE's floor too, it has held onto the model in part because it remains a draw for companies going public at the exchange.
Two of the designated market makers were entirely computerized trading firms before they bought floor businesses.
IMC Financial Markets and Virtu Financial Inc. are high-frequency trading firms, meaning they use computers to buy and sell securities with the goal of gaining tiny profits on the majority of their trades.
They gain from being designated market makers because the role comes with lower trading fees from NYSE for their overall trading. Such firms tend to trade from hundreds of thousands to millions of times a day, so those discounts make a significant difference. KCG has a high-frequency trading group.
The other designated market makers are Barclays PLC, Brendan E. Cryan and Company LLC, and J. Streicher & Co. LLC.
KCG's other business relationships with J.P. Morgan, including electronic trading, will continue, according to a person familiar with the matter.
Wow, everybody here sounds like, MM's this, MM's that. Guess what, those were shares sold. SOLD!! Get over it already. Its the market, that how it works. Every year is the same thing in December. If ya'll were smart you would take advantage of the pattern instead of crying about it.
AI
