Markup Calculation Methodology
(Jun 2013)
Our study looks at markups and markdowns implied by EMMA trade data. My colleagues have shown an example of how we calculate the markups, but I wanted to illustrate the methodology used to handle the more complex cases that arose when analyzing the trade data.
There were effectively four cases that we needed to address. The first case occurs when inter-dealer trades occur on the same business day as the customer trade. In that case we computed the volume weighted average price (VWAP) of the...
Alternative Ways to Gain Municipal Bond Exposure
(Jun 2013)
We've been covering municipal bonds, with a focus on markups, this week on the blog. So far we've discussed some basics, given an example of an excessive markup and introduced SLCG research on excessive markups in municipal bonds . Given that retail investors may be charged excessive markups when purchasing municipal bonds directly, it may make sense for them to purchase municipal bonds indirectly.
Jason Zweig has written a great follow-up to his coverage of the muni markups issue with a...
An Example of an Excessive Muni Markup
(Jun 2013)
This week we've been discussing excessive markups in the municipal bond market. Now that we've outlined what excessive markups are, you might be wondering what such markups actually look like in the EMMA data.
The following figure shows the October 6, 2009 EMMA trading activity in a $6.54 million State of California municipal bond issued in 2009. A customer purchased $1,000,000 of the issue at $113.80, paying $3.507 more than the average inter-dealer price for trades of similar size that...
Retail Investors and the Municipal Bond Market
(Jun 2013)
This week, we will be discussing the buying and selling of municipal bonds by brokers on behalf of retail investors. But to start, let's address some basic questions about the municipal bond market.
What are municipal bonds and how are they traded?
Municipal bonds are simply bonds issued by a state and local government or authorities. Municipal bonds can be general obligation bonds, meaning they are not used to fund specific projects, or they could be issued to finance a new highway, a public...
Welcome to Muni Markup Week on the SLCG Blog
(Jun 2013)
Today SLCG posted a new working paper titled "Using EMMA to Assess Municipal Bond Markups". In it, our colleagues Geng Deng and Craig McCann report a veritable pandemic of excessive markups charged to retail investors in the municipal bond market. This work has been highlighted in a recent Wall Street Journal article by Jason Zweig. Jason's looked at markups generically in the past and we're happy this story has caught his attention.
The primary findings of the paper are that:
SEC Warns Investors About Binary Options
(Jun 2013)
The SEC has issued an Investor Alert on binary options, which are derivatives that pay out a fixed amount if an event happens and zero if it does not. We've covered binary options before, so do check out that post for a detailed background and an Excel spreadsheet that explains how binary options work in some detail.
The Alert highlights several risks of binary options, mostly relating to how they are traded. It notes:
Much of the binary options market operates through Internet-based trading...
SEC Commissioners Vote Unanimously on Money-Market Reform Measures
(Jun 2013)
The SEC voted on Wednesday on changes to rules governing money market funds (MMFs). As we discussed on Tuesday, MMFs are considered low risk, low return investments similar to bank accounts, but experienced 'runs' during the financial collapse of 2008 that helped freeze financial markets. The SEC's new rules hope to prevent such runs by changing how MMFs report their assets.
As widely suspected, the changes target MMFs favored by large institutional investors (dubbed 'prime funds'). While...
SEC Litigation Releases: Week in Review - June 7th, 2013
(Jun 2013)
Final Judgments Entered Against Former Nicor Senior Officers Kathleen Halloran and George Behrens
June 5, 2013, (Litigation Release No. 22715)
Final judgments were entered against Kathleen Halloran and George Behrens, former CFO and former Treasurer of Nicor, Inc. respectively, for allegedly overstating "Nicor's financial performance...by, among other things, making or authorizing false and misleading statements about Nicor's performance in multiple filings with the Commission." The SEC...
Dodging Hedge Fund Requirements: The Case of Mariner Access
(Jun 2013)
Nowadays, there are several ways that retail investors can purchase risky investments which would typically be considered unsuitable. For example, many exchange-traded funds (ETFs) use derivatives to offer investors access to risky asset classes (such as CDOs) or complex options positions (such as covered calls). Since ETFs can be bought and sold like any other listed stock, essentially any investor can now take covered call positions regardless of her understanding of options. There is even...
FINRA Fines Wells Fargo and Banc of America Over Unsuitable Sales of Floating-Rate Bank Loan Funds
(Jun 2013)
Yesterday, the Financial Industry Regulatory Authority (FINRA) announced fines totalling more than $2.1 million levied against Wells Fargo and Banc of America. In addition, FINRA has ordered the two institutions to pay restitution in excess $3 million to customers who suffered "losses incurred from unsuitable sales of floating-rate bank loan funds."
A floating-rate bank loan fund is a mutual fund that mainly invests in floating-rate high-yield senior secured loans. The floating-rate on the...
