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...
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...
Options Strategies Embedded in Exchanged Traded Products
(May 2013)
In theory, exchange traded products (ETPs) can be linked to almost any underlying asset, including derivatives. While many ETPs are linked to portfolios of bonds or stocks, some are linked to portfolios of futures contracts, which we have discussed at length before. Bill Luby at VIX and More has written a couple posts on ETPs that are linked to portfolios of options, which are gaining some traction with investors. As usual, we greatly enjoyed Bill's posts and thought we'd explain some of the...
What Buying a House and Structuring an Asset Backed Security Have in Common
(May 2013)
When you buy a house, it's generally a good idea to get it inspected so you know if there are any expensive problems you might have to pay for after the deal closes. It's also a good idea to make sure that the person inspecting the house be independent, knowledgeable and perhaps most importantly objective -- not paid by or otherwise conflicted with the seller. Otherwise, they might overlook problems to make sure the deal goes through.
Asset backed securities (ABS) -- such as mortgage backed...
Variable Prepaid Forward Contracts
(May 2013)
Recently we've been working a lot with variable prepaid forwards (VPFs) in our casework and we decided to take a step back and explain these complex investments. A VPF is an over-the-counter contract between two parties involving a stock position, an upfront payment and option positions. VPFs are often used to defer taxes on appreciated stock, which has been a matter of some controversy.
Perhaps the best way to explain a complex investment is by example. Consider an investor who purchased...
Equal Weighting versus Market Capitalization Weighting
(Apr 2013)
We often hear about different stock market indexes in the same breath: on the evening news, you might hear that 'the Dow was up half a percent, the S&P gained three quarters of a percent, the NASDAQ was down a tenth of one percent'. While it may seem that these indexes tend to move together on most days, there are important differences between equity indexes. The one we hear about the most is that they are composed of different stocks: the Dow Jones Industrial Average tracks only 30...
