Structured Investments Linked to Proprietary Indices
(Jun 2013)
Structured products are often linked to well known indices like the S&P 500 or the Dow Jones Industrial Average, but recently it has become more and more common for banks to issue structured investments linked to proprietary indices that they create themselves. The use of proprietary indices (also known as 'self-indexing') has begun to arouse suspicion from various sources and so we thought we'd take a step back and talk about the issue for a moment.
Structured products linked to well-known...
SEC Litigation Releases: Week in Review - June 21st, 2013
(Jun 2013)
SEC Charges San Diego-Based Promoter in Penny Stock Scheme
June 19, 2013, (Litigation Release No. 22730)
According to the complaint, David F. Bahr "artificially increased the trading price and volume" of penny stocks in iTrackr Systems "when he conspired with a purported businessman with access to a network of corrupt brokers." Bahr had arranged the fraudulent purchase of $2.5 million worth of shares in iTrackr with this businessman and "during a test run of their arrangement, Bahr paid a...
Foreign Exchange Rate Fixing
(Jun 2013)
Bloomberg News recently reported that traders at some of the world's largest banks have been in the business of rigging foriegn exchange (FX) rates. An FX rate essentially tells you how much of one currency you can buy with another currency: for example, currently you can buy about 100 Japanese yen for each US dollar. The rates affect "trillions of dollars of investments" according to Bloomberg, since they are used for the valuation of portfolios, derivatives, and even equity and fixed...
IRS Could Put a Halt to REIT Conversions
(Jun 2013)
We've talked a lot about real estate investment trusts (REITs) before. In the US, REITs are companies that invest at least 75% of their assets in real estate, pay out almost all of their annual income in dividends, but also pay little or no corporate income tax. As we've discussed before, many companies have tried to qualify for the REIT designation to reduce their tax liabilities, even if their business is only peripherally related to real estate.1 This 'REIT conversion boom' has been...
Reverse Convertibles and Event Risk
(Jun 2013)
Reverse convertibles are short-term debt securities issued by banks whose return of principal at maturity is contingent upon the returns of the linked stock. Although these notes typically pay relatively high coupons, they expose investors to losses on the underlying asset, especially if those losses are beyond the trigger level. Academic research shows that these coupons are not adequately compensating the investor for the market risk that they are bearing by investing in the notes. For...
FINRA Issues Investor Alert on Alternative Funds
(Jun 2013)
The Financial Industry Regulatory Authority (FINRA) recently released an investor alert entitled "Alternative Funds Are Not Your Typical Mutual Funds". FINRA defines Alternative (Alt) Funds as mutual funds that "seek to accomplish the fund's objectives through non-traditional investments and trading strategies."
These funds have garnered significant assets in recent years -- over $175 billion as of May 2013 -- as investors stretch beyond traditional stock and bond allocations for additional...
SEC Litigation Releases: Week in Review - June 14th, 2013
(Jun 2013)
Former Yahoo Executive Settles SEC Insider Trading Case
June 12, 2013, (Litigation Release No. 22726)
A final judgment was entered against Robert W. Kwok, a former Senior Director of Business Management at Yahoo! Inc., for allegedly trading on nonpublic information "concerning Yahoo and Moldflow Corporation." According to the SEC, in April 2008 Kwok learned of an upcoming acquisition of Moldflow by Autodesk, Inc. from Reema Shah, "a former mutual fund and hedge fund portfolio manager at...
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...
