Tag Archives: SEC probe

SEC Probes ETF Pricing Structures; HY Bond ETFs and Other “Less Liquid” Products of Concern to Regulator

MarketsMuse update courtesy of extract from 19 December edition of FT.com, with reporting by Tracy Alloway

Extreme movements in the prices of bonds, commodities and other assets have prompted regulators at the Federal Reserve Bank of New York to take a closer look at the inner workings of exchange traded funds.

Wall Street’s top regulator has been talking to the firms responsible for ensuring the smooth functioning of such ETFs as it seeks to gauge the resilience of the structures to sharp fluctuations

Two “authorized participants” aka “APs” [investment banks and other trading firms whose role includes administering the ETF creation and redemption processes] that were contacted by the New York Fed said the regulator was concerned that prices of ETF units might significantly diverge from the value of their underlying holdings, particularly if the funds tracked less liquid assets or if they experienced heavy redemption requests.

A spokesperson for the New York Fed declined to comment.

Authorized participants said ETFs had performed well even in the face of oscillations in the price of assets such as currencies, commodities and corporate bonds.

“ETFs have been a good tool for price discovery,” a senior trader at one of the largest authorized participants said. So many investors were using the structures to dart in and out of hard-to-trade assets that the ETFs had become a better representation of pricing than the underlying cash market, he said.

But relationships between prices and asset values have been volatile. Shares in the iShares iBoxx high-yield bond ETF recently traded at a discount of almost 1 per cent to net asset value before surging to a premium of 1.3 per cent last week.

The Market Vectors Russia ETF saw its discount to net asset value jump to 5.8 per cent earlier this month, before moving to a premium of 9.5 per cent last week. The SPDR S&P Russia ETF this month reported both the biggest discount and largest premium since the fund was started about four years ago.

ETF market-makers cautioned that discrepancies might occur because the asset values were calculated at specific times, whereas the shares traded continuously.

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Former Sell-Side Trader Blows Whistle on NYSE Order Routing Scheme; SEC Says Nothing..So Far

As recently reported by Automatedtrader.com, with below excerpt from Sept 21 New York Post, this is not the first we’ve heard about Wall Street whistle-blower Haim Bodek; its an update to claims of conflict he brought to the SEC and other regulators last year in connection with NYSE’s electronic order handling procedures that favor high-frequency trading (HFT) strategies wrapped within the NYSE payment-for-order flow schemes. Until now, Bodek’s allegations have gone unanswered, so he is apparently increasing the volume.

Haim Bodek

Now managing principal of Decimus Capital Markets, Bodek is a former Goldman Sachs and UBS trader-turned-high-profile-mole last week launched a fusillade at the already battered New York Stock Exchange, saying the exchange’s latest gamble on high-speed reforms should be stopped.

Bodek last went this ballistic back in 2011, when he went directly to the Securities and Exchange Commission to accuse exchanges of giving turbo-charged electronic traders an unfair edge over the little guy.

Bodek, 43, of Stamford, Conn., had run a high-speed-trading firm after his Goldman and UBS gigs. The SEC is said to be quietly probing his charges, but declined to comment.

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