This is Why Merrill Lynch Paid the SEC and FINRA $15 million over Bank of America's VOL Index-linked Structured Products.
(Jun 2016)
The Securities and Exchange Commission yesterday announced a settlement with Merrill Lynch over structured products linked to Bank of America's proprietary investable volatility index based on VIX Future contracts ("VOL Index"). The SEC press release announcing the settlement and its Order Instituting Proceedings are available on the SEC website. The companion FINRA settlement press releaseand AWC are available on the FINRA website. Bank of America published its VOL Index in 2010 and shortly...
More Impossible Trade Prices Caused by Auto-liquidators: Option Combinations
(Dec 2015)
In three previous blog posts, we documented how auto-liquidators execute option trades at distorted prices to their clients' detriment. The price distortions are caused by the price impact of large sell or buy orders on thinly traded securities. These distortions were reversed within minutes, but not before causing investors millions of dollars of unnecessary losses.
In "The Recent Market Turmoil Spells Trouble for Auto-liquidators like Interactive Brokers", we showed that thinly traded...
How Does VolDex Stack Up to the VIX?
(Nov 2013)
We've talked a lot about the idea of using volatility to hedge equity exposure. The basic finding, from our research work and that of others, is that the CBOE Volatility Index (VIX) hedges the S&P 500 fairly well. Unfortunately, the VIX is not investable, but is a complicated calculation based on a large strip of options contracts -- i.e., contracts of varying moneyness. Proxies for the VIX, such as rolling VIX futures strategies, are much worse hedges and have a number of problems that make...
'Tailored' Exchange Traded Funds
(Nov 2013)
Issuers of new exchange traded funds (ETFs) have a problem: how to attract enough investment to keep the fund alive. ETFs have a relatively high turnover rate, and many of the funds that fail simply never gained significant assets under management. Also, if the fund is not traded frequently, it is likely to have a wide bid-ask spread, further reducing investor interest.
One solution that a few ETF issuers have recently adopted involves building ETFs with a particular customer in mind. Back in...
Just How Risky Are Leveraged and Inverse ETFs?
(Oct 2013)
Leveraged and inverse exchange-traded funds (ETFs) are some of the most volatile securities traded in public markets. They are designed to track a specific index, except multiplying daily return of the index by a positive (leveraged) or negative (inverse leveraged) factor. The 'daily' part is important: leveraged and inverse ETFs do not track the leveraged or inverse return of the index for any period longer than a single day due to portfolio rebalancing. You can find more details about...
Why Do Volatility ETPs Reverse Split?
(Sep 2013)
We still get a lot of questions about VXX, TVIX, and all of the other VIX-related exchange-traded products(ETPs). We've talked before about the persistent loss of value due to negative roll yield, as well as issues surrounding TVIX's suspension of share creations. We've also talked about some of the newer volatility products that attempt to mitigate some of the issues with the older generation of products. We've also analyzed whether VIX-based ETFs could serve as a hedge to equity...
Morgan Stanley's Excessive Municipal Bond Markups
(Aug 2013)
Yesterday, FINRA fined Morgan Stanley for best execution and for charging excessive markups or markdowns. We have been covering markups extensively, and we have taken the Morgan Stanley municipal bond transactions identified by the FINRA action and applied our markup calculation methodology to calculate the distribution of markups charged by Morgan Stanley.
Let's start with an example. FINRA flagged a customer purchase of $145,000 in a West Virginia municipal bond (CUSIP: 95639RBW8) on...
Do Leveraged ETFs Increase Stock Market Volatility?
(Aug 2013)
Leveraged exchange-traded funds (LETFs) are controversial investments. Because they can be leveraged as much as 3x, and can be linked to highly volatile underlying assets, their daily price movement is typically very dramatic. Also, LETFs tend to lose value over time if their underlying assets are relatively volatile due to rebalancing effects, something we've covered in our blog post "Leveraged ETFs", as well as in our research papers, "Leveraged ETFs, Holding Periods
and Investment...
Municipal Bonds Trading in ETFs
(Aug 2013)
About a month ago, we spent a full week highlighting research conducted at our firm that shows the degree to which investors are harmed by excessive markups in municipal bond trading. In the paper, our colleagues argue that low-cost improvements in disclosure requirements could largely eliminate these transfers of wealth from taxpayers and investors to the brokerage industry.
After the research was completed, we began thinking about other ways investors gain exposure to municipal bonds. For...
Why Banks Are Storing Physical Commodities, and Why it May Matter
(Jul 2013)
Physical commodities -- barrels of oil, bars of gold, bushels of wheat, etc. -- are used for a variety of industrial purposes, but can also be bought and sold in financial markets. Most commodities trading involves futures contracts, as trading the physical commodity itself involves transportation and storage costs. Traditionally, banks who traded commodities were only allowed to deal in derivatives such as futures contracts, rather than dealing in the physical commodity itself.
But since the...
