Lord Myners calls for inquiry on 'black box' trading

Lord Myners has called on the Government to launch a focused inquiry into so-called "black box" computerised trading in the wake of extreme volatility in the UK's biggest companies.

High-frequency trading (HFT), which accounts for as much as 50pc of trading in London, has been blamed for exacerbating intra-day swings and putting ordinary investors at a disadvantage due to the speed with which such trades are placed in the market. Photo: Getty Images/Scott Barbour

By James Quinn, and Harry Wilson

10:00PM BST 13 Aug 2011

15 Comments

The former City minister said that high-frequency trading also known as black box trading had been a "contributing factor" in the harsh swings which have led to more than £300bn being wiped off the value of British shares since the beginning of July.

He wants both the Treasury and the Financial Services Authority (FSA), the City regulator, to investigate thoroughly the phenomenon and the impact it has.

High-frequency trading (HFT), which accounts for as much as 50pc of trading in London, has been blamed for exacerbating intra-day swings and putting ordinary investors at a disadvantage due to the speed with which such trades are placed in the market.

Lord Myners, the former fund manager, also called for European banks, which have been at the centre of the storm, to be more honest to investors and increase levels of disclosure of the sovereign debt they are holding.

His calls on disclosure were echoed by Georges Pauget, an adviser to the French government, who said banks must be more open with investors if they are to end the market fears that have led their share prices to collapse in recent weeks. The comments from the two men come after a wild week in global stock markets.

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The nadir came last Wednesday, when investors moved strongly against Societe Generale, France's largest bank, forcing its shares down as much as 20pc. As a result, European regulators chose to ban shorting on banks in France and three other countries.

But Lord Myners said that rather than shorting – which he said was not a contributing factor in falling bank shares – there was a "greater need to address" such trading methods.

"High-frequency trading appears so detached from the true function of capital markets, but is potentially fraught with hazard. It definitely deserves more attention than either the FSA or the Treasury has given it."

Lord Myners has tabled a series of questions in the House of Lords on the subject. Lord Sassoon, commercial secretary to the Treasury, said last week in a written answer that the Government's two-year study into the "Future of Computer Trading in Financial Markets", would not report until autumn 2012.

Andy Haldane, the Bank of England's executive director for financial stability, last month warned now may be the time to set a "speed limit" on market trades to tackle the dangers posed by so-called "flash trading" by high-speed computers.

Larry Tabb, founder of financial market research house Tabb Group, said although HFT was not directly to blame, it was indirectly to blame for removing large swathes of liquidity from the market, meaning that when sizeable sell orders are made, prices drop further than they might have done.

Lord Myners' calls for wider disclosure were echoed by Mr Pauget, the former chief executive of Credit Agricole, who said banks should move quickly to give better disclosure of their funding positions to reassure the markets they are well-financed.

"They have to provide more information. Banks have to give more information on liquidity," said Mr Pauget. He went on to say there was a growing need for all banks to give more details of their net stable funding ratios, which show the proportion of a bank's assets that are financed with longer-maturity debt.

His comments come amid concern that the UK's largest banks are on a collision course with the FSA over the need for more detailed disclosure of the amount and type of sovereign debt each is holding.

http://www.telegraph.co.uk/finance/markets/8700226/Lord-Myners-calls-for-inquiry-on-black-box-trading.html

Biggest Emerging Stock Fund Outflows Since January 2008 May Be Buy Signal

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By Michael Patterson and Jason Webb - Aug 12, 2011 11:08 PM GMT+0800

The biggest outflows from emerging- market equity funds since January 2008 may be a signal to buy stocks at the lowest valuations in 2 1/2 years.

Investors pulled $7.7 billion in the week to Aug. 10, the third-largest withdrawal on record and about 1.1 percent of assets under management, according to research firm EPFR Global. The MSCI Emerging Markets Index jumped an average 17 percent in the six months after outflows of this magnitude during the past decade, posting gains on 11 of 12 occasions, data compiled by EPFR Global and Bloomberg show.

The MSCI gauge sank as much as 20 percent from its May 2 high this week on concern theU.S. economy is stalling and Europe’s debt crisis is worsening. The slump sent valuations 30 percent below the 20 year average at 8.9 times analysts’ 12- month profit estimates, data compiled by Bloomberg and Morgan Stanley show. Fund outflows are a contrarian signal for rallies because they show pessimistic investors have already sold, according to Commerzbank AG’s Michael Ganske.

“When things are selling off and investors are very bearish and panicking then it’s clearly a good time to add positions,” Ganske, head of emerging-markets research at Commerzbank in London, said in a phone interview. “There is clearly a compelling argument to reassess exposure in emerging equities as valuations are very, very cheap.”

The strategy of buying emerging-market stocks after weeks when outflows exceeded 1 percent of assets under management produced average gains of 2.2 percent in one month, 8.5 percent in three months and 28 percent in 12 months, according to data compiled by EPFR Global and Bloomberg.

History Shows Gains

Investors have also been rewarded for buying when the MSCI emerging index fell below 9 times earnings. The last dip to those levels in October 2008 was followed by a 60 percent rally during the next 12 months, data compiled by Bloomberg show. The gauge climbed 44 percent in the year after valuations tumbled that low in August 1998, the month Russia defaulted on $40 billion of debt, the data show.

The MSCI index was little changed today after two days of gains. Reports today showed French economic growth stalled last quarter and euro-region industrial production unexpectedly fell in June.

The 21-country gauge has retreated about 5 percent this week after an unprecedented downgrade of America’s top credit rating by Standard & Poor’s and signs that Italy and Spainmay struggle to refinance debt. The MSCI Emerging Markets Energy Index sank 7 percent, the most among 10 industry gauges, as oil prices tumbled.

‘Growth Scare’

A further retreat in commodities may spur more outflows from developing-nation equity funds, according to John-Paul Smith, emerging-market strategist at Deutsche Bank AG in London.

“Over the short term it’s most likely a by-product of the global turmoil rather than a change of view on the relative attractions of emerging-market equities,” Smith said. “The real damage is likely to happen further out if, as we expect, investors become more negative about the fundamental prospects of both emerging markets and commodities.”

The MSCI index fell more than 15 percent in a month after fund outflows reached more than one percent of assets in August 2001, while the gauge retreated 6.5 percent when withdrawals exceeded that level in May 2006, data compiled by EPFR and Bloomberg show.

This week’s retreat in emerging-market share prices has produced buying opportunities and slowing growth in the developed world may ease inflation pressures in developing nations, said Ivo Kovachev, an emerging-markets money manager at London-based JO Hambro Capital Management Ltd.

The People’s Bank of China will leave borrowing costs unchanged for the rest of this year, according to eight of 10 analysts surveyed by Bloomberg this week. The Bank of Korea keptinterest rates unchanged for a second month on Aug. 11, while Indonesia stayed on hold Aug. 9.

“There has been a growth scare in the world,” said Kovachev. “But perhaps a bit perversely, it may help emerging markets because this year they were suffering from overheating and inflation risk.”

http://www.bloomberg.com/news/2011-08-12/biggest-emerging-stock-fund-outflows-since-january-2008-may-be-buy-signal.html

'Scared to Death': Should I Move Into Cash?

by Walter Updegrave
Tuesday, August 9, 2011

Over the years, I've lost huge amounts of my retirement fund. I've been through the savings & loan fiasco, the tech stock bubble, the crash of 2008 and now this market. I can't afford to lose my money again, so I'm considering moving it all to cash. Do you think that's a good move? I'm scared to death. -- Cheryl P., Houston, Tex.

More from CNNMoney.com: • Retiring Soon: How to Ride Out the Market Volatility • Your Money in a AA-Rated U.S.  • What the Debt Downgrade Means for Your Mortgage

I hear you. Looking back over the past twenty-five years you can easily get the impression that all we've done is lurch from one crisis to the next.

Add to that backdrop new worrisome twists like Standard & Poor's debt downgrade of the U.S. government and Fannie and Freddie Mac, the specter of a double-dip recession, the economic woes in Europe and Monday's more than 5% plunge in the Dow, and it's understandable why you'd want to ditch stock and bond funds and huddle in cash.

But that would be a mistake.

Now is not the time to give in to emotions and make rash moves. It's the time to take a few deep breaths and dispassionately set a sensible course for the future.

Let's start with a little perspective. Yes, the fact that U.S. debt no longer carries a top triple-A rating is troubling. But it's not as if S&P told investors something they didn't know before (i.e; that our country's long-term finances are a mess).

As for the economic effect the downgrade might have, that's far from clear. Ultimately, though, bond investors' expectations will determine the yields on Treasury bonds, not the opinion of a bunch of guys in ties over at S&P.

And, so far, investors seem to be rushing into Treasuries not away from them. So I think people may be overreacting to the whole downgrade thing.

That said, whether the sell-off was an overreaction to the downgrade, the growing sense that the economy may be weaker than previously thought or something else, investors have clearly shown they're skittish about stocks.

But this isn't exactly news either. Although we lose sight of it from time to time, the fact is that the stock market is and always has been a very volatile place.

The flip side of that volatility, though, is that stocks have also generated some pretty impressive long-term returns. If you look at the 56 rolling 30-year periods from 1926 through 2010 (1926-1955, 1927-1956, etc. through 1981-2010) the lowest annualized return stocks have delivered over a 30-year span is 8.5%, and the average 30-year annualized return for all those periods is 11.3%. For bonds, the numbers are 1.5% and 5.1%, respectively.

This doesn't mean stocks will generate the same gains over the next 30 years. I wouldn't be surprised to see them come in considerably lower.

But I don't see any reason why, over the long term, one would expect stocks to underperform bonds or cash, especially considering the current low yields on bonds and cash equivalents.

So it seems to me that the challenge for someone investing his nest egg today is still pretty much what it was before all the debt-ceiling-downgrade hoopla: to participate in stocks' long-term growth without getting hammered too badly when stocks suffer their inevitable periodic declines.

There are two ways you can try to do that. One is to attempt to outguess the market — that is, capitalize on stocks when they're doing well and then move out of them into bonds or cash or gold or whatever to avoid downturns.

The other is to invest in a reasonable mix of stocks and bonds and basically stick to it, allowing the bond portion of your portfolio to dampen stocks' swings. The first approach — moving in, out and around various parts of the market — is difficult-to-impossible to pull off consistently.

If you doubt that, just consider recent events. In the weeks leading up to August 2, investors' biggest fear was that Congress and the Obama administration might fail to raise the debt ceiling on time and thus spark a stock-market meltdown.

People were so convinced that this would threaten their portfolios that many considered moving their money into cash to protect against that possibility. When Congress and the White House reached a deal before the Tuesday deadline, the big market swoon everyone feared was averted.

However, two days later, while investors were still feeling good about dodging the debt-limit bullet, the Dow plummeted 510 points on concerns about the European debt crisis and the possibility of the U.S. sliding back into recession.

And then came Monday's wild 635-point Dow free fall in the wake of S&P's downgrades.

My point is that you can never really tell what might initiate a market decline — let alone know when it might occur.

The more sensible way to participate in stocks' long-term growth is to create a mix of stocks and bonds that gives you a shot at solid returns and offers at least some protection.

The longer away you are from retirement and the more your stomach can handle the value of your retirement savings taking the occasional hit, the more you can devote to stocks.

The closer you are to retirement and the more upset you get when your nest egg gets whacked, the more you should tilt toward bonds and cash. If you're on the verge of retirement, that mix might be somewhere around half in stocks and half in bonds.

Taking the asset allocation approach and sticking with it (except for periodic rebalancing) won't immunize you against losses. But it can help you manage the downside risk of stocks without giving up all the upside.

And, more importantly, it gives you a rational way of dealing with the stock market's volatility and keeping downturns to a magnitude you can handle, rather than engaging in a never-ending guessing game.

By trying out different blends and seeing what sort of losses they incurred, you can get a better feel for what stocks-bonds allocation might be right for you.

Remember, though, if you go with too conservative a strategy to guard against market downturns, you limit your upside. So to get a sense of whether the asset allocation you choose will give you a large enough nest egg to support you in retirement, I suggest you also run it through a calculator like Fidelity's Retirement Quick Check or T. Rowe Price's Retirement Income Calculator.

I don't want to downplay the seriousness of the situation facing investors today. We could very well see lots more turmoil in the financial markets and further declines in stock prices.

But the fact is that there will always be something going on that investors will feel compelled to react to, whether it's the threat of a recession triggering a market meltdown or, in better times, rosy reports of economic growth and corporate profits suggesting the markets will soar.

But if you invest on the basis of hunches and speculation rather than setting a coherent long-term strategy and sticking to it, you'll put yourself at risk of selling after prices have already fallen and buying back in when prices are already inflated.

In the end, that will make it tougher for you to earn the returns you'll need to build a decent nest egg and harder for you to maintain your emotional equilibrium in tumultuous times like these.

3 Different Stock Investing Tips

Depending upon the type of stock, you may need an altogether different investment strategy. We are providing you with three investing tips which will assist you in figuring out as to which one best suit your requirements.

Investing Tip #1: Income
Income stocks are a good investment option for getting regular income from a company. In this investor are paid in the shape of dividends. Though income is taxed yet it provides for a regular income to investors from the stocks.

A company usually divides any excess amount of cash it has as dividend when its operations do no need that money for growth. It can happen because company may have borrowed cash from market or banks or has decided not to expand due to narrow opportunities in the growth.

Investing Tip #2: Growth
These are termed as the hot stocks. They are so called because of their ability to double, triple or even quadruple the investment made by investors in short period of few years. However, to hunt growth stocks is quite a challenge. Like for example, it is not easy to find another Microsoft or Wal-Mart.

But I have some tips for you. You must search and find stocks which have good Earning per Share Growth Rate, have rapidly growing sales and have sufficient operating cash flow and nice profits. When you buy such stocks you become certain that stocks will grow with the time.

Investing Tip #3: Speculative
Investment in speculative stock is based on high risk with high return formula. This is all about getting 100 % returns in shortest time or maybe losing your invested amount altogether! Though returns can usually be good as they normally deal in penny stocks, but all said, risk is there as nobody is sure if speculation is there in stocks. If you are new in stock trade you must resist investing in these stocks.

http://www.makemoneyinstocks.net/3-different-stock-investing-tips/

Speculator vs Investor

Speculator vs Investor

"People who invest make money for themselves; people who speculate make money for their brokers.”

- Jason Zweig

INVESTORS

An investor would carry out background research to:
1. Understand the company’s business.
2. Protect from losses by buying company stock when it’s undervalued.
3. Avoid succumbing to “herd mentality” by buying into hotly-tipped stocks.
The investor would do well, look forward to the assurance of adequate returns and safety principal.

SPECULATORS

Speculators are akin to gambling which carries high risk. And if you consider the matter carefully, would you want to put your hard-earned income to such an uncertain outcome?

Normally, what they buy:
1. A whispered “hot tip” that a particular stock will soon rise in value.
2. Without doing any research on the company, its past performance, or its dividend yield.
3. Media hype on the stock. 

http://special-situation-investing.blogspot.com/

Short-selling: did it work the last time?

There are already doubts in the City about whether the latest short-selling ban imposed by European financial market regulators will stop banking shares falling.

By Ben Harrington, M&A Correspondent

12:58PM BST 12 Aug 2011

3 Comments

Back in September 2008, European countries - including Britain - introduced a short-selling ban as Lehman Brothers, the US investment bank, fell into administration.

The fall of Lehman triggered a wave of heavy selling of financial stocks because investors feared that other banking behemoths might also be allowed to fail by national governments.

As a result, several countries introduced short selling bans on bank shares, including the UK’s Financial Service Authority (FSA).

At the time, Hector Sants, head of of the FSA, said: “While we still regard short-selling as a legitimate investment technique in normal market conditions, the current extreme circumstances have given rise to disorderly markets”.

European regulators followed suit.

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However, the ban failed to stop the decline in financial company share prices in the medium term, as the excellent Reuters graph above shows.

This morning, David Buik, markets analyst at BGC Partners, said banning short selling was "a crass idea”.

He added: “I have heard of a few bone-headed and crass initiatives in my time, but I think Spain’s, Belgium’s, Italy’s and France’s decision to ban ‘short-selling’ temporarily takes the biscuit. Have European politicians learnt nothing from 2008?”

Andrew Shrimpton of financial advisory firm Kinetic Partners, said: “The banning by France, Italy, Belgium and Spain of the short-selling of financial stocks ... will only reduce price volatility for a few days at best."

Mr Shrimpton added: "As demonstrated in 2008, when similar bans were in place, volatility increases after a day or so because liquidity in the stocks is significantly reduced. This measure will reduce the ability for banks to raise capital and increase the risk of a full blown recession in the countries that have adopted the ban.”

http://www.telegraph.co.uk/finance/financialcrisis/8697681/Short-selling-did-it-work-the-last-time.html

A week that knocked the financial world off its axis

Just another quiet summer week, really. The FTSE 100 started at 5,247 and ended at 5,320. It was hardly worth coming out of the sea to check your BlackBerry.

The chart shows the relative performance of Europe's high and low yielding shares but I could have shown a similar chart for Japan, where income has provided an escape from two lost decades for investors. 

By Tom Stevenson, on the Markets

2:40PM BST 13 Aug 2011

Comment

If only. The modest net gain for stock market investors disguised the most dramatic few days in the markets since 2008. If someone had offered no change as Wall Street was tumbling 6.7pc last Monday, few would have turned it down, I suspect.

That is perhaps the first lesson to be learned – the remarkable capacity for markets to confound investors' expectations. If the same patterns played out each time, we would have got the hang of it by now. But each crisis is different enough to ensure that history never quiet repeats itself, only rhymes.

I have drawn a few other conclusions from this fascinating week. First, while developed market shares are undoubtedly cheap they may remain so, and for good reason. It is quite unprecedented, that Fed chairman Ben Bernanke should have been prepared to pre-commit to near zero interest rates two years into the future. This speaks volumes about his pessimism regarding America's economic outlook. The persistent unemployment and low growth implicit in his assessment is incompatible with the Government's assumptions in its deficit reduction plan or many of Wall Street's earnings forecasts.

I think we are seeing a change in the investment environment on a par with the birth of the cult of the equity in the 1950s. That was when, for the first time, equities began yielding less than fixed income securities on the grounds that investors considered the growth potential of share dividends outweighed the extra risk borne by equity investors.

In recent years, the rare occasions when equities have yielded more than government securities have been viewed as a buy signal for shares, but in a low-growth, low-interest rate environment, this premium could become the norm again.

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Having been disappointed in recent years by the vain wait for jam tomorrow, in the form of capital growth, investors are likely to demand jam today, in the form of a high and sustainable income.

This renewed focus on income makes sense because, as the chart clearly shows, shares paying high dividends are not simply interesting to investors seeking to replace the income they can no longer find in cash or by investing in government securities. Income is both the main contributor to the total return from shares and an excellent indicator of future outperformance.

The chart shows the relative performance of Europe's high and low yielding shares but I could have shown a similar chart for Japan, where income has provided an escape from two lost decades for investors.

Looking forward, careful stock selection will be key to investment success. The sell-off has been indiscriminate and this is throwing up plenty of opportunities: good companies at great prices. I wonder whether we might not look back with some disbelief at a time when BP was available at just 5.5 times expected earnings or AstraZeneca at 5.7 times with a dividend yield of 6.5pc. Investor sentiment, measured using a combination of indicators such as market volatility, directors' dealings and fund flows, last week hit its lowest point since the collapse of Lehman Brothers .

What has also become clear this week is that we now inhabit a two-speed world. The transformation of emerging markets, especially those in Asia, continues regardless of the volatility in Western stock markets. It is interesting that the two worlds' markets have not become de-linked in the same way as their underlying economies have. I would be surprised if that did not change soon. The growth differential between Asia outside Japan and the developed world before, during and since the financial crisis argues for a much greater bias towards the region.

The unstoppable shift from West to East has important implications for stock markets closer to home because a key part of any analysis of companies quoted in London and New York is now their exposure to the growth potential of emerging markets. It is one reason why German stocks continue to look more interesting than their counterparts in other parts of Europe. Companies such as BMW and Siemens have understood and grasped the emerging market opportunity.

Meanwhile, let's hope tomorrow really does bring just another quiet summer week. We could all do with one.

Tom Stevenson is an investment director at Fidelity International. The views expressed are his own.


http://www.telegraph.co.uk/finance/comment/tom-stevenson/8699694/A-week-that-knocked-the-financial-world-off-its-axis.html

US Debt Crisis (Video)