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CRS — Dark Pools in Equity Trading: Policy Concerns and Recent Developments (September 26, 2014)

October 1, 2014 Comments off

Dark Pools in Equity Trading: Policy Concerns and Recent Developments (PDF)
Source: Congressional Research Service (via Federation of American Scientists)

The term “dark pools” generally refers to electronic stock trading platforms in which pre-trade bids and offers are not published and price information about the trade is only made public after the trade has been executed. This differs from trading in so-called “lit” venues, such as traditional stock exchanges, which provide pre-trade bids and offers publicly into the consolidated quote stream widely used to price stocks.

Dark pools arose partly due to demand from institutional investors seeking to buy or sell big blocks of shares without sparking large price movements. The volume of trading on dark pools has climbed significantly in recent years, from about 4% of overall trading volume in 2008 to about 15% in 2013. While dark pools reportedly have lower trading fees, their lack of price transparency has sparked concerns about the continued accuracy of consolidated stock price information. In addition, fairness concerns have surfaced in recent regulatory and enforcement actions, in the press, and in Michael Lewis’s book Flash Boys over allegations that dark pool operators may have facilitated front-running of large institutional investors by high-frequency traders, in exchange for payment, and misrepresented the nature of high-frequency trading in the dark pools.

This report examines the confluence of factors that led to the rise of dark pools; the potential benefits and costs of such trading; some regulatory and congressional concerns over dark pools; recent regulatory developments by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA), which oversees broker-dealers; and some recent lawsuits and enforcement actions garnering significant media attention.

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Testing Rebalancing Strategies for Stock-Bond Portfolios Across Different Asset Allocations

October 1, 2014 Comments off

Testing Rebalancing Strategies for Stock-Bond Portfolios Across Different Asset Allocations
Source: Social Science Research Network

We compare the risk-adjusted performance of stock-bond portfolios between rebalancing and buy-and-hold across different asset allocations by reporting statistical significance levels. Our investigation is based on a 30-year dataset and in-corporates the financial markets of the United States, the United Kingdom, and Germany. To draw reasonable recommendations to investment management, we implement a history-based simulation approach which enables us to mimic realistic market conditions. If the portfolio weight of stocks exceeds 30%, our empirical results show that a frequent rebalancing significantly enhances risk-adjusted portfolio performance for all analyzed countries and all risk-adjusted performance measures.

See also: Rebalancing Risk

Cyber-attacks: Effects on UK

September 23, 2014 Comments off

Cyber-attacks: Effects on UK
Source: Oxford Economics

The UK Centre for the Protection of National Infrastructure (CPNI) requested Oxford Economics to carry out a study of the impact of state-sponsored cyber-attacks on UK firms. The study consists of the elaboration of an economic framework for cyber-attacks, a survey of UK firms on cyber-attacks, an event study on the impact of cyber-attacks on stock market valuations, and a series of case studies illustrating the experience of several UK firms with cyber-attacks.

Free registration required.

“Dark Pools” In Equity Trading: Significance and Recent Developments, CRS Insights (August 27, 2014)

September 16, 2014 Comments off

“Dark Pools” In Equity Trading: Significance and Recent Developments, CRS Insights (PDF)
Source: Congressional Research Service (via Federation of American Scientists)

Dark pools are relatively recent and controversial electronic stock trading alternatives to traditional exchanges, such as the New York Stock Exchange (NYSE), and now account for about 15% of overall trading volume. A dark pool is a type of alternative trading system (ATS), a broker-dealer who matches the stock trading orders of multiple buyers and sellers outside of exchanges. Orders sent to dark pools to buy or sell certain stocks are not publicly displayed. When they emerged in the late 1990s, that opacity attracted the pools’ initial clients, institutional investors (such as pension and mutual funds), who used it to conceal large trading interests, thus helping to reduce the risk of the market moving against their trades. Quote concealment is a legacy of a regulation adopted by the Securities and Exchange Commission (SEC) in 1998, Regulation ATS, which allowed ATSs with less than an average 5% share of the trading volume to not publicly display their quotes. This contrasts with the “lit” venues, Nasdaq and the exchanges, which do.

Safe as Houses: Majorities of Americans See Home Ownership, Gold and Jewelry as Safe Investments

September 14, 2014 Comments off

Safe as Houses: Majorities of Americans See Home Ownership, Gold and Jewelry as Safe Investments (PDF)
Source: Harris Interactive

Despite periods of volatility in the real estate market over the past few years, over seven in ten Americans (72%) see owning a home as a safe investment. Majorities agree on this point across generations, albeit with considerable shifts from one generation to the next: nine in ten Matures (89%) see home ownership as a safe investment, compared to just over three-fourths of Baby Boomers (77%) and seven in ten Gen Xers (70%). Even among Millennials – for whom the subprime mortgage crisis of 2007-2008 and the ensuing financial crisis it helped kick off is likely a more formative experience – the majority still see home ownership as a safe investment (63%), albeit with a slimmer majority vote than any of their elder counterparts.

Majorities of Americans also see gold (65%) and jewelry (59%) as safe investments.

The SEC’s Focus on Cybersecurity: Key considerations for investment advisers

September 9, 2014 Comments off

The SEC’s Focus on Cybersecurity: Key considerations for investment advisers
Source: Deloitte

The growing number and complexity of cybersecurity risks facing investment advisers (IAs) has triggered an increased interest in cyber risk management by the United States Securities and Exchange Commission (SEC). Cyber risks and the SEC’s related focus are particularly relevant for mutual funds, hedge funds, and private equity managers.

In this point of view, we outline key considerations arising from the cybersecurity Risk Alert issued by the SEC’s Office of Compliance Inspections and Examinations (OCIE) and describe how IAs can prepare for an OCIE cybersecurity examination and leading practices for IAs to utilize when addressing cybersecurity threats.

Deloitte expects the SEC and its staff to continue to focus on cybersecurity, particularly as the results of a planned sweep of fifty cybersecurity exams unfold. It is critical that IAs not only meet SEC expectations in the cybersecurity arena, but also invest in a program to become secure, vigilant, and resilient in the face of cybersecurity risks.

Rise of the Startup City: The Changing Geography of the Venture Capital Financed Innovation

September 8, 2014 Comments off

Rise of the Startup City: The Changing Geography of the Venture Capital Financed Innovation
Source: Martin Prosperity Institute (Richard Florida)

Virtually the entire modern literature on urban economics – from Jane Jacobs and Robert Lucas to Edward Glaeser and Richard Florida – highlights the role of clustering, density, and diversity of the sort found in cities as key drivers of innovation. Dense urban areas are more productive. They are where highly skilled talent is drawn both to be around other talented people and to enjoy abundant amenities. They are the centers of the kinds social and industrial diversity needed to power creativity and innovation. They give rise to and facilitate the overlapping knowledge and professional networks through which knowledge and ideas spread. They are the places where people from diverse backgrounds can find one another and combine their talents. They are literally defined by their speed of connections and faster urban metabolisms. More than any other social or economic organism, cities are incubators for new ideas, new innovations and new enterprises. In a recent review of the broad literature on urbanism and innovation, economists Gerald Carlino and William Kerr write that: “three-quarters of the U.S. population resided in metropolitan areas. By contrast, 92 percent of patents were granted to residents of metropolitan areas, and virtually all VC investments were made into major cities.”

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