Colin Twiggs, Author at the patient investor

March 18, 2013

ASIC: High-frequency trading taskforce—Key findings

Findings of the recent ASIC investigation into dark liquidity and high-frequency trading.

The high-frequency trading taskforce found that:

(a) some of the commonly held negative perceptions about high-frequency trading are not supported by our analysis of Australian markets—for example:

(i) that high-frequency traders exhibit unacceptably high order-to-trade ratios. Increases in order-to-trade ratios in Australia have been moderate compared with overseas markets, and other algorithmic traders operate at similar levels; and
(ii) that high-frequency traders’ holding times are often a matter of seconds and therefore that they make no contribution to deep, liquid markets. Our analysis shows that only 1.2% of high-frequency traders held positions for an average of two minutes or less, 18% for less than 10 minutes and 51% for less than 30 minutes; and

(b) there is some basis in fact for other perceptions (e.g. about high-frequency trading creating excessive noise and exhibiting predatory or ‘gaming’ behaviours), but other traders are also contributing to the problem.

Both [the HFT and Dark Pools] taskforces have found evidence of potential breaches of ASIC Market Integrity Rules and the Corporations Act 2001 (Corporations Act), and some matters have been referred to our Enforcement teams for investigation. We have also seen a change in behaviour as a result of our inquiries. For example:

(a) fundamental investors are asking more questions about where and how their orders are executed;
(b) there have been improvements to automated trading risk management controls; and
(c) at least one high-frequency trader has ceased trading in Australia.

The main problem with HFT is investor perceptions that they are paying more for stocks than they should be. HFT trading profits can only come out of investors pockets. While the ASX receives massive fees from HFT traders, the erosion of investor trust in fair pricing is too serious to ignore. Failure to address this could see investors migrate to other exchanges or platforms, especially if there is a transparent auction process where HFT traders are unable to intercede.

Colin Twiggs

Colin Twiggs is a former investment banker with almost 40 years of experience in financial markets. He co-founded Incredible Charts and writes the popular Trading Diary and Patient Investor newsletters.

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.

Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008/2009 and 2020 bear markets well ahead of actual events.
He founded PVT Capital (AFSL No. 546090) in May 2023, which offers investment strategy and advice to wholesale clients.

March 18, 2013

Cyprus: Deposit insurance and moral hazard

The outcry over Cyprus levy on depositors in defaulting banks raises the question: Why were depositors not more wary of where they deposited their funds? Not all banks are created equal. The reason is deposit insurance for deposits under €100,000 implied that the government would stand behind its banks and rescue depositors should the banks ever default. The problem is that no one considered the possibility that all the banks would suffer losses sufficient that the government would be forced to default on both its explicit and implied obligations.

Some time ago I wrote about the moral hazard of deposit insurance:

Deposit Insurance: When too much of a good idea becomes a bad idea

Deposit insurance was introduced in the 1930s and saved the US banking system from extinction. Administered by the FDIC, and funded by a levy on all banking institutions, deposit insurance, however, encourages moral hazard. Depositors need not concern themselves with the solvency of the bank where they deposit their funds so long as deposits are FDIC insured. High-risk institutions are able to compete for deposits on an equal footing with well-run, low-risk competitors. This inevitably leads to higher failure rates, as in the Savings & Loan crisis of the 1980s.

The FDIC does a good job of policing deposit-takers, but no regulator can substitute for market forces. Deposit insurance is critical during times of crisis, but should be scaled back when the crisis has passed. Either limit insured deposits to say $20,000 or only insure deposits to say 90% of value, where the depositor takes the first loss of 10%. That should be sufficient to keep depositors mindful as to where they bank. And restore the competitive advantage to well-run institutions.

Requiring depositors to take the first loss of 10 percent should be standard practice for deposit insurance. The same should hold true for bank creditors. But we need to distinguish between insolvency — where liabilities exceed assets — and a liquidity event where the central bank is only called on to provide temporary respite. If the bank is rescued from insolvency by the regulator, bond holders should be required to take an equivalent haircut — painful yet not life-threatening. No one is entitled to a free ride. And bank shareholders, if a there is a bail-out, should lose everything — similar to the Swedish approach in the 1990s.

Colin Twiggs

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.

March 18, 2013

Cyprus Deposit Levy: No Panic Yet But Scary Long-Term Consequences – Forbes

Karl Whelan, Professor of Economics at University College, Dublin reminds us:

….the fact that we don’t see lines at ATMs in Spain and Italy doesn’t mean there isn’t a bank run going on. The Northern Rock episode was a complete anomaly. Modern bank runs stem from people pushing buttons to execute electronic withdrawals of large amounts of funds. For example, I was living in Ireland in 2010 when non-residents pulled €186 billion out of Irish banks between the end of July and the end of December. This was over 100% of Irish GDP and yet there wasn’t a single sign of panic among retail depositors.

Colin Twiggs

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.

March 18, 2013

Local government: the Lakewood model

In his report for the Urban Taskforce Australia, Professor Percy Allan recommends that local government adopt the Lakewood model of contracting in services. Lakewood was a sleepy California town threatened with being engulfed by urban sprawl — until they found a novel way of managing costs and improving services.

Lakewood of the early 1950s was David fighting the Goliath of Long Beach, a city intent on gobbling up its unincorporated neighbour parcel by parcel. The legal turf battles were exhausting Lakewood’s defenders, most of whom were transplants drawn to the promise of this sleepy village-turned-post-war boomtown. Then along came John Sanford Todd, a struggling attorney and proud Lakewood resident, who dreamed up a way to preserve his community’s independence without it going broke: It would become a new kind of city, one that contracted out for police protection, trash collection, fire fighting – just about every service a city provides.

That practice is commonplace in the USA today, but it was a revelation a half century ago. Todd’s vision, dubbed “the Lakewood Plan,” became a model of local government that informed incorporation drives throughout Southern California and beyond. Suburbia took shape in a rash of “contract cities,” including the neighbouring Dairy Valley (now Cerritos), La Puente, Bellflower, Duarte, Irwindale, Norwalk and Santa Fe Springs, which sprang up in such rapid succession that some observers began proclaiming the end of big cities.

There may even be opportunities to extend this model to metropolitan or state level, where states contract in and share the costs of centralized services provided by specialist corporations. This could apply to areas as diverse as road transport, police services and payroll functions.

Colin Twiggs

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.

March 18, 2013

Australia: Sydney is reaching a liveability crisis

Professor Percy Allan kindly sent me a copy a report, to which he contributed, on living conditions in Sydney — prepared by the Urban Taskforce. Here are some interesting excerpts:

Over the next 20 years Sydney will need at least 600,000 new homes located in infill sites and in greenfield sites on the fringes of the metropolitan area. But Sydney has not built sufficient homes over recent years with its current production only half that of Victoria on a per capita basis. Already the average house cost in Sydney is one of the highest in the world and this is impacting on affordability for many families. The Sydney median house is $100,000 more expensive than the equivalent in Melbourne. The average weekly earnings of a first homebuyer can afford a mortgage of $331,000 while the average house price in Sydney is $563,300. The lack of housing supply has led to an increase in rents by 40% over the last 5 years…….

Conclusion

Local government has aggravated Sydney’s housing crisis by:
• Not rezoning sufficient land for affordable multiple dwellings,
• Not adopting clear consistent plans and regulations to guide permissible development,
• Not ensuring individual development assessments are independent of political and vested interests,
• Not spending enough on capital works thereby creating a large backlog of unsatisfactory community infrastructure,
• Using depreciation provisions and reserves for non-capital purposes,
• Under-borrowing for infrastructure enhancements thereby forcing new homebuyers to contribute disproportionately towards this end,
• Not sharing the cost of greenfield infrastructure with existing communities that inherited free public assets from previous generations, and
• Not sharing or outsourcing activities that would benefit from economies of scale and scope nor focusing on specific place management to better respond to community needs at a street level.

Colin Twiggs

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.

March 18, 2013

Quote: Margaret Thatcher

Watch your thoughts for they become words.
Watch your words for they become actions.
Watch your actions for they become habits.
Watch your habits for they become your character.
And watch your character for it becomes your destiny.
What we think, we become.
My father always said that… and I think I am fine.”
~ Margaret Thatcher

Colin Twiggs

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.

March 18, 2013

ASX and Asia fall

The ASX 200 retreated more than 2.0% Monday after the Cyprus deposit grab unsettled financial markets. Expect another test of support at 4980. Breakout would warn of a correction, while recovery above 5150 would signal an advance to 5500*. Declining 21-day Twiggs Money Flow indicates medium-term selling pressure.
ASX 200 Index

* Target calculation: 5000 + ( 5000 – 4500 ) = 5500

Dow Jones Japan Index dropped about 1.5%. Follow through below short-term support would indicate no more than retracement to the rising trendline.

Dow Jones Hong Kong Index has fallen about 2.0% so far. Breach of support at 472 signals a correction.

Dow Jones Singapore Index has fallen 1.0% in the morning and we can expect further weakness in the p.m.

European markets are likely to open lower. If the US follows and finishes the day with a weak close, negative sentiment could start to feed on itself, tipping global markets into a correction. Overall, the primary trend in the US and Australia remains positive.

Colin Twiggs

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.

March 17, 2013

J.P. Morgan, Goldman Get a Dose of Fed's Reserve | WSJ.com

David Reilly reports on the Fed’s latest stress tests:

The passes show how far big U.S. banks have come since the financial crisis. But capital levels seen under the tests, and taking into account the capital-return plans, weren’t especially strong. Tier 1 common ratios for J.P. Morgan and Goldman, for example, were only marginally above the 5% minimum needed.

What’s more, leverage ratios including capital returns are particularly thin: Of the six biggest banks, four had ratios below 5%. While above the test’s 3% minimum, such levels wouldn’t give banks tremendous room to maneuver in a crisis.

The leverage ratios are particularly telling because they don’t allow for risk-weighting of assets. That approach is coming under increased criticism for potentially allowing banks to mask the true level of risk on their books.

Colin Twiggs

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.

March 17, 2013

ZERVOS: 'This Is A Nuclear War On Savings And Wealth' – Business Insider

Joe Weisenthal reports on Jefferies strategist David Zervos’ latest note:

What happened to Cyprus on Friday evening was one of the most significant developments in the Eurozone since the Greek election last summer. To tax the bank deposits of savers sends an ominous message to the entire global investment community. All of us should really take a moment to consider what the governments of Europe have done. To be clear, they initiated a surprise assault on the precautionary savings of their own people. Such a move should send shock waves across the entire population of the developed world.

Colin Twiggs

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.

March 17, 2013

Drug-resistant bacteria and lack of new antibiotics pose ‘catastrophic threat’ | Nature News

Daniel Cressey writes:

The danger of antibiotic-resistant bacteria should be placed alongside pandemic influenza and terrorism on the UK government’s list of threats to national security, the country’s most senior medic has advised. Sally Davies, the UK chief medical officer, warned that antimicrobial resistance “poses a catastrophic threat” and that international action to combat this problem is needed now. Davies, speaking as she launched a report on the problem compiled by some of the country’s leading doctors and academics, called for more research into new antibiotics and better surveillance of the these bugs, incorporating more genomic testing to increase scientists’ understanding of emerging resistance.

Colin Twiggs

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.