Sunday, July 30, 2017

ETF Liquidity: How Difficult is ETF Market Making?

When Goldman Sachs decided to quit as a lead market maker for ETFs, you have to ask just how liquid ETFs would be in volatile, declining market. Goldman Sachs was dissatisfied with a business that yielded fractional pennies on trades while, as a large bank, it was required to maintain strict regulatory capital requirements for liquidity.  This retreat from the ETF market maker business means that smaller, less regulated firms, which will not have strict capital requirements, will be picking up the Goldman Sachs  ETF market making business and be responsible for the liquidity of ETF trades.

In "ETF Liquidity: A Market Maker's Perspective" and "Understanding a Market Maker's Risk Can Help You Save on Transaction Costs" in this Vanguard publication, there is a discussion of the market maker process.  The articles also advise not attempting transactions at the opening or close of the

Sunday, July 23, 2017

Bond Trading Weakness in U.S. Large Banks

When Goldman Sachs reported its 2nd Quarter bond trading revenue had taken a nosedive, the news caught my attention because I had been reviewing the abysmal short term 2016 investment results, which would include bonds, derivatives, currency hedges, etc., of the three largest State of Illinois pension systems and the total negative returns (one eked approximately 2/10 percent).  This is not unusual for the Illinois pension funds which either have incompetent short term investment traders or contracted investment firms.  But when you see Goldman Sachs under performing, it gets your attention.

The Goldman Sachs loss of bond trading revenue was compounded by  large losses in commodities

Saturday, July 22, 2017

Central Banks Should Communicate`

In my response to Brad Setzer's post on central bank coordination, with which I have no real objection other than his citation of an article which continues the exceptionally false Target2 risks argument which is not even competent economics, I merely pointed out how difficult, and often impractical, it is to get central banks to coordinate given different situations within their country and that the ECB presents an  even more difficult problem, because it serves a monetary union without fiscal transfer processes and without a fiat currency.  With respect to Lael Brainard's speech on cross

Friday, July 21, 2017

Is Federal Reserve and ECB Monetary Policy Coordination Practical?

Brad Setzer has an interesting post on central bank monetary coordination based on Lael Brainard's recent speech.  I am not convinced the issue is so much correcting "imbalances" or the supply of high quality government bonds in the eurozone.  If eurozone banks are keeping deposits at the ECB at a negative 40 basis points charge, what does that say about the balance sheets of those banks?  The ECB does not publish excess reserve data on a monthly or weekly basis; therefore, we have no timely means to track stock and flows.  Additionally, the ECB Asset Purchase Program is providing bank liquidity, but its operation has created excess liquidity in some surplus countries where the liquidity is less needed and regulatory balance sheet problems in other countries where banks need to hold on to

Friday, July 14, 2017

Does Russia Fear Qatar's Natural Gas?

In April 2017, Qatar announced it was going to increase liquid natural gas (LNG) production despite a three year market slump, which was viewed as not likely to make its major competitor, Russia, happy. Then, in May, Qatar's state news agency website was hacked with a false flag news story attempting to portray the emir pro Iran and Hamas, a growing friend of Israel and of tensions with Trump.  All designed to inflame other members of the Gulf Coalition.  Despite U.S. Intelligence agencies quickly identifying Russian hackers, perhaps mercenaries, as the source of the false flag

Wednesday, July 5, 2017

Are ETFs a Potential Market Liquidity Problem?

I have previously written are about market liquidity potential problems in responding to a Noah Smith article and put forth the opinion that equity ETFs are more liquid than ETNs, although a financial crisis might cause market liquidity problems when everyone is trying to sell.  I also said they are a second choice to mutual funds holding same basket of stocks, because the transaction costs can be significantly larger for ETFs although their annual fees may be less.  Now, Bank of America is questioning whether large money flows into ETFs is distorting market price-earnings(PE) and  over