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The European Flash Crash

August 24, 2010 By Leave a Comment

If you haven’t read the 3 postings on this site concerning the Flash Crash, this latest piece won’t mean much. But if you have a moment, I’d read the three articles on the “Flash Crash” and then this piece listed on Dow Jones today…..where did they say that that program was sent to?

By LUKE JEFFS

LONDON Circuit breakers prevented sudden losses in five stocks Monday afternoon on the London Stock Exchange from causing a wider market crash, the exchange’s operator said.

The prices of five LSE-listed stocks BT Group PLC, Hays PLC, Next PLC, Northumbrian Water Group PLC and United Utilities Group PLC started to fall suddenly at 2 p.m. local time.

The cause is unknown at this stage but brokers who were watching the market at the time said yesterday it looked like a “fat finger” trade, where a trader pushes a wrong key or sequence of keys, or a glitch in a trading algorithm that automatically generates orders.

The impact of the sudden sell-off was limited however because the LSE’s automatic circuit breakers kicked in when the losses in these stocks neared 10% and trading these names was immediately suspended. The exchange then cancelled all sell orders on these stocks and reopened trading after five minutes, at which time the shares rebounded to their levels before the mini-crash in just a few minutes.

The FTSE 100, which had traded down 0.8% to 5138 between 12.45 p.m. and 1.15 p.m., was unaffected by the sudden fall of these five shares, hovering at the 5150 level throughout.

The London Stock Exchange Group PLC heralded the intervention as a small victory at a time when the European market model has been called into question following the May 6 flash crash when the Dow Jones Industrial Average fell nearly 1,000 points after a similar sell-off in a handful of stocks that wasn’t stopped.

“At around 14:00, our circuit breakers were triggered in a number of securities on the Exchange’s order book,” a spokesman for the LSE said. “These circuit breakers are built into the Exchange’s systems to track the prices at which automatic executions are occurring and will halt execution if certain price movement tolerances could be breached.”

The cause of the May 6 flash crash is being investigated by U.S. regulators but the fact that brokers could continue selling because different trading venues had different circuit breaker rules is believed to have been a factor. Circuit breakers have been triggered on a few occasions on U.S. exchanges since the flash crash.

A month ago Conservative Member of the European Parliament Kay Swinburne published a draft report in which she suggested that “post the ‘Flash Crash,’ all trading platforms stress-test their technology and surveillance systems” to ensure Europe isn’t prone to the factors that led to the U.S. crash in May.

BT Group, Hays and Northumbrian Water Group declined to comment while Next and United Utilities were unavailable for comment.

More at eFinancialNews.com

Write to Luke Jeffs at luke.jeffs@dowjones.net

Filed Under: Fear and Greed, Money is King, Politics and the Market Tagged With: , , , , , , , , , ,

Quite a Run for Mutual Fund Investing

April 21, 2009 By Leave a Comment

Mutual Fund investing has had quite a run since 1987. According to the Investment Company Institute, the mutual fund industry’s national association, mutual funds held $5.5 Trillion in client assets at the end of 1998. These assets were held in over 7,300 mutual funds.

The growth the mutual fund industry continued to blossom through the turn of the century and at the end of 2007, individual U.S. clients held over $12 Trillion in mutual fund accounts, an incredibly large sum of money. These assets undoubtedly have placed strains on the industry as it has had to build the infrastructure necessary to oversee the proper accounting, client management, marketing, and sales operations associated with these funds.

The Investment Company Institute in its 2008 Investment Company Fact Book, (www.icifactbook.org), goes to great lengths to explain that the cost associated with mutual funds has been going down for some time. When discussing the downturn in fees the ICI uses a fabulous chart that reflects costs going back to 1980. This chart reflects how these costs have gone from 2.32% in 1980, to an average of 1.02% today. This is an astounding decrease and one that you might feel would be in line with the substantial increase in mutual fund dollars. Closer scrutiny of this chart reveals that since the turn of the millennium costs have gone down from 1.28% in 2000 to 1.02% in 2007, But wait…..the news from the ICI gets better. The ICI states that large mutual funds tend to have lower-than-average expense ratios because of economies of scale. The larger the dollars in the fund, the lower the fund cost to the investor. This should be great news for the investor, expenses are going down, economies of scale kick in, and less expense is taken from the asset base by the manager of the fund.

However, the comment by ICI with regards to economies of scale doesn’t work out the way you might think. At the end of 1999 the industry had $6.85 Trillion in mutual funds, by the end of 2007 this had ballooned to $12 trillion. So let’s do some math. If we use the $6.85 Trillion in assets at the end of 1999, with the 2000 expense ratio, per the ICI, of 1.28%, the industry took in over $87 Billion in fees in 2000. By the end of 2007, the fees from mutual funds delivered over $122 Billion in revenue to the industry for the 8,000 mutual funds. Total revenue for the industry rose a compounded average annual rate of 4.25% from 2000- 2007. Now let’s look at what was happening in the marketplace. The S & P 500 stood at 1469.25 on December 31st, 1999. On December 31st, 2007 the S & P 500 stood at 1468.36. During this 8 year period the S & P 500 was flat. Investors in equity funds tied to the S & P 500 or similar indices might not have seen substantial change in their investment dollars but the total fees raked in by the mutual fund companies increased nearly 40%.

Why is this important to our clients? If you are still investing in mutual funds we believe it is time to look at lower cost alternatives that can provide you diversification, tax advantages, and current market pricing. We believe that we can provide a service that will lower your overall cost of managing your portfolio through efficient management fee savings. Shouldn’t the fees that you pay to have your assets managed actually provide you added value not just the pockets of your mutual fund company?

By the way, the ICI goes on to say that at the end of October 2008 total mutual fund assets had fallen to $9.6 Trillion from $12 Trillion at the beginning of the year. How do you think the industry will recoup the lost revenue from the downturn in assets, lower fees?

Filed Under: Investing Misconceptions Tagged With: , ,

Fidelity wants to hold your hand…(Boston Globe March 11th, 2009)

March 10, 2009 By Leave a Comment

Fidelity wants you to know that they are in your corner. Fidelity wants you to make the right decisions for your financial future. According to the Boston Globe they will be having more than 500 free seminars across the United States for customers who need their hands held. The topics will cover things like market intelligence, actionable financial strategies, and three on-line calculators to assist in evaluating your portfolios.

I have a few quick questions Fidelity. Let’s start with, “if you are now going to tell me about market intelligence, where was yours in 2008 so I could have avoided some of this debacle?” Why didn’t some of those fabled asset managers like Peter Lynch save most Fidelity clients from losing nearly 40% from their equity funds? Why didn’t Ned come out of semi-retirement, ride the white horse of diversification, cut the fees on his funds, so that we could endure the bloodbath.  (In 2008, 40 out of Fidelity’s 45 Equity mutual funds listed on page 16 of the Fidelity Mutual Fund Guide Special 2008 Year End issue failed to beat the S & P 500. In fact, the average return for these 45 funds was -42.69%, the S & P 500 according to page 24 was down only -37.00%)

The on-line calculator may be helpful because it reminds clients that because of their losses last year they shouldn’t count on retiring for another 8 years. By the way, Fidelity will thank you for putting even more into their funds in order to be able for you to retire after an additional 8 more years of working. Thanks Fidelity, you are always looking out for us. We needed to know that we made poor decisions in 2008, and use that information to be much more market intelligent. By the way, you have also given me an actionable financial strategy! It’s that I shouldn’t place my money at a firm that will not protect me on the downside (most of the prospecti have limits on equity exposure both high and low) and we’ve learned that your funds don’t really perform to well on the upside. ( Only 5 of 45 funds beat the S & P 500 with the best performing fund being down -30.27% in 2008).

So while I appreciate the opportunity to attend one of these seminars, wouldn’t a more aggressive approach have been to save me from the market last year instead of trying to save me as a client this year? Wait, that’s right, I forgot. The young intelligensia that pepper your vast phone centers across the United States are not required to have the best interests of their clients in mind. They just need to hit their goals and sell more Fidelity answers to our now burgeoning needs. (By the way, you did still collect the fees for having my money in your mutual funds last year didn’t you? I wouldn’t want you to have to cut back on anything Ned!).

One other thing, the 2012 529 plan has lost nearly 20% of its value in the last year. Since that’s just 3 years away, would you mind picking up the tab for the final year of college for our family? See, I learned about actionable financial strategies and being market intelligent at one of your seminars.

Filed Under: Mutual Fund Foibles Tagged With: ,