Wednesday, September 29, 2010

In the News: SEC Reviewing Sales of Structured Products

Bloomberg issued a news release today announcing that sales practices of banks and broker-dealers for structured products are being investigated by the Securities and Exchange Commission (SEC) for product overcharging and disclosure of conflicts of interest.

This is not a surprising new release: it is consistent with our findings in our paper on reverse convertibles, ‘What TiVo and JP Morgan teach us about Reverse Convertibles.’ In this paper, we find that brokerage firms consistently overcharged investors of reverse convertibles such that the calculated expected return of this structured product is negative. 

SLCG has a dedicated website providing papers, notes and calculation tools on a variety of structured products. Other related papers include:

Saturday, September 18, 2010

FINRA Regulatory Notice: Municipal Securities

FINRA Reminds Firms of Their Sales Practice and Due Diligence Obligations When Selling Municipal Securities in the Secondary Market

The Financial Industry Regulatory Authority (FINRA) published Regulatory Notice 10-41 reminding broker dealers including municipal securities dealers to 
fully understand the municipal securities they sell in order to meet their disclosure, suitability and pricing obligations under the rules of the Municipal Securities Rulemaking Board (MSRB) and federal securities laws. 

There are certain risks in investing in municipal bonds. Take for instance the default risk of the municipal bond issuer, the municipality is responsible for paying the investor the due interest and principal at maturity. Though municipal bonds can be insured against default by a bond insurer, the investor is still exposed to risk: the credit risk of the bond insurer itself. Moreover, municipal bonds are subject to interest rate risks. Retail investors should also be aware of the extra costs of purchasing municipal bonds, such as fees and mark-ups and be sure that they are not excessive relative to the market.

For related information, investors are invited to visit SLCG’s dedicated website which contains papers including:

Friday, September 17, 2010

FINRA Press Release: Illicit Equities Trading Strategy

FINRA Sanctions Trillium Brokerage Services, LLC, Director of Trading, Chief Compliance Officer, and Nine Traders $2.26 Million for Illicit Equities Trading Strategy

The Financial Industry Regulatory Authority (FINRA) issued a press release this week announcing that 
it has censured and fined New York-based Trillium Brokerage Services, LLC, $1 million for using an illicit high frequency trading strategy and related supervisory failures. Trillium, through nine proprietary traders, entered numerous layered, non-bona fide market moving orders to generate selling or buying interest in specific stocks. By entering the non-bona fide orders, often in substantial size relative to a stock's overall legitimate pending order volume, Trillium traders created a false appearance of buy- or sell-side pressure. 
The settlement is detailed in the FINRA AWC No. 20070076782-01.

A bid or ask order given by a trader with the intention to trade is a bona fide order. FINRA alleges that Trillium put in non-bona fide orders to induce unknowing market participants to trade against Trillium’s limit orders (limit orders are a trader’s highest bids and lowest offers). This is especially effective in securities that trade in low volumes, as non-bona fide orders can give the appearance of liquidity and order depth. FINRA found that Trillium completed 46,000 trades on non-bona fide orders and has brought disciplinary action against the company’s employees.

Hedge funds and brokerage firms possess technology and operations that obviously give them an upper hand in trading over retail investors or traders. We ask retail investors or traders to be aware of such illicit trading activity and market manipulation for thinly-traded stocks, such as microcap stocks.

Wednesday, September 15, 2010

FINRA Investor Alert: Equity-Indexed Annuities

Equity-Indexed Annuities – A Complex Choice

The Financial Industry Regulatory Authority (FINRA) published an Investor Alert on the rewards and risks of equity-indexed annuities. An annuity makes periodic payments to the holder of the annuity. There are fixed annuities that make fixed payments and variable annuities that make variable payments. Equity-indexed annuities (EIA) are similar to both fixed and variable annuities. They pay an interest rate linked to an equity index and guarantee a minimum interest rate.

Investors will benefit from this investor alert: EIAs are complex contracts whose true risks and costs are often obscured and how the lack of SEC oversight and regulation have resulted in ‘unscrupulous’ sales practices of equity-indexed annuities issuers.

SLCG has written a paper on equity-indexed annuities explaining more of this. Investors can visit our dedicated website for more related papers and notes.