Marketplace Scratch Pad

Top of the Morning

Paddy Hirsch Aug 5, 2009

Paddy Hirsch here, filling in for Scott until the weekend.

No flashing

Top story today is news that the SEC plans to crack down on flash orders.

This is going to irritate some small and up-and-coming exchanges like BATS, who show some clients orders for a very brief period before they go wide to the rest of the market. What’s more irritating is the apparent confusion in this Times article between high-frequency trading and flash orders. They are not the same, and yet most reports, even those in the financial press, appear to confuse them. A recent story in the Economist does a good job of spelling out the difference.
Let’s hope the SEC isn’t as befuddled on this one as most reporters seem to be.

Here’s a tip…

Watch the Chinese. It looks as though our partners across the Pacific are worried about inflation.

The WSJ reports they want to buy more TIPS – Treasury inflation-protected securities. These bonds are like T-bills but they’re a hedge against inflation. Here’s a good explanation of how they work.
Anyway, what China wants, China seem to get these days. Our government is falling over itself like an eager suitor courting the baron’s daughter.

Officials from the U.S. and China discussed TIPS issuance at high-level talks in Washington last week. U.S. officials assured their Chinese counterparts that they remained committed to TIPS sales


Will they or won’t they? Recent reports say the auto industry is salivating at the prospect of a couple more billion bucks being pumped into the Cash for Clunkers plan.
Seems dealers may not be so chuffed. The WSJ reports dealers are worried they’ll run out of inventory.

Chrysler’s having particular problems, thanks to the plant shutdowns while it was in bankruptcy. And, surprise, surprise, Toyota’s running out of Priuses (or is that Priii…or maybe Prius’?).

But even if the Senate does come up with the money, and even if there are enough Priux (OK, I give up) on the lots, the bureaucracy behind the program is proving a problem. It’s even more of a clunker than that VW Rabbit with the flat tires that’s rusting away in your neighbor’s driveway.

But it is a government program, and they hired Citigroup to process applications, so what do you expect?

Risky business

John Carney of Clusterstock has in interesting column today, positing that what went wrong with mortgage-backed securities was not the collateral (ie the mortgages) but the capital structure. The top tranche was too big, he says, reflecting the demand from investors (and I ask: and the hubris of the issuers?).

Carney’s case is bolstered by the recent repackaging of a collateralized loan obligation by Morgan Stanley, in which all the securities issued were AAA. The deal was downgraded, and MS recut the structure so that it now has a subordinated tranche, so someone can absorb the losses. In its original form everyone had to absorb the losses, which meant everyone was a loser. The new version creates a fall guy, leaving the senior investors in the money. See the Marketplace Whiteboard on Financial Alchemy for a better explanation.

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