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Nivine Richie, Ph.D., CFA is an Associate Professor of Finance at the University of North Carolina Wilmington. She teaches courses in corporate financial management, derivatives, fixed income, and commercial bank management. Her research interests include cost of capital, banking, and derivatives. She has published studies in the Journal of Economics and Finance, Journal of Futures Markets, Review of Futures Markets, and Journal of Trading, among others.

Calls For Advisor Fiduciary Standard

04-16-2014 10:38 PM with no comments

Financial advisors must know their clients and suggest investments that are suitable given the client’s risk tolerance and return objectives. But a number of consumer advocates say that “suitability” is not enough.

 

From a joint letter written to the SEC by AARP, Consumer Federation of America, CFP Board, FPA, Fund Democracy, Inc, and NAPFA:

 

Designed with a sales relationship in mind, however, the suitability standard does not impose the same clear obligation that exists under a fiduciary standard, which requires the adviser to put the customer’s interest first. Moreover, the suitability standard does not impose an obligation on brokers to appropriately manage conflicts of interest in order to ensure that they do not influence recommendations. These are among the standards that distinguish a suitability relationship from a fiduciary relationship.

For discussion:

 

According to this article from Thinkadvisor (15 April 2014), why do advocates claim that the fiduciary standard is needed to protect clients?

 

Posted by Nivine Richie

The Euro Lives To Fight Another Day

04-13-2014 10:41 PM with no comments

The common currency caused European nations a giant headache during the financial crisis.  But now that the dog days are over, the euro seems to be a winner once again.

 

From Bloomberg (Wishart, 10 April 2014):

 

The euro had its biggest annual gain since 2007 last year as the currency bloc emerged from its longest-ever recession and investors flooded back in. Ireland, Italy and Spain have sold government bonds at record low yields. Even Greece, which briefly flirted with the idea of bringing back the drachma at the height of the crisis, ended a four-year exile from international markets with a bond sale April 10. Even so, it’s not all positive. The economy of the 18-nation bloc is forecast to grow just 1.2 percent this year, less than half the 2.9 percent pace in the U.S. Banks are still reticent to lend. Unemployment remains close to its record at about 12 percent and about a quarter of young workers can’t find a job. What’s emerging is a multi-speed recovery, with Germany and the newer members like Estonia powering ahead while peripheral nations like Italy and Portugal are barely creeping forward.

For discussion:

 

The Bloomberg article argues that perhaps monetary union is not sufficient. What are some of the arguments for increasing the degree of economic union among European nations?

 

Posted by Nivine Richie

Adding Farmland to An Investment Portfolio

04-13-2014 8:56 AM with no comments

This interview with one of the leading farmland investors in the US presents several cases for adding farmland to an investment portfolio.

 

One of the primary reasons for investing in farmland is the low correlation with stock markets. Another is the asymmetry in risk and returns.

 

For discussion:

 

Why is correlation an important factor in choosing an investment to add to your portfolio?

 

Do you agree that farmland is a sound investment? Why or why not?

 

How can an investor enter the farmland investment market?

 

Posted by Nivine Richie

Shedding a Little Light on Dark Pools

04-12-2014 10:32 PM with no comments

Reuters reports that the SEC is considering a proposal to limit trading outside of exchanges and drive trades back to exchanges. “Dark pools” are one example of an alternative trading venue that is under SEC attack.

 

From the Reuters article (Lynch and McCrank, 11 Apr 2014):

 

They say that the amount of trading being done in the "dark" means that publicly quoted prices for stocks on exchanges may no longer properly reflect where the market is, meaning that investors may not be getting the best prices for their trades.

 

The measure under consideration, known as a "trade-at" rule, has long been sought after by exchanges like Nasdaq OMX and the New York Stock Exchange as a way to win back market share against off-exchange competitors such as Credit Suisse's Crossfinder, one of the largest dark pools in the United States.

 

(read the full article here)

 

For discussion:

 

What are dark pools?

 

What is the current SEC rule regarding trade execution?

 

How does the “trade-at” rule compare with the existing rule?

 

Posted by Nivine Richie

In The Absence of Electronic Trading, Open Outcry Kicks In

04-11-2014 9:47 PM with no comments

Photo of Chicago Board of Trade corn pit, 1993 courtesy of Jeremy Kemp, available by Creative Commons from Wikipedia

 

 

One trader described it as a “blast from the past.” In Chicago this week, a computer outage caused trading on the electronic Globex platform to stop temporarily. And that drove traders to the open outcry “pits” to keep business going.

 

From the Chicago Tribune (8 Apr 2014):

 

The world's largest futures markets operator had to shut electronic trade for leading agricultural contracts on Tuesday, just a day before key U.S. crop data, as rare technical problems hit and sent traders scrambling to get back on the floor.

 

CME Group, which has just won a court case giving it the right to use electronic trades as well as open outcry business in calculating end-of-day prices, had to rely solely on the centuries-old floor trading for these on Tuesday.

 

The outage was serious because it came just 15 minutes before the close of trading. According to the article, “Traders flocked back to the old octagonal ‘pit,’ packing shoulder to shoulder and shouting orders across its graduated floor. Traditional hand signals came to the rescue to communicate in the chaos.”

 

For discussion:

 

What are the benefits and limitations of electronic trading compared with open outcry trading?

 

Posted by Nivine Richie

Back In The Bond Markets Again

04-10-2014 6:23 PM with no comments

The consequences of failing to pay your debts are severe. First, the next time you try to borrow money, you will pay a higher rate. But a worse consequence may be that the next time you borrow money, you can’t find any money to borrow.

 

Losing access to capital markets is serious for companies and for countries whose credit qualities decline. But Greece’s re-entry into the bond markets shows that bankruptcy isn’t the end of the world. On Thursday, Greece plans to begin selling long-term bonds again.

 

From the NY Times (Alderman, 9 April 2014):

 

The deal represents a major milestone for the country, which was effectively shut out of the markets in 2010 when the debt crisis left it dependent on international bailouts to stay afloat. Chancellor Angela Merkel of Germany, who more than any other leader is associated with European austerity, is scheduled to arrive in Athens on Friday to affirm that the government is on the right path.

 

The bond sale reflects increased optimism that Greece and other wobbly euro zone countries have turned a corner. In recent months, borrowing costs dropped significantly for Ireland, Portugal, Spain and Italy, as the investors deemed them less risky.

 

For discussion:

 

What factors must investors consider before they buy bonds from a recently bankrupt borrower?

 

Posted by Nivine Richie

New Book Looks Behind the Scenes of High-Frequency Trading

04-06-2014 10:49 PM with no comments

A few short years ago, time was measured in seconds. Today on Wall Street, time is measured in milliseconds.  A recent article in the NY Times (Lewis, 31 March 2014) gives us a glimpse into the new book by Michael Lewis, Flash Boys: A Wall Street Revolt, and also gives us a glimpse into the world of high-frequency trading.  

                                         

“Latency” was simply the time between the moment a signal was sent and when it was received. Several factors determined the latency of a trading system: the boxes, the logic and the lines. The boxes were the machinery the signals passed through on their way from Point A to Point B: the computer servers and signal amplifiers and switches. The logic was the software, the code instructions that operated the boxes. Ryan didn’t know much about software, except that more and more it seemed to be written by guys with thick Russian accents. The lines were the glass fiber-optic cables that carried the information from one box to another. The single-biggest determinant of speed was the length of the fiber, or the distance the signal needed to travel. Ryan didn’t know what a millisecond was, but he understood the problem with this Kansas City hedge fund: It was in Kansas City. Light in a vacuum travels at 186,000 miles per second or, put another way, 186 miles a millisecond. Light inside fiber bounces off the walls and travels at only about two-thirds of its theoretical speed. “Physics is physics — this is what the traders didn’t understand,” Ryan says.

 

(read the full article here)

 

For discussion:

 

After reading the NY Times article adapted from Michael Lewis' new book, what is your opinion of high-frequency trading? Is regulation necessary?

 

Posted by Nivine Richie

What's Driving Stock Prices?

04-05-2014 9:15 AM with no comments

This Bloomberg interview lists a number of factors that drive stock prices: momentum trading, valuation, multiples, economic reports. But sometimes, we just have a hard time deciphering precisely what is going on.

                

One possible explanation for the recent market selloff in the Nasdaq is the “Biotech Bubble.” Investor optimism can drive up stock prices, but it can't drive prices up forever. At some point, reality must set in and bring prices back to properly valuations.

Click here to view this Bloomberg video

 

For discussion:

 

·       What is a “momentum stock?” How would you define a “bubble?”

 

·       What factors drive stock valuations?

 

Posted by Nivine Richie

Corporate Bonds In Demand

04-04-2014 9:15 PM with no comments

Corporate bonds are hard to find, according to online trading platform MarketAxess Holdings. This electronic exchange that was established in 2000 provides an electronic venue for buyers and sellers to meet and post bids and offers for corporate bonds. According to BloombergBusinessweek (Abramowicz, Apr 4 2014), about 46% of the attempts to purchase bonds on MarketAxess fail when no seller is found.

 

From the article:

 

While economists expect Treasuries to lose value this year as the Fed slows its securities buying, investors are still stampeding back to U.S. assets in the face of uncertainty in China and an escalating conflict between Ukraine and Russia.

 

Buyers have gobbled up about $415 billion of new corporate bonds in the first three months of the year, the third-biggest quarter ever, according to data compiled by Bloomberg. Petroleo Brasileiro SA and Cisco Systems Inc. have led this year’s sales, which follow a record $1.5 trillion in issuance last year, Bloomberg data show.

(read the full article here)

 

For discussion:

 

Though MarketAxess has grown to approximately 15% market share, in what ways is the corporate bond market still an “over-the-counter” market rather than an exchange-traded market?

 

Posted by Nivine Richie

A Bank for the Underbanked

04-03-2014 7:58 PM with no comments

The idea that U.S. post offices should offer basic financial services is new to us, but not necessarily to others around the world. In many other countries, individuals can get basic banking services such as check cashing and bill paying at the local post office.

 

From the LA Times (2 April 2014), there are some good reasons to for the post office to offer banking services:

 

The Postal Service has an unmatched network of more than 30,000 post offices in virtually every community in America, nearly 60% of which are in ZIP Codes where there is only one bank branch or none at all. Many residents of these "bank deserts" are among the 68 million financially underserved adults who don't have bank accounts or who have to rely on costly services such as check cashers and payday lenders for some of their financial needs. The underserved collectively spent $89 billion in interest and fees on alternative financial services in 2012.

 

(read the full article here)

 

For discussions:

 

·       What makes a bank a bank? In other words, what characteristics define a bank?

 

·       What does it mean to be “underbanked” or “unbanked?”

 

·       What are the benefits of allowing post offices to offer financial services? What are the risks?

 

Posted by Nivine Richie

Is the Market Rigged?

04-02-2014 8:10 PM with no comments

In this CNBC video, we get a sense of how high-frequency traders try to take advantage of order imbalances in the market. These traders can determine that a large institutional investor is trying to buy or sell because the order size is so much larger than the average order size on an exchange.

For discussion:

 

·       How would you define “price impact” and its effect on transaction costs?

 

·       In your opinion, is the market “rigged?”

 

Posted by Nivine Richie

Investors Eager to Buy Infrastructure Assets

03-29-2014 9:21 PM with no comments

Traditionally, when governments seek financing for infrastructure-related projects, they turn to the big banks. However, as banks grow increasingly reluctant to invest in risky projects, governments are turning to long-term investors such as pension funds, endowment funds, and sovereign-wealth funds.

 

From the Economist (22 Mar 2014):

 

Sovereign-wealth funds and others after the raciest returns are keen on owning infrastructure assets rather than just lending to them. Private-equity firms have raised $250 billion to spend on infrastructure, up from $9 billion a decade ago, says Preqin, a data provider. Blackstone, a buy-out firm, is among those that financed a $900m hydroelectric dam in Uganda that provides half the country’s electricity. Bringing in private investors has benefits beyond shifting debt off public balance-sheets (a wheeze behind many of Britain’s less-than-stellar public-finance initiatives). The three prisons in France will be built by a contractor that will bear the risk of cost overruns, for example. Unlike lackadaisical local authorities, the companies involved will be deeply bothered if the prisons open late, as payments will kick in only once they are available. If operating them is dearer than expected, investors will suffer. Private-sector rigour can thus bring down the cost of public services.

 

(read the full article here)

 

For discussion:

 

What are the benefits and risks associated with private funding of infrastructure rather than bank lending?

 

Posted by Nivine Richie

Can Retail Investors Beat the Pros?

03-28-2014 7:59 PM with no comments

In finance, professional traders are often referred to as “informed” traders while retail investors are sometimes called “noise” traders. From these labels, one can conclude that informed traders have the advantage over noise traders, and that noise traders can’t beat the market.

 

According to this MSN article (Bilello 27 Mar 2014), however, there may be reason for small investors to take heart. While they probably can’t outsmart the pros, they do have a few advantages over them.

 

1.     Small investors have the advantage of time. With multi-year investment horizons, small investors can outwait the professional investors, who probably need to show a return within a very short time frame.

 

2.    Small investors have the advantage of patience. No clients means no need to act impatiently. Professional investors do not always have this luxury.

 

For discussion:

Do you believe you can “beat” the market? Why or why not?

 

Posted by Nivine Richie

Gold Investing May Get Easier

03-28-2014 4:21 PM with no comments

An investor can buy gold several ways. One is to buy gold futures contracts on the CME. Another is to buy exchange traded funds that mirror the price of gold. Investors can even buy physical gold—but then the headache of delivery and storage comes into play.

The Singapore Exchange Ltd. (SGX) is considering making the third option more convenient.

According to Bloomberg Businessweek (Chanjaroen, 26 Mar 2014):

The plan would include bullion deliveries into and out of the Southeast Asian country, said the people, who asked not to be identified because the issue is confidential. SGX declined to comment in an e-mailed statement.

SGX may join peers in South Korea and China in offering physical bullion trading as Asian demand increases, drawing supplies out of Europe. The Singapore government is promoting the city-state as a center for precious metals by removing a sales tax on investment-grade metals in 2012, and as JPMorgan Chase & Co. and UBS AG started storing gold for customers.

 

For discussion:

What are the benefits and limitations of each of these three methods of gold investing?

 

Posted by Nivine Richie

Active Versus Passive Investing

03-22-2014 8:13 PM with no comments

Two broad approaches to choosing investments for your portfolio are passive investing and active investing. Active investors believe that they (of their money managers) possess the ability to choose winning investments and “beat” the market. Some active investors choose market timing strategies while others choose stock-picking strategies. Unfortunately, on average, most investors are average. In the end, many active investors discover that they cannot beat the market. In fact, many discover that they underperform the market because of the fees involved with trying to actively manage the portfolio.

 

Enter passively-managed index funds. Proponents of passive investing claim that the best investment decision is to match the market return, and even better, to do so at the lowest possible cost. This investing style chooses financial assets that mimic an index.

 

According to this USA Today article (Waggoner, 20 Mar 2014):

 

Your basic index fund boots the manager and selects its stocks (or bonds, or other securities) according to an index, such as the Standard and Poor's 500. Until recently, most stock indexes weighted their holdings according to the market value of the stock.

 

The article goes on to describe other weighting schemes for passively-managed funds such as equal weighting or rules-based funds. Whether these other weighting schemes are wise is debatable, of course. According to the article, any scheme that deviates from a traditional market value weighted index is just another form of active trading. In the end, a true passively-managed fund may still be the best investment idea.

 

For discussion:

 

·       According to the article by Bill Sharpe found here http://www.stanford.edu/~wfsharpe/art/active/active.htm, what are the differences between active and passive investors? Why must the actively managed fund underperform the passively managed fund?

 

·       According to the USA Today article cited in the post above, what are the limitations associated with a market-value (or market-cap) weighted index fund?

 

Posted by Nivine Richie

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