Let's see if this gets through. Sorry about the formatting.
>>How are you(guys) valueing the BCE PRE-NT split options? <p>
Hi Lloyd. Yep, you're calculating the underlying price correctly. The
only reason the IVs for BCQ are as high as they are is that for some
reason the IV on BZE options in the States are even higher. A weird<br>
case where the sum is greater than the total of the parts. Across the<br>
board vols have fallen like a rock. I haven't seen anything comparable<br>
since 1992. It's unusual to have stocks trading this far below their<br>
statistical volatility.<p>
After the close yesterday I attended an informational meeting put on<br>
by the ME about their plans for automation. It was an eerie<br>
feeling...if I closed my eyes I would have thought I was back three<br>
years in time listening to the mandarins at the TSE. The exact same<br>
issues have surfaced, and again the exchange has decided to cut off<br>
the toes to make the shoes fit. In every instance where a conflict<br>
arises between current trading rules and system capabilities the<br>
choice was made to change the rules. Without getting into too much<br>
mind-numbing detail, the upshot is that there will be about 80% of the<br>
listed series going into 'dark markets' where there is no dynamic live<br>
quote. Anyone wishing to trade or even to know what their options are<br>
worth will have to ask for a RFQ (request for quote). Other<br>
consequences will be the end of 'market' orders and GTC orders. If no<br>
provisions are made to change the current crossing rules, specialists<br>
have no incentive to remain and the upshot will be a bulletin-board<br>
like the TSE where all orders are crossed by the member except for the<br>
garbage they don't want which they dump into the market, such as<br>
remains. If you like the way banks treat you now you'll love the new<br>
marketplace. No discovery and disclosure, no competition for orders,<br>
just the 'reporting' of trades after the fact. I'm afraid Canadian<br>
investors will have one or two experiences with dark markets, no<br>
ability to enter market orders and be assured of getting a fill, and<br>
come to the reasonable conclusion that doing business in the States is<br>
a much better idea. If automation were such a great idea, the two<br>
largest and most successful exchanges of their kind in the world, the<br>
NYSE and the CBOE, would have embraced it long ago. I'm all in favour<br>
of appropriate technology such as electronic order handling and<br>
reporting, but when the marketplace is systemically prevented from<br>
responding to incoming order flow, the markets perforce degrade to the<br>
lowest common denominator. No one will post their 'best' market when<br>
there is a time factor involved in changing it as the market changes.<br>
My station is about twenty feet from the futures pit here in Montreal,<br>
and I wish you could all hear what an open outcry market is like. With<br>
every change the pit erupts in a cacaphony of traders yelling bids and<br>
offers, competing for order flow. That is what a market should be, not<br>
some pre-programmed system in offices scattered across the country<br>
that mindlessly sends in quotes to a central computer, and that's the<br>
best you get.<p>
There is one last line of defense, and that is the last battle I will<br>
fight: the one sure way to improve an aautomated market place is to<br>
ban the prevalent practise of agency/principal crosses. When you place<br>
an order with your broker, you should be able to feel confident that<br>
he will have your best interests at heart when he executes it. This<br>
may not always be the case if your broker's firm takes the other side<br>
of the trade. Think about it...how hard will he look for a better bid<br>
if he wants to buy it at his price? Even the potential for a conflict<br>
of interest should be eliminated. The answer is to outlaw<br>
agency/principal crosses until and unless your broker is the last<br>
buyer or seller at the proposed trade price. The brokers will of<br>
course fight this fang and claw because it is such a lucrative area<br>
for them. This is the line in the sand that I will try to hold, but I<br>
don't much like the prospects. Perhaps there is enough of a 'scent' in<br>
the air about the industry with the revelations of the 'high-closings'<br>
imbroglio that people might actually step back and have a look at some<br>
of the other practises in the industry. A/P crossing is another of the<br>
'dirty little secrets', in my opinion.<p>
After the meeting about fifteen of us walked from the Bourse to<br>
Sherbrooke and St Laurent for a farewell dinner for some of the<br>
specialists whose last day is today, the end of the three-month trial<br>
period. Three guys with about sixty years of experience are calling it<br>
quits, fed up and disillusioned with the market in Montreal. This<br>
brings the total of Toronto specialists who ahve left to about ten, or<br>
half of those us that made the move. It's not like you can call<br>
central casting and order up a dozen new specialists. Anyway, I was<br>
struck by how vibrant and vital this city is. The Jazz Festival was<br>
just starting, and the streets were teeming with people. I have yet to<br>
encounter any francophone vs. anglophone animus, although others have.<br>
I love this city.<p>
Long-term participants on this board know I call 'em like I see 'em,<br>
but I am compelled to state for the record that what I have written is<br>
solely my opinion, although based on my observations and experience,<br>
which is now twenty years and two exchanges worth.<p>
Anyone making plans for this long weekend should be aware it is going<br>
to rain all day Sunday. I am riding my Harley down here from Toronto<br>
that day.<p>
Happy trading.<p>
Porter |
