Archive for the ‘Sales & Trading’ Category

Understanding The Basic Elements of Forex Trading

Thursday, March 10th, 2011

Understanding The Basic Elements of Forex Trading

The foreign exchange market is finally beginning to garner mainstream attention.  The Bank of International Settlements estimates that the average daily volume in the fx market is around $4 trillion, which makes it by far the largest financial marketplace in the world.  Surprisingly, however, many novice investors and traders have never even heard of this market.

Until the late 1990’s, the only players allowed to execute trades in the foreign exchange market were investment banks, hedge funds, and very wealthy private investors.  Since the minimum contract size was generally $1,000,000, smaller traders were effectively denied entrance into the market.

In the late 90’s, however, this all changed.  The advance of the internet and technology led several online forex brokers to open shop and begin catering to smaller investors and traders.  This led to the birth of the retail foreign exchange market.  In this article, we are going to discuss three key elements to forex trading:  Leverage, Margin, and Equity.

Leverage

The idea of leverage in the fx market has been under intense debate over the last several years.  Since the market is decentralized and worldwide, regulation was largely absent from the fx market until recently.  In 2010, the National Futures Association instituted some major changes, one of them being a cap on leverage at 50:1.  This means that an fx trader in the United States can trade on leverage at a ratio of 50:1.  Thus, if a trader has $1,000 in his account, then he is able to leverage that $1,000 into $50,000 and trade much larger positions in EUR USD.  Until the National Futures Association passed this regulation, some brokers were offering traders up to 400:1 leverage, which means that with a $1,000 account, traders were able to control a $400,000 position in the market. Note that leverage is a two-edged sword. It will increase both losses and profits.

Margin

Margin is the life of a trader.  If a trader does not have enough margin, then he cannot open a trade.  Furthermore, if a trader has an open position moving against him, he may eventually not have enough money to act as margin, which means his account would suffer a “margin call.”

Margin is the amount of money required to open a leveraged position.  For example, if Broker ABC offers 50:1 leverage, and Bob the Forex Trader wants to open a position of $100,000, then Bob has to put up $2,000 of margin.  If Bob’s trade begins to move against him to the point where his account equity becomes less than $2,000, Bob will suffer a “margin call,” which basically means that his broker will call for more margin if Bob wants to keep the position open.

Equity

Everyone knows that one of the leading causes of business failure is a lack of initial capital, and trading is no different.  If a trader opens an account with a few thousand bucks and trades heavily leveraged positions, his chances of success are nominal.

Equity is essential to trading success.  The question many new traders have is, how much money do I need to open an account?  Well, the answer to that question is different for everyone, and it largely depends on what your goals are.  If you simply want to get some trading experience, but still have a full-time job, then a person can open an account with a few thousand bucks.  However, if you are trying to generate enough capital gains to sustain a living, then the initial account balance should be much, much higher.

Leverage, Margin, and Account Equity are three essential aspects of fx trading that every trader must be familiar with.

Check out our intensive investment banking, private equity, and sales & trading courses!  The discount code Merger34299 will be activated until April 15, 2011. Feel free to e-mail thomas.r[at]leverageacademy.com with questions.


Top 50 Small Cap Stocks (Bank Target Price vs. Current Price) – 2.24.11

Thursday, February 24th, 2011

Ranking  |  Company (Ticker)  |  Potential Upside
1 Progress Software Corporation (NASDAQ:PRGS) 984.0%
2 Media General, Inc. (NYSE:MEG) 493.7%
3 Alexza Pharmaceuticals, Inc. (NASDAQ:ALXA) 347.8%
4 MELA Sciences, Inc. (NASDAQ:MELA) 317.5%
5 Cytokinetics, Inc. (NASDAQ:CYTK) 311.2%
6 Celldex Therapeutics, Inc. (NASDAQ:CLDX) 269.6%
7 Peregrine Pharmaceuticals (NASDAQ:PPHM) 241.5%
8 The Princeton Review, Inc (NASDAQ:REVU) 240.1%
9 Somaxon Pharmaceuticals, Inc. (NASDAQ:SOMX) 222.2%
10 AVANIR Pharmaceuticals (NASDAQ:AVNR) 215.8%
11 Neostem Inc. (AMEX:NBS) 214.7%
12 LECG Corporation (NASDAQ:XPRT) 209.2%
13 Enzo Biochem, Inc. (NYSE:ENZ) 205.0%
14 NeurogesX, Inc (NASDAQ:NGSX) 194.1%
15 Microvision, Inc. (NASDAQ:MVIS) 177.8%
16 Novavax, Inc. (NASDAQ:NVAX) 168.7%
17 Rodman & Renshaw Capital Group Inc. (NASDAQ:RODM) 166.7%
18 Vical Incorporated (NASDAQ:VICL) 164.6%
19 American Apparel Inc. (AMEX:APP) 163.2%
20 CytRx Corporation (NASDAQ:CYTR) 158.0%
21 PURE Bioscience (NASDAQ:PURE) 155.5%
22 Zogenix, Inc. (NASDAQ:ZGNX) 148.0%
23 Ligand Pharmaceuticals Inc. (NASDAQ:LGND) 148.0%
24 BioSante Pharmaceuticals, Inc. (NASDAQ:BPAX) 145.2%
25 Inhibitex, Inc. (NASDAQ:INHX) 135.0%
26 Broadwind Energy Inc. (NASDAQ:BWEN) 132.2%
27 MannKind Corporation (NASDAQ:MNKD) 127.8%
28 L&L Energy, Inc. (NASDAQ:LLEN) 127.0%
29 Inovio Pharmaceuticals, Inc. (AMEX:INO) 125.2%
30 Nymox Pharmaceutical Corporation (NASDAQ:NYMX) 120.0%
31 Dyax Corp. (NASDAQ:DYAX) 118.0%
32 Omeros Corporation (NASDAQ:OMER) 117.2%
33 Pharmacyclics, Inc. (NASDAQ:PCYC) 115.6%
34 Allos Therapeutics, Inc. (NASDAQ:ALTH) 115.2%
35 Keryx Biopharmaceuticals (NASDAQ:KERX) 112.3%
36 CKX Inc. (NASDAQ:CKXE) 110.0%
37 FuelCell Energy, Inc. (NASDAQ:FCEL) 108.3%
38 Array BioPharma Inc. (NASDAQ:ARRY) 106.6%
39 Value Line, Inc. (NASDAQ:VALU) 106.5%
40 Local.com Corp. (NASDAQ:LOCM) 105.4%
41 Geron Corporation (NASDAQ:GERN) 102.4%
42 Cenveo, Inc. (NYSE:CVO) 102.1%
43 Neuralstem, Inc. (AMEX:CUR) 102.0%
44 Rochester Medical Corporation (NASDAQ:ROCM) 100.1%
45 Chelsea Therapeutics International Ltd. (NASDAQ:CHTP) 99.1%
46 EXACT Sciences Corporation (NASDAQ:EXAS) 97.3%
47 Dynavax Technologies Corporation (NASDAQ:DVAX) 94.8%
48 Cornerstone Therapeutics, Inc. (NASDAQ:CRTX) 93.4%
49 Aoxing Pharmaceutical Company, Inc. (AMEX:AXN) 91.4%
50 Biodel Inc (NASDAQ:BIOD) 91.3%


Egypt’s Protests Strain Market

Sunday, January 30th, 2011

Following in Tunisia’s footsteps, Egypt’s streets have been full of protestors demanding President Mubarak to step down and end his 30 year reign. Mubarak announced early Saturday that he had asked the country’s government to resign, and pledged to install a new government with a better democracy; proclaiming to be on the side of the people, willing to respect their freedom of speech as long as they protested peacefully. However, as protests continued, curfew was broken, and government vehicles were torched, Mubarak mobilized the army to control the crowds. The White House threatened to cut off its annual aid of $1.5 billion to Egypt if security forces continued to use violence to suppress protestors.

Egypt’s Suez Canal conducts an estimated 8% of global sea trade, carrying approximately 1.8 million barrels a day of crude oil and refined petroleum in 2009, according to the U.S. Energy Information Administration. U.S. crude futures rose to $89.43 a barrel, up 4.4% on Friday. Investors worry that uncontrolled protests could destabilize the already volatile region, and have an even greater impact on crude prices. The CBOE volatility index (VIX), used to gauge fear in the market, jumped more than 24% Friday and the Dow Jones Industrial Average fell 1.4 percent to 11,823.70 after a straight 9 week gain.

Stocks worldwide plunged the most since November, crude oil posted the biggest jump since 2009 and the dollar rose versus the euro after protesters posed the biggest challenge to Egyptian President Hosni Mubarak’s 30-year rule. Egypt’s dollar bonds sank, pushing yields to a record.

The MSCI All-Country World Index of stocks in 45 countries lost 1.4 percent at 4:59 p.m. New York time. The Dow Jones Industrial Average fell 1.4 percent to 11,823.70, preventing its longest weekly winning streak since 1995. Oil futures increased 4.3 percent to $89.34. The dollar appreciated 0.9 percent to $1.3611. Yields on Egypt bonds due in 2020 surged 22 basis points to 6.51 percent. Gold futures jumped 1.7 percent, the most in 12 weeks.

Egyptian protesters clashed with police throughout the country and into the night, defying a curfew and setting fire to buildings. Mubarak imposed the curfew after tens of thousands of marchers chanted “liberty” and “change.” After U.S. markets closed, Mubarak said he asked the government to resign. The demonstrations offset data showing that growth in U.S. gross domestic product accelerated in the fourth quarter.

“The unrest in Egypt has people concerned,” said Mark Bronzo, who helps manage over $25 billion at Irvington, New York-based Security Global Investors. “When it comes to the Middle East, there’s worries the unrest is going to spread. It has negative implications for the world.”

The Dow had to close above 11,871.84 to post a ninth straight weekly gain. Before today, it had risen 1 percent this week, supported by higher-than-estimated earnings. More than 74 percent of the 183 companies in the Standard & Poor’s 500 Index that reported quarterly earnings since Jan. 10 beat the average analyst projection, according to data compiled by Bloomberg.

Egypt overshadowed evidence the U.S. economy, the world’s biggest, is improving. GDP expanded at a 3.2 percent annual pace in the fourth quarter, up from 2.6 percent during the prior three months, as consumer spending climbed by the most in more than four years.

Investors who pushed the Dow above 12,000 for the first time since 2008 this week may be getting ahead of themselves. It surpassed that level the past two days. More U.S. stocks are trading above their 200-day average price than any time since April, when the Dow began a 14 percent slump. The cost to insure against S&P 500 losses with options has fallen to an almost three-year low.

The Dow may have surged too fast following its more than 2,000-point jump since August even as analysts forecast a third straight year of profit growth for the S&P 500, said James Investment Research Inc.’s Tom Mangan and BB&T Wealth Management’s Walter “Bucky” Hellwig. Mangan and BGC Partners LP’s Michael Purves see signs investors are too optimistic about the next few months.

Shares of Ford Motor Co. plunged 13 percent as the automaker said profit slid 79 percent. Amazon.com Inc. declined 7.2 percent after saying earnings may miss analysts’ projections. The Chicago Board Options Exchange Volatility Index, which measures the cost of insurance against losses in U.S. stocks, jumped 24 percent, the most since May.

The NYSE Arca Airline Index lost 4.3 percent after oil jumped. Any disruption to Middle East oil supplies “could actually bring real harm,” U.S. Energy Secretary Steven Chu said on a conference call.

The Suez Canal, which connects the Mediterranean and Red Seas, is located in Egypt. One million to 1.6 million barrels a day of oil and refined products moved north to Europe and other developed economies in 2008 and 2009, according to the Energy Information Administration, the statistical arm of the U.S. Energy Department.

Microsoft Corp. had the biggest drop in the Dow, retreating 3.9 percent, after a shortfall in Windows revenue raised concerns about demand. The slump drove the Nasdaq Composite Index to a 2.5 percent decline, the most since August. The S&P 500 fell 1.8 percent, the biggest decrease since Aug. 11.

The dollar and Swiss franc advanced the most in three weeks against the euro as a day of clashes in Egypt between police and protesters spurred demand for the safety of the currencies. Egypt’s pound traded at an almost six-year low against the American currency. Fitch Ratings revised the Middle East nation’s outlook to negative.

The Swiss franc advanced 1.4 percent to 1.2806 per euro. Egypt’s currency traded at 5.8575 per dollar after touching the weakest level since January 2005 yesterday. Turkey’s lira sank as much as 2.1 percent to 1.6171 per dollar, falling along with the currencies of other nations near Egypt. Israel’s shekel declined as much as 1.8 percent to 3.7141.

Treasuries rose, pushing two-year yields to a seven-week low of 0.54 percent. Yields on 30-year bonds had reached a nine- month high of 4.64 percent following the report showing U.S. GDP growth accelerated.

Gold futures for April delivery rose 1.7 percent to $1,341.70 an ounce, the biggest gain since Nov. 4. The metal climbed to a record $1,432.50 on Dec. 7.

China’s Renminbi Heads for Floating Exchange Rate

Saturday, January 15th, 2011

It was announced earlier this week that China has launched its Yuan for free trade in the open market. China has managed to keep the value of the Yuan, also know as the Renminbi, at a depreciated value, which some analysts argue is undervalued by up to 40%. The Bank of China’s decision to move towards a floating exchange rate, though still tightly controlled, offers hope to those who believe China’s weak currency policy is the root cause of the global economic imbalance. The gradual inflation of the Renminbi may help take away China’s disproportionate advantage in export goods and bring jobs back to the US.

Call it liberalization by a thousand cuts.

 

The Bank of China, one of the country’s main state-owned lenders, is now allowing American firms to trade in renminbi, another step in China’s effort to position the renminbi on the world stage.

 

In July, China started a renminbi settlement system for cross-border trade in Hong Kong, but it placed limits on how much currency could be exchanged.

 

Currency trading in the renminbi was already possible at other banks, but the move by a state-owned lender signals a shift in official policy.

 

The Chinese central bank bowed to international pressure last summer and agreed to make its currency more flexible; the renminbi is now allowed to move as much as 0.5 percent each day. At the same time, the country is cautiously pursuing a strategy of making the renminbi into an international exchange currency.

 

“China sees the global financial system as too U.S.-centric and dollar dependent,”’ said Robert Minikin, senior currency strategist at Standard Chartered in Hong Kong. “That created issues during the financial crisis.”

 

Now, he said, the country is trying to take a step away from that dependence. “Conditions are in place for sustained yuan appreciation against the U.S. dollar,’’ he said, predicting that it would increase by 6 percent this year, to 6.20 renminbi per dollar.

 

With a forecast for high inflation in the expanding Chinese economy, an appreciating currency could help the country dampen so-called imported inflation by making foreign goods less expensive.

 

With the Bank of China move, China is promoting the renminbi to Americans at a time when loose monetary policy on the part of the United States Federal Reserve has some concerned that the dollar’s value will continue to decline.

 

The Bank of China said in an announcement on the Web site of its New York branch that trading firms and individuals could now open accounts in renminbi, buying the currency from and selling it to the bank.

 

While the limits on personal accounts are $4,000 a day and $20,000 a year worth of renminbi, and those accounts are largely for the purposes of exchange and remittance, the bank is also soliciting business from trading firms.

 

China’s decision to keep the renminbi effectively pegged against the dollar at an exchange rate that favors its exports has long been a source of contention between Washington and Beijing. China’s trade surplus with the United States was $181 billion last year, a 26 percent increase from the previous year, The imbalance is likely to put further pressure on the exchange rate.

 

That said, the renminbi hit a new high of 6.6128 against the dollar on Wednesday, an auspicious prelude to a visit to Washington next week by China’s president, Hu Jintao.

 

Separately, the city of Shanghai said it was creating a new investment window, allowing qualified private equity firms to buy renminbi and invest in mainland companies. Reuters reported that the pilot project could grow to be worth $3 billion.

Goldman on the Irish Bailout…European Contagion

Monday, November 22nd, 2010


The Irish bailout being unveiled this week will determine the performance of both the Euro and the global equity markets.  Irish and Portuguese bond spreads had been widening over the past four weeks, since Ireland again became the focus of bearish investors.  Sources claim that the current bailout will be less than 100 billion euros, and will cover the entire country’s budget needs for the next three years.  Ireland’s current budget deficit is about 19 billion euros/year. The problem is that the Irish banking system may need more help than analysts expect.  The system has more than half a trillion in assets.  According to Reuters, the hole in the commercial real estate sector is greater than 25 billion Euros alone.  This does not include potential residential losses.

To make matters worse, a Irish debt resolution could also simply shift bearish speculation to Portugal according to Citigroup and Nomura.  According to Bloomberg, “Portugal’s bonds currently yield 6.88%, compared to 8.26% for Ireland and 11.62 % for Greece.” Growth in Portugal may slow to 0.2% in 2011, which could make the deficit worse and increase worries about the country’s sovereign debt.

Zero Hedge recently provided Goldman’s perspective on the Irish bailout: “For what it’s worth, here is Goldman’s take on the Irish bailout. Since it was Goldman’s endless currency swaps that allowed Europe to lie about their deficits and true debt levels, this should be interesting…

From Francesco Garzarelli

Earlier tonight, Ireland applied for conditional funding assistance and will therefore be the first Eurozone sovereign accessing the EU-IMF support framework instituted in May. The latest European Economics Analyst provides background. There are still several uncertainties surrounding the deal, including the government’s political support (a by-election is due this Thursday), and negotiations on the banks. The yield spread between 5-yr Irish government bonds and their German counterparts has fallen by around 100bp from the 600bp highs reached on 11 November. At this point, we see scope only for a further 50bp tightening. That said, we think that this represents an important step towards a resolution of EMU sovereign woes, and a gradual relaxation of the risk premium that has built up in Italy and Spain, and in Eastern Europe.

Main Points

According to EU sources quoted by the newswires, the size of the package will be in the region of EUR 80-90bn. But this has still to be finalized, including the implications, if any for the Irish banks’ debt.  The amount is broadly in line with our estimates, and can easily be covered. Consider that the EFSM is endowed with EUR 60bn and EFSF has borrowing capacity of EUR 428bn (the portion guaranteed by Germany and France amounts to EUR 220bn). Additional IMF funding is available for up to 50% of the total amount drawn from the EFSM/EFSF with a ceiling of EUR 250bn. Both the UK and Sweden have announced they stand ready to provide bi-lateral loans.
Discussions on the cost of funds are also underway. We expect the EFSF (AAA-rated) to borrow in the region of 2.5% at the 5-yr maturity.  Assuming the terms are in line to those applied to Greece (which should represent a ceiling, given the different credit position of the two countries), the funding cost to Ireland would be along these lines:

  • EFSM/EFSF: Up to 3-yr maturity, Euribor or fixed swap + 300bp; Above 3-yr, Euribor or fixed swap +400bp; 50bp handling fee; (3-mth Euribor is currently 97bp)
  • IMF: Up to 3-yr maturity, SDR rate + 200bp; Above 3-yr, SDR rate + 300bp; Commitment fee, 50bp (est.) + 50bp service charge; (the Euro SDR rate is linked to 3-mth Euripo and is currently around 26bp)
    Using these figures and under a no IMF funding hypothesis, the savings for Ireland relative to the secondary market rates as of last Friday’s close would be in the region of 100bp (notice that the ECB has been intervening in this market, and that this is not indicative of primary access costs).
  • Ireland April 2013 yields 6.30% (bid); corresponding Eurozone funding 2.00%+300bp=5.00%
  • Ireland April 2016 yields 7.40% (mid), corresponding Eurozone funding  2.40%+400bp=6.40%

These, we stress, should be taken as ceilings. A ballpark of 60-30 from the EFSM/EFSF and IMF would result in funding cost closer to 3.5% on a 3-yr horizon.

Broader Market Implications

As discussed in our notes over the past fortnight, and in our latest Fixed Income Monthly, EMU Spreads: Navigating the Issues, we are of the view that the activation of external help should not lead to an escalation of systemic risk as seen in the aftermath of the Greek multi-lateral ‘bail-out’. A pre-agreed institutional framework is now in place, and the ‘stress tests’ have provided information on the distribution of risks across the Euro-zone banking sector.

Other than the evolution of the Irish discussions (size of the package and terms), the near term focus will also remain the Iberian peninsula. A workers strike in Portugal this Wednesday will re-kindle the debate on the much needed structural reforms. Spain unveiled a list of these last Friday, but investors remain uncomfortable about the contingent liabilities stemming from the non-listed cooperative banks.

Our opinion is that Portugal remains a possible candidate for external help, should market pressures remain high. But its systemic relevance is much smaller than that of Ireland’s or Greece’s (the largest foreign creditor is Spain). We remain of the view that Spain is in a different debt sustainability position, and the depth of its domestic market should allow it to withstand market pressures.

We continue to recommend holding 30-yr Greek paper, and would look for opportunities to re-establish long positions in intermediate maturity Italian and Spanish government bonds relative to the ‘core’ countries.

Finally, it is worth recalling that the EFSF will not pre-fund, and its funding instruments will have broadly the same profile as the related loans to Ireland. Its issuance program could lead to a marginal cheapening of bonds issued by supra-national institutions such as the European Investment Bank, the German-based KfW and the French CADES. Note, however, that these institutions have borrowing programs of EUR 60-70bn per annum, while the corresponding annual EFSF issuance would be likely quarter of that amount.”

Options Trading Guide (History, Analysis, Sample Trades)

Thursday, October 21st, 2010

Here is a great guide for trading options.   I am attaching a preview below:

Options Trading Strategy Guide: Option Trading Strategies
As we described earlier, four possible option selections exist for a trader: (1) long a call, (2) long a put, (3) short a call, and (4) short a put. These four can be used independently, together, or in conjunction with other financial instruments to create a number of option-trading strategies. These combinations enable a trader to develop an option-trading model which meets the trader’s specific trading needs, expectations, and style, and enables him or her to anticipate every conceivable situation in the market. This trading structure can be adapted to handle any type of market outlook, whether it be bullish, bearish, choppy, or neutral.

ENJOY!

Options Trading Strategy Guide

Ninety-Three Page Bullish Outlook Report on S&P500 – Goldman Sachs

Thursday, June 3rd, 2010

Goldman Sach’s recently issued a bullish outlook for the industry, with overweight ratings on technology, energy, and basic material stocks.  Especially after the beating energy shares have taken over the past five weeks, the time may be right to buy.  This link was provided by ZeroHedge.

The report highlights GS’s investment process and ranking methodology.

Monthly Chartbook

Google Launches Trading Floor to Manage $26.5 Billion in Cash Reserves

Sunday, May 30th, 2010

According to Google Treasurer Callinicos, the firm has started a trading team and is currently hiring for entry level and experienced trading positions.  Callinicos is very well respected in the finance and technology industries, after serving as Treasurer of Microsoft at a time where the company was generating 7% cash returns.  In 2004, the company was able to pay out a one-time $32 billion dividend.

Specifically, Google is looking for bond traders and portfolio analysts.   The firm currently has the 3rd largest cash reserves of any company, after Microsoft and Cisco.  The trading team will also be used to buy back shares after Google purchased AdMob in a $750 million stock transaction recently.  The transaction was cleared on May 21st.  Surprisingly, Google has been public about not returning cash to shareholders, and instead internally generating value.

The trading floor at Google opened up in January.  Traders at the firm have a primarily role of preserving capital and generating reasonable returns, so that Google has adequate capital to continue to make acquisitions.  The investment team has grown from six people at the outset to 30 people as of today.  Many of the traders at Google are from Goldman Sachs and J.P. Morgan.  Google’s technology allows traders to see 98% of positions in real time, whereas most bank can only monitor 60-70% of transactions in real time.

Google has pulled away from U.S. government notes and has moved $4.9 billion into corporate bonds and agency mortgage-backed securities.  The company has also invested in emerging market sovereign debt.  Unfortunately, Google’s trading salaries are not as lucrative as those on Wall Street, but the company culture is much more laid back and focused on capital preservation.

The firm is currently looking for risk analysts, sovereign debt traders, and MBS traders.  A recent hire, Ranidu Lankaj, had a full ride at Yale, worked for 2 years at Lehman Brothers, and published his first Sri Lankan rap record at age 19. (Source: Bloomberg Businessweek)

Waddell & Reed Guilty for Starting 1,000 Point Drop on May 6th, Barclays Executed Trade

Friday, May 14th, 2010

May 6th will be remembered as the day the DJIA dropped 1,000.  For days, market commentators blamed electronic traders and bulge bracket banks including Citigroup, but today culprit Waddell and Reed was discovered.  Waddell and Reed is one of the oldest mutual fund managers in the United States.  The firm sold 75,000 e-mini future contracts on the S&P500, throwing the market into a tail spin.  Barclays executed the trade in one single trade, instead of breaking it up into 100 or 1,000 different orders.  The negligence on Barclays’ part is mostly to blame, since one can’t blame Waddell for hedging.  We can see today, that Waddell was in the right, as the Euro fell past 1.24.

Waddell’s sell order briefly wiped out $1 trillion from the U.S. equity markets in a 20 minute period.  Over that period, over 840,000 e-mini contract futures were traded by firms including JPMorgan, Goldman Sachs, Jump Trading, Interactive Brokers, and Citadel.  Procter & Gamble fell almost 30% in 10 minutes, as shown above. (Source: ZeroHedge)

According to MarketWatch, “In response to inquiries and published reports, Waddell & Reed Financial, Inc.  today issued the following statement:

On May 6, as on many trading days, Waddell & Reed executed several trading strategies, including index futures contracts, as part of the normal operation of our flexible portfolio funds. Such trades often are executed in response to market activity, and are undertaken to protect fund investors from downside risk. We use futures trading as part of this strategy, broadly known as hedging. This is a longstanding and well monitored practice in certain of our investment portfolios. We believe we were among more than 250 firms that traded the “e-mini” security during the timeframe the market sold off.

Quotes attributed to executives at the CME and the CFTC note that Waddell & Reed has executed trades of this size previously, and indicate that we are a “bona fide hedger” and not someone intending to disrupt the markets. Further, CME noted that they identified no trading activity that contributed to the break in the equity market during this period. Like many market participants, Waddell & Reed was affected negatively by the market activity of May 6.

About the Company

Waddell & Reed, Inc., founded in 1937, is one of the oldest mutual fund complexes in the United States, having introduced the Waddell & Reed Advisors Group of Mutual Funds in 1940. Today, we distribute our investment products through the Waddell & Reed Advisors channel (our network of financial advisors), our Wholesale channel (encompassing broker/dealer, retirement, registered investment advisors as well as the activities of our Legend subsidiary), and our Institutional channel (including defined benefit plans, pension plans and endowments, as well as the activities of ACF and our subadvisory partnership with Mackenzie in Canada).

Through its subsidiaries, Waddell & Reed Financial, Inc. provides investment management and financial planning services to clients throughout the United States. Waddell & Reed Investment Management Company serves as investment advisor to the Waddell & Reed Advisors Group of Mutual Funds, Ivy Funds Variable Insurance Portfolios, Inc. and Waddell & Reed InvestEd Portfolios, Inc., while Ivy Investment Management Company serves as investment advisor to Ivy Funds, Inc. and the Ivy Funds portfolios. Waddell & Reed, Inc. serves as principal underwriter and distributor to the Waddell & Reed Advisors Group of Mutual Funds, Ivy Funds Variable Insurance Portfolios, Inc. and Waddell & Reed InvestEd Portfolios, Inc., while Ivy Funds Distributor, Inc. serves as principal underwriter and distributor to Ivy Funds, Inc. and the Ivy Funds portfolios.”

Morgan Stanley Sovereign Credit Outlook: Greece Fears Continue to Drive Bond Yields Higher

Wednesday, May 5th, 2010

What should have been a 1 month affair has now become a 6 month ordeal for the world credit markets.  As of today, May 5th, the European equity markets are in fact negative for the year and the world MSCI index has given up its entire gain for 2010.  It is ironic how a country that only makes up 2.3% of Europe’s GDP could cause the Euro to fall from 1.40 to 1.28 in a matter of weeks.  Euro shorts have multiplied despite efforts by banks such as Citi to put targets on the currency at 1.35+.  Commodity markets have also been roiled, with the VIX jumping 15% yesterday as well.  Worries that Portugal would be downgraded again have multiplied investor concerns.  Investors around the world wait in fear as policy measures will be discussed by Germany and other European nations on May 7th.  Riots in Greece have killed three so far in retaliation to austerity measures linked to the proposed bailout by the European Union and the IMF.

Please see Morgan Stanley’s outlook below.

Contagion Call Slides

According to Ms. Petrakis of Bloomberg, “May 6 (Bloomberg) — Greece’s Parliament will debate today the austerity measures demanded as a condition of an internationally led bailout as the nation mourns the three victims of Athens protests against the plan.

Prime Minister George Papandreou, whose Pasok party holds a 10-seat majority in the legislature, will tell lawmakers today that the wage and pension cuts are necessary to secure the 110 billion-euro ($141 billion) package and avoid default.

“No one was happy with the new measures,” Papandreou told parliament yesterday after the killings, which he called a “brutal murder.”

“We have compassion for every family who has seen their plans for the future slip seemingly further away,” he said. “But we took these measures to secure a future which might not exist otherwise.”

Greece agreed to the austerity package on May 2, pledging 30 billion euros in budget cuts in the next three years to tame the euro-region’s second-biggest deficit. Papandreou was forced to seek the aid after soaring borrowing costs left Greece cut off from markets. The measures have fueled months of protests that culminated in yesterday’s general strike. Three bank workers were killed when a small group of protesters threw fire- bombs at a bank.

Papandreou is pushing to get parliamentary approval before a European Union summit in Brussels tomorrow on the plan that will help ready the funds for distribution. The country faces 8.5 billion euros in bond redemptions on May 19.

Bonds Drop

Yesterday’s violence deepened losses in Greek debt. The yield premium investors demand to buy Greek 10-year bonds over comparable German debt, reached 719 basis points. The country’s 2-year notes yield almost 16 percent, 26 times more than Germany.

“I want to believe it is easy to overestimate this problem,” said Erik Nielsen, chief European economist at Goldman Sachs Group Inc, in a conference call yester. “One should not be overly concerned so far.”

Europe is scrambling to activate the aid package to try to stop the fallout from spreading to other high-deficit countries such as Spain and Portugal. Yield premiums on those countries’ debt have also jumped and the euro has slid more than 10 percent this year, to the lowest in more than a year.

Chancellor Angela Merkel appealed to the German Parliament yesterday to approve the nation’s share of the loans, saying the stability of the euro was at stake. Germany will pay 22.4 billion euros, almost 30 percent, of the euro-region funds offered to Greece over three years, and public opposition to the bailout is running high. German lawmakers will vote tomorrow on the aid.

Anarchists’ Blaze

The debate in the Greek parliament will be overshadowed by the violence of yesterday’s strike that turned deadly when protesters, who police described as self-styled anarchists, set fire to a branch of Marfin Egnatia Bank SA, killing two women and a man trapped inside the building.

Athens police swept through the anarchist stronghold of Exarhia yesterday, arresting 25, and detaining 70, according to a police statement. A total of 29 officers were injured in yesterday’s protests, the statement said.

Opposition leaders warned Papandreou not to try to exploit the deaths to push through the austerity measures.

“The tragic death of three people is absolutely condemned,” Aleka Papariga, the head of the Communist Party of Greece, said yesterday on state-run NET TV. “But it can’t be used by the government as an alibi for the people to accept these anti-democratic measures — measures that will come every three, six, nine months.”

More Strikes

The violence may not be enough to end the protests. Local government workers are continuing their strike for another 24 hours, with garbage collectors due to begin a walkout tomorrow morning, according to the state-run Athens News Agency. Stavros Koukos, the president of the federation of bank unions OTOE, told Alter TV that a 24-hour strike would be held tomorrow after the deaths of the three bank employees.

The bill on the measures will debated all day with a vote expected late in the day.

Elected in October on pledges to raise wages for public workers and step up stimulus spending, Papandreou revised up the 2009 budget deficit to more than 12 percent of gross domestic product, four times the EU limit, and twice the previous government’s estimate. EU officials revised the deficit further on April 22, to 13.6 percent of GDP.

Papandreou has said the austerity measures are needed to lower the shortfall to within the EU limit of 3 percent of GDP in 2014. Still, they will deepen a yearlong recession and lead to a 4 percent economic contraction this year and boost unemployment already at a six-year high of 11.6 percent.

“The greatest challenge of the days is maintaining social cohesion and social peace,” Greek President Karolos Papoulias said in an e-mailed statement. “Our country has reached the edge of the abyss. It is the responsibility of all of us that we not step forward into it.”