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The WUFC Exchange

INSIDE this issue:

September 2014
Volume V Issue I











Exchang e

Vol: V Issue: I


SEC Leaving No Dark Pool Un-Investigated

Vincent Criscuolo, Financial Analyst
The Beginnings
The dark pool was born in the fall
of 1986. Instinets After Hours
Cross was a primitive dark pool, allowing institutional investors to place
anonymous buy and sell orders
throughout the course of the day. At
6:30 pm each day, an algorithm would
match buyers and sellers, and the
trades would be processed. Even in
1986, the advantages of this private
trading platform were clear: the assumed absence of information leakage eliminated any kind of buying or
selling pressure. This was, and continues to be, a major draw for institutional investors. In essence, the
anonymity of these trades allows institutional clients to keep their cards
close to their chests.

Over the next two decades, dark

pools increased their effectiveness,
and more institutional investors began
to take part. The incentives were
clear: if a large firm wanted to take a
$500M position in XYZ Corp., buying those shares on a publicly trading
market would cause wild buying pressure and diminish gains. It could also
take a multiple months to fill the
trades. As dark pool platforms became more efficient, they were able to
more quickly match buyers and sellers
as orders came in, allowing clients to
take $500M positions in a matter of
seconds, without any immediate disclosure to the market. The trades were
not, and are still not, released to the
public until the following day.

Perfecting Their Craft

By 2004, 2% of all trades are executed through dark pools. Many
competitors to Instinet had emerged
such as early players ITG, Pipeline,
Liquidnet, and Millennium. It was at
this time that dark pools perfected
their craft. Smart Order Routers
(SORs) emerged, providing a low-latency means by which to search dark
pools in search of liquidity. In addition, the broker dealer internalization
engine emerged, enhancing the efficiency of the internal processes carried out by the platforms in terms of
trade processing.
Dark pools traction began to accelerate. By 2008, 8% of all trades
were executed through dark pools.
Today, this figure has increased to
about 40 according to the Tabb
The Issues
Over the last 2 years, dark pools
have introduced new dark order types
and options that have provided
greater opportunity for market gaming. The issue with this is that high
frequency traders are able to take advantage of what should otherwise be
efficient, fair auctions. By providing
new order types and greater opportunities to rapidly enter and cancel orders, dark pools have allowed high
frequency traders to engage in a variety of strategies, such as piggybacking
on large buy orders to ride on the
buying pressure .
As strategies employed by high
frequency traders do not create value
Story continued on p. 5, see Dark Pools

America Movil, Televisa, and Mexican Telecom Reforms

Graham Jordan, Financial Analyst
In December 2012, Enrique
Nieto was elected as the 57th
President of Mexico. Nie to, a
member of the Institutional Revolutionary Party (PRI) that ruled
Mexico for 71 years until 2000, was
elected on a platform promising

tution and created the Federal

(IFT), a regulatory body with significant power over Televisa,
America Movil, and other market
operators. The law provided IFT
with the ability to label companies

with a market share greater than

50% as economically preponderant in effect allowing IFT to
regulate monopolies.
After the amendment, both
Televisa and America Movil were
declared economically preponderant agents Televisa in television
broadcasting and America Movil
in telecommunications. According
to this declaration, Televisa now
has to follow must-offer/mustcarry rules that require it to offer
the programming on its three

(although this restriction excludes

games that it had already purchased the rights to). Moreover,
the Mexican State is auctioning
off two additional frequencies to
add additional channels t o those
already available. As a whole, however, these reforms are not expected to harm Televisas revenues
or profits significantly.
Unfortunately for America
Movil, this could not be any less
true. Reforms required that, as a
preponderant agent, America Movil
must share its entire telecom infrastructure with other players in the
telecom market. They also required that the rates it charge to
do so (mobile termination rates)
be set by the IFT in an asymmetrical manner. This means that it
would cost America Movil more
to work with other players and
would be cheaper for others to
use America Movilssystem.
Originally, this was seen as a
positive for Televisa. Through
multiple operating subsidies including Iusacell, Televisa had been
attempting to break into the

largest national networks to all

broadcasters for free. These
broadcasters must then, in turn,
also broadcast the channels. Televisa is also no longer able to acquire exclusive rights to relevant
Olympic and World Cup games

telecommunications market for a

number of years. America Movils
monopoly on infrastructure and
ability to dominate the market had
always prohibited Televisa from
gaining more than the 8% of the
mobile market it controlled with Iusacell.
Story continued on p. 5, see Telecommunications

Movil has begun talks with Bank of

America to sell a portion of its telecom assets to a competitor so that its market
share dips below 50%.
regulatory and economic reform
that would spur growth and opportunity. Many Mexicans questioned
his seriousness in regulating large
corporate players, however, as his
party has a history of close relationships with near monopol ies.
Both Televisa and America Movil,
who together control nearly 70%
of Mexicos television market,
80% of Mexicos landline phone
market, and 70% of Mexicos mobile phone market have funded
PRI campaigns. In fact, immediately proceeding Nietos election,
a protest movement known as
Yo Soy 123 became an outlet
for thousands of demonstrators
across Mexico to criticize Nietos
closeness with Televisa. The
movement alleged that Televisa
was intentionally broadcasting favorable stories about Nieto to aid
his campaign.
Contrary to this dissent, on
July 14th 2014, Nieto signed a historic telecom reform bill into law
that significantly affected both
America Movil and Televisa. The
law amended the Mexican Consti-

September 2014

WUFC Newsletter Financial Analysis

Inside the Argentinian Debt Crisis

Charles Bagley, Financial Analyst

Earlier this month, various rating

agencies downgraded Argentina to partial, technical, restricted or selective default status. The newfangled
classifications follow United States federal judge Thomas Griesas decision to
block a $539 million Argentinian interest
payment in June this year. Argentinas
legal and credit battles have been ongoing for more than a decade.
The recent Argentinian debt default
is Argentinas second default on sovereign debt in 13 years. In 2001, more than
20% of the nation was unemployed, the
presidency changed hands five times in
just two weeks, and the government was

After writing off many billions of dollars of debt, the Argentinian government reached an agreement with roughly
93% of these investors in which they
settled for a 30% haircut on the debt call.
The remaining 7% of creditors have
held out for over a decade in a legal battle that, for jurisdictional reasons, has
been adjudicated by the US federal
courts. The holdouts demand that Argentina buy the debt back at cost and
pay interest on the unsettled value of the
bonds that has accrued since the lawsuit
The most vocal member of the holdouts, Elliott Management has been in

The Argentinian government reached an

agreement with 93% of [its] investors in
which they settle for a 30% haircut on the
debt call.
forced to stop payment on more than
$100 billion in outstanding debt. This led
to the largest recession in Argentinas
history - its economy shrunk by nearly
Leading up to the 2001 debt crisis,
many investors bought risky and thus
hugely discounted Argentinian bonds.

similar situations before. In the Bush

era, Elliott attempted to seize the US
property of the Republic of the Congo
after the fund purchased over $32 million of the nations debt that later defaulted. In order to enforce later
judgments made against Brazzaville, Elliott went so far as to uncover corrup-

September 2014

tion and embezzlement in the nations

government. Later, in the aftermath of
GMs bankruptcy, Elliot managed to
take control of Delphi Automotive, the
sole supplier of many of the auto parts
to both GM and Chrysler. In this case,
Elliot and other investors demanded that
the US Treasury Department pay billions, including $350 million in upfront
cash, under the threat of destroying
GMs business model. Elliott Management, then as well as now, maintains that
it targets only countries with the ability
to pay incurred debt but refuses to uphold their agreements, though some
claim that the desperate situation the
fund left Brazzaville in impaired the national governments ability to combat a
cholera epidemic.
The US federal judicial system has
been most receptive to the arguments of
Elliott Management and the other holdouts concerning Argentina. Principal to
the case was the legal concept of pari
passu, which stipulates that all creditors
in bankruptcy hearings are to be treated
equally. Pari passu typically means that
all creditors will be paid the same
amount of money prorated for his or
her share of the debt. Simply stated,
each bond will be bought back for the
same amount of money. In this case,
however, federal judge Thomas Gries
Story continued on p. 7, see Argentina

WUFC Newsletter Financial Analysis

Telecommunications, story continued from

p. 3
America Movil was quick to respond to the reforms, however,
deciding that it would rather be a
smaller, albeit more profitable
company than a larger, heavily
one.,America Movil has begun
talks with Bank of America to sell
a portion of its telecom assets to
a competitor so that its market
share dips below 50%. As a result,
America Movil will no longer be
subject to the economically preponderant ruling and will not be

forced to share infrastructure with

Details of which assets America Movil will sell, what price they
will sell them for, and to whom
they will sell them are scarce.
Moreover, once news
of America Movils
cutbacks became public, Televisa also announced its own plan
to divest Iusacell. The
number of announcements and ambiguity
of the how the companies will proceed make

it difficult to tell exactly how these

regulations will truly affect Televisa and America Movil. Only one
reality is clear: Nieto is much
more committed to reform than
originally thought.

Dark Pools, story continued from p. 1.

through fundamental company analyses and eat away the gains of traditional investors, some believe the
strategies are unethical. .Although
trade publications such as the Wall
Street Journal have been highlighting
these concerns for quite some time,
the ethical questions surrounding
HFT were only recently pushed into
the public spotlight. Michael Lewis
book Flash Boys brought many of
the issues surrounding dark pools to
light, while also publicizing the differentiation of IEX Tradings platform,
discussed below.
Some also argue that the very
concept of a dark trading venue eliminates transparency in the markets.
Historically, almost all trading has
been done publicly and potential investors have been aware of all trades
occurring - supply and demand dictated prices in this fair market. That
is, buying pressure, while unfortunate
for an institutional investor, should
justly increase the price of equity.
On the other hand, some argue
that if two parties are willing to trade
in an equity they should be able to
without immediately disclosing it to
the public. They argue that people are
constantly buying and selling objects

without disclosing these purchases to

the public; stocks should be no different.

IEX Trading is attempting to take

market share from more traditional
dark pools by putting high frequency
traders at a disadvantage. The start-up
trading platform is built to benefit the
broker-dealer . Through a broker priority pricing system, IEX puts brokerdealers at the front of every trading
queue, ahead of retail investors and
high frequency traders. This virtually
eliminates the possibility for venue
In addition, IEX introduces a
slightly longer delay before trades are
executed in its dark pool. As all trades
take longer to execute in other venues
where their strategies are effective ,
this reduces the ability of high frequency traders to game the platform.

Looking to the Future

Twenty-eight years after the inception of dark pool investing, the
SEC is beginning to look into these
ethical concerns. The governmentsponsored investigation is focusing
on whether these new platforms are
giving an advantage to high frequency
traders or other parties in order to
maximize trading volume and
whether the pools are sufficiently
Recently, the SEC has subpoenaed high frequency trading firms in
an attempt to discover any preferential treatment the firms are receiving
from their strategies. The announcement of a thorough investigation into
Barclays dark pool has led the platform to lose over half of its trading
volume. For perspective, the Credit
Suisse, UBS, and Barclays dark pools
together generate commissions of
$800M annually. Under the leadership
of Mary Jo White, the SEC is taking
a no-dark-pool-left-uninvestigated approach.
A Potential Solution

September 2014

There are currently 11 public exchanges and 40 dark pools. Moving
forward, the public will have to take
an ethical stance on dark pools in
terms of the price-seeking function
of markets and the importance of
recorded trades. Many outcomes are
possible: continuation of the status
quo, the demise of the traditional
dark pool and the rise of upstarts like
IEX, or perhaps even the total abandonment of dark pools.

WUFC Newsletter Financial Analysis


William Helmold, Financial Analyst
The U.S. bond market has taken many
investors for a ride this year . Between January and August, U.S. bond yields
dropped as the market witnessed an influx of capital from both European and
U.S. investors.
Last month, the U.S. 30 Year Bond hit
its lowest yield for 2014 due to continued
economic sluggishness in Europe causing
a hunger-for-yield amongst European investors. For some bond investors however,
there is a growing bear sentiment that this
years bull rally may be coming to an end.
Many Wall Street bearish bond investors
are decreasing their expectations based on
U.S. economic growth and inflation measures, Federal Reserve actions, and international interest rate parity.
U.S. Economic Growth
Year to date , U.S. economic growth has
seemed positive. Real GDP was up 4.2%
during the second quarter of this year .
For bond traders, a faster growing economy indicates that real interest rates will
be pushed higher as projects return. On
top of this years GDP growth, unemployment has been trending steadily downwards, a further indication of the growing
power of the U.S. Economy. American
unemployment currently sits at 6.2%;
however, this belies an underlying nearhistorically low labor force participation
rate. Nevertheless, industrial output and
personal income are also up for the year,
further fueling an expected underlying increase in market rates. Overall, while continued economic growth is good for the
U.S., it has the potential to push real interest rates up, and increase downward pressure on bond prices.
As the economy continues to improve,
many investors are becoming more sensitive to inflation, and its potential to force
required bond yields higher. Of particular
concern is the large amount of money
currently sitting in the financial system as
a result of the Federal Reserves quantitative easing (QE) program. So far, American banks have reported that they are
holding the majority of excess stimulus

cash; however, as the economy continues

to improve, it will become much more
likely that these excess reserves will be deployed into the market. As commercial
credit liquidity continues to improve and
more projects in the private sector receive
funding, bond yields are in danger of
being forced higher via inflationary pressure. While core inflation is only up
1.86% for the year, this rate is still below
the long-term inflation rate of 3.81%.
This has led most investors to predict a reversion towards the mean on this front.
The Federal Reverse
As the American economy has successfully emerged from the shadow of the
2008 financial crisis, the Federal Reserve
has begun tapering its expansive QE program. The Federal Reserve announced this
summer that it intends to completely halt
its asset purchases by the end of November 2014. As the Federal Reserve used to
purchase billions of dollars of bonds each
month, some investors feel that prices will
soften when the Fed exits the market. In
addition, some analysts have been calling
for the Fed to raise interest rates (via the
federal funds rate), as rates have been kept
artificially low via monetary policy. The
general consensus is that protracted periods of artificially low interest rates helped
cause the financial crisis and, all else equal,
it is better for the economy for interest
rates to buoy up to their normal, long run
levels. With the end of tapering and the
possible increase in the federal funds rate,
there is significant speculation that bonds
will see yields rise in the near-to-medium
Foreign Interest Rate Parity
The final factor that has been supporting the recent bear outlook is the notion
of yield parity between the U.S. and the
European Union. While the United States
has been enjoying moderate economic
growth, Europe has been struggling to
prevent stagnation and, more so, to prevent a double dip recession. Over the summer, the European Central Bank (ECB)
cut interest rates and announced the possibility of charging negative interest rates

September 2014

in order to stimulate the European Unions

economy. As European economic grown
continues to be sluggish, it is increasingly likely that the ECB will be forced
into more aggressive asset buying programs. Moreover, recent geopolitical
turmoil stemming from the Ukrainian
conflict has further hampered European economic activity. In sum, these
forces have contributed to the recent
bull rally in American yields, as European investors sought out American
securities over their low yielding domestic securities. However, as the European economy has continued to
struggle, the foreign exchange rate between the euro and dollar has also
changed, allowing for the dollar to appreciate. This, in turn, has begun to reduce the
downward pressure from Europe, as the
exchange rate essentially contributes to the
bond yields. As a result, American yields
will be more susceptible to the first three
aforementioned forces and are more at
risk of entering a bear phase.
Overall, the U.S. bond market has been
performing well , and by all indications,
will continue to perform well in the immediate future. However, in the long-term,
the bull story becomes far less compelling
as yields are subject to pressure from rising real interest rates resulting from
economic growth, inflationary pressure resulting from increased credit issuance, and a reduction in
low-yield-orientated monetary policy.
In addition, the foreign interest rate
parity between the countries of the
European Union and America is likely
to be aided by an appreciating dollar,
which effectively increases American
bond yields for European investors
and, in turn, effectively reduces the
downward yield pressure that European
economic conditions have been having on
U.S. yield. Ultimately, the American bond
market will see an inflection point towards
a bear market; however, it is presently unclear when these qualitative factors will
manifest as quantitative changes in the
American yield curve.

WUFC Newsletter Financial Analysis

Argentina, story continued from p. 4.

ruled that the holdouts have as much
right to be satisfied as the 93% of creditors who agreed to take a haircut.
Argentina has disagreed to pay the
holdouts the full value of their debt. The
country believes that Griesa neglected
the Rights Upon Future Offers
(RUFO) clause that prohibits the full repayment of one bondholder without
paying every bondholder the same prorated value at the same exact time. If
RUFO is activated, it will incur a $15 billion dollar liability. While this alone wont
make Argentina insolvent, it will wipe out
at least half of the countrys foreign exchange reserves and put the already
struggling nation in tough situation.
So far, the Argentinian reaction
against primarily foreign holdout investors has been highly critical. Buenos
Aires is covered in graffiti that reads Patria o Buitres, meaning Your Country
or Vultures. Many of the people who
subscribe to this view dont understand
why a court in a separate country should
have such a large say in the nations future, and dont recognize the jurisdiction
of the US in this matter. They further rail

against the vulture funds themselves,

noting how from the beginning the funds
seemed content to take advantage of Argentina. Other Argentines disagree, notably famed economist Domingo
Cavallo, arguing that the present debacle
is largely the consequence of the current
In this regard , it is hard to disagree
with Cavallo. Argentinian president
Cristina Fernandez de Kirchner has opportunistically harnessed the nationalistic
reaction against the holdouts. Fernandez
repeatedly uses the term vulture funds
while addressing the public, and her antagonism has paid political dividends.
Even though her country is locked out
from capital markets and an upcoming
credit crunch is possible, her approval
rate increased to over 40% in September.
Although it would be in the countrys
best interest to resolve the conflict as
quickly as possible, Fernandez could be
tempted to further fan nationalistic
flames in order to boost her own political
career. This would further destabilize the
economy of the nation.
One suggestion to resurrect the Argentinian economy is to foster dialogue

between Argentina and the holdouts in

which the holdout coalition could ask
Griesa to unblock Argentinas interest
payments. This would upgrade the country from a virtual default status. Another proposed method is to have a third
party step in to take the governments
burden towards the holdouts. Alternatively, the investors who account for 93%
of the defaulted 2001 debt could waive
RUFO, meaning that they would accept
that the holdouts would be paid a larger
sum. Argentina also could simply wait
until 2015, when the clause expires, and
then pay the holdouts the full sum.
The RUFO clause has received significant attention recently, especially in
light of numerous sovereign defaults. Because RUFO is so often used to force
creditors to accept less-than-ideal terms
in bankruptcy cases, the precedent set in
resolving the Argentinian crisis could affect future sovereign default strategy.
The careful attention the IMF and
World Bank have given this issue stresses
its importance. Although the resolution
of the Argentinian debt crisis a matter of
critical importance, it is clear that no consensus will be reached soon.

Financial Analysis Committee


karan Parekh
Vice President of Financial Analysis

Jenny Qian
Managing Editor

Charles Bagley, Vincent Criscuolo, William

helmold, Graham Jordan &
Brendan Tsai
Financial Analysts

Abigail Richardson & Ese Uwhuba

Copy Editors