STS
ReferencesAssociated Press. “World Currencies Roiled by China Currency Talk,People’s Daily Newspaper Feeds Speculation of a Yuan Revaluation.”May 11, 2005, 12:22 p.m. ET, as reported on the MSNBC Web site(http://www.msnbc.msn.com/id/7815053/).Bloomberg News. November 15, 1999.Browne, Andrew. “How a News Story, Translated Badly, CausedTrading Panic.” The Wall Street Journal, May 12, 2005, p. A1.Hyuga, Takahiko. “UBS to Return Money from Tokyo Trading Error.”Bloomberg News, International Herald Tribune, Thursday, December 15, 2005.MoneyWeek. “What Was Your Worst Day at Work? Not as Bad asThis...” December 9, 2005 (http://www.moneyweek.com/file/5335/mm-0912.html).Samuelson, Paul. “Is Real-World Price a Tale Told by the Idiot ofChance?” Review of Economics and Statistics, 58(1), 1976, pp.120-123.Samuelson, Paul. “Proof That Properly Anticipated Prices FluctuateRandomly.” Industrial Management Review, 6, 1965, pp.41-50.Moffett, Sebastian. “Japanese Economic Growth May Not Translateto Stocks.” The Wall Street Journal, January 6, 2006, p. C14.The Tokyo Stock Exchange. “Recent IPOs on Mothers 2005.” March7, 2006 (http://www.tse.or.jp/english/listing/companies/data/statistics_m-y.pdf).The Tokyo Stock Exchange. “Summary of Report on ServiceImprovements and Report on the Overall System Inspection.” January 31, 2006 (http://www.tse.or.jp/english/news/2006/200602/060210_a.html).The Tokyo Stock Exchange, Japan Securities Clearing Corporation.“Settlement of Shares of J-Com Co., Ltd.” December 12, 2005(http://www.tse.or.jp/english/news/2005/200512/051212_c.pdf).
CHAPTER 10 • THE ACCIDENTAL CATALYST
325
The Tokyo Stock Exchange. “To All Investors and Concerned Parties:Concerning the Stock/Convertible Bond Trading System IrregularityRelating to Processing of Cancel Order for Shares of J-Com Co., Ltd.on December 8.” December 12, 2005 (http://www.tse.or.jp/english0/news/2005/200512/051212_a.html).Wee, Larry. “Yuan Revaluation Report Sparks Asian CurrencySurge.” Business Times Singapore, May 12, 2005.
Endnotes1
The Tokyo Stock Exchange. “To All Investors and Concerned Parties: Concerning the Stock/Convertible Bond Trading System Irregularity Relating toProcessing of Cancel Order for Shares of J-Com Co., Ltd., on December 8.”December 12, 2005. Basically, the TSE system assumed that the J-Com orderhad started to be processed and would not allow the Mizuho trader to cancel theorder in the midst of processing.
2
Traders had good reason to believe that the order was an error. First, the size ofthe order dwarfed the available stock outstanding. Second, a similar incident hadoccurred in 2001 during the IPO of Dentsu, a large Japanese advertising company, when a trader at the Japanese branch of UBS inadvertently sold 610,000shares of the newly listed firm for ¥16 per share resulting in a loss of ¥16.2 billionfor UBS. Incredibly, the Tokyo Stock Exchange did not adjust its trading systemafter the UBS trading error. Takahiko Hyuga. “UBS to Return Money fromTokyo Trading Error.” Bloomberg News, International Herald Tribune, Thursday, December 15, 2005.
3
The Tokyo Stock Exchange. “Recent IPOs on Mothers 2005.” March 7, 2006(http://www.tse.or.jp/english/listing/companies/data/statistics_m-y.pdf).
4
The Tokyo Stock Exchange, Japan Securities Clearing Corporation. “Settlementof Shares of J-Com Co., Ltd.” December 12, 2005 (http://www.tse.or.jp/english/news/2005/200512/051212_c.pdf).
5
The Tokyo Stock Exchange, Japan Securities Clearing Corporation. “Settlementof Shares of J-Com Co., Ltd.” December 12, 2005 (http://www.tse.or.jp/english/news/2005/200512/051212_c.pdf).
6
J-Com shares were split 3:1 during early 2006.
7
Sebastian Moffett. “Japanese Economic Growth May Not Translate to Stocks.”The Wall Street Journal, January 6, 2006, p. C14.
8
MoneyWeek. “What Was Your Worst Day at Work? Not as Bad as This...”December 9, 2005 (http://www.moneyweek.com/file/5335/mm-0912.html).
326
TRADING CATALYSTS
9
The Tokyo Stock Exchange. “Summary of Report on Service Improvements andReport on the Overall System Inspection.” January 31, 2006.
10
As the name suggests, a non-deliverable forward contract is simply a forwardcontract on a currency that is settled in cash at maturity. The party that is longreceives (pays) money from (to) the party that is short if the RMB rises (falls)against the dollar by more than the forward rate before the contract matures.The difference between today’s spot exchange rate and the NDF rate is a measure of the market’s expectations of whether the future spot foreign exchange ratewill be higher or lower than today’s spot exchange rate. Offshore NDF marketsexist for a number of foreign currencies.
11
Larry Wee. “Yuan Revaluation Report Sparks Asian Currency Surge.” BusinessTimes Singapore, May 12, 2005.
12
Ibid.
13
The Wall Street Journal reported on May 12, 2005 that the “news”: “… roiled theworld’s trillion-dollar-a-day foreign exchange market and sparked panicky emailsand phone calls among currency traders and fund managers from Singapore toStockholm as the U.S. dollar tumbled. The dollar later recovered against majorcurrencies.” Andrew Browne. “How a News Story, Translated Badly, CausedTrading Panic.” The Wall Street Journal, May 12, 2005, p. A1.
14
The Nasdaq 100 stock index shares are commonly called QQQs or cubes or theNasdaq 100 ETFs.
15
The S&P 500 stock index shares are commonly called Spiders or SPDRs, Standard & Poor’s Depositary Receipts or S&P 500 ETFs.
16
Bloomberg News, November 15, 1999.
17
Academic research suggests that volatility in some financial futures markets isclustered around days that economic reports are released and within those days,around the time that the reports are released.
18
In contrast, financial economic theory suggests that, in an efficient capital market, prices react only to the arrival of new information and prices bouncingbetween bid and ask. Volatility mirrors the arrival of new information in an efficient capital market.
19
In some cases, online trading services offer market participants an opportunity towager on the occurrence of these unscheduled news events (e.g., the revaluationof the Chinese yuan or the outcome of a referendum), which, in turn, createmarket measures of the probability of the occurrence of the trading catalyst. Theadvent of various online trading services like Tradesports.com has sharplyincreased the array of events that one can wager directly on.
INDEX
Symbols10-year Treasury note, employmentreport (September 5, 2003),214-2151991 Gulf War, 98-9930-year bondsannouncement of potentialresumption of 30-yearTreasury bonds, 46-53Treasury announcementdiscontinuing issuance of,33-40
Aaccidental catalystsBear Sterns, 312-315Mizuho Securities Company,305-310translation errors, 310-312agriculture, weather, 149-153
Asian Financial Crisis of 1997 and1998, 71-72broken promises, 72-73comments by politicians, 74-79market contagion and, 294atypical pneumonia, 148
BBache Halsey Stuart, 268-270Bafin (Bundesanstalt furFinanzdienstleistungsaufsicht), 245Bali bar bombing (October 12,2002), 113Bank for InternationalSettlements, 167Bank Negara, 75Bank Negara Malaysia, 179Bank of England, 179Soros, George, 177Bank of Italy, 177
327
328Bank of Japan, 80, 173Bank of Sweden, 177Bank of Thailand, 71Thai baht, 72Banque de France, 179base metals, Kobe earthquake, 135basis trades, 244beans over bonds spread (BOBspread), 151Bear Stearns, 312-315bets, one-sided bets, 172“Big Bang,” 56Bitsberger, Timothy, 47BOB (beans over bonds) spread, 151Bombay Stock Exchange (BSE), 105bondsTreasury announcementdiscontinuing issuance of30-year bonds, 33-40Treasury bondsmerchandise trade balancereport (February 1987),194-198merchandise trade balance report(July 1986), 198, 201Boxing Day tsunami (December 26,2004), 133-134Brady Commission, 286, 288Brady, Nicholas, 286Brazilian Presidential Election of2002, 106-107breadth of market response, 15-16Brown, John Dennis, 14BSE (Bombay Stock Exchange), 105bubbles, 273-275, 278
Ccash flow risk, 271catalysts, trading catalysts. See tradingcatalystscategorizing trading catalysts, 18CBOT (Chicago Board of Trade),wheat futures (March 1996),246-247
INDEXcentral banksmarket interventions, 185-186purchases of euros, 164-167Chicago flood (April 13, 1992), 155Chinacurrency value, 311SARS, 148circuit breakers, 281Citigroup, 243-246clusters, trading catalysts, 23COMEX (Commodities Exchange),silver, 260-261, 264-271comments by politicians andpolicymakers, 83-84about Asian Financial Crisis of 1997and 1998, 74-79lessons to learn from impact ofremarks on financialmarkets, 85mistranslations, 82-83as trading catalysts, 66, 68broken promises, 68Federal Reserve, 70Greenspan, Alan (speech fromOctober 8, 1997), 69-70intentional comments, 67Sakakibara, Eisuke, 79-80commissions, “Big Bang,” 56Commodities Exchange (COMEX),silver, 260-261, 264-271conditional convergence, 279consensus expectations, 197consensus forecast, 197contagion, 73contamination of food supply, mad cowdisease, 141, 145convergence, 279copper, Sumitomo, 227-233corners, 260, 264, 271-273cost of carry, 172coup d’Etat, ouster of MikhailGorbachev, 122-124
INDEXcrash of 1987, 280-292lessons of, 292-293precursors to, 249-251crashes, 273
DDavis, Peter, 39, 58delta, 88delta-hedging, 230, 242Denmark, Treaty of Maastricht(1992), 107Department of Labor, employmentreport (September 5, 2003),212-216devaluations, 279direction, 204of impact of forecast errors, 217discontinuing issuance of 30-yearbonds, 33-40distributions, 22skewed distributions, 43symmetric distributions, 43dotcom stocks, 275, 278droughts, 150perceived droughts, 151Duisenberg, Wim, 166duration of market response, 13
Eearnings announcements, 45earthquakesKobe earthquake (January 17,1995), 134-138San Fransisco earthquake (April 18,1906), 156eBay, announcement of 2004 fourthquarter earnings, 45ECB (European Central Bank), 164economic relationships, 208, 210economic reportsemployment report, 205merchandise trade balance report(February 1987), 194-198
329merchandise trade balance report(July 1986), 199-201Producers Price Index report, 205scheduled economic reports,202-207economic theory, 318ECU (European Currency Unit),108, 176elections, 103Brazilian Presidential Election of2002, 106-107Indian Parliamentary Election (May2004), 104-106employment reports, 205September 5, 2003, 212-216EMU (European MonetaryUnion), 107EnglandFSA (Financial Services Authority),243-244London terror attacks (July 7,2005), 119-120Engle, Robert, 240epidemics, SARS, 148-149ERM (European Exchange RateMechanism), 175errors, forecast errors, 203-204, 218direction of impact, 217market reaction to, 219ETF (exchange traded fund)market, 313European Central Bank (ECB), 164European Currency Unit (ECU),108, 176European Exchange Rate Mechanism(ERM), 175European Monetary System, 175European Monetary Union(EMU), 107European Union, 176European Union ConstitutionReferenda (2005), 109-112euros, central banks defend the euro,164-167
330event time, 9, 46events, extreme events, 322-323exchange traded fund (ETF)market, 313execution delay, 215external trading catalysts, 16, 321extrapolative expectations, 240extreme events, 322-323
FFama, Eugene F., 21Farivar, Masood, 152Federal ReserveJapanese currency, purchasing, 173rate cut announcement onJanuary 3, 2001, 1-4, 6analyzing market reaction, 8-10text of the announcement, 29as trading catalysts, 70Financial Services Authority (FSA),243-244Fisher, Richard W., 71flight to quality and safety, 280flight to safety, 121floods, Chicago flood (April 13,1992), 155flows, 318forecast errors, 203-204, 218direction of impact, 217market reaction to, 219foreign markets, trading catalysts, 62France, European Constitution, 109Friedman, Milton, 209FSA (Financial Services Authority),243-244fundamental economic information,207-211
GGandhi, Sonia, 104-105general collateral rates, 272geopolitical events as trading catalysts,100-102elections. See elections
INDEXimpeachment of South KoreanPresident Roh Moo-hyun,120-121Khodorkovsky, Mikhail, 102-103ouster of Mikhail Gorbachev,122-124referendums. See referendumsterrorist actions. See terroristactionsgeopolitical risk, 100Germany, Bafin, 245glasnost, 123gold, 264Iraq War, 100Goldman Sachs, Treasury bonds, 40Gooding, Kenneth, 229Gorbachev, Mikhail, ouster of, 122-124Gore, Al, 169grain futures prices, 146Greenspan, Alancomments about financial marketsand the real economy(speech on October 8,1997), 69-70irrational exuberance, 61-63, 66Gulf War (1991), 98-99
HHackard, James, 145Hamanaka, Yasuo, 228, 232Hashimoto, Ryutaro, 82hedging, 241delta-hedging, 242Herman, Tom, 194, 223HKMA (Hong Kong MonetaryAuthority), 73, 180-185Hong Kong dollar, 73Hong Kong Monetary Authority(HKMA), 73, 180-185Hunt, Nelson Bunker, 261, 264-266,269-270Hunt, William Jefferson, 261Hurricane Andrew, prepaymentspeed, 155
INDEX
331Tokyo Stock Exchange, 325accidents, 305-310yen, rise of, 233-239
Hurricane Ivan, 152-153Hussein, Saddam, 91
IIbrahim, Anwar, 78index arbitrage, 284India, silver, 265Indian parliamentary election (May2004), 104-106informationfundamental economic information,207-211noise and, 211-212insider trading, Treasury bondmarket, 39insurance, portfolio insurance, 241,284-285intensity of market response, 13-14internal catalysts, order size(December 1987 S&P 500stock index futures), 247-249internal trading catalysts, 16, 239-242,251-252, 271, 322bubbles, 273-275, 278corners, 271-273crashes, 273market crises, 278-280order size, 242-243Chicago Board of Trade wheatfutures (March 1996),246-247Citigroup, 243-246squeezes, 271, 273interventions. See market interventionsIraq War, effect on markets, 91, 94,97-100irrational exuberance, 62-63, 66Ito, Takatoshi, 240
JJ-Com, 305-306, 308, 310JapanBank of Japan, 173bubbles in stock market, 274
KKennedy, John F., 101Keynes, John Maynard, 23Khodorkovsky, Mikhail, 102Khristenko, Viktor, 174Kobe earthquake (January 17, 1995),134-138Kudrin, Alexei, 102
Llean hog futures, 146leptokurtic distribution, 22Lin, Wen-Ling, 240liquidity, 56liquidity of market, tradingcatalysts, 27liquidity provision, 279liquidity risk, 279LME (London Metals Exchange), 227lognormal distribution, 22London terror attacks (July 7, 2005),119-120Long-Term Capital Managementcrisis, 183LTCM (Long-Term CapitalManagement), 237-238,279-280Lucas, Robert, 209Lula da Silva, Luiz Inacio, 106
Mmad cow disease, 141, 145Madrid Train bombings (March 11,2004), 117-119magnitude, 204Major Market Index, 291managed floats, 72market conditions, 317attaching weight to, 54-55sentiment and, 40-46
332market contagion, Asian FinancialCrisis and, 294market crises, 278-280market efficiency, trading catalystsand, 21-23market interventions, 163, 172-175Bank of England, 175-179central banks, 185-186euros, 164, 166-167Hong Kong Monetary Authority(HKMA), 180-185politicians and policymakers,174-175tapping Strategic PetroleumReserve, 168-171traders, 186market reactionanalyzing market reaction to ratecut announcement onJanuary 3, 2001, 8-10to forecast errors, 219of selected futures contracts toAugust 2003 employmentreport (September 5,2003), 216market responsebreadth of, 15-16duration of, 13intensity of, 13-14speed of, 12market sentiment. See sentimentMcDonald’s, mad cow disease, 142mental anchoring, 315Merchandise Trade Balance, 12merchandise trade balance report(February 1987), 194-195metalsgold, 264silver, 260-261, 264-271Mexico, Ernesto Zedillo, 278Mitterand, François, 176Mizuho Securities Company, 305-310Mohamad, Mahathir, 74-75, 77monetarist, 209
INDEXMonetary Authority of Singapore, 73“Mr. Yen,” 79-80
NNasdaq 100 stock index, 2Nasdaq 100 stock index futures, 30Nasdaq Composite, 275natural disasters, 139-140as trading catalysts, 140-141contamination of food supply(mad cow disease),141, 145potential epidemics andpandemics (SARS),148-149Kobe earthquake (January 17,1995), 134-138San Fransisco earthquake (April 18,1906), 156tsunami (December 26, 2004),133-134weather, 149-153Chicago flood (April 13,1992), 155Hurricane Andrew andprepayment speed, 155NDF (non-deliverable forward)market, 311neo-Keynesian, 209news, information versus noise,319-320Nikkei, Kobe earthquake, 137noise, information and, 211-212non-deliverable forward (NDF)market, 311normal distribution, 22
OoilIraq War, 94Strategic Petroleum Reserve,168-171war premium, 98weather, 152-154
INDEXOklahoma City bombing (April 19,1995), 112one-sided bets, 74, 172Operation Iraqi Freedom, 91orange juice futures prices, 150order size, 242-243Chicago Board of Trade wheatfutures (March 1996),246-247Citigroup, 243-246December 1987 S&P 500 stockindex futures, 247-249
Ppandemics, SARS, 148-149partial equilibrium relationships, 210Peers, Alexandra, 194perestroika, 123policymakerscomments as trading catalysts,66-68, 83-84broken promises, 68Federal Reserve, 70Greenspan, Alan (speech fromOctober 8, 1997), 69-70intentional comments, 67lessons to learn from impact ofremarks on financialmarkets, 85mistranslations, 82-83Sakakibara, Eisuke, 79-80market interventions, 174-175politicianscomments as trading catalysts,66-68, 83-84about Asian Financial Crisis of1997 and 1998, 74-79broken promises, 68Federal Reserve, 70Greenspan, Alan (speech fromOctober 8, 1997), 69-70intentional comments, 67
333lessons to learn from impact ofremarks on financialmarkets, 85mistranslations, 82-83market interventions, 174-175portfolio insurance, 241, 284-285Portillo, Jose Lopez, 174positive feedback trading, 68, 240pound sterling, 176-177Prechter, Robert, 249prepayment speed, HurricaneAndrew, 155Presidential Task Force on MarketMechanisms, 281, 286price move, market conditions andsentiment, 43price pressure, 242Producers Price Index report, 205program trading, 249
Rrate cuts, Federal Reserve. SeeFederal Reserverates, 272rational, 205Reagan, Ronald W., 286referendums, 107European Union ConstitutionReferenda (2005), 109-112Treaty of Maastricht (1992),107-108reflexive trading catalysts, 14, 17relationshipseconomic relationships, 208-210partial equilibrium relationships, 210relative value arbitrage, 279repeated play, 245reportsemployment reports, 205September 5, 2003, 212-216merchandise trade balance report(February 1987), 194-198
334merchandise trade balance report(July 1986), 199-201Producers Price Index report, 205scheduled economic reports,202-207weekly money supply report,205-207Rerngchai, Marakanond, 88riding the yield curve, 236ringgit, 75, 78risk, 297geopolitical risk, 100liquidity risk, 279Roh Moo-hyun, 120-121Roll, Richard, 150Rothschild, Nathan, 101rumors, 310RussiaKhodorkovsky, Mikhail, 102-103school seizure in Beslan (September1-3, 2004), 113
SS&P 500 Stock index futures(December 1987), 247-249Sakakibaru, Eisuke, 76, 79-80, 237Salomon Brothers, Treasury bidrigging scandal of 1991,272-273Samuelson, Paul, 209San Fransisco earthquake (April 18,1992), 156Sarin poison gas attacks (March 20,1995), 113SARS (severe acute respiratorysyndrome), 148-149scheduled economic reports, 202-207SEC (Securities and ExchangeCommission), 58semi-strong form market efficiency, 21sentiment, 317market conditions and, 40-46September 11, 2001, 112-115, 117SET (Stock Exchange of Thailand), 72
INDEXSeung, Park, 83Shearson, 247Shiller, Robert, 138short squeezes, 272silver,