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Trader Talk with Bob Pisani

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  Friday, 27 Jun 2014 | 9:55 AM ET

Russell gets a facelift, reflecting growth, value

Posted By: Bob Pisani

A broad reconstitution of the Russell Indexes occurs at the close of Wall Street trading today. This annual event will re-balance all the indexes in the Russell universe, but in particular the large-cap Russell 1000 and small cap Russell 2000. Those indexed to the Russell indices will have to follow suit at the close, meaning they will have to buy and sell the stocks going in, and coming out of, the various indices.

That's a tall order, given that there is roughly $5 trillion indexed to these benchmarks. Fortunately, the indices are weighted according to market capitalization, so it is not difficult for Wall Street to put together lists in advance of what will have the biggest activity.

The exchanges routinely hold a conference call at 3 pm Eastern (just before the market close), to monitor for unusual market conditions.

»Read more
  Thursday, 26 Jun 2014 | 4:17 PM ET

Why Barclays is in a pickle: Meet the Martin Act

Posted By: Bob Pisani
Eric Schneiderman, attorney general of New York, speaks at New York Law School in New York, on Tuesday, March 18, 2014.
Louis Lanzano | Bloomberg | Getty Images
Eric Schneiderman, attorney general of New York, speaks at New York Law School in New York, on Tuesday, March 18, 2014.

The suit New York Attorney General Eric Schneiderman has brought against Barclays, accusing the bank of running its dark pool for the benefit of high-frequency traders, has all Wall Street wondering: What will Barclays do?

Barclays has 30 days to respond. It has several options, but there is only one likely outcome.

Barclays could:

  1. Dispute the facts.
  2. Make a motion to dismiss, arguing, for example, the complaint does not make out a cause of action. One it would argue even if everything Schneiderman says is true, it doesn't violate New York law.
  3. Settle the case. Which is the most likely scenario.

Why? Because Schneiderman has a very blunt, powerful weapon called the Martin Act.

Read MoreNY AG levels serious allegations at Barclays

The Martin Act gives the New York State Attorney General broad powers to bring civil and criminal action against almost anyone that has business that affects New York State.

The Martin Act was originally passed in 1921. Hard to believe, but at the time there were no federal laws to protect investors against fraudulent claims by brokers nor investment advisors. Federal laws were not passed until the SEC Act of 1933.

Instead, there was a crazy-quilt patch of state laws known as "blue-sky laws," so called because they were designed to protect against schemes that were backed by nothing but blue sky.

And none were more powerful than the Martin Act. It gives the Attorney General the power to regulate and investigate securities fraud.

Sounds pretty straight forward, right? Yes, but the devil is in the details, and here the details are a doozy.

Under federal law, to be convicted of securities fraud you essentially need to prove: 1) There was a misrepresentation of a material fact, 2) the facts represented were false, 3) there was an intent to defraud and 4) there were damaged caused by the fraud.

But under an early series of court cases, the "fraud" that is forbidden under the Martin Act is defined in a much broader sense than under federal law.

Under the Martin Act, you don't need to prove there was a fraud to be convicted. You don't need to demonstrate intent to defraud, or what is known as "scienter."

Under the Martin Act, you only need demonstrate there has been a misrepresentation or an omission of a material fact when selling or promoting securities.

And that's Barclays' problem: All Schneiderman needs to do is demonstrate a misrepresentation or an omission of a material fact.

That's why the entire complaint was riddled with phrases like "falsified information," "gave clients a false understanding" and "falsified marketing materials."

This is all about misrepresentation. Exactly what the law covers.

Bottom line: With such a low barrier, Barclays will have a tough time fighting the charges.

That's why so many cases brought under the Martin Act settle. There is actually a very small body of case law because the law is framed so broadly.

What's the likely fallout from this?

First: Some dark pools may lose orders. Already The Wall Street Journal has reported some clients of Barclays' dark pook Barclays LX are no longer sending orders to them.

Second: This will increase momentum to return order flow to exchanges and away from "unlit" markets, like dark pools. Right now off-exchange" trading volume (dark pools and internalizers) account for nearly 40 percent of trading.

The SEC has been very nervous about all this trading off exchanges. The NYSE (ICE) has already said the trading environment is too complex...too many exchanges, too many dark pools and too many order types.

Letting the market decide...by having clients simply leave dark pools...may alleviate some of the SEC's concerns.

But it doesn't address why traders use dark pools. Some use them to execute larger orders, but that is a minority. They use them because they don't want to pay the fees stock exchanges charge to "take" liquidity.

It's likely this will accelerate a discussion of the whole "payment for order flow" issue, as well as the fees that the exchanges charge and collect to trade on their platforms.

Third: More disclosure on how brokers route institutional orders. SEC Chair Mary Jo White, in a June 5 speech, specifically asked her staff for recommendations on how to provide more information on dark pool trading. You can be sure there are lots of discussions going on right now between clients, brokers and dark pools.

Are there investigations into other dark pools? Almost certainly, but Schneiderman had a big advantage with Barclays, with several former (disgruntled) employees coming forward who were key to the investigation.

He is likely hoping that others might come forward from other organizations.

»Read more
  Wednesday, 25 Jun 2014 | 7:22 PM ET

New York attorney general sues Barclays

Posted By: Bob Pisani
Attroney General Eric T. Schneiderman to sue Barclays Bank over securities fraud on June 25, 2014.
Trusha Chokshi | CNBC
Attroney General Eric T. Schneiderman to sue Barclays Bank over securities fraud on June 25, 2014.

New York Attorney General Eric Schneiderman has sued Barclays, alleging that its dark pool operated to favor high frequency traders.

The suit is surprising, because it does not make the usual generic complaints about dark pools: That they are opaque, that they provide perverse incentives for trading.

The suit alleges very specific instances of outright fraud by Barclays Equities Electronic Trading Division, which operated the dark pool, and that they committed these frauds as part of an effort to become the largest dark pool in the U.S., which was a principal goal of that division.

Specifically, Schneiderman is alleging that Barclays:

1) falsified marketing material purporting to show the extent and type of high frequency trading that occurred in their dark pool;
2) falsely marketed the percentage of aggressive high frequency trading activity in its dark pool;
3) routed a disproportionately high percentage of client orders to its own dark pool;
4) senior execs presented falsified information to a client in an effort to mask Barclays' biased order routing practices;
5) gave information on its dark pool to high frequency traders, including info on the identity and trading activity of other traders
6) committed fraud in connection with the marketing and operation of its dark pool
7) gave clients a false understanding of their exposure to predatory high frequency trading.

Notice the language: Committed fraud. Falsified information. Gave clients a false understanding. Falsified marketing materials.

These are very serious allegations.

It's especially shocking that Barclays gave information on its dark pool to high frequency traders, including info on the identity and trading activity of other traders.The whole point of a dark pool is complete confidentiality! Talk about a violation of trust!

Barclays was supposed to be protecting participants in its pool from perceived predatory behavior, but Schneiderman says Barclays has never prohibited a single firm from participating in its dark pool, no matter how toxic or predatory its activity was determined to be.

Schneiderman goes out of his way to say that he has had the cooperation of former employees. He quotes a former senior Barclays Director: "There was a lot going on in the dark pool that was not in the best interests of clients."

Schneiderman wants Barclays to:

1) provide an accounting of all fees, revenues, or other compensation received from Barclays' Equities Electronic Trading division;
2) pay damages;
3) disgorge all amounts obtained in connection with any violations of the law;
4) make restitution of all funds obtained from investors.

Two issues stand out to me:

1) this is a LAWSUIT (technically it's a summons), not a settlement. Is this because there was no attempt at a settlement, or both sides could not agree?

2) does this kind of activity alleged exist at other dark pools? Are clients elsewhere being misled or deceived? If perverse incentives existed at Barclays, did they not likely exist elsewhere?

One bigger issue: Will this decrease dark pool volume? It's roughly 40 percent of overall trading now, and the SEC has clearly indicated that is a concern. There are roughly 45 dark pools in operation...will any of them close as a result of this?

»Read more
  Wednesday, 25 Jun 2014 | 2:36 PM ET

Americans should win if U.S. oil producers export

Posted By: Bob Pisani
An oil refinery in Pascagoula, Miss.
Getty Images
An oil refinery in Pascagoula, Miss.

The Commerce Department's decision to allow Pioneer Natural Resources (PXD) and Enterprise Product Partners (EPD) to ship very light crude oil (condensate) to foreign buyers with minimal refining has produced an immediate set of winners and losers.

Winners: Eagle Ford area oil producers. This area in Texas produces the light crude (known as condensate) that has been permitted for export. For those producers, selling outside the U.S. market will also likely be more profitable. Notable Eagle Ford producers include Pioneer Natural Resources (PXD), Chesapeake Energy (CHK), EOG Resources (EOG), Anadarko Petroleum (APC), and Comstock Resources (CRK).

The odd thing is that it's likely not all of them produce condensates in large numbers, but they are all up indiscriminately.

Is this the first step on lifting the ban on crude oil exports in general? Not clear, but parts of the market are acting like it is.

Look at the huge drop in refiners, with Valero (VLO), HollyFrontier (HFC), Delek US Holdings (DK) and Marathon Petroleum (MPC) down six to eight percent.

Why? Exporting U.S. crude would likely bring down the price of Brent crude. Refined oil prices are generally set by Brent crude...that's the global market benchmark. So lower Brent prices mean lower profits for oil refiners.

Howard Weil estimates that if the export ban would be completely lifted, the price differential between West Texas Intermediate crude oil and Brent crude would drop from roughly $9 to roughly $6 (the spread has dropped significantly today). They estimate that would lower Valero's full-year EPS estimate from $6 to about $4.

The full ban has not been lifted yet; still, a one-third reduction in earnings is significant.

Lifting the ban should be good for American consumers and for U.S. producers. In theory, Brent prices should drop, and the differential between Brent and West Texas should drop.

And why is oil above $100? It's a supply concern issue. Libya is in civil war. Nigeria could implode at anytime. Iraq already has imploded, though it is still exporting. Venezuela and Mexican production is declining. The biggest fear is production in the Persian Gulf could be impaired.

Will this ruling be expanded to include other producers and other types of crude oil? It's not clear, but one thing's for sure: Other companies are going to be lining up to get export permits of their own.

»Read more
  Wednesday, 25 Jun 2014 | 9:58 AM ET

Penny for your thoughts? SEC rules on small caps

Posted By: Bob Pisani
Traders work on the floor of the New York Stock Exchange.
Getty Images
Traders work on the floor of the New York Stock Exchange.

If you're worried about the low volume of stock trading, the Security and Exchanges Commission (SEC) shares your concern.

Late Tuesday—after literally years of discussion and debate—the SEC finally issued an order for the NYSE, NASDAQ, BATS and two other exchanges to start a pilot program to trade small cap stocks in increments other than a penny. Details on how to implement the plan should be submitted in 60 days or less, but the pilot program would:

1) last one year;

2) include stocks with a market capitalization of $5 billion or less;

3) have average daily trading volume of one million shares or less, as well as a share price of at least $2; and

4) include 300 stocks in three different test groups.


»Read more
  Tuesday, 24 Jun 2014 | 3:49 PM ET

Traders take profits in momo stocks; energy weak

Posted By: Bob Pisani
Scott Eells | Bloomberg | Getty Images

Up and down...all on light volume again. Stocks rose at 10 a.m. ET as May New Home Sales came in much better than expected. That makes sense.

We dropped about 1 p.m. ET for reasons that are somewhat mysterious and may not be all that important.

It seemed to start in the energy space. Energy stocks, as I have emphasized for days, have been the market leaders in June. The S&P Energy Sector is up 4.5 percent this month, number one among the 10 S&P Sectors.

Then oil dropped midday. Oil stocks, which had begun weakening earlier in the morning, began to sell off quickly. E&P companies like EOG Resources (EOG)...that have turned into momentum stocks...quickly began to sell off on heavy volume (note I said HEAVY volume).

Why the change in energy? That's where it gets murky. Vague reports out of Syria and Iraq and Ukraine seemed to make little sense.

Regardless: Energy is a major momentum group right now. So other momentum groups...like semiconductors and airlines also began to reverse as Energy reversed.

What's all this mean? We are overbought on a short-term basis in those "momentum" groups, so rather than exhaust yourself trying to find a reason (Sunni militants are in control of a refinery! Wait...they're not in control! A Ukraine helicopter is down!), you should just read the tape.

No one wants to sell but there are fewer who might want to buy at these levels.

So even the tiniest of air pockets (and this is pretty tiny) causes people to take profits in the momentum names, because so many people are on the same side of the boat.

»Read more
  Tuesday, 24 Jun 2014 | 10:19 AM ET

Buckle up! IPO roller coaster is about to begin

Posted By: Bob Pisani
Getty Images

A boomlet of initial public offerings begins today, starting with a well-known Chinese brand.

Xunlei Limited (XNET), one of the largest internet companies in China, priced its IPO last night—one day early (it was expected to price tonight). The company priced 7.3 million shares at $12, well above the price talk of $9–$11, on the NASDAQ. Xunlei claims it has over 300 million unique visitors each month visit its cite to access music, video and games.

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  Monday, 23 Jun 2014 | 9:15 AM ET

IPOs aim for major water mark as flood builds

Posted By: Bob Pisani
Traders work the floor of the New York Stock Exchange.
Getty Images
Traders work the floor of the New York Stock Exchange.

There are 18 initial public offerings (IPOs) scheduled to price this week (including two holdovers from last week). If all 18 price, we will have 38 IPOs for June, one of the busiest months since 2000.

The big names this week are GoPro's $410 million NASDAQ IPO, scheduled to price Wednesday night for Thursday trading; ServiceMaster (which handles termite and pest control, janitorial services, home inspections, residential cleaning, furniture repair), expects to price Wednesday night for Thursday trading on the NYSE; and arts and crafts specialist Michael's $500 million NASDAQ IPO scheduled to price Thursday night for Friday's trade.

The biggest sector for the week is again biotech/pharmaceuticals, and they are all under $100 million. These names include Adeptus, Ambrx, Amphastar Pharma, KineMed, Minerva Neurosciences, GlobelImmune, and two holdovers from last week, Syndax Pharmaceuticals and Microlin Bio.

In addition, there is a healthcare software company, Imprivata.


»Read more
  Thursday, 19 Jun 2014 | 9:54 AM ET

IPO tsunami builds before summer doldrums

Posted By: Bob Pisani
Traders work on the floor of the New York Stock Exchange.
Getty Images
Traders work on the floor of the New York Stock Exchange.

There's a wave of initial public offerings building before the summer slowdown.

Following the six IPOs that priced on Wednesday, three more priced overnight; all three increased their share sizes. Two of them are biotech, which has returned in a big way after a quiet period.

The big IPO of the week, financial service's provider Markit up-sized its IPO, pricing 53.5 million shares (above the 45.7 million shares expected) at $24, the midpoint of the price talk range of $23–$25.

That's a healthy $1.28 billion raised, making it the fifth largest IPO of the year after IMS Health's $1.3 billion deal.


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  Wednesday, 18 Jun 2014 | 2:59 PM ET

Ugly winter comes back to haunt Fed projections

Posted By: Bob Pisani
A trader on the floor of the New York Stock Exchange reacts to an announcement from the Federal Reserve during the afternoon of March 19, 2014 in New York City.
Getty Images
A trader on the floor of the New York Stock Exchange reacts to an announcement from the Federal Reserve during the afternoon of March 19, 2014 in New York City.

How bad was the winter? Really bad—enough to chill the Federal Reserve's growth estimates.

The Fed's policy statement on Wednesday was little changed, but its economic projections contained a rather shocking revision for 2014's gross domestic product figures. The central bank sharply lowered them, from 2.8 3.0 percent, to 2.1– 2.3 percent.

Even for a central bank that has a dismal record as an economic forecaster, this is a pretty big downward revision. Does the Fed think that economic activity is deteriorating, even as it tapers?

No. This revisions reflects the dismal downturn in activity that took place over the winter. Remember, the Fed only adjusts these numbers quarterly, and the data on the winter was not available in March. What matters is the estimates on the unemployment rate was lowered, to 6.06.1 percent from 6.16.3 percent.

On the other hand, the Fed said "labor market indicators generally showed further improvement." That's a positive, as was the wording in the first paragraph of the Fed statement. Growth in economic activity has "rebounded" instead of "picked up" from April, and business fixed income investment has "resumed its advance;" in April, it had "edged down."

This may seem nit-picky, but nit picking is what Fed statements are all about. In addition, expectations for inflation remain little changed.

Most importantly, there is nothing that suggests the Fed is considering changing its timetable for lifting rates. That is still planned for well into 2015.

--By CNBC's Bob Pisani

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About Trader Talk with Bob Pisani

  • Direct from the floor of the NYSE, Trader Talk with Bob Pisani provides a dynamic look at the reasons for the day’s actions on Wall Street. If you want to go beyond the latest numbers— Bob will tell you why the market does what it does and what it means for the next day’s trading.

 

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

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