Macquarie Bank to address inadequacies within their wholesale FX businesses

ASIC has today accepted an enforceable undertaking (EU) from Macquarie Bank Limited in relation to the bank’s wholesale foreign exchange (FX) businesses, following an ASIC investigation.

ASIC is concerned that the bank failed to ensure that its systems and controls were adequate to address risks relating to instances of inappropriate conduct identified by ASIC.

ASIC Commissioner Cathie Armour said, ‘The wholesale spot foreign exchange market is one the world’s largest financial markets and the proper functioning of this market is of vital importance to the Australian economy.’

‘ASIC has now accepted undertakings from some of Australia’s largest market participants to put in place forward looking processes and controls to ensure that their foreign exchange businesses provide financial services honestly, efficiently and fairly.’

‘ASIC will continue to ensure that there can be ongoing confidence in how our financial institutions conduct themselves now and into the future,’ Ms Armour said.

ASIC identified the following conduct by employees of Macquarie in its spot FX business between 1 January 2008 and 30 June 2013:

  • On a number of occasions, Macquarie employees disclosed to external third parties confidential details of pending client orders including identification of a client;
  • On a number of occasions, Macquarie employees inappropriately disclosed to external third parties confidential and potentially material information about Macquarie’s trading activity associated with large pending AUD orders; and
  • On a number of occasions, when the market approached the trigger price of a stop loss order, Macquarie spot FX traders responsible for managing the order traded in a manner that may have been intended to cause the trigger price to trade when it might not have traded at that time.

ASIC is concerned that Macquarie did not ensure that its systems, controls and framework for supervision and monitoring were adequate to prevent, detect and respond to such conduct, which had the potential to undermine confidence in the proper functioning and integrity of the market.

Macquarie will develop a program of changes to its existing systems, controls, training, guidance and framework for monitoring and supervision of employees in its spot FX and non-deliverable forwards businesses to prevent, detect and respond to:

  1. inappropriate disclosure of confidential information to external market participants; and
  2. inappropriate order management and trading in respect of stop loss orders.

ASIC will appoint an independent consultant to assess the program and its implementation. The program will incorporate changes already made by Macquarie as part of ongoing reviews of its businesses.

Upon implementation of that program, for a period of three years, Macquarie will conduct an annual internal review of the program, which will be independently assessed, and provide an annual attestation from its senior executives to ASIC.

Macquarie will also make a community benefit payment of $2 million to The Smith Family to support The Smith Family’s financial services program aimed at improving young people’s understanding of money management.

ASIC encourages market participants to adhere to high standards of market practice, including those set out in the Global Code of Conduct for the Foreign Exchange Market, published by the Bank of International Settlements (BIS Global FX Code). The BIS Global FX Code provides a global set of practice guidelines to promote the integrity and effective functioning of the wholesale FX market. Phase 1 of the Code was published in May 2016, and Phase 2 is due for publication in May 2017.

ASIC is grateful for the assistance of international regulatory counterparts in progressing the investigation.


Prior to accepting these EU from Macquarie, ASIC’s FX investigation has seen ASIC accept enforceable undertakings from each of the Westpac Banking Corporation, Australia and New Zealand Banking Group Limited, National Australia Bank Limited and the Commonwealth Bank of Australia (refer: 17-065MR and 16-455MR). The institutions also made voluntary contributions totalling $11 million to fund independent financial literacy projects in Australia.

The wholesale spot FX market is an important financial market for Australia. It facilitates the exchange of one currency for another and thus allows market participants to buy and sell foreign currencies. As part of its spot FX business, Macquarie entered into different types of spot FX agreements with its clients, including Australian clients.

Spot FX refers to FX contracts involving the exchange of two currencies at a price (exchange rate) agreed on a date (the trade date), and which are usually settled two business days from the trade date.

Non-deliverable forwards refer to FX forward contracts which, at maturity, are settled by calculating the difference between the agreed forward rate and a settlement rate (which is usually determined by reference to a benchmark published exchange rate). A FX forward contract is an agreement between two counterparties to exchange currencies at a future date at a rate agreed upon in advance.

The High Frequency Trading Arms Race Just Went Up A Notch

High Frequency Trading is an arms race in the quest for speed. It creates an ever more uneven playing field.  This article from Zero Hedge demonstrates to what lengths the high frequency traders will go for just a few millisecond advantage – which makes in the HFT world makes all the different between billions in profits and losses – Bloomberg reports that a mysterious antenna has emerged in an empty field in Aurora, near Chicago, and a trading fortune depends on it.

Strange? Of course: as BBG’s Brian Louis admits “it was an odd transaction from the outset: $14 million, double the going rate, for a 31-acre plot of flat, undeveloped land just west of Chicago. In the nine months since, the curious use of the space has only added to the intrigue. A single, nondescript pole with two antennas was erected by a row of shrubs. Some supporting equipment was rolled in. That’s it.”

As it turns out, those antennas – as readers may imagine – were anything but ordinary. Same goes for the buyer of the property: anything but your typical land investor, although the name will be all too familiar to those who have followed our reporting on HFT over the years: it was Jump Trading LLC, “a legendary and secretive trading firm that’s a major player in some of the most important financial markets.”

Equipment on land purchased by an affiliate of Jump Trading

Jump Trading affiliate World Class Wireless purchased the 31-acre lot for $14 million, according to county records. “They paid probably twice as much as it’s worth,” said David Friedlandof Cushman & Wakefield. “I don’t see anyone else paying close to that price.”

There was a reason why Jump overpaid so much: it was an investment into guaranteed future returns.

Because ultimately the purchase was all about the location: just across the street lies the data center for CME Group, the world’s biggest futures exchange. By placing its antennas so close to CME’s servers, Jump hopes to shave maybe a microsecond off its reaction time, enough to separate a winning from a losing bid in trading that takes place at almost the speed of light. Enough to make billions in profits if done successfully millions of times every minute for year.

As Bloomberg describes the land grab, “it was the latest, and perhaps boldest, salvo in an escalating war that’s being waged to stay competitive in the high-speed trading business.”

 The war is one of proximity — to see who can get data in and out of CME the quickest. A company called McKay Brothers LLC recently won approval to build the tallest microwave tower in the area while another, Webline Holdings LLC, has installed microwave dishes on a utility pole just outside the data center.

“It tells you how valuable being just a little bit faster is,” said Michael Goldstein, a finance professor at Babson College in Babson Park, Massachusetts. “People say seconds matter. This is microseconds matter.”

It also tells you something else: at its core, modern trading is simply about being faster than your competition: no thinking goes into the trade, only reaction times matter. That, and frontrunning your competition. Some more details about this literal land grab:

In October 2015, McKay Brothers, a company that sells access to its microwave network to high-speed traders, leased land diagonal to the CME data center, under the name Pierce Broadband LLC, according to DuPage County property records.

Last month, the county gave McKay approval to erect a 350-foot high microwave tower that could be 600 feet closer to the data center than its current location, records show. Two trading firms, IMC BV and Tower Research Capital LLC, own minority stakes in McKay. Co-founder Stephane Tyc said his firm may never build the tower but it would be part of the firm’s continual efforts to speed transmission time.

Then there’s Webline Holdings. In November 2015, it was granted a license to operate microwave equipment on a utility pole just outside the data center, according to Federal Communications Commission records. Webline has licenses for a microwave network stretching from Aurora to Carteret, New Jersey, where Nasdaq Inc.’s data center is located. Messages left for Webline were not returned.

Back to the mysterious antenna: according to Bloomberg, the license for the transmission dishes is held by a joint venture between World Class and a unit of KCG Holdings, another HFT trading firm that was recently acquired by Virtu Financial. In other words, the “who is who” of HFT has been unleashed on an empty field near Chicago, and to the builder will go the spoils. It could be billions in revenues.

After all this frentic building of microwave tower, who is closest to the CME servers? It is unclear. Trading data first leaves CME computers via fiber cable, and then to nearby antennas that send it by microwave to other towers until it reaches New Jersey, where all the major U.S. stock exchanges house their computers. The moves in Aurora are intended to reduce the time that the data is conveyed through cable; the practical impact is shaving off a millisecond or maybe even a few nanoseconds.

At its core, the race is about latency arbitrage, and not being the slowest firm on the block – a recipe for financial ruin. Sending data back and forth between the U.S. Midwest and East Coast allows high-frequency traders to profit from price differences for related assets, including S&P 500 Index futures in Illinois and stock prices in New Jersey. Those arbitrage opportunities often last only tiny fractions of a second.

Ironically, all the land grab and overpriced land purchases could be made obsolete with one simple decision: a microwave tower could be installed on the roof of the CME data center to eliminate the need for jockeying around the site, the same way the NYSE has a microwave tower next to its NJ headquarters. The exchange is indeed looking at allowing roof access, along with CyrusOne, the company that bought the data center last year, CME said in a statement. Traders being traders, however, they may continue to battle, this time for the most advantageous position on the microwave tower itself.

“We are confident the CME can provide an alternate and better solution which offers a level playing field to all participants,” said McKay’s Tyc.

Which is ironic because at its core, modern High Frequency Trade is about everything but a level playing field: after all there are millions of traders to be frontrun, take that away, and the HFT parasites of the world have no advantage whatsoever.

Much Doubt Surrounds VIX Index’s Optimism

From Moody’s

Financial markets were recently visited by a rarity. During the past week, the VIX index closed under 10 points on May 8 and 9. Since its start in 1990, the VIX index has closed under 10 points on only 11, or 0.1%, of the span’s nearly 7,000 trading days.

Today’s very low VIX index reflects a great deal of confidence that there won’t be a deep sell-off by equities. Not only is there effectively little demand for insuring against a harsh correction, but sellers of such insurance are will to accept a low price for protection against a market plunge.

This insouciance seems odd given how richly priced the US equity market is relative to corporate earnings and the prospective returns from other assets such as corporate bonds. The current market value of US common stock — according to a model based on pretax profits from current production and Moody’s long-term Baa industrial company bond yield — exceeds its midpoint valuation by a considerable 24%. During 1999-2000’s memorable equity rally, the market value of US stocks first climbed 24% above its projected midpoint in 1999’s first quarter and would remain at least that high through 2000’s second quarter. During January 1999 through June 2000, the actual market value of US common stock exceeded its projected midpoint by 51%, on average.

Another comparison of the two periods shows a similarly striking difference between them. The earlier period averages of a 15.4:1 ratio for the market value of common stock to pretax operating profits and 8.05% for the long-term industrial company bond yield were far above the recent ratio of 11.7:1 and the latest Baa industrial yield of 4.68%.

In stark contrast to the current situation, during January 1999 through June 2000 the VIX index averaged a substantially higher 24.3 points when the market value of US common stock was at least 24% above its projected midpoint. Back then, the market had a greater appreciation of the considerable downside risk implicit in an overvalued equity market.

Two prior cases of a below-10 VIX index preceded vastly different outcomes

January 2007 and December 1993 were the two prior moments when the VIX index spent some time under the 10-point threshold. What followed them differed drastically.

January 2007 was merely 11 months before the December 2007 start to the worst recession since the Great Depression. In contrast, December 1993 was followed by 1994’s 4.0% annual advance by real GDP that was the first of a seven year span that had real GDP growing by a now unheard of 4.0% annually, on average. Far different was 2007’s 1.8% annual rise by real GDP that was at the start of what would be real GDP’s 0.9% average annual rise of the seven-years-ended 2013.

In the year following December 1993’s ultra-low VIX score, the market value of US common stock fell by -3.2% despite 1994’s 18.6% surge by pretax operating profits. A lift-off by the average 10-year Treasury yield from Q4-1993’s 6.13% to Q4-1994’s 7.96% was to blame for 1994’s short-lived drop by share prices. Nevertheless, partly because of 1994’s very strong showing by business activity, the earnings-sensitive high-yield bond spread narrowed from Q4-1993’s 438 bp to Q4-1994’s 350 bp.

For the year following January 2007’s brief stay by a less than 10-point VIX index, a drop by the 10-year Treasury yield from January 2007’s 4.64% to January 2008’s 4.00% failed to stave off a -3.4% drop by the market value of US common stock largely because of yearlong 2007’s -7.5% contraction of pretax operating profits. A swelling by the high-yield bond spread from January 2007’s 287 bp to January 2008’s 674 bp stemmed from the worsened outlook for business activity.

VIX Index and high-yield EDF differ drastically on yield spreads

May-to-date’s average VIX index of 10.4 points favors a 312 bp midpoint for the high-yield bond spread, which is much thinner than the recent actual spread of 377 bp. Throughout much of 2016, the VIX index proved to be a reliable leading indicator of where the high-yield spread was headed. Nevertheless, if only because the VIX index now resides in the bottom percentile of its historical sample, a higher VIX index is practically inevitable. Once the VIX index approaches its mean, the high-yield spread will be much wider than the recent 377 bp. (Figure 1.)

Housing Slump & Eurozone Key Australian Investor Concerns

High household debt and further strong house-price gains are fuelling Australian investor’s concerns around a domestic housing-market downturn, according to Fitch Ratings’ latest survey of the country’s fixed-income investors. Investors also believe developments in the Eurozone now pose a greater risk to Australian credit markets than a China hard landing.

The 2Q17 survey was undertaken in partnership with KangaNews – a specialist publishing house that provides commentary on fixed-income markets in Australia and New Zealand. Findings represent the views of managers of more than AUD300 billion of fixed-income assets, accounting for over three-quarters of Australia’s domestic real-money market.

Australia is facing mildly tougher economic conditions according to fixed-income investors. Their outlook for three key economic indicators suggests the next three years will see modest interest rate increases, a drift to slightly higher unemployment and house price declines. Interestingly, 60% of investors expect house prices to rise by between 2% and 10% by end-2017, while 52% expect house prices to decline by between 2% and 10% by end-2019.

Investors believe banks are better placed to manage risks, despite their less-than-rosy economic outlook, following steps taken to strengthen bank balance sheets and tighten lending standards. Property market exposure remains investors’ key concern, but the proportion ranking it as ‘critical’ has dropped to 30%, from 43% in our previous 4Q16 survey.

Corporate Australia’s credit profile is also expected to strengthen, with more investors taking the view that corporates will deleverage. The proportion of investors expecting corporate leverage to decrease has risen to 23%, from 4%, over the three surveys conducted over the past twelve months. Investors have nominated the corporate asset class as their preferred investment choice.

Australian investors anticipate a strong rebound in structured finance RMBS and ABS issuance over the next 12 months. Fifty-eight percent believe there will be increased issuance in 2017, up from just 16% in our 4Q16 survey.

Bank shares lurk as an unseen danger in a property shakeout

From The New Daily.

With property prices at dramatic highs, regulators are getting very nervous about the danger of a shakeout, so they’re trying to chase away investors by making loans harder to get and more expensive.

While the dangers of over-exposure to a property slump through unaffordable mortgages and aggressive negative gearing strategies are clearly understood, there’s another property-related danger lurking in the wings: bank shares.

The banks have been massive winners from the property boom. The lure of easy money from jumping prices has seen them dramatically lift exposures to residential housing, from 47 per cent of their loan portfolios in 1997 to 66 per cent today.

And, as The New Daily recently reported, housing lending has left business lending for dead since capital gains discounts were introduced in 1999. So profitable have banks been they now make up 32 per cent of the value of the Australian share market and, as the following chart shows, they are outgrowing the rest of the market.

But that all leaves them, and investors, highly exposed to property fortunes, according to a new report from investment consultants Rice Warner.

“Australians have been heavily invested in the domestic banking sector due to its high visibility, perceived strong track record (despite the GFC) and size relative to the rest of the Australian market. However, institutions in this sector are, by nature, highly interlinked … on mortgage lending,” the report said.

The interrelationship between bank profits and the property boom has worked in tandem. “But when one starts to fall I won’t be surprised if the other goes down with it,” Michael Berg, a senior consultant with Rice Warner, said.

And private investors, many of them retirees, would be heavily hit by falling bank shares. “Whenever we see a breakdown it shows portfolios are heavily weighted to bank shares,” Mr Berg said.

“It’s fair to draw attention to the very high weightings in portfolios to bank shares,” said independent economist Saul Eslake. “The main reason they’re so attractive is they deliver very high after-tax yields through dividend imputation.”

However if the property market were to fall “the banks may well cut their dividends”, Mr Eslake said. That, in turn, would hit their prices.

A fall in bank share prices and dividends would hit not only the 26 per cent of Australians who have direct share investments it would also hit retirees exposed to shares through super funds.

Self-managed super funds and retail, in particular, are heavily exposed to shares which deliver high dividends. Their members would see incomes cut if prices and more particularly dividends, were cut.

Industry funds also have shares but they tend to have lower exposures than retail funds because they often invest collectively in other asset types.

Another share popular with retirees for its dividends is Telstra, which has fallen 25 per cent since January because of concerns about competition in its markets reducing future profits. “The scary part (with the banks) is when you look what’s happened to Telstra,” said David Simon, principal of advisory group Integral Private Wealth.

“The banks could be facing similar risks.”

Given the fact that many portfolios are made up of at least 20 per cent bank shares, a property-induced banking shakeout would be felt widely, hitting peoples’ retirements and the economy generally as incomes and spending falls.

Bank risk dominating retail portfolios

From Investor Daily.

The typical Australian retail investment portfolio is highly correlated to bank risk and would suffer catastrophic losses in the event of another financial crisis, says Jamieson Coote Bonds.

Speaking to InvestorDaily, Jamieson Coote Bonds executive director and founder Angus Coote said Australian retail investors would get “decimated” if a “sequencing event” were to hit the banking system.

Retail investors often incorrectly assume that hybrid securities and corporate bonds issued by the banks are relatively safe fixed income products, Mr Coote said.

“Everyone knows equity’s a risky product, but people assume that because hybrids and corporate bonds are constant payers of coupons that it is going to happen in perpetuity,” he said.

Breaking down the typical portfolio of a SMSF investor, Mr Coote listed assets that are highly correlated: cash in a bank deposit, bank corporate bonds, bank hybrids (which should be thought of as “preferred equity” rather than fixed income), negatively geared property and bank shares.

The one thing that is missing from Australian investors’ portfolios is high-grade government debt, he said.

Jamieson Coote Bonds’ actively managed bond fund aims to provide a ‘true to label’ product for investors who want a truly defensive product to mitigate losses when risk assets are under pressure, Mr Coote said.

“In the really risk averse times, such as 2008, you have a high grade part of your portfolio that can insulate against some of those losses – and indeed take advantage of some of those losses,” he said.

But Jamieson Coote Bonds is fighting an uphill battle in Australia, where bonds have typically been on the periphery for retail investors.

“The bond market in this country was so small for so long that people just don’t understand it,” Mr Coote said.

“Whereas if you go offshore it’s a bigger and deeper market than the equity market and more prevalent in peoples’ portfolios than equities are.”

Jamieson Coote Bonds would not have been able to launch its government bond product 10 years ago, Mr Coote said, but things are different now that Australia has a “deep and liquid bond market”.

While it is unlikely that one of the big four Australian banks will get into serious trouble, “accidents can happen”, he said.

“We’ve obviously got some risks that are bubbling along, and it’s comforting to know that APRA and ASIC and the RBA are starting to look at the property market and doing something about it,” Mr Coote said.

“These types of things for risky assets are very detrimental to performance. And one thing that has been underestimated in portfolios is liquidity and protection from these left tail events.

“Everyone’s [portfolios] are 80-90 per cent risk in this country. And it’s not right.”

Deutsche Bank Fined For Rigging FX Trading

The US Federal Reserve has announced two enforcement actions against Deutsche Bank AG that will require bank to pay a combined $156.6 million in civil money penalties.

The Federal Reserve on Thursday announced two enforcement actions against Deutsche Bank AG that will require the bank to pay a combined $156.6 million in civil money penalties. The bank will pay a $136.9 million fine for unsafe and unsound practices in the foreign exchange (FX) markets, as well as a $19.7 million fine for failure to maintain an adequate Volcker rule compliance program prior to March 30, 2016.

In levying the FX fine on Deutsche Bank, the Board found deficiencies in the firm’s oversight of, and internal controls over, FX traders who buy and sell U.S. dollars and foreign currencies for the organization’s own accounts and for customers. The firm failed to detect and address that its traders used electronic chatrooms to communicate with competitors about their trading positions. The Board’s order requires Deutsche Bank to improve its senior management oversight and controls relating to the firm’s FX trading.

The Board is also requiring the firm to cooperate in any investigation of the individuals involved in the conduct underlying the FX enforcement action and is prohibiting the organization from re-employing or otherwise engaging individuals who were involved in this conduct.

Separately, the Board found gaps in key aspects of Deutsche Bank’s compliance program for the Volcker rule, which generally prohibits insured depository institutions and any company affiliated with an insured depository institution from engaging in proprietary trading and from acquiring or retaining ownership interests in, sponsoring, or having certain relationships with a hedge fund or private equity fund.

The Board also found that the firm failed to properly undertake certain required analyses concerning its permitted market-making related activities. The consent order requires Deutsche Bank to improve its senior management oversight and controls relating to the firm’s compliance with Volcker rule requirements.

British prime minister calls snap general election

British Prime Minister Theresa May has called a snap general election for 8 June.

She made the announcement in Downing Street after a cabinet meeting.

With a Commons working majority of just 17, and a healthy opinion poll lead over Labour, senior Tories have suggested Mrs May should go to the country in order to strengthen her parliamentary position.

Such a move would also give a mandate both for her leadership and her negotiating position on Brexit before talks with the European Union start in earnest.

Justifying the decision, Mrs May said: “The country is coming together but Westminster is not.”

She said the government has a right plan for negotiating with European Union.

She said they need unity in Westminster, but instead there is division.

From RTE.

The current 5-year fixed term should run to 2020, and will require a 2/3’s vote in Parliament to progress. This may cause significant heartburn in Labour circles in Britain!

The FT Index fell on the news.



UBS: “The Current Market Configuration Is The Opposite Of February 2016”

From Zero Hedge.

Last February, as Chinese stocks and the Yuan were crashing every day, sending the S&P tumbling and government bond yields crashing to record lows, in the process aborting the Fed’s first attempt to hike rates, volatility was soaring and confidence in the economy was in the dumps: in short, the bottom appeared like it was about to fall off. And then, as if by magic, the Shanghai Accord happened, a few central bankers and finance ministers sat down behind closed doors and ironed out an agreement whose details are still unknown, and unleashed one of the biggest market surges in history, in the process once again fooling the Fed and central banks that (benign) inflation has again arrived, lead to not one but two rate hikes by the Fed this time. Indeed, unlike last February when pessimism rules, this time it is optimism about the economy and future that is seemingly boundless, even if the actual economy refuses to confirm this euphoric outlook.

And, if UBS is right, there is no reason to be optimistic. At all.

In a note titled “Separating reflation myth and reality”, the Swiss bank looks at the record gap in what has now become watercooler talk, namely that between hard and soft data surprises, and says that the gulf between the two series is now unprecedented:

The cause of the gap between soft and hard data is often put down to a lag. However, not only is the response from hard data more delayed than usual, the magnitude of the gulf between them is unprecedented. We believe understanding the reasons behind this gap is central to the identifying the nature of today’s reflation, and charting its future.

No surprise there: as noted above, this website was the first to notice the “unprecedented” gap between soft and hard data, only then ushering in the clown brigade of “serious economists” who promptly opined on this gap, ar first dismissing it, and only in recent days, sounding the alarm.

However, it was what UBS noted next that we found more important, because it ties the current euphoria to a market period that is still all too fresh in the minds of traders. This is how UBS compares the current period, in both the markets and economy, with what happened just over a year ago, when as summarized above, the bottom appeared to be falling out of global risk, and in retrospect was precisely the right time to BTFD:

Soft data momentum has been strong for some time, pulling expectations higher too. The 3m change in UBS global data surprises has reached levels it typically mean-reverts from. In the meantime, market volatility across all assets has declined sharply; the 3m change here is not far from its lows. This configuration, the opposite of that in Feb 2016, warns us against adding risk aggressively now.

It would be poetically ironic if just over 12 months after central banks cobbled together a global, if still unpublicized, rescue packge in Shanghai, that the would seek to pull the carpet from under the global economy, something which would happen under Trump’s watch – and for which he would get the blame – and come just as his Goldman advisers convinced him to flipflop on the key values of his core voters, assuring that when the market does crash, few will come to his support, and giving the Fed just the smokescreen to sneak away unscathed and without getting blamed for having blown the biggest asset bubble in world history.

And, if UBS is right and the anti-Shanghai Accord trade is coming, one can only hope that the coming plunge is, as some would put it, bigly.

Short positions in big Aussie banks have shrunk by more than $4 billion

From Business Insider.

Short positions in the major Aussie bank stocks have steadily decreased since the middle of last year.

In a research note, Deutsche Bank analysts said that short positions reduced by around 24 basis points in March to an average of 0.9% of total bank shares outstanding. Average short positions for the big four banks have shrunk by 1% year-on-year.

After a sustained build-up, bank short selling reached a peak in May 2016. The majors were under fire amid calls for a royal commission into poor conduct, increased regulation and uncertainty about the medium-term interest rate outlook.

Those fears appear to have eased, as this chart tracks the reduction in short positions over the last 12 months:

After experiencing the most rapid reduction in shorts over the last 12 months, ANZ was the only major in which short selling ticked upwards in March. March shorts in ANZ stock rose by a fractional 4 basis points.

Calculating the reduced volume of short shares on issue with reference to the market cap of the big four banks before markets opened this morning, the reduced short volume equates to $4.89 billion worth of value. See here:

Deutsche Bank said that the key macro-prudential control administered by APRA was a 30% limit on new interest-only lending. DB said that it expects the new measure would only have a “modest impact” on credit growth.

“While this category contributes ~40% of the majors’ mortgage approvals, a large proportion of borrowers should be able to switch to P&I loans instead (particularly owner-occupiers who account for ~40% of interest-only loans)”.

The DB research shows that short positions in major banks were noticeably lower than their regional counterparts, Bendigo Bank and Bank of Queensland. This chart shows the discrepancy:

Bank of Queensland had short positions amounting to 2.6% of issued stock, with a minor uptick in March shorts. The bank’s reported half-year profit missed forecasts last week.

Looking at the short interest ratio, Commonwealth Bank is the only big four bank with a days-to-cover ratio higher than the ASX average:

The days-to-cover ratio shows the number of days it would take to close out all the short positions on a company’s stock. It’s calculated by summing the total number of shares currently shorted, divided by the company’s average daily trading volume.

When this number is high, it exposes short sellers to a rapid rise in share prices as they scramble to recover their borrowed stock from the market.