Horror Stories Emerging From Selloff

Steve Kanaval |

stock markets today, stock markets now, stocks to buy now, BNY Mellon, mutual fund

During the sharp selloff last week managers had difficulty knowing how long stocks were balancing against short stocks, and other moving parts of their portfolios essentially freezing their ability to react. Given the nano-second commitment needed to execute trades in this environment, managers missed an opportunity that comes once a year (bonus making) because they could not value their portfolios....and before you blink your eyes the event has passed -it is gone.

And if this wasn't enough, the other monster is the high-frequency traders (HFT) who are endorsed by the exchanges and bite a piece of the pie during every move. It has almost become a toll gate for entry and exit, creating a new paradigm in market impact to entry and exit. The deck is stacked so perversely in 2015 that shareholder depth in stocks is a thing of the past, the retail market is non-existent, and professional traders are trading against HFTs as the world watches our game of high stakes poker.

I was reviewing a Reuter's article from last week as the horror stories start to emerge from the corner offices where risk sits. I thought I would share some with you.

Valuing Portfolio Difficult for Managers During Decline

"BNY Mellon Corp was scrambling to fix a computer glitch on Wednesday that has delayed how billions of dollars of assets are valued, throwing the U.S. funds industry into disarray and damaging the reputation of the world's largest custody bank."

"BNY Mellon said an accounting system it relies on to calculate the prices of clients' mutual funds and exchange traded funds (ETFs) broke down over the weekend just as investors headed into a global market meltdown sparked by fears over the Chinese economy."

If you look at the action in just a few samples like these seemingly liquid ETF's, like the Vanguard Healthcare Fund (VHT) or iShares Core S&P Mid-Cap ETF (IJH) , it explains why they couldn't figure out how to value the portfolio. A closer inspection of the pricing shows how many were mispriced and sellers got totally jacked here by someone with a mask. It demonstrates the error in thinking where you would enter a market sell order into a historic down opening. But buyers were smart, they bid directly in front of the circuit breaker levels and were glued to these breakers enacting and closing markets.

SunGard, InvestOne Cost Someone Millions

The system, run by financial software provider SunGard, resumed with limited capacity on Tuesday but was still not fully operational on Wednesday, leaving BNY Mellon ($BK) with a backlog of funds to price. SunGard, which is being bought by rival software provider Fidelity National Information Services, did not return messages seeking comment. BNY Mellon raised the alarm with regulators and held emergency calls with customers to try and resolve the problem.

"No one here can understand why it's not up and running yet," said one executive at a firm that was affected. The glitch occurred on a SunGard system called InvestOne, which is used by financial institutions managing more than $28 trillion in assets. BNY Mellon said it outsources some of its net asset value (NAV) calculations to SunGard.

"No one needs any more uncertainly in the markets or in investors' investment accounts," said Dan Sondhelm, senior vice president at SunStar Strategic, a financial services consulting company in Alexandria, Virginia. Several dozen funds run by Federated Investors Inc alone were affected by the pricing glitch, including the $1.2 billion Federated Muni and Stock Advantage Fund, Federated said.

Invesco PowerShares Capital Management (IVZ)  had 11 ETFs affected by the glitch, a spokeswoman said. In a letter to clients, BNY Mellon said, "We recognize the trust that you have placed in us, and sincerely regret the disruption this has caused you and your organization."

New York-based BNY Mellon has been under fire from some hedge fund investors for having too many employees and not reining in expenses. The bank has nearly $30 trillion in assets under custody and administration. Smooth fund accounting is something its clients rely on. Its archrival, State Street Corp (STT) is considered the No. 1 provider of mutual fund accounting services. BNY Mellon spokesman Kevin Heine said he did not know how many funds had been affected.

In addition to Federated Investors, Guggenheim Investments, and First Trust Advisors both had ETFs affected by the glitch, the firms said. "The SunGard system became available with limited capacity late yesterday," Heine said on Wednesday. "Our teams have been working together to clear the backlog and we are working with SunGard to resume normal processing as soon as possible."

BNY Mellon said it was able to construct Monday net asset values (NAVs) for all affected funds. But there remains a backlog of Tuesday NAVs that still need to be generated. First Trust, which manages several exchange-traded funds, said on Wednesday in a statement that the net asset value of some of its funds contained errors greater than 1%. "The errors resulted from a technical malfunction at our third-party administrator, the Bank of New York Mellon," First Trust said.

Just another day at the office...

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
BK Bank of New York Mellon Corporation (The) 47.65 -0.95 -1.95 4,578,940
IVZ Invesco Ltd 31.42 -0.20 -0.63 2,349,382

Comments

Emerging Growth

VOIP PAL.COM INC

VOIP-PAL COM Inc is a development stage company. The Company is engaged in broadband Voice-over-Internet Protocol ("VoIP") market with the ownership and continuing development of a portfolio of VoIP Patents.

Private Markets

Cloudera

Cloudera offers enterprises a new data platform built on the Apache Hadoop open-source software package. Hadoop is a data-management platform that can consolidate data in a single repository for comprehensive…

MyForce, Inc.

As parents, we constantly worry about the safety of our loved ones. The media bombards us with incidents from across the nation school shootings, frequent assaults on campuses, and crimes…