Today's Tape: 3/10/2023
Another bank run, Vanguard's back from a two year break, and an in depth look at a consolidated tape in Europe...
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Another bank run
Over the past decade, Silicon Valley Bank has positioned itself as the bank of choice for tech start-ups. This has resulted in the ballooning of their balance sheet to $190B in assets. But a bank’s business is not just to attract assets. It is to earn more on those assets than it is paying out in interest-NIM. From 2019-2021, the bank attracted over $100B in deposits. Rather than invest these assets in shorter duration bonds yielding 10 bps, they invested $80B in mortgage-backed securities. 500 bps in rate hikes later and these investments placed a $1B+ unrealized loss on their balance sheet. Now in this situation, banks have two options- hold to maturity in which case the losses are never more than mark-to-market paper losses, or recapitalize their balance sheet by realizing their losses and raising capital if needed. By positioning themselves as the primary bank for tech start-ups has put them in a precarious position. Over 85% of their deposits are from tech companies. So when SVB went with the latter option and announced a $1.5B loss and a capital raise only hours after Silverbank announced it was liquidating itself, well, people got worried. Specifically VCs and founders. People with just one tweet or email could cause billions of dollars of outflows. This is exactly what happened. Companies began drawing down their accounts within the $250k FDIC insurance level resulting in a multi-billion dollar bank run at SVB. Where we go from here will likely evolve over the weekend. The stock is still halted after trading down 70% per market.
Vanguard launches a new ETF
I was fascinated to learn that Vanguard has not launched a new ETF in two years. Well, they are back. The Vanguard Short-Term Tax-Exempt Bond ETF (ticker VTES), which tracks an index of municipal bonds due in seven years or less, begins trading Thursday, according to a press release. The asset-management giant’s last new ETF was the Vanguard Ultra Short Bond ETF (VUSB), which debuted in April 2021 and now has $3.3 billion of assets. But nearly 900 ETFs have been launched since April 2021. So why has Vanguard not been involved? Well, many of the ETFs launched during this time have been looking to ride the latest trends and attract retail investors. Popular launches last year included the God Bless America ETF (NYSEARCA:YALL), an anti-ESG fund, and AXS 2X Innovation ETF (NASDAQ:TARK), a leveraged fund tracking the performance of Cathie Wood's ARK Innovation ETF (ARKK). But this isn’t Vanguard’s game. While Vanguard has the second largest aum across its ETF offering ($1.9 trillion to BlackRock’s $2.2 trillion), it only offers 81 ETFs compared to 392 by BlackRock. When Vanguard launches an ETF they do it because they can attract billions and believe it will last beyond the latest market trend. Thus the fact that they launched a short-term fixed-income ETF is a sign that the asset manager is buying in on the “higher for longer” trend that Powell has been preaching and is betting investors will start to as well.
Deep dive into a consolidated tape in Europe
Phil always puts out great pieces, but this one was our favorite yet. A main trend in Europe over the past month is the momentum behind building a consolidated tape across Europe after the “European Parliament announced its support for the creation of a pre- and post-trade consolidated tape as close to real-time as technically possible.” Fourteen exchanges have already signed on to be a part of this project with the ultimate goal of making European markets more attractive. However, Phil points out that the belief that this consolidated tape can provide the same utility as that in the US is misguided. The main issue- geography. In the US, nearly all trading occurs within a 40-mile triangle of data centers in eastern New Jersey. In Europe, the distance from Stockholm to Madrid is 1500 miles. What does this mean for the future of a consolidated BBO? It means that the ability to use the consolidated feed to trade will be impossible. “In fact, for the most actively traded stocks in the Stoxx Europe 600 index, the EBBO can be stale for almost 67% of the continuous trading session on a volatile day and usually over 20% of the day even when volatility is low “ Sophisticated traders can be up to 25 millis ahead without breaking a sweat- an eternity in a world measure in 10s-100s of nanos. This does not make a consolidated tape a fruitless project. In fact, it can still solve a number of problems and make the European markets more attractive- but the goal to make it a “real time” feed should not be on the short list.
Across the Tape
Trading & Exchanges
FTC Seeks to Block Intercontinental Exchange’s $11.7 Billion Black Knight Deal - link, link2
Investors pull near record sums from corporate bond ETFs - link
Reinventing equity trading: How will SEC new rules impact trading and markets? - link
Ticks and auctions: Will new rules help or hurt retail investors? - link
Acuity partners with multi-award-winning ECN broker, Blackbull Markets - link
Options Announces Partnership with Trade The Pool - link
FINRA Fines Webull $3 Million for Options Customer Approval Violations - link
Vanguard’s First New ETF in Two Years Targets Short-Term Munis - link
Why Do Brokers Who Do not Charge Payment for Order Flow Route Marketable Orders to Wholesalers? - link
Credit Suisse equities business under the microscope after revenue crash - link
Main Street investors pressure SEC, confront Wall Street on stock plan - link
Coalition Greenwich’s deep dive into fixed income TCA - link
Silicon Valley Bank Financial in talks to sell itself after attempts to raise capital have failed, sources say - link
Why Physics Makes a Pre-trade Tape Impossible - link
Regulation
Getting crypto firms to do their work within the bounds of the law - link
Crypto & Digital Assets
Investors might have avoided FTX if the SEC had addressed Bitcoin ETFs, says BitGo CEO - link
U.S. Lawmakers to Reintroduce Crypto Tax Reform Bill - link, link2
Zero-Knowledge Crypto Startup Proven Raises $15.8M in Seed Round - link
Cboe Digital TV Season One - link
New York Attorney General claims that Ethereum is a security in Kucoin lawsuit - link
Fidelity Digital Assets Research Round-Up - link
Blockchain Association Announces Principles for Stablecoin Legislation and Urges Congressional Action - link
Assets Under Management for Global Crypto Exchange-Traded Products Rise Slightly in February - link
Sygnum Bank sees influx in client inquiries as Silvergate winds down - link
SWIFT to Conduct More Tests With CBDC Project - link