Convertibles stall with Nasdaq stock trading halt at mid-session; Alcoa adds a point

By Rebecca Melvin

New York, Aug. 22 - The convertible bond market was quiet to begin with Thursday but got quieter at about mid-session when trading on the Nasdaq stock market was interrupted due to technical problems.

"It's been very quiet. There is nothing going on," said one convertibles trader with a large New York bank.

As for quotes on any names at all in convertibles, the trader said, "We're going to wait until the market reopens."

A trader at a second major New York bank said, "It was dead, d-e-a-d. People already left for the Hamptons."

The Nasdaq market began to reopen at about 3:30 p.m. ET after trading was interrupted for more than three hours starting at about 12:15 p.m. ET.

The problems for Nasdaq, the second-largest stock exchange in the United States, affected quote dissemination.

According to the Trace tape, Alcoa Inc.'s 5.25% convertibles due 2014 traded at 127.75 around midsession, which was up 1.3 points outright on the day. Shares of the Pittsburgh-based aluminum producer trade on the New York Stock Exchange and were not directly affected by the Nasdaq trading halt. They ended the day up 19 cents, or 2.4%, at $8.03.

Take-Two Interactive Software Inc. - the shares of which do trade on the Nasdaq - saw its 1% convertibles due 2018 trade at 109.72, or up 1.9 points, ahead of the Nasdaq interruption. At that point, shares of the New York-based video-game maker were up 38 cents, or 2%, but they closed higher by 4%, which was up 75 cents at $18.94.

The convertibles primary market was quiet on Thursday, with no new issues launched or priced.

Nasdaq said it wouldn't cancel any orders for its restart late in the afternoon. If traders didn't want to be part of the restart they needed to cancel the orders themselves. As for the fallout for the convertibles market itself, sources said there probably wouldn't be much, if any, impact.

"It wasn't as if trading was live and everything went haywire; it's just that everyone is sitting around waiting for things to reopen," an East Coast-based convertibles analyst said.

"It may affect some less liquid things or out-of-the-money things; there might by a few weird prints, but nothing more than that," the analyst said.

Good day for it to happen

All in all, "if this had to happen, Thursday, at the tail end of August was a good day for it," the analyst said. "It's a relatively benign trading environment."

But the situation did raise the question about what would happen if there was a new deal in the market pricing off the closing stock level. Do underwriters have a protocol to deal with such market occurrences? "Would the deal be delayed for a day, perhaps?" the analyst asked.

The answer to the questions, according to one New York-based syndicate source, was that there isn't a protocol and that the situation would be handled "case-by-case."

"It would really depend on the specifics of the case and of the stock. But there is no precedent for it," the syndicate source said, noting that the Nasdaq did achieve a natural close on Thursday.

In a case in which a convertible was in its averaging period at the end of its maturity, the analyst guessed that the low-volume day would be included in the averaging period, but even a half-day outage was unlikely to affect the valuation.

"Honestly, it's not going to affect it for even one day," the analyst said.

So despite some frustrations with Thursday's unexpected market halt, "they couldn't have picked a better day for it to happen," the analyst said.

Mentioned in this article:

Alcoa Inc. NYSE: AA

Take-Two Interactive Software Inc. Nasdaq: TTWO

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