April 02 2014

elb2Our anniversary approaches – indeed it’s a year to the day since we produced our first Beta issue…things have moved on somewhat since we published those first 7 stories and sent them to a few hundred close friends!

Some say it was a fairly quiet trading day (albeit to record Dow highs) but CNBC has received the oxygen of publicity thanks to an HFT fight (we used a b-word in an earlier draft but have omitted it as a lot of email filters have low latency paranoia about rich dialectic language deployment). Actually, the most interesting HFT news is about Icelandic data centres while Bill O’Brien deserves kudos for being the one man with his head above the parapet discussing HFT as Michael Lewis milks the publicity his rather OTT assertions have wrought.

However, the real structural excitement today is in IDBs with ICAP leading the way to a revolution. The numbers may be poor for Q1 but it is the change under the bonnet/hood you need to pay attention to and we have an excellent exclusive (no, not another April Fool!) from industry expert Jake Pugh to outline what is happening…

Elsewhere, multiple OTC matters and that HFT argument while Virtu delays IPO, then again the HFT heat is forex not equities, surely? Goldmans leaving NYSE floor, NSEL liquidation looming, DB1 hit by criminal investigation (after settling civil charges), no foreign warehouses in China for now, MCX share sale endangered as MCX-SX lurches into a coma, NSEL liquidation imminent with redemption likely (seriously!)… Last but not least, just where is ‘Too Big To Fail’ pertinent?

Hmmm, I know people say it was a quiet day in markets but today we bring you another zinger of an Exchange Invest Daily (even before you get to our latest Premium content), happy scrolling!

NB The latest five posts on Premium are:

New: The Ring Cycle


Buying A Stake In MCX – A Guide For The Perplexed

Indian Commodity Exchanges – Background

Reflections On NYFIX: An Offer You Can’t Refuse?

More coming soon at Exchange Invest Premium.

(If you want to join the Exchange Invest Inner Circle and glean more detail than we can fit into this free daily Exchange Invest then please Subscribe Here, it’s only $120 per user/annum – it also helps keeps the wheels running for the free Exchange Invest daily which we encourage you to scroll through forthwith!).

Public Markets

Industrial Change In The OTC IRS Derivatives Market
Jake Pugh: Exchange Invest Guest Post

PLY: Industry expert Jake Pugh hits various nails on the head in this analysis which builds on his previous November research both of which are now on our Web Site Guest Post Pages (open access to all). I would particularly draw investors’ attention to the fact that IDBs and exchanges are going to be a fascinating cross cultural takeover piece in the very near future (as I too have long predicted). This is excellent, cannot miss analysis, hence why it leads today’s coverage. Thank you, Jake.

ICAP Trading Slumps Amid ‘Challenging’ Outlook (subscription)
Anish Puaar – Financial News

ICAP has become the latest IDB to report a slump in trading activity, providing further evidence that the Q1 reporting season will be a bleak one for banks’ markets operations. Speaking on a conference call CEO Michael Spencer said: “Overall trading activity is weak at all our bank clients and in particular in their fixed income, commodities and currencies divisions. Regulatory reform, in particular the Basel III and Volcker rules, have combined to compress risk appetite and capacity among our traditional clients.”

Spencer added that while the outlook for the global broking business would remain “complex and challenging”, it would offer ICAP the chance to target new types of customers.

ICAP Chief Sees Customer Base Shift As Regulation Hits Revenues (subscription)
Financial Times ‎

ICAP, the world’s largest interdealer broker, said more fund managers were becoming its customers.

PLY: This comment really is worthy of the phrase “paradigm shift!” ICAP, traditionally focused on a customer universe comprising the 750 biggest banks in the world, is moving outside its natural bank-only customer base to embrace the buy side… The revolution in the IDBs is absolutely happening now and I applaud Michael Spencer for leading his business forward once again. In the Dodd EMIR Frank world, we have leapt to stage 5 of the “Capital Market Revolution!” phases: “The Reign of Terror” – everybody is out to compete with everybody else in all product lines. Let battle commence!

Highlights From The Brawl Over HFT
Steven Russolillo – Wall Street Journal

Brad Katsuyama, president and CEO of upstart trading platform IEX Group and a prominent figure in Michael Lewis’s new book, “Flash Boys,” duked it out in a 23-minute interview on CNBC with William O’Brien, president of exchange operator BATS, with Mr. Lewis himself weighing in from another set.

CNBC video here.

PLY: It is interesting that Mr O’Brien is the only public market figure actively in the forefront of defending HFT right now – that singularity gives the advantage to anti-HFT arguments. (Maybe he just reads faster than other equity exchange CEOs). There is much to be applauded in HFT and there is an argument to be made for its existence but the industry has gone all shy this week, which is incredible given it is, what, 50% of equity trading on NASDAQ and NYSE?

‘Shame on You’ Is Bats Executive’s Rebuttal Of Michael Lewis
Nick Baker & Matthew Leising – Bloomberg

“Shame on both of you,” O’Brien said during an interview today with CNBC: “You don’t understand that the market has always had intermediaries.”

Did Someone Front Run Michael Lewis?
Steven M. Sears – Barron’s

Unusual action in the options market late last week suggests a bit of trading ahead of the 60 Minutes segment that effectively launched Lewis’ book.

Nasdaq OMX operates some of the biggest stock and options exchanges in America, but its own shares rarely attract much attention in either market. So heavy trading in bearish options on the stock seems peculiar, especially now that HFT is under review by federal authorities.

Some investors bought about 6,000 puts in anticipation the stock would decline. Trade Alert, an options analytical service, said the volume was five-times greater than normal trading volume. The trading seemed to make little sense — until Monday’s announcement that the Federal Bureau of Investigation was investigating HFT.

PLY: At the same time, I would imagine review copies of “Flash Boys” were strewn around Wall Street media desks creating significant opportunity for information seepage. Indeed, if ever the world wants an example of the stellar opposite of low latency, then try old fashioned book publishing (oh and the distribution is clearly biased against the general public in favour of an insider clique, so presumably the FBI will investigate the publishers for provoking insider trading?)…

What It’s Like To Star In A Michael Lewis Book
Kevin Roose – NYMag

In January of last year, Ronan Ryan and Brad Katsuyama got a dinner invitation that would change their lives. The call came from a client who wanted to introduce the pair to Michael Lewis, the best-selling author of Moneyball and Liar’s Poker.

Virtu Delays IPO Amid Flash Boys Furore (subscription)
Arash Massoudi – Financial Times

HFT company Virtu Financial, has delayed a planned US IPO after its bankers advised it to hold fire as this week’s publication of Flash Boys thrust the business of lightning fast trading into the spotlight.

Apparently, Virtu is also still waiting to receive final clearance from US securities regulators on its IPO filing before it can begin investor meetings, which had been expected to start as early as this week.

FBI Seeks Help From High-Frequency Traders To Find Abuses
Keri Geiger & Patricia Hurtado – Bloomberg

Federal agents are making an unusual public plea for the financial industry to bare its secrets. FBI has openly solicited traders and stock-exchange workers to blow the whistle on possible front-running and manipulation via high-speed computers.

PLY: Actually totally unsurprising as I noted when EI reported yesterday the FBI probing HFT firms for abuse of information. In the late 1980’s they had all manner of undercover agents in the Chicago pits to eventually rediscover simple statistics: if you put thousands of people in one place then a tiny proportion may turn out to have broken rules. Being unable to impersonate a colocation server, the FBI will now ask, cajole, coerce and so forth anybody who might have a grudge to come forward and create something they can endeavour to hang a case off. Is HFT entirely bereft of illegal manoeuvring? No, but then again, frankly, what is absolutely bereft of transgressions (erroneously or intentionally) of regulations when we’re talking about a concentration of billions of transactions?

SEC Chair Discusses Probes Into High-Speed Trading
Sarah N. Lynch & Karen Freifeld – Reuters

“We currently have… a number of ongoing investigations regarding various market integrity and structure issues, including high-frequency traders and automated trading…We are very much focused on any abuses in that space,” SEC Chairman Mary Jo White said Tuesday.

PLY: Clearly a career attorney like the SEC Chairman is likely to be very hard on any such issues but that may yet have big issues for the USA, as it could drive the HFT business overseas.

HFT Chase Currencies As Stock Volume Recedes
John Detrixhe, Nikolaj Gammeltoft & Sam Mamudi – Bloomberg

Forget the equity market. For HFT, the place to be is forex. HFT accounted for over 35% of spot currency volume in October 2013, up from 9% in October 2008, according to consultant Aite Group LLC. It’s the opposite of equities, where their proportion shrank to 50 percent in 2012 from 66 percent four years ago, according to Rosenblatt Securities Inc.

PLY: The HFT “great rotation” out of equities has been on for some time – lots of disparate relatively uncorrelated securities not being as much fun (or as profitable) once the sandpit is full whereas the world of forex where correlation is greater, real time dealing is almost 24×7 and markets have all sorts of little arbitrage creases and latency tweaks to be exploited is much more exciting nowadays…

SGX’s Derivatives Market Hit By IT Outage

Trading on SGX’s derivatives market, one of Asia’s major trading venues for equity and commodity contracts, was suspended for over three hours on Tuesday due to a “network hardware interruption” leaving trading suspended between 4.15 pm local time (0815 GMT) and 7.45 pm when trading resumed.

End Of Goldman Era On The NYSE Floor (subscription)
Arash Massoudi & Tracy Alloway – Financial Times

Goldmans’ history has been intertwined with that of the downtown Manhattan exchange since 1896, is in the process of selling its “designated market-maker” unit, according to people familiar with the matter. Goldman paid $6.5bn in 2000 to acquire Spear, Leeds & Kellogg, at the time one of the most powerful trading companies on the NYSE floor. The bank is understood to have lined up IMC Financial Markets, a Dutch trading company, as a buyer for the unit, which analysts now value at about $30m or less.

PLY: The fastest way to close the floors is for big users to abandon them – the sooner all major FCMs exit NYMEX and Chicago for instance, the faster the businesses can be properly rationalised for the digital age. I have discussed some of these issues in a new Premium Post today.

Computershare Acquires SocGen’s SG Vestia

Computershare Limited has acquired SG Vestia Systems Inc. from Société Générale S.A. (GLE.PA). SG Vestia provides employee equity plan administration services to North American and European clients.

Deutsche Börse Unit Faces U.S. Criminal Investigation (subscription)
Friedrich Geiger – Wall Street Journal

U.S. authorities have launched a criminal investigation into whether Clearstream Banking SA, a unit of Deutsche Börse AG, violated money laundering laws and Iran sanctions. DB1 said Wednesday that the probe into its Clearstream subsidiary, which provides post-trading services, was being conducted by the U.S. Attorney for the Southern District of New York. It added that the investigation is at a “very early stage” and that Clearstream is cooperating with the U.S. attorney.

“Deutsche Börse hasn’t yet been contacted directly by U.S. authorities, which are in an information-gathering stage,” the company added.

PLY: This issue vexes me greatly – the US government is flexing muscles in a way which I feel is exploitative of the system and DB1 have already been (in my view unfairly) fined for their previous actions as, so far as I am aware, they were not in violation of EU rules… EU nations have let themselves become a doormat when it comes to foreign policy and that is not good for a polyglot world. It is not difficult to argue that the US is exploiting its legal system to harm EU businesses and give US an advantage in the new opening of post sanctions Iran. Either way it is a worry for DB1.

China Has No Plan To Lift Ban On Foreign Exchanges Setting Up Warehouses
Business Times

China has no near-term plans to lift its current ban on foreign exchanges setting up commodities warehouses on the mainland.

PLY: Clearly the current vogue for Chinese liberalisation has its limits.

No IPOs In Q1 For TSX, Two On TSX Venture, PwC Survey Says
Global Post

A report by PwC suggests a collapse of the market for new mining issues in the first quarter of 2014 led to the worst three-month period for Canadian IPOs in five years. There were just two new issues worth $3.8 million on the TSX Venture Exchange in Q1. That compared with four new issues with a value of $422 million on all Canadian exchanges during the first quarter of 2013.

PLY: Lowest listings in Q1 since 2009 but then again a quick look at the chart on most commodities would note that mined materials were not fantastically in vogue. TMX will doubtless be worried but global factors are a key issue here.

MCX-SX Fails To Do Any Trade On Monday; Just One On Tuesday
Suresh P Iyengar – The Hindu Business Line

With uncertainty looming large, brokers and investors seem to be deserting the MCX-SX.

PLY: Sadly, MCX-SX looks dangerously as if it is entering a death spiral. The rights issue may not have enough momentum and the new management appear powerless to stop the rot. FTIL may have squandered a sale chance with their dallying and alas while more equity competition would be good, the MCX-SX is hemorrhaging badly.

SEF Teething Problems Frustrate FX Market Amid Liquidity Fears
Farah Khalique – Euromoney

CFTC is close to finalizing long-awaited rules for FX derivatives that will herald a seismic shift to trading these instruments on SEFs – but those already trading on SEFs are frustrated with teething problems and unintended consequences, including illiquidity and extraterritoriality concerns.

Private Markets

Sungard Spins Out Availability Services To New Independent Entity
Ben Kepes – Forbes

Sungard Data Systems, the 30-something year old vendor that was itself a spin off from the Sun Oil Company, announced that Sungard Availability Services, a Sungard division responsible for disaster recovery & availability services, has been spun out into an independent company.

EI reported on March 26th that the respective unit planned a $450 mln bond offering to pay down borrowings to its parent company.

‘Lack Of Staff, Skills’ Hinder Sebon, Nepse

Deloitte India has identified inadequate staff and lack of appropriate skills with them as common and major problems at the Securities Board of Nepal (Sebon) and the Nepal SE (Nepse) after conducting an institutional capacity assessment.

PLY: The corporatisation of projects in the exchange domain worries me here. The idea of the staff numbers required demonstrate ancient thinking to me – SAFEX ran South Africa’s etd and ccp with about 36 people, SIBEX had about 36 when I was there for a cash and etd exchange plus depositary and clearing house but Deloitte apparently reckon Nepal’s SE needs 66 people! How long must we waste time with endless ‘avoid responsibility of making a decision’ reports like this one rather than getting on with the business at hand – open up competition, let markets flourish and thus the people will gain prosperity!

Bitcoin Tax Break Will Limit US Investors’ Recent Losses (subscription)
Delphine Strauss – Financial Times

Recent investors in Bitcoin may be nursing losses after a fall of some 40 per cent in the crypto-currency’s value since January – but at least they will be tax deductible. That is one upshot of last week’s decision by the US tax authorities – issued just in time for the annual rush to file individual tax returns – to treat virtual currencies as property for federal tax purposes.

PLY: Hilarious – in the ‘what doesn’t kill us makes us stronger’ arena, the IRS just allowed BTC losses to be tax deductible thus once again demonstrating that the cryptocurrency will survive as the bureaucracy is helping the case, even when it tries to hinder growth!

Bitcoin Derivatives Platform BTC Gets Funding From Seedcoin

Bitcoin derivatives trading platform BTC.sx has secured around $250,000 in funding from Seedcoin Fund.

Paper Bitcoin Wallets Stop Hackers Finding Your Spacecash
Robert McMillan – Wired

The PiperWallet is a small black box that does little more than generate numbers and spit out paper. But if you invest in bitcoin — the popular digital currency — it could be a lifesaver.

Alleged Silk Road Creator’s Lawyer Denies Bitcoin Is ‘Monetary Instrument,’ Moves To Drop All Charges
Andy Greenberg – Forbes

The trial of Ross Ulbricht, the alleged creator of the Silk Road Bitcoin-based black market for drugs, hasn’t yet begun, but it’s already raising hairy legal questions. First on the docket: Is Bitcoin even money?

Special Section: FTI, NSEL, India at the Crossroads

PLY: MCX is up 1.5% while FTIL slips 2% and the world of MCX’s share sale gets complicated and incredibly (as we suspected weeks ago) the EOW may almost make NSEL investors whole…

MCX Share Sale Gets Complicated
Mobis Philipose – Livemint

Things have just become complicated for those bidding for a 24% stake in MCX. MCX said it will consider a preferential issue of shares on 3 April, which clashes with FTIL plan to sell up to a 24% stake in the exchange.

PLY: A good article: it tallies in part with my own copious briefing notes in our Premium Service about stake buying in MCX without which bidders may be less informed than they ought:
Buying A Stake In MCX – A Guide For The Perplexed
Indian Commodity Exchanges – Background
Neither Fit Nor Proper: The FTIL Fire Sale

NSEL: Court To Appoint Authority To Liquidate Assets
Khushboo Narayan – Livemint

The economic offences wing (EOW) of the Mumbai Police on Tuesday said the Maharashtra Protection of Interests of Depositors (MPID) court is set to appoint a competent authority to initiate liquidation of assets attached in connection with the Rs.5,574.35 crore (USD 935 mln) payments crisis at NSEL. The appointment is likely to happen this week.

So far, the EOW has attached properties worth Rs.5,432 crore (USD 910 mln) in the case. This is 97.4% of the total dues of the commodities spot exchange.

CBI Probe Against Bhave, Abraham In Advanced Stage
Times of India

In its probe against former SEBI chairman C B Bhave and former member K M Abraham, the CBI is examining the documents to understand the circumstances under which licence was granted to MCX-SX. CBI Director Ranjit Sinha had a meeting with senior officers and sources say if nothing is found, the preliminary enquiry might be closed. The probe is in advanced stage right now.


TT To Offer High-Performance Link To HKEx’s Futures Exchange
Business Wire

Trading Technologies (TT)will introduce connectivity to the Hong Kong Futures Exchange Limited (HKFE) in Q2 of 2014.

Nasdaq OMX Selects SevOne To Manage Global Network

SevOne, will provide real-time data center performance management solution to support NASDAQ OMX globally.

Lombard Risk Signs GFI Group For Reporter
James Rundle – waters technology

Lombard Risk Reporter will assist GFI Group with the European Banking Authority’s Common Reporting Framework (Corep), which requires all financial firms to submit regulatory returns in the XBRL format. XBRL, the Extensible Business Reporting Language, is a global information standard. As a result of this move, which came into force on January 1, 2014 and has a general compliance date of May 30, all firms regulated by FCA must comply.

Options Picks Iceland For New Datacenter
Faye Kilburn – waters technology

Managed technology services provider Options (formerly Options IT) has set out plans to build a new datacenter in the Westfjords region of Iceland, to house the algorithmic trading applications of firms carrying out FX arbitrage between New York and London, and between New York and Frankfurt.

PLY: The local geothermal / hydroelectric power advantage inherent in Iceland’s unique topography makes Iceland an, er, hot, venue for datacentres (the designs of next generation BMW’s are stored there for instance). It’s a fascinating place for global positioning, although of course those who want to be close to the action are advised to look at solutions from, say, Volta, if you want to be in the heart of London’s financial markets…

IDX Targets To Implement ‘XBRL’ In Early 2015
Jakarta Post

Indonesia Stock Exchange (IDX) expects to roll out (XBRL)-based financial reporting at the beginning of 2015.

How Exchanges Should Tackle Cybersecurity
Institutional Investor

PLY: Useful article by Mark Graff of NASDAQ discussing the Cybersecurity issue for markets.


ACE Launches Gold Hedge Contract
Business Standard

Exchanges are beginning to use gold hedge contracts to penetrate in what has been a territory of MCX.

NCDEX was first. ACE Derivatives and Commodity Exchange, a Kotak Mahindra Group-anchored bourse, announced on Tuesday that it had commenced trading in gold hedge futures contracts. ACE’s contract is a slightly modified version, with import duty being considered for calculating the local gold price which is not in the NCDEX contract.

India – Securitised Debt, OTC Trades To Be Reported Within 15 Min

All trades in securitised debt instruments and OTC corporate bonds will have to be reported within 15 minutes of the transaction from on Tuesday.

Dalian Iron Ore Swaps Contract Boosts Overall Market Liquidity (subscription)
Aaron Woolner & Xiao Wang – Risk

Dalian Commodity Exchange saw the first delivery of its iron ore contract this month – does the success of the onshore China contract threaten SGX’s pre-eminent position in the iron ore swaps market, and how will both be impacted by the Shanghai free trade zone?


NASDAQ OMX Iceland’s Leading Index Expanded To Eight Constituents

NASDAQ OMX announced the expansion of NASDAQ OMX Iceland’s leading index, OMX Iceland 6, from six companies to eight. The update will become effective at the market open on 1 July 2014 as part of the semi-annual review of the index. At the same time the name and symbol of the index will be updated to reflect the increased number of constituents. The new name of the index will be OMX Iceland 8 (OMXI8).

PLY: On top of last week’s Aurorcoin excitement, it’s all been happening in Iceland this past week, with data centre excitement today and now the expansion of the benchmark index as the nation bounces back from the 2008 crisis (partly thanks to ignoring the poisoned chalice of EU aid).

Brazil Bourse Previews Bovespa Index Changes, Itau Tops Petrobras

BM&FBovespa SA, Brazil’s sole financial bourse, offered a first look on Tuesday at its proposals for modifying the benchmark Bovespa stock index for the May through August period.

Career Paths

HKEx announces the following appointments, all effective 1 April 2014.

Gerald Greiner, Head of Global Clearing, is appointed the Advisory Chairman for Group Clearing and Regulatory Affairs. In his new role, Mr Greiner will continue to report to HKEx’s CEO Charles Li and will serve as a senior mentor to the leadership of Global Clearing and Regulatory Affairs.

Calvin Tai, Co-head of the Equities and Fixed Income and Currency (EFIC) Business, is appointed Head of Global Clearing (Asia), responsible for the Group’s clearing operations in Hong Kong. In his new role, Mr Tai succeeds Mr Greiner as CEO of Hong Kong Securities Clearing Company Limited and OTC Clearing Hong Kong Limited.

Trevor Spanner, the CEO of LME Clear Limited (LME Clear), an indirect wholly owned subsidiary of HKEx, is appointed Head of Global Clearing (Europe), responsible for the Group’s clearing operations in the UK. Both Mr Tai and Mr Spanner report directly to HKEx’s Chief Executive.

HKEx press release here.

Baringa Partners, the management consultancy specialising in the commodities, energy and financial services sectors, today announced the appointment of Simon Anderson as a Partner within the Markets & Trading (M&T) business unit.

Legal Business notes that, after a five month stint at biotechnology company Genus as general counsel (GC), Tom Kilroy has returned to banking software company Misys, this time as chief of staff.

Financial Calendar

This month

SGX Q3 results for FY2014
NASDAQ OMX’s Q1 2014 Financial Results
Record date HKEx $1.72 final dividend
Launch of CME Europe
Sibex – Sibiu SE AGM

New announcement

Interactive Brokers Q1 Financial Results on Tuesday, April 15, 2014

FY’13 Consolidated Result After Finalising NSEL Accounts: FTIL
Business Standard

FTIL will announce its audited consolidated financial statements for the year ended March 2013 only after finalising the accounts of crisis-hit NSEL and its subsidiaries.

All forthcoming exchange / investment related events are now listed in our Events page.

Analyst Notes

CME Price Objective Trimmed By Keefe, Bruyette & Woods From $87.00 To $84.00
ICAP “Sell” Rating Reiterated By Canaccord Genuity – GBX 300 Price Objective
Tullett Prebon “Buy” Rating Reiterated By Canaccord Genuity
Sterne Agee Lifted Their Price Objective On Charles Schwab From $27.00 To $30.00

A full table of current analysis can be found on our Analyst Ratings page which is updated daily.

All Analysts, Banks and Brokers are welcome to contribute to this section.


China’s Alibaba Launches Crowdfunding-Like Service For Film Investment
Clifford Coonan – Hollywood Reporter

In just two days, the platform has attracted 240,000 users, each of whom are investing $16-$160 in hotly anticipated upcoming movies.

PLY: A fascinating deployment of the Alibaba network.

Other stories

Traders Say They Are Not ‘Too Big To Fail’, Clearing Houses May Be
Dmitry Zhdannikov & Silvia Antonioli – Reuters

The world’s regulators should stop worrying whether trading houses are “too big to fail” and focus instead on ensuring that new rules are not forcing far too many deals through clearing houses, major commodity traders said on Tuesday.

PLY: Wrong. Regulators ought to do both…back to the Homer Simpson analogy…which I will write up today and add to our Premium service to help inform our inner circle of supporter…(join for only $120 Here).

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