April 03 2014


Swaps transition challenges continue, more bidders named for MCX stakes, lots of backwash from “Flash Boys” with a massive liquidity pool of ignorance broadly apparent in the media. Maker Taker suspension mooted, NLX introduces a penny fee, HKEx discussing linkage with mainland exchanges… EuroCCP is EMIR compliant. OCC raises fees…and more, happy scrolling:

Meanwhile, the latest five posts on Premium are:

New: Homer Simpson & The Supermodel Buffet – AKA A Guide To Clearing In The New Era

The Ring Cycle


Buying A Stake In MCX – A Guide For The Perplexed

Indian Commodity Exchanges – Background

(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!).

Public Markets

Warburg Pincus, Tata Capital Join Bourses For FTIL’s Stake In MCX
Rajesh Bhayani – Business Standard

As FTIL is selling its stake in MCX, it is reliably learnt that Warburg Pincus and Tata Capital have also shown interest in picking up stake. Bombay SE and Deutsche Borse are also keen to pick up a stake. Among private players, Kotak Group has also shown interest. However, as per existing norms, the players cannot take more than five per cent stake each in MCX.

Meanwhile, MCX has once again asked FTIL to transfer its shares in the exchange to an escrow account, even as the latter has initiated the process of divesting from the bourse in a transparent manner.

MCX-SX’s Capital Crunch: Why M&A May Be Its Best Option
Sajeet Manghat – Moneycontrol

MCX-SX is looking for capital, and capital is hard to come by. At the end of FY14, the beleaguered exchange will have a networth marginally above the SEBI mandated Rs 100 crore (USD 16.6 mln).

It will struggle to manage even half of the revised rights issue target of Rs 200-250 crore (USD 33.3-41.6 mln). In such a scenario, amalgamation with another stock exchange like USE is an option on the table.

PLY: Stock volume may be dwindling but the forex franchise is still doing pretty well. Nonetheless, MCX needs surgery and fast, management seem to be passengers currently in what is admittedly a very difficult situation.

NLX Tests The Water With Trading Fees (subscription)
Anish Puaar – Financial News

Since April 1, NLX started charging £0.01 for sterling-denominated contracts and €0.0125 for euro-denominated contracts. NLX plans to revise its fees on a quarterly basis, having been free to date.

A separate notice from LCH.Clearnet, NLX’s clearing provider, which is majority-owned by LSE, confirmed that clearing would remain free until June 30.

PLY: The core question is whether NLX really has any residual volume over and above those incentivised to provide liquidity and some with grudges against ICE-LIFFE? So far progress has been slow and modest with free, charging a cent probably won’t make much difference but at least there will be some modest revenue!

HKEx Surges On China Stock Market Access Report
Kana Nishizawa – Businessweek

HKEx jumped the most in more than a year after a newspaper reported that Shanghai bourse may pass stock orders for overseas markets to it for execution.

Investors may also be able to directly buy mainland-listed stocks through the Hong Kong exchange, the 21st Century Business Herald said on its website, without saying where it got the information. HKEx, soared 5.4 percent, the most since January 2013, to HK$126 (USD 16.23), before trading was suspended at 3:12 p.m.

HKEx – Possible Establishment Of Mutual Market Connectivity & Resumption Of Trading

We have noted press reports today regarding the possible establishment of certain mutual market connectivity between Mainland China and Hong Kong involving HKEx and Shanghai SE.

HKEx wishes to emphasise that as at the date of this announcement, no agreement has been entered into and there is no assurance that an agreement on mutual market connectivity will be entered into. The Company will make a further announcement to update investors and the market in compliance with the SFO and the Listing Rules as and when appropriate.

At the request of HKEx, trading in HKEx shares and convertible bonds on The Stock Exchange of Hong Kong Limited was halted with effect from 3:12 pm on 2 April 2014 (and trading resumed this morning).

EuroCCP First Equities CCP Authorised As EMIR Compliant

De Nederlandsche Bank (DNB, the Dutch central bank) granted authorisation, being EuroCCP’s EMIR National Competent Authority. By granting the license, DNB confirms that EuroCCP complies with EMIR, which includes requirements in respect of risk management, governance and capital.

SEC Commissioner Calls For Review Of Exchange Rebate Model

Commissioner Luis Aguilar suggested SEC should consider a temporary program to test the effects of banning the most common method of pricing used by stock exchanges (“maker taker”), as it may cause conflicts of interest.

Where Do The HFTs Trade In Europe?
Anna Irrera – Financial News

Co-location, data feeds, and order-to-trade ratios went (somewhat) mainstream this week, following the release of Michael Lewis’s new book on HFT.

PLY: AN interesting ESMA chart which seems to not mention the OMX venues (and Germany has no data for the regulated venues?) while I am surprised to see even 10% HFT activity on the Irish SE…

Einhorn Was Like A ‘Dumb Tourist’ In the Market: Michael Lewis
Nick Baker & Sam Mamudi – Businessweek

In today’s “rigged” U.S. stock market, large investors such as Greenlight Capital Inc.’s David Einhorn are like “dumb tourists” led to a casino where the card games are fixed, according to Michael Lewis, whose book “Flash Boys” has touched off a national debate about high-frequency trading.

Michael Lewis on HFT and Markets – video here.

PLY: Okay, I have had enough of this story. Without even reading Mr Lewis’ book, let’s push back on his savvy sensationalism (savvy to sell books, highly misleading when it comes to the truth of markets). There are things wrong with HFT but it isn’t a daily bank robbery of investors as Mr Lewis erroneously suggests. Moreover, take a trip down memory lane. Anybody prefer the days when brokers charged !% and higher fixed commissions? No, me neither. How about the old specialist system where they got to look at your orders for 30 seconds before deciding what market to make? I’m not fussed on this one myself and various readers don’t recall it favourably either. Mr. Lewis needs a change of rose tinted spectacles – to quote Simon Stimson a character in Thornton Wilder’s play “Our Town:” “that’s the happy existence you wanted to go back to. Ignorance and blindness.” There are multiple models out there and they ought to be encouraged to flourish. HFT needs to be thought through in regulatory terms to reduce the predators but the core process can work and generally does work to create a better market.

Technology has made markets much better than they have ever been in history and we ought to defend the right to more models and more competition. The rank populism of Mr Lewis may appeal to an anti-Wall Street mob but he is doing a disservice to investors and enterprise everywhere which is bad for the economy – much much worse than some predatory HFT is currently (albeit with the proviso I would like sensible measures to stamp that out too).

PS “A dumb tourist?” I am sure Mr Einhorn will be ecstatic at that description which suggests he has done inadequate due diligence in how he manages his clients’ money (which I also find very hard to believe). One could call such remarks by Mr Lewis, thoughtless, speaking of which:

Lewis Calls Flash Boys Blowback ‘Thoughtless’
Diane Brady – Businessweek

PLY: Kettle Black Pot index of hypocrisy trades at new highs: Mr Lewis’ inability to grasp modern markets demonstrates the worst of the mediocrity of modern financial media. He of all people really ought to know better – the thoughtlessness in a self-indulgent marketing tour is entirely his.

A High-Speed Retreat Keeps Goldman Out Of A Tangle (subscription)
John Gapper – Financial Times

PLY: I think the opening Goldmans analogy is a touch misleading but the story then gets into its stride and Mr Gapper notes that HFT has probably peaked in equities and indeed that market structure is now more complex and the original dark pools (for me now “Institutional Liquidity Pools”) have created a whole new means of providing better execution for the largest traders while exchanges are facilitating retail better than ever through HFT.

Where the story could also have gone is to note that while Michael Lewis has a proven track record of arriving somewhere after the peak in most trends he has studied, one thing behind even his tardiness is the EU who are currently voting on restrictions which harm Institutional Liquidity Pools and threaten to further damage European savers…

Massachusetts Surveys Investment Firms On HFT
Margaret Collins – Bloomberg

Massachusetts’ chief securities regulator is surveying more than 1,000 investment advisers in the state about HFT.

Speedy Virtu Slows Down IPO Plans (subscription)
Telis Demos & Bradley Hope – Wall Street Journal

Virtu is mentioned only once—in a footnote— in “Flash and is a client of a private trading venue that serves as the hero of Mr. Lewis’s narrative.

As reported yesterday, Virtu and its advisers, including lead IPO bankers Goldman Sachs and J.P. Morgan decided to hold off on the IPO for at least another week.

Frontloading Requirement Bedevils Swaps Pricing
Christopher Whittall – IFR Asia

Major derivatives dealers are struggling to price IRS under an uncertain European regulatory regime, which began its countdown towards mandatory central clearing for over-the-counter derivatives last month.

Nasdaq OMX fired the starting pistol for European clearing on March 18 after it was the first to be given the green light from European regulators to operate as a central counterparty.

As a result, banks are now having to deal with frontloading – the requirement under EMIR for certain derivatives trades that are executed between the time a CCP is authorised and before it goes online to be funnelled through clearing later on.

The uncertainty surrounding the kick-off date for clearing – which could be any time between December this year and mid-2015 – has muddied the waters around derivatives pricing, causing dealers and end users to seek clarification over frontloading from ESMA.

PLY: When it comes to casting “Dumb and Dumber” as an EU funded remake there will be no end of potential cast members. The sheer inability of the regulatory executive to see the perils of their timeline is further harming the EU’s flailing reputation, before it has even begun the process of implementing MIFID II.

OCC Raises Fees, Cites Regulatory Scrutiny
Tom Polansek – Reuters

“There’s a whole new regulatory regime with heightened expectations,” OCC spokesman Jim Binder said on Wednesday. “Because of some of the new regulatory requirements, we need to have more of a surplus, more capital.”

OCC processes trades for all 12 U.S. options exchanges and for some futures markets. The company on Tuesday implemented a fee of 5 cents to clear trades with one to 500 contracts, the range in which most trading takes place, Binder said. The fee had been discounted to 3 cents since 2008, he said.

PLY: Of course “OCC raises fees 60%” will be the battle cry of the bankers but in reality being able to clear an option contract (100 underlying shares equivalent) for 5 cents is a staggering example of just how efficient big CCPs can be.

Aequitas OK With TSX Private Markets Formation, Looks To Open Senior Exchange
John D’Antona Jr. – Traders Magazine

It looks one town is big enough for two of them.

That is, there is enough room for two private market exchanges in Canada, according to the chief executive of Aequitas. This comes in response to last week’s announcement by TMX Group, operator of the Toronto and TSX Venture marketplaces, that it was planning to open an exchange devoted to helping small and mid-size companies raise capital while remaining private.

PLY: Aequitas thrives on competition, good luck to all parties in creating, well, a better market, to modify a recent phrase in vogue in the Canadian exchange world.

TMX & Zhengzhou Commodity Exchange Sign MoU

Zhengzhou Commodity Exchange (ZCE) and TMX announced the signing of a MoU to enhance their understanding of each others’ businesses and to explore the possibilities of cooperation.

Dubai To Challenge London With Islamic Financing Platform
Andrew Torchia – Reuters

Dubai will compete with London for a share of Islamic banks’ liquidity management business by offering a new platform for murabaha trading. Many Islamic banks around the world manage their short-term funds with murabaha, in which one bank acquires merchandise and another agrees to buy it at a mark-up. Traditionally, banks from the Gulf and as far afield as southeast Asia use commodities traded on LME as their merchandise.

NASDAQ Dubai bourse now hopes to grab some of that business with its own murabaha trading system, which has just completed a pilot period successfully.

PLY: Does that suggest the Gulf is about to create a new fashion for the copper forward trade which China seems to have fallen out of love with recently?

Euroclear & TDCC Launch Ground-Breaking Offshore RMB Service

Euroclear Bank and the Taiwan Depository & Clearing Corporation (TDCC) have launched a new service allowing international investors to settle Taiwanese-issued RMB bonds (Formosa bonds) in TDCC. The service, the first of its kind, will allow settlement transactions to be routed from Euroclear Bank’s account with Citi to the local central securities depository, TDCC.

PLY: Very interesting, a useful move from Euroclear. After all the recent RMB currency liberalisation do not (unless I am missing something) seem to have touched the sides of the CSD world – yet…

Euroclear & Latin Clear To Open Panama To International Investors

Euroclear Bank and Central Latinoamericana de Valores S.A. (Latin Clear) – the Central Securities Depository (CSD) of Panama – will, in April 2014, launch an international link sponsored by Panama’s Ministry of Economy and Finance (MEF) to enable global investors to participate in Panama’s capital markets and strengthen the Republic of Panama’s position as a key financial centre for Latin America.

Private Markets

BATS Chi-X Europe Introduces New Pricing Model

BATS Chi-X Europe today announced that it is introducing a new pricing model on its CXE Lit Order Book, the largest of the exchange’s four European order books. The changes are in response to higher market volumes and are designed to bring more competitive pricing to more participants.

The pricing, which is effective retroactively from 1 April 2014, applies to UK, Irish, French, Dutch, Belgian, and Portuguese securities. Depositary Receipts and ETFs within these listing markets are included. All other pricing remains the same.

Swiss Exchange CEO: Dark Pools The Real Problem
Catherine Boyle – CNBC

The CEO of the Swiss stock exchange told CNBC he was more concerned about the lack of transparency in so-called dark pools than about HFT per se.

PLY: A great example of why the “dark pool” name is no longer appropriate for the “Institutional Liquidity Pools.” Listen to the interview and SIX Group CEO Urs Ruegsegger notes how important “ILPs” are (unsurprising: SwX has a partnership with Liquidnet) but castigates internalisation mechanisms which don’t show orders to the market, particularly for retail. I am with him here and indeed would argue that had Michael Lewis understood markets he could have made a useful, nuanced case. Then again nuanced doesn’t sell enough books for Mr Lewis presumably reducing the outlook for a more rational discussion.

Seth Merrin Of Liquidnet On HFT Et Al

Here’s an excellent interview with Seth Merrin, the founder of Liquidnet intelligently assessing that “there are bad things which have to be fixed” and that there needs to be a change whereby retail investors do not believe the market to be fixed… Simple, pithy, logical analysis, worth watching.

CEESEG Shortens Settlement Cycle To Two Business Days

CEESEG will harmonise the settlement period of all partner exchanges in Budapest, Ljubljana, Prague and Vienna starting 6 October 2014, as the EU coalesces on T+2.

Where Is Bitcoin Legal?
Jose Pagliery – CNN Money

In most countries around the world, Bitcoin is neither illegal nor totally unregulated but somewhere in between.

Fitch: Bitcoin Remains Small In Comparison To Payment Processors & Currencies

Total Bitcoin transactions averaged $68 million per day in February 2014, a more than 10 fold increase compared to February 2013. By comparison, payment processors Western Union and PayPal averaged $225 million and $492 million respectively in transaction volumes per day during 2013.

Bitcoin’s transaction volumes are less significant compared to the major credit card companies. From a trading perspective, Bitcoin transaction volumes relative to the stock of outstanding bitcoins resemble those of equity securities. There was about $68 million in average daily transaction volume in Bitcoin in February 2014 relative to its $6.75 billion money supply, or approximately 1% of total market capitalization was traded per day.

Bitcoin Wallet Service Coinbase Denies Security Breach As User Names Posted Online
Tim Hornyak – PC Advisor

Bitcoin wallet service Coinbase has denied it suffered a security breach, but acknowledged that a list of some of its users has been circulating on the Web. “Despite speculation on a few forums, there has been no data breach of names or emails at Coinbase,” the service said in a blog post.

Bitcoin Commodity Exchange CEX.io Imposes Trading Fee, Prepares For USD

CEX.io bitcoin commodity exchange is to introduce a trading fee within the next two weeks. The fee will be introduced in two stages: initially a fixed commission of 0.2%, which will be dropped in favour of a flexible fee of 0.2-0.5% after an initial period. The company says its fee implementation is aligned with its wider monetisation strategy, which will include the introduction of new trading pairs, including BTC/USD and USD/GHS. New script mining services are on the way too.

Two Bitcoin Exchanges In China Suspend Yuan Deposits (subscription)
Chao Deng – Wall Street Journal

Two small bitcoin exchanges in China are stopping customer deposits in yuan, suggesting that exchanges are starting to take action after reports that the central bank has ordered banks and payment companies to close bitcoin trading accounts.

Special Section: FTI, NSEL, India at the Crossroads

PLY: FTIL up slightly, MCX down slightly…

PIL Against NSEL Withdrawn As CBI Tells HC Case Filed

Bombay High Court allowed withdrawal of a PIL seeking a CBI probe into the alleged scam after the investigating agency informed that its Banking Securities and Fraud cell had filed a case against NSEL and its promoters. The CBI was replying to a PIL seeking transfer of probe from Mumbai Police to CBI into the multi-crore scam. A bench headed by Justice P V Hardas then allowed the Petitioner Ketan Tirodkar to withdraw the PIL as his request for a CBI probe had been considered.

The PIL argued that since the scam has national and international ramifications, only CBI had the necessary jurisdiction to probe this matter.

We discussed the evolution of the PIL lodged by Ketan Tordikar previously here, here and here.


How High-Frequency Stock Trader Quantlab Guarded Its Algorithms (subscription)
Bradley Hope – Wall Street Journal

The meeting that started the trouble took place at a monastery in Florence, Ariz.

Under a gazebo’s shade, a Ukrainian physicist who aspires to be a monk met with a Milwaukee lawyer seven years ago and began planning a firm whose profits from rapid-fire stock trades would go mostly to charity.

PLY: An interesting tale of disputed algorithms…

Market Prizm Teams Up With Fusion Systems

MarketPrizm is teaming up with Fusion Systems to offer a fully managed, end-to-end low latency market gateway and trading risk management solution, deployed in co-location, for use by Fusion’s clients in Asia-Pacific.


ICE Said Close To Start Of Credit-Swap Futures That Mimic Index
Matthew Leising – Bloomberg

ICE, owner of the world’s largest credit-default swap clearing house, is close to offering futures on the most-active derivative indexes. The new contracts will replicate the lineup of companies included in the investment-grade and high-yield swap indexes owned by Markit Group Ltd. ICE, as the company is known, failed in an earlier effort at credit-swaps futures that sought to give investors a way to bet on improving or deteriorating credit markets.

Markit Readies Swaps Identification For September Launch (subscription)
Michael Shashoua – waters technology

Markit plans to expand its RED codes to handle reference requirements set by ISDA for credit default swaps, in an effort to better support the credit event process.

Career Paths

China Exchanges Services Company Limited (CESC), a joint venture of HKEx, Shanghai SE (SSE) and Shenzhen SE (SZSE) for the development of financial products and related services, is pleased to announce Shi Xiaocheng has joined its Board with effect from 2 April 2014.

MCX has appointed Sandeep Sarawgi as CFO. He replaces Hemant Vastani who resigned in February.

waters technology notes that benchmark managed data provider Rimes Technologies has opened a Toronto office and has hired Paul Swinhoe as a sales manager in Canada to support the vendor’s efforts in the country.

The Supervisory Board of European Energy Exchange (EEX) has confirmed Steffen Köhler’s current position as a member of the Management Board and extended his term of office by a further five years.

LSE – Statement Re. Board Member

Paolo Scaroni, a NED and Deputy Chairman of the Company, has received a first instance conviction from a regional Italian Court relating to inadequate environmental standards at Enel, a company of which he was chief executive between 2002 and 2005. Mr Scaroni is appealing such decision as unfounded and under Italian law the decision is suspended and conditional pending appeal. LSEG’s relevant regulators have been notified of this development. Paolo Scaroni continues as a non-executive director of the Company.

Reuters reports that Blythe Masters, one of Wall Street’s most powerful women, is leaving JPMorgan after a 27-year career.

Masters will leave the bank in a few months after assisting with the sale of its physical energy and metals business to Swiss merchant Mercuria.

DTCC announced that four new members have been elected to its BoD: Phil Davies, MD and Global Head of Operations at Morgan Stanley; David R. Kimm, EVP, Chief Risk Officer and Treasurer at TD Ameritrade Holding Corporation; Nick Ogurtsov, COO and Chief Risk Officer at KCG Holdings; and Paul Walker, Global Co-Head of the Technology Division at Goldman Sachs.

SEC, in its Office of Municipal Securities, named Jessica S. Kane as deputy director, and Rebecca J. Olsen as chief counsel.

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
Thomson Reuters Q1 2014 earnings on Wednesday, April 30, 2014

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

Share Notes

Interactive Brokers Group SVP Milan Galik sold 1,800 shares Monday, March 31st at an average price of $21.19 (bargain $38,142.00). He now owns 790,517 shares. Mr. Galik’s regular sales are chronicled on this specific page.

Analyst Notes

CME “Neutral” Rating Restated By Zacks – $76.00 Price Target
Barclays Decreased Their Target Price On CBOE From $50.00 To $49.00 – “Equal Weight” Rating

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.


Kickstarter’s Busy Q1 Includes $112 Million In Total Donations
Kurt Wagner – Mashable

Kickstarter released its first-ever quarterly report on Wednesday, revealing $112 million in total pledges and 680,000 new backers in the first three months of this year. Nearly 4,500 projects were successfully funded, and donors pledged more than $1.25 million per day to Kickstarter campaigns, slightly less than the $1.32 million pledged on average last year.

Other stories

5 Reasons Why Indian Commexes Are Not Global Price-Makers
Nilanjan Ghosh (Chief Economist at MCX) – The Hindu Business Line

Indian comexes rank among the top commodity exchanges in the world. According to FIA Annual Volume Survey March 2013, for the calendar year 2012, in many global commodities, namely gold, silver, copper, etc, Indian exchange ranked among the top exchanges in the world, in terms of the number of contracts traded. Despite that, in none of the Indian exchange features as a global benchmark for price-setting in any of the commodity.

PLY: A useful explanation for the local market but India’s prohibitions on foreign investors and currency restrictions make it very difficult for Indian to make a benchmark price in anything. An open free trading India would be a different story.

Can Asean Avoid The US-China Regulatory Feud?
Karin Zarifi – The Nation

In January, SEC moved closer toward forcing China-based accounting firms to assist its investigations of potential reporting and accounting misconduct by Chinese companies that are listed on American exchanges. The accounting firms have claimed that complying with SEC’s demands would put them in violation of Chinese secrecy laws and explicit directions from the China Securities Regulatory Commission (CSRC). Consequently, more than 400 China-based companies listed on US exchanges, with a combined market capitalisation of $185 billion (Bt6 trillion), risk having to find new auditors or face delisting. This dispute has created uncertainty for issuers and their investors.

PLY: Readers may recall my concerns about the Alibaba listing – quite how US exchanges completed their application process to list companies which can argue they are bound by Chinese secrecy laws, is, well, remarkable.

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