August 12 2013

elb2 BM&F is trying to shut the stable door to competition while regulators struggle to understand technological innovation. A new marketplace (or two) breaks ground while others integrate.

Excellent analysis from India’s spot crisis and a good selection of thought from Warsaw all the way to the desk of Bernstein’s Brad Hintz who is hero of the day for being an analysts actually capable of admitting his fallibility. Great reading, even in summer, here’s today’s EI:

Public Markets

BM&F Bovespa Again Delays Clearinghouse Deadline (subscription)
Wall Street Journal

BM&F Bovespa SA has again delayed plans to open up its clearinghouse to competition.having said in May that derivatives would be able to use the clearinghouse from March 2014, and equities by the end of 2014.

PLY: An understandable, if somewhat unacceptable monopolist’s position. Brazil remains a huge but opportunity competing with such an entrenched national champion monopolist will be tricky for outsiders when there is no clear basis for competition. Even in the EU MIFID barely deterred BME from keeping out competition until it reached a heated situation with Brussels’ institutions…

DB’s News Service For Traders Draws Scrutiny Of Investigators (subscription)
Wall Street Journal

Need to Know News, founded by an investment firm and now owned by Deutsche Börse has operated with an overriding mission: sending data directly from the government through high-speed lines to financial firms that are able to trade on it instantly. Some have paid $375,000 a year for the service.

PLY: Here DB are not at fault. Perhaps there is a case for changing the rules but nobody launched anti trust when Reuters usurped carrier pigeons with the telegraph. It is a curiosity of modern regulation that there is a craving for blood wrapped in legal action rather than either acknowledging technological progress or restricting the source material with rules more in keeping with the times.

Warsaw SE Rings Opening Bell In London (subscription)
Financial News

The Warsaw Stock Exchange, which is set to take up to a 30% stake in Alasdair Haynes’ new trading venue Aquis Exchange, has opened its first London office as part of plans to internationalise and lure high-speed traders to its markets.

PLY: A London office is long overdue for GPW while I remain a fan of the Aquis transaction which can add value to Warsaw in many ways.

Private Markets

Dar es Salaam SE Confident With Stage Reached To Integrate EAC Stock Markets

The management of Dar es Salaam SE has said it is confident with the stage reached to integrate all the East African stock exchanges being coordinated by the East Africa Stock Exchanges Association (EASEA).

PLY: The East African Securities Regulatory Authority Act stipulated that residents of the original East African Community (EAC) states – Kenya, Tanzania and Uganda – should treat each other’s nationals as locals when it comes to investment opportunities in their respective countries…a sound approach to building a greater investment infrastructure in Africa.

Global Markets Exchange Group Announces New Derivatives Exchange

Hirander Misra and Vj Angelo today announced the co-founding and launch of Global Markets Exchange Group International LLP (“GMEX Group”). GMEX Group was created to target two distinct but interrelated market opportunities brought about by changes to international regulation in developed markets and by growth and development in emerging market economies.

GMEX Group offers a highly relevant response on how an exchange model should be adapted in the wake of recent financial reform and increasing regulatory requirements globally. This presents great opportunities for positive and sustainable development in an ethical fashion in both developed and developing markets in an era of substantial economic and regulatory change.

PLY: James Davies, ex of Trayport is a welcome addition as COO in an operation which so far does not give precise details of its aims but clearly something in the SEF/OTF field is hinted at. Maybe fixed income too (a vast opportunity). We wish this venture well and look forward to hearing more news of its progress.

Special Section: FTI, NSEL, India at the Crossroads

PLY: After the Eid market close Friday, it’s back to reality for FTI and MCX today with an early sell-off current stabilised a bit with FTI only down about 4% while MCX’s new limit down of 5% was achieved early in the session. Rather than add any more comments, I leave you today with some excellent analysis which demonstrates the thriving, competitive nature of Indian media and how it creates a very good array of coverage of these important matters:

FTIL, MCX Shares Fall As Investors Await NSEL Settlement Plan

A PTI report on Sunday said NSEL has opened an escrow account as directed by the government to ensure payouts on priority to about 8,000 small investors stuck after the exchange halted trading from 1 August.

The government has asked FTI head Jignesh Shah to take complete responsibility for ensuring the settlement of about Rs.5,600 crore (USD 922.87 mln) due to investors.

PLY: Neither unsurprising nor unreasonable but Jignesh Shah is clearly under considerable strain to deliver a settlement for NSEL asap.

Commodity Market Regulator To Step In If NSEL Defaults
The Economic Times

The commodity market regulator is preparing a course of action if the troubled bourse National Spot Exchange fails to pay up by the middle of this week as promised by it.

PLY: While government prepares for the worst. Presumably if NSEL does default that will leave Jignesh Shah in a very difficult position.

Lesson From NSEL Fiasco: Never Take Risks Without A Buffer In Place
The Economic Times

“There is no magic or mystery in finance. The premise for sustainable, stable and good quality structures in finance is actually quite simple. Without adequate capital from investors willing to take risks, it is not possible to keep the promises to other investors who expect fixed returns.”

PLY: A clear, concise, well-written surmise.

CTT Drags Commexes Biz By 41% In July; MCX Sees 37% Fall
CTT Wipes Out Non-Agri Business In Agri Centric Exchanges
Business Standard

Turnover of commodity exchanges dropped by 41% to Rs 8,83,765 crore (USD 146.6 bln) in July, mainly on account of the imposition of commodity transaction tax (CTT) and a sharp dip in prices.

PLY: Two interesting Business Standard stories add to the overwhelming evidence that FTTs inflict significant harm on the economy. India may yet have done the EU a favour with this wrongheaded taxation approach but that will be of little consequence to exchanges and especially farmers being impeded by the duty.

Death Of A Spot Exchange?

In June 2007, the government granted three entities – NSEL, NCDEX Spot and R-Next approval to set-up spot exchanges, it stipulated that they undertake only ‘ready contracts’. Over 20 lakh crore agricultural commodities are traded in India every year.

A ready contract is a spot transaction with delivery of goods within 11 days. In trade parlance it’s called a T+10 contract. Spot exchanges are also allowed to offer 1 day forward contracts – that is, trading in warehouse receipts and intra-day netting of transactions – but since these are forward contracts and forward contracts are not permitted on spot exchanges, the exchanges have been given a specific exemption to allow 1 day forward contracts.

Spot exchanges have also to adhere to the conditions that all outstanding positions will result in physical delivery and that the exchange will not allow any short selling on its platform. Oddly, even though spot exchanges have a set of rules to play by, no regulator was given the task to enforce them.

PLY: Good forensic analysis with focus on key played discussing how even in India’s raj or regulators, nobody seems to have coherently approached the spot exchange marketplace…

Keep Spot Exchanges In The Spotlight
The Hindu Business Line

The NSEL imbroglio has trained attention on the working of spot exchanges and the risks associated with a lack of strict regulatory oversight. While the futures exchanges are by and large well regulated, the same cannot be said of spot exchanges.

But do we need spot exchanges? Yes, we do.

PLY: Highlights UNCTAD amongst the key actors putting together the initial spot exchange revolution and explains just how vital these markets are in the


CME Group Announces The First Aluminum Midwest Premium Contracts Traded
The Sacramento Bee

CME Group, the world’s leading and most diverse derivatives marketplace, announced the first Aluminum MW U.S. Transaction Premium Platts (25MT) Futures (AUP) contracts were traded on Thursday 8 August. This trade was brokered by Jeffries Bache. The trade was a 54 lot strip transaction for November and December 2013 between a physical trader and a major dealer.


Warsaw SE Announces The Composition Of The WIG30

The Warsaw SE announced the composition of the portfolio of the new WIG30 index, which is to be published from 23 September 2013 comprising 30 shares in 13 different sectors.

PLY: The WIG20 remains but clearly WSE expect the broader 30 to become the new benchmark index as a sign of the exchange’s growing strength.

Nikkei-TOCOM Commodity Index To Include Agricultural Product & Sugar Market Contracts As Component From Dec 2

The Tokyo Commodity Exchange (TOCOM) and Nikkei announced today that Agricultural Product & Sugar Market commodities, including soybeans, azuki, corn and raw sugar, will be added as components of the Nikkei-TOCOM Commodity Index and the Nikkei-TOCOM Nearby Month Commodity Index.

Career Paths

Bruce Turner has joined securities firm Interactive Brokers as vice president of securities lending services. Turner joined IBKR in July and is based in New York having reportedly left his role as co-CEO of Quadriserv in May.

At the same time, Quadriserv, which runs the AQS central counterparty-based securities lending marketplace, has welcomed a new investor and revamped its board of directors.

Private investor Rohit D’Souza, the former CEO of Citadel Securities and head of Global Equities at Merrill Lynch, joined Quadriserv’s board. Other company investors include Bessemer Venture Partners and Interactive Brokers.

Greg DePetris and Brian Traquair, president of SunGard’s capital markets business, also joined Quadriserv’s board of directors.

PLY: Congratulations in particular to Greg DePetris on his elevation to the Quadriserv board.

Kara M. Stein has been sworn into office as an SEC Commissioner replacing former Commissioner Elisse Walter. Dr. Michael S. Piwowar, who was also confirmed by the Senate August 1st is expected to be sworn into office as an SEC Commissioner next week.

Who Needs ’em?

For several weeks now, the Israeli stock market has had no management. The chairman of the Tel Aviv Stock Exchange has resigned. The CEO resigned a week earlier. The TASE executive vice president has resigned as well. And so it happens that an important financial institution is functioning entirely without its senior echelon — and no one senses the difference. If I understood the Israel Securities Authority correctly, it is actually functioning better without its management.

The finance minister has previously admitted that he does not have the first clue about economics. But the Finance Ministry seems to be functioning just fine. The Bank of Israel currently has no governor, but business is as usual.

PLY: A truism. Actually from day to day exchanges can survive a long time without top tier management as their pure processing rolls on. However, there does need to be an element of strategy, albeit not that a great many exchange CEOs actually seem to have demonstrable strategic abilities. In this specific case, TASE had a strategy before, it just didn’t mesh with the regulators’ view of the world…

Financial Calendar

JSE Limited – will release Q2 financial results tomorrow

Share Notes

Charles Schwab EVP Jay Allen sold 13,500 shares of Charles Schwab Corp. stock on the open market on Wednesday, August 7th at an average price of $22.12, (bargain of $298,620.00).

Interactive Brokers SVP Milan Galik sold 2,000 shares of the company’s stock on the open market on Tuesday, August 6th at an average price of $16.64, (bargain $33,280.00). Galik now directly owns 824,604 shares.

Analyst Notes

Analyst: We Were Wrong on NYSE-ICE Deal; It’s a Good Deal (subscription)
The Wall Street Journal

“We were wrong,” isn’t typically the headline of an analyst report.

But Brad Hintz of Sanford Bernstein issued a lengthy mea-culpa on his original opinion of one of the highest-profile deals of the year: ICE buying NYX.

“It’s time that we admit to being incorrect about the ICE-NYX merger,” Hintz wrote this week. “The strategic logic of this merger is sound. … Bernstein has become a believer in the transaction.”

Hintz’s self-flagellation is a somewhat remarkable report. Sometimes analysts will admit a mistake, but rarely do they spend more than 300 words reliving the mistake in detail, pointing out the zingers they made and are now eating, and providing a link to clients to the now-rejected note.

PLY: I absolutely applaud and think so much more of Mr Hintz as a result of his becoming perhaps the first ever exchange analyst to admit to anything less than pure perfection. A brave move but one which can only enhance his credibility.

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.


UK Crowdfunding Raises £3m For Clean Energy Projects

Crowdfunding is providing the financial impetus needed to lift renewable energy projects off the ground, as an investment company raises £700,000 in a month, according to Responding to Climate Change.

PLY: So if you believe in global warming, crowdfunding may be helpful. If you don’t, at least it’s private money and not government cash being deployed here.

Other Stories

NYSE’s Amazing Veteran Internship Program
Business Insider

High unemployment among veterans is exactly what Duncan L. Niederauer, CEO of the NYSE Euronext, wants to end.

Last year, Niederauer launched the NYSE Veteran Associate Program, a 10-week paid internship program that offers veterans hands-on experience and training alongside a NYSE staff. In its sophomore year, the program has 29 vet interns from the ages of 23 to their mid-50s.

PLY: As a strong signal to the community, the efforts of NYX are to be applauded in support the brave men and women who have fought for their country.

How Many Exchanges Can The World Handle?

Among the many trading conferences I have had the fortune to attend over the years the question has always arisen as to how many stock and derivatives exchanges there would be in three, five or even ten years time.

Depending on who one canvassed the answer was always different but tended to be less – not more.

My thoughts returned to this issue with news that Aquis Exchange…

Aquis Exchange now joins over 100 trading venues that are already part of the BT Radianz Cloud community and one wonders how much longer that number can be maintained.

PLY: I think I realised how wrongheaded the few global markets thesis was and abandoned it before it even hit the mainstream. The idea remains wrong simply because the exchange universe can expand to incorporate a plethora of new product and models. Overall, an interesting article by Roger Aitken.

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