August 23 2013

elb2 NASDAQ freezes up and seems to have had a problem with an NYSE platform but admits its ‘tecchies’ out to have got to grips faster. Meanwhile, the Goldmans options blunder rumbles on where ISE is one exchange to not bust trades.

All the latest on Everbright and the NSEL crisis while there is an enquiry into a flash crash in India and some investor news et al, read on!

(There’s a UK bank holiday on Monday: for those stuck in the traffic jams trying to get home, don’t forget we’ll still be publishing Exchange Invest as usual!)

Public Markets

‘Flash Freeze’ On Wall Street: Nasdaq Paralyzed By 3-Hour Halt
Fox Business

Trading in all $5.65 trillion of Nasdaq-listed securities was halted for more than three hours Thursday due to a technical glitch.

SEC Chair To Meet Exchanges Following Nasdaq Problems

SEC Chairman Mary Jo White plans to convene a meeting with exchange executives and other market players to discuss regulatory practices after a technical problem forced Nasdaq to halt trading for much of the day.

PLY: The complexity of the plumbing is clearly an issue here and several years after Reg NMS some will be wondering whether those rules were really worth it… Meanwhile, in addition to the NASDAQ closure, hopefully the SEC Chairman will come down on the side of open, fair error policy for the options exchanges under her suzerainty…

Nasdaq OMX Group Shares Fall 4% As Trading Resumes

Shares of Nasdaq OMX Group fell nearly 4% to $30 as trading resumed on the platform.

CME Investigating Soybean Market Data

PLY: A curious case of large backwardations in the soya complex:

Traders said the message appeared to refer to suspect data in CBOT soybean and soymeal futures on CME’s Globex electronic trading platform, where some bids appeared higher than offers, the reverse of normal.

Options Market Has Biggest Disruption Since April

PLY: This quotation from Daniel Brady, President of Entropy Capital jumps out of the page: “I traded with someone and seven hours later I still wasn’t 100 percent sure that the trade was good.”

The cancellation chaos does not reflect well on whichever of the exchanges he was referring to and is bad for bourse credibility throughout the world.

Options Exchanges Wrap Up Review Of Errant Trades

U.S. options exchanges wrapped up their review Wednesday of a flood of erroneous options trades that roiled the market the previous day, and were linked to a computer trading glitch at Goldman Sachs.

PLY: Frustratingly the lack of information transparency here does not really encourage a feeling of security at many US options exchanges.

It is encouraging to note that ISE have not busted trades although they did adjust some extreme prices – something we did not clarify yesterday. It is good to know that at least one exchange is wisely endeavouring to keep the whole market on an even keel as opposed to cancelling trades of large errors which can be easily perceived as an inherent bias towards big counterparties.

Nobody wants errors and there is no schadenfreude when they occur but those who make the errors are materially responsible for their actions.

Moreover, lengthy, subjective, appeals processes are a waste of everybody’s time and again places smaller counterparties under strain as their positions remain unclear for hours, or more often, days. Why should anybody be forced to file with a tribunal to argue that their trade is legitimate?

Here again ISE have acted quickly, decisively and the market knows where it stands.

This is not just about US equity options. Many exchanges world-wide still have legacy processes to deal with modern low latency markets and errors which can occur within them. The industry as a whole needs to pay attention and upgrade their processes. It was fun a decade or more ago providing input when open outcry rule books had to be changed for early electronic trading. In the modern HFT era, more work is clearly required. We’re critical now but we are here to help make markets better for everybody…

Goldman Is A Victor In Ruling On Options Trades (subscription)
Wall Street Journal

Goldman Sachs won a decisive victory Thursday when the NYSE Amex options exchange canceled most of the errant trades.

PLY: NYX’s beleaguered Euronext arm is already reeling from strong competition from TOM in Dutch options. Now NYX has effectively hung a sign over the door of a key element of their business saying “Please don’t think our word is our bond.” This is dreadful news for NYX shareholder value and clearly demonstrates just how much work the ICE team have at NYSE.

Goldman Should Take Glitch Hit, Says Scholes (subscription)
Financial Times

Myron Scholes, one of the founding fathers of modern options trading, has said Goldman Sachs and others should be forced to incur huge losses if they make mistaken trades, instead of being able to cancel them.

PLY: Amen.

NYSE Could Face Vast Layoffs
Fox Business

PLY: Hardly news to anybody who has watched in bemusement as the NYX has spent and sprawled its way to the current dysfunctional Tras-Atlantic millieu.

Frankly, my problem with NYX is not really who should be cut, it’s more who should stay? That’s how much space Jeff has for redundancy manoeuvring. As I have not tired of briefing for the past year, those cost saving targets bandied about at merger time will be significantly exceeded once NYX has an outbreak of management.

30% sounds like a good starting point, although I mean keeping 30%…not the mere 30% cuts being rumoured. Enough to get Fox News breathless but hardly more than sensible seasonal pruning for investors eager for shareholder value to return or customers who value a flat organisation that can provide service.

Focus On The Main Game, Says ASX Boss
The Australian

ASX chief executive Elmer Funke Kupper wants policymakers and regulators to devote more attention to Australia’s international competitiveness, saying the focus on “small” issues is putting the financial sector at risk.

PLY: The protectionist mindset of ASX is terrifying. ASX are out of their depth domestically, even as an essentially all-powerful monopolist. How that can make them competitive internationally if they are cosseted by anti-competitive markets at home simply beggars belief. Pre-Victorian is a generous description to apply to the bunker mentality shamefully prevailing at 20 Bridge Street. Australia deserves better markets.

ISE Goes Maker-Taker With Gemini
Traders Magazine

Responding to the success of some options exchanges in offering a maker-taker pricing model, the ISE launched ISE Gemini in early August.

PLY: A useful primer on the new ISE Gemini exchange, demonstrating how we are going not merely to a multi-platform world (against the prevailing incorrect orthodoxy of a few players mega-merged together) but to a world where multiple models are viable for different types of business. The dynamic management of the modestly staffed ISE have packed more innovation into less than 15 years than many other markets in several centuries…

Private Markets

India – IDFC PE, OIF To Buy Jaypee Cap’s NCDEX Stake
Deal Curry

Delhi-based broker Jaypee Capital Services is in talks with IDFC PE and Oman Investment fund to divest a 14.7% stake in agri future exchange National Commodity & Derivatives Exchange Ltd for around R132 Cr (USD 20.47 mln), Jaypee holds 22.4% stake in NCDEX.

IDFC PE may acquire 5% stake for R44 Cr (USD 6.82 mln) whereas other 9.7% would be sold to OIF for R88 Cr (USD 13.65 mln). The two deals would value NCDEX at R912 Cr (USD 141.48 mln). Motilal Oswal’s Investment Banking arm is the advisor to the seller.

However, of the R132 Cr (USD 20.47 mln) that Jaypee would receive, R43 Cr (USD 6.67 mln) will have to be paid to NCDEX because of the investor’s inability to ramp up volumes on the bourse over three years from November 2010.

Special Section: FTI, NSEL, India at the Crossroads

PLY: In a world where “demat” mania has made India’s markets a marvellous success, they are now being let down by the banking sector’s antiquated technology as various counterparties have presented that pre-card dinosaurs, cheques, which promptly bounced.

I would hate to see the fees levied on 85 million dollars’ worth of bank cheques but clearly a lot of folk have gone a long way beyond their free overdrafts.

Stories are interesting today, the long arm of the bureaucracy is weaving a web around FTI/NSEL while today the shares are up slightly at FTI (1%) and limit up (5%) at MCX.

FMC Demands Details As Rs 550 Crore (USD 85.32 mln) NSEL Cheques Bounce
The Economic Times

Cheques worth close to Rs 550 crore (USD 85.32 mln) submitted by borrowers on NSEL have so far bounced, leaving the FMC regulator to demand disclosure of warehouse audit report copies and even receipts of physical stocks underlying the e-series contracts that investors entered into to buy bullion in small lots.

FMC have sought details of all cheques received by the borrowers and their complete profile, including documents pertaining to know-your-customer formalities.

PLY: I will not be surprised if KYC documentation proves to have holes in it…

NSEL Declares 9 Members As Defaulters
The Hindu Business Line

“Following members have been declared as defaulters as per the rules of the exchange — (a) ARK Imports Pvt Ltd (b) Loil Overseas Foods Ltd (c) Lotus Refineries Pvt Ltd (d) N.K. Proteins Ltd (e) NCS Sugars Ltd (f) Spin Cot Textiles Pvt Ltd (g) Tavishi Enterprises Pvt Ltd (h) Vimladevi Agrotech Ltd (i) Yathuri Associates,” NSEL said in a circular.

I-T Conducts Nationwide Searches On NSEL Members

The Income Tax department is conducting searches on the business premises of two dozen members of NSEL.

Multiple teams of I-T sleuths visited the offices of the firms of the 24 members in multiple cities, a number of which are either small entities or are suspected to be front companies for other people.

The I-T action has been launched to check the stocks and goods stored in the warehouses of these firms, to check the account books and transactions in order to ascertain any possible tax evasion by these entities and verify their claims of huge dues.

NSEL Depositories Ask MCX Traders To Take Delivery Of Demat Holdings
The Economic Times

After the NSEL fiasco, depositories NSDL and CDSL are asking clients and traders of MCX to convert their demat holdings into delivery.

Commodities worth Rs 123 crore (USD 19.08 mln) of those who traded on the MCX platform are held in demat form with NSDL and CDSL, out of which Rs 121 crore (USD 18.77 mln) is bullion metals and Rs 2 crore (USD 310k) is agri commodity, said an official of the commodity exchange.

These demat accounts are different from that of the NSEL clients. While MCX is a futures trading exchange and follows a cash settlement system, nearly 2-3% of trading results in delivery, which was held in demat form with NSDL and CDSL.

NSEL Crisis: ICAI Offers Help For Investigation
Economic Times

The Institute of Chartered Accountants of India (ICAI), which regulates close to 90,000 CA professionals, is open to initiating suo moto action to find out lapses on part of auditors in NSEL.

The move comes after FMC ordered NSEL promoters to appoint forensic auditor within 7 days to recheck its accounts and stock positions in the warehouses.

Two Directors Resign From Financial Technologies’ Board
The Economic Times

Days after top management at NSEL was sacked, two directors, R Devarajan and PR Barpande on the board of crisis-ridden exchange’s parent company FTIL have resigned.

PLY: Note that both of these NEDs are heavy hitters in the world of accounting and audit. Draw your own conclusions…

Corporate Affairs Ministry To Take View On NSEL Very Soon
Economic Times

The Corporate Affairs Ministry today said it will take a view “very soon” on the NSEL episode to ascertain whether it has violated the Companies Act.

Newsmaker: Jignesh Shah
Business Standard

Fit and proper. These three words have come back to haunt the chairman and chief executive officer of Financial Technologies, Jignesh Shah, twice in less than three years.

“Shah’s aggressive nature is legendary. Then, you don’t launch nine exchanges and a slew of other related businesses in warehousing and information management in just 12 years by being slow and steady.”

PLY: A useful outline of the perfect storm now afflicting Jignesh Shah…

NSEL Crisis Exposes Regulatory Gaps

The liquidity crisis at NSEL raises troubling questions on commodity trading, the troublesome aspects of Indian finance and on the credibility of NSEL’s promoter, FTIL.

The list of omissions and commissions is a long one…


ICE Link And Cetip Launch Post-Trade Solution For The Brazilian Bond Market

ICE , a leading operator of global markets and clearing houses, today announced that its post-trade workflow tool for the global credit default swap (CDS) market, ICE Link, is now available on Cetip’s bond trading platform, Cetip|Trader. ICE Link provides operational efficiency to the post-trade workflow, making these activities faster, safer and more standardized.

In recent years the Brazilian bond market has been dominated by non-standardized post-trade processes. ICE Link executes essential procedures of the post-trade workflow such as exchange of accounts allocation, confirmation and integration of the complete transactional data to clients’ internal systems and Cetip’s registration systems for corporate bonds and SELIC for government bonds.

PLY: BY allying with CETIP, ICE have a great potential foothold in Brazil to ultimately compete with BM&F Bovespa.

India – BSE Goes Live On Smartphones
Business Standard

BSE has launched a mobile application that allows investors to keep a track on markets on a real time basis. The new application allows investors a direct access to all 26 BSE indices. Investors can download the free application on Android smart phone, Windows 8 desktop and window 8 mobile.

PLY: Note it is not on IPhone…


Eurex Squares Up To CME As Swaps Battle Moves To FX (subscription)
Financial News

With much of the debate around new opportunities for European market operators in swaps currently surrounding interest rate products, CME Group must have thought its strategy of targeting foreign exchange was a relatively safe bet.

PLY: Still a bit of a storm in a teacup insofar as forex futures remain a tiny element of the global forex market…


Brazil SE Proposes Changes To Benchmark Index

Brazilian financial bourse BM&F Bovespa SA has unveiled potential changes to its benchmark Ibovespa stock index to better reflect the performance of local shares.

Career Paths

Given his salary, it is not unreasonable to see the attraction for ex- Warsaw SE CEO Ludwik Sobolewski as BvB in Bucharest have essentially matched his previous package at the much larger GPW.
With a 4 year contract; he will have a fixed salary of 17 000 euros gross, + apartment allowance, and a performance bonus. He is obliged to increase the company financial Turnover by 50% in 2014, ensure 5 IPOs in the next 12 months and an increase of 10% in free-float
He will receive his bonus if he reaches 80% of these targets.
(In Poland he received 18 000 euro fix plus a performance bonus. He had a total of 338 000 euro in 2012 (a total of 28 166 euro/month).
PLY: Given that Romanian capital markets are a festering pit of incompetence, these targets are eminently achievable, provided the fractious market players can remain vaguely united for any length of time. A large and lucrative opportunity for Ludwik in a country where the markets are a failure despite the size and resources of the country.
Note that BvB made a profit of less than a million Euros in the first six months of 2013, so Ludwik will be under pressure to perform rapidly…

Financial Calendar


Charles Schwab $0.06 Q2 dividend payment
Record date BGC Partners $0.12 Q2 dividend

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

Share Notes

Following his sale of 2,000 shares Tuesday, August 6th at an average price of $16.64, (bargain $33,280.00) reported on August 12th, the sale of 2,000 shares at an average price of $16.78 (bargain: $33,560.00) reported on August 13th, the sale of 2,000 shares Monday, August 12th at an average price of $17.02, (bargain $34,040.00) reported on August 16th, and the sale of 2,000 shares Friday, August 16th at an average price of $17.16 (bargain $34,320.00) reported on August 21 Interactive Brokers SVP Milan Galik sold another 2,000 shares Tuesday, August 20th at an average price of $17.15 (bargain) $34,300.00. He now owns 814,604 shares.

Analyst Notes

ICE Price Target Increased to $200.00 by Analysts at Bank of America Corp. – “Buy” 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.


New Crowdfund Plan Aids Startups With Expertise, Cash

Crowdfunding gets a new twist Thursday with the launch of an online platform that offers startups ideas and expertise as well as cash.

The new platform called JumpStart Fund, marrying crowd-sourcing with crowdfunding, comes from the California-based online community called Jumpstarter, which has been involved in matching investors with technology opportunities.

PLY: Note this innovative model is one which cannot be broadly replicated by exchanges due to regulatory restrictions…

Other stories

CFTC Moves to Rein In High-Speed Traders (subscription)
The Wall Street Journal

The commodities regulator is completing a road map it will use to develop rules aimed at taming the practice of computer trading.

PLY: Make the traders accountable for their actions, that would be a good start as they will have to build a greater pre-trade risk management infrastructure in essence reducing their speeds and ensuring the rest of the markets suffer less. That’s one start. I am incidentally, all for HFT, just not HFT where you can say “oops my algo had a foible” and walk away from your obligations. If your computer entered the order, it’s your order. Period.

Everbright Securities President Booted After Fat-Finger Trades
CNN Money

China Everbright Securities turned out the lights on its president Thursday following a series of embarrassing trading errors that have drawn the interest of regulators.

The company said in a filing with the Shanghai Stock Exchange that its board has accepted the resignation of president Xu Haoming. He will be replaced on an interim basis by Yuan Changqing.

PLY: Note, there is no statement here saying Everbright took their stand in following the moral leadership of Wall Street bankers in rooting out those managers whose staff have made errors in financial markets to take responsibility for their actions.

NSE Justifies Stand On Flash Crash
Business Standard

It was triggered by an ‘error’ and not an ‘event’. That’s how NSE, in its response to a Sebi show-cause notice, has justified a decision not to shut its equity segment for two hours on October 5, 2012, when a trade caused a 900-point dive in the Nifty in two minutes, resulting in the index hitting the lower circuit filter.

Sebi rules require exchanges to shut trading for two hours if the benchmark indices hit 10 per cent in a single day. NSE had shut the equity segment for only 10 minutes on that day.

In the notice, Sebi also held the bourse responsible for not having enough controls in place to avert the crash. Sebi asked NSE: Why were some orders executed even after the circuit filter was triggered? Why didn’t NSE shut the F&O (futures and options) segment? Why didn’t it ensure adequate order trade limits at the broker and exchange levels? Why didn’t it inform BSE (the other major exchange)?

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