August 26 2013

elb2 Late Friday stories emerged that BATS and Direct Edge are discussing merger. NASDAQ in the firing line over its downtime while an Indian haircut may be afoot at NSEL and defaulters are barred from all bourses.

Lots happening, despite the UK bank holiday…

Public Markets

BATS, Direct Edge In Merger Talks (subscription)
The Wall Street Journal

Electronic-exchange group BATS Global Markets Inc. is in advanced discussions to merge with rival stock-exchange company Direct Edge Holdings LLC, in a deal that could unseat Nasdaq OMX Group Inc. as the second-largest U.S. stock-exchange operator by volume.

PLY: No sooner do Spectrum and TA Associates come on board than BATS is looking at a big deal. Clearly after the IPO disaster last year, BATS has issues with going public short term and so the approach is now to create a mega-bourse from the best of the discount exchanges. Direct Edge has done well and this mega-merged entity would have a significant owner in Deutsche Boerse (via ISE who hold 31.5% of Direct Edge). A deal also places pressure on NASDAQ where Bob Greifeld, despite being not flavour of the month in some quarters, has actually done some interesting deals of late.

Nasdaq Shutdown Bares Stock Exchange Flaws (subscription)
The Wall Street Journal

PLY: A good discussion of the labyrinthine confusion of plumbing (reminiscent of the air conditioning in Terry Gilliam’s magnificent movie “Brazil”) which is US equity market infrastructure. Perhaps a solution might be the redemption of Jignesh Shah, beleaguered Indian exchange operator? After all, wasn’t part of the original appeal of his exchange software the fact that it robustly stayed open in the core market even if whole regions of the sub-continent had glitches? Just a thought…

Nasdaq CEO Greifeld Wrings Gain From Stock As Traders Shudder

Nasdaq stock climbed 0.1 percent over the five days, including 1.2 percent yesterday that reduced the 3.4 percent loss suffered when Greifeld froze trading in thousands of securities for three hours.

PLY: A perversely luddite view prevails amongst some old Wall Streeters that markets ought to be not for profit, so then they could be more efficient. Having just spent the weekend in the now thriving cosmopolitan hub of Berlin pondering the remnants of non-achievement during 50 years of not for profit government collectivism, I find myself unable to agree with the control-oriented arguments of certain parties keen to see exchanges do what these parties want, not what constitutes a free, broad, open market.

Nasdaq Focuses On Pivotal 2 Minutes In Trading Halt (subscription)
The Wall Street Journal

PLY: Anatomy of a tipping point: “The period between 10:53 a.m. and 10:55 a.m. in New York on Thursday appears to have been crucial to signaling the coming impact of a connection problem between Nasdaq’s systems and rival NYSE Arca.”

Investor Profits On Tech Error With Nasdaq Stock Options (subscription)
The Wall Street Journal

Technology failed Thursday, but when the market went dark, a delay in electronic messages kept other exchanges from being notified of the halt. Options exchanges continued to allow trading on options tied to Nasdaq-listed stocks, including the stock of the exchange operator itself, for a few minutes after trading in the stocks themselves ceased.

In those minutes, three distinct blocks of trades occurred in put options securing the right to sell the exchange operator’s publicly-listed shares for $31 and $32 apiece…

Nasdaq Fail Should Be Final Nail For Bob Greifeld
Business Recorder

It’s time for Bob Greifeld’s reign as chief executive of Nasdaq OMX to come to a close. Granted, his 10 years in the job have by no means been disastrous. But Thursday’s three-hour trading halt due to systems glitches is just the latest in a series of more recent high-profile flubs. Greifeld looks to have outlived his usefulness at the exchange.

PLY: “…by no means been disastrous.” Ouch! However. looking at the NASDAQ board, it is difficult to see quite who will force Greifeld out. The Scandinavian non-execs give the air of just being excited to fly to New York industry gossips allege while the Gulf shareholders are generally very conservative about management change. Nevertheless, it’s plausible that there will be CEO turnover at both NASDAQ and NYSE soon.

Nasdaq Shutdown Forces SEC’s White Into Fight With Market Perils

PLY: A discussion of Reg SCI which may help but also looks to be pushing a lot of onus on individual exchanges. There needs to be a big downstream push to ensure customers are compliant with internal risk management and therefore held to account (and pay for their losses) when their systems lose control. Equally, it looks as if a lot of updating if not total redesign is required to overcome the central points of failure created from the dog’s dinner of Reg NMS which remains a splendid example of regulation for regulation’s sake when the market was already getting to a national solution without the highly visible clunking fist of SEC action at the time.

The big test is how experienced Prosecutor Mary Jo White will appreciate the fine points of markets and can she act accordingly and not merely judicially?

Goldman Places Four On Leave After Options Error

PLY: Good. At least some evidence of Goldman trying to sort out the mess they caused but seem reluctant to either atone, or indeed pay, for.

Nasdaq & NYSE Vie For 2014 Twitter IPO

PLY: Big battle of prestige and revenue. Can NASDAQ recover from being unfriended by the Facebook IPO? #ExchangeInvest wonders who will get Twitter’s golden hashtag?

Moscow Exchange Announces Date Of Complete Migration To T2

All stocks, Russian Depositary Receipts (RDRs), mutual-fund units, mortgage-participation certificates (MPCs), and foreign ETFs will trade with T+2 settlement starting Monday 2 September.

Private Markets

Shanghai Mulls Circuit Breaker After Everbright Error

Shanghai SE is considering setting up a circuit-breaking mechanism to help avoid a repeat of a trading error on Aug. 16 that triggered the biggest swing in its benchmark index since 2009.

The exchange will also study the possibility of allowing the cancellation of trades.

PLY: Clearly a blanket cancellation policy is bad for markets. We hope Shanghai creates a pragmatic and nuanced response which helps all market players when one makes an error, not a solution implicitly subsidising the errant.

Taiwan SE & MIAX Sign MOU

Taiwan SE (TWSE) has signed an MOU with The MIAX Options Exchange (MIAX).

Currency Seizures From Bitcoin Exchanges Mean The End Of Anonymous Currency Is Getting Closer

The largest Bitcoin currency exchange is facing a perilous future as U.S. authorities continue to seize its bank accounts.

PLY: seized funds because Mt Gox didn’t have a money transmitter licence at the time. However, in terms of anonymous currency, the numbered bearer bonds marked Dollar/Euro/Pound/Zloty still seem to be pretty popular on the high street…

Bitcoin Group, Regulators to Meet (subscription)
The Wall Street Journal

Representatives from at least 7 government agencies are scheduled to meet Monday with the main Bitcoin trade group amid a growing focus from regulators and law-enforcement authorities on the fledgling virtual currency.

Sri Lanka Bourse To Boost Secondary Debt Trading

Sri Lanka’s Colombo SE expects to allow primary dealers in gilts and other financial intuitions to deal listed corporate debt after August 29.

Special Section: FTI, NSEL, India at the Crossroads

PLY: NSEl/FTI fights on but now a haircut request is out there – will it be just the first? Meanwhile FYI shares are up 7.5% and MCX limit up 5% as we close for press…

NSEL Asks Investors To Take A 20% Haircut
The Indian Express

NSEL is believed to have informally suggested brokers and investors take a haircut of Rs 1,100 crore (USD 171.2 mln) — or close to 20% of the total outstanding of Rs 5,573 crore (USD 867.39 mln).

NSEL Defaulters Barred From Trading In Stock Markets
The Economic Times

Stock exchanges have decided to bar defaulters, who caused the payment crisis at NSEL, from all trading activities as per direction from markets regulator Sebi in the latest crackdown against such entities.

PLY: Good.

NSEL Chairman Shankarlal Guru, Related To A Defaulter Firm’s Shief, Quits
The Economic Times

Octagenarian NSEL chairman Shankarlal Guru has resigned from the board of the crisis-hit bourse. He is the father-in- law of Nilesh Patel, MD, NK Proteins (in default against NSEL), the second largest borrower on NSEL with a liability of over Rs 900 crore (USD 140 mln).

Deals On NSEL With Missing, Inadequate Stocks: Tax Department
The Economic Times

The Income Tax department suspects possible tax evasion by defaulters of the NSEL following their nationwide searches last week.

Pawar’s Trusted Aide Resigns From NSEL Board In Wake Of Scam

BD Pawar, a trusted aide of Union Agriculture Minister Sharad Pawar, has resigned as director of NSEL.

Pawar says he submitted his resignation early this month but was not aware whether it had been accepted.

NSEL Investors Raise Concerns With Finance Ministry

Investors stuck with the crisis-hit NSEL today met Economic Affairs Secretary Arvind Mayaram.

Govt Set To Order SFIO Probe Against NSEL
The Times of India

The government is expected to order a probe by the Serious Fraud Investigation Office (SFIO) into NSEL.

Kotak Group Keen To Buy Out MCX As NSE Sells Stake
The Economic Times

Commodity regulator FMC will hold a meeting on Tuesday with some institutional shareholders of MCX to discuss, among other things, the future of the exchange.

A senior industry official said Kotak group, which has interests in the commodity business, is keen to acquire MCX if regulatory authorities and investigation force Shah to put its holding on the block while the promoter of the other exchange that is interested in MCX is sounding out PE funds to join him.

NSE held 2.45% of MCX as of June while FTI I believe owns 1% of NSE.

MCX Investors Meeting FMC To Seek Clarity
Business Standard

Following new guidelines issued by the FMC, MCX has decided to reconstitute the board. Chairman Venkat Chary and an independent director C.M. Maniar are above 70 years, the age limit set by FMC.

Venkat Chary happens to be a former chairman of the FMC while Maniar is a leading chartered accountant.

MCX, NCDEX Together Have Only Rs 5 Crore (USD 778k) To Deal With Payment Settlement Risk
The Economic Times

It isn’t just the unregulated NSEL where the settlement guarantee fund (SGF) was missing.

MCX and NCDEX, the two main commodity futures exchanges with combined daily trading volumes of around Rs 37,000 crore (USD 5.75 bln) – together have less than Rs 5 crore (USD 778k) in the kitty to deal with a payment settlement risk.

Prompted by the absence of protection, regulator Forwards Market Commission (FMC) on Friday issued fresh guidelines for SGF. NCDEX had Rs 2.3 crore (USD 358 k) in the SGF at the end of 2012-13 , while its bigger rival MCX had Rs 1.9 crore(USD 295 k) in 2011-12 , according to annual reports of the two exchanges.

In response to a questionnaire from TOI, NCDEX said the balance had increased to Rs 2.4 crore (USD 373.5 k) on August 21.

SGF is a tool used to deal with situations where one party is unable to meet its payment obligations and the exchange can then dip into this reserve to ensure that there is no default and protects those to whom the money is due.

In its latest annual report, NCDEX has said it is looking to dip into the SGF to deal with a fraud of over Rs 4.5 crore (USD 700k) related to steel contracts, although it has nearly half the amount available at its disposal.


CME Seen Trying To Buy Paris Contracts To Complete Grains Suite

CME is expected to try and buy Europe’s leading wheat futures contract from rival Intercontinental Exchange (ICE), a move that would solidify its dominance of world grain trading.

First DAX ETF Launches On London SE

LSE welcomed Friday the db x-trackers DAX UCITS ETF (DR), the first Exchange Traded Fund (ETF) based on DAX, the blue-chip German equity index, to list in London.


Brazil’s BM&F Bovespa May Alter Index Rules To Retire Penny Stocks (subscription)
The Wall Street Journal

Brazilian oil firm OGX Petróleo e Gás Participações SA may be dumped out of the country’s main stock exchange index if a proposed change to the methodology is adopted.

PLY: I have to admit I always thought the arbitrary NYSE rule against penny stocks was merely a protectionist measure dating back to when brokers thought they had to be paid 1% to trade stocks. I do not follow the logic of this move by Brazil and it only helps create opportunities for the more flexible competitors lining up to take on BM&F.

Financial Calendar

This week:

August 28
Ex-dividend date for $0.18 CBOE Q2 dividend Share

August 30
Record date CBOE for $0.18 Q2 dividend
TMX $0.40 Q2 dividend payment
Record date HKEx interim dividend
GFI Group $0.05 Q2 dividend payment

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

Analyst Notes

ICE’s “Buy” Rating Reaffirmed at UBS AG – $215.00 Price Target
Betfair Group’s “Overweight” Rating Reiterated by Morgan Stanley – GBX 1,000 Price Target.
Interactive Brokers Group‘s “Neutral” Rating Reaffirmed by Zacks – $18.00 Price Target

ICE’s NYSE Deal Will Raise Its Game In The European Derivatives Market

The merger will provide ICE a tremendous opportunity to expand in the European derivatives market.

PLY: Hardly groundbreaking news but good to see some validation of a deal we have always liked. With an injection of responsibility and coherent management, literally anything is possible for all the NYSE business units.

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.

Other stories

Polish Parliament Approves Measures To Implement EU Energy Rules

The Polish parliament Friday approved amendments to its Energy Act which will allow it to implement the provisions of the EU’s Third Energy Package, which includes reforms needed to break down national barriers to gas and power trade, improve security of supply and force traditional incumbent national monopolies to face cross-border competition to provide more choice for consumers.

Expectations Grow For Saudi Stock Market Opening To Foreign Investors

A long-awaited opening of Saudi Arabia’s stock market to direct foreign investment appears near.

Nasdaq Glitch: Sebi Reviews Indian Stock Exchange Systems
The Times of India

PLY: Pragmatically, Indian regulators SEBI want to check that their thriving tech-driven market ecosystem can withstand shocks compared to apparently third world structures in places like, er, the USA.

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