August 28 2013

elb2 The word of the day remains “Shahdenfreude,” coined as a result of the unanimous opinion of my inbox while the perils of counterparty risks are writ large as New York’s equity markets bicker before meeting the new Principal. Chairman White on September 12. If you stick to futures you are fine, notes one informed blogger while lots of people are trying to get market silo folk to think lateral. Tricky.

As always the day’s pithiest review of markets and the only one devoted to financial infrastructure world-wide:

Public Markets

CBOE Futures Exchange Suffers Small Data Issues

CBOE notified traders that the CBOE Futures Exchange was having issues with a limited number of canceled orders from Monday. The orders were executed between 7:10 a.m. and 7:30 a.m. CDT (1210-1230 GMT) on Tuesday, the CBOE said in a notice. After a review, CBOE said the trades in question will stand.

PLY: Clearly either Goldmans weren’t involved or perhaps the trades stand because CBOE does not employ a welter of senior ex-Goldmans staff.

SEC Reviews Nasdaq As Rivals Blame Each Other For Outage
U.S. SEC To Meet Exchange Heads September 12 Over Nasdaq Outage

Regulators are questioning how robust Nasdaq’s systems are after last week’s massive trading outage, while shrugging off a spat with NYX as a distraction. Chairman Mary Jo White will meet with exchange heads September 12 to discuss the outage.

Nasdaq Broken, Futures Live On

All you can see on CNBC and Twitter right now are investors in shock after the Nasdaq announced it was halting trading after an “unexplained technical issue.” As the 2nd largest U.S. Stock exchange, this is alarming for many, but we can’t help but point out that once again, futures markets once again prove port in a storm.

The chart below shows the Nasdaq composite versus the Nasdaq futures over the past few hours, and you can clearly see the index flat lining while the futures have kept trading, allowing traders and investors to hedge or place their bets. The CME’s slogan, “where the world comes to manage risk” has changed to “where the world comes to trade the Nasdaq” for the past two hours.

PLY: An excellent blog post points to how futures markets work when cash markets collapse. Good for CME, bad for cash silos like NASDAQ – wonder how soon it will be before NLX lists the NASDAQ indices?

Quick View: Exchange Technology Needs Fresh Approach (subscription)
Financial Times

Another August and the market is again fiercely debating its plumbing. In the past 10 days Goldman Sachs experienced problems in the options market, then glitches shut both Nasdaq & Eurex.

PLY: A useful piece from Philip Stafford with an excellent conclusion: “With every failure, it feels like fresh perspectives are needed.”

The problem is that too many exchange executives are terrified of anything non-linear and regard an “outside opinion” as asking the nearest sell-side participant. Import fresh thinking and they just look terrified.

In this way cousins in-breed and become genetically deficient. Equally, when we look at the huge amounts squandered on fintech subsidiaries by some exchanges in recent years, it is really difficult to square the circle with this statement by Duncan Niederauer: “We think of ourselves as an applied technology company.” To be fair, NYX have apparently “applied” a billion in spend to fintech…

BATS-Edge Next Step In Rapid Evolution Of Financial Marketplaces
The Fiscal Times

Watching the way that the world of stock exchanges has changed in the last quarter of a century can make you feel like you’re peering into a kaleidoscope and slowly turning the tube, watching as, with each revolution, the little pieces fall into entirely new patterns.

…If you expect the fast and furious rate of change in the securities trading world to slow down as has the volume in stock trading, you’ll be disappointed.

PLY: An interesting, thought provoking refresher of exchange history, worth pondering over coffee.

Direct Edge To Adopt BATS Data Feeds, Tech (subscription)

PLY: BATS technology will power the merged BATS-Edge entity in a migration similar to the Chi-X acquisition by BATS in 2011.

High Frequency Caution Pays Off In Asia (subscription)
The Wall Street Journal

PLY: A smugness is upon Asian markets as they have slowed markets down and hence not had the problems caused by Goldman Sachs errors’ nor NASDAQ outages etc. (well apart from Everbright…) Maybe I have got my history mixed up here. I thought what made Asian exporters great was producing electronics better than western gadgets and automobiles which were more reliable with less downtime than the junker clunkers of nationalised behemoths like British Leyland or subsidised Detroit.

Protectionism never improved any market. Arguably part of the US’s systemic failings in recent times could be attributed to the closed-minded protectionist approach of exchanges and regulators which has shut out international competitors. Asian markets being closed to outside investors in one way or another helps nobody except the entrenched reactionaries.

Charles Schwab Must Face Auction-Rate Suit

Charles Schwab must face a lawsuit in which New York state accused it of falsely describing auction-rate securities as liquid investments without disclosing the risks, an appeals court ruled.

Licence Glitch Shuts Down IBKR Margin Loans
The Age

Australian regulator ASIC has stopped Interactive Brokers from providing margin loans in Australia after it discovered the firm did not have a licence to do so, after more than 13 years in the Australian marketplace.

Private Markets

SIX Achieves Strong Operating Profit In The First Half Of 2013

Operating income rises 4.3% in the first half of 2013. All business areas contributed to this growth, particularly the international business of Payment Services

Earnings before interest and tax (EBIT) amount to CHF 116.6 mln (USD 126.7 mln) (-67.5%). Adjusted by the gain on disposal of the Eurex investment in 2012, EBIT increases 25.2% or CHF 23.5 mln (USD 25.5 mln) compared to the previous year. All business areas have improved their results

Group net profit stands at CHF 93.1 mln (USD 101.19 mln) (-72.3%). Adjusted by the gain on disposal of Eurex, Group net profit improved by 31.9% or CHF 22.5 mln (USD 24.45 mln) in comparison with the previous year

Press release here.

India – NCDEX Slashes Transaction Charges
Business Today

National Commodity and Derivatives Exchange will decrease transaction charges – firing a direct shot across the bows of previously dominant MCX.

PLY: Let battle begin! NCDEX is looking to fight its way back into the commodity futures business after coming off second best to the more aggressive MCX for some years… This move clearly may affect the MCX value for its likely future sale.

Farmers Seek CBI Probe Into NCDEX Turmeric Trade
The Hindu Business Line

The Turmeric Farmers Association has urged the Prime Minister to order a probe by the Central Bureau of Investigation into the malpractices on the NCDEX and set up a separate Turmeric Board to help their cause and asked for Tumeric to be delisted from NCDEX.

PLY: Banning any commodity trade is a bad idea. Markets must be open, fair and permitted. Banning any commodity from free trade is regressive and only provokes volatility as studies have show related to Onion futures (banned under a misguided 1965 US act).

Special Section: FTI, NSEL, India at the Crossroads

PLY: Jignesh Shah is a man who seems to keep getting up from the canvas every time the referee counts to around 7. He’s back and standing, still giddy from all the punches but this time he has funnelled a loan from FTI to make up the second consecutive defaulter deficit for NSEL. After scraping together 1.9 million USD by payment time last evening, NSEL has received a 26.7 million dollar lifeline from FTI which will be used to fully repay 608 small investors. This probably removes some of the most voluble complaints from the NSEL creditor pool and was directed by NSEL regulator FMC.

That said some 6380 other investors remain unpaid…

Meanwhile Grant Thornton are confirmed as forensic auditors at NSEL as requested by FMC.

Shares today: FTI up nearly 7%, MCX limit up 5%.

Finally, I have coined a new EI noun to summarise the correspondence we have received pertaining to the NSEL affair: “Shahdenfreude” as seen on Twitter:

@Exchange_Invest noun: #Shahdenfreude – a feeling of shameful joy at the downfall of MCX/NSEL founder Jignesh

NSEL Defaults But Pays Off Small Investors
Business Standard
NSEL To Pay-Out Rs 177cr (USD 26.69 mln) Via Loan; FMC Calls It A ‘Default’

After defaulting for a consecutive time in a fortnight, NSEL received a Rs 177-crore (USD 26.69 mln) lifeline from its main promoter, Jignesh Shah-run Financial Technologies. This bridge loan, will be used to clear payments to 608 small investors who were due to receive up to Rs 2 lakh (USD 3016) as of July 31.

NSE Gets Just Rs 8-cr (USD 1.2 mln) Return By Selling Stake In MCX
The Economic Times

PLY: Clearly not an ideal result for NSE but a profit is a profit and it isn’t the enormous loss hanging over NYSE. The problem with Indian exchange investment was that the private market became rather flat after the Jalan Committee’s misguided and restrictive conclusions.

Govt Appoints Two Groups To Probe NSEL Crisis
Business Standard

As mentioned yesterday, with some more detail here, on the two working groups constituted within a larger task force to probe developments in the NSEL crisis and suggest ways to thwart any systemic risks.

“Once the two reports come, on decisions which fall under my jurisdictions, I will take those decisions,” Finance Minister P Chidambaram told a press conference.

The two groups will come under the overall supervision of a task force under economic affairs secretary Arvind Mayaram.

One examine legal/regulatory violation by NSEL or associated companies. “This group will be headed by the enforcement directorate chairman and will have representatives of the directorate of revenue intelligence, Securities and Exchange Board of India (Sebi), Reserve Bank of India (RBI), department of consumer affairs (DCA), Forward Markets Commission (FMC), Serious Fraud Investigation Office and Central Board of Direct Taxes.”

The other group will suggest measures that could be taken to ensure no systemic impact of the NSEL developments and be headed an RBI deputy governor while comprising the FMC chairman, a Sebi member and adviser to the Financial Stability and Development Council.

PLY: Two crucial weeks where the NSEL hangover will hopefully result in a sensible streamlining of regulatory process. The worry is that we have another Jalan Committee situation where the freedom of Indian markets to serve the people and grow prosperity will be impeded with markets harmed as a result of overly prescriptive restrictions which may actually increase, as opposed to reducing, risks, systemic or otherwise. In any high pressure situation, there is always a concern the knee jerk reaction will triumph over a pragmatic, balanced response.

Sebi To Tweak Stock Exchange SGF

The NSEL default has forced market regulator Sebi to swing into action. It has decided to review the settlement guarantee funds maintained by stocks exchanges, and is working on bringing in uniform guidelines for this fund as part of its risk management measures.

Sebi chairman UK Sinha is taking no chance when it comes to ensuring that any of the exchanges under his purview fall prey to the NSEL settlement crisis.

NSEL’s Warehousing Receipts Similar To Banker’s Receipts Of Harshad Mehta Scam?

In the Harshad Mehta scam bankers were issuing fake bankers receipts or BRs, representing government securities. But while BRs were accepted on the basis of trust, NSEL created the illusion of a ‘trade guarantee fund’ which has mysteriously vanished

“History never repeats itself, but it rhymes,” said Mark Twain. Some 21 years after the Harshad Mehta scam shook the market, the same saga seems to have been repeated in the scam involving NSEL.

In 1992, Harshad Mehta, who was pumping up stocks to frenzied heights, was systematically taking advantage of a poorly regulated government securities market, which had no proper checks and balances. And he was not alone – a cabal of top bankers and brokers were found to have issued fake bankers receipts (BRs) which were supposed to represent gilt edged government securities and bonds.

The truth spilled out only when the Reserve Bank of India (RBI) appointed a high-level multi-disciplinary committee to investigate. The story of NSEL is fast representing a similar situation…

PLY: A worrying procedural note in this fascinating article: cases pertaining to the Harshad Mehta scam are still going through Indian courts 21 years later…

Commexes Get A New Set Of Rules On Accountability
Business Standard

In the wake of the developments at NSEL FMC, issued a circular on Tuesday making MDs and CEOs more accountable.

Follow Satyam Example To Resolve Crisis At NSEL
The Economic Times

What is important with the NSEL crisis is how authorities deal with it — and prevent recurrence of such scams. Look at the facts: 24 borrowers – not even one is credit worthy; 88 godowns — not even one has all the stocks.

We hear that the chairman’s son-in-law is the largest borrower and the promoter’s brother-in-law is the auditor. And then there is a web of well-paid, but poorly informed, independent directors and advisors. It looks like a perfectly fixed match, where even umpires and camera-men are taken care of. The result: 15,000 investors have been swindled of Rs 5,400 crore (USD 814.47 mln).

The FMC did not have regulatory powers; after the crisis, it has been given only ‘limited’ powers. It is literally begging for information from the accused.

The ministry of corporate affairs has limited understanding of financial frauds. The ministry of finance has no jurisdiction over it. The ministry of company affairs is looking into it. The PM’s office is forming a committee. The opposition parties are trying to figure out ‘what’s in it for me’?

The erstwhile CEO of the NSEL has taken the entire blame, saying: “Hit me, hate me or hang me, but, I am the only person guilty of oversight or fraud. I want to embrace martyrdom and save all my company men, including the promoter, a hands-on entrepreneur, auditors who were supposed to verify the stocks, the board that was supposed to review audit and control processes.”

PLY: A brilliant pithy article by Nirmal Jain, laying bare the fact that a crisis this large cannot be the work of one oversight/error/problem, it really requires ‘organisation.’ Also one very pertinent point is the poor remuneration of NEDs which is a factor mitigating against good governance with western boards too.

The NSEL Debacle: Seven Questions For The Government

1) Why was NSEL granted an exemption from regulatory scrutiny?

2) Why did the government take over a year to clamp down on NSEL’s trading, despite having received complaints from FMC in 2012?

3) Why is NSEL still being run by its erstwhile promoters, and why are the warehouses still under its control or of its customers, when mis-governance has been proved beyond doubt?

4) How is it that the promoters of NSEL have been able to get away with false/inconsistent statements and promises since the debacle broke?

5) Given that the fact that the exchange was offering a forward contract (which automatically should have brought it under the FMC scrutiny) was well known, why did no arm of government act until now?

6) Why are no serious questions being asked by the regulatory and investigative arms of the government on the governance and risk management of the exchange?

7) Isn’t it curious that most of the defaulting members on the exchange seem to be obvious “shell” companies, some specifically set up for no other purpose but trading on NSEL? And why is nothing being done about this?

Fit And Proper Impact: Buy MCX Get MCX-SX Free?
Business Standard

PLY: It’s the ultimate BOGOFF! When you unravel all the options and warrants then buying FTI’s 26% in MCX probably gives you a free stock exchange: MCX-SE!

Meanwhile, FMC may yet be damned if they do and damned if they don’t declare Jignesh Shah and Joseph Massey not “fit and proper” to run/own exchanges. Do it and they will doubtless endure legal flack from JS/JM but if they don’t they look weak…

Either way, I suspect MCX is in play already and there is a great opportunity out there for somebody to sweep up some assets with enormous potential in the pulsating hotbed of Indian commerce.

‘Fit and Proper’ FAQs
Business Standard

PLY: A useful “F&P” primer primer.

NSEL Lost Direct Marketing Licence From Maharashtra 9 Months Ago
The Economic Times

Troubles started brewing at crisis-hit NSEL even nine months ago with Maharashtra Agriculture Department cancelling its direct marketing licence after finding irregularities at the bourse.

“The license of National Spot Exchange (NSEL) was cancelled on December 26 last year as there were no bidders and agent himself was purchasing the material,” Maharashtra Agriculture Marketing Director Deepak Taware told PTI.

After inspections of the exchange, irregularities were found in the running of the exchange, following which license was cancelled, he added.

NSEL Founder Jignesh Shah’s Role Being Probed
Mumbai Mirror

The Economic Offences Wing of the Mumbai Police has launched a preliminary inquiry into the Rs 5,600 crore (USD 844.64 mln) NSEL crisis after some investors lodged a complaint against the exchange and its office bearers.


TMX Group Launches Canadian Implied Volatility And Greeks Analytics Feed
The Wall Street Journal

There is a new analytics feed for options traded on TMX’s wholly-owned subsidiary Montréal Exchange via TMX Datalinx, providing Greek letters & 1970’s compact Chevrolet updates*…

*Vega for the uninitiated.

FixSpec Launches Radical New Platform: Central

FixSpec is a new enterprise platform designed for brokers and exchanges to deliver improved customer service, monitoring and operational efficiency when making and maintaining trading connections.

Startups Racing To Offer Markets Speed, Security
Fox Business

PLY: The race for speed aligned with security heats up. Of course 2 simple matters can help make things safer: proper pre-risk management before orders exit the counterparty and pre-trade margin checking. Not foolproof but they would make an incremental safety improvement for all.

Financial Calendar


Ex-dividend date for $0.18 CBOE Q2 dividend
Ex-dividend date for $0.10 Interactive Brokers Q2 dividend

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

Share Notes

ICE CEO Jeffrey Sprecher sold 44,029 shares Friday, August 23rd at an average price of $184.96 (bargain $8,143,603.84). He now owns 262,668 shares.

Analyst Notes

Wells Fargo initiated coverage on ICE with an “Outperform” rating – $210-$230

NASDAQ OMX Stock Shows Declining Trend

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.


Final Crowdfunding Rules Not Likely Until Late 2014

Final crowdfunding rules are not likely to be in place until late 2014 because the Financial Industry Regulatory Authority and the Securities and Exchange Commission need to take more action, according to a (subscription) blog on corporate and securities regulation.

Other stories

Perspective: Is Romania A New Capital Market Superstar?

The superstar when it comes to capital markets in Emerging Europe has been Warsaw SE for many years now. But it looks as if Romania has decided to give the Poles a run for their money.

PLY: I think East Capital are slightly breathlessly getting ahead of themselves here. There is a great deal of dysfunction in Romanian markets and governance standards are low. There needs to be a lot more work for the market to remotely get into the same league as Poland – remember there are about 85.000 client accounts in all of Romania at both exchanges. Poland can add that many new investors in a good month. Then again there are amazing investment opportunities in Romania precisely because it still practices rather feudal approach to capital markets, so East are on to something!

Wall Street Is Getting Too Glitchy
Investor Place

A good standby for science fiction is the computer gone haywire — think 2001: A Space Odyssey or War Games. It makes for great entertainment, but not so fun when they become part of the real world.

Just look at the financial markets lately. Most recently we just saw a clerical error on the Tel Aviv Stock Exchange wipe out almost the entire market cap of Israel Corp. and take the exchange down about 2.5% in a five-minute period. But that’s just one in a slew of high-profile glitches and typos that have led to disturbances and even crashes:

PLY: A review of some recent market problems…

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