August 29 2013

elb2 Movement in the listing of India’s exchanges is very exciting news while an academic study debunks the canard that HFT raises volatility.

Meanwhile great results from Moscow Exchange, more feedback on the encouraging Six results and proof that ISE remains an organisation with foresight, vision and execution.

Mega-BATS wants to be a ‘country club’ while noting there are riches in data.

All the news in India’s agri-scandal and excitement as HKEx tries to find a way to allow AliBaba (one of the world’s biggest exchanges of sorts) to list in Hong Kong despite the strong influence of founder billionaire Jack Ma.

Finally, all the best to “Ibbo” one of the finest to grace the LIFFE management over the years and a sad loss for ICE.

Public Markets

Moscow Exchange Announces Results For Q2 2013

Total operating income rose 21.0% YoY to RUB 6.30 bln (USD 189.75 mln).
EBITDA up 32.2% YoY to RUB 4.54 bln (USD 136.74 mln); EBITDA margin increased to 72.1% from 66.0% in Q2 2012.
Net profit increased 57.1% YoY to RUB 3.30 bln (USD 99.39 mln).

BATS CEO Plans To Attract IPOs
The Wall Street Journal

PLY: This I think is going to be really really tricky. ‘BATS-Edge’ will need to find a way to make themselves attractive to what are strong offerings of NYSE / NASDAQ each with that veneer of country club establishment feeling. This aura and exclusivity is something both the Wall Street dino-bourses have really done well in recent years and the teenage upstart mega-BATS is going to really find it difficult to get wiggle room.

There needs to be a lot of thinking to find a USP here. Not that it can’t be done, just that it could be darn tricky. I mean it’s like, well, having a bunch of blokes from Kansas build a platform and defeat Wall Street’s finest ECNs. I mean who could see that working?

BATS CEO Sees Stock Data Value Rising From Merger
Bloomberg

PLY: Running this extended story to demonstrate the difference in legacy markets and the new predators. BATS-Edge sees data sales as a big money maker where most exchanges have taken it for granted and in an era of collapsing market share have found it harder to garner prestige fees for a minority report of live trade.

Exchanges are in the micropayments business as I have been saying since the mid-1990’s. The legacy markets need to move with the times – and that means running lean and seeking new micropayment avenues as opposed to merely cost cutting.

Panel To Review Nasdaq Data-Feed Outage (subscription)
The Wall Street Journal

U.S. stock and options exchanges, regulators and other industry officials plan to hold a conference call next Wednesday to detail what caused the Aug. 22 technology failure that left Nasdaq-listed securities frozen for more than three hours.

Citadel, Virtu, Two Sigma, RGM Bid For E*Trade Unit
Reuters

Citadel LLC, Virtu Financial, Two Sigma and RGM Advisors are among the companies bidding for E*Trade Financial Corp’s market-making unit in a deal expected to be worth $100 million to $200 million.

ISE Gemini Fastest To Surpass Two Percent Market Share

PLY: ISE GeminiTM is barely past the limber up stage (if it came from Google they would say it was still in beta!) of its rollout but has already reached 2% market share – stunning!

The rollout is now being accelerated and presumably other players will be quaking in their boots.

Once again ISE demonstrates why they became the poster child of Capital Market Revolution. Strong thinking, good management, great implementation…and on a remarkably lean payroll too. This is good for equity options markets and great news for ISE’s parent, DB.

ISE Signs MOU With Moscow Exchange
The Options Insider

PLY: ISE are co-operating with Moscow Exchange where EUREX has already been active. I am never a big fan of MOUs which rarely generate enough to repay the airfares which created them but there is clearly good reason to want to be close to the progressive Moscow Exchange and the dynamism which is being built in Moscow’s financial centre with considerable government support.

Private Markets

SIX Earnings Boosted By Eurex Stake Sale (subscription)
Financial Times
Six Group On Track For M&A (subscription)
Financial News

Six Group, the operator of Switzerland’s national stock exchange, has reported a 32% increase in net profit for the first half of 2013, as the group gears up to make acquisitions across the business.

The exchange group reported net profit of CHF 93.1 million ($101.3 million) for the first six months of this year, up from CHF 70.6 million (USD 76.73 mln) in the same period in 2012.

The results do not take into account the CHF 266 million (USD 289.13 mln) gained by Six Group last year from the disposal of its 50% stake in derivatives exchange Eurex to Deutsche Boerse in January 2012. The sale increased the first half of 2012’s net profit figure to CHF 336.6 million (USD 365.86 mln).

PLY: First up I thought EUREX board was split and Six had 20% of the equity? If they sold half the shares for under 300 million dollars, I think that would be quite remarkable, valuing EUREX at not much more than Jean-Francois Theodore paid for LIFFE a decade ago…

However, the key here is that Six produced good results and more significantly, beneath the ‘hood of the group it is important to understand how they are building a powerhouse payments business. When I took the train to FESE convention this year, I enjoyed the lunch in the Warsaw-Berlin express buffet car as east Prussian countryside whizzes by and your credit card payment is processed by an arm of Six…

Thai Bourse Firms Up Cooperation With Cambodia, Laos And Vietnam

Stock Exchange of Thailand (SET), together with other stock exchanges in Greater Mekong Subregion (GMS) – Cambodia, Hanoi, Hochiminh and Laos –, will collaborate to strengthen the region’s competitiveness and raise its global profile during the first GMS exchanges CEOs meeting ‘GMS Focus’, hosted by SET, as a platform for closer collaboration among GMS exchanges and to initiate GMS capital market developments in three areas: capital market education, corporate governance and market information sharing.

PEGAS: Successful Migration Of EEX Spot Market

As from August 28, the natural gas products listed on the Spot Market of EEX are tradable on PEGAS, the joint platform of EEX and Powernext.

Special Section: FTI, NSEL, India at the Crossroads

PLY: Well, Rome wasn’t burnt in a day and neither will NSEL be but things continue to look tricky.

Meanwhile, MCX has already retraced 50% from its all time low with it’s 9th consecutive limit up day (expand the limits please dear regulator, as we have inferred before, the stock is now being restricted to the upside!). Currently at 355 from a low of 228 on August 19th, the exchange is clearly in play some way or another.

Elsewhere FTI is pretty much flat on the day.

Finally spare a thought for the Rupee which is in Fed-inspired taper freefall. Hence the debts of NSEL haven’t gone down much but in USD they have shrunk a bit. Alas for NYX it also means their stake in MCX is still worth an awful lot fewer dollars than they paid for it…

3rd Payout: NSEL Gets Only Rs 80 Lakh (USD 118 k) On August 28
The Hindu Business Line

NSEL has so far gathered only Rs 80 lakh (USD 118k) Wednesday from its members and clients against the third scheduled payout of Rs 174.72 crore (USD 25.81 mln) due September 4.

MCX Hits Upper Circuit, Up Nearly 50% From Record Low
Business Standard

A combined 18,352 shares have changed hands on the counter and there were pending buy orders for 1.76 million shares on BSE and NSE (National Stock Exchange) at 1045 hours.

Crisis Management Team Appointed At NSEL
Business Standard

Jignesh Shah, has appointed a crisis team to manage NSEL.

Two More FTI Directors Resign
The Economic Times

Two more FTI directors have resigned, C M Maniar and N Balasubramanian both high profile lawyers in India.

After the latest round of resignations, FTIL board now comprises Chairman and Group CEO Jignesh Shah, Whole time Directors Dewang Neralla and Manjay Shah and Directors Chandrakant Kamdar and Ravi K Sheth.

The development also comes close on the heels of two other FTIL directors R Devarajan and PR Barpande resigning from the board last week.

NSEL Fiasco: When Protestors Arrive In BMWs, Mercs!
moneylife

While regulators, investigation agencies are apparently working hard at tracking Rs5,600 crore (USD 827.3 mln), the ‘investors’ who are fighting for their funds held a unique protest outside the exchange plaza — almost every one of these protestors are HNI and many turned up in BMWs, Mercedes and Pajero cars.

First, their plan to protest as well as report on their little demonstration was disseminated by a professional PR agency. This firm is also at work trying to set up meetings for the investors with various media houses.

While these super-rich investors do deserve full sympathy and their money back, their actions do raise several questions. None of them seems to blame the brokerage firms, which persuaded them to invest in NSEL’s ready-forward products which had promised them a 15% return. In fact, the brokerage firms themselves seem to be part of the forum. This is curious, because the top 10 investors of NSEL happen to be among the biggest brokers on the capital market; and SEBI holds brokers accountable for the advice given to investors.

PLY: Especially in emerging markets I have frequently marvelled at the way investors remain utterly in thrall to their brokers / money managers right up to the point where some of them get carted off to jail. It makes me wonder how they ever made any money in the first place…

Will Honour All Promises; Ready For Any Probe: NSEL’s Shah
Moneycontrol

Jignesh Shah denies all charges, is willing to face any probe.

“Neither me nor Financial Technologies has done anything unethical or improper…and I personally and the Financial Technologies is ready to go any scrutiny or anything which is required to be done,” he told the meeting.

Shah says the board of NSEL has constituted a crisis management team. “We will honour all our commitments. There have been lapses at NSEL but we will fix those,” he said.

He also said NSEL is extending “full cooperation to forensic” auditor Grant Thornton.

NSEL Declares 10 More Members As Defaulters
Indian Express

NSEL Wednesday declared ten more entities as defaulters after they failed to pay their dues in the second settlement, taking the total number of defaulters to 19.

The members who have today been declared defaulters are: LOIL Continental Food, LOIL Health Foods, Mohan India, Namdhari Food International, Namdhari Rice and General Mills, White Water Foods, Shree Radhey Trading Company, P D Agroprocessors, Swastik Overseas Corp and Juggernaut Projects. The exchange also declared the name of clients who traded through defaulting members.

NSEL’s Focus On Small Players, ‘A Ploy To Break Investors’ Unity’
The Hindu Business Line

NSEL’s move to pay off small investors with exposure of less than Rs 10 lakh on a priority basis has come in for severe criticism from investors who were protesting outside FTI Wednesday

Aggrieved investors under the NSEL Investors Forum felt the exchange was trying to split the unity and reduce the strength of affected people by making payments at its discretion.

Sharad Kumar Saraf, Chairman of the Forum, said investors would intensify protest across the nation and would not rest till the settlement was done in full. On the delay in filing a police complaint and moving the court against the promoters, he said that would be a time-consuming affair, and defeat the forum’s intention of recovering the dues at the earliest.

However, he said that option was also being kept open.

The forum feels the transfer of the case to the Finance Ministry will have a positive impact as it has better links with the investigative agencies compared to the Consumer Affairs Ministry, said Saraf.

There was a mild commotion when the protesters tried to break the police barricade and enter the FTI premises. However, it was foiled by the police.

Expert Team To Examine FT’s Fitness To Lead NSEL
The Economic Times

The FTI “fit and proper” question will come up for discussion when the first working group constituted under a panel headed by economic affairs secretary Arvind Mayaram meets soon.

Mumbai Police To Investigate NSEL Payment Crisis
Business Standard

The Economic Offence Wing (EOW) of the Mumbai police will soon launch a probe.

Govt Probes Cash Deals, KYC Violations In NSEL
Business Standard

The finance ministry-appointed panel probing the NSEL issue is looking into cash transactions aided by brokers and the poor implementation of know-your-customer (KYC) norms.

PLY: Developments progressing faster than we thought, I only raised the issue of likely KYC anomalies a few days ago and it looks as if they have found a few smoking guns already…

We Have A Limited Role To Play In NSEL Crisis: FMC Chairman Ramesh Abhishek
The Economic Times

In an interview with ET NOW, FMC Chairman Ramesh Abhishek, talks about NSEL fiasco. Excerpts:

PLY: Today’s must read for some perspective from the regulator.

NSEL: Chronicle Of A Crisis Foretold
Business Standard

Every day, there are new developments to follow in the National Spot Exchange Ltd (NSEL) crisis.

There seems to be an erroneous perception in the marketplace that equates spot exchanges (spotexes) with stock exchanges (SEs) and commodity futures exchanges (comexes). A spotex is as different from an SE and comex as chalk from cheese. The latter two are licensed, regulated and supervised by their respective regulators – SEBI, FMC and the ministry of consumer affairs. The former is a completely independent entity. A spotex has to obtain exemption under section 27 of the Forward Contract Regulation Act from the FMC if it wants to offer intra-day netted spot contracts. This exemption, if granted, gives FMC limited oversight on a spotex. Compare this to an SE or comex where everything, from the application for permission to act as an exchange to the equity capital structure, board composition, CEO appointment and so on, is governed by regulators.

Products

Exchanges Move To Revamp Curbs On Some ETFs
MarketWatch

U.S. exchanges & FINRA have asked SEC to exclude a handful of lightly traded exchange-traded funds from new market-volatility curbs following a string of phantom halts in ETFs that scarcely trade.

High-Frequency Trading Does Not Raise Futures Volatility
Reuters

Volatility in futures contracts has remained largely stable in the face of increased participation from high-speed and algorithmic traders often blamed for roiling markets, according to a study issued on Tuesday released by the FIA.

Ghana Lists 10-year Eurobond
ghanaweb.com

Ghana’s 10-year Eurobond was on Wednesday listed on the Ghana Stock Exchange to afford local, foreign and prospective investors the opportunity to buy and trade on the secondary market, the first time an African country is co- listing a Eurobond on the local exchange.

The bond is already listed on the Irish Stock Exchange in Dublin.

Nasdaq OMX NLX Bourse Considers Third-Party Products
Fincad

PLY: Presumably they must be original products and not something copied from some other platform…

Cyprus Stock Exchange To Launch Derivatives By Early-2014?
Financial Mirror

CSE plans to introduce a market for derivatives by early-2014.

Career Paths

A notable upheaval at LIFFE breaking overnight with the departure today for a vigorous autumn gardening season of joint CEO Mark Ibbotson. A veteran staffer at LIFFE who is one of few remaining with considerable perspective and history within the exchange, “Ibbo” will be much missed. It is a crying shame he won’t be part of the ICE empire as he clearly has the capacity and market credibility to strongly impact ICE’s impending restructuring of the NYX and LIFFE entities.

The former Goldmans’ staffer Finbarr Hutcheson becomes sole CEO of LIFFE in the interim ahead of ICE taking full control while Andrew Dodsworth has been elevated to the LIFFE board with responsibility for the exchange’s regulatory functions.

We wish “Ibbo” every success and hope to hear of a magnificent new berth where his talents can shine in the near future.

Financial Calendar

Tomorrow:

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

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, the sale of 2,000 shares Friday, August 16th at an average price of $17.16 (bargain $34,320.00) reported on August 21, the sale of 2,000 shares Tuesday, August 20th at an average price of $17.15 (bargain $34,300.00) reported on August 23, and the sale of 2,000 shares Thursday, August 22nd at an average price of $17.10, (bargain $34,200.00) reported on August 27, Interactive Brokers SVP Milan Galik sold another 2,000 shares Monday, August 26th at an average price of $17.26 (bargain $34,520.00). He now owns 810,604 shares.

Analyst Notes

The Easiest Way To Profit From The ‘Options Boom’
StreetAuthority

The Chicago Board of Options Exchange is the undisputed leader in the domestic options market, boasting 28% market share while offering options on equities, equity indexes and exchange-traded funds (ETFs). Founded in the early 1970s, the company went public just three years ago, cashing in on the trend of financial exchanges going public.

Much like the stocks of other financial exchanges, CBOE has been surging in 2013, with shares up 61% on the year.

PLY: Hmmm, one of the problems of these quasi-amateur analysis sites is their inability to really understand what they are talking about. The CBOE is hugely propped up by its monopoly index franchise and while that is profitable, the exchange itself needs to look a lot more like a business than a legacy to excite long-term investors, as opposed to those reckoning sooner or later CME will step in to unify the Chicago derivatives markets.

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.

Crowdfunding

FCA Sets Sights On Crowdfunding Regulation
blue&green tomorrow

PLY: Always worrying when any regulator says they will review a market and cut risk – usually this means they will add a lot of regulation and kill the market. This does reduce risk but it rather misses the point.

Other stories

Hong Kong’s IPO Dilemma
The Wall Street Journal

Alibaba Group Holding’s plan to let its founder and management have control over the make-up of directors on its board as a condition for a Hong Kong listing has put the city’s stock exchange in an awkward position.

If HKEx rejects the plan, it may lose out on what could be one of the biggest initial public offerings in recent years. But if it gives the green light, it risks departing from its oft-stated principle of treating all shareholders equally.

PLY: If you aren’t aware of Alibaba, its IPO could be worth $70 billion, which makes Facebook hyper-IPO look very small cap at only” $16 billion. Clearly there are issues as Jack Ma controls the company but that doesn’t fit quite neatly with HKEx rules. All manner of possible solutions are being discussed.

India – Sebi Reviews IPO Norms For Stock Exchanges
Livemint

India’s capital market regulator is set to review and modify norms that are proving to be hurdles for stock exchanges in listing their own shares through initial public offerings (IPOs).

Both BSE and NSE want to float.

PLY: The ambiguous existing SEBI rules on exchange listing need reform to enable to the Indian markets to enjoy the benefits of being public companies. The Jalan Committee in 2011/2012 was a hugely retrograde step for Indian capitalism, let alone capital markets. It appears SEBI is now going to continue paring down this misguided report. A dynamic market in Indian exchanges would be an ideal way to open a new chapter after the resolution (such as it may be) of the NSEL fiasco.

Taiwan – Foreign Issuer Rules To Be Relaxed
The China Post

To expedite and promote the stock listings of foreign companies on local exchanges, the Taiwan Stock Exchange yesterday announced that it will render concessions and relax the enforcement of regulatory measures.

Dubai Government Launches Foreign Exchange Scheme Targeting Expats
The New Indian Express

In an interesting development, the Dubai government has introduced a scheme to help the expats receive the advantage of the soaring value of the country’s currency.

DGCX, under the Government of Dubai, has launched a scheme which allows sending more than Rs 2 lakh (USD 2954) equivalent of UAE dirhams. According to the scheme, those who join it by paying 300 dirhams (USD 81.67) in advance are able to receive the benefit of the day’s exchange rate even if they pay the rest of the amount later. This will mainly benefit non-resident Indians (NRIs) as the rate of rupee is witnessing a down fall day by day. However, the money will reach the addressee only after paying the full amount and a fall in the exchange rate during the period will not affect the customer. But, seven dirhams a month will be levied as service charges.

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