August 30 2013

elb2 Well the heavens have opened as the silly season gathers to a close and there is a biased binary set of opinions on NASDAQ. Lots of criticism but a few (more pragmatic) defenders too. The way that NDAQ are being pilloried while Goldmans are getting away with what is tantamount to digital daylight robbery is barely mentioned (but there is one splendid story below!).

The brilliant big deal news of the day is the announcement that NSE has bought the half of its index subsidiary in a deal which echoes the brilliant FTSE purchase by LSE in December 2011.

That noose is back around Jignesh Shah’s neck and actually he is now in the equivalent corporate state of clinical death. Even is he is breathing and his companies trading, they now appear doomed to death by a thousand cuts of litigation amid an arsenal of smoking guns.

Public Markets

Nasdaq Says Flaw Exposed In Data Flood Caused Trade Halt
Bloomberg
Nasdaq Says Performance On Breakdown ‘Unacceptable’ (subscription)
The Wall Street Journal
Nasdaq Plans To Analyze Computer System After Trading Outage
Businessweek
Time To Fix The Not-So-Nifty Nasdaq
Bloomberg

Nasdaq OMX Group’s massive trading halt last week was due to a software bug and other internal technology issues triggered by problems at NYSE’s Arca exchange that led a key backup system to fail.

Bob Greifeld: “We know there’s going to be issues with software, we know there’s going to be bugs, we seek to get to perfection but it’s difficult.”

Nasdaq has changed the way it manages a key data feed to avoid another market freeze, according to WSJ and the same problem will not recur.

Nasdaq OMX press release here.

Nasdaq Takes Step In Fixing Glitch: Cops To It
MarketWatch

Nasdaq’s mea culpa was more than just a departure from previous statements:

“We are responsible for them, regret them, and intend to take all steps necessary to address them to enhance stability and functionality of the markets.”

That’s not only an admirable admission by any company, but exceptionally so for a major exchange. For too long, the exchange industry has been in a defensive-and-offensive posture when it came to accusations. The Nasdaq under CEO Bob Greifeld has been especially prickly.

It took him a month to admit Nasdaq fumbled the Facebook Inc. IPO in 2012.

Moreover, the inability of exchange leaders to admit mistakes and shortcomings is hurting the marketplace, which is increasingly seen by the investing public as rigged and out of control.

PLY: Good core point here. Bob Greifeld has strengthened his position with a core admission of error.

Don’t Write Off Under-Siege Nasdaq After The Flash Freeze
Fox Business

PLY: A measured headline from Fox as elsewhere low latency epitaphs being written for NASDAQ verge on the hysterical. Direct-BATS just amalgamates flow. It doesn’t rob NASDAQ of any business per se. The IT breakdown was embarrassing but had it not happened in August would we be talking about it so much? Yes Bob Greifeld is under pressure although he will survive if he can show discernable growth at eSpeed, his IR acquisitions and of course the European NLX exchange.

It will be interesting to gauge the mood on the streets of Stockholm concerning OMX when I visit the beautiful Swedish capital next week.

Nasdaq’s Reign As King Of Tech IPOs At Risk
USA Today

Tech IPOs stand 13 to NYSE, 8 to NASDAQ of 21 technology IPOs in 2013 so far but all eyes are on 2014’s possible pageant queen: Twitter…

Code Blue
The Economist

TIME was it took a war to close a financial exchange. Now all it needs is a glitch in technology.

Oddly, nowhere near as much attention is being applied to Goldman, which has been secretive about what went wrong. It has said only that “immaterial losses” occurred from trading problems during a system upgrade and that a review is under way.

PLY: It’s a delight to see the sound thinkers of the Economist probing the Goldmans sham where it has suffered “immaterial losses” perhaps amounting to tens of millions, largely because they strong-armed exchanges (some of which are run by ex-Goldmans alumni, as several EI readers are wont to point out). The fact that Goldmans are permitted to cover up their internal disorganisation is becoming almost as frustrating an issue as the labrador markets which simply rolled over and cancelled trades at the cost of running a credible market for thousands of other counterparties when Goldmans barked.

Girding For Battle As Electronic Derivatives Trading Revived
Reuters

The $300 trillion (193.19 trillion pounds) privately traded U.S. derivatives markets could be on the verge of the biggest change in their 30-year history if investors embrace new electronic trading platforms that would reduce the market dominance of large banks.

PLY: No need for could, this IS an absolute positive: the markets are going to be bigger, better and even if only a few crumbs drop off the OTC beanstalk to the pure exchanges, bourse profits will increase significantly. Meanwhile a horde of new platforms may be too many at first but from what may be an almost chaotic degree of hyper-competition, will rationalise to provide new investor champions. These are very exciting times, even if we had to wade through the dismal drafting of Dodd Frank’s 6500 pages to get here…

Goldman Sachs, Citadel Win Seats On Bats Board Through Merger
washpost.bloomberg.com

Goldman Sachs and Citadel plan to take seats on the board of Bats post Direct Edge takeover.

Moscow Exchange Cashes In On Overseas Push (subscription)
Financial News

Moscow Exchange saw net profit grow 57% in the second quarter, its first full quarter since going public, as the Russian bourse reaps the benefits of its international expansion plan.

PLY: Note to the EU. Moscow is ready and waiting for your order flow if you commit FTT suicide.

Private Markets

CRISIL Sells 49 % Stake In Index Related JV To NSE For $15.5 mln
Reuters

Indian credit rating agency CRISIL Ltd is selling its entire 49 per cent stake in India Index Services & Products Ltd (IISL), a joint venture with NSE India, to its JV partner’s arm NSE Strategic Investment Corporation Ltd for Rs 100 crore (USD 15.5 mln).

The stake sale comprises 637 000 shares of face value Rs 10 (USD 0.15) each representing 49 % of the total equity share capital of IISL.

The development comes after National Stock Exchange discontinued its branding contract with global ratings agency Standard & Poor’s under which it used the S&P brand to market its indices in January this year. In February S&P Dow Jones Indices tied up with the Bombay Stock Exchange (BSE) to use the indices of India’s oldest bourse.

PLY: Just as the FTSE purchase marked a brilliant leap forward for the newly confident and progressive LSE under Xavier Rolet, this is a terrific deal for NSE. Plaudits to CEO Chitra Ramkrishna for masterminding an excellent deal which can only make NSE a much more exciting proposition as it approaches IPO in the (regulation permitting) near future.

Special Section: FTI, NSEL, India at the Crossroads

PLY: It’s one of those days where after the calm of a flat FT session, the stock is in meltdown again, losing nearly 20% today.

The problem is not a smoking gun, it’s a smoking arsenal that is I suspect about to tip Jignesh Shah’s empire into the abyss. There are investigations of foreign currency violations with the overseas FTI exchanges and apparently clear evidence of FTI subsidiaries illegally trading on sister company MCX.

I fear Jignesh Shah is now ostensibly finished. Even if he survives the myriad of government attacks, dodges any criminal and civil charges, pays off the creditors etc he will remain embroiled in a Sisyphean task of defending litigant which will tie him up for more than a decade in the Indian courts.

Meanwhile MCX is shrugging off the requests for a broker strike from a predominantly HNW investor group with shares (again) limit up (10 days in a row!). The NSEL investor group in their increasingly strident approach risk looking petulant at best.

Finally, once again the issues arising from the murky loans processes for leveraged NSEL trading suggests the broker community will also be coming under significant fire once the regulators have dealt with FTI/Jignesh Shah and his associates.

Fresh Trouble For FTI As Group Firm IBMA Trades On MCX Against Govt Rules
The Economic Times

FMC has stumbled on information that IBMA (Indian Bullion Market Association) a firm controlled by FTI group has been trading on FT-promoted MCX in violation of government guidelines.

More borrowers Behind 24 Players Who Raised Rs 5,600 crore; Few Deny Owing Money
The Economic Times

More and more actors are emerging in the NSEL drama.

Some of the borrowers, whose liability runs into hundreds of crores, have a paid-up capital of less than a crore.

A Delhi-based property developer has taken the largest client-level exposure on crisis-ridden bourse NSEL.

PLY: While always sympathetic to investors who lose money in any crisis, it has to be said that some element of due diligence was clearly lacking by brokers, borrowers and lenders alike throughout the NSEL bubble. Yes the exchange would have been wise to monitor this but did it really have the power to influence what brokers do?

ED Investigates Bullion King Prithviraj Kothari Links With Jignesh Shah
India Today

Controversial bullion king Prithviraj Kothari is apparently working as a facilitator for FTI.

The ED is also investigating if the FT group was involved in foreign exchange violations under the FEMA Act in four commodity exchanges based in Dubai, Bahrain, Mauritius and Singapore.

PLY: Rumours abound that the amazing rags to riches gold trading billionaire Prithviraj Kothari may be the power behind the throne of MCX and a silent partner of Jignesh Shah. This has potentially explosive implications, if only because of the covert element, regardless of any issues concerning Mr Kothari and other allegations.

10 More Defaulters Barred From Stock Trading
The Economic Times

Individually, NSE, BSE and MCX-SX have disabled the Unique Client Codes (UCC) of those defaulter entities who are registered as clients of their respective exchange’s members, this week adding 10 entities including: LOIL Continental Food, LOIL Health Foods, Mohan India, Namdhari Food International, Namdhari Rice & General Mills White Water Foods, Shree Radhey Trading Co, P D Agroprocessors, Swastik Overseas Corporation and Juggernaut Projects.

NK Proteins Total Net Outstanding Highest At Rs 970 cr (USD 145.53 mln)
Financial Express

Releasing pay-in obligations of 39 clients through 24 members, NSEL said Ahmedabad-based NK Proteins is the biggest defaulter with net dues of Rs 969.89 crore (USD 145.51 mln) at members level.

The net outstanding includes dues to the tune of Rs 419.30 crore (USD 62.91 mln) to its clients Darshan Baldevbhai Patel and Rs 634.24 crore (USD 95.15 mln) to Tirupati Retail (India). The exchange today announced client-wise pay-in obligations of 39 clients through 24 buyer members.

Among other members, Shree Radhey Trading has net outstanding of Rs 34.64 crore (USD 5.19 mln), PD Agroprocessors Rs 637.55 crore (USD 95.65 mln), Swastik Overseas Rs 100.88 crore (USD 15.13 mln), Aastha Minmet India Rs 23.87 crore (USD 3.58 mln), Namdhari Food International Rs 51.07 crore (USD 7.66 mln), Whitewater Foods Rs 84.87 crore (USD 12.73 mln), ARK Imports 719.42 crore (USD 107.93 mln), Vimladevi Agrotech Rs 14.02 crore (USD 2.1 mln), Namdhari Rice and General Mills Rs 10.45 crore (USD 1.56 mln), the release said.

Other players, including Lotus Refineries, has the net outstanding of Rs 252.56 crore (USD 37.89 mln), NCS Sugars Rs 58.85 crore (USD 8.82 mln), MSR Food Processing Rs 9.15 crore (USD 1.37 mln), Sankhya Investments Rs 6.61 crore (USD 991k), Yathuri Associates Rs 424.64 crore (USD 63.71 mln), LOIL Overseas Foods Rs 85.19 crore (USD 12.78 mln), LOIL Continental Food Rs 338.40 crore (USD 50.77 mln), LOIL Health Foods Rs 287.48 crore (USD 43.13 mln), Mohan India Rs 575.08 crore (USD 86.28 mln), Spin Cot Textiles RS 38.26 crore (USD 5.74 mln), Topworth Steels & Power Rs 159.96 crore (USD 24 mln), Metkore Alloys & Industries Rs 98.08 crore(USD 14.71 mln), Tavishi Enterprises Rs 333.01 crore (USD 49.96 mln) and Juggernaut Projects Rs 219.20 crore (USD 32.88 mln), the statement said.

Meanwhile, the exchange said it has collected only Rs 80 lakh (USD 120k) today from its members and clients against the third scheduled payout of Rs 174.72 crore (USD 26.21 mln), due on September 4.

NSEL Gathers Rs 17 lakh (USD 25.5 k) On Second Day For Third Payout
The Economic Times

NSEL could collect only Rs 17 lakh (USD 25.5 k) today from its members and clients against the third scheduled payout of Rs 174.72 crore (USD 26.21 mln) which is due on September 4.

Manage Risk Better: Commex Investors
Business Standard

Amid the payment crisis at NSEL, institutional investors in commodity exchanges are demanding an improvement in risk- and collateral-management practices at these bourses.

NSEL Investors Urge Sebi Not To Renew MCX-SX Licence
Business Standard

NSEL Investors Forum has urged Sebi not to renew MCX-SX’s licence, which is due in September, because NSEL promoter FTI is also the promoter of MCX-SX.

PLY: While I can understand the frustrations of the NSEL Investors Forum, I really do not remotely follow why rescinding a licence and hence inflicting damage on FTI financially will help anybody get their money back. Surely much better to force a sale of the exchange to clear up liabilities? Moreover, this forum’s increasingly strident tone when they appear to represent a rather wealthy group of investors, risks damaging their rightful claims. After all NSEL may have run the platform but it was not, so far as we are aware, forcing these clients to take broker loans to trade on NSEL.

The Reign Of Bureaucrats
Business Standard

FTI has over the years become a refuge for many ex-bureaucrats and former regulators.

It was a win-win as the group, whose exchange businesses were highly susceptible to policy changes gained by the understanding and connections of the babus while the babus themselves got an opportunity to put their retirement years to good use.

PLY…but the bump in the carpet was that it allowed Jignesh Shah to remain relatively aloof from any problems or bad news as a group of supplicant placement managers were not in a position to stand up to the group founder…

Products

NCDEX Re-Launches Gold, Silver Futures
The Hindu Business Line

Days after slashing transaction charges, the Indian NCDEX has re-launched the gold and silver futures with additional delivery centres to boost volume.

The exchange has aligned the expiry date of the new gold contracts to that of currency futures, unlike MCX which tracks COMEX (NYMEX).

The exchange also plans to re-launch its steel contract with quality specification from the Bureau of Indian Standard.

Thai Bourse Lowers Minimum Volume For Block Trade, Effective September 2

The Thailand Futures Exchange (TFEX), division of SET, has decreased the minimum size required for block trade transaction of high notional-valued contracts, effective from September 2, 2013.

Indexes

Eurex Launches Incentive Scheme To Mark Three Years Of Eurex/KRX Link
hedgeweek

To mark the third anniversary of the Eurex/KRX Link, Eurex is waiving trading fees for the Eurex KOSPI Product for the month of September.

Euronext Portuguese PSI 20: New Rules In 2014

More free float from Euronext in Portugal and indeed Amsterdam:

AEX Selection To Be Based On Free Float Market Cap

The AEX-Index® family will change from turnover to free float adjusted market capitalization ranking.

Career Paths

Following our scoop yesterday, the excellent (and as I can see from my inbox: deservedly popular!) Mark Ibbotson is already contemplating a few days at the late season cricket and how best to approach the garden.

Meanwhile Finbarr Hutcheson is CEO of LIFFE, at least until ICE take over etc etc.

Press release here.

The leading candidate to be the next CEO of the Tel Aviv Stock Exchange is rumoured to be Gili Cohen, the former chief investment officer at Excellence Nessuah Investment House and a member of Harel Insurance Investments & Financial Services’ investment committee.

Financial Calendar

Today:

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

Monday:

Labor Day
ASX ex-dividend date for AUD 82.3 cents full-year final dividend for the year ended 30 June 2013
Record date NZX for NZD 1.25 Q2 dividend

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

Analyst Notes

Hedge Funds Aren’t Crazy About NASDAQ Anymore
Insider Monkey

At the end of the second quarter, a total of 18 of the hedge funds we track were bullish in this stock, a change of -14% from the previous quarter. With hedge funds’ sentiment swirling, there exists an “upper tier” of noteworthy hedge fund managers who were boosting their stakes meaningfully.

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

U.S. Futures Regulator NFA Comes Under Fire From Within
Reuters

A U.S. futures industry regulator is falling short in its attempt to keep tabs on brokers and asset managers, more than a year after the collapse of one brokerage under its oversight that cost clients hundreds of millions of dollars, according to one of the regulator’s directors.

Attain Futures CEO Jeff Malec, elected to the National Futures Association (NFA) board of directors earlier this year, told brokers in an email this month that the regulator “isn’t doing all that it could” to protect futures traders and urged them to complain about it.

Following The Bitcoin Trail
The Economist

ONE of the advantages of Bitcoin—a cryptographic currency popular on the internet—is its anonymity.

PLY: Another good Economist feature pointing out how data trails exist as surely as footprints do and that therefore your anonymity remains only as good as your ability to, well hold only Bitcoins and do nothing with them, while having created them through processing and not buying the cryptocurrency.

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