December 02 2014


Collapsing oil prices and a tumbling Ruble are grabbing the mainstream headlines & helped keep me occupied on the airwaves yesterday while the market infrastructure parish may not have a lot of headline news but an ongoing issue continues to bubble up beneath the surface:

NLX, that infamous carbuncle on the face of our much loved friend, derivatives platforms, has apparently been encountering more rough sea of late. We led the story in June while all around the conventional media were writing ludicrously gushing tributes which were presumably unrelated to any corporate largesse flowing from NLX itself. The remarkable tributes piqued my interest and as you will recall, led to multiple questions in “The Butterfly Effect.

None of these original questions have ever been addressed by NLX which only multiplied my concerns.

(Follow ups on our Premium service include: NLX: Big Data: Easy to Find?, NLX: Missed Opportunity, NLX: Measuring Up the Coffin?, NLX: Plus Ca Change? while in the free daily the story was first broken by us as follows: June 2nd and June 3rd).

The problem with the NLX MTF centres around a preponderance of butterfly trades (conservatively amounting to 90% of all NLX volume by our rough calculation). The butterflies appear to have no economic value and imho amount to a form of market abuse: If a trade has no economic value, how can it be in any way beneficial (apart from for those who do it in order to get paid by NLX as part of their incentive scheme)?

My worry is how long this problem has festered despite clear and understandable rage amongst incumbent exchanges and counterparties throughout the world that they are judged by higher regulatory values than appear to have been applied to NLX.

Now, we sit at an interesting threshold. The FCA has been more pro active of late and is finally apparently more concerned about these schemes. Meanwhile, in a move which demonstrates a doubling down of even the most remarkable hubris that has surrounded NLX, the London-based MTF is apparently now warning market makers not to engage in market abuse!

In summary:

NLX is not a viable market. It has been a longstanding process of transferring (some use the more blunt and somewhat emotive term, “laundering”) parent shareholder funds to market makers & proprietary traders who have profited by using butterfly trades with what must surely be regarded as the clear acquiescence of management.

NLX has apparently now warned market makers not to engage in market abuse yet NLX has been entirely complicit (one might even suggest, pro-active) in establishing, developing and permitting (some might even argue: endorsing – at least until a possible recent volte face) an ongoing process of entirely non-economic trades which, as I say, strikes me as amounting to months of artificial volume stimulated by incentives and nothing else.

A quick chat with Uncle Google reveals this from UK regulator FCA:

“The following behaviours are, in the opinion of the FCA, market abuse (manipulating transactions) of a type involving false or misleading impressions:
(1) buying or selling qualifying investments at the close of the market with the effect of misleading investors who act on the basis of closing prices, other than for legitimate reasons; [Note: Article 1.2(c) Market Abuse Directive]

(2) wash trades – that is, a sale or purchase of a qualifying investment where there is no change in beneficial interest or market risk, or where the transfer of beneficial interest or market risk is only between parties acting in concert or collusion, other than for legitimate reasons;

Given that NLX has been a series of time dependent non-economic trades in immobile (aka riskless) instruments, deploying butterflies (which I fear may not be fully understood by some of the cash market folk predominant within group management and NLX itself)…it is, to me anyway, a challenge to regard the above FCA data (which is inherently similar to that in the US and elsewhere) as in some way, shape or form, reflecting the MTF practices which NLX has encouraged through incentive schemes and apparently shown no previous inclination to preclude, despite the topic being broadly discussed in the derivatives mainstream, particularly once Exchange Invest brought it to public attention in June.

Markets are built on credibility and trust. Markets need to be properly regulated. Markets also MUST demonstrate an economic benefit – that is what we have been pushing in the derivatives world for decades and which has been the watchword of derivatives industry leaders throughout that period. I am simply unable to see what NLX is doing other than potentially sullying the reputation of the industry while simultaneously depreciating shareholder value. True, if shareholders want to spend a nickel a quarter of earnings on subsidising NLX, that is their business and capitalism enables them to do so BUT what is not acceptable is to have a market which does not deliver economic benefit and is being run in a fashion which I am not alone in feeling, has run contrary to regulatory principles applying in the UK, the EU, as well as across the Atlantic and indeed pretty much throughout the world.

Competition is a wonderful thing and I support it. However, I don’t support bank robbers as a viable alternative to those lousy legacy service providers for a simple and civilised, reason. Likewise, I think the mantra of competition has in and of itself been challenged by this sorry episode in MTF/exchange history. We need competitive markets but creating a smokescreen around clearing access must surely never be allowed to permit any market to create a chimera of liquidity driven by non-economic activity. Yet, to myself and I know many readers, NLX feels suspiciously like it adheres to the latter as opposed to being a viable competitor.

I am entirely unable to see why an MTF which appears to have been hovering precariously close to outright endorsement of market abuse for months on end is of any benefit to our industry.

Moreover, as NLX now is warning its market makers not to engage in market abuse, it is difficult to see how any of them can viably risk carrying on as before – thus we reach an impasse:

a> volume continues on NLX as before but even NLX now recognises the risk that this is tantamount to market abuse;

b> there is no volume on NLX whatsoever (as opposed to the flap of butterfly wash which has been pretty much the only ‘business’ ever to grace NLX).

My natural predisposition is never to close a market but to seek every angle to repurpose any venture. However, as of right now, I sincerely cannot see any reason to retain this MTF as a part of a credible market framework, serving the industry in the UK or elsewhere.

It’s time to close NLX.

Public Markets

Symphony Buys Chat Service (subscription)
Justin Baer – Wall Street Journal

An instant-messaging software company that has drawn investments from Goldman Sachs and other big banks signed a deal to buy a chat business from a potential rival.

Symphony Communication Services LLC acquired an arm of Markit Ltd.

EEX: Competition Authorities Approve Sale Of Shares In Gaspoint Nordic

Danish as well as German competition authorities have now approved’s sale of half its shares in Gaspoint Nordic to EEX.

CME Europe Expands Trading Incentive Scheme (subscription)
Philip Georgiadis & Tim Cave – Financial News

CME Europe has extended an incentive scheme designed to encourage trading in the fledgling bourse’s FX contracts, doubling the scheme’s bonus pool and the number of firms that can benefit from it.

This so-called “short-term liquidity creation scheme” offered a monthly bonus pool of $50,000 to a group of six member firms which could demonstrate their ability to actively promote liquidity, according to trading notices.

PLY: I think the industry will have to spend a lot of time studying incentive schemes going forward. I am absolutely in favour of their existence but the NLX affair has lit the fuse leading to an explosive situation which could yet implode in the regulator’s faces in a fashion which may be arguably more damaging than even the many fixing fiascos elsewhere within the market infrastructure parish.

Nasdaq Dubai Islamic Trading Platform Plans Expansion
Times of Oman

Nasdaq Dubai, which lists about $21 billion of sukuk, plans to expand an Islamic trading platform as the Gulf emirate takes another step in its drive to become capital of the global Sharia-compliant economy.

DTCC Expands Global Derivatives Trade Reporting Footprint With Canadian Launch

…launches Global Trade Repository in Canada – 7th jurisdiction where DTCC is enabling financial firms to meet new regulatory mandates requiring the reporting of OTC derivatives transactions.

Private Markets

BSE Doubles Spending To Improve Corporate Disclosures
Santanu Chakraborty – Livemint

BSE plans to double its compliance budget to ensure companies disclose market-moving information to investors.

PLY: Good move.

NSE Wants Investors’ Tip-Off On Stock Market Rigging

NSE has created a special section on its website for this purpose, which the exchange said “intends to invite information and tips on violations/ manipulations that may adversely affect the market quality and integrity”.

PLY Probably a good move but I fear it will be mostly folks complaining that they got a tip and it didn’t work out – as after all, previous academic research has proven most insider trading tips lose money… However better to try than not methinks.

SEC Sees Local GMS Gateway
Nuntawun Polkuamdee – Bangkok Post

Thai SEC is thinking of pushing the Thai capital market as a gateway for investment in frontier bourses of the Greater Mekong Subregion (GMS) to reinforce its competitiveness in Asean.

Previous discussions on SET expanding collaboration with the GMS exchanges here.

African SE Plans Pan-African Data Centre Network
Banking Technology – Elliott Holley

A pan-African vision has inspired the African SE which has ambitious plans to tap the potential of the continent using hosted technology and a secure base in Mauritius.

PLY: You know I am still scratching my head as to why anybody wanted to pay hard cash for Bourse Africa last week… I just don’t get what was worth $40.5 million.

Special Section: FTI, NSEL, India at the Crossroads

PLY: FTIL up 2% while MCX is flat. No other news.


DB1 Updates Xetra Trading System

DB1 introduced a further-developed version of its electronic trading system on Monday. Xetra Release 15.0, offers new risk management functions.


LCH.Clearnet Converts Cleared OTC Commodities Derivatives To Futures
Commodities Now

LCH.Clearnet has classified its cleared OTC commodities derivatives contracts as Block Futures.

Baltex and Cleartrade Exchange (CLTX), both regulated trading venues, will be the first platforms to register dry bulk FFA trades. CLTX will also process iron ore, steel, coal, fertiliser and container trades.

PLY: Good stuff and further encouragement for CLTX and indeed the often forgotten Baltex. With lower fuel prices, FFA rates may be volatile for a bit depending on just how this shores up demand for transport in a fascinating segment which is relatively untouched by transparent centralised markets despite the pure commoditization of containerisation itself…here is CLTX’s take:

CLTX Selected For All LCH.Clearnet Commodity Future Trades
Mike Fox – LeapRate

CLTX announced that it will provide trade registration and execution services for the full suite of LCH.Clearnet Ltd (LCH) EnClear futures contracts. CLTX will be the only exchange to offer futures and options contracts on Freight, Fertilizer, Iron Ore, Steel, Coal and Container Freight for clearing at LCH.

Earlier this month, EI reported that EEX is planning to offer trade registration for 11 dry bulk freight contracts listed on CLTX. EEX bought a 52% stake in CLTX in January 2014.

EEX Takes Over Trading Of Agricultural Derivatives Products From Eurex – Migration Of Open Positions Planned In May 2015

EEX plans to offer trading in Agricultural Index Futures contracts as of May 2015, the introduction is subject to the EEX Exchange Council’s approval. At present, these products are listed at Eurex.

PLY: The Hannover WTB exchange was subsumed by EUREX in a sort of shotgun marriage (the regulators wielding the firearms) in a deal I was sorry to miss but negotiating with the WTB shareholders was tad challenging. Now the commodities are being squeezed out of EUREX into EEX which with its CLTX holding and better sensitivity to niche products ought to be at the right scale to help German hogs, potatoes et al.

ISE Offers Discount Of 33% On LEI Bulk Orders Of 10 Or More Codes

The cost of buying 10 or more new legal entity identifiers (LEIs) through the Irish SE (ISE) is now reduced to €120 per LEI on This price reduction represents a discount of 33% on the regular price of €180.

PLY: Clearly the world’s most obscure cyberMonday deal but on top of recent clearing discounts, ISE is working hard to add value for shareholders and clients alike.

Deutsche Bank & BayernLB Execute First OTC Trades On Bloomberg To Clear At Eurex Clearing

Deutsche Bank and BayernLB have executed the first trades on Bloomberg to be cleared via EurexOTC Clear for IRS.

PLY: EUREX has been remarkably muted in terms of announcements of clearing recently and this amounts to some form of breakthrough trade, at least suggesting German institutions are endorsing the now Frankfurt domiciled CCP.


BM&FBOVESPA: Start Of Trading Of BB ETF S&P Dividendos Brasil Fundo De Índice

Career Paths

The Supervisory Board of DB1 reappointed Ms Hauke Stars, a member of the DB1 Executive Board, for five years with effect from 1 December 2015.

DB1 press release here.

FT reports that Stephen O’Connor has stepped down as full-time chairman of ISDA, after just 18 months. He will be replaced by ISDA vice-chairman Eric Litvack, who will combine the position with his existing role at Société Générale as MD and head of regulatory strategy for the group’s Global Banking and Investor Solutions business. The changeover will take place on January 1.

Bolsa Mexicana de Valores informs that it appointed Jaime Ruiz Sacristán as Chairman of the BoD starting January 1, 2015, for a period of 2 years with a possible renewal for another period with the same time extension.

The members of the Board of Directors were designated and ratified as it follows:

Constitutional Members


Jaime Ruíz Sacristán
Luis Robles Miaja
Marcos Ramírez Miguel
Ernesto Ortega Arellano
Eduardo Cepeda Fernández
Gonzalo Arturo Rojas Ramos
Carlos Bremer Gutiérrez

Alternate Directors

Alonso García Tamés
Rafael MacGregor Anciola
Carlos Hank González
Tomás Christian Ehrenberg Aldford
Marcos Martínez Gavica
Diego Ramos González de Castilla
Edgardo Mauricio Cantú Delgado

Independent Advisors


Francisco Gil Díaz
Alfonso González Migoya
Ricardo Gutiérrez Muñoz
Alberto Navarro Rodríguez
John Pietrowicz
Fernando Ruíz Sacristán
Alberto Torrado Martínez
Claudio X. González Laporte

Alternate Directors

José Luis Guerrero Álvarez

Waters Technology reports that Michael McCrea, a former senior data executive at TMX, joined data audit and contract compliance firm JCV Investment Systems on Dec. 1 as EVP, to aid JCV’s efforts to help exchanges and content providers protect their intellectual property rights.

Financial Calendar

This week

Record date Interactive Brokers Q3 $0.10 dividend
TMX $0.40 Q4 dividend payment
Record date LSEG 9.7 pence interim dividend

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

Analyst Notes

ICE Was Upgraded By Zacks From “Neutral” To “Outperform” – $265.00 Target Price
Zacks Reaffirmed Their “Neutral” Rating On Charles Schwab – $30.00 Price Target

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.


Lending Club Seeks Up To $692 Million In I.P.O.
Michael J. De La Merced – CNBC

The company disclosed in an amended prospectus on Monday that it planned to price its stock sale at $10 to $12 a share, potentially raising up to $692.4 million. At the midpoint of that range, it would be valued at about $4 billion.

UK P2P Lender Targets Australian Businesses
James Eyers – AFR

UK-based “peer-to-business” lender ThinCats will begin offering loans to Australian small businesses via its web-based platform this week, after wholesale and sophisticated investors were brought onto the site last week. The arrival of ThinCats comes as a new equity crowdfunder, Equitise, expects to facilitate its first capital raisings in New Zealand next week after being awarded a license by the NZ Financial Markets Authority.

Wall Street Helping Marketplace Lenders Raise Money

According to a December 1st report from Rafferty Capital Markets, around 40 different financial institutions are providing money to well-known names such as the Lending Club, Prosper and Social Finance and many others being formed or in operation already.

Richard X Bove of Rafferty Capital highlights that financial institutions have already committed an estimated $9 billion dollars to marketplace lenders in 2014 – the figure comes amid news that Lending Club is raising up to $700 million in an IPO.

Other stories

FCA Takes A Good Look At MTFs, Enforces Rule Book

Britain’s FCA has undertaken a thematic review of MTF operators‘ rule books, reiterating that the FCA expects all MTF operators to be able to demonstrate that they have considered the Good Practice Observations when determining their approach to compliance with MAR 5.

PLY: QV The opening comments today.

CFTC To Reopen Comment Period For Position Limit Rulemaking

CFTC submitted to the Federal Register a notice reopening the comment period for Position Limit Rulemaking. The notice will appear in the Federal Register on Wednesday, Dec. 3.

Statement Of CFTC Commissioner Sharon Y. Bowen Regarding The CFTC’s Reopening The Comment Period For Position Limits Rulemaking

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