February 17 2015


Do auctions work? Study suggests LSE open may not be optimal. Meanwhile Fidessa profits slip as the task of maintaining a modern wrapper on legacy systems looks increasingly Sisyphean for big old vendors.

As a sensible New York councillor proposes accepting Bitcoin to save on municipal transaction costs, Chicago councillors flirt with economic suicide and gifting the world’s derivatives markets to, well, anywhere but the windy city. GMEX gets a new investor, alongside updates on metal warehouses, Indian CTT and post OTC markets et al…

Elsewhere in the outside world, the mad, bad and dangerous to know club also referred to as the Eurozone is lurching into the next stage to meltdown as the looney left meets the looney blob in what amounts to a head on splat of 360 degree economic illiteracy driven by short term political expediency meeting the Kickcanistan mentality of dismal government, poor regulation and ghastly oversight all round.

“Cheer up, the worst is yet to come” as Philander Chase Johnson once memorably intoned.

Meanwhile, our Premium service, has new Premium Briefs to remind you of various issues in the industry (updated daily) when news arises. All briefs can be found on our dedicated Briefs page via Exchange Invest Premium.

Latest briefs include:

Bulgarian SE Sale Brief
ICE – SMX Deal Brief
DFM – ADX Merger Brief
BATS – Direct Edge Merger Brief
HKEx – SZSE Stock Connect
HKEx – SSE – Stock Connect Brief Part 1, Part 2 and Part 3
IEX India Sale
Virtu Financial IPO

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Public Markets

NZX 2014 Full Year Financial Results

Operating revenue $65.2 mln, up 3.8%
EBITDAF $24.6 mln, down 4.7%
NPAT $13.1 mln, up 8.3%
Fully diluted EPS 5.1c

PLY: Not the most spectacular set of results from NZX of late but their recent progress has been remarkable overall.

Fidessa Preliminary Results FY 2014

Revenue GBP 275 mln, down 1%
Operating profit GBP 38.8 mln, down 10%
Diluted EPS 75.8p, down 6%

PLY: Legacy vendors have a struggle ahead as realisation bites that innovation actually applies acutely to their aging systems.. That massive fintech boom being funded by banks might look like a bubble in some folks’ eyes (and it may be so!) but it also resembles not so much a bullet, more an entire armoury of lethal ordnance all inscribed with the names of legacy vendors such as Fidessa, Sungard et al. They will doubtless survive (unless they really get it horribly wrong) but will need a lot of surgery and swift management (er, “agile” management as opposed to “SWIFT” management) to avoid the next decade of relentless bombardment from the upstarts.

Soc Gen Acquires Stake In GMEX Group
GMEX Group

Following the investment by DB1, Soc Gen becomes the second minority investor in GMEX Group and plans to provide execution and clearing services for clients trading on the exchange.

PLY: A big fillip for Hirander Misra and GMEX not merely from the investment cash perspective but also the endorsement of a big bank broker arm.

Effectiveness Of LSE Opening Auction Questioned (subscription)
Philip Stafford – Financial Times

The opening auction for FTSE 350 stocks on the London SE (LSE) regularly fails to set prices for more than 80% of the index, throwing into question its use, a new academic paper has argued.

A 12-month study of trades in the largest listed companies in London by the University of Edinburgh Business School found that the 10-minute auction, used before the market opens to help traders come to an agreement on an opening stock price, was almost entirely ineffective. Only in the last 60 seconds of the window was significant activity observed, it said.

PLY: Interesting. Last week at the e-Finance Lab Frankfurt event (aka Gomberfest), an LSE rep was somewhat eager to refute the notion* that their planned lunchtime auction was aimed at BATS Europe during its most liquid period pre-US open incidentally. I am not sure the audience were convinced.

*Incidentally, a notion explicitly floated by one Patrick L Young, having been raised more circumspectly by others.

TSX Warns On Retail Flow To US Markets (subscription)
Anna Nicolaou – Financial Times

The new head of Canada’s largest stock market has warned that the US practice of stockbrokers paying for order flow is “a major issue” for Canada and called for greater freedom to let local market participants compete.

Canadian brokers have begun sending retail trade orders south to large US market makers, known as wholesalers, in part to avoid fees charged by public stock exchanges. These wholesalers, the largest of which are electronic market makers such as Citadel and KCG, often pay stockbrokers to win their trading business.

About half of Canadian retail trade flow is now diverted to the US, according to TMX, operator of TSX. If left unchecked this could be a “serious problem” for Canada’s capital markets, says Lou Eccleston, TMX CEO.

In the US payment for order flow is legal, albeit contentious, but in Canada it is forbidden.

PLY: …and I can only hope that the USA will soon adopt the sensible approach and outlaw this egregious practice which runs contrary to best execution imho.

The “La Salle Street Tax” Fairy Tale
Chicago Sun Times

Like Tinkerbells with pixie dust, dozens of candidates for alderman keep trying to spread a complete fantasy: a “La Salle Street tax” would solve all or much of Chicago’s massive financial problems.

Don’t believe it. Chicago needs solutions, not fairy tales.

PLY: It’s always interesting how the hearts of New York and Chicago beat with a capitalist heart feeding a leftist city which then funds the feckless and reckless sector also known as local government (in the case of Chicago it hasn’t even funded the pensions of said council staff). The windy city FTT movement makes for an intriguing murder-suicide plot fuelled by a union bloc with Syrza-like tendencies (and equivalent economic illiteracy). After all that hard work making the CME-centric ‘loop’ the heart of a global empire and the envy of the derivatives world, a city of outrageously incompetent public services could yet gift advantage to the rest of the world’s markets (including those in relatively enlightened Democratic mayoralties like New York or Atlanta…).

One alternative: after closing the pits and perhaps hanging a Boeing from the ceiling of 141 West Jackson (qv an FT letter by yours truly years ago), CME can just decamp to Europe…and presumably ponder its Asian marketplace in order to avoid the growth suicide pact which is the Eurozone.

Anyway, as a plan to raze the loop and turn it into expensive grazing land for those traditionally deep ex-urban moo-things, there is no better suggestion than an FTT whether large or small.

CFTC To Propose Swaps Anonymity (subscription)
Katy Burne – Wall Street Journal

U.S. regulators are poised to introduce measures that would ensure anonymity for traders in the $700 trillion market for swaps, said people familiar with the discussions, a flip-flop that would hand a victory to hedge funds and speedy trading firms while dealing a blow to banks.

Will Investors Warm To A Shenzhen Connect? (subscription)
Gregor Stuart Hunter – Wall Street Journal

The tepid performance of a trading link between Shanghai and Hong Kong may make investors think twice about getting excited about adding new connections – notably to Shenzhen, China’s third stock exchange.

Despite marking the biggest opening of China’s equity markets under Communist rule to date, Shanghai-Hong Kong Stock Connect has failed to live up to the hype, fund managers said.

PLY: Given ‘through train’ is on track to break its quota in the near future, I would love to see how the Hong Kong media benchmark this project as a near failure…

Read our Premium briefs: HKEx – SZSE Stock Connect and HKEx – SSE – Stock Connect Brief Part 1, Part 2 and Part 3.

LME Warehousing; Overdue Reform Or Regulatory Over-Reach?
Andy Home – Reuters

The most controversial part of the exchange’s proposed overhaul of its warehousing system is an extension of its regulatory reach into the twilight zone between financial and physical markets. LME’s consultation period on its proposed reforms has just closed. There will almost certainly have been push-back from warehouse operators.

PLY: While not a fan of more regulation for regulation’s sake, it strikes me that the simple truth is that markets work with liquidity, flexibility and openness. Having a system where getting your metals out or in to the warehouse involves a crypto-protectionist system of which the Teamsters Union in their prime would have been proud, suggests to me there is little choice but to downstream regulation to cover warehouses better…

Romanian Clearing House – Reduction Of Share Capital (Romanian version)

Sibex, the Romanian derivatives exchange, as a holder of a 41.194% stake in Romanian Clearing House (RCH), announced that on Feb 16th 2015 the EGM of RCH decided the reduction of the share capital of the company with the amount of Lei 9.73 mln (USD 2.5 mln), from Lei 10.81 mln (USD 2.77) to Lei 1.08 mln (USD 0.27 mln). The cash is to be distributed to the shareholders.

PLY: A first step in the ongoing lingering death of the SIBEX exchange. SIBEX Management, bereft of ability to run the business with any vision will close the clearing house as everything is being outsourced to Hellenic Exchanges, albeit that the volume has been allowed to dwindle to essentially zero. A sad development but it ought to come as no surprise to readers of Exchange Invest.

Private Markets

BTER Claims $1.75 Million In Bitcoin Stolen In Cold Wallet Hack
Stan Higgins – CoinDesk

China-based Digital currency exchange BTER announced that it has lost 7,170 bitcoins, or roughly $1.75 million at press time, in an apparent hack on its cold wallet system.

Earlier this month, MyCoin, a Hong Kong-based bitcoin trading company, was closed, leaving as many as 3,000 local investors with combined losses of HK$3 billion (USD 387 mln).

PLY: Subtle difference: BTER seems to have been hacked. MyCoin looks to have been a classic ponzi scheme wrapped up in new, digital, garments. That said a cold wallet hack is clearly worrying.

New York Councilman: Bitcoin Could Save City Millions
Pete Rizzo – CoinDesk

New York City councilman Mark Levine introduced a bill petitioning for the city to accept bitcoin as payment for fines and fees.

PLY: Hooray, the blob has a living, breathing advocate of change and the future in its midst.

Dividend News

NZX final 2014 dividend of 3.0 cents to be paid on 27 March 2015 for holdings as at 13 March 2015.

Fidessa final dividend, if approved by shareholders, will be 25.0p and payable on 12th June 2015 to shareholders on the register on 15th May 2015. In addition, a special dividend of 45.0p is proposed and, if approved, will be paid at the same time as the final dividend.

Special Section: FTI, NSEL, India at the Crossroads

All markets closed on February 17 on account of Maha Shivratri festival.


Technical Failure Delays Trading In Futures, Options On Eurex
John Detrixhe – Bloomberg

PLY: EUREX opening delayed due to technical problems with T7 which last had an issue in late October.

JSC Of Bulgaria, Macedonia, Zagreb Stock Exchanges Seeks Contractor For Electronic System

SEE Link, a joint stock company established by the Bulgarian, Macedonian and Zagreb stock exchanges, is seeking a contractor to establish an electronic system for order routing. Companies based in any of the three countries may take part in the tendering procedure with a submission deadline of April 1, 2015.

In July 2014, EBRD provided a grant to SEE Link for the introduction of the electronic system.

In end-October 2014, the company published a tender notice specifying the projected value of EUR 250 000 of the online platform.

PLY: In their domestic markets, Bulgaria uses Xetra while Zagreb and Macedonia are on homebuilt systems so far as I recall. Given the tender is restricted to domestically based to companies based in one of the three countries, the current in-house systems would appear to have an advantage for supplying the system.


Nasdaq Mulls European Equities Derivatives Expansion (subscription)
Anna Irrera – Financial News

Nasdaq is thinking about expanding its equities derivatives franchise across Europe, following the success of its Dutch equities options platform, The Order Machine.

PLY: It makes innate sense for NASDAQ to exercize their option in TOM to expand control forthwith and kill off the entirely nebulous NLX which has achieved nothing despite costing a fortune with only a potentially toxic legacy, having created at best a suggestion that NASDAQ doesn’t know its butterflies from its elbow and at worst, has left a potential liability trail which may yet come back to bite the group. TOM on the other hand, is an excellent franchise and a good business – it deserves to be expanded and various normal workaday staff at NLX could help market the service, leaving the empty core of the failed futures MTF to be euthanised – and deliver a handy saving to the NASDAQ coffers.

Pressure Builds To Move More FX Trading Onto Exchanges
Patrick Graham & Jamie McGeever – Reuters

International regulators struggling to rein in the $5 trillion-a-day global fx market are finally finding some support from asset managers warming to the idea of moving more trading onto exchanges.

PLY: Absolutely, totally and completely… Ironically, I worked on a plan to this effect (cash forex) some years back but it was clearly just too early. The pure on-exchange forex segment looks exciting and is a much better prospect in the short-medium term than the already over-serviced Bond market. This story is a little interwoven and unclear about how derivatives are all of excitement to the exchanges but not necessarily the cash market per se.

Read our Premium posts: CHF Forex Fiasco Strike One: MacroEconomic and CHF Forex Fiasco Strike Two: Market Infrastructure.

More Commodities Exempted From CTT
Business Standard

The Indian finance ministry has expanded a list of commodities exempted from CTT. Now, the list includes rice, dals made from pulses such as tur and urad, onions and various spices.

PLY: Good, hopefully the list can be expanded to become comprehensive and hence render the CTT de facto extinct.

Zambia To Adopt OTC Derivative Rules
Nkole Mulambia – Daily Mail Zambia

Bonds and Derivatives Exchange (BADEx) plans to engage financial markets in Zambia this year to adopt the Group of Twenty (G20) commitment on OTC derivatives in line with international developments.

Career Paths

Waters Technology reports that Interactive Data has hired ex-Thomson Reuters sales manager Gary Broadhurst as senior sales specialist responsible for sales within the vendor’s Trading Solutions business. Prior to joining Interactive Data, Broadhurst worked briefly at Lloyds Bank, following a twenty-year period at Thomson Reuters.

Financial Calendar

This week

SEC Advisory Committee on Small and Emerging Companies – public meeting by conference telephone call
ESMA open hearing in Paris on the issues set out in its Consultation Paper on MiFID II/MiFIR published in December 2014
SEC roundtable to explore ways to improve the proxy voting process – see agenda here.
Record date TMX $0.40 dividend

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

Analyst Notes

Argus Upped Their Price Objective On ICE From $240.00 To $262.00 – “Buy” Rating

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.


Monetary Authority Of Singapore Sets Out Proposals For Securities-Based Crowdfunding

Other stories

ESMA Publishes Annual Report & Supervisory Focus For CRAs & TRs

ESMA has published an annual Report on its direct supervisory activities in 2014 regarding credit rating agencies (CRAs) and trade repositories (TR). The report summarises the key actions taken during 2014 and outlines ESMA’s supervisory work plans for both sectors for 2015.

Gaming In Futures Market Suggests Model Could Be Improved – CMCRC

Research from the Capital Markets Cooperative Research Centre (CMCRC) has found that changes to the matching algorithm used in futures markets leads to new strategic behavior by traders.

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