January 17 2014


EU11 FTT may exclude derivatives, Schwab income jumps, Warsaw expounds myopic strategy, EU to ban bank prop trading? Singapore in vogue, Shanghai OTC clearing open, CFTC certifies Javelin MAT, Aequitas tweaks launch plans, former IT director seeks to wind up HKMEX, Caixa Bank sells BME stake.

An interesting Friday after a busy week, welcome to today’s Exchange Invest, happy scrolling:

Public Markets

Schwab Reports Q4 Net Income Up 51% YOY
Charles Schwab

Charles Schwab announced $319 million net income for Q4 2013, up 10% from $290 million in Q3 2013, & up 51% from $211 million for Q4 2012.

Net income for calendar year 2013 was $1.1 billion, up 15% from the year-earlier period.

The company’s 2012 financial results include a pre-tax gain of $70 million, or $44 million after-tax, relating to the resolution of a vendor dispute and a non-recurring state tax benefit of $20 million.

PLY: Essentially encouraging numbers which reflect the Dow’s progress, gradual upswing without huge volume spurts.

ICE Benchmark Administration To Become New Administrator Of LIBOR On February 1, 2014

ICE has been confirmed as the new administrator of LIBOR from February 1.

PLY: As expected, here’s to a fairer, better respected benchmark.

Warsaw Eyes Creation Of Regional Stock Exchange Giant (subscription)
Wall Street Journal

WSE Thursday spoke about its growth strategy for 2014-2020, with the bourse targeting partnerships and acquisitions to expand in CEE and diversify the revenue base. One crucial part of that: a potential merger with the Vienna SE, with CEO Adam Maciejewski hoping a deal can be completed this year.

The merger was tabled last April and talks are progressing quite well, Mr. Maciejewski said in an interview with sister title Financial News. “We are now waiting for the green light from our shareholders to start the second phase of the deal, which we expect quite soon. The second phase will include due diligence. I hope that we can reach an agreement this year.

PLY: The utter failure of vision at WSE is a tragedy. Presumably fuelled by the government’s desire for perverted political glory over shareholder value, the advantages of incremental expansion remain vastly better than this cack-handed empire building which destroys shareholder value. Private shareholders really ought to demonstrate coherent opposition to the government on this one, even though the skewed anti-free market system of the government’s minority (but voting dominant) stake will be the casting vote to opt for what will mark a relative decline in the fortunes of the exchange. A myopic tragedy unfolds just when the New Europe needed markets to focus on their growth, not ego-driven mergers which will prove difficult to integrate.

Derivatives May Escape Euro Zone Transaction Tax: Document

The “bogeymen” of derivatives and securitised debt, blamed for deepening the financial crisis, may escape a new euro zone transactions tax as policymakers fear harming funding for companies and the economy.

The document prepared for the two-day meeting shows the scale of exemptions on the table as countries are increasingly anxious not to crimp funding to companies or fuel concerns over government bonds.

PLY: Not a good week for Europe although some relief from the idiotic 11 nation FTT proposal would be a start to at least showing a glimmer of optimism the continent actually wishes to embrace growth, not merely manage relative decline.

Regulating Capital Markets – At Last
The Economist

IT MAY sound like another instalment of “The Hobbit”…

PLY: The Economist gives a typical overview. I would put it as: Essentially MIFID II is a collection of bumps in the carpet stitched together by political compromises driven largely by politics rather than delivering better markets, let alone economic growth. The Europhile Economist Magazine may not quite agree.

ECB’s Noyer Prods French Financial Sector Over Euronext

France’s financial sector should use the impending spin-off of Euronext as an opportunity to enhance Paris’ status a financial centre and boost the economy, Bank of France Governor Christian Noyer said on Thursday.

PLY: France is hugely open to business, er, with a domestic FTT while pushing a dubious cross-border addition, with swingeing taxes and a government which is verging on the absurd and an army of unemployed. Now the head of the central bank is panhandling for investors to buy the 30% pre-IPO stake. Doubtless they will get the investors via this arm twist (eventually) but if they buyers knocking the doors down to the bankers, would such a top level bureaucrat be reduced to ‘prodding?’

…and no, in answer to a multitude of requests, I am not sure how one can sell an IPO short.

SocGen’s Cabannes Calls For Derivatives Clearinghouse In Paris

Paris should be considered for a euro-area clearinghouse for rates and equity-derivatives trades, helping the city compete with London, Societe Generale Deputy CEO Severin Cabannes said.

PLY: Er, like, Clearnet? Clearly a political move by Soc Gen to endeavour to tame the anti-banking and anti-capitalist fervour of the French government by pledging loyalty (or maybe to avoid buying Euronext shares by seeking to invest elsewhere).

Growth-hungry Bourses Beat A Path To Singapore (subscription)
Financial Times

Since it was founded by Sir Stamford Raffles in 1819, Singapore has been known as a commodity trading centre in Asia, first in rubber and tin.

Now exchanges are beating a path to the city-state as they tap the region’s fast-growing commodity and energy markets.

Last week Deutsche Börse, through its EEX unit, bought a 52 per cent stake in Cleartrade, a small fuel oil and commodity trading platform set up in Singapore in 2010.

ICE, in November snapped up SMX from India’s FTIL for $150m.

A third project is in the works from Japan, where the TOCOM plans to launch an OTC swaps trading platform in Singapore with Ginga, a Japanese broker.

PLY: With Volcker rules and now the MIFID open clearing edict, Singapore has become ever more attractive on regulatory grounds alone, before we consider those regional growth rates which would make eyes water in the likes of Europe.

Derivatives Exchanges Raise The Stakes
Futures & Options World

PLY: Lest you are new to this subject, a review of some stake acquisitions by exchanges around the world in recent months.

LSEG In Agency Talks After Split With Citigate
PR Week

LSEG is close to assigning six-figure City, corporate and public affairs work to a new agency, having parted company with Citigate Dewe Rogerson.

PLY: Interesting that Citigate refused to pitch for a renewal. A key issue may have been the public affairs element. LSE have had to spend considerably more on this side in recent years since they left FESE as the pressure of doing everything in isolation is expensive (even doing it on what would be regarded as a bargain basement budget compared to many banks for example).

Exclusive: SEC May Seek More Power To Enforce Volcker Rule

U.S. securities regulators fear they do not have the full range of enforcement powers to police Wall Street’s compliance with the controversial Volcker rule, and told Reuters they are considering new rules to fill the gap.

Officials at SEC say the rule, which generally bans banks from making speculative bets with their own money, does not currently allow the agency to police brokerages for technical violations.

PLY: At the same time if SEC does get these powers, will they really have the budget to police them evenly?

EU Weighs Ban On Proprietary Trading At Biggest Banks From 2018

The largest banks in the EU would face a “narrowly” defined ban on proprietary trading from 2018 under draft plans by Michel Barnier, the EU’s financial services chief.

Regulators would also have until then to gauge whether some banks should split off their trading activities into separately capitalized units.

PLY: Strikes me separating investment banking from retail banking would deliver much clearer efficiency on this front. Clearly despite the looming end of Commissioner Barnier’s term in office, the greater regulation push is still in full swing at EU level.

Private Markets

Aequitas Tweaks Launch Plan

Canadian upstart stock exchange applicant Aequitas Innovations Inc has tweaked its proposed trading model after its initial plan was rebuffed by Ontario’s securities regulator.

The Ontario Securities Commission (OSC) revealed on Thursday it had blocked Aequitas’ initial proposal because it restricted access to visible orders, which breaks OSC rules ensuring fair access. Aequitas is aiming to break the dominant grip of TMX with a model that limits controversial HFT strategies. It plans to offer so-called lit and dark markets, as well as a hybrid market combining features of each.

Aequitas press release here.

PLY: I continue to find the Aequitas model fascinating. Like IEX in the US, it has a lot of elements that could be a real game changer for markets.

Shanghai Clearing House Becomes Fifth In Asia To Start OTC Clearing (subscription)
Central Banking

Shanghai Clearing House (SCH) started clearing onshore renminbi (CNY) IRS January 2 with a mandate expected in June, but the clearinghouse is unlikely to apply for ESMA recognition.

Within Asia-Pacific, China is the latest country to start OTC clearing after Australia, Hong Kong, Singapore and Japan. As a G-20 member, China is keen to comply with the commitment laid out at the Pittsburgh summit in 2009 to clear all standardised derivatives and, as its young derivatives market expands, clearing will be increasingly important.

PLY: Moreover China will do whatever it takes to be a major global player, even while the EU is narrow-mindedly endangering its own market structure. Why bother with ESMA, in the long term view of China they are probably (astutely) pricing in the collapse of the EU.

CFTC Certifies Javelin’s MAT Request Kicking Off Mandatory Trading Of IRS On New Trading Venues Or SEFs
Digital Journal

Javelin SEF announced today that the CFTC has certified its MAT Submission of IRS thereby requiring mandatory trading of swaps on SEFs or exchanges.

Nigerian SE To Protect Investors Via Surveillance Programme
This Day Live

NSE will introduce a world-class surveillance programme this year that will support plans to launch new listings and products as part of efforts to make the market more attractive to investors.

Thai Bourse Operating Normally, But Office Is Closed
Pattaya Mail

The Stock Exchange of Thailand (SET) is operating normally today but its main office public entrances and exits are closed.

SET’s main office next to the Queen Sirikit National Convention Center (QSNCC) is closed following reports that the Network of Students and People for Reform of Thailand (NSPRT) will demonstrate at the building.

PLY: Again the resilience of the SET against vigilante mob threats is to be applauded.

Chinese Central Bank Official: We Don’t Want To Suppress Bitcoin

A representative from the People’s Bank of China claimed in a press conference that his institution is not trying to prevent bitcoin use, just clarify its status.

Questioned about the central bank’s recent actions limiting bitcoin use in China, its chief of the survey and statistics department Sheng Song Cheng answered:

“We don’t want to suppress or discriminate against bitcoin, we are simply saying it is not a currency.”

PLY: Process moves slowly but methodically in China. The idea of a ‘currency’ being born and becoming prominent in under 5 years is anathema to the Chinese speed of action. A pragmatic solution will doubtless emerge in time presuming China realises the advantage to having Bitcoin as ballast against irresponsibly managed western fiat money.

Canada Says Bitcoin Isn’t Legal Tender (subscription)
Wall Street Journal

Canadian officials have been pretty quiet in the bitcoin debate, but the government’s stance became clearer on Thursday.

Canada doesn’t consider bitcoin to be legal tender, a government official said, putting a question mark over the use of the increasingly popular virtual currency here.

PLY: Ah the old British legal precept of legal tender… The Anglosphere in its rigid approach to cash may yet run into a problem here with an issue not so apparent in many other forms of legal system.

Ex-Employee Seeks To Wind Up Barry Cheung Chun-yuen’s Failed HKMEx (subscription)
South China Morning Post

A former employee of the failed HKMEx is seeking to wind up the company run by former Executive Council member Barry Cheung Chun-yuen.

Andrew Carter, a former director of technology at the HKMEx, has initiated a company winding-up proceeding against the failed commodities exchange as a creditor.

Special Section: FTI, NSEL, India at the Crossroads

PLY: A bit of a pullback today for the exchanges, MCX down nearly 6% and FTIL off over 4% while Indian stocks are largely flat.

Brokers Say NSEL Scam A Corporate Fraud
Business Standard

Commodity traders have protested against the threat of the economic offences wing (EOW) of the city police to attach properties of brokers of NSEL. Members of the commodity trading fraternity see the payment default as entirely a corporate fraud.

“The fraud was done at NSEL. Involvement of brokers is necessary for executing any trade on exchange platforms and brokers have traded on behalf of clients. Hence, attaching the properties of brokers is surprising,” said Motilal Oswal, chairman of Motilal Oswal Financial Services Ltd, a leading brokerage.

PLY: A tricky issue, NSEL did create a fraud but the brokers don’t seem to have noticed and then added very lucrative funding options on top without adequate due diligence…

3 More Borrowers In Settlement Talks
Business Standard

Three large borrowers of the beleaguered NSEL – PD Agro (dues of Rs 644.55 crore – USD 105 mln), the Aastha Group (Rs 246.67 crore – USD 40 mln) and N K Proteins (Rs 969.89 crore – USD 158 mln)- are in settlement talks with the exchange.

Meanwhile, on Thursday, the EOW summoned broker Nirmal Bang Commodities for interrogation. The next set of brokers summoned by EOW comprises Geojit Comtrade and Systematix Commodities. Police scrutiny of data from NSEL servers was underway, the official said.


Colt Powers Source’s Growth To Over $500 Billion Worth Of Transactions

Colt today announces that it has designed and deployed a managed IT infrastructure and networking service for Source UK Services Ltd, enabling one of Europe’s leading exchange traded product providers to focus on generating financial returns for customers and shareholders. By partnering with Colt, Source’s investment team has been able to deliver on its ambitious expansion plans, and is now processing transactions with a combined value of over $500 billion.

Launched in 2009, Source specialises in exchange-traded products. The firm has grown aggressively to manage $15 billion of assets, becoming the fifth largest provider of these services with a core business in the European equity markets.


Thai Bourse Expects Derivative Warrants On Indices To Be Launched This Year

Stock Exchange of Thailand (SET) has recently joined with brokers to continuously educate investors on using derivative warrants (DW), and expects that DWs on SET Index series can be launched by brokers this year. As many as 761 DWs were launched in 2013, with an average daily trading value of THB 1,000 million (approx. USD 33 million), increasing 254 percent from the previous year.

Career Paths

LSEG today announces that Sherry Coutu and Joanna Shields will join the LSEG Board as NEDs with immediate effect.

Betfair legal director Justin Hubble has left the gambling company just months after company secretary Martin Cruddace resigned.

EarlyShares, a funding platform that connects passionate entrepreneurs with smart investors, announced it hired Salomon Wancier as Chief Marketing Officer and Jonatan Alava as Director of Engineering.

Russia Investment bank BCS has appointed John Barker as Executive Chairman of BCS Financial Group in London. John started his new role at BCS in January 2014.

John was formerly the MD and Head of International at Liquidnet Europe Ltd. He has also held various senior positions at Instinet Global Services Ltd, including Director of Operations, Head of Trade Support and managing the membership of multiple exchanges, clearing and settlement systems.

PLY: Having created the European arm of Liquidnet and run it for a decade, I am delighted to see John securing this position with BCS, a major Russian broker cum investment bank with a range of fascinating HFT solutions to MOEX amongst other products.

Calastone has appointed former SunGard chief executive Cristóbal Conde as a NED.

Conde will take a seat on the main Calastone board and has also purchased a minority stake in the privately held business.

Changes in investors/shareholders

Caixabank Sells Stake In BME

Caixabank said it had sold its 5 percent stake in the stock market operator BME to institutional investors at 29.6 euros per share, netting capital gains of 47 million euros for the bank.

PLY: Unsurprising as Spanish banks (in particular) need to sell everything they can to keep their capital ratios functioning during austere banking times.

Financial Calendar

CBOE $0.50 special cash dividend payment

Next week
Interactive Brokers Q4 financial results
SGX Q2 Results

This month
ITG Q4 2013 financial results on Thursday, January 30, 2014

Next month – new announcement

BGC Partners Q4 2013 financial results on February 12, 2014

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

Share Notes

Interactive Brokers Group CFO Paul Jonathan Brody sold 8,491 shares Tuesday, January 14th at an average price of $22.87 (bargain $194,189.17). Mr. Brody’s regular sales are chronicled on this specific page.

Analyst Notes

Betfair “Hold” Rating Restated At Deutsche Bank – GBX 1,060 Target Price

CBOE: Great Growth But Very Expensive (subscription)
Seeking Alpha

CBOE has steadily increased profits and revenues for years. And yet this kind of growth comes with a hefty price tag: the stock sports a P/E of roughly 25X on earnings of about $2 for 2013. In 2013, an investment in CBOE paid off nicely for investors (but then so did investing in almost everything else).

PLY: I tend to retain a certain concern that CBOE is driven by a huge takeover premium as the only really eligible girl at the prom but it has only modest clearing revenue given its non-vertical status.

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 – 2014 IPO?
Sramana Mitra

PLY: Will Lending Club make use of its $100 million-revenue run rate to go public during 2014?

New Crowdfunding Platform Offers Lowest Fees In the Industry
Digital Journal

E-Fundie, based in Tel Aviv Israel, today announced the launch of its new crowdfunding platform.

The unique service offers the lowest fees in the industry, allowing users to keep the money they’ve raised, no matter how much money is raised.

In addition, E-Fundie crowdfunding users who raise up to $100,000 pay only 3% of the funds raised. Those who raise over $100,000 will pay only 1% of the funds they raise.

PLY: An aggressive new entrant to the market, good luck to E-Fundie!

Other stories

Buying NYSE Brought Worldwide Attention To Sandy Springs Business
Reporter Newspapers

Jeff Sprecher says he could see right away the difference that buying the iconic New York Stock Exchange meant for his Sandy Springs-based company. A college friend texted him to say, “Who knew you could actually buy that thing?”

“It’s really changed our lives,” Sprecher said of the acquisition of the New York exchange last year. “We’re getting attention from all over the world.”

But New York’s historic stock exchange is only one of 16 exchanges owned by ICE, which calls itself the leading global network of exchanges and clearinghouses.

PLY: Rumour has it that Jeff Sprecher is learning to love those regular phone calls from Senator Schumer.

CFTC Expands Portal Capabilities To Make Public Submissions More Efficient And Secure

CFTC announced today that it has expanded the capabilities of an external portal that allows market participants and the general public to submit information more easily and securely while enhancing the CFTC’s ability to process submissions.

The CFTC Portal Project now allows the public and market participants, including designated contract markets (DCMs), derivatives clearing organizations (DCO), SEF, Swap Dealers (SD) and Major Swap Participants (MSP), to more easily complete applications and submit data to CFTC in a timely and more confidential manner.

PLY: A useful increment to improving dialogue.

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