January 20 2015

Let’s start with a quick discussion of real-time clearing:

Cinnober Video no. 2 – link here.

cinnober 2


(If you missed it, the previous video made with our friends at Cinnober in Stockholm can be found here).

Elsewhere, forex is being much discussed and I cannot help but feel we will have more news of losses to come, after a spot of deckchair denial reshuffling. Good to see FCA proactively writing to regulated firms in the UK but this ought only to be the first step towards entirely revamping the now discredited forex market.

I have discussed the situation already in two Premium Posts (how can you afford to miss out at $120 per user/ annum?) and we have more to come:

CHF Forex Fiasco Strike One: MacroEconomic
CHF Forex Fiasco Strike Two: Market Infrastructure

Also, over in the Premium service, we have recently added two more briefs to give you the background history to specific events. The latest pair are:

BSE – USE Merger Brief

We continue to update these briefs as / when there is more news.

Today in your free daily Exchange Invest, it’s a mega day for market structure!

Festering forex problems with a vortex of worry swirling around Saxo Bank as China preparing for options. Buy side launching new platform – is it a Liquidnet killer? JPX issues bullish restatement of forecasts, LSE announces new apprentices, Thai futures exchange merger on course…and much more, happy scrolling!

Public Markets

JPX Notice Of Revision To Earnings Forecast & Dividend Forecast

JPX consolidated earnings forecast for F.Y. ending March 31, 2015 and Y-E dividend forecast for the fiscal year ending March 31, 2015 announced on October 31, 2014 have been revised.

Operating revenue 101,000 mln yen (USD 856 mln) (up 8.6% compared to previous forecast)
Operating income 42,500 mln yen (USD 360 mln) (up 23.2% compared to previous forecast)
Net income 26,500 mln yen (USD 224 mln) ( up 26.2% compared to previous forecast)

Big Fund Managers Form New Dark Pool Equity Trading Venue (subscription)
Stephen Foley – Financial Times

Nine of the world’s largest fund managers are launching a new dark pool for equity trading, in an attempt to prevent HFT firms from disrupting their trades and raising costs.

The venue is to be called Luminex, and is due to be formed this week by a consortium of companies that also includes BlackRock, Capital Group, MFS, Invesco, T Rowe Price, JPMorgan Asset Management, State Street and BNY Mellon. The minority shareholders will each have 4.9%, with the remaining 60% held by Fidelity who are leading this first buy side controlled block trading venue.

PLY: This is nothing more than a full frontal on the dark pool industry and potentially amounts to a bullet with the name Liquidnet inscribed along the side. Incidentally, stories vary in the media, as it seems the venture already has some regulatory approval and has been formed but not officially launched.

Swiss Franc Fallout Claims More Casualties (subscription)
Philip Stafford, Caroline Binham & Miles Johnson – Financial Times

UK FCA sent letters to an unspecified number of currency brokers on Friday asking them to update the regulator about any impact the Swiss move could have had on their balance sheets.

Denmark’s Saxo Bank was forced to admit on Monday that it was likely to suffer losses.

Saxo Bank said it would fulfil all of its regulatory capital requirements though it would also be likely to incur some losses from customers unable to pay their debts. The group doubled its margin requirements for Swiss franc trades last September to 8%, which effectively halved the amount of leverage available to customers to around 12.5 times.

Meanwhile KPMG was appointed as special administrator to Alpari (UK) Ltd after the group failed over the weekend to agree a rescue takeover deal. “We have had a number of enquiries from interested parties in relation to the company’s business,” said Richard Heis, one of the KPMG administrators. “We will be speaking with these parties and others over the next few days, and hope to secure a deal to preserve the business and jobs as far as possible.”

Alpari, which employs about 170 people in London, has nearly $100m in client money which has been segregated under FCA rules.

PLY: FCA needs to be proactive and then all regulators need to find a whole new way to deal with forex trading as the current ‘best practice’ especially at the retail end all too often appears somewhat dubious.

Saxo – Under Pressure?
Saxo – Under Pressure? (2)
John Hempton – Bronte Capital

PLY: Saxo Bank, that 500lb gorilla of the leveraged forex ‘puntersphere’ at first appeared to be shrugging off any losses in a breezy ‘storm in a teacup’ fashion. Now we’re hearing 7 sigma excuses and that makes Sydney hedge fund manager John Hempton, worried.

Rather than give my own views on Saxo, I thoroughly recommend you read Mr Hempton’s remarks. John Hempton has an excellent pedigree, incidentally, as an analyst of frauds & failing companies. He can spot a corporate Empire without clothes at a distance of 50 balance sheets and beyond…

FXCM Rescue Package Includes Rising Interest Rate (subscription)
Wall Street Journal

FXCM on Monday provided further details on its $300 million rescue package from Leucadia National Corp., saying the initial interest rate of 10% increases by 1.5% per annum each quarter as long as the loan is outstanding, but won’t exceed 17%.

The credit agreement also includes limitations on FXCM’s ability to merge, dissolve or sell assets.

PLY: Gosh, it sounds as if FXCM really got itself a CFD of sorts, or at least the leveraged funding side thereof. I wonder if anybody gets a haircut on dividends?

Jefferies Reprises Role Of Market White Knight (subscription)
Telis Demos – Wall Street Journal

Jefferies’s role in bailing out FXCM is reminiscent of one it played in 2012, when Knight Capital Group needed an emergency infusion to stay afloat after a slew of accidental stock orders put the trading firm on the verge of collapse.

Jefferies, initially invested $125 million in Knight and is now sitting on a stake in its successor firm valued at $270 million. It also earned tens of millions more when Knight was acquired by a trading firm and in banking and financing fees. Jefferies is still a major shareholder in the company and continues to advise it on asset sales.

PLY: It’s nice to see the word ‘accidental’ being used for the comprehensive self-immolation of KCG from which it escaped with remarkably little regulatory sanction (unlike Everbright in China some months later).

Leucadia & FXCM: Is This Knight Capital Re-Visited? (subscription)
Christopher Wallace – Seeking Alpha

LUK has provided a rescue loan to FXCM, similar to what it provided to Knight Capital 2 years ago.
LUK made significant profits in a matter of months off the Knight investment.
LUK is trading at the historically low end of its valuation range.

“Those who don’t learn from history are doomed to repeat it.” – Georges Santayana

PLY: All possibly true but whereas KCG got wiggle room and wasn’t splatted with more regulation, I sincerely hope this time around the tide has turned against the economically nebulous retail forex punting industry. As per that Santayana quotation, well the thing about forex trading is retail traders have short memories and HFT mixed in means that sector can repeat lessons from history without learning even before the history has been written up in the first place…

Derivatives Watchdogs Expected To Agree Swaps Rules Reprieve
Michelle Price – Reuters
Steven Maijoor, ESMA Chair, Delivers Remarks At Opening Session Of Asian Financial Forum In Hong Kong

Speaking on the sidelines of the Asia Financial Forum in Hong Kong on Monday, Steven Maijoor, chair of ESMA, told Reuters the European regulator hopes to agree a new timeline for introducing margin requirements for privately-traded derivatives in the coming weeks.

DB1 Receives Approval For Eurex Clearing Asia

‘In-principle’ regulatory clearance from MAS to set up clearing house: Eurex Clearing Asia set to start business in 2016. DB1 says will also seek recognition as a third-country CCP with ESMA in Europe For Eurex Clearing Asia.

DB1 press release here.

PLY: The peninsula doomsters will once again wail that SGX is being squeezed out of its natural habitat but I beg to differ. This clearly strengthens the Singapore offering coming on top of ICE’s acquisition of SMX. The city state is now clearly the CCP destination in South-East Asia, trumping Australia which ought to have been the natural home but has spent too much time drinking the ASX kool aid (ironically only to see the competitive LCH.Clearnet sweep OTC markets from under the nose of the monopolist incumbent). Singapore has a huge opportunity to reinforce its financial centre here in a derivatives world. Some of that will come to SGX, provided management keeps its head and risks unleashing some ingenuity as it has in the past…

Private Markets

Investors To Get Taste Of New China Via Shenzhen Trading Link
Pete Sweeney & Michelle Price – Reuters

Foreign investors eager to tap into the next generation of Chinese firms should soon be able to directly trade stocks in Shenzhen, but the high valuations and extreme volatility of the country’s second-largest exchange may limit early inflows.

Earlier this month, Chinese Premier, Li Keqiang, said a stock link between Hong Kong and Shenzhen should be established.

PLY: Excellent point insofar as the valuation of Chinese stocks right now worries many. Having the link accepted by the end of the next cyclical downturn will pay dividends for a patient HKEx.

Thailand – One Futures Exchange By H2
Darana Chudasri – Bangkok Post

The planned merger of the two local futures exchanges is expected to be completed by H1 this year, enabling investors to trade all futures products at the Thailand Futures Exchange (TFEX). Her comment came after the SEC board approved guidelines for facilitating the integration of the Agricultural Futures Exchange of Thailand (AFET) and TFEX to comply with the cabinet’s resolution.

PLY: I am sorry to see the AFET being taken over, they made good progress but I wish the unified bourse every success.

Ghana – ‘Commodity Exchange Will Come Alive This Year
Ghana Web

Ghana Commodity Exchange (GCX), which will operate on a Warehouse Receipt System (for grains and cereals) modelled after a similar one in Ethiopia, was expected to take off by December 2012 but could not materialise due to factors which included a change in leadership at the trade ministry.

Last year EI reported that eleni (run by Eleni Gabre-Madhin), a private company positioned as the premier commodity exchange promoter in Africa, formed a private-public investment consortium to finance the establishment of GCX.

Investment consortium partners included Ghana’s top tier financial institutions, Data Bank Agrifund Manager Ltd, Ecobank Ghana Ltd, UT Bank Ghana Ltd, as well as IFC, 8 Miles Fund and eleni, with minority stakeholding by the Government of Ghana.

Zimbabwe – SME Stock Exchange Awaits Regulatory Nod
Tatenda Macheka – Zimbabwe Mail

ZSE CEO, Alban Chirume, told The Zimbabwe Mail on the sidelines of a Strategic Economic Research and Analysis (Sera) meeting on Zimbabwe on Friday that everything is set for an SME stock exchange.

Special Section: FTI, NSEL, India at the Crossroads

PLY: MCX ticks up nearly 2%, FTIL up 1%. Resolution of NSEL fiasco…


HFT debate: HHT Creates Market Upset
Robert Young (Head of Liquidnet Canada) – Benefits Canada

High-frequency trading (HFT) has inhabited the market for more than a decade, but only during the last couple of years has it become a subject of intense scrutiny, both in Canada and around the globe.

PLY: A sensible article from Robert Young (no relation!) who runs Liquidnet Canada.

High-Speed Trading Fills Void Left In Proprietary Desks
John Detrixhe & Sam Mamudi – Bloomberg

Wall Street banks struggling with recently defanged currency-trading desks have found a surprising ally: high-frequency traders.

PLY: Hmmm, so HFTs are delivering currency fills, does that mean we ought to blame them for the repricing that banks have been passing on belatedly to retail forex customers?

That previous sentence appears so laden with potential contradiction that it ought to occupy regulators for weeks on end, methinks…


China Set For February Stock Options Launch (subscription)
Luke Jeffs – FOW

The main Chinese regulator has set February 9 as the launch date for China’s first stock option and specified the rules for firms trading the landmark contract (on the SSE 50 ETF).

Shanghai Gold Exchange To Launch Options Trade On Trial Basis
Parvez Jabri – Business Recorder

China will soon launch gold options on a trial basis on the Shanghai Gold Exchange (SGE) to boost its bid to develop a viable bullion price benchmark.

China currently bans trading in commodity options to limit speculation. Shanghai Futures Exchange has been running simulated options trade for gold and other commodities since late 2013.


MOEX: Compliance With The IOSCO Principles For Financial Benchmarks

MOEX as an administrator of the financial benchmarks for the Russian equity, fixed income, FX and money markets has undertaken internal audit procedures and prepared a report in accordance with the IOSCO Principles for Financial Benchmarks.

Career Paths

LSE Launches Apprenticeship Programme
Ben Martin – Daily Telegraph

LSE has partnered with charity City Gateway for the scheme, in which 12 people, aged between 16 and 24, have secured apprenticeships with some of the biggest companies in finance.

Standard Chartered, Societe Generale and Allianz Global Investors, along with the LSE, have taken on the apprentices as part of the “Gateway to the City” programme, which aims to equip young people with the skills needed for careers in the financial services.

PLY: What a sensible idea. It’s notable how the City of London in many senses worked better when management was a mix which included those who had begun in post rooms at age 16 (or lower)…

Financial Calendar

This week

SGX Q2 Results For Financial Year 2015 (FY2015)
Interactive Brokers Q4 Results

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

Analyst Notes

ITG Upgraded By Zacks From “Neutral” To “Outperform” – $21.40 Price Target
Charles Schwab “Buy” Rating Reaffirmed By Deutsche Bank – $37.00 Price Target
Zacks Restated Their “Neutral” Rating On Charles Schwab – $28.50 Price Objective

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.

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