January 29 2015

Multilateral pith today – I ponder where to vote in the BGC-CME-GFI love triangle while industry expert Jake Pugh weighs in with a pith perfect assessment of how forex is the new Hotspot and in a way the reciprocal is true too.

Thus, a busy week is progressing briskly. On a personal level it feels a bit like tv/video central – twice on CBC News at the weekend and another live slot on RT last evening while the third video in my Cinnober series has been published. I truly believe this is simply the most fascinating era for capital markets which we are lucky to be witnessing:

cinnober 3

The previous videos made with our friends at Cinnober in Stockholm for this year’s series are:

The future of money – where is cryptocurrency heading?

What will the launch of real-time clearing at BM&FBOVESPA mean for the industry?

Meanwhile, over in Premium Posts, busy as always with several new Premium Briefs to remind you of various issues in the industry (and don’t forget others such as the BGC-CME-GFI deal file) are updated daily when news arises. Recent briefs include:

Barclays Index Unit Sale Brief
NY AG – Barclays Dark Pool Brief
FX – CHF Crisis – Brief
China’s Everbright Securities Trading Error – Brief

Our Premium service is now on a real roll – can you afford not to be a subscriber? $120 per user/year and it helps keep EI Free. Subscribe here or email and I will invoice you forthwith.

Public Markets

Nasdaq Q4 2014 Financial Results

Generated quarterly record Q4 2014 non-GAAP diluted EPS of $0.75, a 9% increase YoY. Q4 2014 GAAP diluted EPS was $0.50.

Q4 2014 net revenues were $517 million, down 1% YoY. On an organic basis, excluding the impact of fx rates, Q4 net revenues rose 3%.

Non-GAAP operating expenses were $296 million in Q4 2014, down 5% YoY. On an organic basis, excluding the impact of fx rates, non-GAAP operating expenses fell 2%.

Non-GAAP operating margin was 43% in Q4, up from 40% in the prior year period.

The company repurchased $58 million of stock in Q4 2014, bringing total repurchases to $178 million since the repurchase program was restarted in Q2 2014.

Bursa Malaysia Delivers Highest Profit After Tax And Minority Interest (PATAMI) Since 2008 – Posts 15% Jump In Its PATAMI & Proposes 18 Sen Final Dividend

PATAMI at RM198.2 million (USD 54.6 mln), up 15%
Annualised return on equity at 25%, improved by 4 percentage points
EPS at 37.2 sen, up by 14%
Operating revenue at RM471.3 million (USD 129.8 mln), up 7%
Operating expenses at RM232 million (USD 63.9 mln), up 1%
Cost-to-income ratio at 46%, improved by 2 percentage points

PLY: Very encouraging numbers from Kuala Lumpur.

MarketAxess Reports Q4 2014 Financial Results

Q4 Financial Highlights (vs Q4 2013)

Record revenues of $70.2 million, up 16.1%
Record pre-tax income of $33.5 million from continuing operations, up 35.0%
Record diluted EPS from continuing operations of $0.57, up from $0.41
Record total trading volume of $211.4 billion, up 23.4%
Record estimated U.S. high grade market share of 16.1% up from 13.9%

Full Year 2014 Financial Highlights (vs 2013)

Record revenues of $262.8 million, up 10.1%
Record pre-tax income of $118.5 million from continuing operations, up 10.5%
Record diluted EPS from continuing operations of $1.97, up from $1.81
Record total trading volume of $767.0 billion, up 10.6%
Estimated U.S. high grade market share of 14.5%, up from 13.8%

PLY: Also very encouraging numbers from MarketAxess.

BGC Issues Letter To GFI Shareholders Dated January 28, 2015 – Urges GFI Shareholders To Vote AGAINST The Inferior CME-GFI Management Transaction And Tender Their Shares To BGC

BGC Re-affirms Offer To Acquire GFI For $6.10 Per Share In Cash – BGC Sends Executed Agreement Which Includes Terms Obligating BGC To Complete $6.10 Per Share Tender Offer If CME Merger Vote Fails And GFI Countersigns – ISS Issues An Additional Note On The Proposed GFI Management-CME Merger Further Highlighting What ISS Has Deemed “Significant Conflicts Of Interest” – ISS And Glass Lewis Recommend That GFI Shareholders Vote AGAINST The Inferior CME/GFI Management Transaction – ISS Further Recommends Tendering Shares To BGC

Epic Battle For Control Of GFI Comes To A Head Thursday At Midnight
Kevin B. Sanders – Observer

This week will likely bring resolution to a drama gripping Wall Street, as CME vies for control of GFI Group, pitting GFI insiders like CEO Colin Heffron against BGC’s chief Howard Lutnick.

PLY: For background, read our daily updated Premium brief: BGC – CME – GFI Brief. Also, the Kevin B Sanders piece above is another excellent read.

Where to vote? Frankly, I can’t vote for the GFI-CME deal. It’s nothing against CME, they have attempted to create a value additive deal for their interests but alas the GFI management have not during this process struck me as sufficiently transparent nor have they, to my mind, adequately separated their own interests (admittedly as some 38% of the equity holding) from that of the investors and company as a whole.

True, GFI subsumed by BGC could make life difficult for many senior managers but then the whiff of self-interest refuses to evaporate here.

Thus we reach a point where the status quo won’t do (otherwise GFI would never have been perceived to be actively shopping for some sort of deal in the first place methinks). With outside investors reluctant to commit to IDBs in need of restructuring, GFI is wedged in a place bereft of soft furnishings.

However, BGC haven’t done any Due Diligence nor signed an NDA (according to the NY Observer article above) it appears and that is a cause for concern on their ability to close. Nevertheless, the bid strategy has been played sublimely by Howard Lutnick and BGC although without DD it is tricky to see where they fund an outright purchase… but then again has an outright purchase always been the end game here? Methinks BGC would assess the optionality of a deal which gives them assets they want and CME assets they want too. There is all to play for here, although I simply cannot endorse the GFI pleas to vote for the CME-GFI bid as it stands and at a lower price than the competing BGC bid.

LSE To Put Russell Investments Up For Sale For GBP 923 Mln ($1.4 bln)
Jessica Toonkel – Reuters

LSE bought Frank Russell from insurer Northwestern Mutual last year for $2.7 billion primarily for its large index business and now plans to put Russell Investments up for sale in mid-February, hoping to fetch around $1.4 billion (923 million pounds) for the unit.

PLY: For the background, see our Premium brief: LSE – Frank Russell Deal Brief. The LSE deal juggernaut turns its hand to selling for once and $1.4 billion is bang in the middle of expectations. However, if the bidding process becomes heated then clearly the price might further narrow the gap to the $2.7 billion LSE paid for the entire business last year. Moreover, if it does, that may leave egg on the face of Russell CEO Len Brennan who was always apparently opposed to breaking the group up for sale under its previous owner, Northwestern Mutual.

FXCM To Forgive Some Client Losses (subscription)
Ira Iosebashvili & James Ramage – Wall Street Journal

FXCM said it would forgive loans it made to small traders who were pummeled by losses when the Swiss franc unexpectedly surged earlier this month, a bid to appease customers as it seeks to recover from an event that almost crippled the firm.

The losses left the New York-based company in danger of violating capital requirements, and the firm turned to Jefferies Group LLC-parent Leucadia National Corp. for an emergency $300 million loan to continue operations.

FXCM will end up paying as much as 82% of its future profits to Jefferies over the course of the loan, according to Sandler O’Neill + Partners, making it essential to recoup client losses without further alienating its customer base.

PLY: Our Premium brief: FX – CHF Crisis has the background here. My gast remains flabbered that brokers are allowed to indulge any clients with such low latency blanket debt forgiveness. It strikes me as another ludicrously dangerous precedent to indulge in mass debt karma…

GMEX May Face Slight Delay In Launch Date (subscription)
Alice Attwood – FOW

According to GMEX CEO Hirander Misra, the GMEX launch may require an additional level of sign-off from the Eurex Clearing Supervisory board which does not meet until the end of April.

Hong Kong-Shenzhen Launch Set For H2, Will Miss June MSCI Review
Michelle Price – Reuters

HKEx expects a Shenzhen ‘through train’ (previously discussed here, here, here and here) to launch in H2 this year..

Many market watchers had expected the landmark Stock Connect scheme linking Hong Kong with Shanghai to be extended to Shenzhen before June.

SGX CEO Hopes Southeast Asia Will Copy Stock Link (subscription)
South China Morning Post

SGX CEO said he is looking to emulate the much-heralded stocks through-train scheme between Hong Kong and Shanghai by formally linking Southeast Asian bourses.

With a plan already in the works to form a stock trading link with Taiwan later this year (as discussed here and here), Magnus Bocker said that establishing direct connections between exchanges had replaced mergers and acquisitions as the industry’s main growth strategy, particularly in Asia.

PLY: Sorry, have to disagree with Magnus here. The reason “through train” works is because China is massive, exciting, grows a lot, oozes potential and is largely foreigner-phobic when it comes to investment. Hence foreigners will use the unique access point for as long as there is no other way in. A morass of interlinked exchanges is just another variation on the tired old theme of ‘exchange cooperation’ amounting to a euphemism to justify foreign travel on expenses.

European Commission Launches Work On Establishing A Capital Markets Union

The European Commission has kicked off its project to create a Capital Markets Union (CMU) for all 28 EU Member States with a first orientation debate at the College of Commissioners. Well-functioning capital markets will also facilitate the mobilisation of private financing in the context of the Investment Plan for Europe.

Previous discussions here yesterday.

Private Markets

Bats Buys Hotspot Currencies Platform For $365 Million
John Detrixhe & Sam Mamudi – Bloomberg

Bats is buying a currency-trading venue, making its first foray into the $5.3 trillion market and diversifying its sources of income.

The stock-exchange operator has agreed (as rumoured earlier this month) to acquire Hotspot FX from KCG Holdings Inc. for $365 million in cash, according to statements from both companies. The deal values Hotspot at 16 times its EBITDA in 2014.

BATS press release here.

PLY: For more on deals, see our Premium brief: Exchange Deals.

Permit me to pass the pith handle to industry expert Jake Pugh, whose splendid ‘mot juste’ I wholeheartedly endorse:

JP: “There was much commentary last week after the SNB pulled the peg/plug on the Euro (aka stopped themselves out) and the problems created for the retail fx/spreadbetting platforms filling client stops. But what is now becoming clear is that it may also have sounded the death knell for the ‘single dealer’ bank platform.

The migration onto exchange is now likely to accelerate as regulators and investors realise that an electronic platform is not the same as an ‘exchange’. This is a very astute move by BATS, not least because of the best execution requirements of MiFID 2. OTC multi-dealer platforms or electronic marketplaces with ‘aggregated’ liquidity are the prized asset of the moment and so we can expect to see further M&A amongst the IDBs or maybe even the spread betting sector. Meanwhile, it’s another body blow to the investment bank flow business model.”

PLY: Thanks again for that excellent contribution, Jake. More of his wisdom can be found here – Derivatives Market Infrastructure and here – Industrial change in the OTC IRS derivatives market.

India – Bourses Aim To Enlarge Index Business Pie
Sneha Padiyath – Business Standard

BSE and National SE (NSE) are betting big on the index development business, currently only a small portion of their overall revenue.

PLY: Still underdeveloped, with huge potential. Note too how NSE retains an independent indexing arm while BSE, like Istanbul have gone for cooperation with a global index firm.

Gazprom Suspends Participation In SPIMEX Over Tax Issue
Alexey Novikov – Interfax

The amount of gas trading for delivery in February on the St. Petersburg International Mercantile Exchange (SPIMEX) fell by half on Monday after Gazprom suspended trading.

The total volume traded was 134.6 million cubic metres (MMcm) on 26 January, down from 314.8 MMcm a month earlier for delivery in January.

Rosneft and Novatek were the only two companies still trading after Gazprom’s suspension.

Gazprom withdrew from the market after identifying a tax risk, a source familiar with the situation told Interfax. Before trading began on Monday, Gazprom warned SPIMEX it risked losing money because it cannot refund VAT for gas transport services to itself.

SPIMEX launched its first auction of natural gas last October – reported here.

Dividend News

Nasdaq has declared a regular quarterly dividend of $0.15 per share on the company’s outstanding common stock. The dividend is payable on March 27, 2015, to shareowners of record at the close of business on March 13, 2015. Press release here.

MarketAxess declared an increase in the quarterly cash dividend to $0.20 per share of common stock outstanding, to be paid on February 26, 2015 to stockholders of record as of the close of business on February 12, 2015.

Bursa Malaysia proposed a final dividend of 18 sen per share, bringing the full year 2014 total dividend to 54 sen per share. The proposed dividend will be presented to shareholders during the Company’s 38th AGM in March 2015 for their approval.

Special Section: FTI, NSEL, India at the Crossroads

PLY: MCX up 2%, FTIL up 1%, no news.


LCH.Clearnet Sees FX Options Clearing In 2015 (subscription)
Alice Attwood – FOW

LCH.Clearnet plans to be ready for fx options clearing by the end of 2015 as the market awaits clarity on mandatory clearing for NDFs.

PLY: The wholesale business eagerly awaits news on clearing of Non-Deliverable Forwards while the retail arm of the business is still reeling from last week’s sudden outbreak of Non-Delivery in the here and now.

Career Paths

FT reports that Alberto Pravettoni has left his role at LCH.Clearnet, to pursue other interests.

Dan Doscas, previously an operations technology executive at Citi, has joined Markit as a director in the company’s trading services group.

SEC announced that Erin E. Schneider has been named the Associate Regional Director for enforcement in the San Francisco office.

CFTC’s Giancarlo Proposes Swap Personnel Exams (subscription)
Katy Burne – Wall Street Journal

J. Christopher Giancarlo, the lone Republican among four commissioners at CFTC is urging the introduction of examinations for swaps traders and brokers, in the latest effort to overhaul opaque derivatives markets that have drawn criticism since the financial crisis.

Financial Calendar


ITG Q4 2014 Financial Results


GFI Group special meeting of stockholders to vote on the transaction with CME

New announcement

Dubai Financial Market PJSC – Board of Directors’ Meeting – February 2nd, 2015
CBOE Risk Management Conference March 4 – 6, 2015 (press release here)
SEC Roundtable To Explore Ways To Improve The Proxy Voting Process – February 19, 2015 (press release here)

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

Share Notes

Charles Schwab Chairman Charles R. Schwab sold 200,000 shares Monday, January 26th at an average price of $27.31 (bargain $5,462,000.00). He now owns 675,480 shares. Mr. Schwab’s regular sales are chronicled on this specific page.

Analyst Notes

TMX Price Objective Lowered By Scotiabank From C$60.00 To C$53.00 – “Sector Perform” 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.


P2P Lenders Rebrand And Evolve (subscription)
Tracy Alloway & Emma Dunkley – Financial Times

On the sidelines of an alternative-lending conference, the heads of some of the biggest companies in the “P2P” space met privately to discuss rebranding the sector.

Eyeing the success of Uber (qv PLY’s RT Op-Edge: Uber: A small step towards world bankruptcy) and Airbnb — tech groups that have created digital marketplaces for car rides and rooms — they agreed to drop the peer-to-peer name in favour of “marketplace lending”.

In investor materials released over the following months by Lending Club, the biggest US P2P lender, as it prepared for its $5bn IPO, the phrase “peer-to-peer” did not appear once.

The new name illustrates the rapid evolution of a sector that emerged to disrupt big banks by directly connecting borrowers with lenders and offering better rates for both. While initially aiming to bypass the financial system altogether, some of the sector’s biggest players are now looking to team up with the institutions they set out to challenge — among them Goldman Sachs, Société Générale, Santander UK and Royal Bank of Scotland.

PLY: Interesting.

Big Banks Eye P2P Lending Push (subscription)
Patrick Jenkins & Tracy Alloway – Financial Times

Two of the world’s leading investment banks are looking at a move into the fast expanding P2P lending sector, underlining how even established financial institutions are racing to embrace technology to disrupt traditional finance.

Société Générale and Goldman Sachs are among several banks discussing a plan to back Aztec Money, an emerging P2P financing platform that has created an online marketplace where people can bid for company invoices.

Other stories

IOSCO Publishes Final Report On Risk Mitigation Standards For Non-Centrally Cleared OTC Derivatives

IOSCO published the final report Risk Mitigation Standards for Non-centrally Cleared OTC Derivatives, which sets out nine standards aimed at mitigating the risks in the non-centrally cleared OTC derivatives markets.

CFTC Commissioner J. Christopher Giancarlo Releases Swaps Trading Rules White Paper – Pro-Reform Reconsideration Of The CFTC Swaps Trading Rules: Return To Dodd-Frank

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