July 15 2013

Serial disruptive MTF/exchange CEO Peter Randall has penned an excellent article for the FT’s august opinion pages (see Crowdfunding section) while elsewhere there seems to be evidence of the buy side being a bit restive, exchanges tweaking things and more OTC to platform/CCP (maybe exchange?) rumblings…

Public Markets

Danish Funds Sue Banks In US For Blocking CDS Exchange-Trading


Four Danish pension funds have filed a lawsuit against twelve large banks, accusing them of increasing costs for investors trading in the $27 trillion credit default swap (CDS) market by stopping exchanges from entering the market. An Ohio pension fund filed a similar suit in May.

PLY: Having long been keen to see the buy side exercising its muscle, I salute these funds who are pressing for open transparent markets free of investment banker monopolies.

ESMA Begins Detailing Central Clearing Of OTC Derivatives


ESMA has launched a Discussion Paper to prepare the regulatory technical standards (RTS) which will implement provisions of EMIR regarding the obligation to centrally clear OTC derivatives.

The consultation is aimed at assisting ESMA in developing its approach to determining which classes of OTC derivatives need to be centrally cleared and the phase-in periods for the counterparties concerned.

PLY: Clearly phase in will be key as initial regulatory discussions post Lehman were for an all at once uber-clearing exercize which would have caused chaos. Yes, delaying or tiering moves to CCP may help the banks maintain a monopoly but it will not be sustainable.

LCH.Clearnet To Clear CDS For US Clearing Members

LCH.Clearnet SA has received permission to begin clearing credit default swaps (CDS) for US clearing members through CDSClear, LCH’s credit default swap clearing business while its application to the US CFTC for registration as a derivatives clearing organization (DCO) is pending.

PLY: Joyous news to mark Bastille Day (the 1789 storming of a French prison marking the birth of the revolution and of course the end of monarchical tyranny in France leading up to the government now being 57% of the economic activity in the entire nation. Vive la Liberte! as the saying goes)*. Incidentally, as I recall, the French government wanted to ban CDS entirely until they got this clearing house facility in Paris and then miraculously changed their mind.

NYSE Euronext And TOM May Both Win Battle, Lose War (subscription)

Futures and Options Intelligence

NYSE Euronext and Dutch derivative platform The Order Machine (TOM) have both claimed victory to different extents following the outcome of their intellectual property battle last week.

PLY: Useful analysis of a ‘war’ between incumbent exchange and upstart MTF which appears to be mired in the digital equivalent of the trenches…

Brokers Urge Systems Upgrade For HKEx

South China Morning Post

HKEx needs to upgrade its systems and introduce commodities trading in order to compete with rival exchanges in Shanghai and elsewhere in the world, local brokers and international investors said.

PLY: With H shares losing their lustre, its clear that HKEx is in a fascinating position but ‘fascinating’ could also translate into ‘failure.’ There’s everything to play for and clearly the exchange is working hard to sustain its position as the ideal gateway to China.

Johannesburg Targets High-Speed Traders (subscription)

Financial News

JSE has laid out plans for attracting more high-speed trading activity to its market, in the hope it will help to improve liquidity in those stocks that are dual-listed.

PLY: Co-location coming to Jo’burg as exchanges seek to maximize their revenue from secondary trading. Not an unreasonable strategy but the large buy side players must equally have free access to block trading facilities…

Romania: Sibex to Launch Power Derivatives


PLY: Readers may recall I had a brief and exciting spell as CEO of SIBEX before sadly its descent into management fiasco. With the former Chairman banned for 5 years, the market is now trying to rebuild and I am pleased to see they have created power derivatives for the Romanian market in keeping with one of the priorities in my Strategic Review…

Bucharest SE incidentally had still failed to implement their original plan for such derivatives dating back to 2010.

Private Markets

Namibia: Gold Opens NSX Alternative Investment Board


The Namibian Stock Exchange has launched the Alternative Investment Board (AIX) in another effort to develop and deepen the local capital market.

PLY: AIX is in addition to the recently launched OTC board, with AIX aimed at companies with assets outside Namibia.

Uganda: Automated Stock Trading Before End Of Year


The Uganda Securities Exchange (USE) hopes to have the electronic trading system running by Q3 2013.

PLY: Open outcry will die in Uganda along with dematerialisation wiping out paper stock certificates…

Tullett teams with S&P Capital IQ (subscription)

Financial News

IDB Tullett Prebon has signed a “long-term, strategic partnership” with S&P Capital IQ to distribute its data through the research firm.

PLY: A gold rush to provide data for algo traders et al as/when formerly OTC markets open up is creating a lot of interest at the data end of the IDBs who increasingly represent something like an exchange business albeit with even more legacy personnel.


ISE Shelves Plan To Bring Pari-Mutuel Settlements To Options Market

Wall Street Journal (blog)

All bets are off on one firm’s bid to make playing the options market a bit more like going to the track.
ISE has scratched plans for an options contract using technology also known in the world of horse races — so-called pari-mutuel settlement, in which all bets are pooled upfront and the winners’ take comes out of the pool.

Under an effort that began in 2006, ISE was working on new options to allow traders to speculate on events, including the outcome of economic data releases and corporate earnings.

PLY: Dodd Frank placing the jurisdiction of pari mutuel with the states killed this interesting initiative. America continues to penalise anything it sees as too close to betting while gradually moving towards more sensible investor regulations (qv JOBS Act). Curiously, Britain wrestles with letting people invest of their own free will but they are entirely free to gamble with alacrity.

Financial Calendar

Interactive Brokers Group second quarter financial results on July 16 2013
Charles Schwab Corporation is expected* to report earnings on July 16 2013

Will Schwab Earnings Rise With Stocks At Record Highs?


Charles Schwab will release its quarterly report next Tuesday. With the stock trading near five-year highs, there’s rising optimism that the company has put its worst days behind it.

Analyst Notes

Credit Suisse analysts reduced their earnings per share (EPS) forecast for shares of NASDAQ OMX Group
Sterne Agee restated their “Neutral” rating on shares of Charles Schwab Corp

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.


Exchanges Can Crowdfund Recovery (subscription)

Financial Times

Find a winning strategy and copy it could be the simplest business advice ever cited. But for the financial infrastructure industry, it’s proved more of a challenge.

As Clayton Christensen described in his book The Innovator’s Dilemma, successful companies can put too much emphasis on customers’ current needs, and fail to adopt new technology or business models that will meet their unstated or future needs.

This is precisely the problem with the incumbent financial infrastructure industry.

PLY A magisterial overview from Peter Randall. The exchange industry is locked in a bout of “Stockholm Syndrome” with the sell side and appear incapable of existing without deferring to the investment banks who love to hate exchanges. Moreover, the “social utility” question is a key one. However one can also argue that regulators are stymying the exchange industry by refusing to let them go direct to the public, in relation to archaic listings rules/underwriting procedures and worst of all, the classification (aka restriction) on allowing customers to exercise their own free will to invest their money as they choose! (As I recall Milton Friedman had a few choice words on the latter issue of being “Free To Choose”).

At the same time, many of these problems could be overcome if only exchanges really appreciated and concentrated on what they need to do to profit from the ongoing peer to peer upheaval of finance…

CfPA Applauds SEC’s Approval Of Title II JOBS Act Crowdfunding Provisions (subscription)

Wall Street Journal

Equity-based crowdfunding came one step closer to actualization Wednesday with the SEC voting 4-to-1 in favor of lifting the ban on general solicitation of private placements to accredited investors.

The SEC ruling will create a new kind of offering–a 506(c). This allows private companies and investment firms to advertise private securities offerings to accredited investors only. The SEC is still working on proposed rules for Title III, which will enable the general public to participate in equity crowdfunding.

PLY: “What do want: Title III, When do we want it? NOW!”

…progress by the SEC but it needs to be more and faster, the crowdfunding revolution is now growing so rapidly it threatens the existing regulatory system by discrediting the regulators as slow-moving. To be fair to SEC they are moving faster than any other regulator in the world right now but that still may not be sufficient pace to avert crowdfunding having it’s Bastille moment (*and yes, I know it was July 14, but we don’t publish Sundays & hey, try finding a Frenchman working today: QED).

Crowd-funding: We Really Are All In This Together


When credit dried up after 2008, the internet created new solutions, as it has done in so many sectors. Many businesses and commentators have struggled with what exactly to do with the ubiquity of the web and its ability to throw off so much data – crowd-funding has turned those questions into definitive platform strengths and now we are seeing quite amazing developments.

Crowdcube Eyes MENA Crowdfunding Expansion

Arabian Gazette

Middle East and North Africa crowdfunding is getting hotter with the world’s leading regulated crowdfunding platform Crowdcube announcing MENA expansion.
PLY: An interesting move by Crowdcube although I am not entirely convinced their approach will work insofar as the original Crowdcube while an excellent platform is remarkably UK-centric in its workings. To expand they will really need specific partners in the areas who understand the vast differences in raising capital even within apparently synergous regions…

Other stories

Wall Street Regulators Adopt Better Technology To Monitor Markets

Washington Post

The regulators who police Wall Street are ramping up their surveillance of trading activity, using technology to suss out potentially abusive practices that threaten to undermine public confidence in an increasingly fragmented financial market.

FINRA has launched 280 investigations based on information it gleaned from software it rolled out last August that scans the major trading exchanges and other venues to look for specific patterns of suspicious trading.

PLY: Increased use of surveillance software is logical and one way in which – allowing for IT costs – regulators can significantly increase their ability to police markets in a digital era. The frustrating point of the discussion remains the fact that “dark pools” are inferred as inherently dubious: we need to start calling the block facilities “Institutional Liquidity Pools” to emphasise their unique benefit to all investors and markets.

Buy-side Seeks Cost Assurances On Libor Transfer

The TRADE News

A potential increase in costs is the biggest buy-side concern over the transfer of Libor administration from the British Bankers Association (BBA) to NYSE Euronext.

PLY: I can sympathise with the IMA that they don’t want to be severely squeezed in a for profit LIBOR scenario but presumably ICE will appreciate that a feather or two won’t severely upset the golden goose of the buy side.

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