March 20 2014

elb2Surely nobody can be shocked (least of all FTIL/Jignesh Shah) at the SEBI order to dispose of their exchange holdings? Meanwhile, SEF mutterings of despair (‘a road to nowhere?’) as ESMA releases the singular EMIR CCP database (hopefully only a short-term solution, no offence intended to NASDAQ OMX). Elsewhere, JPM stays in metals brokerage, JPX ups estimates, Marketwire ensnared by NY AG to stop feeding HFT signals which destabilises exchange values. China liberalises a little more, Bitcoin derivative exchanges coming soon to the USA? LSE proposes auction for blocks…

…and as always much more, happy scrolling…

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Public Markets

SEBI Orders FTIL To Sell MCX-SX Stake
Reuters
SEBI Bars FTIL From Holding Shares In Stock Exchanges
The Hindu

SEBI, on Wednesday, ordered that FTIL is not a ‘fit and proper person’ to acquire or hold any equity share in a recognized stock exchange or clearing corporation, either directly or indirectly. The order also covers warrants that FTIL may be holding.

The capital market regulator also said that FTIL should divest all its existing equity holdings in MCX-SX, MCX-SX Clearing corporation Ltd (MCX-SX CCL), Delhi SE (DSE), Vadodara SE (VSE) and National Stock Exchange of India Ltd (NSEIL) within 90 days.

SEBI’s order follows the removal by commodities regulator FMC of its “fit and proper” designation on FTIL and an order for it to sell most of its stake in MCX.

PLY: Significant but utterly unsurprising. FTIL, at best failed to monitor its investments (despite multiple board positions and so forth) or at worst, was aware or, if not embroiled in, some dodgy practices. Whichever way you go, it’s tricky appending “fit & proper” status to anybody in these circumstances.

Presumably life just got a lot busier for JM Financial who were appointed to sell the FTIL MCX stake a few weeks back.

JPX: Notice Of Revision To Earnings Forecast And Dividend Forecast
MondoVisione

PLY: Interesting: JPX forecasting an increase in profit of 9% compared to previous data.

JPMorgan Metals Brokerage Unit Not Part Of Sale To Mercuria
Reuters

JPMorgan’s metals brokerage business, which includes its LME ring dealing team, will remain part of the U.S. investment bank while the bank’s Henry Bath metals warehousing business is included in a $3.5 billion sale of its physical commodities business to Swiss-based trade house Mercuria.

PLY: Having been tripped up over what looked like exploitative rents in warehousing, banks are keen to shuffle off that mortal, er, coil but JPM will retain its metals brokerage business.

Marketwired To Stop Direct Feeds To High-Speed Traders (subscription)
Scott Patterson – Wall Street Journal
NY Attorney General Schneiderman Announces Marketwired Agreement To End Sales Of News Feeds To High-Frequency Traders
MondoVisione

Marketwired, has decided to stop providing the releases directly to high-frequency traders. Marketwired signed a deal to stop the practice with New York Attorney General Eric Schneiderman, who has stepped up efforts to crack down on abusive practices by high-frequency firms.

PLY: First there was big data, how long before we have underground data centres, so-called “data-easys” where traders gather in private to enjoy ull trading data and trade HFT from all manner of illicit sources?

Seriously, what is the point in just slowing things down? It’s not the speed which is the problem (and indeed the short-term legal-political approach is plain dumb as always in a big data universe… Moreover what price regulatory arbitrage? I know, how fast is the question you’re already asking…

Trading Probe Breaks String Of Gains For U.S. Exchange Operators
Gerrit De Vynck & Lu Wang – Businessweek

Things had been improving for U.S. stock exchanges, with volume rising, the bull market entering its sixth year and investors coming back to the market. The run of luck was broken yesterday by New York AG Eric Schneiderman, who is probing whether U.S. markets are giving high-frequency traders unfair advantages by offering faster access and data than is normally available to the public. Nasdaq OMX’s stock fell the most in seven months.

It also raises questions about the fairness of markets just as Virtu Financial, an HFT that has earned money every day but one for five years, prepares for an IPO.

PLY: It is only fair to note that various exchanges have appeared eager to maximize short-term revenue gain from HFT without a coherent approach to managing the business going forward preferring q on q HFT growth…

Eric Schneiderman Is Probing HFT But He Shouldn’t Stop There
Mark DeCambre – Quartz

The rationale for cracking down on such practices is to eliminate unfair advantages the HFTs have over other participants in the market. But Schneiderman might also do well to look at another source of market distortion: The rebates that exchanges offer broker-dealers (including, but not only, HFTs) to do business with them directly.

PLY: An attack on ‘maker taker.’ I think the clear issue here is the lack of really coherent cases being made for M-T in the current environment. There may be good cause for M-T to flourish (at its advent I was a fan) but I am not seeing the arguments being made coherently (and yes, I know, at least one reader is very keen to discuss this over lunch, I just haven’t been in your city recently!)

LSE Proposes New Intraday Auction Period (subscription)
Philip Stafford – Financial Times

LSE is planning to lure large block orders from off-exchange venues by holding a short intraday auction period.

LSE Consultation on the market structure for the introduction of an intra-day auction for SETS Equities and IOB – here.

PLY: An inspirational idea which dates back some time. Not sure who was first but let me apply a peppering of plaudits to the likes of Steve Wunsch and the Arizona Stock Exchange in 1990. ePit under Rich Friesen was producing software for intraday auctions akin to the LSE concept during the dotcom bubble but I welcome other folks to claim/nominate their part of this innovation!

Anyway, a very interesting idea from LSE which might just help them win at least some modest sized block business back by running auction markets during the regular trading session…

CFTC Begins Swaps-Data Overhaul In Effort To Boost Comprehension
Silla Brush – Businessweek
Statement Of Commissioner Scott D. O’Malia
MondoVisione

CFTC, citing an inability to fully understand swaps-market data, has begun an overhaul of information collected by DTCC, CME and others.

The top U.S. derivatives regulator released a request for comment yesterday on about 70 questions on ways to change how and which information must be reported to the swap-data repositories created under Dodd-Frank Act rules. CFTC could later propose changes to policies intended to help regulators supervise the $693 trillion market.

CFTC press release here.

PLY: The fact that such detailed questions are being asked at this stage gives a hyper-clear indication of just how ignorant the G20 was of the bottle which they opened in search of a financial pacification genie after their too big to fail banks, failed.

ITG Launches POSIT Dark Pool In Korea
John D’Antona Jr. – Traders Magazine

Buyside traders can now access the same type of crossing network, POSIT, for Korean equities as is available to their American counterparts.

Why You Should Care CME Plans To Cut B Shareholder Reps On Board By Half
Jeffrey Carter – Futures Magazine

In the latest CME proxy statement, CME management is asking B-shareholders to decrease their representation on the CME Board of Directors by 50%. We intend to vote no on this question, and desire to keep the B share representation at the current six board members.

The B share can be one of CME’s most valuable assets if they utilize them correctly. However, CME’s management has always looked at the B share with disdain.

PLY: I am not close enough to this to give a sound judgement right now but I would note the B share slate at the next CME board election includes at least one of the finest trading thinkers I have met, namely Ray Cahnmann of Transmarket. Jeff Carter writes with passion and insight and you need to review his thought-provoking argument…

Crown Looking To Buy Betfair’s Australia Shares
Kirby Garlitos – CalvinAyre

The move can be interpreted as James Packer’s attempt to gain full control of the 50 percent shares of Betfair’s Australian business that he doesn’t own yet and it could be a smart play considering that he gets full control of a joint venture that his partner doesn’t appear to be too keen on continuing.

Betfair has racked up $47.3 million in losses since it began offering its unique brand of bookmaking in 2007, even taking into account the company’s revenue last year when it earned $54.9 million, 8.6 percent more than 2012 but still $1.6 million in the red, making it the sixth time in seven years that Betfair has reported a loss to its year-end books.

PLY: As I recall Betfair co-founder Ed Wray has been running the Australian operation, is he planning to spend more time in the UK on his quasi-governmental ambassadorial roles for SMEs?

ESMA Publishes List Of Authorised CCPs And OTC Derivatives
MondoVisione

PLY: A release to note the current “splendid isolation” of NASDAQ OMX – presumably soon to be joined by EUREX, LCH.Clearnet and others unless we have an outbreak of ‘Mutually Assured Counterparty Destruction’ by self-interested / or simply terrified, regulators (Subscribers can also read my Premium Post: The Dark Side Of EMIR Regulation).

Private Markets

What’s Behind Liquidnet’s Acquisition of Vega-Chi
Ivy Schmerken – Wall Street & Technology

Drawing on its relationships with global asset managers in equities, Liquidnet has acquired bond trading platform Vega-Chi to build an institutional size liquidity pool for corporate bonds.

Shanghai SE Raises Shareholding Cap For Foreign Investors (subscription)
Chao Deng – Wall Street Journal

Shanghai SE is easing restrictions on overseas investors, giving them more flexibility to invest in China’s tightly controlled capital markets.

With immediate effect, foreign investors can collectively own up to 30% in a single company, up from 20%, If foreign investors’ collective shareholding in a company exceeds 26%, the stock exchange will make a relevant announcement on the following trading day. The cap on ownership in a company by an individual foreign investor remains at 10%. The exchange also said that foreigners will be able to trade asset-backed securities.

PLY: Almost unnoticed, China has been doing a lot of liberalising in the past fortnight (again!), wider Yuan bands, invitations to banks (surely a poisoned chalice?) and now shareholding / investment limits with this the latest of several announcements.

Markit Launches Web Platform
Securities Lending Times

Markit has launched a new securities lending data online platform to caters to specific workflow requirements of lenders and borrowers.

QIC First Australian Buy-Side Firm To Execute On A SEF (subscription)
Justin Lee – Risk

Queensland Investment Corporation (QIC), the A$79 billion ($72 billion) fund manager, has become the first institutional investor in Australia to execute a trade on a SEF with a US dollar IRS trade it put through on Bloomberg.

Bitcoin Firms Explore U.S. Rules For Derivative Exchanges
Reuters

Companies have inquired in the past month about regulations that would govern exchanges for bitcoin derivatives.

“Let me tell you, (if) they’ve got a derivatives contract, we have jurisdiction… and we should regulate it,” Bart Chilton, a member of CFTC told Reuters in an interview. “In the past 30 days, a number of companies requested information to see what the rules were for setting up a market place to trade bitcoin derivatives,” Chilton said. “These are people that are inquiring about what they should do if they wanted to request (official) status.”

PLY: Good to see and exciting to read, the cryptocurrency revolution continues. The difficulty for the big department stores will be how to react – again they need to have feeder structures to nurture markets methinks. So far only DB1 (through their excellent appointment of Chief Innovation Officer Brendan Bradley) have anything like this in place. Now I am witnessing a remarkable increase in understanding Bitcoin and cryptocurrency going forward (having advocated them since the late 1990’s) and remain available for calls / presentations to help foster understanding at the corporate level.

Bitcoins Are Like ‘Glass Beads’, Warns Danish National Bank
Alex Hern – The Guardian

The Danish national bank has released a briefing note firmly declaring bitcoin to not be money, noting that the currency is more like “glass beads”.

“Bitcoins are not money in a proper sense as there is no issuer behind them,” the report states. “Instead, bitcoins display the characteristics of a commodity to which users attach value. Unlike precious metals such as gold and silver, bitcoins have no actual utility value, bearing closer resemblance to glass beads.”

PLY: Denmark needs to learn a second D-word: “disintermediation.” That’s why there is no issuer and no need to have one either – it’s the future: the peer to peer economy. It’s also the death of central banking…I wonder why the DNB are so worried?

SecondMarket Seeks To Open Bitcoin Fund To Ordinary Investors (subscription)
Michael J. Casey & Paul Vigna – Wall Street Journal

SecondMarket is racing to open up a private bitcoin investment fund to ordinary investors as soon as Q4, potentially beating a rival offering by the Winklevoss brothers who have applied to create a Bitcoin ETF. SecondMarket, which launched the Bitcoin Investment Trust last September to cater to wealthy investors, has started lining up lawyers and investment banks to help with the process.

EI reported on February 26th that SecondMarket plans a regulated Bitcoin exchange.

Could The IMF Have Built Bitcoin? (subscription)
Financial Times

Sir, Isn’t it curious that the International Monetary Fund has never been mentioned in any recent FT reports on Bitcoin?

PLY: One of those cute epistles for a watercooler moment upon which the FT thrives. Misses out the single flaw in the argument: the IMF using its initiative: ‘I mean where are the briefing papers and academic studies outlining how to use initiative within the IMF structure? How many consultants must we employ to use our initiatives? Do we need to have our thoughts audited?’ Nope, the IMF didn’t invent Bitcoin. Fun letter though.

The True Significance Of Bitcoin
Jeffrey Kutler – Institutional Investor

For all the ink, both literal and virtual, that has been spilled over the controversies and misadventures of the digital currency Bitcoin, it remains a curiosity if not a complete enigma to most of the population.

PLY: Leaving the best of Bitcoin today to the last – a most engaging article by Jeff Kutler noting amongst many other items, why I am entirely in the vanguard of being for cryptocurrency but simultaneously treated with wariness by the ‘true believers:’

“Bitcoin, although just one of dozens of so-called cryptocurrencies at various stages of development, is a flashpoint for debates between supporters and skeptics. The former were characterized as “anonymous libertarian frontiersmen” by Patrick Young, head of DV Advisors – and he is pro-Bitcoin! In Exchange Invest, his newsletter chronicling money and market developments, Young has argued that Bitcoin “offers a solution to various issues” by enabling even micropayments in small fractions of a dollar with lower processing costs and less friction than in credit and debit card systems.”

…another splendid musing from Jeff Kutler, read the whole article!

Special Section: FTI, NSEL, India at the Crossroads

PLY: Markets are sanguine at the news on FTIL being forced to sell its exchange stakes by SEBI with MCX and FTIL flat while the CBI and NSEL continue their investigations…

CBI, Mumbai Police Share Notes On NSEL
The Economic Times

CBI, which has registered a case against top NSEL and PEC officials for allegedly conspiring to cause a loss to the state-run company, met a senior Mumbai police official in connection with PSU companies’ role on the crisis-ridden bourse, according to police sources.

EOW Finds Faults With NSEL Auditors
Business Standard

Mumbai police has now found that even auditors of the NSEL has violated several norms and some of them are punishable under the Indian Penal Code. Police has found some discrepancies since inception of the exchange in 2007.

CBI To Investigate Parallel MCX Scam
The Times of India

Central Bureau of Investigation (CBI) has taken over investigations into parallel commodity exchange scam from state criminal investigation department (CID). The racket allegedly operated parallel exchanges of MCX using illegal software developed by a Dubai-based software company and duped unsuspecting people.

It is alleged that accused made transactions worth Rs 22,000 crore (USD 3.6 bln) through MCX using their registered company — Money House Commodity Pvt Ltd and its offices across India from 2011 to 2013, according to an official record.

CBI Looking Into Role Of Former FMC Chief
Khushboo Narayan – Livemint

The Central Bureau of Investigation (CBI) is examining the role of Venkat R. Chary, a former chairman of FMC, in connection with the payment crisis at NSEL, according to two people aware of the development.
Chary was non-executive chairman of MCX from September 2003 to August 2013, when he resigned from its board as FMC guidelines require directors over the age of 70 to retire. He served as chairman of FMC, the commodities futures market regulator, from 1984 till 1987.

Don’t Think CBI Has All The Facts On Bhave Case, Says Chidambaram
P Vaidyanathan Iyer & Sunil Jain – The Indian Express

Finance Minister P Chidambaram Wednesday said the CBI did not have the entire facts when it registered a preliminary enquiry against C B Bhave, the former chairman of SEBI, in connection with permissions granted to the MCX-SX.

“I have been briefed in the case. I don’t think the entire facts are yet before the CBI. The original licence granted to MCX-SX was only to deal in currency futures. It was not a licence to deal in equity. I think the distinction is important,” Chidambaram told The Indian Express in an interview.

PLY: Odd that the Finance Minister is so quick to be involved here. Maybe the CBI are wrong…but the government looks bad here in rushing to protect their civil servants.

The Wrong Targets In The NSEL Scam
Livemint

The investigation into the NSEL crisis has taken a curious turn, with the Central Bureau of Investigation (CBI) registering preliminary enquiries, not just against the promoter group FTIL, and the men running it but also against the very men who first ruled that the FTIL group was unfit to run an exchange.

No Need For Another Stock Exchange
Lokeshwarri Sk – The Hindu Business Line

There is absolutely no doubt about the integrity of Bhave and Abraham. Their vehement opposition to giving MCX-SX permission to start equity trading platform in 2010 and the legal battle that followed is sufficient proof of that.

PLY: Scary anti-competitive stuff here: “This struggle to make inroads in to Indian capital market throws up the question — does India need more than one stock exchange?” Of course the same argument was raised repeatedly when the NSE first came to challenge the BSE when it was asleep at the wheel of Indian capital markets 2 decades ago. Would it make sense to turn back to that? Allow competition to flourish and the customer will benefit – kill it and India will slip backwards…

Technology

Autilla Establishes Precious Metal OTF With Multi-Asset Solution From Cinnober
Cinnober

Autilla Ltd has selected TESS Connect & Go from Cinnober Financial Technology as its platform to migrate its precious metals OTC broking onto a proven electronic trading platform.

PLY: A very interesting development, look forward to hearing more from Autilla as it develops…

Redline Trading Solutions Announces Osaka Exchange Trading Support
PRWeb

Market data from Osaka Exchange’s J-GATE trading system is now available through Redline’s InRush 3 embedded ticker plant at ultra-low latency speeds.

Mozambique SE Launches Dematerialisation Service
macauhub

Mozambican stock exchange (BVM – Bolsa de Valores de Moçambique) plans to launch a technological platform called Central de Valores Mobiliários (CVM) to dematerialise securities, announced the head of BVM, Anabela Chambuca.

Products

Legislation To Let Retail Investors Buy Bonds On ASX
Shaun Drummond – Financial Review

Years of regulatory tinkering to kick-start a retail corporate bond market will come to a head in June when legislative changes should pass that allow retail investors to buy bonds issued to institutional investors via ASX. The new regime will also allow a less onerous prospectus to be used for retail bonds for multiple bond issues over three years, as long as the bonds are deemed “simple” enough.

PLY: A good move. Hopefully competing platforms are also being encouraged to help investors and issuers have more choice?

Career Paths

IEX Group, which runs a dark pool designed to stave off the extremes of HFT, hired former Deutsche Bank executive Jay Fraser as head of business development.

Financial Calendar

This week

CBOE $0.18 quarterly dividend payment
NZX $NZ 0.0160 final dividend payment

New announcements

CME Q1 2014 results Thursday, May 1, 2014

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

Analyst Notes

Scotiabank Lifted Their Price Target On TMX From C$52.00 To C$59.00 – “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.

Crowdfunding

UK To Explore Legislation To Make Banks Refer Small Businesses To Alternative Platforms
Finextra

Proposals by the UK’s Chancellor of the Exchequer to explore legislation that will force banks to refer small businesses that they turn down for loans to crowdfunding and P2P platforms have been cheered by the alternative lending industry.

PLY: Sounds impractical to me. Actually one excellent move in yesterday’s UK Budget was that the Chancellor removed at a stroke a huge bottleneck in the system and disintermediated the annuity industry who have long been providing rubbish returns through a monopolistic provision that pensioners had to buy such coverage. What the Chancellor ought to be doing is encouraging the removal of absurd prescriptive FCA regulation to encourage alternative platforms while reducing the monopoly power of banks. That will solve things much quicker than his current anaemic proposal whereby your banker will mutter the mantra ‘you could always try an alternative funding source’ into the back of a handkerchief while appearing to sneeze.

Other stories

‘The Path Forward’ Could Lead To Nowhere
FOW

One of the missing ingredients of regulatory reform was the global coordination of rules, despite – to be fair – best efforts from bodies such as IOSCO and the FSB.

This led to a disparity in timelines and laws and an immediate fragmentation of liquidity. For example, the world of Interest Rate Swaps found itself mainly on SEF for USD but some off-SEF, and other currencies mainly off-SEF with some on-SEF and OTC FX was mainly migrating off-shore and off-SEF.

This led to inefficient trading, reduced liquidity, widening of spreads and a theoretical increase of global systemic risk. All unintended consequences and absolutely not what a regulator or (capitalist) legislator would want to see. So what to do?

PLY: Excellent input from an anonymous SEF operator…

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