May 05 2014


MCX-SX raises barely a third of rights issue target, bidders reluctant to commit to FTIL MCX stake without more data, KCG results, more on the IDB morph, could Cinnober save BOAT from the scrapyard? CME’s in-house VC discussed. NSE (USA) heading for closure, SIX provides super Repo service to SNB & banks, closes Oslo CCP deal too. India abandoning “anchor investor” concept post NSEL, finds new ways to gum up free market capitalism for exchanges. A tricky set of points to switch on the A Share “Through Train” while Japan hopes for more foreign IPOs as NEPSE struggles with complex requirements for a simple electronification project. Prosper welcome more investors to P2P lending while problems arise in China. Travelex investigating P2P forex trading ahead of likely summer IPO.

Welcome to Monday’s Exchange Invest, markets are closed in the UK as most of Continental Europe gets back to work / prepares for the next Bank Holiday.

Recent Premium posts include:

HFT1: The Market is Not Rigged
– first in a series about HFT and the issues arising…

Gordon Bennett! Low Latency Data At The New York Yacht Club?
– a follow up to HFT: The Early Years

OSOV No Argument
– democracy is an essential antidote to plutocracy –

The ZA Pivot
– Cinnober grabs the clearing advantage in South Africa –

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Public Markets

KCG Q1 2014 Financial Results

KCG Holdings reported consolidated earnings of $35.7 million, or $0.30 per diluted share, for Q1 2014. Net income for Q1 2014 included income from continuing operations, net of tax, of $36.9 million, or $0.31 per diluted share. Pre-tax income from continuing operations for the quarter of $59.4 million included income of $1.8 million from investment gains net of asset write down charges.

PLY: Corporate services growth more muted quarter on quarter than the growth in the market making side.

FTIL Board To Meet On May 10 To Finalise Bidders For MCX Stake
The Economic Times

FTIL was unable to finalise bidders for sale of its 24 per cent stake in commodity exchange MCX and said its board will meet again on May 10.

PLY: Precisely as I suggested (and hardly a quantum leap in the Due Diligence process), binding bids are few and far between as bidders have sought the full PwC special audit report and are clearly asking other questions about MCX. For FTIL to achieve even the current stock market price for their stake (let alone the discount which would seem plausible based on historical practice for such a large block) there needs to be a bit more transparency as bidder trust is eroding. Meanwhile FMC are meeting tomorrow (6th) to discuss the affair. FTIL are clearly living on borrowed time in this instance.

Deloitte May Not Challenge PwC’s MCX Audit
Ram Sahgal – The Economic Times

Deloitte, the statutory auditor for MCX, said it’s not perturbed by critical observations about the exchange in a forensic audit by PwC because the two auditing exercises are by definition fundamentally different.

India – Govt Clears New Rule On Commex Shareholding, Rule Abolishes Anchor Investor Concept
Sugata Ghosh & Ram Sahgal – The Economic Times

Only entities like banks, financial institutions, stock exchanges, depositories and commodity bourses that are regulated by financial market regulators will now be allowed to hold up to 15% in a commodity futures exchange. For others, the shareholding will be capped at 5%, according to a new rule that is expected to be notified in less than a week.

PLY: The idea of an approved or regulated shareholder for an exchange is a fair one but the concept that nobody can hold more than 15% is dumb as it removes the incentive for commercial operators to enter the market and reap the benefits (the “anchor shareholder’ concept was a bizarre anachronism even at its birth). At the same time, I would question the merit of letting a bank hold 15% given how egregiously the legacy banks have tended to protect their interests at the expense of exchanges, as per the current ongoing situation…to which it disappointingly has to be noted, so many exchange bosses are utterly supplicant to major investment bankers the world over.

Through Train’s Exclusive Use Of Yuan A Hurdle For Hong Kong Investors (subscription)
Enoch Yiu – South China Morning Post

Beijing obviously wants to use the through-train cross-border trading scheme to encourage investors to use the yuan to trade stocks. To succeed, however, it has to do more to make it easier for international investors to obtain the yuan they need.

PLY: An acute and welcome piece of thoughtful analysis. The urge for Yuan expansion is a good move to convertibility but insisting even HK Dollar holders must convert to buy A shares suggests a spot of inflexibility in the model which will lead to, at least, teething troubles. A more flexible ‘swap’ arrangement ought to work better as writer Enoch Yiu appositely notes.

Interdealer Brokers Angle For A More Diverse Catch (subscription)
Sarah Spikes – Financial News

PLY: In brief, as I have not tired of noting for some time, the Dodd-EMIR-Frank process completes the (somewhat latent) transition of IDBs to de facto hybrid exchange-broker combos (actually not wildly dissimilar – in a different asset class – to the early ICE). Thus their whole approach to life is morphing and with it, their traditional position as the interbank brokers (and voice brokers too – that’s a headline grabber still but really a sideshow to the broader revolution)…

I am not convinced that any banks have yet thought through what this means for their gradually diminishing importance in markets…

FAO: Amongst our increasing wealth of discussion of IDB evolution, note we have been discussing ICAP’s move to electronic trading here and here. There is also a useful Premium Post: ICAP Explores A New Galaxy and our excellent guest posts by Jake Pugh: here and here.

CME Makes A New Bet On The Future (subscription)
Lynne Marek – Crain’s Chicago Business

Futures exchange operator CME, as much a technology as a trading company today, is on the prowl for tech startups. Like other Chicago-based companies such as rival CBOE and Motorola Solutions Inc., CME is looking to develop a pipeline to technology trends that could spark new businesses.

PLY: In response to the appointment of Brendan Bradley as Chief Innovation Officer at DB1, Mark Fields is now heading a form of in-house VC at CME Group. This is to be welcomed. Every day I see a stream of fascinating opportunities for exchanges to expand their business but usually at a scale which is difficult to immediately incorporate into the core business. More exchanges need to think this way – as indeed I have been proposing for quite some time…and we need much more early stage / feeder finance / coherent development for new market-related solutions. Indeed a day spent at my Young Markets conferences in recent years has amply demonstrated a world replete with interesting tech and exchange-related ventures which have vast opportunity…

National Stock Exchange Files With SEC To Halt Operations
Sam Mamudi – Bloomberg

National Stock Exchange (NSX), an equity trading venue with about 0.2 percent of U.S. volume, has filed with SEC to cease operations on May 30 which would cut the number of public stock exchanges in the U.S. to 11, and would come one month after CBOE Stock Exchange closed. That venue, which is partially owned by CBOE, owns NSX.

PLY: Unsurprising that some venues will close. At the same time, it would be good to have a better feeling that CBOE has a clear strategy going forward other than just looking a a photo of the CME each morning and humming wistfully “some day my prince will come.”

Japan Hopes To Net Foreign IPOs
Frances Yoon – IFR Asia

JPX said in its medium-term management plan last week that it planned to persuade more foreign companies to list new shares on Tokyo SE as part of its goal to boost its clout among the region’s capital markets. Tokyo, however, appears to be an attractive destination as it is home to the Japan Government Investment Pension Fund, the world’s largest, as well as many top institutional investors. Yet, historically, Japan has had little success in luring foreign companies to list on its exchanges after it began allowing non-Japanese firms to do so in 1995.

PLY: The wall of money argument might help Japan but I think this vogue for cross border listings amongst many exchanges is a little, well, see my above comment on CBOE for the right musical number to accompany said thinking…

Private Markets

MCX-SX Rights Issue Raises Rs60 Crore (USD 9.97 Mln), Falls Short Of Target
Ashish Rukhaiyar – Livemint

MCX-SX has raised less than one-third of the Rs.200 crore (USD 33.2 mln) it targeted from a sale of stock to existing shareholders, forcing it to look at a preferential allotment of shares to bolster capital. MCX-SX raised Rs.60 crore (USD 9.97 mln) through the rights issue. The exchange had initially planned to raise Rs.544.69 crore (USD 90.5 mln) through the sale, which was announced in January, but later said it was targeting around Rs.200 crore (USD 33.2 mln).

PLY: MCX-SX has managed to turn a tricky situation into something which verges on the downright dangerous. A wholesale rethink of the business is required, I hope it can survive. Note the MCX-SX licence is up for renewal this year (discussed below).

SIX Securities Services Completes Oslo Deal
Tammy Facey – Asset Servicing Times

SIX Securities Services completed its acquisition of Oslo Clearing today. SIX initially agreed to buy Oslo Clearing from Oslo Børs for 180 million Norwegian krone (USD 31.5 mln) in December 2012. Oslo Clearing currently carries out CCP clearing of financial derivatives, equities and securities lending products. It will become a part of securities services, the post-trade division of SIX. Oslo Clearing will maintain its planned implementation of CPP interoperability for equities clearing with LCH.Clearnet.

PLY: SIX now has a new foothold in the CCP business after selling its interest in EUREX ahead of the abortive NYSE-DB1 merger.

Markit Mulls Sale Of Boat Reporting Service (subscription)
Anish Puaar – Financial News

Financial data firm Markit is exploring a sale of its OTC equity reporting service to Cinnober and is currently gauging client interest in keeping the service running. The move marks a u-turn from Markit, which said last November that it would close the trade reporting service – formerly known as Boat — in September, citing diminished demand for off-exchange data. A potential sale of the service to Cinnober, which already provides the underlying technology to the service, would allow existing clients to continue reporting off-exchange equity trades to the service without having to make any operational changes.

EI reported on November 4th that Markit planned to close Boat. On November 12 – there was more discussion on the matter.

PLY: Can Cinnober rescue BOAT from the scrapyard and instill it with a suitable new momentum to make it worthwhile? A fascinating potential development for the entire European market as well as an interesting move for Cinnober.

SIX To Provide New Swiss Money Market For SNB & Financial Institutions

Since 2 May 2014 SIX operates the new Swiss money market trading platform. The Swiss National Bank (SNB) uses the SIX trading platform to execute all monetary policy transactions and to auction Confederation bonds and registered money market claims. The trading platform represents a key contribution to the stability and efficiency of the Swiss financial system.

PLY: A neat way for the exchange marketplace to expand in Switzerland and this exchange based process ought to be good for the repo market. Once again the exchange model can prove its value, so long as exchange management can escape their fear of the sell side’s attempt to hold platforms hostage.

India – Licences Of Six Stock Exchanges Up For Renewal This Year
The Economic Times

Licences of six bourses, will come up for renewal this year.

UP SE (expires June 2)
Bhubaneswar SE (June 4)
OTC Exchange of India (August 22),
Pune SE (September 1),
MCX-SX Exchange (September 15)
Inter-Connected Stock Exchange of India (November 17).

In 2015 three more licences are up for renewal:

Vadodara Stock Exchange (January 3, 2015),
Jaipur Stock Exchange (January 8, 2015)
United Stock Exchange of India (March 21, 2015).

PLY: Note that MCX-SX is the only one of the 6 expiring in 2014 with any form of meaningful volume. Several of the above are essentially dormant. BSE and NSE have 99% of the equity volume and are in receipt of permanent licences.

Canadian Securities Exchange: Trade Execution Fees Reduced

Canadian Securities Exchange (CSE – formerly the CNSX) announced the implementation of a significant decrease to its trade execution fees for CSE and TSX Venture listed securities. The new fees are designed to reduce costs for the dealer community and encourage greater liquidity for listed companies.

Bitcoin: Time To Take Your Profits Off The Table?
Mike McAra – Futures Magazine

The news’s been the same for some time now every time Bitcoin takes a dive – it’s the Chinese government, telling exchanges or banks what to do or not to do with Bitcoin. No one seems to be quite sure what’s been said or done, the Chinese central bank’s officials don’t go on record but the slump is attributed to government actions.

PLY: The bearish notices are coming in thick and fast for Bitcoin. I am getting closer to thinking we’re approaching a bottom – although there may be an accelerated sell-off yet to end the bear trend… when BusinessWeek or The Economist issue a death notice, we will be close to the bottom.

Special Section: FTI, NSEL, India at the Crossroads

PLY: Grumblings in the media as the investigations don’t seem to be delivering any action. MCX is off 3%, FTIL down 5% due to worries over the completion of the sale in MCX and indeed whether FMC may pull the rug from under FTIL at its scheduled meeting tomorrow.

SUVs, Posh Villas, Pricey Plots Purchased From NSEL Funds: ED

High-end vehicles, posh villas and flats, expensive plots, shares in beach-side hotels and vast tracts of agricultural land are some of the purchases made by the accused of the multi-crore payment scam in NSEL through money laundering.

PLY: I continue to be amazed by this scandal. Oh yes the cars, villas, hotels etc etc are all fairly par for the course in the genre but it is a very Indian affair – in the west there would be all manner of, extracurricular couplings cited too while this whole affair remains seemingly cash only and somewhat chaste. At least it makes it easier to make a Bollywood version of the NSEL scandal I suppose.

Jignesh Shah Confiscated Our Passports, Says NSEL Scam Accused Anjani Sinha To EOW
India Today

It started with a bang but is now going through a sluggish period. The investigation into NSEL scam is heading nowhere as of now.

PLY: Understandable Indian media frustration at the lack of charges and despite a host of restrictive orders, so far the cash flow is slow…

Rajesh Mehta Of Swastik Overseas Held Over NSEL Scam
Business Standard

The Economic Offences Wing (EOW) of the Mumbai police has arrested Rajesh Mehta, an accused in the NSEL scam. He is the owner of Gujarat-based Swastik Overseas. Rajvardhan Sinha, ACP of EOW, has confirmed the arrest. Swastik Overseas owes NSEL Rs 113.33 crore (USD 18.87 mln).


TMXmoney Mobile Offers Comprehensive Financial Tools & Information Optimized For Mobile Devices

TMX Datalinx, TMX Group’s information services division, today announced the launch of a new mobile version of its financial portal TMXmoney.

Nepse Extends Deadline To Hire Consultants
The Himalayan Times

Nepal SE (Nepse)’s failure to find a suitable consultant to advise it on new automated system for the second time will further delay the trading system upgrade. Nepse has extended the deadline for the national and international consultants to bid contract to provide advisory service by two more weeks.

“We have not received applications from any eligible consultant so far, but since some companies have requested for extension of the deadline so that they can participate, we are pushing back the cutoff date,” informed Sitaram Thapaliya, general manager of Nepse. The original deadline to submit the EoI was May 3.

PLY: It is a damning indictment of bureaucracy today that the whole system at NEPSE could have been fully automated by now if it weren’t for the rather excessive strain of bureaucracy which is killing emerging market growth (both at a macroeconomic level and on an exchange basis too).


TWSE Announces To Launch Formosa Stock Index May 5
China Post

Taiwan SE (TWSE) will launch the Formosa Stock Index on May 5, in collaboration with the GreTai Securities Market (GTSM), to gauge the performance of both the main board and the OTC market.

NZX Equity Derivatives Launch Date Announced

Following the successful completion of Equity Derivatives testing, NZX is pleased to announce the launch of Index Futures on 16 June. The Futures contract will trade off the NZX20 index, a capital index launched on 23 April 2012 off a base of 3000. The NZX20 is highly correlated with the NZX50 benchmark index, providing market participants with the same easy and cost effective hedging tool available in most offshore markets.

BM&FBOVESPA: 3ª Previews For The Ibovespa Theoretical Portfolio Valid From May/Aug. 2014

BM&FBOVESPA announces the third preview for the BOVESPA Index theoretical portfolio, which will be valid for the period of May 05-August 29, 2014, based on the closing of the April 30, 2014 session.

Career Paths

SEC announced that Chief Economist and Division of Economic and Risk Analysis (DERA) Director Craig M. Lewis will leave the agency.

He will return to his position as the Madison S. Wigginton Professor of Finance at Vanderbilt University’s Owen Graduate School of Management.

Financial Calendar

This week:

CBOE Q1 2014 financial results
ICE Q1 financial results
TMX Q1 2014 Financial Results
Record date Charles Schwab $0.06 quarterly dividend
Record date MarketAxess $0.16 quarterly cash dividend
SunGard Q1 2014 financial results

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

Analyst Notes

LSE “Sell” Rating Reaffirmed By Goldman Sachs GBX 1,700 Price Target
CME “Equal Weight” Rating Restated By Barclays – $78.00 Target Price
CIBC Raised Their Price Objective On TMX From C$50.00 To C$55.00 – “Sector Perform” Rating
Tullett Prebon “Neutral” Rating Restated By Goldman Sachs – GBX 390 Target Price
ITG‘s “Overweight” Rating Reaffirmed By JPMorgan Chase – $24.00 Target Price
Keefe, Bruyette & Woods Raised Their Price Objective On Shares Of ITG From $21.00 To $22.00

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 Lender Prosper Marketplace To Get $70 Mln In Funding
Ianthe Jeanne Dugan – Wall Street Journal

Prosper Marketplace Inc., a leading P2P platform based in San Francisco, is to announce Monday $70 million in additional funding to help drive its growth. The investment was led by Francisco Partners, a private-equity firm that focuses on technology. Other backers include Institutional Venture Partners and Phenomen Ventures. The investment –seven months after a $25-million infusion by Sequoia Capital, BlackRock and other investors—underscores a growing appetite to fuel a fledgling but fast-growing disintermediation of conventional banking.

P2P is exploding as a lending mechanism, it still has enormous potential, this is barely the beginning.

Travelex Explores P2P Currency Trading
James Quinn & Ashley Armstrong – Daily Telegraph

Travelex, the foreign exchange specialist, is exploring the establishment of a P2P currency offering as it moves to boost its digital platform before its stock market flotation this summer. The 38-year-old Apax-backed business, which is likely to float by the end of June, is considering a P2P platform to allow currency exchange between individuals. The project is believed to be the idea of Sean Cornwell, Travelex’s chief digital officer, the former COO of Shutl, an e-commerce delivery platform sold to eBay at the end of last year.

PLY: Travelex has a core franchise of providing cash foreign exchange at costs which ought to truly focus the attention of Michael Lewis. Leveraging their brand to provide P2P transactions, however, is a good idea, particularly as the future of forex must be in platforms as opposed to the many current dealer based operations which I do not believe are fundamentally tenable going forward.

China’s Unchecked P2P Lending Faces Tough Days

China’s P2P lending has been hit with some strict regulations to clean up the business after a string of frauds and defaults. P2P lending platforms have sprung up all over the Internet and loans are mounting, but some of these platforms are involved in illegal fundraising or have had trouble servicing payments, said Liu Zhangjun, director-general of the Interagency Illegal Funds Taskforce.

PLY: One key sentence to read in this story: “The business in China has no thresholds, standards or regulations making illegal borrowing easy, and in many cases economic crimes are systemic.” This may help clarify why there are issues in China. The fact that savers are generally forced to deposit with banks at low rates which strip their savings against inflation is another key factor, not the P2P model itself.

Other stories

India – FMC To Review Evening Trade In Agri Commodities
Sharleen D’souza – Business Standard

FMC is set to review its decision to allow evening-session trade on commodity exchanges and consider whether this is keeping speculators away by allowing hedging provisions, or being misused. In its first month, evening-session trade on commodity exchanges has seen increased participation.

PLY: India struggles to keep the balance between speculation which has been somewhat rampant in agri markets, versus the key requirement to engage those requiring hedging.

FINRA Rule Change To Limit Self-Trading Approved

FINRA announced the SEC’s recent approval of a FINRA rule change to limit self-trading. This change to FINRA Rule 5210 requires firms to have policies and procedures in place that are reasonably designed to review their trading activity for, and prevent, a pattern or practice of self-trades resulting from orders originating from a single algorithm or trading desk, or related algorithms or trading desks.

HKEx – New Articles Of Association Approved

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