May 30 2014

elb2Investors encouraged by Russell’s merits for LSE while LME & CME seek to solve London’s silver fix problem. NASDAQ OMX close notes offering successfully. BATS chip away at the country club with a fascinating addition to the listing fees model. Molybdenum and other new metals contracts to trade in China, CFTC reviewing HFT trading ‘perks’ while we inch towards Bitcoin derivatives as well as a new Brazilian coffee contract.

NLX is one year old tomorrow (31st May), many happy returns to Charlotte Crosswell and her team. I will consider and report back on the exchange’s progress to date next week.

As always, I encourage you to scroll all the way through Exchange Invest…

Meanwhile, if perchance you run out of things to read, then subscribe to our Premium service. Recent highlights include:

New: CME Election Results
– a brief look at the voting patterns on the board and B-share vote

Creating A Chain of Value
– how will exchanges incorporate innovation?

India: What Will Modi Do?

HFT1: The Market is Not Rigged

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 –

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Public Markets

CME, LME Compete To Provide Alternative To London Silver ‘Fix’
Clara Denina – Reuters

Major metal exchanges emerged as contenders in developing an alternative to the London silver price benchmark, or “fix”, after the century-old system for setting the globally recognised price is disbanded in August.

Previous discussions on the topic on May 16th.

PLY: While the EU appears poised to launch a ‘fix crackdown’ once they have got over the highly undemocratic business of picking Presidents, Commissioners and assorted flunkies, nonetheless the move to provide more benchmarks enables huge upside for all manner of exchanges. The London fixes alone could yet become more important in silver (and gold) than ever before. Exciting opportunities for exchanges as the banks yield their monopolistic power in this area.

LSE Rises As Investors Warm To Russell Deal (subscription)
Bryce Elder – Financial Times

Investors have warmed to the idea of LSE buying Russell Investments, with the stock up for six straight days since it entered exclusive talks.

Credit Suisse expected LSE to pay around $2.4bn for the index business, part funded with a $1.4bn rights issue. Assuming a 20% discount on the new shares, it forecast a deal would boost LSE’s EPS by 6% in the first year.

PLY: Russell is a good deal for LSE although how they handle the asset management side will involve new territory for an exchange group if they retain it (and market reaction suggests investors are not averse to the idea). Of course the sell side may not like it but the Rolet era has been centred on the LSE being incredibly close, some might say directly supplicant to, the banks.

NASDAQ OMX Closes $500 Million Senior Notes Offering

NASDAQ OMX announced that it closed a public offering of $500 million aggregate principal amount of 4.25% Senior Notes due 2024. J.P. Morgan Securities LLC and Wells Fargo Securities, LLC acted as Joint Book-Running Managers for the offering.

The announcement regarding the start of the offering and details of the pricing was reported on May 20th.

High-Speed Trading Perks Said To Be Focus Of CFTC Review
Matthew Leising – Bloomberg

CFTC is seeking detailed information on the incentives that U.S. derivatives exchanges such as CME and ICE offer to spur trading.

CFTC wants to know who gets trading fee discounts, how much money they save, and whether programs to reward early adopters of new futures contracts ever end. High-frequency trader Virtu Financial Inc. publicly revealed the examination in March, saying CFTC asked for information on its “participation in certain incentive programs offered by exchanges or venues.” Virtu didn’t give specifics. The fairness of financial perks that exchanges give to high-frequency traders and others have captivated market critics for years, though the debate has mostly centered on stocks, not the futures industry overseen by the CFTC.

PLY: There’s nothing like getting worked up about something and then exploding in a bundle of confused fury is there? I will be adding a post on this topic to the Premium subscribers as there are clearly different things to discuss here – incentivising those who help contracts to grow and then what at its extreme appears to be an inability of exchanges to cut the umbilical cord of incentive for fear of…well fear of…

…well making a decision is a big issue for many exchange managers for starters.

At A Glance: Mifid II Proposals On Controlling HFT (subscription)
Anish Puaar – Financial News

PLY: A brief surmise for those who have not managed to wade through all 800 plus pages of ESMA-lese to get at these nuggets.

ICAP, Gasteam America LP To Form Alliance Focusing On LPG Operations
Robert Gibbons – Reuters

ICAP Energy and Gasteam America LP are forming a strategic business alliance to complement their respective liquified petroleum gas (LPG) operations, allowing Gasteam, a physical brokerage / international marketing & consulting firm, to benefit from ICAP Energy’s futures / derivatives expertise and infrastructure.

Ex-RBC Executive Appears to Confirm Proprietary Trading Spinoff (subscription)
Ben Dummett – Reuters

Mark Standish, former co-CEO of Royal Bank of Canada’s RBC Capital Markets division, appeared to confirm on his LinkedIn page that the division is planning to spin off its New York-based proprietary trading business into a stand-alone hedge fund.

PLY: Who needs to use HFT methods? Just hang out on LinkedIn and a few other social media sites, the data wash is just enormous, he said, cuing a mass outbreak of paranoia.

Private Markets

BATS Exchange Unveils New Pricing And LMM Program For Listings Business
BATS Global Markets

BATS announced new pricing for its U.S. listings business: exchange-traded products (ETPs) that trade more than 400,000 shares per day will be eligible for a free listing on BATS Exchange. BATS had previously offered free listings to any ETP that traded more than 2 million shares per day. Under the new pricing, 223 ETPs market-wide will currently be eligible for a free listing on BATS.

BATS Exchange will also be introducing a Lead Market Maker (LMM) program for its listings business beginning June 2. The LMM program, which has been approved by SEC, is a new rewards-based program designed to incent market makers based on the amount of executed added liquidity they provide in BATS-listed securities for which they are an LMM. The new LMM program is designed to provide even greater incentive to market makers to provide liquidity in less actively traded products.

PLY: An interesting programme, salami slicing the legacy model towards an alternative rationale for competing for listings with the country clubs.

Inching Towards Bitcoin Derivatives
Jon Matonis – CoinDesk

Bitcoin derivatives are more in demand than ever, as bitcoin company executives seek a way to hedge balance sheet risk.

PLY: Bitcoin Foundation Executive Director Jon Matonis continues to address the development of Bitcoin derivatives trading. So far really only on a forex basis although clearly sooner or later a yield curve will build…

Bitcoin Bots Bought Millions In The Last Days Of Mt Gox
The Guardian

Bitcoin prices were being manipulated in late 2013 by a pair of autonomous computer programs running on bitcoin exchange MtGox, according to an anonymously published report. The programs, named Willy and Markus, allegedly pushed prices up to $1,000 before the bubble burst after Mt. Gox’s collapse in late February.The report’s author alleges that some of the trades were coming from inside the exchange itself. “In fact,” the report says, “there is a ton of evidence to suggest that all of these accounts were controlled by MtGox themselves.”

PLY: Mt Gox continues to look somewhat murky.

Special Section: FTI, NSEL, India at the Crossroads

PLY: MCX and FTIL off circa 1% as the Mumbai Fraud Squad get help in Punjab to rein in a few more defaulters…although still no news on when all these tied assets might begin to be sold.

Punjab Govt Tells State Police To Help NSEL With 5 Defaulters
Business Standard

With a majority of the defaulting borrowers of the scam-hit NSEL based in Punjab, the government there has directed its police’s economic offences wing to assist their Mumbai counterparts in the recovery of dues. NSEL had sought the state government’s help in recovery of Rs 1,524 crore (USD 258.7 mln) from five companies there — three of Laxmi Overseas Industries (LOIL), ARK Imports and White Water Foods.


Katsuyama On Difference Between “Predatory HFT” vs. “Market Makers”
Mark Melin – ValueWalk

Faster trading does not lead to investors obtaining the best price for stocks, according to a study by European academics who considered the NASDAQ OMX trading venue.

As study says speed increases cost, question is how do you differentiate between real liquidity and HFT bandits?

PLY: To be fair to this article, I presume ValueWalk is aimed at a low level retail trading audience but the egregious comment is clearly: “The study uncovered a little discussed yet critical issue in high frequency trading (HFT) – differentiating between the market maker and the directional high frequency trader.” Clearly this is the use of “discovered” as in “I just “discovered” wheels are helping my daily commute when I tried driving with only 3 on my car.”

Then again a central conceit which is an unfortunate part of the truth/fiction gap in Lewis’ book is this knowledge deficit issue which is highly fallacious, suggesting nobody ever thinks about such issues in trading. Nevertheless, the core issue is at just which speed / or to be arguably more precise, with which algorithm does HFT part company from being useful liquidity provision to a predatory strategy? Brad Katsuyama offers some thoughts here.

MOEX Has First “All-Market” Trading Solution With Horizon Software

Horizon is the first global vendor to be certified for both equities and derivatives trading on MOEX. The company has worked closely with MOEX to release fully compliant, high-speed connectivity for members and clients and is the only global vendor to be certified for both equities and derivatives markets by the exchange.

PLY: I am surprised to hear that no other global vendor (although ‘global’ vendor is of course a broad church definition for fintech anyway) has yet been certified for both equity and derivatives trading on MOEX.

Traiana Launches Enhanced Version Of CreditLink For Buy-Side Firms Trading On SEFs

Traiana has launched an enhanced version of CreditLink with new functionality designed for buy-side market participants trading on SEFs. The enhanced version includes services to streamline post-trade processing of SEF trades, manage the allocation process for bunched orders, and the ability to monitor limits across the entire trade lifecycle.


CBOE To Launch SPX End-of-Month Options In July

CBOE announced that on Monday, July 7, it plans to introduce PM-settled, End-of-Month options series (EOM) — with expiration dates falling on the last business day of the month — for its S&P 500 Index (SPX(SM)) options.

Brazil Exchange To Launch New Coffee Futures Contract

Brazil exchange operator BM&FBovespa SA plans to launch a new coffee futures contract later this year in an attempt to increase the commodity’s liquidity, which has fallen gradually in recent years. The new contract will have the same maturity dates and quantity as existing ones, but coffee types 6 and 7 will be covered rather than types 4 and 5.

PLY: Interesting albeit also slightly confusing to my mind as coffee types 4 and 5 are considered export-grade while 6 and 7 are generally for domestic consumption. That may help domestic liquidity I suppose but surely leaves a big CTD basket issue / anomaly? Given that coffee prices have been inflating for many reasons (of which my own contribution in purchase is modest), it is interesting that BM&F are mixing their contract in this way. Although it may smack some slightly of desperation. With a moderately bitter aftertaste and a hint of guarana, presumably.

China Plans To Launch Nickel, Tin Futures This Year

Shanghai Futures Exchange (ShFE) is planning to launch China’s first nickel and tin futures this year.

Bohai Exchange’s New Moly Trading Platform To Boost Price Transparency, Trade In China

China’s Bohai Commodity Exchange (BOCE), a government-backed online trading platform, has added molybdenum to its list of spot commodities, and this is expected to boost moly trade in the mainland and increase price transparency.

PLY: LME already trades Molybdenum incidentally.

UK Watchdog Wants An ‘Innovation Heaven’ In Financial Products
Huw Jones – Reuters

Britain’s markets regulator pledged on Thursday to offer a more sympathetic ear to financial firms wanting to develop new products that help customers save for their old age. Martin Wheatley, CEO of FCA, struck a more conciliatory note after lawyers have criticised the year-old watchdog for being heavy handed and effectively vetoing new products.

PLY: So those who want to invest locally in the economy through crowdfunding can…oh hold on a minute: “innovation heaven” postponed (temporarily we hope!).. I would love this catchy phrase to be true but the actions in the breach of FCA are sadly lacking currently. Perhaps change is coming from the top at last. Here’s hoping.

Listed Derivatives Trading Back On The Rise (subscription)
Anish Puaar – Financial News

Global derivatives volumes traded on exchanges grew by over 7% in 2013 with greater activity in futures and options based on commodities and interest rates helping to reverse the previous year’s declines.

The latest adjusted figures from WFE, which cover trading across 51 trading venues, were boosted by the prospect of tapering in the US, which helped drive a 13.5% rise in the number of interest-rate contracts traded to 3.3 billion and increased trading of commodity derivatives in mainland China, where contract volume grew by 39%

PLY: To the ETD industry 7% net growth still feels like a recession to many given the historical expansion back in the days when banks still thought they were solvent.

Japan OTC Exchange To Launch Market For TOCOM And RIM Swap Trades On June 24

TOCOM announced that the Japan OTC Exchange Inc. (JOE), the joint venture with Ginga Energy Japan Pte. Ltd is now scheduled to establish Facilities Similar to Specified Commodity Markets for RIM Swap (Gasoline, Kerosene, Gas oil, Bunker A fuel oil and LSA fuel oil) and TOCOM Swap (Crude oil, Gasoline, Kerosene, Gas Oil, Chukyo-Gasoline, Chukyo-Kerosene) and start operations on June 24, 2014.

Career Paths

WSJ reports that NYSE Executive Joseph Mecane is to leave the company.

Mr. Mecane had served as an executive vice president overseeing NYSE’s markets since 2008. He came to the exchange from UBS Investment Bank, where he was a managing director in the equities division. As we can’t forget (hooray!) last week EI reported that NYSE CEO Duncan Niederauer is retiring.

SEC announced that Stephanie Avakian has been named deputy director of its Division of Enforcement.

Financial Calendar


BM&FBOVESPA approved R$204.9 mln (USD 92.3 mln) dividends payment
GFI Group $0.05 quarterly dividend payment
Record date CBOE $0.18 quarterly dividend
Record date Interactive Brokers $0.10 quarterly dividend

Next week

BGC Partners $0.12 quarterly dividend payment
Bulgarian SE AGM
TMX $0.40 quarterly dividend payment

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

Share Notes

ICE Director Vincent Tese unloaded 1,000 shares Thursday, May 29th at an average price of $195.48 (bargain $195,480.00). He now owns 8,361 shares. ICE Insider Stock Transactions are chronicled here.

Other stories

India – Banks Must Quickly Get Into The Commodity Market Act
Nilanjan Ghosh (Chief Economist of MCX) – The Hindu Business Line

Banks are not allowed to participate in the Indian commodity derivatives markets. Such non-participation of the most important financial institution of the country – banks – is an important missing link in the evolution of this market in India.

PLY: Yes, I agree, banks ought to be allowed into the Indian commodity markets – it makes no sense to leave out any willing actor in any economic situation. Another useful column from Mr Ghosh.

Can Modi Govt Clear The Cloud Over Commodity Futures Mkt?
Free Press Journal

A decade into its evolution, India’s commodity futures market finds itself at a crossroad, with a slew of recent developments leading to loss of confidence among market players and resulting in a continuous downtrend in volumes. The need to strengthen market regulations was recognised long ago but never addressed.

PLY: The key is not new and more regulation but actually a better system of regulation – and indeed there are clear benefits to deregulation (allowing banks in, changing exchange ownership rules etc etc) as well as actually having a valid regulatory system – but that probably suggests closing SEBI/FMC et al down and starting again.

BGC Sued by Broker Who Refused Water-Throwing Initiation Ritual
Kit Chellel – Businessweek

BGC Partners was sued by a former broker who said he was subjected to a campaign of abuse after refusing to take part in a “boorish” initiation ritual called “the run.”

The tradition requires “brokers to run across the floor whilst others throw water at them after they complete their first trade,” Bou-Simon, head of the basis swaps desk said. He said the practice was unsafe, citing an incident where an employee was taken to the hospital after colliding with a piece of furniture. BGC said Bou-Simon was subject to disciplinary investigations and had fallen asleep at his desk.

PLY: I have to admit that the juvenile nature of the IDB community rarely knows any bounds but frankly the idea that an Australian rugby supporting Chelsea fan was somehow mobbed having clearly had many years experience in the field, is frankly drivel. I don’t support silly frat boy antics but given the plaintiff already worked at BGC from 2000-2005 this lawsuit strikes me as specious at best – it was not a new “innovation heaven” feature methinks.

As a parting shot to the week, I note that the convicted criminal Jordan Belfort (‘the Wolf of Wall Street,” central character of that overlong b grade crypto-porn film by Martin Scorsese) is giving an “Extreme Training” presentation in Bucharest. Romania later this year. Frankly I am not sure who will be teaching who at this event but if Mr Belfort pays attention I suspect he may learn a thing or two. On that note, have a great weekend!

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