Feb 15, 2020 21 min read Exchange Invest Weekly Podcast

Exchange Invest Weekly Podcast 032

National Stock Exchange of India were asked by Sebi, the regulator to divest the entire 37% stake they hold in Computer Age Management Services.

Transcript

ICE masterclass call fails to sway box bound investors, France ever eager to get more CCP from London. No Connect linkage for Alibaba stock and CME results disappoint. Also news of the NCDEX IPO and more!

Welcome to the Exchange Invest podcast with me Patrick L Young. It's all the bourse news that's fit to pth.

Having enjoyed the speed of Concorde in the same direction way back when, it was quite the excitement to see storm Ciara helping record breakers across the Atlantic this past weekend. A British Airways jet managed a record breaking four hour 56 minute trip from JFK to Heathrow (Concorde averaged three and a half hours) for the same trip but with de facto Economy Class legroom for all. Presumably there was a slightly more agreeable meal to be had in the premium classes on the 747 which belted along at its top speed of 825 miles an hour, thanks to a 265 mile per hour tailwind. By comparison, that tailwind alone was more than 2.5 times the top speed of the Vickers Vimy used by Alcock and Brian for the first transatlantic flight in June 1919, involving 16 hours of flying over the shorter distance from Lester fields St. John's Newfoundland to Clifton county Galway.

Indeed, several people were flying into their own adverse storms this week, no tailwinds to be found. CME earnings were the biggest of the pile as their leader of the pack status would suggest. Their earnings nonetheless, were lagging estimates in Q4 and were going to drop year on year lower trading activity walls to blame. Well the thing is with CME a silo-gistic trade processing Titan, there's no pivot when markets are calmer, giving it a high correlation to volatility.

At the same time ASX results, they posted a 250 million Australian dollar profit after tax. They're trying to build ‘the exchange of the future’ and making much of Digital Asset in which they invested some more money recently and which is building their new blockchain CSD.

Tradeweb they had numbers as well: they beat estimates by one cent. And CBOE, they managed well: the profits of parsimony. They helped keep CBOE above analyst expectations while posting disappointing results for growth mavens .TMX Group's results were, well, I suppose the most exciting thing was there was no sign of Lou Eccleston after his voluntary retirement, which of course was not linked to any shenanigans at Pravda-Berg his previous employer. Meanwhile, Euronext, they had the first numbers to come in with input from the Oslo bourse which they acquired during the course of the last year. But unfortunately Dubai Financial Markets saw a profit and revenue decline for the whole of 2019.

And that brings us ladies and gentlemen to the Intercontinental Exchange, who had an epic earnings call even by their own high quality standards last week, just as this podcast was being recorded. Overall, a great set of results 9% increase in the quarterly dividend, another set of record breaking revenues and profits.It was a good result and a remarkable call: a must listen. At the same time, there were problems of course in relation to what might be called investor myopia. As we know last week, as was discussed in podcast 31. The news leaked out that there was some sort of a discussion ongoing between eBay and ICE. Although at the time of the leak, it seemed as if discussions had drawn to a conclusion. To put it mildly, analysts and investors were, frankly, very, very skeptical about the possibility of a tie up. If nothing else, it's a very interesting lesson in the modern ultra low latency edge of how once a leak can get out, it can spiral out of control. Ultimately, we had no opportunity to see what a deal might have looked like and indeed what might have been the advantages to the parish. That worries me considerably because in the future, those who are trying to transform their pure deal making businesses, those that are well indeed reporting this week, disappointing results due to transaction volume being the big drivers, such as CME are going to find it more difficult to manage to revolutionize their business unless the analysts / investors can manage to find a way to think outside the box.

And let's face it, the Intercontinental Exchange itself is a business which is entirely been driven and built on incredible out of the box thinking, and management. Ultimately, a terse one liner press release graced the late night wires last week.

“Based on investor conversations following today’s ICE earnings call, ICE has decided to cease exploring strategic opportunities with eBay.”

That was disappointing for management, frankly it was disappointing to me because I was fascinated to see what was going to happen. It's a rare shareholder rebuke, albeit, alas, I think a reasonable reflection of a sheep-like tendency of too many in the current investor / analyst class, and I mean, not not just in the parish of exchanges, but across the whole gamut of investing.

Jeff Sprecher said many fascinating things in what amounts to another master class for the future masquerading as an earnings call. It's an absolute must listen, ladies and gentlemen, I advise you to go to the investor relations site of the ICE and download immediately in order to learn more about the business, the shape of the business, and indeed the potential for the future of the business. However, after this one article, I will leave the last word on Intercontinental Exchange for this week to the CFO Scott Hill, who concluded his call remarks with this robust create the balance sheet core:

“We've spent an hour, not talking about a volume business, that's crushing it right now. We had some good questions earlier about a data business that is growing at twice the level of the large company we acquired a few years ago, at over 50% margins.

The combination of that business, generates $3.3 billion of EBITDA. It generated last year, $2.3 billion of free cash flow. That's where capacity comes from. That's the starting point. It's the strength of the existing business.

The fact that all of our colleagues, aren't listening to this call, but they're running our exchanges and our clearing houses and selling data and building ETF Hub, and building a mortgage business, that's the foundation of capacity.

Because if we don't have that $3 billion of EBITDA, if that EBITDA hadn't grown every single year for 14 years. We wouldn't be able to enter into a conversation about going and levering up. So, it's those three things that drive it, with the last one being the fundamentally most important one.”

Bravo, Scott Hill. There was a lot to learn in last week's earnings call from the ICE. A lot. It sadly revolved around how so many parishioners just don't get the plot about the future. And many of those investors were absent the early years of the ICE story when few wanted to listen, that's depressing in the extreme.

By the way, of course, the most clueless, don't read the Exchange Invest daily newsletter. Is that correlation or causation? Well, I've pithed you decide.

Back over in Europe and Euronext, they're still analyzing whether to bid for the Madrid bourse: very interesting to watch. Stephane Boujnah, has been biding his time, of course, the SiX group from Switzerland, they've put in a pretty frothy offer and it seems to be accepted,

so far, subject to regulatory permission. It's that regulatory permission of course, which is going to be the deciding factor. Evidently Euronext wants to keep its powder dry on BME right now, to see what possible encumbrances are added by the regulators. Stephane Boujnah also made one interesting comment on his quarterly earnings call. He mentioned the desire of Euronext to own Borsa Italiana once again: he went further he said Borsa Italiana, its natural owner is Euronext or words to that effect. Yet LSE says it’s not for sale, they consistently say it's not for sale. At the same time...There have been rumors in the past, perhaps Stephane Boujnah was alluding to something that we haven't seen behind closed doors. One thing Euronext also said was that the case has yet to be made for shortening the trading day. This of course, is an ongoing debate in London at the moment where various people want to see less work for presumably exactly the same pay, not something that ever seems to work out in the rest of the economy. Indeed, well, there you go: the high speed traders they've also caught this Bernie Sanders-esque economic bug.

The European Principal Traders Association are arguing for a shorter trading day as they tend to their ‘bots. This only adds to the serene sense of isolation #firstworldproblems writ large, enjoyed by most in financial markets these days. Surely, this whole concept of less work for the same pay is a sign that a huge bull phase is working its way towards a conclusion?

Great news on the IPO front NCDEX the National Commodity And Derivatives Exchange of India, originally a commodity bourse that was built with the active participation and a cornerstone shareholding from the National Stock Exchange of India itself (NSE those electronic pioneers of markets as a competitor to MCX the multi Commodity Exchange which was pioneered by Jignesh Shah long before the ignominious demise of NSEL, which had absolutely nothing to do with NSE, but was called the National Spot Exchange and was of course, a huge well, ultimately Farago. Some might say a scam, but certainly a sham and something which has still not been resolved umpteen years later by the Indian courts, which doesn't make you too confident about the idea of doing business in India for certain reasons. Anyway, NCDEX, they have filed their offer documents for an IPO to become the third listed exchange in India after the Bombay Stock Exchange BSE and of course the Trailblazer MCX, Multi Commodity Exchange. Meanwhile, the National Stock Exchange itself, it's still trying to find a way to get to IPO as has been the topic of various podcast series, in recent episodes, Also this week, the National Stock Exchange of India were asked by Sebi, the regulator to divest the entire 37% stake they hold in Computer Age Management Services. CAMS, that might sound like a very innocent mnemonic, but it's actually the largest mutual fund transfer agent in India. So presumably there's a bit of a concern over monopoly issues going on there as they hold 70% market share. Well, to be precise, I think it's 69.6% market share of the overall amount of mutual fund transferring going on in the growing Indian market.

At the same time, there was a good article in VC circle publication this week, talking about “the National Stock Exchanges’ valuation is stuck in a time warp.” And indeed, the NSE are stuck in a groundhog day. It's partially of their own making, but it's always had Sebi involvement around the edges. One does wonder when the value will finally shine through of these global chart topping volumes and derivatives, which was always the potential for NSE even when I was in Mumbai doing investor due diligence years ago At the same time, now they're top of the parade top of the hit parade top of the charts in the FIA listings… How soon before National Stock Exchange’s valuation will actually reflect the incredible volumes that they are doing?

From one NSE to another. The Nigerian Stock Exchange is now set for the final conversion - at last! - of the Nigerian Stock Exchange to a public liability company. They're going to be appointing a new board and then that's going to result hopefully in a stock market listing. Meanwhile, the demutualization is slated to end on April 24th.

Also in Africa, Zimbabwe, the SMEs there are scrambling to try and get involved in the new Growth Enterprise Market in the north of Africa, Algeria, they're looking to further develop their bond and stock markets to try and ease domestic financial pressure. Sukuk or Islamic bonds and developing a small Stock Exchange are seen to be key sets that they can manage to put together in order to progress the oil Reliant economy as it seeks to diversify its funding sources.

Vendors had cause to worry this week for at least a couple of reasons. First of all a story which didn't get much publicity overall, but Interactive Brokers that 500 pound gorilla of a discounter preferred by many semi professional and professional investors the world over, have launched Bond Scanner, it's a lovely little nifty piece of kit which will help investors find the best pricing on a wide range of fixed income. Bloomberg fixed income, that legendary best bond platform of them all it isn't but it's getting closer by the day. Every incremental innovation which eats at the need for a terminal is causing to my mind huge risks towards the Classic vender model. IBKR may have a clunky login for their clients, but that has opened a Pandora's box of data nowadays, and there's no fixed fee for actually logging in. Where does that leave the 300000 installation cash flow of respectively Pravda- Berg / Refinitiv? Well, not yet hanging by a thread, but rather it does start to look like one of those lovely cottages near an eroding cliff. The back garden looks a bit shorter from the kitchen window this morning and every day until eventually it collapses into the sea.

Elsewhere. asset managers in Europe led by EFAMA, which is their industry body are saying market data prices may need a competition probe. It's a funny old world, given how data charges have hardly changed given the vast expansion of more and indeed more accurate, data and data sets that are packaged compared to a decade ago.

However, it is interesting that EFAMA wants to investigate the role of data vendors. We have to be somewhere up or past peak value for this pure terminal business. And that must be a concern if either you believe Refinitiv has a high value for what it currently is. or indeed, if you're the sort of person who holds Bloomberg stock without believing you are a bit messianic. Whether the latter messianic crisis may afflict one or more folks in the Pravda-Berg Empire is clearly ope, to further satirical consideration.

Meanwhile, talk of vendors and the probability that they're somewhere over the precipice of the cliff leads us to big data and if you crunch the numbers this week: Well by 2025 on current trends, absolutely nobody will be watching the Oscar ceremony on American television.

Then again, what is the TV? Is that something like twitch for old people?

These days no bulletin would be complete without news of the crumbling problem of Cum-Ex, the cumulative ex dividend scandal. Gradually, it's reaching closer and closer to players in London And indeed, one former London investment banker Martin Shields may have to pay back some 16 million US dollars perceived to be ill gotten gains. Or possibly one might say, ‘Ill gotten franks’ as in the franking of the dividends from which they were cumulatively removing their tax credit. Equally not a good week to be part of the Freshfields law firm. They've come under considerable financial and reputational fire in Germany and beyond.

Hong Kong's IPO engine seems to be stalled at the moment as the outbreak of coronavirus keeps dealmakers at home.

Elsewhere, NASDAQ priced a $600 million senior notes offering which went away smoothly, and the Bolsa De Valores, De Colombia, increased its shareholding in the Colombian central counterparty risk clearing house to 55.98%.

Still on clearing, excellent document of the week by one of the finest bodies around in the industrial firmament of the parish, CCP 12, the global body for clearinghouses in derivatives, they published their progress on initiatives in otc derivatives report.

Elsewhere, interesting news from EEX, the dynamic power centric bourse arm of the Deutsche Boerse itself. EEX is looking to grow Japanese and US power businesses this year.

Meanwhile, just as we mentioned the issue of stuttering IPOs in the world's leading IPO Haven, Hong Kong, due to various viral concerns emanating from Wuhan so too, we've seen some issues: SGX are allowing some firms to delay their AGM some results. And there have been similar sorts of pressures and resolutions coming through in Hong Kong as well.

One Piece of blockchain there was an interesting story discussing why central bank digital currencies are perceived as the killer app for blockchain in 2020.

Given I was talking about this stuff 20 years ago, I must admit there is excitement in CDBC. That's central bank digital currencies, this week's up acronym of the week. But it's not, I believe, the killer app. Although of course, it would be great news for the good folks of SETL whose excellent CSD technology in the blockchain arena, also stretches into being a trailblazer for the CBDC, the central bank digital currency market, while SETL appear more advanced than most in delivering the tools to make it work. Perhaps my problem with the whole concept is I don't really want to trust any of the current crop of charlatan central bankers, the QE merchants with my wealth, given their manipulations in recent years, even beyond the usual historical shenanigans that come with the brief of being a central banker. However, if CDBC kick starts delivering competitor credible currency against the behemoth bitcoins of the blob, then it will be a good thing.

And in people news this week, Brian Durkin after a lifetime with CME Group and its forebears is stepping down as President. Equally, the CME after they've gone through their hugely complex process akin to the Soviet States during the course of the Warsaw Pact, have named their director nominee slate, throwing off a demutualization legacy without modernization strikes me as more concerned with regime extension at all costs, rather than a serious transition to modern corporate governance appearing here. CME has to show that it is more than just leanings towards a personality cult, which it has been all too often in its history on through various chairmanships. At the same time, there remain conscious efforts of regime maintenance and other ways too qv that nomination procedure for the board, which as I mentioned earlier, some might perceive as a remarkable facsimile of the Soviet system of official communist candidates. Then again, CME remains broadly untroubled by the race to modernity, seeking more to exploit its quasi-monopolist approach to trading than actually building extraneous, unrelated businesses going forward. or so it seems. It's not a terrible strategy per se. Just it strikes me as a disappointing lack of ambition, given the potential to leverage the base.

In product news, biggest news of the week, Alibaba has been blocked from the Hong Kong Stock link to China. Quite interesting. Disconnect the distance to exclude shares of China's biggest e commerce company from a cross border trading link is clearly a blow to Hong Kong. Is it a punishment or is it simple self interest at work? ...muse the good folks of Bloomberg this week.

Meanwhile, Boursa Kuwait, they've launched a new index to encourage trading in their main market shares. The BK main 50 index containing the most heavily traded shares on the main market in Kuwait, Moscow Exchange they're expanding their interest rate derivatives offering the London Metal Exchange has been under some pressure to investigate some shenanigans around the nickel market. And thanks to the introduction or the extension of BME, Robert Hooke

Elsewhere, worries, ‘the LIBOR transition seems to be hitting a hurdle after Sofr linked bond sales slumped’ was one headline and Bloomberg, which adds to news that actually no further legislation is planned to increase the usage of Libor alternatives in the future. And indeed also, Fannie Mae and Freddie Mac have signaled that soon the day will be coming where they will no longer accept Libor linked mortgages.

And that brings us ladies and gentlemen to Brexit. Reuters had an exclusive headline this week, France is ramping up pressure to shift $200 billion of Euro clearing away from London according to sources. Paris attempting to inspire the European Union to dance on the head of a protectionist pin is not unsurprising. They're trying to find means to constrain clearing to within the eurozone for various types of Euro denominated derivative for what is a majority business traded ex the EU 27. The fringe may be capable of finding tiny tweaks, but ultimately I don't think this can succeed.

However, that won't stop France from trying, as it is long since failed in direct competition to wrest business from the UK’s vastly larger financial center #DespiteBrexit. At the same time, there were a number of clashes during the week across the English Channel. ESMA was trying to retain its influence over the UK in relation to an LME centric spat on one level. And at the same time there were questions concerning CSDR cash penalties for non settlement into different clearing settlement depositories going forward. Rules are being adopted and finally enacted on the continent. At the same time the incoming boss of the Bank of England was warning of what can happen if there's a spat between the two: the European and the UK regulators, and indeed also the Bank of England sought to warn of limits to the European Union supervision of the UK clearing banks. The Bank of England worries about and I quote, “multiple pairs of hands on the steering wheel” in the event, pointedly of contagion from a continental banking crisis affecting the UK system. These are fair points, but unfortunately they're only likely to feed further paranoia in Brussels. At the same time, no one wants to risk another run of financial crises, particularly given that Angie Can-Kicker and her elite squad of duct tape applying penury merchants remain in power in Germany and therefore, across the European Union, to potentially inflict fiscal pain on the many, to rescue a few German banks.

Then again, we reached a very sad tale demonstrating the pure play paranoia in Brussels. A

remark by the finance minister, who by the way, has resigned just as this podcast was being recorded on Thursday, the 13th of February: Said Javid made the fair remark that he was looking towards a long term healthy, equivalent relationship between the UK and the EU’s markets. Absolutely fair comment.

However, the comment that Britain wants a healthy, mutually advantageous long term relationship concerning financial markets to trade as a whole caused a fit of the vapors in Brussels, Michel Barnier, Brussels’ entirely boxed in and thought limited, show pony negotiator, instantly blurted out that this was quite impossible. Perhaps this demonstrates the difference between business and the blob. As an entrepreneur, I approach negotiations seeking to do deals. Brussels seemingly starts with quite the opposite intention boxing itself in before it even has a chance to consider the opportunity in front of it.

When the officials of Brussels and Mr. Barnier we're dealing with the equally limited to resume, this amounted to a kind of zero sum of ‘lose lose’ stances. But now that we have Bo Jo - Boris Johnson - in charge, the British government wants to make progress. The EU as a result is exposed. And indeed, perhaps the best Article of the week discussing that exposure was in City AM: “Brexit, a drawbridge to equivalence” was written by Nicholas Michael. He's the head of the Luxembourg financial center group, and I quote, “but what the EU is perhaps only just starting to grasp is that the UK under this government is not going to agree to a general acceptance of EU law in exchange for some access to the EU market.”

There's a lot more in that article. I recommend you go and read it: “Brexit, a drawbridge to equivalence” as it clearly tries to prise open the closed mindset of Brussels so we can get on with better trade, better markets and ultimately helping the European Union survive on its pathway to its much needed reforms.

In technology, SIFMA made a statement on data connectivity which takes us across the Atlantic but it's the same old news about data as we were hearing from EFAMA earlier. In fact, one fascinating side note from the invariably data rich ICE earnings call last week was the point about how the, well, furious actions all the way through to just plain whiny actions, from US market data users had ended up actually freezing innovation in the data market itself in the US stock market environment.

No one wants to innovate or even deliver incremental change at the moment thanks to litigious activity and other threats, the #becarefulwhatyouwishfor problem writ large without having to consider the depth and book of the complaints.

Meanwhile, in Bigworld this week, in the race for the Democratic nomination, Pete Buttigieg doesn't want to incarcerate folks found in possession of crystal meth or heroin. Presumably that's to prevent the Iowa caucus app developers being locked up. In Berlin. Mrs. Merkel's long goodbyes were further prorogued as her implausible proposed successor Annegret Kramp-Karrenbauer resigned as party leader long before ‘Muti’ abandon the prime ministerial cudgels of indecision which are her political trademark.

Over at the EU, they've been drawing up new member regulations to preclude malign third country influence which the South China Morning Post saw as an oblique attack on China. Yes, that may be a plausible concept in this time of very stressed relations amongst many countries as they consider adding Huawei to their 5g network. But then again, given all the recent EU remarks, it might also be just aimed at curbing Brexit Britain?

It proved to be a big day for sackings and in fact, a big week for sackings, the UK cabinet has been reshuffled as we record as I mentioned earlier. In China, the bosses of Hubei the province, which includes Wuhan have all been unceremoniously dumped. Elsewhere Of course, COVID-19, as it's now been christened, is wreaking event havoc. The season the opening Formula One Chinese Grand Prix is off. The Hong Kong Rugby Sevens have been postponed, indeed, most everything involving a crowd and China has been prorogued, including by the looks of it the upcoming People's Congress. Art Basel in Hong Kong is off and the League of Legends Pro League postponed, leaving folks to Twitch alone presumably. Meanwhile, in the parish Bursa Malaysia have canceled their palm and Lauric oils, price Outlook Conference and exhibition until late June.

Even Europe is not unscathed, with the biggest casualty of the week being the Mobile World Congress in Barcelona, which engages zillions of people in 5g small talk. This clearly comes at an economic cost and indeed, peripheral to the parish, Alibaba have unveiled relief measures for online merchants affected by the corona virus outbreak.

However, let's leave this week on a slightly more optimistic note: CEOs who mentioned growth on earnings calls see outsized stock gains.

So that ladies and gentlemen brings us to the end of another week of the Exchange Invest. Weekly Podcast. This has been Episode 32. with myself, Patrick L Young. Don't forget you can catch all the pith and all the stories Monday through Friday and the Exchange Invest Daily Newsletter. It costs starting out only $200 per user per year to be licensed for the full understanding of all the news that's fit to pith, about the stock exchange business, the exchange business as a whole and market infrastructure worldwide.

This week, we included issue 1684. In the year 1684, there was a conversation between Edmund Halley, Christopher Wren and Robert Hooke in an inn, in which Hooke later claimed not only to have derived the inverse square law, but also all of the laws of planetary motion. Ladies and gentlemen, it sounds much like any Signed English pub talk today can resolve major issues over a few pints. Speaking of such off the cuff discussions years ago, I made the comment.

“The trouble with weather forecasting is that it's right too often for us to ignore it, and wrong too often for us to rely on it.” In the latest round of mentions and dispatches for that quotation

The Marian star in Ohio mentioned it last week. And I wrote back thanking them for using the quotation, to wit, I gained a second column mentioned how delighted the author was that I was writing from the beautiful nation of Malta, in none other than Africa!

A little spot of geographical alignment which seems to have gone awry, somewhat ironically came on the day after the good people of Valletta, were celebrating the feast of St. Paul's shipwreck, when, of course, he made land in Europe in Malta, having escaped from the Middle East some days before. On that note, ladies and gentlemen, I wish you a great week in markets.

Thanks for listening to the Exchange Invest podcast.

Patrick L Young