John Lothian Newsletter: BATS unveils retail order discount plan; Trading volumes soar on Dubai exchange; Standard Chartered Settles Iran Inquiry for $340 Million

Aug 15, 2012

BATS Exchange starts up a retail discount plan in order to stay competitive with NYSE Euronext.  Dubai’s DGCX sees new product offerings and incentives to trade pay off in a big way, as volumes over last year nearly triple.  Standard Chartered bank agrees to settle in a hurry with New York regulators for hiding transactions with Iran.  In today’s First Read, take a look at a WSJ video that provides an overview of the Peregrine fraud, and includes comments from John Lothian, who fortunately takes a supporting rather than feature role in the piece.

First Read

The Unanswered Question

As we search for solutions to the Peregrine Financial Group crime spree and the MF Global non-criminal (so far) implosion, answers to questions about another criminal brokerage firm blow-up go unanswered.

The industry has come forward with after-the-fact solutions to the MF Global issues.  The regulators have quickly put in place electronic confirmation of bank statements to address the PFG mess.  But despite all of the concern over inexperienced or captured regulators in each of those cases, the the fact is a well-known private equity investor and a robust public accounting IPO process failed to find the ongoing fraud at Refco.  One estimate is that Thomas H. Lee and the public accounting firms doing the IPO due diligence spent over $10 million in investigating Refco and did not find their more than decade long fraud.

You might say, well, in the Refco case there was no problem with their futures commission merchant business and that it seamlessly moved to Man Financial.  But you would be wrong.   You see Refco’s now in jail CEO was also stealing money from clients, but the clients would change often.  The Friday before the Monday Columbus Day banking holiday when the news first broke, Refco stole over $300 million of customer segregated funds from a single customer account while directing a transfer of collateral intended for its FCM to its off-shore broker-dealer.  

The big difference between the hole in segregated funds in the Refco case compared to the PFG case is that the theft did not take place over the last 20 years, but rather on the last business day.  

Somehow, because of the bank holiday on Monday, the freezing of customer accounts by Refco on Tuesday and the subsequent bankruptcy, those stolen segregated accounts were not returned prior to the balance of Refco’s FCM segregated funds moving over to Man Financial.  No pro-rata distribution took place.  Instead, it took extraordinary legal efforts on the part of my former employer Tom Price to get all those funds returned to the account they were stolen from. It took about 2 ½ years to get all the money back.

So the question is, how was Refco different from PFG and how the customer claims are being handled there?  Is it because is was just one institutional customer that it was treated differently?

But more importantly, the question is, if a profit motivated private equity investor and a big public accounting firm doing pre-IPO due diligence can’t find the Refco fraud, why would we expect the regulators to be able to find this kind of fraud?

When I asked this question at the CFTC’s Technology Advisory Committee meeting in July, no one had an answer.  When I asked this question again at a meeting in Chicago of a number of industry executives, they had no answer.  

The question goes unanswered.  But I can tell you this, if we are going to truly restore customer confidence in our markets, this question must be answered.  Until then, a big cloud remains over the industry and our markets.  

~John J. Lothian


WSJ In-Depth: Last Days – The Fall of Peregrine [VIDEO]
The collapse of Peregrine Financial Group and the alleged confession of its former CEO, Russell Wasendorf Sr., to a multi-million-dollar fraud stunned futures traders and put regulators in the spotlight. WSJ looks in-depth at Peregrine’s last days.

**** The video includes a couple of short clips shot in our office featuring some bearded guy.

**** This video was very well done.


Banks withdraw food commodity funds
Javier Blas, Commodities Editor –
European banks are withdrawing vehicles that allow investors to speculate on food prices due to reputational concerns amid pressure from campaigners and politicians.

**** Smart idea.


JPMorgan Bank to Hold Collateral After Futures Firms’ Losses
Matthew Leising – Bloomberg
JPMorgan Chase & Co. will allow customers to house excess swaps and futures collateral in a separate bank account as it seeks to reassure investors after losses at MF Global Holdings Ltd. and Peregrine Financial Group Inc.

**** More of a trend I see in the retail sector where futures traders are moving to traditional online stock brokers who now offer futures trading.  Hold your funds on the securities side unless they are needed to margin a futures position, then move all your excess back to the securities side every night.  I call this self-medication on the part of retail traders who don’t have an insurance program on the futures side, but do on the securities side.


Asia takes on algos
While US regulators struggle with the latest bout of algo-induced turbulence in markets, their counterparts in Asia have been getting ahead of the game.


Cristobal Conde Appointed Executive Chairman of True Office
True Office, a start-up technology company that gamifies regulatory compliance training, is pleased to announce the appointment of Cristobal Conde as Executive Chairman, effective immediately. As Executive Chairman, Mr. Conde brings vast experience heading one of the world’s largest information technology companies to a hands-on role at True Office where his expertise will be invaluable.


The Time Has Come for Options Dark Pools
Russ Chrusciel – Advanced Trading
Equities are so 2008. In my world, equities are nothing more than a hedging instrument and an input to a pricing model. Options will be the playground for the trading community in 2013 and beyond. And you know what’s going to grow options trading for the masses? Options dark pools. Yes, you heard me correctly.


For Stability’s Sake, Reform Money Funds
The crisis in the euro area is a reminder that threats to financial stability are never far away. While progress has been made on financial reform over the past two years, more must be done to ensure that the financial system is robust enough to absorb shocks and still provide the credit needed for economic growth and job creation.


Exchange technology doomed to fail (occasionally)
Galen Stops – FOW
The automated trading environment, and the technology that underpins it, is coming under serious scrutiny, and with good reason. First of all and algo ran amok, almost bankrupting Knight Capital, and then last week the Tokyo Stock Exchange (TSE) and Bolsas y Mercados Espanoles (BME) both suffered technical glitches that halted trading on them.


MGEX develops thirst for apple juice
Javier Blas in London –
The Duke brothers, the villains trying to squeeze the orange juice market in the Hollywood comedy Trading Places, have a new potential target: apple juice. Nearly half a century after the launch of the original frozen concentrated orange juice (FCOJ) futures contract, the Minneapolis Grain Exchange has this week started trading the first derivatives on apple juice, in a move that could bring modern-day risk management techniques to the conservative apple juice industry.

**** The Duke brothers, really?


Five Facts About Clearing
Andrew Lamb – Open Markets
At the International Derivatives Expo in London earlier this summer, there was no small amount of focus on the fast-approaching mandate for clearing over-the-counter (OTC) derivatives in both the United States and Europe. I was part of a panel discussion there about how clearing houses are building the infrastructure for this change. To understand that, as well as other factors shaping the OTC clearing environment, I have identified five facts that will be important to keep in mind in the coming months:


The other multiplier effect, or Keynes’s view of probability
John Kay – Financial Times
In recent weeks I have described how people think about risk. They use approaches very different from those implied by the models of quantitative finance and decision theory. They are influenced by what is salient, rather than what is probable. Events that are phenomenally unlikely – the winning of a large prize in the lottery or a child’s abduction by a paedophile – influence their thinking to a disproportionate degree because they grab attention. Few people think of uncertainty in terms of statistical distributions and are able to attach probabilities that add up to one to a well defined set of disparate outcomes. They tell stories about the future instead.


Dimon: trading loss the ‘dumbest thing I have ever seen’
Shanny Basar in New York – Financial News
Jamie Dimon says he never considered resigning over the $5.8bn trading loss in JP Morgan’s chief investment office in London, but concedes that it has played into the hands of supporters of the Volcker Rule.


Australian and UK regulators warn on crowdfunding risks
Australian and UK watchdogs have both warned of the potential financial and regulatory risks for participants involved in the fast-growing crowdfunding sector. Using online platforms and social media to raise funds for business projects – with sponsors getting a return – has proved popular in the US and is now gaining traction in the UK and Australia.

JLN Forex

Yuan Bulls and Low Volatility Fuel China Currency Note Sales
Investor confidence in the Chinese currency as volatility in the yuan-dollar exchange rate holds at about the lowest in a decade is fueling sales of structured notes that profit on gains against the greenback.

Currency Flows Reversing China to Colombia as Trade Slows
Just three months after the biggest developing economies sold dollars to support their currencies, policy makers from Colombia to China are moving to weaken exchange rates and revive exports as the International Monetary Fund forecasts the slowest trade growth in three years.

Argentina Publishes New Mutual Fund Foreign Exchange Rules
Dow Jones
Argentine mutual funds have about five weeks to value their offshore holdings using the regulated exchange rate under new rules published Monday in the Official Bulletin.

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Lead Stories

BATS unveils retail order discount plan
Philip Stafford –
BATS Global Markets, the third-largest US stock exchange, has unveiled plans to offer discounts on retail orders in direct response to a controversial new platform from NYSE Euronext. The Kansas-based group will offer discounts of a tenth of a cent. The move comes only weeks after NYSE began its own programme, which allows traders to offer prices better than the market rate by fractions of a cent.

Trading volumes soar on Dubai exchange
Rebecca Hampson – Financial News
Trading volumes on the Dubai Gold and Commodities Exchange almost tripled in the first seven months of this year compared to the same period in 2011, on the back of new contracts and attempts by the exchange to encourage new participants onto its platform.

Standard Chartered Settles Iran Inquiry for $340 Million
Standard Chartered, the British bank, has agreed to pay New York’s top banking regulator $340 million to settle claims that it laundered hundreds of billions of dollars in tainted money for Iran and lied to regulators.

Standard Chartered Faces Fed Probes After N.Y. Deal
Standard Chartered Plc (STAN), having settled a New York money laundering probe for $340 million the day before it was to defend its right to operate in the state, still faces federal inquiries over claims it helped sanctioned nations including Iran illegally funnel money through the U.S.

Old software blamed in Knight’s huge loss
By Stephanie Ruhle, Christine Harper And Nina Mehta – Bloomberg News
Knight Capital Group’s $440 million trading loss stemmed from old computer software that was inadvertently reactivated when a new program was installed, according to two people briefed on the matter.

On Wall Street, the Rising Cost of Faster Trades
For several years, the Wall Street wizards who built a faster, more fragmented stock market justified their creation by pointing to the benefits it yielded for investors in the form of lower trading costs. But as the speed and complexity of the markets have continued to change at a rapid pace — with trade times now measured in millionths of a second — a growing number of studies and market participants suggest that those benefits to investors have stalled or even started to reverse.

BofA Bids Were Made to Rig Muni Prices With UBS, Witness Says
A prosecution witness who claims he conspired to rig bids on municipal bonds with three former UBS AG employees denied bids he made were legitimate as a defense attorney sought to characterize them as simply hurried.

Greece seeks two-year austerity extension
Kerin Hope in Athens –
Greece is seeking a two-year extension of its latest austerity programme aimed at improving the country’s debt sustainability and prospects for a return to growth, according to a document obtained by the Financial Times.

Euro Zone Economy Shrinks, Darkening Outlook
The euro zone’s $13 trillion economy is shrinking, data published Tuesday showed, a development that threatens to worsen a global slowdown and intensify the debate about Europe’s attempts to restore confidence in the currency union.


CFTC’s Division of Swap Dealer and Intermediary Oversight Responds to Questions Regarding Recent Amendments to Compliance Obligations for Commodity Pool Operators and Commodity Trading Advisors
Responses Intended to Provide Additional Guidance to Affected Market Participants

Exchanges & Trading Facilities

Plans Retail Price Improvement (RPI) Program for BATS BYX Exchange, Pending Regulatory Approval
BATS Global Markets today announced plans to introduce a Retail Price Improvement (RPI) program to its BYX Exchange as a one-year pilot program, subject to approval by the U.S. Securities and Exchange Commission (SEC).

LME’s cobalt and molybdenum contracts hit $1.0 billion notional turnover
The London Metal Exchange (LME) minor metals contracts have reached $1.0 billion in notional turnover. Cobalt and molybdenum have traded 7,748 lots so far in 2012 (equivalent of $291 million), with a total of 22,161 lots traded since launch (equivalent of $1.0 billion).

ISE Completes Roll Out of Implied Order Functionality
Industry-Leading Complex Order Book Further Enhanced by Improved Liquidity and Fill Rates
The International Securities Exchange (ISE) today announced that it has completed the roll out of Implied Order functionality* for all products in its complex order book. ISE introduced Implied Order functionality in May to a limited number of symbols and has conducted a measured roll out over the past three months.

[CBOE] VIX Customer Large Trade Discount for August 2012

Hedge Funds & Managed Futures

Brevan Howard Looks to U.S. to Raise Money for Currency Fund
Alan Howard’s Brevan Howard Asset Management LLP, Europe’s second-largest hedge fund, is looking to the U.S. to raise money for a three-year-old investment pool focused on currencies.

Citigroup Plans $200 Million Collateralized Loan Obligations Fund
Dow Jones
Citigroup Inc.’s alternative asset management unit is planning to launch a $200 million fund to invest in collateralized loan obligations, seeking to take advantage of investors’ demand for yield in a low interest rate environment.

Study: 78 Money Funds Risked ‘Breaking the Buck’
A study by the Boston Federal Reserve Bank says that 78 money market mutual funds had to seek help from their sponsors to keep from having their share prices drop below a dollar from 2007 to 2011.

Amid Insider Trading Inquiry, Tiger Asia Calls It Quits
New York Times
Tiger Asia, a spinoff of Julian Robertson’s Tiger Management, says it will return investor money, as it continues to face an insider trading investigation by authorities in Hong Kong.

JPMorgan’s “whale” problem lures hedge-fund sharks
Reuters via Yahoo! News
JP Morgan Chase’s “London whale” problem attracted some hedge-fund sharks in the second quarter. New regulatory filings show that several big hedge-fund players loaded up on JPMorgan even as heavy losses on a soured credit derivative bet made by a trader known as the “London whale” sent the bank’s stock reeling.

BofA Merrill Lynch Fund Manager Survey Finds Resurgence in Investor Sentiment
Business Wire via Yahoo! Finance
Investor sentiment has risen sharply from the lows of July and fund managers have increased allocations to equities, real estate and commodities, according to the BofA Merrill Lynch Survey of Fund Managers for August.

Finance Chiefs Face Forex Questions
Emily Chasan – CFO Report
The Big Number: 34%
That’s the amount of companies receiving questions from analysts about foreign exchange in second-quarter earnings calls. Risks related to foreign exchange fluctuations are getting more attention from Wall Street analysts.

Banks & Brokers

Knight Capital Group Releases July 2012 Volume Statistics
Knight Capital Group, Inc. today released U.S. equity Market Making, Knight Direct equity and Knight Hotspot FX foreign exchange volumes at for the month of July 2012.

Moore Leads Funds Avoiding ’Dead Money’ in JPMorgan Stake
Moore Capital Management LLC, the hedge fund that had boosted its JPMorgan Chase & Co. investment earlier this year, joined other firms in selling the bank’s shares following a multibillion-dollar trading loss.

Goldman Sachs and Investment Banking’s Swan Song
The Motley Fool
Goldman Sachs’ dismal second quarter earnings report confirms that the investment bank bubble has finally burst. The firm lost $194 million on its investment in the Industrial and Commercial Bank of China on top of the $112 million lost on their other stock investments.

JPMorgan Sued Yet Again – Analyst Blog
JPMorgan Chase & Co. has hit the headlines yet again for the wrong reasons. Israel -based Bank Hapoalim BM has gone to New York State court and is pursuing approximately $361.2 million in residential mortgage-backed securities from JPM, according to a Bloomberg report published last Friday.

UBS denies helping Germans evade taxes
Reuters via Yahoo! News
UBS denied it is helping wealthy Germans dodge taxes by telling them to move funds to Singapore and other money centres ahead of a Swiss tax deal due to come into force in January.

US options house hires ex-Getco trader in London
Tim Cave – Financial News
A former high-frequency trader at Getco and Goldman Sachs has reemerged as the UK director of Volant Trading, a specialist US options trader looking to grow its presence in Europe.

Lloyds Bank to Sell Private Equity Assets for $1.6 Billion
The Lloyds Banking Group, the partly nationalized British bank, agreed on Wednesday to sell a number of its private equity investments to the British firm Coller Capital for around £1 billion, or $1.6 billion.

Boston Technologies Partners with CPattern to offer Guardian Angel Analytics Service to Forex Brokerage Customers
Boston Technologies is pleased to announce that it has partnered with CPattern to offer the widely-acclaimed Guardian Angel analytics platform to its network of forex brokerages.

JonesTrading And Conifer Group Enter Strategic Partnership For Broker/Dealer Services

Clearing & Settlement

Clearing Connectivity Standard Launched For Central Counterparty Clearing
Sapient Global Markets has announced the completion of a new industry standard for cleared OTC derivatives related activity reporting for asset managers, futures commission merchants (FCMs) and custodians. The Clearing Connectivity Standard (CCS) is a standardized connectivity format that can be used by the FCM community to transmit OTC clearing related information on behalf of their asset manager clients to custodians.

CME Group Clearing Advisory
IMPORTANT: Customer Gross Margining Update and Timelines

CME Group Clearing Advisory
NYMEX Options Expiration Operational Procedures for the Trading Floor and Clearing Members (PAO, PO) Effective Wednesday, August 15, 2012

Indexes & Products

SGX: MSCI Singapore Free Index Up 16.6% In 2012 YTD

FTSE Mondo Visione Exchanges Index Holds Steady In July


SEC Charges Wells Fargo for Selling Complex Investments Without Disclosing Risks
The Securities and Exchange Commission today charged Wells Fargo’s brokerage firm and a former vice president for selling investments tied to mortgage-backed securities without fully understanding their complexity or disclosing the risks to investors.

SEC: Alleged Utah Ponzi operator fell victim to other frauds
The Salt Lake Tribune
Federal regulators say an Alpine man ran a “classic Ponzi scheme” that took in $27 million from at least 93 investors, while losing some of their money by investing in frauds and using other funds to purchase a luxury home and pay personal bills.

Peregrine’s indicted CEO set to face judge on Friday
Reuters via Yahoo! News
Russell Wasendorf Sr., the founder and chief executive of failed brokerage Peregrine Financial Group, is set to appear before a judge on Friday after being indicted on 31 separate charges of methodically lying to regulators.

Standard Chartered PLC: New York State Department Of Financial Services Agreement Is Announced

Statement From Benjamin M. Lawsky, Superintendent Of Financial Services, Regarding Standard Chartered Bank

Environmental & Energy

Should Australia pursue international carbon links?
Climate Spectator
It has been recently reported that the federal government is considering the possibility of limiting access to international carbon permits. Also, South Korea has said it will ban the use of international emissions units (such as Certified Emissions Reductions (CERs)) under its ETS until 2020. So should this cause Australia to re-consider linking its carbon market with international markets?

California’s carbon-trading market will launch in November
The long run-up to California’s cap-and-trade program will finally end this November, as the state launches its market for carbon allowances. Polluters will buy allowances for each ton of carbon dioxide they produce on an open market. Producing more will therefore cost a company more; producing less will yield a cost savings. The system is intended not only to impose a cost on the pollution, but also to bring down the total amount of pollution.

China’s Sinopec Pursues Big Energy Deal in Texas
The Wall Street Journal
A Chinese group that includes major oil company Sinopec is in advanced talks to put up to $1 billion in a Texas clean-energy project, in what would mark one of the biggest investments by Chinese companies in the U.S. power sector.

**RKB – From the article: People involved in discussions said China’s investment will be a “significant share” of the project’s cost, consisting partly of debt and partly of equity. Siemens also has a role.


China Bear Market Lures Record Foreign Bids as Locals Pull Funds
International money managers are lining up to buy stocks in mainland China at a record pace, even as a third year of equity losses spurs local investors to empty trading accounts like never before.

SunGard-Sponsored Celent Survey Finds Large Chinese Financial Institutions Need to Improve Risk Management
Competition from within the industry and a more complex financial environment now outweigh regulatory factors as key considerations for risk management at large financial institutions in China, according to a survey* by analyst firm, Celent, sponsored by SunGard.

China Bad Loans Rise for Third Straight Quarter as Economy Slows
Chinese banks’ bad loans increased for a third straight quarter for the first time in eight years, highlighting pressures on asset quality and profit growth as the economy weakens.

SET Welcomes Quanzhou Chamber Of Commerce
Su Fulun, President of Quanzhou Chamber of Commerce, Xiamen, with 3,000 companies members and total investment value of 10 billion yuan over the last five years, and other members were recently welcomed by The Stock Exchange of Thailand’s (SET) President Charamporn Jotikasthira and SET’s top executives on the occasion of visiting Thai bourse’s office in order to discuss investment opportunities on Thailand’s capital market and possible listing on SET.

Bloomberg Television and Saxo Capital Markets Tie Up to Launch ‘Top 5 Movers’
Saxo Capital Markets, in partnership with Bloomberg Television, will launch a new segment called ‘Top 5 Movers’, reporting the week’s most important movements across multiple asset classes including FX, Commodities, Indices and Equities.

Frontier Markets

Palestine Exchange Will Close For Eid-Al-Fitr Holiday

Dubai Financial Market Closed For Eid Al Fiter Starting Saturday, 18 August 2012

John Lothian Newsletter

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