Clearinghouses Push Back Against Worries Over Their Size; Two Sigma rapidly rises to top of quant hedge fund world

Oct 24, 2017

First Read

Hits & Takes
By JLN Staff

Bad news for Deutsche Boerse as the judge in the insider trading case against Carsten Kengeter declined to approve a settlement that was submitted by prosecutors. As reported by the FT, the case is crippling Deutsche Boerse at this time. It’s pretty hard to execute a strategy if you don’t know whether the CEO will remain. Nonetheless, Eurex has been posting some strong numbers in its interest rates complex this year. Brexit could open up more clearing opportunities for the exchange. Potential moves in other regions, say Asia, could open up some new growth. But the ongoing probe and potentially more investigations by state regulators in Hesse and German regulator BaFin could continue to derail Kengeter’s “Accelerate” strategy, aimed at upgrading the culture and growth across all of Deutsche Boerse’s divisions. With less than six months left on Kengeter’s contract, what will the DB board do? ~JK

With just one week to go in its Pink for a Purpose Campaign, CME Group has already raised more than $30,000 from its employee fundraisers and larger community to supplement the company’s $125,000 donation. Funds benefit Bright Pink, the only national non-profit focused on the prevention and early detection of breast and ovarian cancer in young women. Consider supporting the cause today via this link. ~JJL

More milestones! It’s now been a record-setting 242 days since the S&P 500 has registered a 3 percent or more decline. It’s also been 33 trading days since the S&P 500 has declined at least .5 percent. ~SD

Yesterday’s Asia Pacific newsletter can be found here. ~JJL

FinTank Presents is holding an event at DePaul today at 5 PM titled “The Rapidly-Changing Derivatives Market Ecosystem.” Speakers include Hazem Dawani, Chief Product Officer – Vela and Steve Tumen, CEO, Deep Systems. Chuck Bohm of ED&F Man is moderating. ~JJL

Based on hypothetical performance using back-tested performance data, the combination of stocks in the NYSE FANG+ Index have returned a 28.44% annualized total return from September 19, 2014 to September 15, 2017, as compared to 14.89% for the NASDAQ 100, 9.86% for the S&P 500 and 16.80% for the S&P 500 Information Technology Index, according to the ICE website. ~JJL

My post about the Cboe’s new logo has generated over 5600 views on LinkedIn. ~JJL

The small letters of the Cboe logo de-emphasize the Board Option Exchange element, meaning they are now more than just an options exchange. The boxes, or bases, are reflective of their acquisition of BATS and their logo. The boxes also form an arrow showing they are a forward thinking company. I think all aspects are thoughtful and meaningful. ~JJL


R.J. O’Brien Hires Giemza to Lead Global Risk Department
Chicago-based R.J. O’Brien & Associates (RJO), announced today the appointment of Brad Giemza as Managing Director and Chief Risk Officer. Giemza will serve on RJO’s senior management team.

**Nice hire for RJO. Congrats to Brad Giemza.~JK


Not so fast: alternative investment managers skeptical of cryptocurrencies
Cryptocurrencies appear to be taking the world by storm, but many alternative investment managers are unconvinced. A survey conducted by BarclayHedge finds that more than two-thirds of hedge fund managers have no intention of investing in cryptocurrencies.

**Who among the 17 percent are investing?~JK


Deutsche Börse Photography Foundation organizes “Magnum Photos at 70: Past – Present – Future”; Program for the 70th anniversary of the Leica Camera Frankfurt on 24 and 25 November 2017
Deutsche Börse
The renowned photo agency Magnum Photos is celebrating its 70th anniversary this year. The anniversary program focuses on both the history of the development and the current developments at Magnum Photos and gives an opportunity to meet international photographers who reflect on their community as cooperatives as well as on their individual works.

**If you haven’t seen the photography at Deutsche Boerse, you should.~JK


MarketsWiki Page of the Day: Carsten Kengeter
In a setback for Deutsche Boerse, a Frankfurt court on Monday declined to approval a settlement between the company’s chief executive, Carsten Kengeter, and prosecutors over allegations of insider trading.


VIX Bits: The Thermometer Isn’t Broken
Spencer Doar – JLN

On the 30th anniversary of the ’87 market crash last week, Cboe, in collaboration with ProShares, hosted a panel discussion “Current Dynamics of the VIX Market.” There was a lot to glean – from the applications of VIX ETPs to unique characteristics of VIX futures to general perceptions of volatility.

Dominic Salvino, Group One’s VIX options specialist, had an analogy for the current low levels of VIX, comparing it to high February temperatures in Chicago. On February 18, the thermometer reached 70 degrees Fahrenheit, only the fourth time that’s happened since 1971. Is that weird? Yes. Is it worth noting? Yes. Does that mean that the thermometer is broken? No. The thermometer is simply reading the conditions in the same way it always has.

Read the rest here.


Monday’s Top Three
Everyone wants to know what Don Wilson is up to. The top read stories from Monday were led by the Financial Times’ DRW leads high frequency trading charge into cryptocurrencies. Second went to The Wall Street Journal’s Former Energy Trader Goes All-In on Bitcoin. Everyone wants to know who’s all in on Bitcoin. Third went to the intrepid Gary DeWaal‘s Bridging the Week Cryptocurrencies Primer; Pre-Open; EFRPs; Spoofing Again, looking at what else, cryptocurrencies. It’s happening. It’s hip. It’s now.


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Lead Stories

Clearinghouses Push Back Against Worries Over Their Size; Industry officials say the system has been improved, and let markets decide structure and competition issues
Gabriel T. Rubin – WSJ
Swaps clearinghouses are pushing back against the suggestion by a top Trump administration official that they have become too big and pose a market risk, saying regulatory and internal “stress tests” prove there is no cause for alarm.

Two Sigma rapidly rises to top of quant hedge fund world; Fund now on par with Renaissance with assets under management reaching more than $50bn
Robin Wigglesworth, US Markets Editor – FT
Two Sigma has vaulted over the $50bn assets under management mark to put it on a par with Renaissance Technologies as the biggest global quantitative hedge fund, as investors continue to pile into computer-powered investment strategies.

Court blocks Deutsche Börse insider-trading settlement; CEO Carsten Kengeter had agreed EUR500,000 payment to end probe
Olaf Storbeck in Frankfurt – FT
A court in Frankfurt, Germany, on Monday night refused to approve a settlement between Deutsche Börse chief executive Carsten Kengeter and criminal prosecutors over alleged insider trading.

Battle hots up for London clearing business post-Brexit; UK stock exchange faces off with Deutsche Börse as US regulator sends warning
Philip Stafford in London – FT
As negotiations over the UK’s exit from the EU grow more urgent, another critical battle is playing out with ramifications for global markets.

TradingScreen responds to allegations of former CEO Philippe Buhannic
A war of words, and possible legal battle, is heating up between the former CEO, and current board and management of electronic trading solutions provider TradingScreen.

U.S. jury finds ex-HSBC executive guilty of fraud in $3.5 billion currency trade
Brendan Pierson – Reuters
A U.S. jury on Monday found a former HSBC Holdings Plc(HSBA.L) executive guilty of defrauding Cairn Energy Plc (CNE.L) in a $3.5 billion currency trade in 2011.

Do “Gray Rhinos” Pose a Greater Threat Than Black Swans?
Nathan Jaye – CFA Institute Enterprising Investor
Gray rhinos are popping up everywhere — in a front-page story in The New York Times or in an announcement in an official Chinese government publication that sent Chinese stocks tumbling.
The apt metaphor of the “gray rhino,” referring to a highly likely yet ignored threat, was coined by Michele Wucker, speaker and author of The Gray Rhino: How to Recognize and Act on the Obvious Dangers We Ignore. She also spoke at the 2017 CFA Institute Annual Conference.

HSBC Trader’s Conviction Will Echo Through $5 Trillion FX Market
Lananh Nguyen and Patricia Hurtado – Bloomberg
‘Lesson to senior executives:’ invest in more ethics training; Mark Johnson found guilty of fraud after four-week trial
Global currency traders and compliance officers who monitor them were put on high alert after a New York jury convicted a former HSBC Holdings Plc executive of fraud for front-running a large client order.

Hedge Fund AUM At New Record Even As Macro And Managed Futures Are Hit Redemptions
Continued positive aggregate returns to end Q3 lifted hedge fund assets to another all-time high, despite net flows shifting back into negative territory. On a net basis, outflows were small in September, but the industry did feel redemptions pressures more broadly than any other month this year. While aggregate returns have continued to be positive, segments like macro and managed futures have produced mixed results. Flows to end Q3 for these strategies have reflected what is likely a mixed bag of investor sentiment.

InfoReach Now Offers Block Execution via CODA Markets
Customers of InfoReach have a new outlet to source liquidity for block trades: CODA Markets’ CODA Block. InfoReach makes it easy for customers to route to CODA Block utilizing existing executing broker relationships and order entry tickets.

Only One in 10 Tokens Is In Use Following Initial Coin Offerings
Olga Kharif – Bloomberg
Token Report analyzed application use from 226 coin sales; Usage rates remain low as financing rises to record $3 billion
Need further evidence that the digital-currency market is in a frenzy? How about the fact that only about one out of 10 tokens issued in initial coin offerings is in use following the sales.

Regulators Can’t Keep Up with Wall Street’s Robot Invasion
John D’Antona Jr. – Traders Magazine
That’s the question regulators are asking when it comes to examining the ever-increasing amount of algorithmic trading technology. This hyper-technical realm is the land of ultra educated quants and technologists who understand coding and other hyper-sophisticated technologies running today’s trading computers. Against this backdrop, government watchdogs are having trouble figuring out how to look under the hood of machines running lightening-fast algorithms or machine-learning software.

Exchanges, OTC and Clearing

Nasdaq completes $705m buy-side analytics acquisition; eVestment has a client base of 2,000 investment companies with more than 90% of the top asset management firms.
Hayley McDowell – The Trade
Nasdaq has completed its purchase of buy-side analytics provider eVestment for $705 million in a bid to bolster its information business and buy-side reach.

Nasdaq Completes Acquisition of eVestment
Nasdaq (Nasdaq:NDAQ) today announced the completion of its acquisition of eVestment, an industry leading content and analytics provider used by asset managers, investment consultants and asset owners to help facilitate institutional investment decisions.

ICE completes purchase of BAML’s fixed income index platform; Deal expands ICE’s index portfolio to more than 5,000 global fixed income and commodity indices.
Hayley McDowell – The Trade
ICE has completed its acquisition of Bank of America Merrill Lynch’s (BAML) fixed income index platform, which will become a part of the ICE Data Services business.

Deutsche Boerse CEO suffers court setback in insider trading case
Reuters Staff
A German court has refused to stop proceedings against Deutsche Boerse’s (DB1Gn.DE) top executive who is faced with allegations of insider trading over share purchases.

SEC Approves Discriminatory CHX Speed Bump
Themis Trading Blog
On Friday the SEC approved the Chicago Stock Exchange proposed speedbump as a 2 year pilot program, where CHX would be required to collect and report various statistics. It had received twenty comment letters on the CHX’s proposal, including several from market structure thought leader, R.T. Leuchtkafer.

Toronto Stock Exchange and Venture Exchange Lead Four-Day Roadshow in Israel
TMX Group’s equity exchanges, Toronto Stock Exchange (TSX) and Venture Exchange (Venture), today announced they will return to Israel as part of a four-day roadshow from October 22-25.

Intercontinental Exchange Named to Inaugural Fortune Future 50
Intercontinental Exchange (NYSE:ICE), a leading operator of global exchanges and clearing houses and provider of data and listings services, has been named to the Fortune Future 50. The innovative methodology employed by Fortune and The Boston Consulting Group includes a set of forward-looking metrics to determine the top 50 companies that are best positioned to adapt and deliver growth in a complex environment.

Exchange Sector Shows Strengthening In Share Values – FTSE Mondo Visione Exchanges Index Increases By 6.8 Per Cent In Q3 2017 And 23.6 Per Cent Over 12 Months – Index Closed Up 3.6 Per Cent In September
The exchange sector continued to demonstrate positive returns for investors with continued positive performances on the FTSE Mondo Visione Exchanges Index in Q3 of 2017. Bulgarian Exchange topped the leader board with an increase in share value of 67.3 per cent in Q3 2017 against a 6.6 per cent increase in Q2 2017.

Namibia Stock Exchange celebrates 25 years of driving local investment
Namibia Economist
The Namibia Stock Exchange (NSX) last week celebrated their 25th anniversary and Chief Executive Officer, Tiaan Bazuin encouraged investment in the local economy amid the worldwide market uncertainty.


Bitcoin Pioneer Says New Coin to Work on Multiple Blockchains
Olga Kharif – Bloomberg
Metronome to make debut at industry conference in Las Vegas; Bloq co-founder Jeff Garzik helped develop bitcoin blockchain
Jeff Garzik, one of a handful of key developers who helped build the underlying software for bitcoin that is known as blockchain, has seen its shortcomings firsthand. So he decided to create a better digital currency.

Companies Must Use AI—or Else; If a company isn’t using artificial intelligence, says Intel CEO Brian Krzanich, it is going to be outpaced by another company that is
Artificial intelligence is the latest Holy Grail for the tech industry. What is the potential for this technology? And how close are companies to achieving it?

Stock Picking AI? Elementary, My Dear Watson
Tim Edwards – S&P Dow Jones Indices
Keen watchers of the ever-developing exchange-traded product space may have noticed an intriguing development last week, as the first purely “artificial intelligence”-based stock-picking ETF launched. Powered by IBM’s “Watson” platform, the fund sponsors claim to use a proprietary quantitative model to select stocks that will outperform, based on machine learning applied to vast data sets.

The London Token Fundraising Manifesto
Michael Mainelli – City AM
Four chilling words, “A spectre is haunting”, unite Karl Marx, Friedrich Engels, and the Communist Manifesto of 1848 with free market adherents and cryptocurrency libertarians 169 years later.

China’s Latest Fintech Offering Looks Overpriced; Alibaba-backed Qudian has been on a wild ride; investors should shop elsewhere
Anjani Trivedi – WSJ
An Alibaba BABA -2.36% -backed fintech company that services young, Chinese consumers? Looks like a buy.


The New Populism Isn’t About Economics; Nationalist candidates are winning around the globe in growing economies. Another crisis is afoot.
Tyler Cowen – Bloomberg
Economic theories of populism are dead, we Americans just don’t know it yet. Over the past week, two countries have brought populists to power, but in both cases those places have been enjoying decent economic growth.

Americans Are Retiring Later, Dying Sooner and Sicker In-Between; U.S. life expectancy is declining, new calculations show.
Ben Steverman – Bloomberg
The U.S. retirement age is rising, as the government pushes it higher and workers stay in careers longer.

Trump Says He’s ‘Very, Very Close’ to Naming Fed Chair Nominee
Jennifer Jacobs – Bloomberg
President Donald Trump told reporters Monday he is “very, very close” to announcing his nominee for chairman of the Federal Reserve.

As ‘New Era’ Dawns, Xi’s Party Stays Out of the Sun; China’s growing influence confronts the world with a secrecy seen as a fact of life at home
Andrew Browne – WSJ
The most important moment in the life of China’s Communist Party, the coming-out parade of its top leaders, is the culmination of a process steeped in mystery.


Washington insiders say tax reform likely to pass, see ‘rebalancing’ of derivatives regulation
Lene Powell – Jim Hamilton’s World of Securities Regulation:
Despite a chaotic legislative environment, tax reform has a good chance of passing, said a panel of government affairs experts at a derivatives industry conference sponsored by FIA. Regarding derivatives in particular, the panelists see a “rosy picture” in revisiting regulation, including possible revisions to the Supplemental Leverage Ratio in bank capital requirements and CFTC proposed rules on position limits and automated trading.

Ex-HSBC Currency Trader Convicted of Fraud for Front-Running
Patricia Hurtado and Lananh Nguyen – Bloomberg
U.S. says Johnson took advantage of $3.5 billion client order; Defense lawyer says Brooklyn jury ‘convicted an innocent man’
Former HSBC Holdings Plc currency trader Mark Johnson was found guilty of fraud for front-running a $3.5 billion client order, a victory for U.S. prosecutors as they seek to root out misconduct in global financial markets.

Ex-HSBC Trader’s Guilt Casts Shadow Over Colleague’s Extradition
Suzi Ring – Bloomberg
Mark Johnson front-running conviction pressures Stuart Scott; Scott awaiting judgment Thursday on extradition to U.S.
The fraud conviction of a former HSBC Holdings Plc executive by a U.S. jury may be a harbinger of what’s to come for London colleague Stuart Scott, as a judge prepares to rule on his extradition to face the same charges this week.

HSBC’s ex-head of FX cash trading found guilty of fraud; Former senior FX trader at HSBC defrauded one client out of more than $7 million.
Hayley McDowell – The Trade
The former head of global FX cash trading at HSBC has been found guilty of fraud following his role in a multi-million dollar front running scheme.

Trump Administration Increases Heat on CFPB’s Arbitration Rule; Report criticizing rule comes as Senate considers eliminating it
Yuka Hayashi – WSJ
The Treasury Department on Monday criticized a rule governing how banks resolve disputes with consumers, part of an effort by the Trump administration to thwart a controversial plan initiated under the previous presidential administration.

Treasury Faults Arbitration Rule Aimed at Protecting Consumers
Jessica Silver-Greenberg – NY Times
The Treasury Department took aim on Monday at a rule that would allow millions of Americans to band together in class action lawsuits against Wall Street firms, saying it could trigger frivolous lawsuits and drive up the cost of credit.

The Equifax hack is being investigated by the Financial Conduct Authority
Lynsey Barber – City AM
The City watchdog has launched an official investigation into the massive hack of Equifax which exposed millions of people’s personal data.

FCA releases RBS restructuring unit update: City watchdog plots “more focused investigation” into RBS-GRG
Catherine Neilan – City AM
The Financial Conduct Authority will carry out “a more focused investigation” into Royal Bank of Scotland’s treatment of small businesses within the Global Restructuring Group (GRG).

2018 FINRA Cybersecurity Conference
This year’s conference helps you stay current on today’s cybersecurity challenges and the ways in which organizations can understand vulnerabilities and threats, and create resilience against cyber attacks. Whether you are the Chief Information Security Officer, an IT professional, compliance officer or business owner, you will learn from leading experts in the industry and participate in engaging sessions to leave you with valuable information to help you protect your organization.

FINRA Updates FINRA Transparency Services Uniform Executing Broker Agreement
FINRA has updated the FINRA Transparency Services Uniform Executing Broker Agreement (Agreement). The Agreement allows a member firm to report trades on behalf of another FINRA member to the relevant facility.

Statement on FCA investigation into Equifax Ltd
The FCA announces today that it is investigating the circumstances surrounding a cybersecurity incident that led to the loss of UK customer data held by Equifax Ltd on the servers of its US parent.

China’s securities regulator fast tracks rented-flat-backed securities
South China Morning Post
Poly Real Estate granted US$754 million quota for the sale of securities backed by its rented flats portfolio, by Shanghai Stock Exchange

Investing and Trading

Commodity traders and farmers on edge over risk of La Niña
Emiko Terazono – Financial Times
Commodity traders and farmers are on edge over a developing weather phenomenon that threatens droughts in Brazil and Argentina and excess rains in Australia.
The probability of a La Niña weather phenomenon occurring at the end of the year and persisting into the first quarter of 2018 is being raised by meteorologists. Caused by the cooling of the tropical Pacific Ocean, the phenomenon can also bring droughts to the US midwest farm belt but rainfall in Southeast Asia.

Bond Traders Are Piling Into a Fed-Proof Bet
Brian Chappatta – Bloomberg
Flattest U.S. yield curve since 2007 may just keep flattening; All potential Fed leaders seen as more hawkish than the market
Traders in the $14.2 trillion Treasuries market have found a way to avoid fighting the Federal Reserve, or at least its imminent leadership change.

Global Investors Chase Safety, Yield in U.S. Bonds; U.S. borrowing needs and demand for the debt have increased amid steady central bank support.
Daniel Kruger – WSJ
While the U.S. economy has yet to return to rates of growth seen before the financial crisis, the U.S. bond market has been a magnet for global savings. Treasurys have been a repository for central banks looking to bolster their financial reserves and for private investors seeking to preserve capital.

Bullish oil bets favour Brent over US WTI contract
David Sheppard, Energy Markets Editor – Financial Times
Hedge funds’ passion for oil trading is no longer a transatlantic affair, with a near record bet on the North Sea Brent contract standing in sharp contrast to far more modest positioning in the US benchmark.
Exchange and regulatory data this week showed that while hedge funds have amassed a net position equivalent to almost half a billion barrels of Brent, with prices nearing $60 a barrel, in West Texas Intermediate (WTI) they hold little more half that amount.

Martin Shkreli’s Legacy Upends a Creative Financier; Humanigen still needs to improve on the company it keeps
Spencer Jakab – WSJ
The name changed but the drugmaker now known as Humanigen still needs to improve on the company it keeps.


BofA breaks ranks to take investment adviser status ahead of Mifid; Bank moves to provide research in Europe before market rules come into force
Peter Smith and Robin Wigglesworth – FT
Bank of America Merrill Lynch has filed with the Securities and Exchange Commission to be a registered investment adviser, breaking ranks with US peers ahead of the overhaul of European market rules that come into force in January.

Barclays to offer free accommodation to graduate job applicants; Survey finds many candidates turn down interviews because of the expense
Aliya Ram and Madison Marriage – FT
Barclays is to offer all graduates — not just its own applicants — free accommodation for job interviews in London, Birmingham and Manchester, some of the UK’s main employment hubs.


Why This Stock Bear Sees No Hope for Emerging Markets
Ben Bartenstein – Bloomberg
Smith says few attractive bets in authoritarian regimes; Ecstrat favors nations with low exposure to commodities, China
John-Paul Smith won’t give up on his bearish bet against developing nations.

Saudi Wealth Fund Seeks to Target Investment Returns of Up to 9%
Matthew Martin and Arif Sharif – Bloomberg
Public Investment Fund’s returns vary between 3 to 9 percent; Fund is targeting returns of 8 to 9 percent in 2025 till 2030
Saudi Arabia’s sovereign wealth fund is seeking to boost returns from its investments as it helps the kingdom reduce reliance on revenue from oil exports.

U.K. Investor Calls for Tokyo Broadcaster to Trim Its Bloated Stock Portfolio; Japan’s cross-shareholding structures have prevented necessary restructurings and contributed low productivity levels
Kosaku Narioka – WSJ
A London-based money manager is launching an activist campaign against a major Japanese television network, taking aim at an entrenched practice in Japan that has many listed companies holding stock in one another.

Ill-Timed Uber Investment Roils a Giant Saudi Fund; Questions about fund also center on how much money it has to invest
Justin Scheck and Maureen Farrell – WSJ
Saudi Arabia’s state-owned Public Investment Fund is poised to become one of the world’s biggest investors. But the fund is troubled by disappointing investments, including in Uber Technologies Inc., and has struggled to calculate its own value.

China’s Entrepreneurs Squirm Under Xi Jinping’s Tightening Grip
Guo Junwen was a successful property developer in southwestern China when the authorities threw him behind bars three years ago on charges involving land use and seized his business.


Brexit Talks Are Running Out of Time; Negotiations must move to the next stage as soon as possible.
The Editors – Bloomberg
In view of the deepening Brexit gloom ahead of the meeting, last week’s amicable European Union summit was moderately encouraging: At least the talks didn’t break down. Both sides ought to understand, however, that when they meet next time, moving to actual trade negotiations is essential.

Future of Brexit is up to UK, Tusk warns May; European Council president’s remarks come after PM said next step is for Brussels
Jim Brunsden in Brussels – FT
One of the EU’s most senior politicians has warned Theresa May that the outcome of Brexit talks is up to the UK and not Brussels, after the British prime minister said she was waiting for the EU to decide on the future relationship.


Piketty’s Inequality Theory Gets Dinged; Data for the 19th century looks too spotty to draw broader conclusions.
Noah Smith – Bloomberg
People tend to like big, sweeping theories of economic history. When Karl Marx foretold a supposedly inevitable series of class conflicts and revolutions that would end in a communist utopia, the idea was so powerful that it inspired revolutions, alternative economic systems and wars. Other thinkers depicted economic history as the triumph of a particular culture, or the inevitable ascendance of free-market capitalism.

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