Observations & Insight
The Spread – A Big Deal
If LSEG’s purchase of Refinitiv goes through, it would be quite the mega deal for capital markets. This episode of “The Spread” examines the tie-up’s potential.
Watch the video »
LBOs Make (More) Companies Go Bankrupt, Research Shows
Alicia McElhaney – Institutional Investor
Healthy companies acquired by private equity firms through leveraged buyouts see their probability of defaulting on loans increase ten-fold, new research shows.
According to researchers at California Polytechnic State University, roughly 20 percent of large companies acquired through leveraged buyouts go bankrupt within ten years, as compared to a control group’s bankruptcy rate of 2 percent during the same time period.
****SD: I found this a perfect read when contemplating Refinitiv’s debt load in the wake of LSEG’s discussions to buy the former Thomson Reuters finance and risk unit.
Deutsche Bank sets deadline for equity derivatives sale
Laura Noonan, Stephen Morris and Olaf Storbeck – Financial Times (SUBSCRIPTION)
Deutsche Bank has set a September deadline for bids on the vast portfolio of equity derivatives it is selling, as the struggling lender looks to expedite a key part of its ambitious restructuring.
The derivatives are among the assets earmarked for disposal in Deutsche’s bad bank, which it is relying on to free EUR10bn to help foot the bill for the overhaul as well as fund investments in technology, compliance and control functions.
****SD: Despite having already wound down nearly all of its cash equities positions, “any sales of equity derivatives will probably take months to complete as buyers must complete the arduous process of taking over individual client accounts. Deutsche has said that it plans to sell or run down 60 percent of the CRU holdings by the end of 2019, but has not given timetables for specific assets.”
Markets Are Eerily Quiet Right Now
Gunjan Banerji – WSJ (SUBSCRIPTION)
Markets are enjoying an exceptional period of calm, one that some investors are betting will persist.
Expectations for swings in the S&P 500 have been muted and investors have increased derivatives bets that tend to pay out if stocks continue their slow but steady climb and volatility stays low. The S&P 500 and Nasdaq Composite closed at records on Friday as the latest batch of second-quarter earnings results trickled in.
Citi combines its stock trading and prime brokerage business
Imani Moise – Reuters
Citigroup Inc (C.N) is combining its stock trading business with its prime brokerage unit, which caters to hedge funds, private equity firms and other investors.
****SD: Bloomberg here.
Chinese Hackers and the CAT?
Themis Trading Blog
While the industry gears up for the beginning of testing for the Consolidated Audit Trail (CAT) this December, there are still some that want to derail the project. After the SRO’s finally booted Thesys Technologies from the project, completion of the CAT seemed to be gaining momentum. FINRA has taken over production of the CAT and the CAT NMS Plan has produced what looks to be a reasonable timeline However, there are those that continue to balk at the idea of having personally identifiable information (PII) reside in the CAT database. The latest objector is Senator John Kennedy (R-LA) who just sent a letter to the SEC outlining his case against having PII in the CAT.
One Pound Prop After Another Is Removed as Brexit Risks Build
Anooja Debnath – Bloomberg (SUBSCRIPTION)
The pound is buckling under concerns about Brexit, and the Bank of England may add further pressure to the currency when it meets this week.
Sterling dropped as much as 0.8% against the dollar to 1.2119 on Tuesday, extending Monday’s 1.3% decline. The cost of insuring against volatility in the pound over a three-month period has climbed to the highest among the Group-of-10 currencies as concerns grow that U.K. Prime Minister Boris Johnson will opt for a no-deal Brexit.
****SD: Reuters has Sterling slides towards $1.21 amid scramble to price no-deal Brexit, and Bloomberg has How Low Will the Pound Go? Nomura’s Mr. Brexit Has Some Ideas.
You Can Now Trade Options For This Cannabis ETF
Javier Hasse – MarketWatch
The Cannabis ETF, a fund managed by Innovation Shares with CNBC’s Jon and Pete Najarian as advisors, on July 26 announced the availability of put and call options.
The options are listed on the NYSE Arca Options and NYSE American Options markets.
****SD: It joins MJ and YOLO as a marijuana themed ETF with options available.
Exchanges and Clearing
Osaka Exchange: Selection Of Development Vendors For Next Generation Derivatives Trading System Date
Osaka Exchange, Inc. (OSE) has been engaged in the selection of development vendors for the replacement of the next generation derivatives trading system since April 2019, with the primary concept being “Launch Timely” to realize timely addition of products and functionalities and to contribute to business growth. OSE hereby announces that Nasdaq Technology AB and NTT DATA Corporation have been selected to be the development vendors.
****SD: For more on what’s happening in Japanese derivatives, see our recent video with Osaka Exchange President and CEO Hiromi Yamaji – Breaking Down The Merger of JPX and TOCOM.
JPX eyes overseas props to boost commodity markets
Louisa Chender – Global Investor Group (SUBSCRIPTION)
The exchange group is also revamping its derivatives trading system with Nasdaq Technology, NTT Data Corp
Japan Exchange Group: Announcement Concerning Commencement Of The Tender Offer For Shares Of Tokyo Commodity Exchange, Inc.
Japan Exchange Group, Inc. (the “Tender Offeror”) hereby announces that it resolved, at the meeting of the Board of Directors held on July 30, 2019, to acquire the shares of common stock (“Target Company’s Common Stock”) and non-voting stock (“Target Company’s Non-Voting Stock”) of Tokyo Commodity Exchange, Inc. (the “Target Company”) (the “Target Company’s Common Stock” and the “Target Company’s Non-Voting Stock” shall hereinafter be collectively referred to as the “Target Company’s Stock”), through the tender offer (the “Tender Offer”) under the Financial Instruments and Exchange Act (Act No. 25 of 1948, as amended; hereinafter referred to as the “Act”).
Overview of Earnings for Q1 FY2019
Japan Exchange Group, Inc.
Itiviti Appoints Gavin Welsh As Head Of Customer Success, Strengthening Customer Focus
Itiviti, a leading technology and service provider to financial institutions worldwide, today announced the appointment of Gavin Welsh as EVP, Head of Customer Success, Itiviti Group. Gavin brings more than 25 years’ experience of Fintech customer support and relations to Itiviti, most recently as Global Head of Client Coverage at TradingScreen. Reporting to CEO Rob Mackay, Gavin will define and drive Itiviti’s customer strategy.
Regulation & Enforcement
European Commission Sets Out Equivalence Policy
The European Commission is taking stock of its overall approach to equivalence in the area of financial services. EU equivalence has become a significant tool in recent years, fostering integration of global financial markets and cooperation with third-country authorities. The EU assesses the overall policy context and to what extent the regulatory regimes of a given third country achieves the same outcomes as its own rules. A positive equivalence decision, which is a unilateral measure by the Commission, allows EU authorities to rely on third-country rules and supervision, allowing market participants from third countries who are active in the EU to comply with only one set of rules.
My False Hope for the FBI, DOJ Assistance in the OptionSellers, INT
One of my earlier blogs stated that we would have to depend on the FBI, Department of Justice, to do the job of the CFTC. My apologies to the CFTC.
FIA Responds to ESMA’s EMIR 2.2 Level 2 on Tiering and Comparable Compliance
On 29 July, FIA, alongside ISDA and AFME responded to the ESMA consultations (i) draft technical advice on criteria for tiering under Article 25(2a) of EMIR 2.2; and (ii) Technical Advice on Comparable Compliance under article 25a EMIR.
Principal of binary options trading to pay USD200,000 for illegal off-exchange trading and registration violations
The US Commodity Futures Trading Commission has issued an order filing and settling charges against Curtis Dalton of Middleton, Massachusetts, requiring him to pay USD200,000 for offering illegal off-exchange retail commodity transactions to US and overseas customers while failing to be registered by the CFTC as required.
****SD: He ran a “binary options trading platform operated by an unregistered British Virgin Islands company located in Cyprus.” Everything about that sentence sounds shady.
AI Strengthens Its Hold on the Trading Desk
Artificial intelligence has moved beyond to having a toe-hold on the trading desk, according to an online poll conducted during a webinar hosted by industry analysis firm Greenwich Associates regarding AI’s use on the trading desk.
Crowded Stock Trades Near Record Levels Highlight Market Risk
Mark Kolakowski – Investopedia
The massive and seemingly broad gains in the stock market in recent weeks have concealed a striking and potentially risky trend. The top 50 stockholdings of mutual funds and hedge funds, whose investment approaches typically differ, have a near-record degree of similarity, according to a study by Bank of America Merrill Lynch. “This huge world of investible assets has shrunk down to a small cohort,” observes Savita Subramanian, head of U.S. equity quantitative strategy at BofAML. “We’re all in this echo chamber where everyone goes to the same dinners and drinks the same Kool-Aid,” she adds. The trend was detailed in a story by The Wall Street Journal as outlined below.
JPMorgan Says Major Assets `Overbought’ on Eve of Fed Easing
Ksenia Galouchko – Bloomberg (SUBSCRIPTION)
Investors betting the U.S. Federal Reserve is set to extend the market bonanza with a rate cut may have overplayed their hand.
JPMorgan Chase & Co. strategists are warning that a slew of risk markets are flashing “overbought” signals, with combined asset-manager positioning in U.S. equity futures the most extended in years. Aberdeen Standard Investments’ multi-asset team is preparing for disappointment as it lightens up on equity and emerging-market debt holdings ahead of the Fed’s meeting this week.
How to Play IBM Investor Day With Stock Options
Steven M. Sears – Barron’s
International Business Machines (IBM) stock options are priced liked a 99-pound weakling ahead of a major event that could redefine how investors view the company’s management team, corporate strategy, earnings outlook and stock valuation.
Apple, AMD stock option traders aren’t expecting fireworks after earnings reports
Tomi Kilgore – MarketWatch
Options oddsmakers aren’t expecting fireworks after Apple Inc. or Advanced Micro Devices Inc. report their much-anticipated quarterly results after Tuesday’s closing bell. That’s not to say options traders aren’t prepared for some volatility, just less than the average moves seen after previous earnings reports.
Asset Bubbles to Zombie Companies: The Dark Side of Rate Cuts
Sarah Ponczek, Anchalee Worrachate, and Laura Benitez – Bloomberg (SUBSCRIPTION)
Warren Buffett’s warning that you only learn who’s swimming naked when the tide goes out is hardly heard these days as waves of easy monetary policy wash over the world’s financial markets.
The U.S. Federal Reserve and fellow central banks are only trying to support economic growth and spur inflation. But their embrace of lower interest rates may pump up the price of assets that are already richly valued, or stoke demand for higher yields that come with elevated risks.