John Lothian Newsletter: SEC Concerned About Other Exchanges; Bats CEO Says Trade Problems a Symptom of Too-Complex Market; Europe hit hardest by slump in global equities trading

Jan 14, 2013

The SEC, reacting to revelations by BATS exchange that it may have been overcharging customers, is concerned that the same problem may exist in other exchanges. BATS, for its part, considers that its problems are a symptom of excess complexity in market rules and structures. The Great Volume Slump of 2012 (just invented that title) was most prominent in Europe, with those exchanges reporting lower activity than other regions. In First Read today, take a look at Tom Cashman’s essay, “Reflections from a dinosaur.” We’ve also got a fresh JLN interview with Jorge Alegria of MexDer, who talks about the state of the exchange, and also regulatory reform in Mexico.

First Read

Other Voices: Reflections from a dinosaur
Reflections from a Dinosaur
by Thomas F. Cashman

A few years ago at Halloween, I told my daughter I would be dressing as a dinosaur during trick-or-treating. She was a bit confused when I marched around our neighborhood dressed in my colorful trading jacket from my days as a floor broker in the CBOT’s soybean futures pit. Yes; I am a dinosaur, and proud of it, if not the kind my daughter imagined.

It may come as a surprise then, that I support the concept behind a proposal called AT 9000, a set of quality management standards for algorithmic and high-frequency trading systems. The AT 9000 concept calls for the development of minimum industry standards and protocols for the design and testing of automated trading systems. Such standards would be developed primarily by the industry itself, and would required to be met before any algorithm is deployed in a live trading environment.

The proposal’s premise is that automated traders have an ethical obligation to take responsibility for their systems and how they interact with the market. The notion that each market participant has a duty to the overall marketplace and to other market participants should not be seen as a novel idea; we dinosaurs have always understood this obligation. I commend the authors, though, for bringing this concept into the electronic age.

As a pit broker in the days of open outcry, my duties were simple – best execution, diligent attention to market activity, and protection of customer order information. In other words, put the customer first, and follow exchange rules. But I also had duties to the other traders in the pit and to the market as a whole. Some of these duties were spelled out in pit etiquette guidelines and exchange regulations, while others were part of an overall duty of honesty and fair dealing. Honoring these duties provided market information to participants within, as well as outside of, the pit. Ethical behavior increased liquidity as traders were more likely to trade with someone who they deemed to be honest, fair and having integrity. Ethical behavior encouraged participation as traders in nearby pits or at desks around the floor made their decisions in part based on the price information that went out on the boards or flashed across the floor.

Traders and brokers defined themselves by the performance of these duties. An ethical broker ideally ended up with more business; an ethical trader ended up with more trades. Though the reward for ethical behavior was not always immediate, liquidity and customer confidence were served and fostered as these duties were followed and honored.

The AT industry is under a tremendous amount of scrutiny by regulators, market participants and the media. It is in their best interest to be seen as acting towards a greater good, if only from a PR perspective. Yet, I would also contend that overall market liquidity would be enhanced and trading opportunities for the AT Industry would increase if they were to be seen as ethical actors. As in the days of old, ethical behavior would increase market participation and confidence in the marketplace.

It also makes sense, to this dinosaur at least, that the AT industry take the lead in the development process. During the era of mutually owned exchanges, a high priority was placed on having the rulemaking processes represent various segments of the marketplace. Regulatory committees were comprised of brokers, independent traders, commercial firms and other market participants, who would work alongside exchange staff to promulgate rules and regulations governing trade. Efforts were made to communicate with all market participants and elicit feedback. Pit committees worked with the exchange to craft etiquette rules. We all had a stake in the process and the result.

That model worked for many years and fostered a strong proprietary connection to the integrity of the the marketplace. Implementing AT 9000 would give the AT community a greater stake in the integrity of the market as it becomes part of a self regulatory process. For this reason alone the proposal ought to be given serious consideration. Going forward, there is no doubt the marketplace will have more involved and empowered regulators. Nevertheless, there must always be a role for those who are regulated to have a voice so that they feel they have a stake. This will only serve to enhance their willingness to act ethically towards the overall market and other participants.

The strongest argument for a self regulatory approach may be that no one is more competent to address these issues. It is not only in the regulated markets arena that we see the fast pace of technological advances strongly outpace the ability of top-down regulators to keep pace. Is it best for the market to have reactive post-crisis remedies after each snafu or to have the most qualified minds working with regulators to scheme out a fair playing field for all concerned? Which approach would do more for engendering liquidity and customer confidence? I strongly believe AT 9000 is on the right track.

Today, market participants are spread out geographically and disintermediated much more than in the past. But just because miles separate us and servers are where we meet does not mean we are not part of a greater whole. We are. The sooner we recognize this reality, the sooner we will have markets that best serve the purpose of price discovery, and the sooner customers will regain confidence in our markets. It is up to us. AT 9000 is one way participants can be brought together and work toward a better market as a community.

Even dinosaurs might have a role to play.

**Tom F. Cashman has been a full member of the Chicago Board of Trade since 1997 as an independent floor broker and trader.


HFT Rules – Three Part HFT Harmony
Zach Ziliak, senior associate, litigation and enforcement, Mayer Brown

High Frequency Trading (HFT) has been in the financial press a lot over the past several years. From the Flash Crash of 2010 to the collapse of Knight Capital in 2012, trading glitches and the negative impact of HFT on markets and investor confidence is well-documented. In tomorrow’s segment of the Restoring Customer Confidence series, Mayer Brown attorney Zach Ziliak outlines the three sources that will address HFT and help restore customer confidence.
Ziliak says regulatory bodies will likely continue to address HFT guidelines, exchanges are imposing new fees on HFT practices and AT 9000, standards system for HFT practices, will help establish a higher bar for HFT participants.


Jorge Alegria

CEO Jorge Alegria on the Growth Potential for MexDer

Jorge Alegria, CEO of the Mexican Derivatives Exchange (MexDer), has seen his share of change since joining the exchange in 2003. The exchange has partnered with CME Group to offer its products on the CME Globex platform and vice versa. It also is set to launch its new derivatives trading platform in March. Alegria also sees an opportunity in its bond contract and the possible addition of commodities. In this interview with John Lothian, he also outlines the regulatory reforms in Mexico and their impact on the derivatives market.

Watch the video »


NYSE Arca Continues to Hold #1 Position for U.S. Exchange Traded Product Listings and Exchange Trading
NYSE Euronext (NYX) today announced NYSE Arca, its fully electronic U.S. equities market, continued to hold the leading position in Exchange Traded Products (ETPs) listings and exchange trading in 2012.

**JK – A ranking that will please Mr. Sprecher.


VIX Futures Open Interest Reaches New High
The CBOE Futures Exchange, LLC announced that open interest in futures on the CBOE Volatility Index reached a new all-time high of 438,038 contracts this morning. This morning’s high surpassed the previous high mark of 431,265 VIX futures contracts on September 18, 2012.

**JK – This is sounding like a broken record.


Hostile climate tests futures brokers
Tom Osborn – Financial News
Futures brokers are facing difficult times amid stormy market conditions that have already forced some firms into radical action.

**JK – Key stat in this story: The number of FCMs registered with the CFTC has fallen 33 percent since 2008.


Regulator Turns to Peregrine Executives for Fixes, Details on Fraud
A key financial regulator has interviewed the executive team that ran Peregrine Financial Group Inc. in an effort to improve its oversight of the industry, which was heavily criticized in the wake of the broker’s collapse last July.


Bats Violations Highlight Hazards as Flows to Funds Hit Record
Bats Global Markets Inc.’s disclosure that computer errors that permitted almost 450,000 bad trades comes just as investors start to regain confidence in stock markets.

**JK – It’s really complicated. Trust us, we built it.


Regulating Against Too Big To Fail Is Going To Increase Too Big To Fail
I find myself very amused by this point being made by Craig Pirrong. Not amused as in I’m laughing because I think he’s wrong. Rather, amused in the sense that the people constructing these new apparatti to regulate the financial markets don’t seem to understand that they’re making the very problem they’re trying to regulate against worse.


FIA Business Continuity/Disaster Recovery
Industry Impact and Lessons Learned from Hurricane Sandy: Survey Summary Results
Ninth Annual Futures Industry Disaster Recovery Test

**JK – Floating computer servers work!


Managing expenses, growing revenue at Allston Trading
By Lynne Marek – Crain’s
Job: CEO, Allston Trading LLC, Chicago, since Sept. 10.


Two supercomputers crunched the data and conclude high frequency trading has “little impact on our lives”
Quartz via Yahoo! Finance
Scientists used two of the world’s largest supercomputers in a study that has determined the impact of high-frequency trading on US stock markets is virtually nothing.

**JK – Oh sure, ask the computers if they have any impact on trading. What did you think they’d say?


Twitter trading platform set for launch
Tim Cave – Financial News
The man behind the first hedge fund to trade using Twitter data is using the same technology to launch an online trading platform with a market sentiment tool, as efforts to harness the power of social media to drive investment and trading decisions gather momentum.

***JM: You know that saying, that genuinely effective trading tools remain a secret for the inventors so they can use them to make profits? Yeah.


Traiana Secures Strategic Investment from Seven Leading Global Banks
ICAP plc (ICAP), the world’s leading interdealer broker and provider of post trade risk and information services, today announces that it has sold a 12% stake in Traiana, Inc. (“Traiana”) to seven of Traiana’s leading customers, giving the business a valuation of $300 million. Collectively, the Investors also have an opportunity under certain conditions to acquire in the future an additional 20% equity in Traiana for a price of up to $82.5 million.

**JK – Big news for Traiana.


Bill Brodsky

CBOE CEO Bill Brodsky talks about stepping down after 15 years

Bill Brodsky, chairman and CEO of the CBOE, announced last month he was stepping down from his post in May 2013, and taking the role of executive chairman. He has held the top spot at the exchange since 1997 and was at the Chicago Mercantile Exchange for 15 years before taking over at the CBOE. Brodsky spoke with John Lothian about his decision, his successor Ed Tilly as well as the importance of separating the role of CEO and chairman in public companies. He also addressed some of the keys to the CBOE’s success over the past quarter century, the potential for growth in the industry and finally, the road ahead. He has been often rumored to be on the shortlist for the top regulator’s post at the SEC.

Watch the video »


MarketsWiki Page of the Day
Ren Jin

MarketsWiki Recent Updates


Steven Slovak; Ren Jin; William J. Brodsky; Jacob “Jack” Lew; Jorge Alegria; Joe Murphy

Companies, Organizations and Groups

JPMorgan First Capital Securities Co; BATS Global Markets




33,627,782 pages viewed, 7,326 articles, 152,101 edits
MarketsWiki Statistics

Lead Stories

SEC Concerned About Other Exchanges
Officials at the Securities and Exchange Commission are concerned the issues highlighted by the recent trading problems BATS Global Markets Inc. could be occurring at other exchanges, according to a person familiar with the agency’s oversight efforts.

Bats CEO Says Trade Problems a Symptom of Too-Complex Market
Nina Mehta – Bloomberg
The software problem that caused Bats Global Markets Inc. to allow trades that violated rules is a symptom of overly complex market regulations that should be simplified, Chief Executive Officer Joseph Ratterman said.

Europe hit hardest by slump in global equities trading
Michelle Price – Financial News
Europe was hardest hit by the global slump in equities trading last year with the value down 21% compared with the previous year, according to analysis of data provided by Thomson Reuters.

Optimism grows over prospect of equities revival
Giles Turner, Mike Foster and Matthew Attwood – Financial News
European investment bankers are beginning to sense a shift in sentiment among investors, with appetite for higher yields creating a sustained move into equities for the first time since the middle of 2008 and demand for riskier credit in the financial and sovereign sectors.

BOE Warns Extra Capital May Curb Growth
Raising bank capital requirements could cost the U.K. economic growth in the short term and cause some lending to shift to unregulated financial firms, the Bank of England said on Monday.

EU redrafts plan for bank rescue funding
Peter Spiegel in Brussels –
Eurozone countries facing Irish-style bank collapses will still have to shoulder a large portion of future bailouts if they want to receive any aid from the eurozone’s E500bn rescue fund, according to a proposal seen by the Financial Times.


Lawsuits fly over the cost of regulation
Michelle Price – Financial News
Lobbying is a well-established means of influencing the outcome of new reforms but during the past year the financial services industry has resorted to a more drastic measure: litigation.

Copper users attack SEC on ETF backing
Jack Farchy in London –
A group of copper users has rounded on the Securities and Exchange Commission for its “arbitrary and capricious” decision to approve the first US investment product that would hold physical copper.

Finra chief eyes pools
New York Post
Richard Ketchum, the Street’s top cop, is taking on high-frequency trading — and the “dark pools” where it operates — with a probe, sources tell The Post. Ketchum, who runs the Financial Industry Regulatory Authority, has vowed to illuminate the 50 or so dark pools and their computerized trading. Black…

City sackings at five-year high
David Thomas – Financial News
City sackings and suspensions are at their highest level in five years, according to new data which shows the impact of disciplinary action on the financial sector after a spate of damaging scandals.

CFTC Extends Public Comment Period on Rulemaking Enhancing Protections Afforded Customers and Customer Funds Held by Future Commission Merchants and Derivatives Clearing Organizations

ESMA And The EBA Take Action To Strengthen Euribor And Benchmark Rate-Setting Processes
The European Securities and Markets Authority (ESMA) and the European Banking Authority (EBA) have today published the results of their joint work on Euribor and propose principles for benchmark rate-setting processes.

The Autorité des Marchés Financiers publishes an update of its inspection charter

The Autorite Des Marches Financiers Applies The ESMA Guidelines On The Compliance Function Requirements

ISDA/AFME/BBA Response To EBA’s Draft Regulatory Technical Standards On Prudent Valuation Under Article 100 Of The Draft CRR Of Nov 2012

Exchanges & Trading Facilities

Vienna Stock Exchange Introduces New Low Latency Feed
As of today, the Vienna Stock Exchange, a subsidiary of the CEE Stock Exchange Group (CEESEG) which also includes the stock exchanges of Budapest, Ljubljana and Prague, will start a new low latency market data service for vendors and other non-member parties interested in CEESEG low latency market data.

Technology Sector Experiences Resurgence On Toronto Stock Exchange And TSX Venture Exchange In 2012
During 2012, the technology sector experienced a resurgence in Canada. The top 35 technology issuers, ranked by market capitalization at December 31, 2012, had an average share price appreciation of 31% in 2012. More than half of these companies saw their share price increase by over 20% and only seven saw their share price decrease in 2012.

Burgundy: 54 % Of Trading In Swedish Equities On Alternative Marketplaces During 2012
During 2012 about 54 (47) percent of the total Swedish equity trading was executed on alternative marketplaces. Burgundy reached a market share in Swedish equities of about 2.98 (3.88) percent during 2012. Fragmentation has increased throughout 2012. During 2011 about 47 percent was traded on alternative marketplaces compared with 40 percent in 2010. The total market turnover for Swedish equity trading decreased in 2012 with about 8 percent compared to 2011.

EEX Review Of 2012: Trend Towards Short-Term Trading On The Power Market Continues

Direct Edge Trading Notice #13-02: Update To Trading Notice #12-64

Direct Edge Technical Notice #13-01: Attribution Message Testing

TOM MTF Statistics Week 2, 2012

Hedge Funds & Managed Futures

Cash fall puts equity derivatives in the driving seat
Tim Cave – Financial News
After years of playing second fiddle to cash equities, equity derivatives are finally moving into the spotlight.

UK business plunges 90% at Capital International
Mark Cobley – Financial News
Capital International, a US fund manager that enjoyed rapid growth in the UK institutional market in the late 1990s and early 2000s, has suffered a fall in its UK assets of almost 90% in the past five years.

Pew’s Bair Says Bond Risk High Given Unprecedented Fed Easing
The Fed has kept its benchmark interest rate close to zero and more than tripled its balance sheet since 2008 to about $3 trillion as part of its efforts to sustain growth following the collapse of the subprime-mortgage market.

Money-Market Funds in Latest Week Strong, But Moderated Versus Prior Week
Katy Burne – Dow Jones
Money market funds attracted fresh cash in the week ended Wednesday, new data released Thursday show, continuing a stream of inflows that have added $170 billion to the funds since the start of November, according to the Investment Company Institute.

Ex-Centaurus trader finds profitable swings in natgas
Prominent banks and hedge funds have fled the natural gas market due to the sharp decline in prices but Bill Perkins, a trader at the now-defunct commodity hedge fund Centaurus Energy, says there is still plenty of money to be made there.

Fidelity, Federated, Schwab to post daily fund values
Reuters via Yahoo! Finance
Fidelity Investments, Federated Investors Inc and Charles Schwab Corp on Friday joined a growing list of top U.S. money market fund managers in agreeing to post daily fund asset values, as the industry comes under growing pressure from regulators for more transparency.

RK Capital grows profits to £11.3m
Giles Turner – Financial News
RK Capital Management, a commodities-focused hedge fund founded by Tory donor Michael Farmer, has had a bumper year, according to its latest company accounts.

Bill Ackman’s Hedge Fund Looks To Be Off To A Bad Start In 2013
It’s very early on in 2013, but it looks like William Ackman’s got a bit of trouble on his hands—on the surface it looks like his hedge fund is off to a poor start after two years of disappointing returns.

People Terrified by Giant Squid Have Hedge-Fund Manager Ray Dalio to Thank
New York Magazine
Ray Dalio, the eccentric billionaire behind hedge-fund juggernaut Bridgewater Associates, has many talents: trading currencies and sovereign bonds, distributing baseball cards featuring his employees’ assets and weaknesses, writing long manifestos about radical transparency.

Belize Rejecting Argentine Default Model Spurs Region-Best Rally
Belize’s dollar bonds are rallying the most in emerging markets after the Central American nation improved a restructuring offer that was worse than what Argentina gave creditors following its 2001 default.

CFTC Commitments Of Traders Reports Update

Banks & Brokers

Who will save the traders from themselves?
Phillipa Leighton-Jones – Financial News
At the beginning of the new year, as you may have been thinking about how to regenerate parts of your business, or cut staff, or plan a new career, one former trader was having a more dysfunctional time: waking up in The Verne prison on the Isle of Portland in Dorset.

JPMorgan faces U.S. order to improve compliance, sources say
A U.S. regulatory probe of JP Morgan Chase & Co. is expected to result in an order that the bank correct lapses in how it polices suspect money flows, in an action expected as soon as Friday, people familiar with the situation said.

Citi’s New Bond-Trading Platform Latest in Electronic Offerings
Katy Burne – Dow Jones
Citigroup Inc. is rolling out a new electronic trading system for corporate bonds, becoming the latest in a string of firms to respond to the growing desire of their customers to trade directly with one another.

Vatican surprised by bank’s credit card block
Associated Press via Yahoo! News
VATICAN CITY — A senior Vatican official says he is “truly surprised” that the Bank of Italy ordered credit card payments suspended in the tiny city-state and insists the Vatican has taken adequate measures to fight money laundering.

Uncertainty Hangs Over Wall Street in 2013
Big American banks have plenty to prove in 2013. Wells Fargo aside, their valuations have languished below book value. After a strong 2012 for stock markets and with fourth-quarter earnings reports imminent, JPMorgan and Goldman Sachs are again near that level. But when they get there, it will be a relief rather than anything to crow over.

Investment banks: time for a fitness boot camp
William Wright – Financial News
If, like me, you returned to work this month to find that your suits had mysteriously shrunk by a few inches over the Christmas break, then losing a few pounds is probably one of your priorities for the new year.

JPMorgan weighs actions on internal “Whale” probes: reports
Reuters via Yahoo! News
JPMorgan Chase & Co may release on Wednesday additional results of internal probes into its $6.2 billion “London Whale” trading loss that could lead to a lower bonus for CEO Jamie Dimon, according to published reports.

Goldman may delay UK bonuses until top tax rate falls
Reuters via Yahoo! News
NEW YORK – Goldman Sachs Group Inc is considering delaying bonus payments in the U.K. until after April 6, when the top rate of income tax in the country will drop to 45 percent, from 50 percent, a person familiar with the bank’s operations said on Sunday.

Novelli returns to UBS
Matt Turner – Financial News
A former head of global M&A at UBS is returning to the Swiss investment bank where he will be reunited with Andrea Orcel, the man charged with refocusing the business around a strong advisory service.

Credit Suisse to Cut Bonus Pool by 20%: Report
Credit Suisse will cut its bonus pool for 2012 by 20 percent to around 2.3 billion Swiss francs, the fourth year in a row the Swiss bank has slashed payouts, a newspaper reported on Sunday.

Wells Fargo boosts adviser force as rivals’ numbers decline
Reuters via Yahoo! News
Wells Fargo & Co’s U.S. brokerage business bolstered its adviser force in the final quarter of 2012, helping to expand the company’s client asset base at a time when rival firms have seen more advisers walk out the door.

Goldman Sachs Declares Preferred Stock Dividends

Morgan Stanley Schedules Quarterly Investor Conference Call

Clearing & Settlement

LCH.Clearnet implements industry-leading default management process for bonds and repos
LCH.Clearnet Ltd, the multi-national clearing house’s UK-based CCP, has put in place best-in-class systemic risk mitigation for bonds and repo cleared through its RepoClear service by implementing formal loss allocation arrangements. LCH.Clearnet Ltd’s loss allocation arrangements, which are unique to the bond and repo market, were designed in close collaboration with leading fixed income market participants.

Indexes & Products

S&P Dow Jones Indices Announces Quarterly Index Reviews

S&P Dow Jones Indices Announces Changes To The S&P/TSX Canadian Indices – A Deletion From The S&P/TSX Global Mining Index

Athens Exchange: Creation Of The Customized “Hellenic Mid & Small Cap Index”


SunGard Wins Two Banking Technology Readers’ Choice Awards for Trading and Risk Management
SunGard has won two categories in the sixth-annual Banking Technology Readers’ Choice Awards.

TMX Atrium Adds Diverse High-Performance Path To Moscow
TMX Atrium, provider of smarter infrastructure solutions for the financial community, today announced a new low latency path from Frankfurt into the rapidly growing hub at Moscow M1. The new path provides increased opportunities for TMX Atrium clients trading between Frankfurt and Moscow.


SEC Charges Tech Consultancy Volt with Fraud
Accounting Today
The Securities and Exchange Commission has charged New York-based technology consulting firm Volt Information Sciences and two of its former officers with securities fraud.

Environmental & Energy


China Hints at Far Wider Welcome to Overseas Investors
In what would be a drastic liberalization of China’s huge but still cloistered capital markets, the country’s top securities regulator said Monday that foreign investment could be allowed to rise as much as tenfold.

NSE, Japan’s JPX plan Nifty futures for Osaka
Reuters via Yahoo! Finance
The National Stock Exchange and Japan Exchange Group will seek to launch yen-denominated futures based on the Nifty, the bourse operators said on Thursday.

China’s Sovereign Wealth Fund in Big 2012 Turnaround
CNBC via Yahoo! Finance
China Investment Corporation, the world’s biggest sovereign wealth investor said 2012 was a much better year for the $482-billion fund, with returns of over 10 percent.

HKFE Announces Revised Margins For Aluminum Corporation Of China Futures

Frontier Markets

Morgan Stanley to trim Dubai staff amid global cuts: sources
Reuters via Yahoo! News
DUBAI – Morgan Stanley Inc , the sixth-largest U.S. bank by assets, is trimming staff at its Dubai office, mainly by cutting jobs in its equities division, as part of a global plan to reduce costs, three sources aware of the matter said.

DGCX 2012 Volumes Reach All-Time High Of 9.6 Million Contract
2012 annual trading volumes on the Dubai Gold and Commodities Exchange (DGCX) registered a substantial growth of 137% from 2011 to reach 9,601,553 contracts. The upsurge in 2012 volumes – the Exchange’s highest ever annual volumes since inception – was led by the substantial growth of Indian Rupee and Gold futures. Traded over a period of 256 trading days, the annual volumes represent a value of $ 372.83 billion.

40% Growth In Settlement Window Volumes On Dubai Mercantile Exchange In 2012

ADX Receives Korean Financial Delegation And Signs MoU With Korean Counterpart

Malawi Stock Exchange Weekly Trading Report

John Lothian Newsletter

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