First Impressions

Open Access: Loss Leaders and Profiting from “Free”
Doug Ashburn in London, JLN

Editor’s Note: We included an incorrect link to the full story yesterday so in case you missed it here it is again:

The most interesting tidbit from this year’s IDX was a seemingly offhand comment made by ICE CEO Jeff Sprecher at the exchange leaders panel. Regarding open access and clearing interoperability, which European regulators are pushing to maximize customer choice in execution and post-trade services, Sprecher said exchanges will be further incentivized to list each other’s products, with execution eventually becoming a loss leader for exchanges.

He said “take the economics out of execution, then make it back elsewhere,” which simply means more fees for data, clearing, connectivity and other add-ons. As a sort of unscientific poll among IDX attendees, I asked a number of professionals what they really thought of the idea. Each anonymous quip is followed by my view.

“You can’t give your product away without lowering the value of your enterprise.” (from a career technologist)

I was rather shocked to hear that comment, as you most certainly can. Google has earned itself a market cap of $506 billion, and many of its products are free to the end user. The trick, of course, is to make money off of “free.” Those that figure out a way to make money off of “free” get to survive. The rest will struggle. The key is to somehow differentiate.

To read the rest of the article, go here

Quote of the Day

“This is a perfect example of a favor bank, which is exactly how Wall Street works.”

John C. Coffee Jr., a professor and expert on insider trading at Columbia Law School in the story, “How Keeping Up Appearances Ruined a Former Dallas Banker”

Lead Stories

How a 143-Year-Old Swiss Bank Took a Quick Road to Ruin in Asia
Even in Asia’s cutthroat world of wealth management, the news of a mass defection at RBS Coutts, venerable bankers to the British royals, came as a shock. Lenders battered by the financial crisis were fighting for Asia veterans who could bring the lucrative accounts of the region’s growing ranks of millionaires, and Coutts rainmaker, Hanspeter Brunner, had jumped ship with a staggering 70 colleagues. Their destination: BSI SA, a small Swiss bank looking to get big in a hurry.

Banks seek geeks for mutual advantage
Financial Times
Was banking ever cool, I ask a 50-something investment banker. His eyes glaze over as he recalls the halcyon years of the 1990s. Deals were booming, finance was abuzz with the “greed is good” mantra from the 1987 film Wall Street , and saying if you were an investment banker you “could get you as many dates as you liked”. Those glory days lasted until the early 2000s when suddenly hedge fund and private equity managers were the cool kids on the block. And then came the financial crisis. Bankers were lambasted for their role in the crash in terms usually reserved for estate agents, parking attendants and Somali pirates.

Economics Struggles to Cope With Reality
There are basically four different activities that all go by the name of macroeconomics. But they actually have relatively little to do with each other. Understanding the differences between them is helpful for understanding why debates about the business cycle tend to be so confused.

A Tale of Two Debt Write-Downs
Adair Turner – Project Syndicate
At the end of 2015, Greece’s public debt was 176% of GDP, while Japan’s debt ratio was 248%. Neither government will ever repay all they owe. Write-offs and monetization are inevitable, putting both countries in a sort of global vanguard. With total public and private debt worldwide at 215% of world GDP and rising, the tools on which Greece and Japan depend will almost certainly be applied elsewhere as well.

Shareholders Are Disappearing Before Our Eyes
In the stock market, more ownership seems to be concentrated in fewer hands all the time.
That’s been a worry for at least a century, since Louis Brandeis wrote his book “Other People’s Money.” But today’s financial technology has created an improbable scenario under which companies could use that concentration to put their investors in the dark.

Banks face crunch from falling house prices, cheap mortgage rates and global economic slowdown
The Telegraph
A dangerous cocktail of falling houses prices, rock bottom interest rates on mortgages and a weak global economy will put a serious squeeze on Britain’s banks, analysts have warned.

Big is not beautiful in UK bank ratings
Financial Times
You probably don’t think much of your bank. Mailshots of services you have happily lived without; “your call is important to us” as you wait and wait to speak to a human being; fat booklets of terms and conditions that life is too short to read; punishment charges for going overdrawn. They are all the same — or not, according to Michael Lafferty and Jane Fuller, both formerly of this parish. Their Bank Quality Ratings, culled from those other unread tomes, the annual reports, prove that there is gold buried in the hundreds of pages of low-grade ore. They pan for sustainability in the small print, and award stars.

Higher Fees Unavoidable As Exchanges Transform Into Data Companies; Exchanges are becoming more like data companies according to industry experts at the FIA International Derivatives Expo
Joanne Faulkner – Waters Technology
Exchanges are no longer just trading venues, but in many cases have become more like data companies, according to industry experts at the FIA International Derivatives Expo (IDX) in London last week who say that ongoing demand from end users will continue to push up prices for exchange market data.

Central Banks

Caution pervades at four of world’s top central banks
It is a sign of the caution that permeates the global economic outlook when four of the world’s top central banks, all due to meet within days of each other, are almost unanimously expected to make no change to their extraordinary stimulus programs.

Fed’s silence is the loudest sound for markets this summer
Financial Times
The sounds of silence. The prospect of tighter Federal Reserve policy and a disorderly slide in China’s renminbi have dominated fearful market conversations for much of the year. Now, as the frightened chatter quietens to barely a whisper, investors are playing catch-up on performance. Many began the week embracing a disappointing US jobs report for May as another example of bad news being a good thing. Commonly known as the central bank put, it’s when weaker economic news prompts investors to buy equities, commodities and corporate debt in the belief that interest rate policy will remain loose, or in the case of the US Fed this summer, happily unchanged.

The Fed Must Attack Low Inflation
The U.S. economy remains weak, with inflation expected to remain below the Federal Reserve’s target for years to come. When the central bank holds its policy-making meeting next week, it should take decisive action to end the malaise.

It’s a Good Thing the Fed Has Missed its Chance to Raise Rates. Here’s Why.
MoneyBeat – WSJ
A shockingly weak May jobs? report? knocked the Federal Reserve off what looked like a clear course to raise interest rates in the next few months. Up and down Wall Street, you could hear the groans: once again the Fed missed its chance.

ECB Doesn’t Need New Stimulus to Hit Goal, Policy Maker Says
The European Central Bank has pledged enough stimulus to return euro-area inflation to its goal, policy maker Bostjan Jazbec said, in a sign that officials may sit tight over the summer months.

Negative interest rates by ECB, BOJ can’t boost growth, Allianz says
Leslie Shaffer – CNBC
Central banks are essentially out of ammunition, with zero and negative interest rate policies spurring greater savings, not growth, said Michael Heise, chief economist at Allianz Group.
Moves by central banks from Japan to the euro zone to slash interest rates below zero have upended financial markets: investors are now paying some governments for the privilege of parking their funds while commercial lenders are mulling storing their cash in costly vaults instead of keeping them with central banks.

Five Questions for Janet Yellen
Next week’s meeting of the Federal Open Market Committee (FOMC) includes a press conference with Chair Janet Yellen. These are five questions I would ask if I had the opportunity to do so in light of recent events.

Bank of Russia Cuts Interest Rates
By Andrey Ostroukh – The Wall Street Journal
MOSCOW—The Bank of Russia cut interest rates on Friday for the first time in nearly a year, paving the way for an easing cycle to prop up the battered economy.
The central bank cut the key rate by half a percentage point to 10.5% after leaving it unchanged for six successive board meetings. Symbolically, the key rate has been cut to the level it was at before an emergency rate increase to 17% in late 2014 designed to stem a slide in the ruble.

Central Banks Can’t Ignore Blockchain’s Obvious Lure
Bank Think
We all know that virtual currency resides on the blockchain. But what about regular currency? It may be just a matter of time before blockchain money is a reality. Pragmatism and (ironically) central bankers may propel it.

Negative interest rates: Academics vs. markets
Brendan Mochoruk and David Wessel – Brookings Institution
Editor’s Note: For more on how experts view negative interest rates, watch the video of our recent Hutchins Center event.
What happens when central banks push interest rates below zero, as central banks in the euro-zone, Switzerland, Sweden, Denmark and Japan have done? Academics and central bankers tend to think that the benefits outweigh the costs, while market participants tend to think the opposite.

Insight – How Yemen’s wartime central bank keeps country afloat
As civil war engulfs Yemen, the central bank is so committed to staying neutral that it pays salaries of soldiers on both sides. The bank distributes money to public-sector workers in both government and rebel-held areas, and guarantees payments for vital grain and flour imports.

Regulatory News

U.S. proposal would require clearing more interest-rate swaps
The U.S. derivatives regulator on Thursday proposed widening the universe of interest-rate swaps that must be cleared through a central organization, as part of its efforts to align U.S. rules with those overseas. The Commodity Futures Trading Commission said its proposed requirement for swaps that exchange interest rate cash flows will be consistent with those in Australia, Canada, the European Union, Hong Kong, Mexico and Singapore.

Banks Gain Ground in Push to Change Derivatives Capital Rule
The world’s biggest banks have argued for years that capital rules punish them for handling clients’ derivatives trades. All that lobbying is starting to pay off.

How Keeping Up Appearances Ruined a Former Dallas Banker
At age 67, Thomas C. Davis should be enjoying all the perks of a long and distinguished career at the pinnacle of Wall Street and the Texas business elite. These include golfing at the prestigious Dallas Country Club and Preston Trail Golf Club, where he was a member; trips to Las Vegas and golf tournaments on the private jet he co-owned; and fractional ownership of two professional sports teams, the Texas Rangers and the Dallas Stars.


FX Trader Seeking to Beat Your Peers? Set Your Alarm For 3 A.M.
As currency markets get upended by high frequency firms in search of a nano-second’s edge, it’s an established notion in the industry that timing is everything. Now Deutsche Bank AG has found a low-tech way to put that principle into practice: Get up at three in the morning. This anti-social recommendation rests on the idea that time of day holds great sway over the behaviors of major world currencies — a conclusion from calculations drawn up by the firm’s strategists Daniel Brehon and Nicholas Weng. They’ve identified repeating patterns that stand firm across markets and timezones and can, the pair say, help traders predict currency behavior and mitigate spread costs.

Haven Currencies Benefit as Risk Events Keep Investors Guarded
The yen advanced with the Swiss franc as investors opted for their relative safety as they brace for events next week and discount chances the Federal Reserve will increase interest rates in coming months.

EU Requires Interest-Rate Derivatives Clearing in 3 Currencies
Over-the-counter interest-rate derivative contracts denominated in the Swedish, Norwegian and Polish currencies must be cleared through central counterparties under new European Union rules.

Zimbabwe’s Mugabe says ‘surrogate currency’ will prevent dollar outflow
Zimbabwean President Robert Mugabe said on Thursday the introduction of local bank notes by the central bank later this year, which he called a “surrogate currency”, would help prevent foreigners taking greenbacks out of the country.
He also said the shortage of U.S. dollars in the economy would be overcome soon, although he did not elaborate.


Human capital imperative to future of bond trading
The Trade
Human capital is more important than ever for the future of the bond trading desk, despite multiple headcount reductions across the industry, according to panellists at the Fixed Income Leaders Summit.

Bond Yields Around the World Fall to Records on Growth Outlook
The rush into government bonds during 2016 shows no sign of reversing as a weakening global economic outlook and political risks fuel demand for perceived havens. German 10-year bonds headed for a third weekly gain, pushing the yield close to zero, while gains by Japanese and Swiss securities with similar due dates drove their already-negative yields to new all-time lows. Demand for Treasuries kept yields near their lows since February, when investors were unnerved by a selloff in emerging markets.

Foreign Demand Soars for U.S. Treasurys, the ‘One-Eyed King’
The global hunger for U.S. government debt is intensifying as investors seek better returns from the negative yields and record-low rates found in Japan and Europe.

Puerto Rico’s Bonds Rally as House Nears Passage of Rescue Plan
Puerto Rico bonds are staging the longest rally in six months with the U.S. House of Representatives poised to vote on legislation to help resolve the island’s $70 billion debt crisis.

Indexes & Index Products

Under new chief, China’s securities regulator pushes fixes ahead of MSCI deadline
China’s securities regulator has rushed through stock market rule changes under its new chairman in a bid to persuade MSCI to include domestic Chinese shares in one of its global benchmarks.
The New York-based index provider will announce on June 14 if China has done enough to overcome investor concerns, which were heightened by its heavy-handed response last year to a stock market crash.

How MSCI inclusion might affect Chinese stocks
South China Morning Post
As the decision on China share inclusion in the Emerging Market Index looms, previous experiences can offer glimpses into what reactions might be expected

We’ve Been Outsmarted By Smart Beta. Let’s Try Smart Alpha Instead
Seeking Alpha
Lured by the prospect of outperforming the markets (as measured by capitalization-weighted indexes), investors have flocked to so-called smart beta indexes, driving them to exceed $500 billion, which is about 20% of all US exchange-traded product. Fueling this fire, Franklin Templeton recently joined the likes of Fidelity, Goldman and John Hancock in launching smart beta ETFs.

‘ETF 20/20’: Exchange Traded Fund Monthly Report
Our monthly ‘ETF 20/20’ report briefly summarizes recent Exchange Traded Fund (ETF) trends globally. It uses data from the First Bridge ETF database that includes all global ETPs.


Man who said gold miners was the ‘best trade in the world’ now sees this
Annie Pei – CNBC
The gold rally is back on and that has one group of stocks surging.
Gold miners have rallied in seven of the last eight trading sessions, pushing the space to a two-year high. But the rally has one former bull switching sides.
Larry McDonald, head of global macro strategy at ACG Analytics, who called gold miners the “best trade in the world” in January, now says a pullback is imminent, as he believes the space is currently overbought.

Indian gold discounts hit widest in 3-1/2 months on muted Asian demand
By Rajendra Jadhav and Koustav Samanta
Gold discounts in India expanded to their widest in nearly 3-1/2 months this week amid lacklustre demand elsewhere in Asia, with bullion’s recent rally dampening retail demand.
The safe-haven asset, which is highly sensitive to interest rates, has climbed almost 2 percent this week after weak U.S. payrolls data and comments from Federal Reserve Chair Janet Yellen undercut expectations of an imminent rate hike.

Hong Kong Gold Exports To China Slipped In April, But Still Higher Than Year Earlier
Lawrence Williams – Seeking Alpha
While we feel that the net gold export figures for Hong Kong gold entering mainland China remain as something of an indicator of the strength of mainland gold imports, they no longer really serve as a proxy for the total Chinese import figure. Chinese gold imports are increasingly coming in directly from other countries and we estimate, perhaps conservatively, that nowadays as much as 40% or more imported gold is entering the mainland from countries such as Switzerland, the UK, the US and Australia, which report detailed data, and from other gold producers that don’t. Time was when 85% or more of known Chinese gold imports were arriving via Hong Kong. This is just no longer the case.

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