First Impressions

Balancing Act
Doug Ashburn – JLN

Back in 2009, in the aftermath of the financial crisis, the G-20’s finance ministers met in Pittsburgh to agree on a set of principles to guide new regulations on clearing, execution and capital standards. These principles eventually led to Dodd-Frank, EMIR, Basel III and the rest of the regulations still being implemented and fought over. While a consensus was reached in Pittsburgh, trying to balance global interests with local regulations, and trying to balance safety and liquidity, has proven to be much more difficult to achieve than initially hoped.

Today and tomorrow, all of the U.S. financial regulators, and a host of participants, bank heads, academics and market structure experts are gathering at the Federal Reserve Bank of New York in what could well become the “Pittsburgh Moment” for fixed income market structure.

Over the next two days, these deep thinkers will look at the recent Joint Staff Report on last October’s Treasury flash crash, the role of market makers and high frequency trading in the current market structure, and what steps can and should be taken to improve market structure. Let us hope that, whatever principles are agreed to from this week’s conference, the regulators lead with the need for striking the right balance, and let the regulations flow from there.

Click here to see the conference announcement and here to see the agenda

One area of concern, which was specifically addressed in the Joint Staff Report, is whether the high rate of trade cancellations and self-matching in the futures markets during the Treasury flash crash will receive the blame for the heightened volatility. If so, will self-match prevention become mandatory at the exchange level, or will we see a shift toward a tool at the ISV level, such as TT’s new Position Transfer mechanism, which prevents self-trades from reaching the exchange level by essentially creating a “synthetic fill” that matches the buy and sell orders and sends them directly to the back office? (For more on this issue, take a look at a recent post on TT’s Trade Talk blog.)

Last night, before jumping on a plane to join the party at the New York Fed, CFTC Chairman Tim Massad delivered an address at the World Federation of Exchanges Annual Meeting in Doha, Qatar. Massad discussed self-match prevention and a host of other areas where technological innovation has solved a problem, but, in the process, opened up new challenges. These new challenges will be addressed with, you guessed it, technological innovation.

Read the text of Massad’s speech, then stayed tuned to hear more on the market technology issue from our own Jim Kharouf, who is moderating a panel today at the WFE meeting titled “Exchanges and Technology: Balancing Innovation and Disruption.” They will touch on today’s market structure challenges, but also address the next generation of innovation and disruption, such as cybersecurity and blockchain.

Balancing innovation and disruption – that is the real trick, isn’t it?

Quote of the Day

“The lines between retail and institutional trading are becoming way more blurry. Back in the day, only the institutions had access to the best tools in the marketplace … and that’s becoming completely democratised.”

Jannick Malling, CEO of Tradable, in the story, “Smartphones put power to deal currencies into retail traders’ hands”

Lead Stories

‘3rd Wave’ — Why people are worrying about emerging-market debt
Mike Bird – Business Insider
In 2015, a picture of a Chinese fruit vendor trading stocks with a laptop at his stall went viral on social media. The number of Chinese with margin trading accounts — in which investors are extended huge amounts of credit to bet with — had exploded so far that even street-market grocers felt it was normal to place leveraged bets on equities.
It became a bit of a symbol of the economic and financial turmoil in China and much of the rest of the developing world: Growth has slowed, but debt is sloshing around like never before.

US junk debt regains high-yield status
Eric Platt – Financial Times
After years of investor enthusiasm, US high-yield debt is once again living up to its name. Yields on lower quality rated securities have soared since January as investors ask a pivotal question: are they being paid enough for the risk of owning junk-rated bonds?

Why Morgan Stanley Can’t Trade Its Way Out of Trouble
John Carney – WSJ
The best traders are nimble. That’s often not possible for a bank’s trading business as a whole as Morgan Stanley showed Monday.
The problem is that trading desks have high fixed costs that can’t necessarily be quickly brought down when revenues dry up. That can have an outsized effect on the bottom line.

Hedge Funds are Bringing Back Everyone’s Least Favorite Toxic Investment
Matt Scully – Bloomberg
Joshua Siegel is bringing back a version of one of the most toxic financial vehicles ever devised and arguing that this time it’s going to be different.
His StoneCastle Financial is among the funds that are reviving the collateralized debt obligation, or CDO.

What a Puerto Rico ‘Superbond’ Would Mean for the U.S.
Kristi Culpepper – Fortune
The success of this transaction could be construed as a moral obligation of the federal government, in which it seems reasonable to question whether a financial bailout is on the horizon.
The U.S. Treasury is considering assisting Puerto Rico with the issuance of a “superbond” to restructure the commonwealth’s $72 billion of outstanding bonded debt, The Wall Street Journal reported last week.

Credit Agricole to pay $787 mln to resolve U.S. sanctions probe
Karen Freifeld and Maya Nikolaeva – Reuters
A subsidiary of France’s Credit Agricole SA has agreed to pay U.S. authorities $787 million for moving hundreds of millions of dollars through the U.S. financial system in violation of sanctions against Iran, Sudan, and other countries, authorities said on Tuesday.

Has the market priced in an ‘earnings recession’?
Michael Santoli – Yahoo Finance
When we all have worried for long enough and prices go down, markets get less risky, not more.
Greece and China didn’t get “fixed.” Investors just fretted over them enough, and market prices adjusted sufficiently, to make them seem less an immediate threat to economic health. And then the value of stocks and bonds not in the direct path of the damage lofted.

Does oil drive financial market measures of inflation expectations?
David Elliott, Chris Jackson, Marek Raczko and Matt Roberts-Sklar – Bank Underground
Oil prices have fallen by more than 50% since mid-2014. For much of this period, financial market measures of both short-term and longer-term inflation expectations appear to have mirrored moves in oil prices, particularly in the US and euro area. But how strong is the relationship between oil prices and financial market inflation expectations, and what should we make of it?

Why there’s no easy way out of Spain’s insurmountable economic mess
Mehreen Khan – The Telegraph
Spain is the current superstar economy of the eurozone.
The country, which was bailed out by Europe after becoming embroiled in one of the worst banking and house price collapses in the euro just four years ago, is now proudly held up as the European Union’s model economic pupil.

Greek bank recapitalisation needs seen at less than 20 bln euros -bankers
George Georgiopoulos and Lefteris Papadimas – Reuters
Recapitalising Greece’s four main banks will cost less than 20 billion euros ($23 billion), two senior bankers with direct knowledge of the matter said on Tuesday ahead of the outcome of an assessment of their needs expected by the end of the month.

After love affair with voters, Trudeau faces economic reality
Dan Lett – Winnipeg Free Press
History will show that in the days leading up to this election, hardly anyone would dare mention the possibility of a Liberal majority. Even diehard Grits would not dare to dream.
By the end of Monday night, however, the message was clear Canadians ended their brief but torrid flirtation with the NDP. As for the Conservatives, they were handed divorce papers.
And yet, having pulled off one of the greatest political comebacks in Canadian history, the Liberals and leader Justin Trudeau will wake up today with one awful realization: the honeymoon for this government will, in all likelihood, be historically brief.

The macro-micro conflict
Jon Danielsson, Morgane Fouché and Robert Macrae – VOX, CEPR’s Policy Portal
There has always been conflict between macro- and microeconomic regulation. Microeconomic policy reigns supreme during good times, and macro during bad. This column explains that while the macro and micro objectives have always been present in regulatory design, their relative importance has varied according to the changing requirements of economic, financial and political cycles. The conflict between the two seems set to deepen and so, regardless of which ‘wins’, policymakers must not undermine the central bank’s execution of monetary policy.

Russia retreats to autarky as poverty looms
Ambrose Evans-Pritchard – The Telegraph
Russia is running out of money. President Vladimir Putin is taking a strategic gamble, depleting the Kremlin’s last reserve funds to cover the budget and to pay for an escalating war in Syria at the same time.
The three big rating agencies have all issued alerts over recent days, warning that the country’s public finances are deteriorating fast and furiously. There is no prospect of an oil revival as long as Saudi Arabia continues to flood the market. Russia cannot borrow abroad at a viable cost.

The Economics of Fiscal Policy (October 2015)
The Independent Economists Group (IEG) was established in April 2012 as a forum to bring together some of the most senior economists in the sector. The aim is to advance the public debate on key topics, to enable the sector to make a coherent contribution to this debate, and therefore to support policymakers in resolving the key issues facing the UK, EU and global economies.

Home Prices Are Rising Faster Than You Think
David Blitzer – S&P Dow Jones Indices
Prices of existing single family homes, as measured by the S&P/Case-Shiller National Home Price index, are rising is single digit terms. However, the price changes that matter – the real or inflation adjusted changes – may be higher than many suspect. Backing out inflation, as shown in the chart, gives real increases averaging 6.3% annually in 2012-20015. The compares to real increases of 6.8% annually during 1998-2005, the peak years of the housing boom. With two percent wage increases and one percent inflation, a real increase of 6% or more can make a difference. These numbers may offer one explanation for the recent popularity of apartments and renting.

Bank of Italy Governor Investigated in Banca Spoleto Probe
Lorenzo Totaro, Sergio Di Pasquale and Chiara Vasarri – Bloomberg
Bank of Italy Governor Ignazio Visco is under investigation in a probe regarding the 2013 placement of Banca Popolare di Spoleto SpA in special administration, according to a court document obtained by Bloomberg News.

Deutsche Bank Error Said to Briefly Send Client $6 Billion
Nicholas Comfort and Michael J Moore – Bloomberg
Deutsche Bank AG’s foreign-exchange unit mistakenly sent about $6 billion to a U.S. hedge fund client in June and recovered the money a day later, a person briefed on the situation said.

Central Banks

Dollar Declines as Central Banks Signal Looser Policy Is Working
Eshe Nelson – Bloomberg
The dollar fell against most of its major peers as officials from Europe to Australia signaled that their looser monetary policies are starting to work.
The statements encouraged speculation that policy makers will be less inclined to introduce new currency-sapping measures to stimulate their economies. The Bloomberg Dollar Spot Index approached an almost four-month low reached last week.

Bank of England forced into u-turn by bankers’ human rights lawyers
Tim Wallace – The Telegraph
The Bank of England had to water down plans to punish bad bankers after legal threats over executives’ human rights, it has emerged.
Andrew Bailey, deputy governor at the Bank and the head of the Prudential Regulation Authority, had wanted to make top bankers prove their innocence if something went wrong in their part of the business.

FRB: Speech–Powell, The Evolving Structure of U.S. Treasury Markets
Federal Reserve
I am pleased to be here with this distinguished group of market participants, academics, government officials, and many others who are vitally interested in the issues before us today.1 I am sure that all of us recognize the importance of the U.S. Treasury markets to our economy and our financial system; indeed, to the world economy and the global financial system. As Bill just outlined, for the next two days, we will collectively address the most important questions facing the Treasury markets today.2 Are there significant problems in these markets that are not likely to self-correct? More specifically, is liquidity in broad decline, or more prone to sudden disappearance? If so, what are the causes? And what are the costs and benefits of potential market-led or regulatory responses? The design of this conference is to provide a forum for differing perspectives on these issues.

Fed’s Williams sees rate rises appropriate in ‘near future’
Despite strong headwinds from overseas that are holding down U.S. inflation, the Federal Reserve should soon begin to raise interest rates to slow down economic growth before it becomes unsustainable, a top Fed official said on Monday.

Emerging Asia’s monetary policy
Central banks across Asia continue to look at maintaining an accommodative monetary stance. In Singapore, the Monetary Authority of Singapore (MAS) reduced the slope of its SGD NEER policy band slightly. While market concerns on growth have risen, the MAS itself appears reluctant to ease policy significantly (see In Focus).

Bank of England’s McCafferty Sees Risks From Delaying Rate Rise
Jill Ward and Jonathan Ferro – Bloomberg
Ian McCafferty said global threats to the U.K. economy simply add to the risks affecting its outlook and don’t change his view that a Bank of England interest-rate increase is needed sooner rather than later.

Should We Be Concerned about Declines in Labor Force Growth?
Federal Reserve Bank of Atlanta Macroblog
For the second month in a row, the October jobs report from the U.S. Bureau of Labor Statistics (BLS) has revealed a decline in the labor force. From August to September, the labor force lost a seasonally adjusted 350,000 participants. And the August number of participants was a seasonally adjusted 41,000 below July’s level. Although two months don’t necessarily make a trend, observers have noticed the declines in the labor force (here and here, for example), and they deserve some attention.


China’s capital outflows top $500bn
Shawn Donnan – Financial Times
Capital outflows from China topped $500bn in the first eight months of this year, according to new calculations by the US Treasury that highlight the shifting fortunes in the global economy.
The outflows, which peaked at about $200bn during the market turmoil in August according to the estimates released on Monday, have also contributed to a shift by Washington in its assessment of the valuation of China’s currency, the renminbi.

FX players divided on market structure
Euromoney Magazine
Foreign-exchange market participants are warming to the idea of exchange-like trading and abolishing outdated market practices such as last look – but banks and non-bank players still cannot agree on the future landscape of FX, according to a survey published by LMAX Exchange.

Euro to Pound Conversion Downside to Extend say Merrill Lynch
Sam Coventry – Pound Sterling Live
Investors are biased to selling euros ahead of Thursday’s European Central Bank meeting on the fear that Mario Draghi could say or do something that would be consistent with easier monetary policy.

Why Currency Markets Are Experiencing Flash Crashes
Dan Weil – Institutional Investor
The stock and bond markets have received plenty of attention for flash crashes that have occurred over the past five years, but they aren’t alone.
Several flash crashes have hit the currency markets too, most notably in March, when the U.S. Dollar index dropped 3 percent in just under four minutes and then gained most of that back in three minutes. Whereas 3 percent may not represent a huge move for a stock, it is for a currency and even more so for a currency index.

Smartphones put power to deal currencies into retail traders’ hands
Jemima Kelly – Reuters
Once the preserve of big international banks, smartphones are putting the power to deal currencies into the hands of a new cohort of traders, who can make a fortune — or lose their shirt — on the bus to work.
Retail foreign exchange trading has grown rapidly in recent years, but the image has been of a lone trader in front of a computer screen. Smartphones, owned by around half the world’s adults, are changing that.

Indexes & Index Products

ETFs, ETPs Listed In U.S. Gathered Record $145 Billion In Net New Assets
Deborah Fuhr – Nasdaq
ETFs and ETPs listed in the United States have gathered a record 145 billion US dollars in net new assets as of the end of Q3 2015. Although September was another roller coaster ride for investors they allocated US$19.1 billion in net new assets to ETFs and ETPs listed in the United States during the month. This marks the 8th consecutive month of positive net inflows, according to ETFGI’s ETF and ETP United States insights report for September 2015.

Here’s Why Japanese Investors Have Gone Ga-ga Over That Leveraged ETF
Eric Balchunas – Bloomberg
Japanese investors appear to have fallen head-over-heels in love with a leveraged ETF.
The NEXT FUNDS Nikkei 225 Leveraged Index ETF – which uses derivatives to provide twice the daily performance of the Nikkei 225 Index – is up 260 percent since launching and despite a big dip over the past two months. That’s actually more than two times the return of the index – a phenomenon in leveraged ETFs known as the compounding effect.

ISE ETF Ventures and Partners Launch New Cancer Immunotherapy ETF
Press Release – International Securities Exchange
ISE ETF Ventures has partnered with Loncar Investments, Exchange Traded Concepts, and Amplify Development to launch the only exchange-traded fund (ETF) focused on cancer immunotherapy, the emergent biotechnology sector dedicated to activating the body’s immune system to treat the disease. The ETF successfully launched on October 14, 2015, on NASDAQ.

STOXX Introduces New Suite Of Smart Beta Indices
Press Release
STOXX Limited, a leading provider of innovative, tradable and global index concepts, today introduced the STOXX Select and STOXX Diversification Select index families. These new indices are derived from major STOXX benchmarks, measure the performance of companies with low volatility, high dividend yield, and – in case of the STOXX Diversification Select Indices – low correlations. Index components are weighted by the inverse of their volatility.

Two new pan Arab smart beta indices launched by S&P Dow Jones Indices
CPI Financial
S&P Dow Jones Indices (S&P DJI) announced today the launch of two new smart beta indices catered to the Middle East and North Africa (MENA) market, the S&P Pan Arab High Dividend Low Volatility Index and the S&P Pan Arab Composite Shari’ah Dividend Index, expanding its leading family of smart beta indices.

SEC’s Aguilar Asks, “How Can the Markets Best Adapt to the Rapid Growth of ETFs?”
John D’Antona Jr. – Traders News
The rapid growth of the exchange traded fund sector and its effects on the broader equities market has caused quite a stir among industry professionals and now one Securities and Exchange Official is openly asking what can be done to keep markets stable.

European benchmark rules may hurt innovation – CFTC
Cian Burke – Futures & Options World
Timothy Massad, chair of the Commodity Futures Trading Commission (CFTC), warned on Tuesday the proposed European benchmark regulations could damage benchmark administration
Speaking at the World Federation of Exchanges annual meeting in Qatar, Massad, told delegates the approach being taken by European regulators to benchmark integrity risked imposing additional costs and requirements on non-EU countries, making it difficult to introduce new benchmarks.


Gold On Verge Of Posting First Positive Year Since 2012
Frank Holmes – Forbes
After its stellar performance last week, gold might do something it hasn’t done since 2012, end the year in positive territory. You can see past returns for yourself in our perennially popular Periodic Table of Commodities Returns.

Gold industry stays gloomy on yellow metal
Financial Times
The price of gold will go virtually nowhere over the next year, according to a closely-watched poll of the precious metals industry.

Gold Mining Contributing $171B to World Economy
Scott Portugal –
The World Gold Council, in conjunction with the consultancy group Maxwell Stamp, recently released a report to show how much the gold mining industry contributes directly to the economy in 2013. The figure was a gold-level $83.1 billion. The report also stated that the direct impact of gold mining combined with the indirect economic impact is up to $171.6 billion.

The Biggest Thing to Happen to Gold Mining Since the Shovel
Peter Krauth – Money Morning
Right now, many of the planet’s gold miners are eking out in survival mode, breaking even if they’re lucky, or losing money on every ounce they produce. It’s become unsustainable.
Meanwhile, globally, there are thousands of gold mines holding tens of millions of ounces left underground. Essentially, those mines and the gold stuck inside are worthless – unless someone devises a new way to extract the “leftovers” in a safe and cost-effective way.


The poor earning power of Japanese firms
Hyeog Ug Kwon – VOX, CEPR’s Policy Portal
Though Japanese firms benefit from a high-quality workforce and invest in R&D as much as their US counterparts, they fall behind US firms in terms of their earning power. This column suggests that corporate structures in the two countries could be an explanation for this phenomenon. The findings indicate that CEOs of US firms aim to maximise profits, whereas CEOs of Japanese firms prioritise long-term corporate survival.

Pin It on Pinterest

Share This Story