First Impressions

TAC Committee Meeting Part 2: Algo Traders Say Reg AT Putting Trading Firms at “Precarious, Unwarranted and Unnecessary Risk”
Sarah Rudolph, JLN

At the top of the list at the CFTC’s Technology Advisory Committee meeting on Tuesday was a discussion of the CFTC Proposed Rule: Regulation Automated Trading (Reg AT).

The most contentious aspect of the discussion was whether or not the CFTC should be allowed to look at firms’ computer code for their automated trading systems. The CFTC seems convinced this is necessary and the automated traders seem equally convinced that it is a terrible thing to do.

Access to firm’s proprietary codes would help the CFTC determine whether there was intent in cases of market manipulation, which can be difficult to prove with an algorithm. But firms consider their algorithmic codes their trade secrets.

Richard Gorelick, co-founder and CEO of RGM Advisors, said requiring registrants to hold their proprietary source code in data repositories for the CFTC would violate standards of due process, a concern raised by a number of industry participants. One comment letter submitted by the Modern Markets Initiative said the rule would “place the trade secrets and intellectual property of algorithmic trading firms at precarious, unwarranted and unnecessary risk.”

Read the rest of the report at HERE
***DA: Also see Part One of Jeff and Sarah’s TAC Report, CFTC Tackles the What Ifs of Blockchain


John Lothian News/MarketsWiki Survey 2016 – Two More Days!
You know that GEICO ad in a corporate break room with the band Europe that was all over the airwaves the last few months? We’re in a similar “final countdown” phase. Friday, February 26 is the final day to participate in our 2016 reader survey and win an Apple Watch! Help us help you by giving us three minutes of your time and sharing your thoughts. Our quick survey also features the witticisms of Jim and Doug. So, we have that going for us, which is nice. Click HERE before it’s too late.

Quote of the Day

“While I understand the impetus behind wanting a single [monetary policy] rule to follow, it’s just not ready for prime time. It reminds me of the FDR quote that rules aren’t necessarily sacred, principles are.”

John C. Williams, president and CEO of the Federal Reserve Bank of San Francisco, in the story, “Single monetary policy rule ‘not ready for prime time’ – Fed’s Williams”

Lead Stories

As China’s Economic Picture Turns Uglier, Beijing Applies Airbrush
Edward Wong and Neil Gough – NY Times
This month, Chinese banking officials omitted currency data from closely watched economic reports. Just weeks earlier, Chinese regulators fined a journalist $23,000 for reposting a message that said a big securities firm had told elite clients to sell stock. Before that, officials pressed two companies to stop releasing early results from a survey of Chinese factories that often moved markets. Chinese leaders are taking increasingly bold steps to stop rising pessimism about turbulent markets and the slowing of the country’s growth. As financial and economic troubles threaten to undermine confidence in the Communist Party, Beijing is tightening the flow of economic information and even criminalizing commentary that officials believe could hurt stocks or the currency.

****SD: Also from the NY Times, China Gives Glimpse of Its Solutions to Economic Problems

Bond Markets -Nobody Expected This Monty Python Moment
Richard Barley – WSJ
In a famous Monty Python sketch, nobody expected the Spanish Inquisition. The equivalent surprise for global markets is ever-lower bond yields. It is startling to recall now that at the start of 2014, 10-year U.S. Treasury and U.K. gilt yields were around 3%, 10-year German Bunds close to 2% and Japanese yields at 0.7%. What’s more, many thought they were heading higher from there. Where are they now? In the U.S., the 10-year yield is hovering around 1.74%, it is 1.39% in the U.K. and just 0.15% in Germany. In Japan, it is minus 0.06%—investors are paying the government to lend money to it.

Electronic Bond Trading Platforms Seek to Attract Larger Orders
Katie Linsell – Bloomberg
Electronic bond trading is struggling to attract large orders. Platform operators are looking to change that. Proposals for increasing trade sizes include better matching buyers with sellers, improving data on bank inventories and providing access to private forums, according to officials scheduled to speak at an Association for Financial Markets in Europe conference in London on Thursday. One of the main challenges is that the transparency of electronic platforms can affect prices. Alerting other investors that you want to buy or sell large chunks of debt allows them to steal a potentially profitable trade by executing an order ahead of yours. Investment managers sometimes get around this by breaking up trades, which can be costly and complicated.

7 Reasons Why Breaking Up Big Banks Is a Bad Idea
Christian Stracke – Barron’s
In recent months, many politicians and policy makers have grown more aggressively vocal in their call to break up large and systemically important U.S. banks as a further measure toward preventing another global financial crisis.

Delinquencies on peer-to-peer loans are rising
Ian Kar – Quartz
Some people who have been borrowing money from lending startups have been falling behind on their payments. Data from lending data service Orchard Platform shows that delinquency rates on loans issued by fintech startups have been creeping higher over the past few months. Delinquency rates on peer-to-peer loans have increased from 0.56% in January 2015 to 0.75% in December 2015. Similarly, charge off rates—which is when a lender essentially says the loan isn’t getting paid back—grew too, from 0.33% in September to 0.51% by December.

There’s much talk of helicopter drops. Please let’s not go there
Jeremy Warner – The Telegraph
If you happen to be in Glasgow and fancy a pint of “Stone of Destiny” lager, pop into the Arlington Bar on Woodlands Road. As an added bonus, you can pay for your drink in “Scotcoin”, one of a burgeoning number of so-called “crypto-currencies” that has sprung up in the wake of the apparent success of Bitcoin, the world’s first wholly digital currency.

Moody’s Fate in Subprime Probe to Be Decided Soon by U.S.
David McLaughlin, Tom Schoenberg and Andrew M Harris – Bloomberg
The U.S. Justice Department will decide in the next few months whether it will sue Moody’s Corp. for allegedly inflating ratings on mortgage bonds at the heart of the 2008 financial meltdown, according to people familiar with the matter.

Foreign Money Could Be Slow to Enter China’s Bond Markets
Dow Jones Business News
China is warming to a new source of cash to fund its burgeoning debt pile: foreign investors. Yet a flood of overseas money into its bond markets may not materialize right away. Late Wednesday, Beijing announced it was loosening restrictions that had previously made it hard for most large foreign funds to participate in China’s$7.5 trillion domestic bond market. “It is another step in the direction to open up the capital market,” Luke Spajic, Asia portfolio manager at Pimco– one of the world’s largest bond funds– told a panel discussion in Shanghai on Thursday. “We warmly welcome” the move, he said.

World trade records biggest reversal since crisis
Shawn Donnan and Joe Leahy – Financial Times
Weaker demand from emerging markets made 2015 the worst year for world trade since the aftermath of the global financial crisis, highlighting rising fears about the health of the global economy.

Central Banks

IMF Says G-20 Countries Need to Ramp Up Government Spending
Ian Talley – WSJ
The world’s largest economies should agree to a coordinated increase in government spending to counter the growing risk of a deeper global economic slowdown, the International Monetary Fund said Wednesday.

Fed’s Lockhart Says Rising Rates to Create Risks for U.S. Banks
Steve Matthews – Bloomberg
Federal Reserve Bank of Atlanta President Dennis Lockhart said rising U.S. interest rates could undermine bank profits while their exposure to commercial real-estate also remains a risk.
“For the first time in more than a decade, bankers face the potential of operating in a rising rate environment,” Lockhart said in remarks at a banking conference in Atlanta on Thursday. “Rising rates will create challenges in managing net interest margins and risks.”

St. Louis Fed’s Bullard Discusses Falling Inflation Expectations and Monetary Policy Normalization
St. Louis Fed
Federal Reserve Bank of St. Louis President James Bullard discussed “More on the Changing Imperatives for U.S. Monetary Policy Normalization” in a presentation Wednesday to the Money Marketeers of New York University. Bullard said that two pillars of the Federal Open Market Committee’s (FOMC) 2015 case for monetary policy normalization have changed in 2016. In particular, he noted that market-based inflation expectations have fallen further and that the risk of asset price bubbles over the medium term appears to have diminished. “These data-dependent changes likely give the FOMC more leeway in its normalization program,” he said.

Single monetary policy rule “not ready for prime time” – Fed’s Williams
Federal Reserve Bank of San Francisco
Prescribing a single monetary policy rule for the Federal Reserve to follow is ill-advised, said John C. Williams, president and CEO of the Federal Reserve Bank of San Francisco.

Fed Officials Mull Global Financial Market Turmoil As Investors’ Expectations Diverge
Owen Davis – International Business Times
As the Federal Reserve gears up to meet next month to decide the near-term course of monetary policy, investors have essentially taken it for granted that policymakers will opt against an interest rate increase. The larger question now is whether a period of heightened financial stress in recent weeks has shifted its medium-term rate projections. Investors are looking to comments from no fewer than eight Federal Reserve speakers this week for clues about the Fed’s next step. Prominent among them is the Fed’s Vice Chairman Stanley Fischer, who in a speech Tuesday pinned the recent market turmoil on worries over growing pains in China and flagging commodity prices.

Fed’s Kaplan to downgrade his expected path of rate hikes at March FOMC
Dallas Federal Reserve President Robert Kaplan said on Wednesday that his more downbeat assessment of the U.S. central bank’s path of rate hikes will be reflected at the next policy meeting in March.


The World is Silently Bleeding Reserves
Alexander Assim – The Market Mogul
The financial crisis taught the world a lot and among those lessons one proved more important than the rest; that banks and financial institutions of the developed world were severely under-capitalised. They were leveraged to the hilt, investing profits at the expense of saving and it left them with far too little in the coffers to help them survive a period of terminal market decline. After the devastation to both the industry’s operations and reputation it became evident that, if banking as we knew it was allowed to continue, these capital reserves could never again be allowed to slip to such unsatisfactory levels.

Most-Volatile February for Currencies in Six Years Hints at More
Rachel Evans and Lananh Nguyen – Bloomberg
Currency traders are enduring the most-volatile February in six years, and implied price swings suggest more fluctuations ahead. Realized three-month volatility for the yen has risen to 10.5 percent, the highest since March, and a measure of future volatility is approaching the highest since 2013. For the British pound, historic volatility has shot up to 9 percent and implied fluctuations are nearing 12 percent, the highest in almost a year.

Liquidity, Kill Switches Are the Talk of the Currency Universe
Lananh Nguyen – Bloomberg
The specter of shrinking liquidity gripping fixed-income desks globally is creeping its way into the world’s biggest, most liquid financial market. Amid conversations about central bank policy and algorithmic trading, it was concerns about diminishing liquidity — or the prospects of it drying up entirely during times of market stress — that dominated discussions this week at the TradeTech FX conference in Miami.

In defense of killing the $100 bill
Peter Sands and Lawrence H. Summers – Washington Post
Our advocacy for ending the printing of high denomination notes — first in a working paper by Peter and colleagues and, later in a post by Larry — have been attacked on the ground that this proposal represents an infringement on liberty (for example, see here and here). Most prominently, the Wall Street Journal concludes an editorial with the remarkable assertion: “Beware politicians trying to limit the way you can conduct private economic business. It never turns out well.”

Pound Holds Biggest Decline Since 2009 as U.K. Growth Quickens
Eshe Nelson – Bloomberg
The pound held its steepest decline in more than six years as data confirmed that the U.K. economy gained momentum at the end of last year. Sterling was little changed against the dollar Thursday after falling 3.3 percent in the previous three days, the biggest drop since June 2009. Gross domestic product increased 0.5 percent in the fourth quarter, up from 0.4 percent in the three months through September, and in line with the median forecast of economists in a Bloomberg survey.

Wall Street Darling Blythe Masters to Promote Bitcoin in Washington
Avi Mizrahi – Finance Magnates
Blythe Masters, the Wall Street maverick bringing the gospel of the blockchain to the big banks, is going to be advocating the benefits of the distributed ledger in the US capital next week. The Chamber of Digital Commerce, a Washington, DC-based trade association representing the digital asset industry, announced that the CEO of Digital Asset Holdings will be a keynote speaker at the Chamber’s DC Blockchain Summit on March 3, 2016 at Georgetown University. Masters now also serves on the board of advisors for the lobby.

Japan considers making bitcoin a legal currency
Richard Smart – The Guardian
Japan’s governing Liberal Democratic party is planning to propose legal changes that would define bitcoin and other cryptocurrencies as currencies.

Supersized Currency on Europe’s Fringes Defies Big Banknote Clamor
Aliaksandr Kudrytski – Bloomberg
As some major central banks debate the future of their high-denomination bills, a former Soviet republic stranded between Russia and the European Union is about to increase the value of its biggest banknote 25-fold. The central bank in Belarus, which is preparing for its third currency overhaul by dropping four zeros off the ruble this year, will make a 500-ruble ($231) note the highest denomination.

Indexes & Index Products

Up to $430 bln in yuan bonds may join EM index in future-JPMorgan
Up to $430 billion of yuan bonds could join JPMorgan’s widely used emerging currency debt index once some key regulatory hurdles are scrapped, giving China a 10 percent weight in the benchmark, the bank said.

ETF combos trades may help weather market storm
For investors who believe the best trades come in twos, some choice ETF pairings may be the best way to ride out the market volatility. In a rough year for stocks, the telecom sector is the best performer in the S&P 500, rising more than 8 percent as the broader index has fallen 6 percent. Following this trend, Boris Schlossberg of BK Asset Management recommends shorting the SPDR S&P 500 ETF (SPY) and going long telecom stocks.

VIX Got Ahead of Itself Breaking 20 Based on Bond Hedge Cost
Joseph Ciolli – Bloomberg
With U.S. stocks fresh off their best week of the year, a signal from the bond market suggests investors have become too bullish, too quickly. It’s a comparison of hedging costs, specifically, where the Chicago Board Options Exchange Volatility Index has decreased to nearly the lowest level in 2 1/2 years relative to investment-grade credit-default swaps, data compiled by Bloomberg show. Hedge fund positions on U.S. stocks just saw the biggest two-week increase of 2016, data from the U.S. Commodity Futures Trading Commission show.

Does This S&P Death Cross Spell Disaster?
Alex Eppstein – Schaeffer’s Research
While it was easy to miss, the S&P 500 Index’s (SPX) 200-day moving average crossed below its 400-day trendline yesterday. It was the first time this death cross has occurred since April 2012, and the 17th time dating back to 1950. As you might infer from the expression death cross, the assumption is this signal has bearish implications. To help us quantify returns following this type of bearish cross, I enlisted the help of Schaeffer’s Senior Quantitative Analyst Rocky White, who put together the three charts below. The data indicates that the SPX historically underperforms following similar death crosses, versus both golden cross (200-day crossing above the 400-day) and anytime returns


A Big Bet on Gold Is Getting Crowded
Ben Eisen and Saumya Vaishampayan – WSJ
Big investors such as billionaire entrepreneur Mark Cuban are trying to take advantage of a recent rally in gold prices by buying bullish derivatives on a popular exchange-traded fund that tracks the yellow metal.

Venezuela is shipping gold to pay debt
Venezuela sent $1.3 billion worth of gold bars to Switzerland in mid-January, according to data from the Swiss Federal Customs Administration.

Gold moves revive memories of 1990s currency crisis
Gold has performed better than most other major asset classes this year, rallying around 16 percent since the start of the year as investors rushed into traditional the safe haven asset.
With the price of the precious metal moving higher this week as sterling has plummeted, analysts are comparing gold’s moves to the European currency crisis in 1990s. Back then, the U.K. was forced to abandon a European currency peg in late 1992, famously helping investor George Soros make $1 billion by betting against the pound and the Bank of England.

Venezuela Says Gold Reserve Accord Paves Way to Investment
Noris Soto, Jose Orozco and Pietro Pitts – Bloomberg
Venezuela’s government said it resolved a dispute with Gold Reserve Inc., paving the way for $2 billion of investment by the Spokane, Washington-based company in a mining joint venture.

Sibanye Eyes Gold, Platinum Acquisitions in 2016 as Stock Soars
Kevin Crowley and Andre Janse Van Vuuren – Bloomberg
Sibanye Gold Ltd., the biggest producer of the metal from South African mines, wants to buy gold and platinum assets this year as it seeks to capitalize on its rising earnings and share price, Chief Executive Officer Neal Froneman said. “We want to consolidate our position in the gold sector and the platinum sector,” he said in an interview at Bloomberg’s offices in Johannesburg on Thursday. “This year we could do a material gold and platinum transaction. That’s going to be our aim.”


Failure to Lunch
Malia Wollan- NY Times
For 11 years, June Jo Lee, an ethnographer, has been traveling the country, talking to Americans about how they eat. She has often been in offices, observing white-collar workers. In one interview, a 20-something administrative assistant at an architecture firm in Seattle told her, ”I don’t think I ate at a table at all this week if you don’t include my desk at work.” In Chicago, Lee talked to an I.T. specialist who lunched in front of his computer and assiduously avoided the break room; anyone who ate in there was odd. Another guy said that each week he would bring in a crudité party platter from Costco and graze from it when he got hungry.

Performance and clients taking back seat to regulatory issues for buy-side
John Bakie – The Trade News
Traditional concerns of asset managers such as investment performance and client relations are increasingly taking a back seat as firms struggle to navigate other changes in their business, according to research by Linedata.

****SD: From the story: “despite significant discussion in the media and at industry events around the potential for blockchain to be disruptive to the industry, only 8% view it as being disruptive over the next five years.”

Beijing eclipses New York as billionaire capital
Yuan Yang – Financial Times
Not only does it share the rude taxi drivers, freezing winters and crowded metro carriages; Beijing now matches New York for billionaires, according to one annual ranking.

What’s in Warren Buffett’s Letters: Bible Heroes, Naked Swimmers and Roaches
Warren Buffett loves an audience.

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