First Impressions

Speedy Delivery: Keith Ross on HFT, Reg NMS and Dark Pools
JohnLothianNews.com

Today’s financial markets can be summed up in three words – global, fast, and complex. But as the market structure evolves, so must the regulatory structure that oversees it. John Lothian News has spoken with several industry experts to create this series on the evolution of financial market structure.

In Part 3, Keith Ross, CEO of PDQ ATS offers his thoughts on HFT, Regulation NMS, maker-taker arrangements, and dark pools, and voices his concerns that regulatory oversight may give way to legislative overreach.

Watch the video »

Quote of the Day

I have yet to see a three-year track record on an alternative fund that I’m impressed by. The fees are so high that the good ideas are wiped out by the compensation structure.

Christopher Van Slyke, a founding partner of WorthPointe in the story, “Alternative Mutual Funds Draw Concerns from Financial Advisers, Regulators”.

Lead Stories

Alternative Mutual Funds Draw Concerns from Financial Advisers, Regulators
WSJ.com
Alternative mutual funds are growing in popularity, but some financial advisers say they are not yet sold on these complex and evolving products. Investors generally have been smitten with the funds, which may use strategies common to hedge funds or combine several different investment strategies. Many use them to improve their portfolios’ performance or provide returns not correlated to stocks or bonds.
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***DA: The bottom line is that high-touch management is expensive. It is scalable, however, so the structure gets much cheaper as a fund grows. But such scale will never be reached unless the financial enticements (profits) show up.

China, the US, and PPP: a pretty poor parallel
James Mackintosh | FT Alphaville
Much is being made of China being about to pass the US as the world’s biggest economy — and of China’s fight to massage down the figures. We hate to side with Chinese statisticians, but at the very least Beijing may well be right to play down the comparison in its local media.
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***DA: Lies, damn lies and statistics. Which nation is richer when adjusted for purchasing power parity – Poland or East Timor? Click to find out.

Demise of the Trickle-Down Delusion
Barry Ritholtz – Bloomberg View
Any reader of this site has likely heard about the book currently setting the world of economics aflame. “Capital in the Twenty-First Century” was written by a French economist named Thomas Piketty. It is on the New York Times best-seller list and is currently sold out, with its publisher scrambling to print more copies.
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***JB: This picture is taped to my computer about a foot away from me. While it’s nice to have Thomas Piketty’s data at hand it has been pretty clear “trickle down” economics has been a bogus model since…well…forever. Even George Bush (the senior) called it “voodoo economics”.

Abe Says Wages, Jobs Key to Beating Deflation, Pledges EU Deal
Svenja O’Donnell – Bloomberg
Japanese Prime Minister Shinzo Abe said wages and employment must rise for his country to beat deflation, as he promised to secure an economic partnership between Japan and Europe.
“To overcome deflation, it is absolutely necessary for wages and employment to move in a visible way in a positive direction,” Abe said in a speech in London today. Improving sentiment among small and mid-size companies shows “a discernible feeling of growth has gradually come to permeate society.”
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***DA: How’s that sentiment thing going? All I see is cost inflation and wage stagnation. The solution? Keep on printing.

BoE warns that housing bubble risks derailing economy
Chris Giles, Sam Fleming, Elaine Moore and Delphine Strauss – FT.com
The Bank of England has given its strongest warning yet that a housing bubble threatens to derail the UK economy, saying that spiralling property prices were “the very brightest [hazard] light” on its dashboard.
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***DA: Oh, yeah. And housing price inflation.

The SEC could find new uses for an old law
FT Alphaville
It is probably too late to change the number of individuals charged in relation to the financial crisis, even if US regulators reconsider their treatment of offending corporations, but there may be a route to more aggressive enforcement by dusting off a little used part of a 1934 statute. Jordan Thomas, a former SEC Enforcement Director and chairman of the whistleblower representation practice at Labaton Sucharow, outlines a way the Commission could go after malign managers in the future.
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UK borrowing costs rise to highest above Germany’s in 15 years
Elaine Moore and Delphine Strauss – FT.com
Britain’s long-term borrowing costs have risen to their highest above Germany’s for 15 years, as investors react to diverging economic recovery stories across the world.
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***DA: Looks like an arbitrage opportunity to me.

Australia weighs austerity moves as cuts loom
Jamie Smyth in Sydney – FT.com
It is one of a handful of countries that retains a triple A credit rating, its economy grew almost 3 per cent in 2013 and unemployment is under 6 per cent: in many ways Australia is the envy of the developed world.
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***DA: Everything but Vegemite. No envy there.

Abe steps up his salesmanship on foreign odyssey
Jonathan Soble in Tokyo – FT.com
Shinzo Abe’s harshest detractors call him a jingoist and a xenophobe, but if the Japanese prime minister dislikes foreigners you would not know it from his travel schedule.
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Pension funds weary of interest rates high-wire act
Cecile Sourbes – Risk.net
Rising rates would help reduce pension fund deficits, but would also hurt the sector’s hedges. That could be managed by trimming hedge ratios, but funds are scared of acting too soon.
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***DA: It’s hard to be right about direction and timing as well. Ask PIMCO.

Central Banks

Draghi’s Inflation Bets Firmer Than Fed: Cutting Research
Simon Kennedy and Alaa Shahine – Bloomberg
Mario Draghi has more reason than Janet Yellen to be confident investors won’t question the ability of central banks to keep inflation on target.
Inflation expectations are key to the economic outlook in the U.S. and Europe because if investors doubt policy makers can keep consumer price growth near their goals, then price pressures may begin to fade toward deflation.
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Carney Consensus Facing Test as BOE Focuses on Slack: Econom
Emma Charltony – Bloomberg
Mark Carney’s grip on the Monetary Policy Committee is about to be tested as officials discuss new forecasts, freed from their low interest-rate pledge.
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Fed Chairwoman Yellen: Will Seek to ‘Tailor’ Oversight of Community Banks
WSJ.com
Federal Reserve Chairwoman Janet Yellen sought to calm the concerns of community bankers Thursday with a speech suggesting the central bank will tread lightly in regulating smaller banks while at the same time promising to get tough on the biggest U.S. firms.
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Yellen’s Fed Resigned to Diminished Growth Expectations
Rich Miller – Bloomberg
Federal Reserve Chair Janet Yellen and her colleagues have lowered their sights on how fast the economy needs to expand to meet their goal of cutting unemployment.
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Draghi ABS Plan Seen Helping Banks, Not Business
Alastair Marsh – Bloomberg
Mario Draghi’s plan to spur growth by getting the European Central Bank to buy asset-backed securities and persuade lenders to sell more of the bonds is being met with skepticism by the region’s biggest money managers.
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Currencies

Draghi’s Virtuous Bond Circle Vicious for Currency
Anchalee Worrachate – Bloomberg
When the Federal Reserve and Bank of England raised the prospect of buying bonds to support the economy, the dollar and the pound tumbled. As the European Central Bank makes similar suggestions, the euro is rising.
That’s the perverse predicament facing ECB President Mario Draghi, who is trying to avert the risk of deflation that a stronger currency would exacerbate. Working against him is the wave of cash flooding into euro-region bonds as investors, including the world’s largest money manager BlackRock Inc., snap up the securities in anticipation of quantitative easing that may lower yields and push prices higher.
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***DA: The challenge of running a central bank – it’s akin to trying to control three knobs with only two hands.

FX: No Fun Any More (Cont.)
Katie Martin – MoneyBeat – WSJ
The ban on fun in the miserable foreign exchange industry continues.
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Daiwa Capital Markets Expects Yuan to Slide Further
MoneyBeat – WSJ
Is the Chinese yuan’s surprising slide over? No, says Daiwa Capital Markets, it’s just the beginning and the currency will slump a further 8% over the next two years.
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BitBeat: Robocoin ATMs Becoming a ‘Bank’
MoneyBeat – WSJ
Robocoin is making some significant changes to how its ATMs handle cash and bitcoin exchanges, all in the name of speeding up transaction and making remittances easier. In the words of a Robocoin press release, the firm is becoming “a bank.” Its ATMs, which are owned and managed by licensed third-party operators, are described as branches.
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Indexes & Index Products

MSCI’s Chinese Stock Puzzle
Weiyi Lim – BloombergBusinessweek
Among money managers, MSCI (MSCI) is a well-known financial company that sells portfolio risk analytics and manages widely followed stock market indexes. It’s now a target of criticism after floating a proposal to include domestic Chinese stocks in its Chinese and developing-nation indexes starting next year. The idea is getting a cold reception from investors, who call it “unfair,” “silly,” and “crazy.”
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Gold

Gold falls on Fed confidence in recovery
Thomas Hale – FT.com
Gold fell more than 1 per cent on Thursday after the US Federal Reserve reaffirmed its confidence in the domestic economic outlook. Although growth in the US economy slowed sharply in the first quarter, the Federal Reserve reduced asset purchases by a further $10bn to $45bn a month on Wednesday.
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Gold Prices Erase Gains as U.S. Employers Boost Payrolls
Debarati Roy – Bloomberg
Gold prices, trading little changed, are poised to fall after U.S. employers boosted payrolls in April by the most in two years, cutting demand for the metal as a haven.
The 288,000 gain in employment was the biggest since January 2012, Labor Department figures showed today. The jobless rate plunged to 6.3 percent, the lowest since September 2008. Through yesterday, bullion climbed 6.7 percent this year as signs of faltering U.S. economic growth boosted demand for a haven.
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Bright Spot for India’s Gold Demand
Biman Mukherji and Debiprasad Nayak – The Wall Street Journal
Gold demand in India, the world’s No. 2 consumer, is gaining momentum, just as it appears to be easing in top consumer China.
Indian consumers recently have had a number of reasons to open their wallets: weak international prices, a Hindu festival and a string of upcoming dates traditionally reserved for weddings.
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