First Impressions

Let’s Pause a Moment: Keith Ross Talks Dark Pool Rules and IEX

The addition of high speeds and multiple execution venues has altered the equity market structure in recent years. Now, the SEC is weighing in with newly proposed rules on dark pools. Meanwhile, IEX, which rose to fame with Michael Lewis’ “Flash Boys”, is trying to move from dark pool to full-fledged exchange. Keith Ross of PDQ ATS says transparency is a good thing, and a market pause has its benefits in alternate venues, but as an exchange, could create chaos.

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Quote of the Day

“Nothing here is criminal, it’s just stupid. I think they’re generally just stupid.”

Steve Eisen, former manager of FrontPoint Partners, in the story, “The US government interviewed the heroes of ‘The Big Short’ — here’s what they had to say”

Lead Stories

Central banks lurch from topsy-turvy 1970s to helicopter money
John Plender – Financial Times
John Maynard Keynes is reputed to have identified an immutable law, which says that the market can remain irrational for longer than you can stay solvent. The great economist’s personal experience of investment certainly provided strong support for this. Rational bets he made in currency and commodity markets came seriously unstuck. He had to be bailed out by family friends. Yet the logic of this wise dictum has currently been suspended thanks to the actions of central banks. As long as they continue to resort to quantitative easing, speculative positions can be held indefinitely, financed very cheaply in whatever currency is weakening in response to the latest round of monetary experimentation.

Back From the Dead: Interest-Rate Hikes Are Getting Priced in Again
Min Zeng – Wall Street Journal
The U.S. bond market is starting to think about something it hasn’t considered for months: rate increases. After having convinced themselves as recently as a month ago that there was no chance the Federal Reserve would raise interest rates this year, traders are signaling that at least one is likely before the end of December—putting another possible source of volatility back on the agenda. There is little expectation the Fed will raise rates when it announces its next policy decision on Wednesday. But the odds of an increase by June have jumped to 43%, and the odds of one by December are now 75%, based on the price of interest-rate futures on Friday. That is a sharp turnaround from early February, when the market was estimating the chance of a rate increase at either point at zero.

Holding Prosecutors Responsible in an Insider Trading Investigation
Dealbook – NY Times
The Roman poet Juvenal posed the question “quis custodiet ipsos custodes?” or “who will guard the guards themselves?” That issue surfaced last week as part of a lawsuit filed by a hedge fund owner against a number of F.B.I. agents and federal prosecutors in Manhattan, including the United States attorney in Manhattan, Preet Bharara, accusing them of making deliberate misrepresentations in an affidavit used to obtain a search warrant in an insider trading case that ended up putting the hedge fund out of business.

Bill Gross is cleared to pursue Pimco lawsuit
Bond manager Bill Gross will be able to pursue his lawsuit to recoup hundreds of millions of dollars from Pacific Investment Management Co in the wake of his 2014 ouster from the firm he co-founded.
Pimco agreed to accept as final a tentative decision issued late on Sunday by California Superior Court Judge Martha Gooding that Gross’ breach-of-contract lawsuit was strong enough to proceed, Gross’ lawyer said on Monday.

Caution persists as financial markets hit the reset button
After a miserable start to the year, financial markets are looking for a do-over.
Stocks, junk bonds and commodities were hammered throughout January and most of February, causing some investors to wave the recession flag, but now they’ve pretty much returned to levels that prevailed at the outset of 2016.

Goldman Sachs to Buy Honest Dollar, a Small Plan Start-Up
Dealbook – NY Times
Goldman Sachs is adding a little robo to its investment management business, buying Honest Dollar, a digital retirement savings tool aimed at millions of small-business employees who do not have access to traditional employer-sponsored savings plans.

Bond Traders Can’t Sleep as Fed Policy Becomes a Foreign Affair
Susanne Walker Barton, Wes Goodman and Alexandra Scaggs – Bloomberg
Even in the mighty U.S. Treasury market, bond traders are taking their cues from central bankers in Europe and Japan. With Mario Draghi and Haruhiko Kuroda pressing ahead with their grand monetary experiments, negative yields in Germany and Japan are exerting greater and greater influence over U.S. Treasuries. Overnight trading of Treasury futures has exploded, reaching levels not seen in years. Ten-year U.S. notes are also moving the most in tandem with German bunds since 2014.

Goldman revamps electronic stock trading to catch rival
Raj Mahajan achieved a rare feat when he rejoined Goldman Sachs Group Inc (GS.N) last year with the coveted title of partner, the Wall Street bank’s highest rank. Then he got to work on fixing the pipes.
That plumbing has to do with the technology Goldman uses to route stock orders to exchanges and private trading pools. The bank has long been one of the top two stock brokerages in terms of revenue and customer rankings. But in recent years Goldman’s status slipped in electronic trading because its technology did not keep up with client demands for ever-faster trades.

CoCo Coupons May Receive Payout Priority to Disarm Debt Grenade
John Glover – Bloomberg
European regulators signaled they may be considering linking interest payments on banks’ riskiest debt to dividend payouts, investors and analysts said, as authorities seek ways of jamming the pin a little further into the hand grenade that’s attached to the securities. A so-called dividend stopper, which would bar dividend and bonus payments unless coupons are paid on additional Tier 1 bonds, could be a solution for the European Commission as it seeks to reassure the market, investors said.

****SD: Speaking of bank debt, UBS Jumpstarts Market for Risky Bank Debt With $1.5 Billion Sale

Unanswered questions in online lending
Financial Times
The following chart from Kroll Bond Rating Agency would raise eyebrows about any young company, but for an online lender in particular it poses troubling questions (click to enlarge). That’s the total loan originations for Marlette Funding, a Wilmington, Delware-based lender started by a bunch of ex-Barclays employees in 2013. It took them just ten months to hit $200m — a milestone Lending Club hit after 5 years, Bloomberg noted — and then just another few quarters to almost double that again to $395m in Q3 2015. But late last year, the company’s meteoric growth faltered on a quarter-by-quarter basis, with originations dropping by 21 per cent to $312.5m in Q4 of 2015 — even though that’s still up 51 per cent year-on-year, it’s a sharp slowdown on the 230 per cent year-on-year growth it had chalked up in Q3.

‘Bid This Bond’ – How Regulation Will Change Trader and Sales-Trader Workflow
Gary Stone, Bloomberg Trading Solutions – TABBForum
The once-simple process of bidding a bond for the buy side is growing more complex. Regulation is adding more steps, checks and validation points to traders’ workflow. But technology and quantitative methods are emerging that will enable dealers to adopt a framework that creates an efficient, repeatable, rules-based evaluation structure.

Democrats’ Bills to Empower Puerto Rico Face Uphill Battle
Dealbook – NY Times
Democrats in the Senate said they would introduce two bills on Monday to give Puerto Rico broad powers to shed some of its $72 billion of bonds while also giving its public workers’ pensions priority over the bonds.

RBS Said to Cut 550 Jobs as In-Person Advice Moves to Web, Phone
Stephen Morris – Bloomberg
Royal Bank of Scotland Plc plans to cut about 550 jobs as it scales back in-person advice to certain customers seeking investments and insurance, according to a person briefed on the moves. Some clients will be directed to a new online investing platform to keep their business with the bank commercially viable, the person said, asking not to be identified discussing the thinking behind the push.

Pimco’s $18 Billion Question
A change in how Pacific Investment Management Co. accounts for reinvested dividends and capital gains helped the bond manager minimize an exodus of clients by about $18 billion last year. Pimco at the start of 2015 began counting such payouts as inflows, a departure from the way it used to report flows. The change, made as the Newport Beach, California-based firm was under pressure to stem a flood of redemptions following the departure of co-founder Bill Gross, has put a spotlight on a controversial issue among money managers — what to count as new money.

****SD: Interesting day for Pimco. First, news that Bill Gross may pursue Pimco lawsuit: Gross’ lawyer and also that Norway’s Sovereign Wealth Fund Drops Pimco as External Manager

SEC approves budget of independent accounting board
The Securities and Exchange Commission on Monday approved the budget for the auditing watchdog that oversees the work of leading U.S. accounting firms.
The SEC staff recommended approving the budget of the Public Company Accounting Oversight Board (PCAOB) and SEC Commission Chair Mary Jo White and Commissioner Kara Stein endorsed the $257.7 million budget.

Central Banks

ECB’s Cheap Loans Highlight Rift Among Europe’s Banks
Todd Buell – Wall Street Journal
The European Central Bank’s decision to offer eurozone financial institutions cheap four-year loans offers fresh hope to struggling banks in Southern Europe—and has drawn immediate ire from their Northern European rivals. The loans allow eurozone banks to borrow at no cost for up to four years. Many banks in Italy, Spain and the region have struggled to clean up bad loans and maintain investor confidence. But in Germany, where banks sit on more cash than they can productively deploy, the industry lashed out at the loan program and other aspects of the ECB’s monetary-policy decision. German financiers said the moves were unnecessary and could undermine German investments, insurance and retirement plans.

The ECB, liquidity fear and an expandable shopping list
FT Alphaville
The ECB did stuff last week, namely it cut rates while downplaying further cuts, tried to protect the banks under its care from negative rates and pledged to boost its balance sheet. That was considered, after some confusion, impressive by markets, amongst other things because of the ECB’s shift to buying up private assets — “investment-grade euro-denominated bonds issued by non-bank corporations established in the euro area are to be inccluded in QE,” as Deutsche summarised while others wondered aloud about what else the ECB might end up buying. The problem so far, though, is that the universe of assets it can now buy is actually smaller than one might have originally thought.

IMF backs unconventional monetary policies despite warnings from emerging economies
Rajesh Kumar Singh – Reuters
Unconventional monetary policies of central banks in Europe and Japan received an endorsement from the International Monetary Fund on Sunday, even as policymakers from emerging markets warned that such policies were increasing risks for the global economy. The debate over the merits of unconventional policies comes days before major central banks such as the U.S. Federal Reserve, the Bank of England and the Bank of Japan unveil their interest rate decisions.

Fed’s Plans to Raise Interest Rates Are Delayed, Not Derailed
Binyamin Appelbaum – New York Times
Federal Reserve officials will gather in Washington on Tuesday and Wednesday to debate whether a bumpy start to the year is now in the rearview mirror, clearing the way for higher interest rates. The Fed is not likely to raise rates this week, but the steady growth of the domestic economy — despite the wobbles of financial markets and the weakness of other developed nations — is strengthening the hand of officials who say that higher rates are necessary to maintain control of price inflation.

As market rallies back, investors turn eyes to the Fed
Lewis Krauskopf – Reuters
Investors who have pushed the U.S. stock market higher over the past month will be taking their cues about the pace of future interest-rate hikes next week from the Federal Reserve. Recent economic data has relieved concerns that the United States might be heading for a recession and helped fuel the benchmark S&P 500 index’s .SPX 11 percent recovery since mid-February. But evidence of improving domestic conditions could also prod the Fed to speed up planned rate increases and thereby potentially dampen enthusiasm for stocks.

Strong US, weak world picture challenges Federal Reserve
Daily Mail
Federal Reserve policymakers will hold their finger away from the rate-hike trigger when they meet next week, analysts say, but chances are it could move a bit closer. Meeting after the European Central Bank cut interest rates Thursday in the face of weakening eurozone economic growth and inflation, the Fed is expected to heed caution even as it sees good signs of strength in the US economy. Those signs though, analysts say, increasingly point to June –or possibly even April — for the next increase in the federal funds rate, the Fed’s short-term benchmark, after December’s hike to 0.25-0.50 percent.

China’s Growth Target Is the Next Test for Its Central Bank
China’s central bank chief oozed calm in an annual press briefing in Beijing Saturday, supported by weeks of composure in markets as investor anxiety over the nation’s currency policy eased. How long the lull lasts will depend on how policy makers manage a balancing act made tougher by a weaker-than-anticipated start to the year for the world’s No. 2 economy. After People’s Bank of China Governor Zhou Xiaochuan spoke at the country’s annual gathering of the legislature, data showed an “alarming” failure of growth to respond to recent stimulus, Bloomberg Intelligence analysts Tom Orlik and Fielding Chen concluded.

Putin’s $50 Billion Oil Cache Gives Russia Luxury to Ignore ECB
Olga Tanas – Bloomberg
Russian central bankers have fewer reasons to offer relief to their recession-wracked economy than you might think. Their decision whether to resume an interest rate-cutting cycle this week is almost beside the point as the government of Vladimir Putin lubricates the economy in the background with oil wealth amassed in better times. Russian banks are sitting on the most cash in five years, allowing them to lend to each other at a lower rate than they borrow from the central bank. In the eurozone and in the U.S., money market rates are higher than benchmarks.

Do negative rates mean central banks are out of bullets?
Tom Stevenson – The Telegraph
The European Central Bank sailed further into uncharted territory last week, expanding the scale and scope of its quantitative easing bond-buying programme and driving interest rates deeper into negative territory. No one knows where this huge experiment will end but more and more people are concerned that the ECB’s leap into the dark will lead to unwelcome and unintended consequences.

The Effects of a Month of Negative Rates in Japan
Toru Fujioka and James Mayger – Bloomberg
The Bank of Japan shocked markets in January with negative rates. The policy had immediate effects on financial markets, even before it actually started on February 16. Although most analysts don’t expect a change on Tuesday, they are expecting the central bank eventually to cut the rate further.

Mario Draghi’s Lesson for Kuroda: Loose Lips Sink Policy Ships
Enda Curran – Bloomberg
Mario Draghi provided a useful lesson last week to his Japanese counterpart Haruhiko Kuroda: how you communicate your policy may be at least as important as the actions you take. After the European Central Bank on March 10 unveiled a more aggressive dose of monetary stimulus than many analysts had anticipated, financial markets registered disappointment nevertheless. ECB President Draghi triggered a reversal in the euro’s decline, and a slide in European stocks, by saying at a press conference that further rate cuts may not be needed.

Asia shares looking up as Fed hike unlikely ‘until June’
Wong Wei Han – The Straits Times
Following the buzz around the European Central Bank’s (ECB) aggressive easing package unveiled last week, market attention will return to the United States this week as the Federal Open Market Committee (FOMC) sits down for its March meeting. It is not expected to announce another rate hike after the two-day meeting starting tomorrow, but it might drop hints on when it might raise interest rates again.

Rajan Seeks Global Color-Coded Rules to Rate Monetary Policy
Unni Krishnan – Bloomberg
Indian central bank Governor Raghuram Rajan called for a new set of international rules to assess monetary policy that includes using color codes to rate how beneficial measures are to global welfare. Rajan, speaking at an International Monetary Fund meeting in New Delhi, said policies seen as good for the world should be rated green, while those that should be used temporarily would be classified orange. Policies that should be avoided at all costs would be rated red, he said.


For Euro Bears, Fed Offers Their Last Hope for a Weaker Currency
Rachel Evans – Bloomberg
Traders staking their reputations and capital on a weaker euro are looking to U.S. policy makers to deliver where the European Central Bank failed. With ECB President Mario Draghi warning this week that interest rates may have reached a floor — after lowering them as part of an expansive program of additional easing — one possible catalyst of a lower common currency has been shuttered. That’s drawing attention to the Federal Reserve’s March 15-16 meeting, and whether its actions can support a stronger dollar at the expense of the euro. The Bank of Japan will issue a policy statement March 15.

Pound’s swings complicate life for small UK firms before EU vote
Tom Phipps drew up this year’s business plan long before Prime Minister David Cameron called a referendum on Britain’s membership of the European Union last month. The announcement came as no surprise to Phipps, a purchaser for Universal Tyres, a medium-sized firm on the western outskirts of London. Even the June 23 date had been widely expected. But he had not factored in the sharp swings in the value of the pound that followed the decision, or the currency’s nine percent slide against the U.S. dollar since early December, largely on concerns that Britain might vote to leave the EU.

****SD: From FT, Brexit volatility not over yet for sterling: Barclays

The Price of China’s Controlled Currency: Stunted Role in Global Trade
Wall Street Journal
The yuan is losing its luster as a means of settling cross-border transactions, a development that trading companies blame in part on the Chinese government’s reluctance to loosen its grip on the currency. Bureaucratic issues and a lack of yuan-denominated assets in which to invest have discouraged non-Chinese companies from using the currency in trade with their Chinese partners.

Swiss Seen Holding Fire as Franc Resists ECB for Second Time
Thomas Jordan seems to have gotten off the hook once again. For the second time in less than four months, the Swiss National Bank president has seen the franc weaken rather than strengthen in the wake of new European Central Bank stimulus. That relief means Jordan and his fellow policy makers won’t cut rates on March 17, according to the majority of economists in a Bloomberg survey.

Why the Strong Dollar Won’t Pack the Same Profits Punch
Justin Lahart – Wall Street Journal
It caught fire on Thursday, jumping 1.8% against the dollar after the European Central Bank announced a fresh round of stimulus measures while playing down the potential for more rate cuts. That caught traders who had forecast a widening divergence between ECB and Federal Reserve policies off guard, making for a violent swing.

‘Love affair’ with negative rates ends as central banks step back from global currency wars
Mehreen Khan – The Telegraph
The world’s most powerful central banks will come under renewed to pressure to regain control over the global economy this week as faith in extraordinary monetary stimulus fades. Following last week’s shock and awe stimulus blitz from the ECB , nervy investors will turn their attention on the US and Japan amid speculation that central banks’ brief “love affair” with endless interest rate cuts is over.

Central banks beat Bitcoin at own game with rival supercurrency
Ambrose Evans-Pritchard – The Telegraph
Computer scientists have devised a digital crypto-currency in league with the Bank of England that could pose a devastating threat to large tranches of the financial industry, and profoundly change the management of monetary policy. The proto-currency known as RSCoin has vastly greater scope than Bitcoin, used for peer-to-peer transactions by libertarians across the world, and beyond the control of any political authority.

Indexes & Index Products

Turquoise to launch ‘A-list’ ETF platform
Tim Cave and Mark Cobley – Financial News
Turquoise, the equity trading venue majority-owned by the London Stock Exchange, is to launch a specialist market for exchange-traded funds in a bid to boost liquidity in the products. The London-based platform has joined forces with TrackInsight, part of investment adviser Koris International, to launch a market segment for trading only highly rated ETFs.

Russell Investments expands executive leadership team, naming Vernon Barback President
Press Release
Russell Investments, a global asset manager providing actively managed multi-asset portfolios and services that include advice, investments and implementation, today announced the appointment of Vernon Barback as President. The appointment is effective January 21. Barback will be a member of the firm’s Executive Committee, reporting to CEO Len Brennan.

Eurozone equities recovery trails S&P 500
Rochelle Toplensky and Joel Lewin – Financial Times
An enthusiastic response from eurozone equities following the latest easing from the European Central Bank, still leaves the region trailing the US S&P 500, a performance divergence that few analysts predicted for 2016. The latest stimulus efforts from the ECB notably boosted banks and triggered a broad-based rally across the region’s share markets at the end of last week. Further gains depend heavily on European companies delivering better earnings growth in the coming quarters and confounding bearish expectations among analysts and investors.

The Fed caused 93% of the entire stock market’s move since 2008: Analysis
Lawrence Lewitenn – Yahoo Finance
The bull market just celebrated its seventh anniversary. But the gains in recent years – as well as its recent sputter – may be explained by just one thing: monetary policy. The factors behind that and previous bubbles can be illuminated using simple visual analysis of a chart. The S&P 500 doubled in value from November 2008 to October 2014, coinciding with the Federal Reserve Bank’s “quantitative easing” asset purchasing program.


Gold Believers Scoff at Goldman Warning as Wagers on Rally Rise
Megan Durisin – Bloomberg
There seems to be almost nothing that will deter this year’s newfound gold enthusiasm. Even with a turnaround in global equities and signs of a more robust U.S. economy, investors are still piling into the metal. Money managers are holding the biggest net-wager on a rally in more than a year, and holdings in bullion-backed funds have climbed for 10 straight weeks, the longest streak since 2012. All this comes as Goldman Sachs Group Inc., the bank that foresaw gold’s collapse in 2013, continues to stick by its prediction that prices will start to retreat.


The US government interviewed the heroes of ‘The Big Short’ — here’s what they had to say
Matt Turner – Business Insider
The National Archives did a document dump on Friday, releasing transcripts, meeting agendas, and confidentiality agreements from the Financial Crisis Inquiry Commission. The group was set up in the aftermath of the crisis by Congress to look into the causes of the event, and the documents are a gold mine of information. There are interviews with Warren Buffett, Goldman Sachs chief executive Lloyd Blankfein and AIG Financial Products chief Joe Cassano.

Economist stirs debate by challenging German orthodoxy
Noah Barkin – Reuters
Marcel Fratzscher is not your typical German economist. Educated at Oxford and Harvard, he often writes the first drafts of his papers in English. When asked whose work inspired him, he names Amartya Sen, a Nobel Prize-winning Indian economist and philosopher. And in contrast to many of his domestic counterparts, Fratzscher does not believe the German economy and the special brand of rules-based governance – Ordnungspolitik – that has shaped it since World War Two is a model that others should emulate.

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