First Impressions

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

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

“Truth be told, Jonathan Mathew is no mathematical genius, he’s not a brilliant man, nor was he cherry picked by Barclays [from a premier school]. The danger is you just lump him in with the others.”

Lawyer Bill Clegg who represents Jonathan Mathew in the story, “Ex-Barclays Trader Called ‘Average’ as Lawyer Seeks Separation”

Lead Stories

Debt traders miss credit default swaps as losses loom
Financial Times
Investors looking for shelter from the next corporate bond storm have all but lost the ability to buy a type of financial umbrella called the single-name credit default swap. These derivative contracts provide a form of insurance. When the perceived creditworthiness of a company falls, single-name CDS prices rise, offsetting losses on a portfolio of bonds and loans.

Low interest rates and timid governments are trashing economic growth, warns OECD
The Telegraph
Permanently low interest rates are ruining investments and savings, the Organisation for Economic Co-operation and Development (OECD) has warned, undermining long-term economic growth. Low rates are designed as an emergency boost to crisis-stricken economies, but are harmful over long periods of time, the study said.

Lisbon and Warsaw take on New York and London
Financial Times
People joining a global bank in the future are just as likely to be based in Lisbon, Dublin, Warsaw or North Carolina, as they are in London or New York. Many of the biggest US and European banks are accelerating the shift of thousands of people and ever more critical activities out of the main financial centres to lower-cost locations. Executives at BNP Paribas are drawing up plans to hire several thousand more staff over the next three years in Portugal, and France’s biggest bank is likely to more than double the almost 2,000 people it already employs in Lisbon.

****SD: I’d watch that tag team wrestling match.

Safer Banks Need Less Regulation
In his efforts to dismantle the financial reforms of the past six years, Republican Congressman Jeb Hensarling makes an excellent point: Regulation could be a lot less burdensome if banks had enough capital.

Brexit might trigger run on Britain’s record financial debts, S&P warns
The Telegraph
Britain is the world’s most vulnerable state on a key measure of short-term debt and credit markets might suddenly seize up if voters opt for Brexit, Standard & Poor’s has warned. The US credit rating agency is crystal clear that Britain will be stripped of its coveted AAA status immediately and may face a double-barrelled downgrade if the country takes a leap in dark, jeopardizing its trading and financial ties to its biggest market.

Social Market Analytics Breaks Down #Brexit
CBOE Options Hub
We’ve lived through many pop culture name mergers. Most are power couples such as Tom Cruise and Katie Holmes (TomKat), Brad Pitt and Angelina Jolie (Brangelina), and of course Ben Affleck and Jennifer Lopez (Bennifer 1.0) and then Ben Affleck and Jennifer Garner (Bennifer 2.0). The one that is catching my attention these days is the one that will never appear on the cover of the National Enquirer. Of course this is the combination of British and Exit or Brexit. For those more familiar with the origins of TomKat than geopolitical news, Brexit is the term being used to refer to the June 23rd referendum regarding Britain’s membership in the European Union. The choice is to Brexit or I guess Bremain.

Lending Club, securitisations and proper loan due diligence
Financial Times
One of the causes of the global financial crisis — and there were many — was just outright fraud. Fraud when US subprime mortgages were being written; fraud when those mortgages were being packaged into bonds; and fraud again when those bonds were being sold to investors.

What you’re not hearing about George Soros today
The Reformed Broker
August 2006 – a reporter for the Financial Times walks into a former Presbyterian church-turned-dining club with George Soros. The place is deserted, save for the pair and some staffers who will serve them a quiet lunch. The reporter asks the famed investor about the infamous day in 1992 when he “broke the British pound” with his bet against the UK’s government and its currency. Soros can’t recall which day it was, despite the fact that his masterpiece trade netted him a billion-dollar profit.

****SD: Here’s the WSJ story referenced.

Large Lenders Really Are Slimming Down – MoneyBeat
MoneyBeat – WSJ
Big banks are no longer so big. Despite the wave of mergers during the crisis, the biggest banks in the U.S., U.K. and Eurozone now account for a smaller portion of total bank assets than they did before it.

Citi powers up ‘superbankers’ to drive revenues
Financial News
Citigroup wants to supercharge its top coverage bankers in Europe, where the bank has ambitions of becoming a top-three investment bank for revenue generation.

Central Banks

Negative Interest Rates Are Nothing to Fear
The world’s central banks are increasingly employing a controversial method to stimulate economic growth: negative interest rates. I’m convinced that this can be a valuable tool, but its power depends a lot on how it’s used.

Negative rates stir bank mutiny
Financial Times
Lenders in Europe and Japan are rebelling against their central banks’ negative interest rate policies, with one big German group going so far as to weigh storing excess deposits in vaults. The move by Commerzbank to consider stashing cash in costly deposit boxes instead of keeping it with the European Central Bank came at the same time as Tokyo’s biggest financial group warned it was poised to quit the 22-member club of primary dealers for Japanese sovereign debt.

****SD: Captain Bligh should be on the lookout.

Will the Fed Raise Interest Rates? Who Cares?
Investor’s Business Daily
With the Federal Open Market Committee (FOMC) set to meet this month, the focus among Fed watchers is on whether the central bank will, or won’t, raise the rate (Fed funds) at which banks lend to one another. What’s perhaps not discussed enough is why the Fed presumes to set this rate at all. Figure that an interest rate is a price like any other. And as a price it should reflect the needs of the saver every bit as much, and perhaps more, than it does the borrower. What is referred to as “easy credit” may actually be a nominally high interest rate so long as the price brings savers with access to credit into the marketplace in order to fulfill the desires of borrowers.

Everything’s a Buy as Central Banks Keep on Greasing Markets
Misery is making strange bedfellows in global markets. At a time when risky assets including stocks, commodities, junk bonds and emerging-market currencies are rallying to multi-month highs, so are the havens, from gold, government bonds to the Swiss franc and the Japanese yen. No matter that the U.S. labor market is deteriorating and the World Bank has just cut its estimates for global economic growth. Investors either don’t believe the news is bad enough to kill a global recovery that’s already long in the tooth, or they’re betting that sluggishness in some of the biggest economies means central banks will stay more accommodative for longer.

****SD: Too much grease leads to slippery slopes.

Draghi Buying Junk Bonds Shows ECB Will Do Whatever It Takes
Since a surprise interest-rate cut at his first meeting as European Central Bank President, Mario Draghi has shown a penchant for pushing the envelope. The bank’s entry into the corporate bond market on Wednesday was no exception: buying bonds with junk ratings. The second day didn’t disappoint either, with purchases of notes from troubled German carmaker Volkswagen AG.

Bank of England’s Risk-Free Reference Rates
For the better half of this decade, one could not help but hear and acknowledge the growing phenomenon of Financial Benchmark Reforms – an aftermath of manipulation and false reporting of global interest rate benchmarks. From the Wheatley Review in 2008 to the latest European Benchmark Regulation, regulators, administrators and market participants are engaging actively to restore investor confidence into the tainted benchmarks. Much of this work is in line with the Financial Stability Board’s (FSB) recommendations on reforming the interest rate benchmarks through a multi-rate approach.

The ‘Yellen Call’ Makes July a Live Meeting, Says Goldman
With the S&P 500 within shouting distance of its all-time high, Goldman Sachs Group Inc. has a warning for investors: Federal Reserve Chair Janet Yellen is here to limit your gains.

Regulatory News

Ex-Barclays Trader Called ‘Average’ as Lawyer Seeks Separation
The lawyer for former Barclays Plc trader Jonathan Mathew said his client only had “average intelligence” and asked jurors to separate him from better educated co-defendants accused of manipulating benchmark rates.

ESMA lacks resources for MiFID II bond rules
The Trade
ESMA lacks the ‘technological resources’ to deal with the influx of data following the implementation of MiFID II, as experts advise buy-side to “arm yourself with knowledge”.


Brexit and the UK’s Euro-Denominated Market: The Role of Clearing Houses
TABB Forum
Clearing houses in the UK operate an extremely sizable market in euro-denominated transactions. Even though the numbers are big in value terms, however, in substance, clearing houses shifting to the continent will not make a big difference to the UK economy and employment. Arguably, there is a case for the ECB to claim that the euro area business of clearing houses be relocated.

BOJ Watch: Markets irked by initiative to revise Tankan forex assumptions
Nikkei Asian Review
A proposed change to the exchange rate component of the Bank of Japan’s closely watched quarterly survey of business sentiment could render it useless as input for currency trading, market participants worry.

Non-bank FX market makers grow in Asia
Euromoney Magazine
Research published by East & Partners in December found that leading non-bank providers had made notable market-share and wallet-share gains in the Asian FX market. The Asian Business Foreign Exchange Markets (ABFX) report showed that Asian corporates in four key markets had significantly decreased the percentage of FX business they did with nominated primary providers.

Selling Dollars Instead of Lanterns Highlights Egypt Crunch
Egyptians speculating on likelihood of more pound devaluations
Currency slumped again at street sales after brief reprieve
Above the counter at Manal’s electrical store in Cairo are the lanterns and string lights that will illuminate homes during the holy Muslim month of Ramadan that began this week. Below it are dollar bills destined for the black market. The businesswoman is the kind of opportunist currency dealer authorities targeted in March when they devalued the pound and raised interest rates to draw dollars into a formal economy starved of hard cash. Customers filing through her door shows success remains elusive.

Scary FX attractions of EM Amusement Park
Financial Times
At the Emerging Markets Amusement Park, investors have grown tired with some of its fairground attractions. Last year, they screamed on the big dipper when EM currencies plunged in the face of a strong dollar, collapsing commodity prices and worries about China. This year, they have felt queasy aboard the rollercoaster, going through fluctuations in EM assets as the Federal Reserve blew hot and cold over raising rates. But is it time for investors to have a go at a more risk-free excursion, showing why a lasting relationship with EM holds no terrors?
Last Friday’s shock US payrolls data dealt a significant blow to the dollar and to rate expectations.

****SD: Not my kind of roller coaster.


Forget the Fed, You Can Still Find Yield
Fox Business
With the Federal Reserve largely expected to begin hiking interest rates sometime this year, fixed-income assets could weaken, but bond exchange traded fund investors have some alternative options to help maintain yield generation and hedge against the negative effects of rate risks. Bond-related ETFs are exposed to rate risks because of their effective duration exposure. Bond funds hold a collection of debt securities to maintain their target duration strategy. The ETFs will also see their underlying holdings decline in value as the older issues trade at a discount to newer issues with higher yields. Consequently, the funds may lose out when selling a less valued older debt securities for the better-yielding newer issues when trying to maintain their target duration strategy.

El-Erian Yen Nightmare Allows Japan Bond Buyers to Rest Easier
Mohamed El-Erian calls the surging yen a nightmare for the Bank of Japan. For bond investors, it may be a reason to sleep more soundly. Five- and 10-year auctions drew the strongest bidding in almost two years, capping a rally that sent Japanese government securities surging 5.7 percent in 2016. It was the top performance of 26 sovereign markets in yen terms tracked by Bloomberg and the European Federation of Financial Analysts Societies. While negative yields will make it tougher to repeat this year’s gain, a surging yen will damp inflation and encourage the central bank to maintain its bond-buying stimulus program.

Agency based bond trading model will become dominant
The Trade
The agency based trading model will likely succeed principal trading in fixed income markets, but there will always be a place for principal trading, experts agree. Increasing regulatory pressure and bank balance sheet constraints are expected to impact the move, and as these pressures mount it is thought principal trading could migrate towards more liquid markets like foreign exchange.

A 2% Yield on a 50-Year Gilt? Bonkers. Totally Bonkers
Big numbers lost their power to shock after $1 trillion became the standard bailout package. Small numbers are rapidly losing their power to shock too, as government-bond yields sink to nothing, or less, in the major developed markets.

Barclays on bond trading liquidity
Business Insider
People are worried about bond-market liquidity. Yes, yes, I know. You know that already. Barely a day goes by without someone adding to the chorus complaining about difficult trading conditions. There have even been TV adverts addressing the topic.

Indexes & Index Products

Asset management: Index we trust
The Economist
When John Bogle set up Vanguard Group 40 years ago, there was no shortage of scepticism. The firm was launching the first retail investment fund that aimed simply to mimic the performance of a stock index (the S&P 500, in this case), rather than to identify individual companies that seemed likely to outperform. Posters on Wall Street warned that index-tracking was “un-American”; the chairman of Fidelity, a rival, said investors would never be satisfied with “just average returns”; and the Securities and Exchange Commission (SEC), Wall Street’s main regulator, opposed the firm’s unusual ownership structure. The fund attracted just $11m of the $150m Vanguard had been hoping for, and suffered net outflows for its first 83 months. “We were conceived in hell and born in strife,” Mr Bogle recalls.

Looming MSCI decision tests progress of China’s stock market
Nikkei Asian Review
The Chinese stock market is bubbling with excitement on hopes that MSCI will decide Tuesday to finally include A-shares in a benchmark index, but some market watchers are warning against staking too much on the decision.

If S&P 500 clears this hurdle, record territory may await
It’s been a long time since the S&P 500 closed at a 52-week high—ending that drought could be a potentially bullish sign for the stock market in a summer fraught with uncertainties, according to an analyst at Bank of America Merrill Lynch.


The Big Bet of 2016: Joining George Soros in Gold
Abating expectations for Federal Reserve rate increases have fueled a fresh boom in everything that glitters, from gold futures to the shares of gold-mining firms to exchange-traded funds that give traders a way to bet on gold’s daily rise and fall.

****SD: From Barrron’s — George Soros Is Back In The Cockpit And He’s Buying Gold Stocks

Hedge Fund Citrine Bets on Gold as Economic Woes Weigh on Copper
Gold’s biggest rally in almost four decades has further to run as weak economies and teetering equity markets drive investor demand for the metal, according to Citrine Capital Management LLC. The hedge fund is “bullish overall on gold because the global economy is pretty poor with China as an issue,” Paul Crone, founder of Citrine, said in an interview. “Gold could go as high as $1,400 an ounce,” or 11 percent above Wednesday’s closing futures price, he said.

London appetite for gold bars, coins rises on Brexit nerves
At Sharps Pixley, a gold showroom in London’s smart Mayfair district, demand for bullion bars and coins is rising, with men and women of all ages buying up the safe-haven metal in case of a British exit from the European Union.

NSE to commence trading on sovereign gold bonds
Economic Times
Investors now have one more choice to diversify their portfolio. For the first time trading in the sovereign gold bond will commence on National Stock Exchange of India Limited’s (NSE) platform from Monday. The Reserve Bank of India and SEBI have cleared the trading in the new instrument recently. The product will be launched in the cash segment of NSE. This will ensure ease of trading, wider reach, no additional procedure for regular investor to buy and sell through the exchange.


Obama’s Overtime Rule Defies Econ 101
The Barack Obama administration recently changed the rules for overtime pay. The rule affects only salaried workers, since hourly workers already receive overtime. Specifically, the new dictum mandates overtime pay for people earning salaries between $23,660 and $47,476, who previously weren’t guaranteed this benefit. How should we expect this change to affect the economy and the workplace? The answer isn’t easy.

Ransomware and the New Economics of Cybercrime
The Atlantic
It’s a good time to be a cybercriminal. There are more victims to target, there is more data to steal, and there is more money to be made from doing so than ever before. It would seem to follow, then, that there’s been very little progress since 2007, when hackers stole at least 45.6 million credit-card numbers from the servers of TJX, the owner of TJ Maxx and Marshalls, catapulting the now-commonplace narrative of the massive data breach to national prominence.

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