First Impressions

Boris Ilyevsky, International Securities Exchange – Growing Up with Options

“Your first impressions matter quite a bit, and perception is reality.”

When Boris Ilyevsky joined the fledgling International Securities Exchange back in 1999, he had no idea what it would entail. He quickly learned that starting out at a startup meant wearing a number of hats – customer service, business development, technology and more. Sixteen years later, he is still with ISE, and in many ways the exchange still embraces the startup mentality. In this MarketsWiki Education talk, he takes us through the ins and outs of a startup and the Golden Rule of customer service. He also reminds us that, unless one is working at Pizza Hut, one should never answer the customer service line with the greeting “Pizza Hut.”

Watch the video »

Quote of the Day

“They promised the world, they messed up, they closed the banks, and now they want to drag us to elections.”

Angelos Handris, a 55-year-old manager of a street kiosk near central Athens, in the story, “In a Twist, Europe May Find Itself Relying on Success of Alexis Tsipras of Greece”

Lead Stories

Draghi’s Post-Holiday Inbox Stuffed With Trouble for Policy
Jeff Black and Esteban Duarte – Bloomberg
The euro area’s monetary-policy makers aren’t getting to slumber through the dog days of August.
Even with talks over Greece’s third bailout wrapped up, European Central Bank officials are having their repose disturbed by developments that could jolt their plan to revive the region’s economy. In coming weeks, they’ll have to deal with a world in which China has devalued its currency, oil has slumped to almost $40 a barrel, and investors in emerging markets are walking wounded.

In a Twist, Europe May Find Itself Relying on Success of Alexis Tsipras of Greece
Jim Yardley – NY Times
Europe spent months trying to crush Alexis Tsipras. But now that Greece’s leftist prime minister has called a snap election and is seeking a mandate for the tough new bailout program he negotiated with his country’s creditors, Europe, oddly enough, may find itself invested in his success.
Greece never fails to surprise, and Mr. Tsipras’s turbulent eight-month tenure has proved he is rarely predictable. But the man many European leaders once regarded as a populist wrecking ball is now presenting himself as a figure who can deliver pragmatism and stability — and carry out the sort of austerity program he once inveighed angrily against.

BofAML — Here’s What Usually Happens After Equity and Bond Markets Disagree
Luke Kawa – Bloomberg
The severe selloff in U.S. equities this week could be seen as long overdue reconciliation between equity and bond markets.
Until recently, a puzzling disconnect has prevailed between measures of fear in these two asset classes, with fixed-income investors considerably more jittery than their equity counterparts.

Bonds’ Terrible Twins: Low Yields and Illiquidity
Richard Barley – WSJ
Talk to a bond investor, and low yields and illiquidity will quickly crop up in conversation. The two issues may be more tightly entwined than many think.
Much of the debate about bond-market liquidity has been about banks that have been required by regulators to hold more capital against risky assets. That has made it less attractive for them to act as market-makers and hold bonds on their balance sheets. But Citigroup ‘s credit strategists suggest that ultralow yields have made it much more costly for investors to trade too.

Bond Investors Dial Back September Rate-Increase Expectations
Cynthia Lin and Min Zeng – WSJ
Economists may be offering a balanced interpretation of the Federal Reserve’s July meeting minutes released Wednesday, but bond investors are having much stronger feelings that a September rate increase may not be in the cards.
With the Fed’s next policy announcement less than a month away, focus across financial markets has been whether the central bank will deliver its first rate increase in nearly a decade on Sept. 17. Economic data have sent mixed signals, so many bond-market participants were keen on finding a “smoking gun” in Wednesday’s minutes to suggest policy makers are ready to act.

EU’s 2016 stress test will include 50-60 euro zone banks
Francesco Canepa and Huw Jones – Reuters
Between 50 and 60 euro zone banks will be included in next year’s stress test of top EU lenders, fewer than half of the number in the 2014 exercise, a European Central Bank spokeswoman said on Friday.

Wrong Fix for Short-Term Corporate Thinking
Barry Ritholtz – Bloomberg
Every now and then a remarkably bad idea springs to life. It gets debated, ridiculed and eventually discarded. In the marketplace of ideas, free and open debate help to determine which ideas are useful and which wind up in the rubbish heap. (John Stuart Mill was onto something). We tolerate reprehensible ideas because, ultimately, free speech leads society toward a greater truth.
Today’s column is about a concept so misguided and ill-conceived that it cries out for a debunking.
The idea is that publicly traded corporations should stop reporting their quarterly financial results.

Barclays must face U.S. class action over Libor
Jonathan Stempel – Reuters
Barclays Plc shareholders who accused the British bank in a lawsuit of inflating its stock price by manipulating the interest rate known as Libor may pursue their case as a class action, a U.S. judge ruled on Thursday.

JPMorgan Warns This Emerging-Market Credit Strength May Fizzle
Lisa Abramowicz – Bloomberg
Try figuring this one out: Emerging-market stocks have gotten pummeled over the past few weeks while corporate bonds from the same regions have outperformed many other assets.
How does this make sense? It doesn’t really, especially as China shows more signs of slowing, said Scott McKee, head of an emerging-markets corporate-debt group at JPMorgan Chase & Co.’s asset-management unit.

Japan Bond Trading’s 73% Drop to Record Shows Stimulus Damage
Kevin Buckland and Shigeki Nozawa – Bloomberg
Japanese government bond trading has slumped to a record low and the Bank of Japan’s own analysis shows a market still in stress across a range of indicators.
Trading volume sank to 15.6 trillion yen ($127 billion) in July, based on BOJ calculations using figures from the Japan Securities Dealers Association on Thursday. That’s down 73 percent from as high as 57.4 trillion yen in April 2012, a year before BOJ Governor Haruhiko Kuroda began unprecedented debt purchases. While a central bank report released Tuesday showed falling transactions and negative interest rates on repurchase agreements, it also signaled improvements in bid-ask spreads and the price impact of orders.

Ex-head of New York bank sentenced to two-and-a-half years prison for TARP fraud
Nate Raymond – Reuters
A former president of a failed New York bank was sentenced to 2-1/2 years in prison on Thursday after becoming the first person to be convicted for trying to defraud the U.S. government bailout program established during the financial crisis.

Blame Wall Street Dealer Retreat on Lower Risk, Flash Trade
Alexandra Scaggs – Bloomberg
Wall Street dealers should blame their financial-crisis hangovers and high-speed traders for the decline in their balance sheets, not just government regulations, Federal Reserve Bank of New York researchers say.
The rise of high-speed electronic transactions among investors, dealers and proprietary trading firms has probably shrunk bid-ask spreads, according to a blog post Friday from the New York Fed. That makes it less profitable to trade Treasuries and reduces the need for large balance sheets, according to the research. And because the sharpest drop in risk-taking followed the financial crisis, it isn’t clear to what extent new regulations are the trigger, the analysts said.

Why are the markets dropping? Don’t blame the Fed
Ylan Q. Mui – Washington Post
Is this the beginning of “Rate Rage”?
You could be forgiven for thinking so, judging by all the blame that’s been heaped on the Federal Reserve for the selloff in stock markets over the past three days. The blue-chip Dow Jones Industrial Average has plunged 500 points, and the broader Standard & Poor’s 500-stock index erased its gains for the year. Markets Friday morning were already beginning to edge down.

SF Fed Chief Warns on Using Monetary Policies to Shape Housing Market
Phil Hall – National Mortgage Professional
One of the top officials in the Federal Reserve System warned using monetary policies to address perceived problems in the housing market is a strategy with more than a few problems.
Speaking before the Bank Indonesia – BIS Conference in the Indonesian capital of Jakarta, San Francisco Federal Reserve John Williams warned that “sizable and significant effects on house prices in advanced economies” can result from adverse monetary policy shifts.

There’s a Shortage of Cops on Wall Street — and New Trouble Brewing
David Dayen – The Fiscal Times
Elizabeth Warren likes to refer to financial regulators as “cops on the beat.” If that’s the case, we’re having a cop shortage.
Numerous high-level positions at multiple federal agencies overseeing the banks have gone unfilled since Republicans took over the Senate. This increases the power of habitually more conservative and bank-friendly staff, creates delays on the still-unfinished Dodd-Frank reform law and has stymied positive policy shifts. Given election-season pressures and ever-present gridlock, there’s only a short window of action before these key regulatory positions remain vacant for the rest of the Obama presidency.

Is The Worst Over For Commodities? Check This Chart
Panos Mourdoukoutas – Forbes
Investors sifting through commodity charts to figure out whether the worst is over for commodities probably have missed a chart that paints a bleak long-term picture for commodities — a secular decline in capacity utilization, which dates back to the late 1970s.
What’s behind this trend? Unprecedented monetary easing and ultra-low interest rates for a prolonged period of time, in our opinion.

Brazil Has Yet Another Big Mess on Its Hands After State Default
Filipe Pacheco – Bloomberg
Engulfed by political and economic crises, Brazil can ill afford to be beset by more problems.
Yet that’s exactly what is happening after its southernmost state of Rio Grande do Sul defaulted on a 280 million real ($80.9 million) payment to the federal government this month — the first since the nation’s municipal-debt meltdown in 1997. The state, proportionally the most-indebted in Brazil, is in such distress that it didn’t pay salaries to public workers in July.

Apple Raises $1.6 Billion in Record Corporate Bond Deal
Benjamin Purvis – Bloomberg
Apple Inc. raised A$2.25 billion ($1.6 billion) with a debut Australian debt sale that’s the largest bond deal ever Down Under by a non-financial company.
The iPhone maker sold A$1.15 billion of seven-year notes at a yield of 110 basis points more than swap rates and A$1.1 billion of four-year securities at a 65 basis point spread.

Investors spy opportunity in wake of LatAm sell-off
Paul Kilby – Reuters
A handful of buyside firms are seeing opportunity and remain determined to stay the course even as many other investors made a large-scale retreat from the asset class this week.
Retail accounts took out some US$2.49bn from dedicated EM bond funds this week – the largest weekly outflows recorded by EPFR since January 2014.

Citi Overlooked a Few Thousand Illegal Trades
Matt Levine – Bloomberg View
Yesterday’s $15 million Securities and Exchange Commission settlement with Citigroup over a grab bag of administrative violations is objectively boring and yet I find myself fascinated by it. Big banks, as securities dealers, trade public stocks and bonds, but as relationship banks, they also have lots of secret information about the companies that issue those stocks and bonds, information that is not allowed to fall into the hands of their traders. So a major job of banking compliance is just to keep those functions separate. Citi’s subsidiary Citigroup Global Markets sometimes messed that up, in ways that probably didn’t hurt anyone but that tell you a lot about banks and regulation.

Bloomberg becomes regulated trading venue in Europe
Philip Stafford – Financial Times
Bloomberg is set to fall under the same trading platform regulations as its rivals after the UK markets watchdog approved the fixed-income venue’s application to upgrade its legal status.

Central Banks

The Fed’s at risk of repeating its 1937 mistake
Mike Bird – Business Insider
Everything seems to be going wrong in the global economy right now.
Chinese growth is slowing, Hong Kong’s Hang Seng is officially in a bear market, Greece is heading into elections, and emerging markets around the world are feeling the strain of the strong US dollar.
In the advanced world, the United States and United Kingdom are seeing some decent growth, while Japan and the eurozone are expanding modestly at best.
And the next important question for everyone is whether the US Federal Reserve thinks the backdrop it’s looking at is good enough to raise interest rates for the first time in nine years. The Fed funds rate has sat at 0.25% since December 2008.
September has been penciled in as a strong possibility for a long time now, though markets are now starting to reconsider. What’s the worst that could happen?
Well, it could be like 1937 again.

Lockhart: Regional Leaders Have Ears to Ground in Way Fed Governors Don’t
Michael S. Derby – WSJ
The Federal Reserve’s 12 regional bank presidents play a vital role taking the pulse of the economy and using that knowledge to shape Fed policy, Federal Reserve Bank of Atlanta President Dennis Lockhart said Thursday.
The district banks, with headquarters and branches spread across the country, have closer contact with businesses than the central bank’s Washington-based governors, he said, according to the transcript of an interview posted on the Atlanta Fed’s website.

Rand Paul: Fed’s ‘Risky’ Accounting Needs Strict Audit
Rand Paul – Newsmax
The U.S. Federal Reserve has grown massively in recent years.
Since the 2008 financial crisis, it has increased its balance sheet from less than $1 trillion to an incredible $4.4 trillion.
Given this sharp increase in the Fed’s risk, it’s reasonable that the Fed should be audited more thoroughly than in the past.
My bill to audit the Fed is just three pages long, and simply says that the Government Accountability Office should conduct a full audit. It has 32 co-sponsors in the Senate and 142 in the House.

U.S. Urges Supreme Court to Reject Iran Central Bank’s Appeal on Judgments for Terrorism Victims
Brent Kendall – WSJ
The Obama administration is urging the U.S. Supreme Court to reject an appeal by Iran’s central bank seeking to prevent terrorism victims from collecting nearly $2 billion in frozen Iranian banking assets.

Four factors dictating the paths of US and UK interest rates
Julian Chillingworth – Professional Adviser
Interest rates on both sides of the Atlantic have been at record lows for six and a half years, but after a great deal of speculation and opaque pronouncements from central bankers, a hike now feels very close indeed.
Many investors expect the US Federal Reserve to raise its Fed Funds Rate band by 25 basis points at its September meeting, or failing that, in December.

David Stockman: Fed Fears It Will Trigger Wall Street Hissy Fit
David Stockman – Newsmax
It’s getting downright hazardous out there, and not just because the robo-machines were slamming the “sell” key on Thursday.
The real danger comes from the loose assemblage of official institutions which claim to be running the world.
They might better be referred to as “can kickers united.” It is now blindingly obvious that they have lapsed into empty ritualism, contrivance and double-talk in the face of a global economy and financial system that is becoming more unstable and incendiary by the day.

Should Central Banks Be Given Authority Over Bitcoin?
Sarah Jenn – newsBTC
One of the most popular features of bitcoin is that it is a decentralized currency with no government or monetary authority overseeing activity. For bitcoin enthusiasts, this gives more power to the network in determining the value of the cryptocurrency instead of having its levels controlled by officials.
However, a report by a Suffolk University researcher suggested that central banks should be given authority over the cryptocurrency. The report indicated that the Federal Reserve and European Central Bank should be given a mandate to monitor threats that digital currency systems pose to the broader financial system.

MAS apologises for misspelling Yusof Ishak’s name in commemorative folder
The Monetary Authority of Singapore (MAS) has apologised for misspelling the late Yusof Ishak’s name in a folder containing the SG50 commemorative notes, which were made available for exchange today (Aug 20).
The name of Mr Yusof, who was Singapore’s first President, was misspelt as “Yusok”. The MAS is printing stickers that will be stuck over the error on the folders from next Tuesday. Those who have purchased the notes can also collect the stickers then.


Divergent Monetary Policy Keeps Dollar Buoyant
Dan Weil – Institutional Investor
Is it showtime again for the dollar? The currency’s powerful rally that sent it to multiyear highs against a range of its developed-markets peers early this year has stalled over the past five months. But market participants expect the greenback to climb anew as the Federal Reserve raises interest rates and other central banks remain in easing mode.

Why China’s Currency Could Fall 20%
Russell Napier – Barron’s
In case you missed it, China just devalued by 1.9% to reflate the economy. It’s not enough; that scale of move has never been enough to achieve reflation. So we are moving to a much lower Chinese exchange rate, a much more flexible exchange rate and probably much less buying of Treasuries by the PBOC. The one fixed point in the firmament of global macro trades is now gone.
The illusion of Chinese control is finally ending and with it the ‘certainty’ that China grows strongly while maintaining its link to the USD. It is time to grasp both the short-term implications for prices and, much more importantly, the longer-term implications for the structure of the global monetary system.

Bitcoin Company BitGold connects with USA’s biggest banks
Nikhil Gupta – newBTC
The Bitcoin firm BitGold, which is a Canadian international savings and payments service, that enables individuals and businesses to transact with physical gold, has announced that it has successfully created a direct link with nine of America’s biggest banks.

What’s up with the dollar?
Matt Weller – Futures Magazine
The dollar was once considered a safe-haven; however, during the recent bout of market panic, when stock markets like the Dax have had their biggest weekly decline since September 2011, the buck has had a torrid time versus other G10 currencies.
We should add a caveat here. There has been a vast contrast between the performances of the dollar versus emerging markets currencies, some of which have fallen to fresh record lows vs. the greenback, and the performance of the buck vs. the G10. For this piece, we will focus on the G10 space, as the selloff in the EM forex sphere is fairly easy to understand.

Africa Running Out of Options as China to Kazakhstan Devalue
Paul Wallace and Rene Vollgraaff – Bloomberg
Currency devaluations from Kazakhstan to China are heaping pressure on African central banks to relinquish control of their exchange rates as they run down reserves faster than any other region.

Forking hell
The Economist
“Federal Reserve deeply split. Renegade group of board members to create separate American dollar.” Such a headline seems highly unlikely, but this in essence is what is happening in the land of Bitcoin, a digital currency. On August 15th two of its main developers released a competing version of the software that powers the currency. With no easy way to resolve feuds, some are warning that this “fork” could result in a full-blown schism.
The dispute is predictably arcane. The bone of contention is the size of a “block”, the name given to the batches into which Bitcoin transactions are assembled before they are processed. Satoshi Nakamoto, the crypto-buff who created the currency before disappearing from view in 2011, limited the block size to one megabyte. That is enough to handle about 300,000 transactions per day—suitable for a currency used mainly by geeks, as Bitcoin once was, but nowhere near enough to satisfy the growth aspirations of its boosters. Conventional payment systems like Visa and MasterCard can process tens of thousands of payments per second if needed.

China’s Central Bank Resorts to ‘Dirty Peg’, BNP Paribas Says
Fion Li – Bloomberg
Less than two weeks after pledging to allow a freer exchange rate, the People’s Bank of China has tightened its grip on the yuan, according to BNP Paribas SA.
The onshore yuan has traded within 0.3 percent of 6.4 a dollar from Aug. 14, a level that BNP Paribas Chief Economist for Asia Richard Iley calls a de facto “dirty” peg. China devalued its currency last week and introduced a more market-determined method of setting the daily fixing, which the yuan can move as much as 2 percent either side of.

Indexes & Index Products

Why investors need to know about indices
John Authers – Financial Times
Why do you need to know about financial market indices? The FT is still only half way through a two-week series looking at this subject, so readers are owed an explanation. Here is my attempt.
First, indices have grown more powerful. That is partly of course because of the growth of passive index investing, in which funds merely follow an index. This has been a broadly positive development because it reduces costs.

CFTC/SEC Jurisdictional Battle Heats Up Over Dividend Indices
Michael M. Philipp and Ignacio A. Sandoval – Mondaq
The CFTC recently approved a futures contract on a dividend index as a non-security based index futures contract over the SEC’s objection that the dividend index contract could be a security future; the CFTC’s actions may have implications for market participants in this and other dividend index futures contracts and swaps.

Record Volume for VIX Weekly Futures Today as Five Volatility Indexes Rose by More Than 20%
Matt Moran – CBOE
Today the S&P 500 (SPX) Index and Dow Jones Industrial Average both fell by 2.1%, while the CBOE Volatility Index (VIX) and 4 other volatility indexes rose by more than 20% (see table below), and the VIX Weekly futures had record daily volume of 1,847 (estimated).

U.S. stock indexes plummet after China fears spur global sell-off
AP – Indianapolis Business Journal
The U.S. stock market endured its worst performance in 18 months on Thursday, driven lower by another slump in Chinese shares and heavy selling by technical traders.
The global rout started in China, where sharp declines in energy and property stocks pushed the Shanghai Composite down more than 3 percent. That selling soon spread to European and U.S. markets, where the Standard & Poor’s 500 index moved further below a closely watched trading level.

Indices Get Crushed on Worse Day in Months
Harry Boxer – FXstreet
The stock market had a terrible day, one of the worst days in months as the indices cracked and cracked hard. They took out the head-and-shoulder bottoming patterns and the lows as well, reaching the bottom of the channel, and then key, secondary support at the close, going away at the lows for the day.
Net on the day, the Dow actually dipped and closed under 17,000 at 16,990.69, down 358.04, closing at the low for the day. The S&P 500 was down 43.88 to 2035.73. The Nasdaq 100 was down 125.77 to 4385.13.


South African Gold Miners Rally Most Since 1999 as Metal Rises
Neo Khanyile – Bloomberg
South Africa’s index of gold-mining stocks surged the most this week on record as the precious metal traded near a one-month high and the rand extended declines.

Is the gold rally a dead-cat bounce or new bull market?
Simon Maierhofer – MarketWatch
Gold is up 7% in 10 days. Why? More importantly, is this more than a dead cat bounce?

What’s the deal with the NFL slathering everything in gold this year?
Chris Chase – For The Win
If you’ve watched any NFL preseason game this year (and we pray that you haven’t — they’re worse than ever), you’ll have noticed the 50-yard marker on both sides of the field are painted gold instead of the usual white. What’s the deal with that? Is it the NFL boasting about its riches? Did Dan Snyder successfully petition the NFL to get half the Redskins’ team colors onto every field? Is this the start of Roger Goodell’s Scrooge McDuck phase, obviously culminating in this?


There’s No Good Reason to Mimic a Hedge Fund
Noah Smith – Bloomberg
Everyone seems to be talking about this paper by Mikhail Tupitsyn and Paul Lajbcygier of Monash University in Australia. The paper is about hedge funds. Gawker writer Hamilton Nolan and Vox writer Matt Yglesias both say that the upshot of the paper is that hedge funds are a scam.

The gig economy is only good for some workers—but it doesn’t need to be that way
Allison Schrager – Quartz
An economy full of on-demand gig workers sounds great—if you are an employer and don’t want the financial commitment of paying another employee. A staff job offers the security most workers need, but most gig workers are less secure. Since being an employee is still desirable for most workers, especially for less skilled workers, there’s a push by state governments to turn contractors into employees. Yet it doesn’t need to be that way. Instead, we need to restructure America’s economic infrastructure to better support gig workers.

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