First Impressions

Disruptive Practices: A Test Case?
By John J. Lothian
The arbitration of HTG Capital Partners and Allston Trading is doing all of us a big favor. It is highlighting the CME’s new spoofing rule, which is based upon last year’s CFTC guidance on disruptive trading. It will give us the arbitration version of case law upon which other spoofing cases will be judged.

Last week the CME issued its new spoofing rules, just as the Bloomberg story about the HTG arbitration against Allston Trading was hitting the wires. The CME “Disruptive Practices Rule 575” was issued August 29 and takes effect on September 15, 2014:

CME Group: Disruptive Practices Prohibited
New Rule 575 and the accompanying Questions & Answers and examples in this Advisory Notice codify particular types of disruptive order entry and trading practices that the CME Group Exchanges find to be abusive to the orderly conduct of trading or the fair execution of transactions.

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Of particular interest is this from the Rule 575 notice: (C) is, is of the character of, or is commonly known to the trade as, “spoofing” (bidding or offering with the intent to cancel the bid or offer before execution). On May 28, 2013, the Commodity Futures Trading Commission (“CFTC”) made effective its “interpretive guidance and policy statement” respecting subparagraph (5). Rule 575 prohibits the type of activity identified by the Commission as “spoofing,” including submitting or cancelling multiple bids or offers to create a misleading appearance of market depth and submitting or cancelling bids or offers with intent to create artificial price movements upwards or downwards.

Another CME and ICE feature being discussed related to the HTG/Allston story is the CME Group Globex Self-Match Prevention Functionality. This functionality, which helps firms avoid large wash trade instances and related fines, was called a “recipe for spoofing” by one proprietary trading executive. ICE’s Self-Trade Prevention Functionality can be seen here (PDF).

The question of how HTG could identify an anonymous trade counterparty on Globex has been raised in trading and Internet circles. The answer is this. When a party proves to the exchange a pattern of abuse has occurred it can file a John Doe arbitration. This means the other party is not named initially, but the exchange has to name them as part of the arbitration proceeding if there is a single party on the opposite side of the alleged abuse. In this case, CME determined that single party was Allston.

Quote of the Day

“I think we should have a very good season of buying. This is a booming economy at the end of the day.”

Ashok Minawala, former chairman of the All India Gems and Jewellery Trade Federation in the FT’s story “India gold smuggling rises on import curbs.”

Lead Stories

Eurex launches euro-swap futures suite
The Trade
Eurex’s euro-denominated interest rate swap futures have gone live today, with the German exchange getting the jump on competition by launching the alternative products to OTC derivatives.
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**JK – Here come swap futures in Europe.

Commerzbank chief calls for common euro-zone bonds
Reuters
The chief executive of Germany’s second-biggest lender, Commerzbank, wrote in a German newspaper on Wednesday that euro zone states should start issuing common bonds if they are serious about making the euro a globally strong currency.
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**JK – Commerzbank’s CEO said common liability was “already a reality.”

Sterling Finally Wakes Up To Scottish ‘Yes’ Vote Threat – MoneyBeat
Josie Cox and Chiara Albanese – MoneyBeat – WSJ
If the pound’s tumble on Tuesday is anything to go by, you might be forgiven for thinking that investors have only just been told that Scotland is voting on independence from the U.K. in two weeks’ time.
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U.S. judge dismisses FDIC lawsuit against banks over mortgage bonds
Nate Raymond – Reuters
A judge on Tuesday dismissed a lawsuit by the Federal Deposit Insurance Corporation against banks including Deutsche Bank AG and Credit Suisse Group AG over mortgage-backed securities sold before the 2008 financial crisis.
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**JK – Has the statute of limitations run out on banks?

Cats and Dogs Living Together? Bonds and Stocks Both Rising
Paul Vigna – WSJ
At first glance, it doesn’t seem right: both stocks and bonds are rising this year. That shouldn’t be, should it? After all, if the market is buying risky equities, wouldn’t that automatically mean they are dumping safe-haven bonds? The converse argument holds, too; if the market is seeking the shelter of bills, notes, and bonds, aren’t they therefore selling equities?
Turns out, not really. Even though the conventional wisdom holds that when bonds go down, stocks go up, and vice versa, it seems that over the long run, the path for both is up.
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**JK – Quick, who can tell me how many of the past 10 years, we had positive markets in both stocks and bonds? Hint: It’s more than five.

Emerging-Market Distressed Bonds Have Worst Month in Year
David Yong – Bloomberg
Emerging-market distressed debt had its worst month in more than a year in August amid banking turmoil in South Africa and Turkey, a coal-industry rout and the conflict in Ukraine.
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Sovereign debt plan takes on holdouts
Elaine Moore – Financial Times
Got a “vulture” problem? Bond market heavyweights, backed by Washington, have come up with a plan they say should avoid a repeat of the sovereign debt meltdown between Argentina and its holdout creditors.
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Holdouts give vultures a bad name
Martin Wolf – Financial Times
In one corner we have Argentina, serial defaulter. In the other, we have professional “holdouts”, bondholders who refused to accept a compromise deal with Buenos Aires and have become serial litigators. Whom should one wish to succeed? This is a tough choice. But I have backed Argentina for two reasons. The strategy of the holdouts works at the expense of other creditors. And, as sensible new proposals from the International Capital Market Association reveal, it works at the expense of restructurings, even when these are essential.
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**JK – If you ever wanted to know what pari passu means, this is the story for you.

Credit fund targets EUR1.5 billion amid bank deleveraging
Sarah Krouse – Financial News
Credit specialist LCM Partners is aiming to raise EUR1.5 billion for a new European credit opportunities fund that aims to take advantage of the ongoing disposal of non-core assets by the region’s banks.
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“Oops, we raised rates too soon”
Cardiff Garcia – Financial Times
An amusing quartet of charts from BCA Research. “What really matters is that financial instability risks didn’t rise during the temporary period in which rates were higher,” said nobody.
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Central Banks

Is the Federal Reserve Running On Empty?
Norbert Michel – Forbes
Politico ran an attention-grabbing headline last week: The Mystery Woman Who Runs Our Economy. The article itself offered an interesting look at what makes Yellen tick, but the title presupposed way too much.
No single person or committee runs our economy, no matter how hard the Federal Open Market Committee tries. Far from harmless, this notion that someone in Washington is flipping switches to control the economy prevents Congress from imposing meaningful reforms on the central bank.
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ECB to Roll Out QE? Not So Fast
Alen Mattich – MoneyBeat – WSJ
Will European Central Bank President Mario Draghi unveil a massive asset purchase program, or quantitative easing, following this week’s policy meeting?
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BoE group kicks off procyclicality debate
Rob Mannix – Risk.net
A recent paper from the Bank of England’s Procyclicality Working Group shows the bank is thinking about how to balance insurance policyholder protection with financial stability
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**JK – I took the pro cycling lane to work today.

On The Optimal Size Of The Financial Sector – Speech By Benoît Cœuré, Member Of The Executive Board Of The ECB, At The ECB Conference “The Optimal Size Of The Financial Sector”, Frankfurt, 2 September 2014
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Currencies

Independent Scotland cannot join EU and keep pound, says senior Euro official
Anna Fedorova – Investment Week
One of Europe’s top officials has said Scotland will not be allowed to keep using the pound sterling and remain in the European Union in case of an independence vote.
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Russell builds out Emea implementation team
Andrew Pearce – Financial News
Russell Investments has continued to expand its European implementation services team, with a brace of hires from Record Currency Management and Legal & General Investment Management.
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New Zealand dollar caught between safe-haven and EM status
Solomon Teague – Euromoney Magazine
This summer has seen a long-term bull market for the New Zealand dollar finally taper off as carry traders cash out of the Kiwi.
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Indexes & Index Products

How Smart is Smart Beta?
Bill Stone – Forbes
When discussing smart beta strategies with some investors, I am sometimes struck by their visceral negative reaction to the topic. As much as I appreciate the clever moniker given to these strategies, I suspect it can strike others as a little too clever. Perhaps they interpret smart beta as implying that their beta is dumb – for serious investment professionals, akin to calling their baby ugly. For those impacted individuals, please feel free to substitute scientific, factor, advanced or systematic beta for smart beta, but I suspect it is in your best interest to take note of the smart beta phenomenon.
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Thomson Reuters launches corporate responsibility indices for European companies
Adam Brown – IR Magazine
Thomson Reuters has launched a new series of its corporate responsibility indices (CRI) aimed at measuring the performance of European companies that are top-rated for their record in addressing ESG issues, the company says.
The Thomson Reuters CRI Europe indices, which will cover stocks with a higher-than-average ESG rating, will include an overall European ESG index, plus three individual indices that focus on the environment, social issues and corporate governance.
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What Could Happen to Major Stock Indices When a Correction Comes
Richard Suttmeier – The Street
It has been a long time since the stock market had a correction. Today we’re going to look at the potential lows the major averages could see when we do get one.
At the start of August the five major averages were in a technical formation that came close to signaling a correction.
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**JK – Interesting chart.

Gold

Gold hits 2-1/2 month low on report of Ukraine ceasefire
Reuters
Gold hit its lowest since mid-June on Wednesday after Ukraine said it had reached agreement with Russian president Vladimir Putin on a “permanent ceasefire” in its eastern Donbass region, before paring losses after Russia said no deal had been struck.
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India gold smuggling rises on import curbs
Avantika Chilkoti – Financial Times
India is suffering a renewed spate of gold smuggling at the start of the annual festive period, which traditionally prompts a spike in demand, as import restrictions continue to throttle official inflows of the yellow metal.
Customs officials say seizures have jumped in recent weeks in advance of the festival season, which will reach its peak around Diwali in late October, while smugglers find ever more imaginative means of hiding undeclared gold.
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China’s Biggest Banks Boost Holdings of Gold Amid Leasing Demand
NewsMax
The value of precious metals held by China’s biggest lenders surged 66 percent from a year ago as banks lease more gold to customers because tighter borrowing rules make it harder to lend funds.
Precious metals held by Industrial & Commercial Bank of China Ltd., China Construction Bank Corp., Agricultural Bank of China Ltd. and Bank of China Ltd., the country’s four biggest lenders, were worth 378 billion yuan ($62 billion) at the end of the second quarter, according to financial reports. The growth since last year outpaced the gain in benchmark bullion prices, which rose 7.5 percent over the same period.
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Gold: The Thin End Of The Wedge
Bob Kirtley – Seeking Alpha
Gold had a horrendous year in 2013 disappointing many of its supporters; however, 2014 started brightly bringing with it much hope for an attempt at achieving new record highs. Gold prices moved quickly from the $1200/oz level to flirt with $1400/oz by mid-March. The summer brought some confusion with gold rallying and falling without much in the way of conviction in either direction.
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