First Impressions

Lively “Crossfire” Panel of Exchange Leaders Opens SFOA Burgenstock 2015
Sarah Rudolph – JLN

The 2015 Burgenstock SFOA conference in Geneva kicked off with a lively discussion on “Crossfire,” the well known panel hosted for many years by Patrick Young, the editor of ERivatives Review. The panelists were Phupinder Gill, CEO of CME Group, Chitra Ramkrishna, CEO of the National Stock Exchange of India, David Peniket, president and COO of ICE Futures Europe, Magnus Billing, the president of Nasdaq, and Christian Katz, the former CEO of Six Swiss Exchange and former president of FESE.

The panel was at odds over the horizontal versus the vertical clearing model. Nasdaq strongly believes in the horizontal model as a key component of competition in the exchange space, said Billing. A recent regulatory proposal regarding open access among exchanges will bring Nasdaq’s model forward, he added.

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Quote of the Day

“Anything that is going to increase the volume of trade, the efficacy of trade, is also going to increase the opportunity and bandwidth of criminals to move their products and launder funds.”

Bill Majcher, who worked with American and Canadian federal police, in the story, “Mexican drug cartels eye Asian markets”

Lead Stories

High-frequency traders are now dominating another huge market
Portia Crowe – Business Insider
High frequency traders have moved in on the US Treasury bond market in a big way. just published a confidential list of the top 10 firms ranked by volume traded on BrokerTec, an ICAP-owned trading platform for US Treasuries which is believed to make up 65% to 70% of interdealer market volumes.

Janet Yellen Says Fed Interest Rate Increase Still Likely This Year
Jon Hilsenrath and Ben Leubsdorf – WSJ
Federal Reserve Chairwoman Janet Yellen laid out her most detailed case yet for the central bank to begin raising short-term interest rates later this year, effectively lobbing a warning to financial markets that the central bank’s decision to keep rates near zero last week wasn’t a shift toward an interminable delay of monetary tightening.

The New Bond Market: Algorithms Trump Humans
Katy Burne – WSJ
In midtown Manhattan one recent morning, Ryan Sheftel and a handful of math whizzes at New York-based Global Trading Systems LLC were debating how to profit from rapid-fire changes in the world’s most-liquid market, U.S. Treasurys.
Their quandary: how to gain an edge on dozens of firms seeking out trading signals by buying and selling milliseconds ahead of rivals. Hours later, after one suggested tracking Treasury moves by simulating atoms colliding inside metal, a bid to predict how other traders would respond to market moves, they began tweaking their proprietary computer codes to react faster.

Slower global growth involves risks for eurozone – ECB’s Liikanen
Slower growth in the global economy involves risks for the recovery of the euro area economy and combined with lower oil prices means inflation could rise more slowly than expected, ECB Governing Council member Erkki Liikanen said on Thursday.
A slower recovery in the euro area would present new challenges for monetary policy, Liikanen, who is also the governor of Finland’s central bank, said in a statement.

Hedge Funds Buy FHA Homes For 65% Value; Evict Families
Clayton Browne – ValueWalk
The U.S. government has been selling Hedge Funds occupied homes for 65 cents on the dollar, and then turning a blind eye when the hedge funds kick the hapless homeowners out six months later. The FHA’s low profile special program to sell homes in the foreclosure process to private investors has been operating for almost five years now. Billions of dollars worth of mortgages all across the country have been sold to hedge.funds and other private investors under the program.

This is the best time to borrow money. In all of history.
Matt O’Brien – Washington Post
This is the best time to borrow money in recorded history.
That’s right: Interest rates are lower today than they were when FDR or Napoleon or Henry VIII or Genghis Khan or Charlemagne or Julius Caesar or Alexander the Great or even Hammurabi were around. Or, if you want to put a year on it, lower than at any time since the ancient Sumerians made the first loans, payable in either silver or grain, back in 3000 B.C.

Mexican drug cartels eye Asian markets
Bryan Harris – Financial Times
Latin American drug syndicates are sweeping into Asia, spurred by growing wealth, regional trade pacts that ease smuggling and some of the highest margins on offer.
Growth in the drugs trade, a significant part of an illicit economy worth more than $100bn a year in east Asia alone, has led to a rapid rise in seizures: 254m methamphetamine pills, for example, were intercepted in east and Southeast Asia in 2013 — a more than eightfold increase in just five years.

Central limit order book platforms face uphill battle
Euromoney Magazine
Proponents of central limit order book (CLOB) point to its ability to deliver liquidity at times of extreme market stress, but they have yet to convince the majority of market participants that the price is worth paying.

NY Fed bank examiner who criticized Goldman loses appeal
A federal appeals court on Wednesday ruled against a former bank examiner for the Federal Reserve Bank of New York who said she was fired after refusing to change her findings about Goldman Sachs Group Inc. By a 3-0 vote, the 2nd U.S. Circuit Court of Appeals in New York said Carmen Segarra did not deserve federal whistleblower protection over her May 2012 firing, seven months after she joined the New York Fed.

Use of Big Data Technologies in Capital Markets (FULL REPORT)
Ruchi Verma and Sathyan R Mani – Infosys
Data is growing at a tremendous rate with an increase in digital universe from 281 Exabyte’s (year 2007) to 1,800 Exabyte’s (year 2011). However the increase in data is, in itself, a minor problem, but the increase in percentage of unstructured data in the overall data volume is what is concerning all, including Wall Street.

China to issue new rules on panda bonds, ease restrictions on issuers, proceeds – sources
China’s central bank is drafting new rules for yuan-denominated bonds sold by foreigners on the mainland, known as ‘panda bonds’, and is planning to allow more companies to issue them and ease controls on how proceeds can be used, said two sources with direct knowledge of the matter.

Xi Jinping Hears Tough Complaints of American Business
Jane Perlez and Nick Wingfield – NY Times
On a day that President Xi Jinping wanted to show off the significance of China’s huge market to American business, the titans of the American tech industry lined up for a 10-minute photo opportunity with Mr. Xi here at Microsoft’s campus.

Study by law professor says U.S. SEC pads enforcement statistics
Sarah N. Lynch – Reuters
The U.S. Securities and Exchange Commission’s metrics for computing annual enforcement statistics are “deeply flawed,” making the agency falsely appear as though it is getting tougher every year, a new academic study concluded.

Jim Chanos: China Debt Surge Echoes 1990s Japan
China is on a path similar to the one that preceded Japan’s lost decade in the 1990s as the country’s debt level grows twice as fast as its economy, according to Jim Chanos, the hedge fund manager who predicted the 2001 collapse of Enron Corp.
“We have an economy addicted to credit,” Chanos, founder of Kynikos Associates LP, said during a panel discussion on China in New York Tuesday. While the country doesn’t appear to be facing an “imminent collapse,” it is on a trajectory similar to the one Japan was on before its asset-price collapse in 1991 “but on steroids,” he said.

The debt case for Middle East investment
Chris Wright – Euromoney Magazine
Saudi Arabia and Iran have been presented chiefly as an opportunity on the equity side, but both markets are attracting interest from the fixed income community as well.

Deflation supercyle is over as world runs out of workers
Ambrose Evans-Pritchard – The Telegraph
Workers of the world are about to get their revenge. Owners of capital will have to make do with a shrinking slice of the cake.
The powerful social forces that have flooded the global economy with abundant labour for the past four decades years are reversing suddenly, spelling the end of the deflationary super-cycle and the era of zero interest rates.

Is Bigger Always Best? The Effect Of Size On Hedge Funds
Using Preqin’s new fund size benchmarks on Hedge Fund Analyst, together with the results of our interviews with approximately 300 hedge fund managers, we analyze the effect that fund size has on the overall hedge fund industry by looking at performance, terms and conditions, and the fund sizes institutional investors are looking for.

Central Banks

Repeat prescription: Weighing the economic benefits of low interest rates against the financial risks
The Economist
This was supposed to be the year when the Federal Reserve would raise interest rates, which have sat between zero and 0.25% since late 2008. Shortly after the Fed allowed rates to lift off, pundits presumed that the Bank of England, which since March 2009 has held its base rate at 0.5%, a three-century low, would follow.

Wanted: Fed Officials Who Care Less About Bond Market Volatility
Simon Kennedy and Jeanna Smialek – Bloomberg Business
Damned if you hike, damned if you hold. Such may be the feeling inside the Federal Reserve a week since it met the expectations of financial markets by postponing its first interest-rate increase since 2006, in part because “financial developments” threaten to impede growth and inflation.

Central banks will struggle to raise rates from zero – ECB’s Praet
Central banks around the globe may struggle to raise interest rates because economies have got too used to ultra-low rates, the European Central Bank’s chief economist, Peter Praet, said on Thursday.

Bank of England to Reveal Thoughts on Bond Market Liquidity
Jason Douglas – WSJ
The Bank of England is due to spell out Friday its latest thinking on an issue that has been unsettling policy makers worldwide – an apparent shortage of liquidity in some financial markets. The U.K. central bank’s Financial Policy Committee, chaired by Gov. Mark Carney, is one of a new breed of macroprudential bodies that have emerged since the crisis tasked with safeguarding the stability of the financial system.

Central Banks Below Zero
The main monetary news last week was Janet Yellen’s decision not to start a modest liftoff in U.S. interest rates until, well, whenever. So it might have escaped broader notice that the Bank of England is inching toward the same conclusion, despite Britain’s recent success as the fastest-growing developed economy.

“People’s QE” is more sensible than unconventional
Edward Hadas – Reuters
If the financial system were being designed from scratch today, “People’s QE” would be uncontroversial. Jeremy Corbyn, the new leader of the UK’s opposition Labour party, would need other radical ideas and clear-thinking hedge fund managers such as Paul Marshall would gain no notoriety for endorsing common sense in the pages of the Financial Times.
Central bankers use quantitative easing, which can be defined as the official creation of new money, to bring down interest rates and increase liquidity in financial markets. In People’s QE, as sketched out by Corbyn and tentatively endorsed by Marshall in a Sept. 22 column, the government uses newly created funds to pay for infrastructure investments. The ultimate goal is the same – to help the monetary system support the real economy.

Norway’s Rate Cut Could Trigger Moves from Commodity Exporters — SEB
Chiara Albanese – WSJ
A surprise rate cut by Norway’s central bank might prompt policy makers in other commodity exporting countries to take similar actions in coming months. The Norges Bank cut its main interest rate from 1% to 0.75% Thursday, citing the negative effect of a steady decline in the price of oil on the country’s economic prospects and the outlook for inflation.

Taiwan not necessarily following U.S. on monetary policy: Perng
Y.S. Tsai, C.W. Huang and Lillian Lin – Focus Taiwan
Perng Fai-nan, governor of Taiwan’s Central Bank, said Thursday that the bank’s decision to cut its key interest rates represented a shift from a relatively accommodative monetary policy to an easy money policy, and does not necessarily follow the United States.


All about the eurodollars, redux
Izabella Kaminska – Financial Times
You may have seen our work on the hypothetical eventuality of no more petrodollars, eurodollars, sweatdollars and all other forms of offshore recycled dollars here, here and here.
You may also have seen our coverage of the technical overvaluation of the yuan and the upcoming capital outflow problem here, here and here.
And last of all, you may have seen how we think it all connects together here.
For those who didn’t, Paul Mylchreest at ADM Investor Services International — who it must be flagged has a certain gold-loving disposition – has been nice enough to consolidate a lot of our thinking in a new report on the impact of diminishing eurodollars in the system.

Countries Looking to Devalue Their Way to Growth Have a Big Problem, HSBC Says
Luke Kawa – Bloomberg
Economists at HSBC have a message for monetary policymakers who are hoping their stimulus will help devalue their local currencies and spur exports: Good luck with that.

A Big Bet That China’s Currency Will Devalue Further
Landon Thomas Jr. – NY Times
When Mark L. Hart III, a hedge fund investor based in Texas, makes an investment bet, he does it in the style of his home state: big time.
Since 2007, his winners have included high-risk, high-return wagers that the United States housing market would collapse and that Greece would go bankrupt.

Asian soft-pegs like Sri Lanka face ‘impossible trinity’ as US tightens
Asian countries which are soft-pegged to the dollar are facing impossible balancing act to maintain economic stability and growth as monetary conditions in the United States tighten, the Asian Development Bank said.

Indexes & Index Products

FINRA on ‘Smart Beta’ ETFs: Buyer Beware
Leslie Josephs – WSJ
Wall Street’s self-regulator Wednesday warned investors of risks associated with a popular category of exchange-traded funds: “smart beta.” “People are searching for yield and smart beta potentially holds the promise of higher returns, so we want people to understand the pros and the cons,” said Gerri Walsh, FINRA’s senior vice president for investor education.

Euronext again delays volatility launch
Alice Attwood – Futures & Options World
Euronext has delayed the launch of its new volatility contracts for the second time, but said that it is still working with clients on the design of the new additions.

Time to redefine the ETP family?
Deborah Fuhr – Financial News
ETFs have a well-deserved place in investment strategies and have a positive impact on the securities markets, but it has become clear that retail investors and investment professionals lack clarity about the regulatory structure of exchange-traded products.

Believe it or not, gold miners are starting to glitter
After years of depreciation, the gold-mining ETFs are beginning to exhibit basing patterns in contrast to the toppy patterns exhibited by the major equity market indices.

Tokyo Stock Exchange To Begin Calculating And Publishing Currency Hedged Indices With Daily Hedging (US Dollar And GBP)
Press Release – Mondovisione
The Tokyo Stock Exchange (TSE) has been calculating and publishing the TOPIX Total Return Euro Daily Hedged Index since September 2012. TSE will start calculating and publishing the same version of the index with GBP and US Dollar hedging on September 24.


Barrick’s cyanide spill five times larger
Buenos Aires Herald
The amount of cyanide solution that spilled from Barrick Gold’s Veladero mine in San Juan province is almost five times more than previously believed, the company acknowledged yesterday as a second federal prosecutor moved to investigate national and provincial officials and mining executives amid growing environmental concerns.

Something has changed in the gold trade: Gartman
Amanda Diaz – CNBC
Stocks pain has turned into gold’s gain.
Gold prices soared to a one-month high Thursday as fears of a global slowdown have investors seeking so-called safe haven assets like bonds and bullion. And according to Dennis Gartman, often referred to as the “commodities king,” the rally in gold could just be starting.


Grexit, the unfortunately named software startup, is changing its name
Shelly Banjo – Quartz
After a tumultuous summer of negotiations between Greece and its lenders to avoid a “Grexit,” the debt-stricken country remains part of the Eurozone (at least for now).
The other “Grexit,” an unfortunately named software startup based in Palo Alto, California, has moved on in any case—rebranding with a new name and trying to move past the mixup.

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