First Impressions

Reconcilable Differences: Duco’s Christian Nentwich on what can be done to address reconciliation problems in the financial industry

Today, trades occur in milliseconds around the globe. But there are still aspects of the business that lag behind, especially in the post trade area. Christian Nentwich, CEO and co-founder of tech firm Duco, estimates there is more than $500 million in unreconciled fees in the brokerage space. Here is how his firm is attempting to address the reconciliation problem.
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Quote of the Day

“Slowing economic growth and rapidly rising debt levels are rarely a happy combination, and China’s borrowing spree seems certain to lead to trouble.”

Henry M. Paulson in the story, “A Veteran of the Financial Crisis Tells China to Be Wary”.

Lead Stories

Trader Charged With Manipulation That Contributed to ‘Flash Crash’
Dealbook – NY Times
A futures trader was arrested in Britain over allegations that his manipulation of trades helped prompt the May 2010 “flash crash,” when the Dow Jones industrial average plummeted 600 points and unnerved many investors, even though stocks quickly recovered their losses.
The trader, Navinder Singh Sarao, 37, was arrested Tuesday morning at his home in London on charges of wire fraud, commodities fraud and manipulation charges, prosecutors in the United States said during a news conference.

Investors Just Got a Billion-Dollar Lesson in China’s ‘Mystery Meat’
China’s first developer bond default gave global funds a $1 billion-plus lesson. Investors just wish they could understand what it was all about.
The market value of Kaisa Group Holdings Ltd.’s six dollar-denominated bonds has fallen by $1.2 billion since the first signs of trouble in October that culminated in missed payments Monday, data compiled by Bloomberg show. Anti-graft probes, incomplete financial disclosure and wayward corporate governance have all been blamed for the decline of a company that had $1.5 billion of cash only 10 months ago. Yet none of the world’s biggest finance companies can say for sure.

CEOs Awarded More Cash Pay
With the stock market scraping against record highs, big-company CEOs are moving into cash.
Cash compensation for chief executives rose at its fastest rate in at least four years in 2014, swelling to 37.3% of total CEO compensation, higher than it has been since 2010, according to a survey of early proxy filings by the Hay Group for The Wall Street Journal.
The rise in cash pay contrasts with trends just after the financial crisis, when shares had cratered and companies filled out their top officers’ pay packages with equity grants.

A Veteran of the Financial Crisis Tells China to Be Wary
Dealbook – NY Times
About 340 pages into Henry M. Paulson’s new book on China, a sentence comes almost out of nowhere that stops readers in their tracks.
“Frankly, it’s not a question of if, but when, China’s financial system,” he writes, “will face a reckoning and have to contend with a wave of credit losses and debt restructurings.”

Exchanges, SIFMA go to SEC trial in battle over market data fees
Wall Street’s leading trade group went to battle on Monday against two top U.S. stock exchanges, arguing they should not have leeway to hike the fees they charge traders to access crucial proprietary equity market data.

Aberdeen, Blackrock flag risks in frothy Chinese stock markets
Aberdeen Asset Management’s head of Asian operations warned on Tuesday that Chinese money was moving “a bit like a casino” in domestic stock markets, while BlackRock called on China to reform its capital markets further to avert boom and bust scenarios.

Stock-Trading Monopolies Weren’t So Bad
By Justin Fox, Bloomberg
The people who run Norway’s giant sovereign wealth fund have discovered something. It turns out that when stock trading is done in lots and lots and lots of different places, it can actually be hard for investors to get a good deal — or at least to be able to tell if they’re getting a good deal.

Hidden dangers that banking regulators fail to chart
Robert Lenzner
Seven years after the crash the authorities still know next to nothing, writes Robert Lenzner
Nobody knows anything.” Applied to Hollywood, William Goldman’s words inspired optimism, but such words also apply to finance, where they bring a far darker mood.

Bond investors grumble at buyback bonanza
Robin Wigglesworth, FT
Shareholder activists are on the prowl, and fearful executives are taking no chances. US companies are expected to hand a record $1tn to shareholders this year through dividends and stock buybacks. But not all investors are thrilled at their munificence.

Morgan Stanley posts highest profit since financial crisis
By Anil D’Silva and Avik Das
Q1 net profit jumps 60 pct
Adjusted net revenue rises 10.3 pct
Adjusted revenue from equities trading rises 33 pct
Shares up 0.4 pct in early trading (Adds Breakingviews link and graphic link)
Wall Street investment bank Morgan Stanley reported its most profitable quarter since the financial crisis on Monday, boosted by higher revenue from trading bonds and equities.

Central Banks

Inflation goal may be too low, says Fed’s Rosengren: FT
Central banks including the Federal Reserve may need to set higher inflation targets in the future to avoid dealing with low economic growth, Eric Rosengren, president of the Federal Reserve Bank of Boston, said in an interview with the Financial Times.

ECB staff have proposal to tighten Greek use of emergency funding: Bloomberg
European Central Bank staff have prepared a proposal to increase the haircut on the security that Greek banks offer in return for emergency liquidity, Bloomberg reported on Tuesday, citing people with knowledge of the discussions.

GOP: Probe of Fed leak ‘inadequate’
Republicans on the House Financial Services Committee say an official investigation into a leak of confidential, market-moving information at the Federal Reserve was “inadequate.”
Committee Chairman Jeb Hensarling (R-Texas) and Rep. Sean Duffy (R-Wis.), who leads the panel’s Oversight and Investigations Subcommittee, vowed Tuesday to launch their own investigation into the central bank’s handling of the October 2012 leak.

Central Banks Should Resist Peer Pressure to Ease, Says Trichet
Central bankers should be careful not to ease monetary policy in response to actions by their peers, which may lead to an excessively accommodative stance globally, the former head of the European Central Bank said.
While the U.S. and Europe aren’t trying to weaken their currencies, their unprecedented monetary stimulus has consequences on the global foreign-exchange market, former ECB President Jean-Claude Trichet said in an interview in Singapore on Tuesday.


Derivatives Pioneer Blythe Masters Tackles Digital Currency
Institutional Investor
Blythe Masters has seen the future before, and Wall Street followed. Will it happen again?
If the development of virtual currencies is the story of a long cultural struggle between the idealistic hackers who founded them and the incumbent powers of the financial industry, this year has already seen established money strike two major blows. In March, San Francisco Bitcoin firm 21 emerged from stealth mode to announce a $116 million round of venture funding, the largest ever by a company in the digital currency sector. But it was the announcement of Wall Street pioneer Masters, 46, as CEO of Digital Asset Holdings — a New York start-up with fewer than 20 employees that has yet to launch a single product — around the same time that really caught the attention of the investment world.

DoJ pushes for foreign exchange deal with 5 banks in May
Gina Chon in Washington and Tom Braithwaite in New York, FT
The US Department of Justice is pushing for five banks, including JPMorgan Chase and Barclays, to resolve allegations they manipulated the foreign exchange markets in one mega settlement scheduled for mid-May, according to people familiar with the case.

FXCM places interbank business in shop window to repay SNB shock loan by Solomon Teague, Euromoney
FX broker FXCM has unveiled its plans to sell its non-core assets to repay loans post-Swiss National Bank disaster, and focus its resources on wholesale as well as prime of prime services.

Central banks prepare to offload $100 billion worth of euros
Outright selling of the Euro by central banks could still run into a 12-figure sum, a significant flow out of the single currency and a major force for further weakness as central banks steer clear of negative-yielding assets

Currency Swings Worry Treasurers in Asia
MoneyBeat – WSJ
The biggest worry for treasurers of Asian companies this year? Currency markets.
That’s according to a J.P. Morgan survey that found 40% of treasurers in the region said foreign exchange was their primary concern as they worry that big currency swings could hit global growth over the next year.

Greek Parallel Currency: How to Do it Properly
According to several recent media reports, both the Greek government and the ECB are taking into consideration the possibility (for Greece) to issue a parallel domestic currency to pay for government expenditures, including civil servant salaries, pensions, etc. This could happen in the coming weeks as Greece faces a severe shortage of euros.

Indexes & Index Products

Small cap defensive: Oxymoron, or simply overlooked?
The phrase ‘small cap defensive stocks’ may seem to be an oxymoron however, the Russell Stability Indexes methodology allows for the identification of small cap stocks that—like their large cap counterparts—display risk characteristics that may be considered defensive in nature. Learn more about index performance, characteristics and factors through the analysis of the Russell 2000 Defensive Index and the conventional Russell 2000 Index. (PDF)

Low Volatility Works for This Small-Cap ETF
ETF Trends
With risk appetite high, low volatility exchange traded funds have recently taken some flak for lagging their traditional broad market peers.
That criticism, a familiar refrain as low volatility funds have become increasingly popular with investors, often focuses on the performance of “low vol” ETFs in short time frames. Over the long haul, ETFs that emphasize a volatility damping approach have often offered superior risk-adjusted returns.

Schwab Touts Fundamental Indexes As Alternative To The S&P 500
Seeking Alpha
Traditional market capitalization-based indexes like the S&P 500 assume “the biggest companies are the best companies,” according to Schwab’s Anthony Davidow, and “some would even say that market-cap indexes overweight the overvalued stocks and underweight the undervalued stocks.” In response to these inherent shortcomings of market cap-weighting, Mr. Davidow advocates fundamentally weighted indexes in the recently published whitepaper, Fundamentally Weighted Indexes: An Alternative to the S&P 500?

Despite Rate Increase Chatter, Bonds Are Outperforming
ETF Trends
The yield of the U.S. Treasury 10-year as measured by the S&P/BGCantor Current 10 Year U.S. Treasury Bond Index ended the week 9 basis points as month-over-month CPI was the same as prior and lower than the 0.3% expected level. A drop in crude oil futures also helped push treasury yields to lower at the close of the week. The index has returned 0.71% MTD and 3.79% YTD. Ahead this week the Treasury will be auctioning $18 billion of 5-year TIPS.

The Empowering Ability to be Selective in Emerging Markets
S&P Dow Jones Indices
With a recent webinar on China, an ETF.COM article titled “Global Investors Plan To Shun Emerging Markets” caught my eye. The article, written by Rachael Ravesz, noted that 29% of the 4,208 investors surveyed by asset manager Legg Mason planned to move money from Emerging Markets into Developed Markets. The article shared a few reasons why global investors may now be reassessing their views on Emerging Markets including poor performance of the EM benchmark, the impact of oil prices, and a strong US dollar.


NYC Apartments, Art Top Gold as Stores of Wealth, Says Fink
by Jonathan Burgos Netty Idayu Ismail, Bloomberg
Gold’s traditional role as a store of wealth has been usurped by contemporary art and apartments in cities such as New York and London, according to Laurence D. Fink, head of the world’s biggest asset manager.

RBC Capital Markets: Central Banks to Keep Buying Gold
Gold Investing News
Mineweb reported that according to a report from RBC Capital Markets, central banks are likely to keep buying gold in 2015, thereby supporting the price of the yellow metal.

Mystery Deepens After 1 Gold Bar Found From Nearly $5M Highway Heist
One of the gold bars stolen in a highway heist last month has been found in South Florida, according to the FBI.
“This confirms that there is a South Florida nexus to this crime,” Justin E. Fleck, supervisory special agent of the squad leading the investigation, said in an FBI news release Monday. “We believe that additional gold bars from the robbery may still be in South Florida and we continue to need the public’s help in solving this crime.”

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