First Impressions

A Tale of Two Issues: Zach Ziliak Breaks Down the HFT Debate

Today’s financial markets can be summed up in three words – global, fast, and complex. But as the market structure evolves, so must the regulatory structure that oversees it. John Lothian News has spoken with several industry experts to create this series on the evolution of financial market structure.

In part 6, quant -turned-attorney, Zach Ziliak points out that Michael Lewis’ Flash Boys, like any good novel, gets broken down into good vs. evil, and HFT has become an easy target. He says it is important to separate the debate in two – automated systems’ day to day activities, and issues related to the flash crash and other system failures.

Watch the video »

Quote of the Day

“Volatility and the so-called tail risks always sneak up on you and are always something you don’t think is coming. We’re not blind to the fact that volumes are low, but we are investing over the long term.”

Michael Guarnieri, Nomura Holdings Inc. global head of credit products in New York in the story, “Wall Street Bets on Bond Revival in Trader Hiring Spree”.

Lead Stories

Wall Street Bets on Bond Revival in Trader Hiring Spree
Lisa Abramowicz – Bloomberg
Wall Street firms are starting to bet on an end to the profit-eroding boredom in credit markets by building their trading desks.

**JK – So does a bond revival involve a tent, bible and snakes? Yep, I thought so.

EU Financial-Transaction Tax Plans Turn to Derivatives
Rebecca Christie and Jim Brunsden – Bloomberg
European efforts to build a financial-transaction tax are turning to which derivatives to tax and how to leave room for future expansion, planning documents show.
Greece, which holds the EU’s rotating presidency until July 1, has proposed several options for taking the plan forward, according to the documents prepared for a May 28 working group meeting. One task will be to decide which derivatives to tax, while another will be to choose how the current plan should set the stage for a broader scope later on.

**JK – One has to wonder about the methodology here. How does one pick an instrument to tax?

Happy Birthday Taper Tantrum. Look How Tame You’ve Become
Alen Mattich – MoneyBeat – WSJ
One year ago, Ben Bernanke, then chairman of the U.S. Federal Reserve, made the point that later in the year the central bank would start to reduce, or “taper” the pace at which it bought U.S. Treasury bonds conditional on good economic news.

***DA: So much for bond market upheaval forcing fiscal discipline.

Meteor Bonds. Oh Yes.
MoneyBeat – WSJ
Worst day ever: you get struck by a meteor and your bonds go down the tube. Yes, bonds that allow investors to bet against natural disasters have a new risk to wager on: meteor strikes.

***DA: If I get hit by a meteor, the last thing I am thinking about is my bond portfolio. I will likely be thinking about how much I am going to miss my kids. And pizza.

***JB: Since we’re on the topic of meteors be sure to enjoy the new (no one has seen this one before) Camelopardalids meteor shower tonight and into Saturday morning. Some suggest it might grow into a meteor storm, some say it might be a bust. Whatever the case if you have clear skies be sure to look up. It should be visible above most of North America. Starts around 10:30p and peaks around 2-4a EST. More info can be found here:

***JK: Risk will be eliminated by this man, former astronaut – Ed Lu – Protecting the Earth from Asteroids. Great listen over the weekend –

Norinchukin Says Treasury Yields Shouldn’t Rise Much
Kosaku Narioka – MoneyBeat – WSJ
There aren’t many more conservative, risk-averse groups than Japanese farmers. But make no mistake, they have sizable assets to invest.

The macroprudential model back on the financial catwalk
Gillian Tett –
Sartorial fashion is cyclical. Every few years, certain trends that had dropped out of style become hot on the catwalk again – meaning that ideas are constantly recycled. Something similar may be under way in central banking too.

***Monetary policy and finance under the same roof? Perish the thought!

Wall Street Finds New Subprime With 125% Business Loans
Zeke Faux – Bloomberg
Doug Naidus made his fortune selling a mortgage company to Deutsche Bank AG months before the U.S. housing market collapsed. Now he’s found a way to profit from loans to business owners with bad credit.

***DA: Right back where we started, except with fewer, but much larger banks.

Spain dives into inflation-linked bonds
Elaine Moore –
Spanish pensioners tend to buy their groceries from Spanish shops. If the price of pan and leche goes up, so does the money they need from their retirement savings. That is why pension funds like to link their investments to inflation.

New annuities are structured products in all but name
Yakob Peterseil –
Insurers have borrowed liberally from banks’ playbooks, with the result that the biggest-selling insurance products of the past few years are almost indistinguishable from structured notes and certificates of deposit.

Yes, rates will rise. Do control yourselves
David Keohane | FT Alphaville
From a tame taper to a rate rage? And on its birthday too. As Alan Beattie says, it was a year ago this week that the “taper tantrum” shook emerging markets, after comments from Ben Bernanke raised fears of the Fed tightening monetary policy. That sucked for EMs even if the reaction to the actual taper, which began in December, was much more chilled.

Bond Buyers Skip Fine Print as Low Rates Sow Complacency
Caroline Chen and Charles Mead – Bloomberg
To understand the rising concern about complacency in the corporate-debt market, look no further than the Clear Channel Communications Inc. bonds that investors showed up in droves to buy last month.

***DA: What’s the worst that could happen?

Central Banks

Fed on road to ‘normal’ may be rocky: Williams
The Federal Reserve is finally moving back to “normal” monetary policy, a top Fed official said on Thursday, even as he warned of possible lurches along the way.

***DA: Meet the new normal. Same as the old normal, almost.

How High Will Fed Push Rates?
Jon Hilsenrath – The Wall Street Journal
Investors are especially focused these days on where the Federal Reserve’s target interest rate is likely to end up in the years ahead. During the tightening cycle that ended in 2006 the Fed pushed its target fed funds rate up to 5.25%. In 2000 it pushed it to 6.5%. Fed officials say they don’t expect rates to go very high this time around because the economy will remain fragile for years after the 2008 financial crisis.
So how far will the Fed go?

***DA: Fed does not push rates up. The market pushes the Fed to act on rates.

China’s economy entered ‘manageable slowdown’ – central bank chief
China’s economic slowdown is “manageable” as the country is in a stage of development where reforms and environmental protection take precedence in policy considerations, Central Bank Governor Zhou Xiaochuan said.

***DA: Remember when Bernanke said the crisis was limited to subprime and “contained?”

China’s central bank chief admits difficulties with Africa
Javier Blas in Kigali, Rwanda –
Beijing has made a rare and candid admission of the difficulties in its economic relationship with Africa, with one of the country’s top financial officials describing some Sino-African deals as “not so good, not so satisfactory”.


EM currencies benefit as investors return
Delphine Strauss –
A year after Ben Bernanke’s first mention of tapering triggered a panic in emerging markets, a rush back into higher-yielding assets is allowing central banks to scale back measures put in place to support their currencies in the worst of the sell-off.

Deutsche Bank Puns Its Way Through FX Trade Ideas
MoneyBeat – WSJ
The puns are, quite frankly, painful. But Deutsche Bank’s big set piece ‘Blueprint’ on the FX market, designed to offer clients trade recommendations for a plethora of currencies, contains some intriguing ideas.

Pound at 17-month High Beats Forecasts by Most on Record
David Goodman – Bloomberg
The pace of the pound’s rally to a 17-month high against the euro has caught analysts by surprise, with the exchange rate exceeding their forecasts for the end of next month by the most on record.
The pound is more than a penny stronger than the median estimate of analysts for June 30, amid bets the Bank of England is moving closer to increasing interest rates while its European counterpart looks to add more stimulus that tends to weaken a currency.

***DA: Great. Three weeks before we converge on London for IDX. As if it wasn’t expensive enough in that town.

Who’d have thought. Cryptocurrencies are replicating conventional systems
Izabella Kaminska | FT Alphaville
We were struck by a PR email we received this week directing our attention to a three-month old crypto currency called “Blackcoin”.

Indexes & Index Products

LSE’s Russell Buy to Boost International Index Appeal; Analysts Wary of Data Cost Impact
Giulia Lasagni – Waters Technology
The London Stock Exchange’s proposed acquisition of US-based index provider and asset manager Russell Investments from the Northwestern Mutual Insurance Company will allow the exchange to diversify its revenue streams and expand its outreach into the US market, though some fear that the benefits deriving from a more diverse offering could be outweighed for buy-side index clients by higher fees resulting from increased market concentration.

Europe set to be key battleground for index providers
David Wigan – Risk Magazine
The evolution of the European ETF market has lagged behind its US counterpart as retail investors have been slow to follow institutional investors into the asset class. But shifting market dynamics mean index providers are now jostling to take advantage.

Charles Schwab: For 98% of Americans, this is the best way to invest
Victor Reklaitis – MarketWatch
In case you were wondering, Charles Schwab really likes index funds.
The founder of Charles Schwab Corp. talked with reporters about the “power of indexing” on Thursday, just after publishing a new note on the subject.
He didn’t throw actively managed funds and other stock pickers completely under the bus.
But Schwab did say low-cost, diversified funds that track indexes are the best approach for 95% to 98% of Americans.

***DA: Buy, hold, repeat.

Volatility In Small-cap Stocks Will Eventually Disrupt The Calm In Large-cap Indexes
Pre-open sentiment is pointing to a positive open for stocks, but trading volumes will most likely be even weaker by this week’s low standards ahead of the Memorial Day weekend. Stocks made decent gains this week and the trend will likely continue in today’s session as well, though low volumes have a way of exaggerating any price action.

Checking out of the ETF hotel could be costly
Tracy Alloway in New York –
Hotel California by the Eagles is one of the best known soft rock songs from the seventies. But its lyrics – about a seemingly welcoming guesthouse revealed as a ghostly limbo – offer a partial analogy for an important part of modern financial markets: exchange traded funds.

U.S.-based stock funds post $7.6 bln outflows – Lipper
Investors in U.S.-based funds pulled $7.6 billion out of stock funds in the week ended May 21 on weak U.S. economic data and disappointing corporate results, data from Thomson Reuters’ Lipper service showed on Thursday.

How Big is the Global Stock Market?
Joshua M Brown | The Reformed Broker
The below chart comes to us from Bank of America Merrill Lynch’s recent global equity strategy report. You’re looking at a table listing the world’s equity markets (in billions) along with some fundamental and valuation data.


Historic gold fix pricing system criticised as vulnerable
Neil Hume and Xan Rice –
Unlike other commodities, such as copper or coffee, gold does not trade on an exchange in London. Investors wishing to buy and sell gold wholesale rely on a 24-hour over-the-counter market serviced by a number of investment banks such as Goldman Sachs, JPMorgan and UBS.

Barclays fined $44 million for gold price setting failures
Barclays Plc has been fined 26 million pounds ($43.8 million) for control failings over its setting of gold prices, which occurred just a day after the British bank was fined $450 million for rigging Libor interest rates.

Credit Suisse notes help adviser bet big on gold miners
Yakob Peterseil –
Gold bugs had a rough 2013, but some are saying the precious metal and the companies that extract it have been bashed enough. Yakob Peterseil talks to Dan Scharlach of Innovative Wealth Partners about using commodity-linked structured notes

CFTC Wins Fraud Trial against Hunter Wise Related Precious Metals Firms and Their Owners
The U.S. Commodity Futures Trading Commission (CFTC) today announced that on May 16, 2014, a federal court in Florida entered an Order finding in the CFTC’s favor following a trial against four Hunter Wise related companies and their owners on charges that they had fraudulently misrepresented the nature of precious metals transactions that resulted in millions of dollars in customer losses.

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