John Lothian: Cyber threat grows for bitcoin exchanges; Wheat price falls to lowest level in a decade; Are Index Funds Eating the World?

Aug 29, 2016

First Read

Straining to See
By John J. Lothian

It was scary. On a canoe trip down the Sugar river on Saturday in Turkey Run State Park in Indiana, my canoe hit a strainer while trying to rescue a canoe with a couple of young scouts in it. Both canoes were sucked under the strainer, which is a hazardous spot on a river where water passes through but solid objects do not.

Everyone is fine. We escaped this watery vortex caused by a narrowing turn in the river and a tree seemingly strategically fallen in the water. The water pressure sucked our canoes under the tree, dumping all of us into the river.

No one was snagged in the tree strainer, which was the best news. Our canoes were recovered after pulling them under the tree, where they were trapped. The only things lost were my glasses, a hat and my dignity.

I am a canoe merit badge counselor. I have warned many scouts about the risks of strainers, but had never gone through one myself until Saturday. It is not something I want to repeat.

Let’s just say that I experienced excessive liquidity in a way I had not done before.


Gender and Pay Equality – We can and must do more
By Craig Donohue, OCC Executive Chairman
As a husband and father, I am fortunate to have three strong women around me: my wife Elsa who was a trader and money manager, my oldest daughter Caity who is a lawyer in Chicago, and Kelsey, who will be attending college this year.

***** The OCC does thought leadership as well as, or better than, anyone I can think of. And Bravo to Craig.


SGX Announcement-Appointment of Chairman
The Directors of Singapore Exchange (SGX) are pleased to announce their election of Mr Kwa Chong Seng to succeed Mr Chew Choon Seng as Chairman of the Board. Mr Chew will be retiring at the conclusion of SGX’s Annual General Meeting on 22 September 2016, and will not be standing for re-election. He joined the Board in December 2004 and has been the Chairman since January 2011.

***** Retiring is a good thing.


Climate change predicted to halve coffee-growing area that supports 120m people
Michael Slezak – The Guardian
Climate change is going to halve the area suitable for coffee production and impact the livelihoods of more than 120 million of the world’s poorest people who rely on the coffee economy, according to a new report by the Climate Institute, commissioned by Fairtrade Australia & New Zealand.

***** The end of the world is like that, dealing with items you don’t have anymore.


Navigating Bridges: Timely Updates in Financial Services
by Gary DeWaal, Katten Muchin Rosenman LLP
Last week, a nonmember was summarily barred from accessing all CME Group exchanges’ markets for 60 days for endeavoring to disguise that he was the controller of five trading accounts that were not in his name. In addition, 13 investment advisers agreed to settle charges brought by the Securities and Exchange Commission that they passed along to their own investors false performance data provided by an independent third party adviser. As a result, the following matters are covered in this week’s edition of Bridging the Week


Big data, Google and the end of free will; Forget about listening to ourselves
by: Yuval Noah Harari
For thousands of years humans believed that authority came from the gods. Then, during the modern era, humanism gradually shifted authority from deities to people. Jean-Jacques Rousseau summed up this revolution in Emile, his 1762 treatise on education. When looking for the rules of conduct in life, Rousseau found them “in the depths of my heart, traced by nature in characters which nothing can efface. I need only consult myself with regard to what I wish to do; what I feel to be good is good, what I feel to be bad is bad.” Humanist thinkers such as Rousseau convinced us that our own feelings and desires were the ultimate source of meaning, and that our free will was, therefore, the highest authority of all.

***** An algorithm for free will?


Friday’s Top Three
Friday’s top clicked story had all the elements of a Friday favorite – it was topical, involved our industry regulator, the NFA, and involved a young investment prodigy, good investing gone bad, and accusations of criminal trespass, harassment and general “thuggery” by investigators. To us, it looks like standard due diligence in trying to track down someone who has been playing fast and loose with the rules, and then hides and/or skips town. Read it HERE.
In second place, WSJ’s Why Banks Can’t Pay Enough To Attract Tech Talent, is basically an infomercial for our MarketsWiki Education event series. And, in third place, a warning from Bloomberg to banks that, if you think you hated the Volcker Rule, it will seem like child’s play compared to the next round of rules designed to prevent systemic risk.


Last Week’s MarketsWiki Pages of the Day
Monday – Tradeweb Markets LLC
Tuesday – Baltic Exchange
Wednesday – Seed SEF LLC
Thursday – IMC Group
Friday – T+2

MarketsWiki Recent Updates


Kate Maehr; Joerg Fischer; Wiet Pot; Rob Defares; Keizo Goto; Drew Shields

Companies, Organizations and Groups

Singapore Exchange Limited; Nasdaq, Inc.; ICE Clear U.S.; MIAX Options Exchange


The Financial Futures Association of Japan?; Options Industry Council


85,641,710 pages viewed; 201,756 edits; 22,261 pages
MarketsWiki Statistics

Lead Stories

Cyber threat grows for bitcoin exchanges
By Gertrude Chavez-Dreyfuss – Reuters
When hackers penetrated a secure authentication system at a bitcoin exchange called Bitfinex earlier this month, they stole about $70 million worth of the virtual currency. The cyber theft — the second largest by an exchange since hackers took roughly $350 million in bitcoins at Tokyo’s MtGox exchange in early 2014 — is hardly a rare occurrence in the emerging world of crypto-currencies. New data disclosed to Reuters shows a third of bitcoin trading platforms have been hacked, and nearly half have closed in the half dozen years since they burst on the scene.

***JK: A point of comparison. Last year, the FBI reported 4,091 bank and armored carrier robberies in the US, resulting in 9 deaths and 57 injuries.

Central Bankers Spurn Call for Radical Approach at Jackson Hole
Steve Matthews, Jeff Black – Bloomberg
Fed’s Yellen says more activist measures not being considered; OJ, ECB ready to ease further if fiscal action falls short
Central bankers aren’t retreating from the fight against low inflation, although they’re wary of launching a fresh assault on any daring new fronts.

Wheat price falls to lowest level in a decade; Commodity goes below $4 a bushel for first time since 2006 as good weather helps yield bumper crop
by: Gregory Meyer in New York – FT
The price of wheat has crashed to the lowest level in a decade as huge harvests pile up in big growers from Russia to the US, cutting the cost of staple foods around the world.

Are Index Funds Eating the World?; Even the father of passive investing has warned of the potential for ‘chaos’ if index funds get too popular
“Too much of a good thing,” said Mae West, “can be wonderful.” Too much of a good thing might also make investors wonder.

Central bankers to persist with brave new world; Policymakers at Jackson Hole indicate unconventional policy tools will endure
by: Sam Fleming in Jackson Hole – FT
The message from the meetings in Jackson Hole was clear: there is no winding the clock back to the pre-crisis world of central banking as officials seek ways of improving their monetary weaponry.

New tans, same old ‘polycrisis’ as Europe’s summer ends
Alastair Macdonald – Reuters
The European Union grinds back into action this week after its August break, still dazed by Britain’s midsummer vote to quit the EU and facing much the same “polycrisis” as a year ago: a mass of refugees, a fragile economy, hostile Russians and, yes, those Brits, now more awkward than ever.

Forecasts of Brexit Gloom May Be Overdone
Josh Zumbrun – WSJ
It’s early, but data so far suggest the British decision to leave the European Union could be another example of a recurring phenomenon: expert predictions of dire consequences to political decisions that end up proving overheated. Economists are good at digging into the forces behind inflation or productivity, or exploring the downsides of wealth inequality. But they face steeper challenges in extrapolating from political events, especially ones with few or any past corollaries. “Forecasters often feel incentivized to pump up the probability of worst-case scenarios” said Philip Tetlock, an expert in political forecasting at the University of Pennsylvania.

The Swedish Tycoon Hunting for Commodities Says He Makes His Own Luck
Danielle Bochove – Bloomberg
Family’s mining companies are looking to bulk up: Lukas Lundin; ‘Scary’ number of assets may need to be consolidated, he says
If Monopoly were played for natural resources, Lukas Lundin would be the natty gent in the tuxedo — riding a motorcycle.

China banks starved of big data as mobile payments rise; Mobile wallets from Alibaba and Tencent cut lenders’ access to crucial transaction details
by: Gabriel Wildau in Shanghai
The rise of third-party mobile payments in China at the expense of credit and debit cards is threatening commercial banks’ access to the customer data viewed as crucial to newly emerging financial and consumer business models.

How Fracking Changed The World
By VW Staff
The Planet Money oil gets put to a test by a lively trucker with his own centrifuge. He also shows us how to stay clean on a dirty job site. At the end of the episode, we make a deal to sell our oil with a middleman.

Exchanges, OTC and Clearing

SGX launches SGX APAC ex Japan Dividend Leaders REIT Index
Singapore Exchange (SGX) today announced the launch of the SGX APAC ex Japan Dividend Leaders REIT Index, composed of 30 real estate investment trusts (REITs) across the Asia Pacific ex Japan region. It will be the first SGX index to be used as a benchmark index for a new exchange-traded fund (ETF), which will be issued by Phillip Capital Management (S) Limited (Phillip Capital Management), the asset management arm of Phillip Capital.

On Demand Auctions Gathering Steam at Chicago Stock Exchange
John D’Antona – MarketsMedia
Trading activity at the Chicago Stock Exchange isn’t just limited to the floor traders or algorithms but to “on-demand” auctions that can help reduce information leakage and promote block trading. In a move designed to help the institutional buy-side trader find liquidity without fear of being either front-run or picked-off, Steve Givot, senior vice president for strategy and product management and his team at 440 South LaSalle Street are promoting their unique version of the “on demand” auctions or as they call it “SNAP” auctions. Given the current state of the equity market structure, Givot told Markets Media in an interview that the time for the SNAP auction has come.

California’s New Climate Rules, Explained
By John Upton – KQED
Following more than a year of legislative toing and froing, California’s leaders agreed this week on how ambitious the state will be in the fight against climate change after 2020.

Dalian Commodity Exchange Revises Relevant Rules In Risk Management Measures
Dalian Commodity Exchange (DCE) issued a notice to revise the rules for the trading margin rates and the price limits in the situation of consecutive price limits on the same direction. The revised rules shall come into effect from the settlement on August 24, 2016.

Tokyo Commodity Exchange: Inhibition Of Implied Function (Bait Order Generation) At The Launch Of The Next Generation System
The next generation system is slated to go live at TOCOM on Tuesday, September 20. In order to assure its stable operation, the Exchange will temporarily inhibit implied function (bait order generation).


US election: Nobody is talking about climate change; People are afraid that doing something about global warming will make them poorer
by: Edward Luce – FT
You would never guess it from the US election. But for the third year running the world is on course to exceed a record temperature in 2016 — having suffered the hottest July in history last month. People are right to worry their children may not have it as good as they did. Yet the changing planet plays little role in their foreboding. By any barometer, US politics has hit extreme weather in 2016, yet global warming ranks near the bottom on the list of voter concerns. Illegal immigration, on the other hand, is near the top, even though net inflows came to a halt five years ago. Is democracy on course to duck the biggest challenge of our age?

Investing and Trading

Currency Traders Can’t Lose as Trusted Strategies Reap Big Gains
Susanne Barton – Bloomberg
Everyone’s a winner in the $5.3 trillion-a-day global currency market this year. For just the second time in the past decade, three major foreign-exchange trading strategies are all producing positive returns. The carry trade, in which investors borrow in Group of 10 currencies with low interest rates and use the proceeds to buy assets with higher yields, is on pace for its biggest annual gain since 2012, according to Deutsche Bank AG index data. Trades that buy undervalued currencies and sell expensive ones, and tactics that latch onto foreign-exchange trends, are also making money.

Oil Barons Find Narnia in West Texas
Liam Denning – Bloomberg Gadfly
If you happen to find a battered, exhausted oil baron slumped in a dark corner (and who doesn’t from time to time?), just whisper this one word in their ear to revive them: “Permian.” This shale basin, which stretches across northwestern Texas and into a portion of New Mexico, is rapidly becoming a Narnia-like place for the exploration and production sector. There, profits can still be made and growth can be had. For an industry savaged by job losses and bankruptcies, that sort of escapism is a good thing. Until, of course, it becomes a bad thing.

***SR: No talking animals have been found yet in West Texas.

One Chart Shows What Investors Are Dreaming About
By Mark Gilbert – Bloomberg
You’ve probably heard the old saw about equity markets “climbing a wall of worry.” Stock market prices can rise even when the economic backdrop is gloomy as investors look ahead and anticipate better times.

Wall Street Redoubles Fight to Manage $100 Billion at Endowments
Michael McDonald – Bloomberg
Funds turn to outside managers to run complex portfolios; TIAA brought company president to Connecticut college pitch
When the University of Connecticut sought help managing a slice of its small endowment, TIAA found it was competing with 26 other money managers. So the financial services giant sent its biggest gun: President Roger Ferguson, a former vice chairman of the Federal Reserve, to pitch in person.


Central bankers to persist with brave new world
Sam Fleming – Financial Times
The message from the meetings in Jackson Hole was clear: there is no winding the clock back to the pre-crisis world of central banking as officials seek ways of improving their monetary weaponry. The point was made by Janet Yellen, the Federal Reserve chair, in a speech that opened the Kansas City Fed’s annual symposium, a gathering of the central banking elite in Grand Teton National Park.

Fed should keep trillions in bonds to provide stability: paper
Jonathan Spicer – Reuters
The U.S. Federal Reserve should scrap a plan to shrink its massive bond holdings and instead keep them “indefinitely” as a new and little-recognized tool to protect against financial shocks, according to research presented on Saturday to some of the world’s top central bankers.

Carl Icahn and Bill Ackman: A Wall Street Soap Opera in 6 Acts
David Benoit – WSJ
Carl Icahn and Bill Ackman have had an unusual Wall Street relationship, to say the least. March 2003 – The Historical Context. Mr. Icahn purchased a stake in Hallwood Realty Partners from Mr. Ackman’s Gotham Partners. Included in the deal is what’s been called “schmuck insurance” for Mr. Ackman, which would have given Mr. Ackman some of the profits above a 10% gain if Mr. Icahn sold within three years.

Goldman Sachs, Morgan Stanley Take a Tough Assignment: Reinventing Themselves
Liz Hoffman – WSJ
In the darkest days of the financial crisis, Goldman Sachs Group Inc. and Morgan Stanley became bank-holding companies to shore up confidence and gain the implicit backing of the Federal Reserve. But few believed the Wall Street powerhouses would fundamentally change—that they would don the banking cloak until their trading and investment-banking businesses came roaring back. Things haven’t played out that way: Trading revenues globally have shrunk, more stringent regulation has forced the firms out of once-lucrative businesses, and higher capital requirements have kept returns in check.

Hedge Funds Bail on Copper as Goldman Predicts ‘Supply Storm’
Luzi-Ann Javier – Bloomberg
Copper is stuck in a rut. While other metals have shined in 2016, copper has struggled to gain traction and last week erased its gains for the year. Demand in China, the world’s biggest user, is slowing just as Goldman Sachs Group Inc. predicts a “supply storm” will hit the market and drag prices even lower.

Iraq Can Crush OPEC’s Oil Freeze Believers
By Julian Lee – Bloomberg
When the OPEC nations last met with Russia to agree an output freeze, back in April, it was Saudi Arabia that shot down the deal — refusing to take part without Iran. This time both countries may be more accommodating; the stumbling block is more likely to be Iraq.


UK regulator to monitor WhatsApp’s data sharing with Facebook
Britain’s data privacy regulator said on Friday it would monitor how popular messaging service WhatsApp shares data with parent Facebook Inc under a new privacy policy.

Brexit: London’s Fintech Sector is Falling Down
The recent Brexit vote in favor of Britain leaving the European Union has so far had mixed consequences. While there are few sectors that tend to benefit from it, London’s financial sector is not one among them. London has been trying hard over the past few years to gain the distinction of being the fintech capital of Europe. This ambition has led to the creation of a favorable atmosphere for many fintech startups, including those dealing with cryptocurrency and blockchain technology. With the country is now poised to leave the European Union, it stands to lose various trade and open market benefits it used to enjoy.

Tech sector bubble territory? Not so fast, say analysts
Fears that the tech sector is entering another bubble have been dismissed by analysts interviewed by CNBC in spite of concern surrounding market statistics that suggest rapid growth for the sector. The tech laden Nasdaq has risen more than 110 percent in the last 5 years while technology stocks listed on the S&P 500 have enjoyed similar gains.


U.S. SEC paid $3.75 million to BHP Billiton whistleblower: report
The U.S. Securities and Exchange Commission paid a BHP Billiton insider $3.75 million for detailed information in an investigation into alleged bribery of Asian and African officials, the Australian Financial Review reported on Monday.

Sebi probes portfolio services of leading fund houses
Joydeep Ghosh, Samie Modak & Chandan Kishore Kant – Business Standard
Portfolio management services (PMS) of some major fund houses have come under the scanner of the Securities and Exchange Board of India (Sebi). Sectoral sources said the regulator’s enquiry started after it was discovered that some of these PMS had not truly customised each investor’s portfolio and were using the same model portfolio across all investors. According to Sebi guidelines, the portfolio manager shall purchase or sell securities separately for each client and also segregate each clients’ funds and portfolio of securities and keep them separate. Sectoral people expect the enquiry to be a precursor to fresh guidelines on the PMS business.

Rising LIBOR: SECular shift
The Economist
During the financial crisis of 2008, LIBOR was a gauge of fear. The London inter-bank offered rate—at which banks are willing to lend to one another—leapt. (Even then it may have been too reassuring: banks have since been fined billions, and traders jailed, for rigging it.) Lately it has been climbing again: on August 22nd three-month dollar LIBOR rose above 0.82%. That is no cause for panic, but it is a seven-year high and 0.2 percentage points more than in June. What’s going on?

China Stock Traders Feel the Heat With 774 Probes in Two Months
China’s regulators are intensifying scrutiny of unusual movements in stocks as they seek to damp speculation in the nation’s financial markets. Exchanges in Shanghai and Shenzhen have opened 774 investigations into wild price swings since the start of July and halted 38 investor accounts, according to the two bourses’ official micro-blogs. They’re also being more public about their campaign, publishing case studies of “abnormal trading” and challenging companies for extreme price movements. Liu Shiyu, who was appointed chairman of the China Securities Regulatory Commission in February, has emphasized the need for a tough stance on market excesses.

South African finance minister to be charged with graft: newspaper
South African Finance Minister Pravin Gordhan could be charged with graft as soon as this week, the City Press newspaper reported on Sunday, citing senior sources in the police, the National Prosecuting Authority (NPA) and the tax service. The AFP news agency quoted an NPA spokesperson as saying “there is no decision whatsoever to prosecute anyone”, but that police had given prosecutors a docket on Friday. Neither Gordhan nor the prosecuting service could be reached by Reuters.

SEC: Purported Green Technology Company Defrauding Investors
The Securities and Exchange Commission today charged a California-based company and two executives with using baseless financial projections and other misleading statements to defraud investors in a venture to manufacture environmentally-friendly building materials.

Texas broker-dealer agrees to pay $2 million in fines, restitution
A Texas wealth management firm U.S. regulators said grew too fast to supervise agreed to pay more than $2 million in fines and restitution to settle charges its senior management failed to rein in partner offices where brokers were churning accounts.


India’s central bank: Reserve player
The Economist
Central banks need the confidence of investors to function well, so questions about their leadership and independence are seldom welcome. On August 20th Narendra Modi, India’s prime minister, belatedly appointed a new head of the Reserve Bank of India (RBI), nine weeks after Raghuram Rajan, the incumbent, surprised everyone by announcing he was stepping down. The new man, Urjit Patel, was an understudy to Mr Rajan—prompting plenty to wonder why the original cast member was, in effect, forced out. Beyond the usual way stations for central bankers—Yale, Oxford, a period at the IMF—Mr Patel was once a management consultant and an executive at Reliance Industries, a group headed by Mukesh Ambani, India’s richest man. He has been a deputy governor of the RBI since 2013.

Japan Pension Giant’s Losses Imply a $53 Billion Stock Splurge
Yuko Takeo and Shigeki Nozawa – Bloomberg
The world’s biggest pension fund has room for a Japan stock shopping spree after the value of its investments tumbled last quarter. The $1.3 trillion Government Pension Investment Fund would need to spend $53 billion on domestic shares to meet its target for the asset, according to Bloomberg News calculations, after the fund said Friday that holdings fell to 21 percent of investments at the end of June. Its goal is a quarter of the portfolio. The fund also has scope to offload $56 billion in domestic bonds after falling yields boosted their weight to 39 percent of the total, above the 35 percent level it seeks to hold.

Digging Into China’s Growing Mountain of Debt; Data that breaks the country’s borrowing into its bank, corporate, government, and household components can help you get a more-nuanced picture.
Jing Sun – Bloomberg
Some prominent investors are worried about China’s debt. George Soros sees an “eerie resemblance” between conditions in China now and those in the U.S. leading up to the financial crisis in 2008. “It’s similarly fueled by credit growth and an eventually unsustainable extension of credit,” Soros told the Asia Society in New York in April.

95% of China’s Electric Vehicle Startups Face Wipeout
Bloomberg News
Government raises technology standards, may limit makers to 10; Backers of 200-plus EV companies include Jack Ma, Li Ka-shing
China’s electric-vehicle industry, with 200-plus companies backed by a raft of billionaires, verges on a massive shakeout as the government imposes stricter technology standards on fledgling manufacturers and considers limiting their number to only 10.

Chinese Banks Dominate Asian Capital Markets As Bulge Bracket Firms See Shares Shrink
By Jillian Yue – China Money Network
The good old days are gone for bulge bracket banks in Asia.

Chinese banks braced over industrial restructuring; Banks expected to take the hit in restructuring of steel and coal industries
by: Don Weinland in Hong Kong – FT
China’s banks are set to be the biggest losers in the sweeping bailouts of the country’s steel and coal industries.


Ian Traynor, Europe editor of the Guardian, dies aged 60; The ‘journalist’s journalist’, Ian covered post-cold war Europe, including the fall of the Berlin Wall and the expansion of the EU
Julian Borger – The Guardian
Ian Traynor, the Guardian’s globally respected Europe editor, died in Brussels on Saturday after a short illness at the age of 60.

Google And The Newspapers – The EU Gets This Quite Gorgeously Wrong
Tim Worstall – Forbes
Opinions expressed by Forbes Contributors are their own.
The European Union is not an organisation to be afraid of doubling down on failure. That’s one of the problems with it of course, or perhaps more accurately one of the joys of observing it from outside. Well outside it by preference. Here they’ve decided that they’re going to go after Google GOOGL +0.28% and the newspapers. They’re going to change EU law so that it follows German law on the copyright of newspaper articles then indexed by search engines. This is something that has failed to achieve the desired goals in Germany. So, therefore, as in that startling EU logic, everyone must now do what has failed. Rather worse, it will actually increase the problem that the EU says that it would like to solve, the increasing dominance of the larger search engines and news feeds like Facebook

Cargill sees growth in plastics hedging; Swaps unit of commodity trading giant describes increasing need for derivatives on resins prices
Stella Farrington –
US-based commodity trading firm Cargill has high hopes for over-the-counter derivatives linked to plastics prices. The hedging tools are part of the product slate at Cargill Risk Management (CRM), the company’s US swap-dealer unit, which is aiming to build market share in commodity derivatives as banks retreat from the business. Cargill says plastics are a natural extension of its traditional focus area, agricultural commodities, since food-company clients often buy large volumes of plastics for…

***SR: I’ve got one word for you, Benjamin…no, wait – two words.

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