John Lothian Newsletter: Asian Exchanges Eye Hong Kong-Shanghai Trading Link; BATS Becomes Largest Equities Trading Venue in July; ICE patents were subject of legal challenge

Aug 12, 2014

First Read

The Dog Days of Summer
John Lothian
We were as shocked as anyone upon hearing of the death of actor and funnyman Robin Williams by apparent suicide. He had reportedly been suffering from depression for a number of years. We are sorry to lose such a talented performer and offer our sympathy and prayers to his family and many friends.

In the dog days of summer, we sometimes get off our schedules and routines. It is easy for us to get lost, as Williams seemingly did. For someone with so many friends, it is hard to believe he felt so alone as to kill himself.

Last week some of the interns at our social event asked me about the industry. I told them all the great stories, but shared some of the harder ones too. I told them about how this industry can kill you, just like many other ones can. I told them I do what I do to help people manage their risks, not just buy and sell oriented ones.

One of those risks is mental health. I have seen people I work with destroyed by the pressures of this industry. I know of multiple suicides, including one of a young man whose girlfriend broke up with him and he incurred a $70K trading debit. He thought his life was over and that he was so alone no one would find him in his apartment, so he killed himself with his foot out the door.

There are other ways to kill yourself too, like too much drinking, or drugs or even food. I have seen all of them.

We need to be ever vigilant on behalf of our family, friends and associates. I always tell my Boy Scouts that being cheerful is one of the best aspects of the Scout Law as it helps you help other people at all times. A smile is something that is hard not to return and when it is returned it produces endorphins which makes the other person feel good.

So remember to be cheerful, help people at all times and just smile at them. It is a good start.


Debate Over High-Frequency Trading on IEX Muddied by Trade Counting
Bradley Hope – MoneyBeat – WSJ
IEX Group Inc., the start-up trading venue operator that promises to protect investors from predatory trading activity, has found itself at the center of a fierce debate about just how much of the trading in its dark pool is done by high-frequency trading. With IEX expected to file its application to become a full-fledged stock exchange with the Securities and Exchange Commission sometime in the next week, the stakes in the back-and-forth are higher than usual. However, looking closer at the details, it does appear to be a somewhat misleading debate.

***** Bradley Hope does a nice job of dissecting the IEX HFT debate.


Chinese options “could launch this month”
William Mitting – Futures & Options World
ETF options could be launched in China as soon as this month as the country gears up for the full launch of options trading, a leading lawyer has said. China is undergoing a widespread reform of its financial markets as it seeks to build Shanghai as a global financial centre and develop its capital markets.

***** And who can trade them?


Under SEC Questioning, Jokes and Jitters
Jean Eaglesham – WSJ
The SEC initially released three heavily redacted transcripts related to its investigation of AIG’s near-collapse. After the Journal appealed, the agency removed almost all the redactions. The documents provide a rare peek into the legal wrangling that took place behind the scenes as investigators tried to piece together the events that led to the crisis and identify any wrongdoers. They show interrogations that were at times intense and at other times devolved into discussions about Roman history and how to interpret emails whose authors used smiley faces.

***** This is the last time I will use “Et Tu Brute :-)”


Fund groups review approaches to social media after FCA move
Julia Rampen – Investment week
Fund groups are to review their current policies regarding social media after the Financial Conduct Authority published guidelines on what groups can put on websites such as Twitter.

***** Regulatory idiocy. No, I can’t say that. I don’t have enough characters left after the required disclosure.


Celebrating Greenspan’s Legacy of Failure
Barry Ritholtz – Bloomberg
On this day in 1987, Alan Greenspan became chairman of the Federal Reserve Board. This anniversary allows us to take a quick look at what followed over the next two decades. As it turned out, it was one of the most interesting and, to be blunt, weirdest tenures ever for a Fed chairman.

***** Yes, I remember it. He became chairman right before the stock market crash of 1987, which still gives me the willies.


The Supercomputer Set to Shed Light on Dark Pools: Video
Better Markets CEO Dennis Kelleher discusses the proposed SEC supercomputer that would be used to track orders and peer into dark pools. He speaks with Pimm Fox on “Taking Stock.”

***** Really, Pimm is someone’s name?


Putting High Touch in Low-Touch Trading
Robin Farnan – TABB Forum
New levels of collaboration between the high-touch and low-touch trading services that firms offer their clients, and an intricate balance between multiple channels, infrastructure and data, are needed to determine when, where and how to trade.

***** I like a nice medium touch, not too high, not too low.



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Lead Stories

Asian Exchanges Eye Hong Kong-Shanghai Trading Link
Gregor Stuart Hunter, Kosaku Narioka and Kwanwoo Jun – WSJ
Exchanges in Asia are nervously eyeing a new trading link between Hong Kong and Shanghai, and mulling how to stay competitive on worries it will soak up funds from global money managers. Amid already tepid trading volumes across the region, officials at exchanges in Asia are worried the Hong Kong-Shanghai link will leave less money for them if it proves successful and they don’t take measures to keep up.

BATS Global Markets Becomes Largest Equities Trading Venue in July
Adil Siddiqui in Executing Venue – Forex Magnates
The summer slowdown affecting financial trading monthly metrics was invisible in US equity markets as one of the largest ECNs saw a sharp jump in trading volumes. July became a historic month for the venue as it surpassed its pervious value of trades and became the world’s largest stock exchange operator for the first time. The rise in activity comes as traders reinvest funds back into rising stock markets.

ICE patents were subject of legal challenge
William Mitting – Futures & Options World
At least two of the patents acquired by the IntercontinentalExchange last week have been the subject of legal challenges for IP infringement. ICE announced the acquisition of seven patents on Friday in a bid “to prevent third parties from using these intellectual property rights against our customers”.

Munich Court Mulls Filing Charges Against Deutsche Bank’s Fitschen
Eyk Henning and Isabel Gomez – WSJ
A Munich court is reviewing a prosecutor recommendation to file charges against Deutsche Bank AG co-Chief Executive Jürgen Fitschen and former board members over alleged false testimony in the bank’s legal battle with the heirs of former media mogul Leo Kirch, two people close to the matter said Tuesday.

S.E.C. Finds Bond Fraud in Kansas
Federal regulators said Monday that Kansas had defrauded investors by bringing $273 million of bonds to market in 2009 and 2010 without disclosing that its pension system was deeply underwater and that the investors ran a risk of not being fully repaid.

South Korea to double daily stock trading limit
Song Jung-a in Seoul – Financial Times
South Korea plans to expand the daily price movement limit on stocks traded on the main board for the first time in nearly 16 years, as part of government efforts to revitalise the financial sector.

Exclusive: Standard Chartered to scour records for money laundering, with penalty at stake
Brett Wolf – Reuters
Standard Chartered Plc will soon begin sifting through a mountain of data for signs of possible money laundering or other criminal activity, as a result of faults in the software critical to its anti-money laundering compliance program, two sources with knowledge of the matter said.

The inside is getting out
Dan McCrum – Financial Times
Some board members are not the best judge of value when it comes to their own stock, but overall you might expect buying by insiders to be a good sign. That theory has prompted Citi to take a look at purchases by directors, as they try to work out whether stock markets are overvalued.

U.S. Banking Industry Profits Racing to Near-Record Levels
Robin Sidel And Saabira Chaudhuri – WSJ
Banks are lending to companies and individuals at the fastest pace since the financial crisis, helping propel profits to near-record levels. U.S. banks posted $40.24 billion in net income during the second quarter, the industry’s second-highest profit total in at least 23 years, according to data from research firm SNL Financial.

ISDA plays down speculative activity
Futures & Options World
The International Swaps and Derivatives Association (ISDA) has published a report arguing that the amount of speculation in the over-the-counter (OTC) derivatives market is commonly misrepresented.


Fed gives preview of future non-bank scrutiny
Gina Chon – Financial Times
The scrutiny of AIG and GE Capital, which are overseen by the Federal Reserve, is a preview of what other non-banks may face if they are also designated as systemic risks to the financial system.

Standardisation to emerge in fixed income clearing, new research finds
Charlie Woodward – The Trade
A level of standardisation will emerge as clearing houses with global reach establish regional entity tie-ins with clearinghouses in the rest of the world, TABB Group research has found.

Do ‘Living Wills’ for Banks Even Make Sense?
STEPHEN J. LUBBEN – Dealbook – NY Times
Last week, while some of us were trying to do our part to reduce the world’s oyster population, the Federal Reserve and the Federal Deposit Insurance Corporation decided that it was time to reject the “living wills” submitted by all of the major financial institutions.

CFTC’s Division of Market Oversight Extends Conditional Time-Limited No-Action Relief to Australian-Based Trading Platform Yieldbroker Pty Limited
The Commodity Futures Trading Commission’s (CFTC) Division of Market Oversight (DMO) today announced the issuance of a no-action letter extending the conditional time-limited relief provided in CFTC No-Action Letter No. 13-76 for Australian-based trading platform Yieldbroker Pty Limited (Yieldbroker).

Fatca compliance slowing down after ‘ambiguous’ IRS notice
Jessica Meek –
Banks are reining in their Fatca compliance programmes in light of a notice the US Internal Revenue Service (IRS) released in May outlining a transitional period for Fatca compliance, one expert warns.

EU-US Dialogue Project promises action on reinsurance collateral
Louie Woodall –
European regulators are pushing the US to reduce reinsurance collateral requirements through a covered agreement between the European Union and US federal government.

New Zealand’s Financial Markets Authority: Strategic Finance Settlement Proceeds To First Distribution

Exchanges & Trading Facilities

BATS Global Markets Reports July Volume and Activity
U.S. Equities Market Share Totals 20.3%; 21.5% Market Share in Europe

Hospitality Invest Lists Its First Bond Issue On Oslo Børs

NASDAQ Announces End-Of-Month Open Short Interest Positions In NASDAQ Stocks As Of Settlement Date July 31, 2014

MIAX Options – Customer Cross Order Type Deployment Schedule – Second Rollout Of Symbols

MIAX Options Exchange – MIAX Price Improvement Mechanism (PRIME) Deployment Schedule – Second Rollout Of Symbols

Mexican Stock Exchange Releases Monthly Financial Report For July 2014

Hedge Funds & Managed Futures

Boutique firms’ M&A success starts to fade
Daniel Schäfer in London – Financial Times
After rapidly eating away at larger banks’ market share since the financial crisis, boutique firms’ success story in advising on mergers and acquisitions shows the first signs of fading.

Barclays Quant Trading Unit Said to Take 60 Employees in Spinout
Kelly Bit – Bloomberg
A Barclays Plc (BARC) trading team that’s leaving this year to start a quantitative investment firm will take 60 bank employees with them, adding to Wall Street’s migration to the $2.8 trillion hedge-fund industry.

Top Canada finance ministry official to join Blackrock
Top Canadian finance ministry official Jean Boivin will join Blackrock Inc, the world’s largest money manager, the firm said on Monday.

Two Creeks Hedge Fund Launches With $1.5 Billion
Rob Copeland – WSJ
A former top executive at Ziff Brothers Investments launched a new hedge fund with $1.5 billion, marking one of the biggest startups for the industry in 2014.

JPMorgan Strikes Deal to Spin Off Its Private Equity Arm
WILLIAM ALDEN – Dealbook – NY Times
JPMorgan Chase has agreed to spin off its private equity unit through a deal with two investment firms, realizing a long-held goal for the giant bank.

Welcome to the World of ‘Pension Smoothing’ – The CFO Report
Vipal Monga – WSJ
A government accounting maneuver to pay for road repairs, subways and buses will allow many U.S. businesses to delay billions of dollars in pension contributions for retirees.

Gross Cuts U.S. Government-Related Debt at Pimco Total Return Fund
Min Zeng – WSJ
Bill Gross cut U.S. government-related debt holdings at the Pimco Total Return Fund in July as bond prices pulled back. U.S. government-related holdings accounted for 45% of the $223.1 billion bond fund at the end of last month, compared with 47% at the end of June, according to data available late Monday afternoon

Blackstone inks its second European deal of the year
Becky Pritchard – Financial News
Private equity giant Blackstone, which has been cautious on doing new buyouts in Europe this year amid rising asset prices, has bought French firm Alliance Automotive for around EUR440 million — a deal that is only its second in the region this year.

Nest Q&A: ‘Pretty quickly we will be up in the billions’
Mark Cobley – Financial News
The National Employment Savings Trust, the public pension set up by the government in 2011, has set out its agenda for the next three years, a plan that emcompasses infrastructure funds; more social and environmental activism; and grappling with the after-effects of the UK Chancellor’s radical reforms to the annuities market

Banks & Brokers

Banks face biggest ever class action over late fees
Pia Akerman – The Australian
AUSTRALIAN banks are set to be the target of the country’s biggest ever class action as the fight over unfair penalty fees dramatically broadens.

Finance: The FICC and the dead
Tracy Alloway and Michael MacKenzie – Financial Times
The top brass at Citigroup gathered early this summer at their annual off-site meeting to discuss the fortunes of the US bank. The presentations covered a wide range of topics, not least Citi’s stubbornly low share price. But one, by credit strategist Matt King, stood out: “Who Stole the Market’s Mojo?”

Nearly half of firms get at least 50% of recurring revenue from fees
Laura Miller –
Nearly half of advisers already have the majority of their recurring revenue coming from fees, according to a FundsNetwork survey, less than two years to go until the April 2016 deadline where all on-platform assets need to be moved to clean share classes which do not pay trail commission.

Santander joins third FinTech Innovation Lab
Anna Irrera – Financial News
Santander, the banking group that last month launched a $100 million financial technology fund, has emerged as a backer for Accenture’s latest fintech accelerator programme.

Barclays adds new London crime fighter
Lucy Burton – Financial News
Barclays has hired an anti-money laundering specialist in London and is exploring plans to launch a dedicated financial crime team in Asia Pacific, according to a person familiar with the situation.

Goldman Sachs Conference Call to Announce 2014 Third Quarter Results

Clearing & Settlement

US to force swaps overhaul to improve wind-downs
Philip Scipio – Reuters
The way the world’s largest banks use derivatives is set for drastic change after the US Federal Reserve and Federal Deposit Insurance Corp moved to strip financial counterparties of early termination rights on new derivatives contacts in the event of some future bank failures.

Additional trade reporting requirements come into force
Jon Watkins – The Trade
Buy-side firms across Europe must comply with new mandatory reporting requirements from today, providing information on the valuation of transactions and collateral posted for OTC and exchange-traded derivatives.

Banks shun Emir’s indirect clearing service
Cecile Sourbes –
Banks are still incapable of offering indirect clearing for over-the-counter derivatives more than two years after rules for the service were added to the European Market Infrastructure Regulation (Emir) – an attempt by regulators to ensure small OTC market participants would be able to clear. Big banks say the terms on which they would have to offer the service make it commercially unviable.


BOAT customers navigate their way to Cinnober
Jon Watkins – The Trade
Customers of the OTC trade reporting service BOAT have all moved to the system’s new owners Cinnober, the Swedish financial technology provider. Cinnober acquired BOAT in July from Markit, reviving the service set to shut down by the end of the year.

FIX Trading Community Awards Global Recognition For Positive Impact Contribution To Connamara Systems QuickFIX Open Source Project
Connamara Systems, LLC (Connamara), a provider of services to exchanges, swap execution facilities, commodity trading advisors (CTAs) and hedge funds, today announced the non-profit, industry-driven standards body for global financial trading, FIX Trading Community, awarded Connamara Systems and its founder, Jim Downs, recognition for the QuickFIX Open Source Project’s positive impact in the global trading community and FIX standard adaptation on the FIX Trading Community’s 20th Anniversary.

Faisal Selects SunGard for Risk Management
James Rundle – WatersTechnology
Faisal Islamic Bank of Egypt has tapped SunGard’s risk management suite in order to enhance its operational apparatus, the vendor has announced.

Thomson Reuters Releases “Big Data In Capital Markets” Survey Results
Thomson Reuters, the world’s leading source of intelligent information for businesses and professionals, has today published the results of a commissioned survey ‘Big Data in Capital Markets: At the Start of the Journey,’ prepared by Aite Group to assess the implementation of big data strategy among financial services firms.

Misys Acquires Custom Credit Systems, A Leading Provider Of Credit Workflow And Loan Origination Software


CFTC Orders New York Resident Jacob N. Stein to Pay More than $344,000 in Restitution and Civil Monetary Penalty for Commodity Pool Fraud and Misappropriation
The U.S. Commodity Futures Trading Commission (CFTC) today announced that it entered an Order requiring Jacob N. Stein of Hankins, New York, individually and doing business as TEPdesign, Inc., to pay restitution of $244,400 to defrauded customers and a $100,000 civil monetary penalty, for committing fraud and misappropriation in connection with a commodity pool that traded leveraged or margined off-exchange foreign currency contracts (forex). Neither Stein nor TEPdesign, Inc. has ever been registered with the CFTC.

Environmental & Energy

PACOM not waiting on politics to plan for climate change challenges
Stars and Stripes
As Congress remains gridlocked on more than 200 bills related to climate change, U.S. Pacific Command is forging strategies with partner nations in the region to mitigate the security effects of global warming.

PG poll: Scientific consensus on climate change has not permeated the public
James P. O’Toole, Pittsburgh Post-Gazette
Despite the scientific consensus that global warming is occurring and caused by human activity, a new survey conducted for the Pittsburgh Post-Gazette demonstrates that many Americans remain uncertain about the impact of climate change and the need for government action to address it.

Deep emissions cuts needed by 2050 to limit warming: U.N. draft
Deep cuts in greenhouse gas emissions of 40 to 70 percent by mid-century will be needed to avert the worst of global warming that is already harming all continents, a draft U.N. report showed.


Stock Connect scheme undergoes first trial
Jennifer Li – The Standard
The first trial of the Shanghai-Hong Kong Stock Connect took place in the mainland yesterday, with 11 Hong Kong-listed firms taking part.

Hong Kong Financial Regulators Go On Blogging Spree
Ned Levin – MoneyBeat – WSJ
It’s been a bloggy few days for Hong Kong’s financial regulators. Last Friday, Charles Li, the chief executive of Hong Kong’s stock exchange, opened up about challenges in implementing a trading link between Hong Kong Exchanges & Clearing Ltd.0388.HK +0.11% and the Shanghai Stock Exchange on his personal blog. On Sunday, Hong Kong’s mustachioed Financial Secretary John Tsang posted his own blog about his concerns that Hong Kong could face a “perfect economic storm” brought about by a slowing economy and political uncertainty.

China Probes Threaten to Squeeze Foreign Profits
China’s antitrust crackdown signals a new era of regulatory scrutiny in the country and threatens to end the days when products from Audi sedans to Starbucks lattes generate fatter profits in Beijing than in London or New York.

Ton-up for stock connect, but challenges remain
Simon osborne – The Trade
Over 100 participants in Hong Kong have signed up for the new Shanghai Hong Kong Stock Connect, the pipeline for two-way securities investment between the mainland and Hong Kong which is scheduled to go live this year. Nevertheless, there are still hurdles to overcome.

SGX securities volume remains in doldrums
Simon Osborne – The Trade
Whilst securities turnover at the Singapore Exchange (SGX) improved 2% in July from June, the total traded value of S$21 billion was still 24% down from July 2013.

Chinese trusts face slower growth as economy weakens
Gabriel Wildau in Shanghai – Financial Times
China’s trust sector, the largest segment in the country’s expanding shadow-banking system, grew at its slowest pace in more than two years in the second quarter as trusts grew cautious about lending into a weak economy.

KRX To Hold KOSPI Market Joint IR Conference

Frontier Markets

Money-Market Investors Risk Losses on African Bank Debt
Robert Brand – Bloomberg
Investors in South African money-market funds holding African Bank Investments Ltd. (ABL) securities are facing capital losses even as money managers slash interest payments to offset writedowns of the debt.

Scholar Fees Targeted by Regulators: Islamic Finance
Bankers and officials from Bahrain to Indonesia are standardizing documents and bond structures to limit impediments caused by varying interpretations of Shariah law. It can take up to 12 weeks to arrange a sukuk sale, compared with eight for a non-Islamic debt offering, according to law firm Clifford Chance LLP. A well-respected expert can charge between $500 and $1,000 an hour in the Middle East, according to two scholars, who declined to be named due to the sensitivity of the issue.

Ecobank’s investment banking business expands into Kenya
Kanika Saigal – Euromoney Magazine
Nairobi is to become the location for Ecobank’s first investment banking business in east Africa and will provide a platform to access the developing capital markets in the region.

DGCX posts monthly growth but annual fall
Futures & Options World
Trading on the Dubai Gold and Commodities Exchange (DGCX) has grown by 18% month-on-month in July. The firm traded 992,061 contracts, which it valued at US$29.95 billion, however the volume has fallen year-on-year, when in July 2013 volumes in currency futures alone reach 1,450,041.

Cairo Amman Bank Flash Comment: JD Deposits At Banks Up By 404 Million JD In June 2014, Weighted Average Interest Rate Continues To Drop

The Egyptian Exchange (EGX) Monthly Statistical Report July 2014


The link between capital and inequality
John Bakie – The Trade
What is Capital in the Twenty-First Century about?
The book is written by French economist Thomas Piketty and focuses on wealth inequality in Western Europe and the US since the 18th century. It argues that concentration of wealth among a select few is a core feature of capitalism that needs to be tempered by intervention from states, otherwise it threatens the democratic order.

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