First Read

Bits & Pieces – Literally
Jim Kharouf, Sarah Rudolph and Doug Ashburn, JLN

In John’s ongoing journey to rebuild himself one part at a time, he is having shoulder surgery today. That makes two knees, two or three vertebrae and now one shoulder. He may actually be on his way to becoming the $6 million man, in terms of medical costs but not performance.

All levity aside, this does mark the third time in three years that John will be under the knife. If that weren’t bad enough, last week the Lothian family received the news that John’s uncle, family patriarch, retired professor and former member of the Wisconsin State Assembly, Thomas Lothian, passed away. Please keep the Lothians in your thoughts this week.

In John’s absence, the JLN staff is putting the newsletter together. Because of the Memorial Day holiday, we will not be publishing the newsletters on Monday, May 25, and we will not be publishing JLN Financials on the Friday before Memorial Day.

Here’s to a swift recovery and a good week.


Thomas A. Lothian, II, 1928-2015
My uncle, Thomas A. Lothian, II, died on Thursday at the age of 86 in a hospital in Milwaukee, Wisconsin. He was my godfather, the patriarch of my family for 70 years and a man of unquestioned integrity.

Tom was a college professor, teaching chemistry at the University of Illinois at Chicago for many years. He moved to Williams Bay, WI in the early 1970s and commuted from there into Chicago, many times with traders who had summer homes in the area.

He was a public servant all his life, whether a teacher, a village trustee, a county commissioner or even as a member of the Wisconsin Assembly while in his 70s.

Read the rest of the obituary at


ORC Chicago Discussion – Consolidation in Derivatives
May 20, 2015 – 4 p.m. to 7 p.m.
The Library Bar, 190 S. LaSalle St, 40th Floor Chicago
Interested in how consolidation has impacted financial technology?
Please join us for an industry-critical conversation about how consolidation in the derivatives space has impacted technology. Experts will lead an interactive discussion looking at how firms are managing the integration of systems, lessons learned and how to maximize benefits for the end users.
4:00 pm – Opening remarks by Orc Group
4:15 pm – Panel discussion
5:00 pm – Networking reception with cocktails and appetizers
Speakers include:
Carl Gilmore, Co-Head of Futures, Wedbush Futures, Jonas Hansbo, Chief Strategy Officer, Orc Group, Lynn Martin, Chief Operating Officer, ICE Clear US, Nancy Stern, General Counsel, Allston Trading, Rick Tomsic, Chief Executive Officer, Tradovate

Moderated by: Jim Kharouf, Editor in Chief, John Lothian News


For the Highest-Paid C.E.O.s, the Party Goes On
It pays to work for John C. Malone. The billionaire who built a cable and communications empire is 74, and no longer a chief executive himself. But Mr. Malone still exerts sway from various boardrooms, and the C.E.O.s at the companies he oversees are routinely among the best compensated managers on the planet. Last year, the largess was particularly notable.

**JK: No sign of exchange CEOs on that list.


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Navigating Bridges: Timely Updates in Financial Services
Gary DeWaal, Katten Muchin Rosenman LLP
The Chairman of the CFTC intimated last week before a Senate committee that some regulatory relief might be forthcoming. Meanwhile, a non-US cotton merchant was fined by the Commission for not filing required reports with the agency after self-reporting its own infractions and correcting its mistakes; and the adjudicatory arm of the Financial Industry Regulatory Authority recommended tougher sanctions for certain offenses.


Clearing houses are big risk, top U.S. federal researcher says
Douwe Miedema, Reuters
Clearing houses, whose role to guard financial stability was much expanded after the 2007-09 crisis, now pose threats themselves, the head of the top U.S. financial research agency told Reuters on Friday. The Office of Financial Research has looked at these firms, which are for instance run by CME Group Inc., Deutsche Boerse’s Eurex, and Intercontinental Exchange Inc, to see where risk is building up.

**JK: Oh great, now you tell us. Let’s go back to the way it was before.


Hedge funds loom large in oil price moves
Forget the interplay between supply and demand. When it comes to oil prices, hedge funds and speculators are exerting an uncommonly large influence, say many in one of the world’s most important markets.

***DA: As a CFTC commissioner during the original position limits fight, Bart Chilton warned of the danger of “massive passives.” I am interested in his position these days.


8th Annual FIA/FIA Europe International Derivatives Expo
Register for IDX 2015 by 22 May and save! Sign up early and save up to GBP 80+VAT!


Long run: Jack Schwager talks traders, old and new

Jack Schwager’s career runs from pre-financial futures markets to author of the Markets Wizard books to an online start-up today. As the recipient of the CTA Expo’s 2015 Lifetime Achievement Award in New York in April, he spoke with Jim Kharouf, editor-in-chief of John Lothian News about what he knows about about top traders and his new venture, Fundseeder, an online platform for the next generation of market wizards.

For Schwager, top traders don’t just post profits, but have great risk management as well.

“It doesn’t have to be complicated at all,” Schwager said of risk management systems. “Most risk management can be achieved with some very, very simple rules.”
Watch the video »

Lead Stories

Bank swap books suffer as CME-LCH basis explodes
A 13-fold increase in the relative cost of clearing interest rate swaps at CME instead of LCH.Clearnet is estimated to have cost dealers $20 million each. It may also reduce client flows into CME A build-up of interest rate swap exposure among dealers clearing at CME Group is being blamed for a two-week surge in the relative cost of sending trades there, rather than using a rival venue, LCH.Clearnet.

High-frequency trading faces tougher Bank of England scrutiny
Caroline Binham,
High-frequency trading is to face tougher scrutiny from the Bank of England in an attempt to reduce the risk of shocks to the financial system. It is believed to have been a contributory factor in the crash of US equities five years ago and gained public notoriety last year following the publication of the book Flash Boys.

Trader Wrestles With Lehman Estate Over Big Bonus
When Lehman Brothers Holdings Inc. abruptly filed for bankruptcy in September 2008, many stunned employees walked away with little more than boxes filled with desktop knickknacks. A little-known bond trader, Jonathan Hoffman, took something else: an IOU for $83 million in unpaid bonuses.

Chaos Ensued in Arb Shops Over Fishy Avon Bid
MoneyBeat – WSJ
Traders who bet on the likelihood of mergers, known as arbitrageurs, said chaos ensued in their shops on Thursday when the first headlines about an $18.75-per -share bid for Avon Products Inc.AVP -1.56% hit on Thursday late morning.

Why bank non-execs need danger money
If you have ever wondered why non-executive directors of banks are paid five times the national average wage for a (very) part-time job, the Prudential Regulation Authority may have an answer: it is danger money. Under proposals covering the so-called Senior Manager’s Regime, non-execs could find themselves threatened with bankruptcy or even jail if their bank fails.

Janet Yellen Takes a Back Seat to China
Bloomberg View
Traders have been panicking over the sudden rise in global bond yields triggered by the expected tapering of the Federal Reserve’s stimulus programs. But an unlikely savior may emerge to limit the damage: China. That’s the view of researchers at Oxford Economics, who think the world’s second-largest economy is starting to eclipse the United States as the most influential player in setting global borrowing costs.

Ready for the World Stage? As China Opens Up, Its Central Bank Remains a Mystery
Bloomberg Business
In its quarterly report, the People’s Bank of China questioned the merits of transparency, saying too much openness could lead to “pressure from various sides.” Such a stance and its unscheduled policy moves come as Governor Zhou Xiaochuan and Premier Li Keqiang loosen barriers to money flows and seek to establish the yuan as an international currency.


Why Obama Is Wrong and Warren Is Right on Trade Bill Quarrel
Bloomberg Politics
Elizabeth Warren has warned leery Democrats that a fast-track trade bill could undo U.S. laws such as the Dodd-Frank banking regulations later. A number of constitutional scholars and other legal experts say she’s right.

EY predicts pre-MIFID algo flurry
The Trade News
Traders should expect up to 40 algorithms on the market to trade fixed income and foreign exchange by the time the Markets In Financial Instruments Directive II (MIFID II) takes effect in 2017, according to research from EY.

Remarks At The Inaugural SEC Equity Market Structure Advisory Committee Meeting, SEC Commissioner Kara M. Stein, May 13, 2015
I urge each of you to focus on thinking about what we must do to improve the structure and operations of the U.S. equity markets on behalf of all Americans. That is the true end goal. This includes considering and seeking out views from those not in this room today. For example, while the discussions you undertake will focus on the market structure of stocks, there is no representative from a public company that issues the underlying stock. I think that we also have to be mindful that we do not have representation from retail brokerage. We need to carefully consider these constituencies and interests as we move forward.

Bank of England to test UK banks on coping with illiquid markets
Yahoo News UK
Britain’s banks will be tested this year on how they would cope with investors clammering to sell bonds in fragile markets, Bank of England Deputy Governor Andrew Bailey said on Friday.

China Securities Regulatory Commission: FAQ On Beneficial Ownership Under SH-HK Stock Connect

Exchanges & Trading Facilities

Little progress seen so far in turning Hong Kong into a commodity trading centre
South China Morning Post
Three years after the local exchange bought the London Metal Exchange, little progress has been made in turning Hong Kong into a commodity trading centre.

CME Group and Korea Financial Investment Association Sign Letter of Intent for Greater Collaboration
CME Group
CME Group, the world’s leading and most diverse derivatives marketplace, and Korea Financial Investment Association (KOFIA), announced today they have signed a Letter of Intent (LOI) to explore mutual collaboration in the areas of market education and training.

CME Product Modification Summary: Name Of E- Micro Nifty Index Futures Changed To E-Mini Nifty Index Futures
Effective Sunday, May 17, 2015 for trade date Monday, May 18, 2015, and pending all relevant CFTC regulatory review periods, please be advised that the Chicago Mercantile Exchange, Inc. will amend the name of the E- Micro Nifty Index Futures (Clearing Symbol MNF/Globex Symbol MNF) to E-Mini Nifty Index Futures.

Intercontinental Exchange Announces 2015 Annual Meeting Results
Intercontinental Exchange (NYSE: ICE), the leading global network of exchanges and clearing houses, announced today the result of the company’s 2015 Annual Meeting of Stockholders, which was held May 15, 2015.

Nasdaq Stockholm Lists Bitcoin-Based Certificate
Nasdaq announced that Bitcoin Tracker One, a tracker certificate that uses the digital currency Bitcoin as underlying asset, starts trading today at Nasdaq Stockholm. Bitcoin Tracker One is issued by XBT Provider, part of the KNC Group.

Cleartrade Exchange Announces First Trade Of New Mini Fertilizer Futures
Cleartrade Exchange (CLTX), the Singapore regulated futures exchange for commodity derivatives, announces the first trade for its new mini fertilizer futures contracts. The contracts launched on Thursday May 14th with the first trades observed on CLTX later that day.

Hedge Funds & Managed Futures

FX swings knock company earnings
Companies’ financial results have revealed the impact of unprecedented currency volatility on revenues and is a running theme this year, say analysts, emphasizing the need for a flexible hedging policy.

Hedge Funds Close Doors, Facing Low Returns and Investor Scrutiny
For decades, nearly everything that the billionaire Julian Robertson touched turned to gold. Mr. Robertson, founder of the hedge fund Tiger Management, seeded a network of hugely successful “Tiger Cubs” — companies that in turn seeded more talent. It became the closest thing the hedge fund industry had to a dynasty.

Digital currencies: A gold standard for bitcoin
Anthem Blanchard grew up with gold. His father was such a dedicated goldbug that he flew a biplane towing a 50-foot sign declaring LEGALIZE GOLD! at President Richard Nixon’s second inauguration to promote the idea that ordinary Americans should be allowed to buy it.

Central banks chase investor herd into liquidity trap
Investors used to thinking that vast quantities of cheap central bank money make financial assets a one-way bet have had a rude awakening in recent weeks, as that same conventional wisdom created frailties in the functioning of markets. The latest correction may look little more than a blip in a eight-year rally. But it has exposed a painful truth about an essential issue – liquidity.

Bond-Market Crash Has Wall Street Divided on What’s Next
Bloomberg Business
Maybe, just maybe, this whole bond rout is ending. The global selloff that’s set investors on edge finally slowed last week, and some analysts are saying the worst is over. Treasuries look fairly valued given the outlook for inflation and interest rates, according to Bank of America Corp. — although with plenty of caveats. In Germany, options traders convinced a bund-market crash was all but inevitable less than two weeks ago have scaled back most of those bets.

King Ken: Recovered Citadel chief takes the hedge fund throne
In April, a hedge fund firm in Chicago snagged arguably the most sought after economic mind in the world: Ben Bernanke. “He has extraordinary knowledge of the global economy,” Citadel founder and CEO Ken Griffin crowed in a statement announcing that his investment shop had hired the former Federal Reserve chairman as a senior advisor. “His insights on monetary policy and the capital markets will be extremely valuable to our team and to our investors.”

Banks & Brokers

BAML Makes Equities Push in London and New York
MoneyBeat – WSJ
Bank of America Merrill Lynch has made more than 20 hires in equity sales and trading in the US and Europe in recent weeks, as it joins a number of rivals in looking to either consolidate or grow their market share in the business.

Morgan Stanley Names New Global Co-Head of FIG
MoneyBeat – WSJ
Morgan Stanley MS -0.76% has promoted John Esposito to global co-head of its financial institutions group, a role formerly held by its new chief financial officer Johnathan Pruzan and former CFO, Ruth Porat.

Swiss broker to set up London repo venue
Philip Stafford,
Tradition, the Swiss interdealer broker, is looking to reinvigorate Europe’s struggling repo market with a new electronic trading venue where pension funds and corporations can pawn high-quality assets for cash.

Australian Broker BBY Enters Administration as Rescue Talks Fail
Bloomberg Business
BBY Ltd., an Australian brokerage and wealth manager, entered administration after negotiations to raise capital fell through. Accounting firm KPMG was appointed Monday as voluntary administrator, according to an e-mailed statement from receiver PPB Advisory, which is working for BBY’s bankers.

Clearing & Settlement

Cyber security tops DTCC risk barometer
“US post-trade utility the DTCC is reporting that almost half of the respondents in its most recent Systemic Risk Barometer Study cited cyber security as their top concern, making it the single largest fear and doubling its rating compared to just 12 months ago.

Foreign investors welcome regulator’s stance on China shareholding rights
Under Stock Connect, foreign investors’ Shanghai shares are held by the HKEx’s clearing house on their behalf, in a legal structure known as beneficial ownership. The HKEx in turn holds the shares onshore in China at the Shanghai Stock Exchange’s clearing house, ChinaClear.

Indexes & Products

New ETFs Aim to Better Track Commodity Prices
AccuShares’ new lineup of ETFs attempts to minimize the costs and tracking error incurred by most commodity ETFs. But it adds a whole different layer of complexity and cost instead.

Human Stock Pickers Gain Against Indexes
For now at least, human stock pickers are making a comeback against the overall market and rivals who just aim to clone its performance.

Nobel Winner’s Math Is Showing S&P 500 Unhinged From Reality
Bloomberg Business
If you sold every share of every company in the U.S. and used the money to buy up all the factories, machines and inventory, you’d have some cash left over. That, in a nutshell, is the math behind a bear case on equities that says prices have outrun reality.

Offering Choices – The S&P BSE AllCap
S&P Dow Jones Indices
The importance of choice is gaining ground in all areas of life. I really resonated to the latest advertisement from Amazon, “Hindustani Dil Kahta Hai, Aur Dikhao, Aur Dikhao!” (“The Indian heart says, Show me more, show me more!”). I would agree that choice is not only important in our day-to-day lives; it also holds true while making investment decisions. A well-classified universe helps in avoiding confusion, as there are innumerable options to choose from and to use for setting goals or requirements. Good and clear categorization helps simplify the process.


Orc Obtains CBOE Certification For Next-Generation Trading Platform
Orc, a global leader in trading technology, today announced that its next-generation Orc Tbricks trading platform now offers a certified interface to the Chicago Board Options Exchange (CBOE), including the CBOE Futures Exchange (CFE). The new high-speed interface enables quoting and trading a broad range of products, including equity options and index options such as CBOE Volatility Index (VIX Index) options.

How Aging Millennials Will Affect Technology Consumption
Last year, millennials gave birth to 85% of the babies in America, according to Goldman Sachs. Or in other words, they aren’t as young as you might have imagined. It is a fact of demographics that there are now more people age 24 in America than any other age, a consequence of the “baby boomlet” that happened once post-WWII baby boomers had children of their own.

The next big acquisition craze: Fintech
USA Today
Emerging financial technologies has Wall Street companies worried that if they don’t asses the threat they could suffer from similar disruption problems that have plagued publishing, retail and travel industries. Kaja Whitehouse reports. Michael Monday and Kaja Whitehouse

eClerx & Comply Exchange announce alliance to solve tax reporting pressure
eClerx a global provider of business process support to the world’s largest financial institutions, today announced a partnership with Comply Exchange, to form an end-to-end solution for tax reporting. The partnership instantly provides financial entities with a scalable tax reporting solution to support the many cumbersome activities associated with customer segmentation, client outreach, data validation and reporting of tax status.


US appeals court restores guilty plea in ‘squawk box’ case
A federal appeals court on Friday restored the guilty plea of a former Merrill Lynch administrative assistant whose testimony helped convict six former brokers and traders who traded on news from a company “squawk box.” The 2nd U.S. Circuit Court of Appeals in New York said a lower court judge had erred in expunging the conviction of Irene Santiago, who had pleaded guilty in 2005 for lying to investigators and testifying falsely to a grand jury.

Environmental & Energy

Oil Investors Take a Closer Look at Production
A spotlight has landed on a previously overlooked metric as oil traders drill deeper for clues on price movement. More often, investors are looking to weekly U.S. oil-production data from the U.S. Energy Information Administration for signs the global glut of crude that sunk prices last year is starting to shrink.

European Commission – Emissions Trading: 2014 Data Shows Emissions Reduction
Emissions of greenhouse gases from installations participating in the EU Emissions Trading System (EU ETS) are estimated to have decreased by about 4.5% last year, according to the information recorded in the Union Registry.

Has the Kyoto protocol made any difference to carbon emissions?
By Duncan Clark – The Guardian
Under the Kyoto protocol most developed nations other than the US committed themselves to targets for cutting or slowing their emissions of the key greenhouse gases that cause climate change.

Britain risks losing out in carbon debate if it exits EU
By Barbara Lewis and Susanna Twidale – Reuters
Should Britain vote to leave the European Union it would be relegated to the sidelines over important carbon market reforms vital to safeguarding EU environmental targets over the next decade and beyond.


Does China already have the highest level of margins vs free float in market history?
FT Alphaville
Margin positions in the Chinese equities market have continued to rise in the past month, since we wrote our first Twilight Zone note on April 20. Since then, margin positions have risen by 9.2% MoM to RMB1.9 trillion, or an unprecedented 8.9% of the market capitalization of the combined free float of Shanghai-Shenzhen stock markets. This could already be the highest level of margins vs free float in market history

Beijing to Unveil South America Investments
Chinese Prime Minister Li Keqiang is set to bring greater financial support to South America this week, part of Beijing’s broader effort to reassure developing countries that have been hit by China’s declining demand for raw materials. On Tuesday, Mr. Li is expected to discuss with Brazilian President Dilma Rousseff plans to build a giant railway, corporate acquisitions and the disbursement of billions of dollars for the overhaul of Brazil’s aging infrastructure as South America’s largest economy gears up for the Rio Olympics next year.

Amid China slowdown, foreign creditors face bankruptcy riddle
As China’s economy slows and Beijing becomes more relaxed about letting its companies fail, a rising number of foreign bondholders risk being caught up in the country’s unpredictable court system.

Frontier Markets

Thai Economy Struggles to Grow as Exports Wilt
Thailand’s modest economic growth in the first quarter of 2015 is casting a shadow on the recovery of Southeast Asia’s second-largest economy, which has been struggling with sluggish domestic consumption and global demand.

Investment from emerging nations surges
Foreign direct investment by emerging economies surged by almost a third last year as companies in China and elsewhere sought new opportunities offshore as a respite from slowing growth at home, according to new UN figures to be released on Monday.

India Central Bank Downplays Odds of Early Rupee Convertibility
Bloomberg Business
An Indian central bank official downplayed the chance of early progress in making the rupee fully convertible as China seeks a bigger international role for its currency.

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