John Lothian Newsletter: Bats Said in SEC Settlement Talks Over High-Speed-Trading Perks; CME to Start EU Gas Futures as Trayport Remains Independent; High-frequency trading takes root in U.S. securities class actions

Aug 6, 2014

First Read

Bits & Pieces
By John J. Lothian
Tom Cashman‘s former soybean pit broker partner David Clements and his wife attended yesterday’s MarketsWiki World of Opportunity Summer Intern Education Series in Chicago. David is retired and up from Texas and wanted to hear his former partner talk.

Clements shared that he still reads my newsletter from time to time, despite being retired. But what struck me was what he said about his understanding of it. “I only understand about 50%,” he said.

The world has changed so much since he retired that 50% of what we talk about on a daily basis is new. That is a measure of the change that is occurring in the industry and that has been a subject of the series as various speakers shared how they manage change.

* * *

We had three proprietary or principal trading executives speak yesterday; Don Wilson, Steve Brodsky and Ray Cahnman. Wilson and Cahnman shared their stories and where things are headed. Wilson shared the three main areas of trading of DRW, traditional market-making, risk taking and latency sensitive trading, which some call HFT, he said. Cahnman led off with a list of his favorite books and movies about the markets (see below) and finished with a description of the teamwork necessary today to be successful in proprietary trading. His ending comment, complete with a twist off of a beer bottle he brought, was from The Most Interesting Man in the World: “Stay thirsty my friends.”

Brodsky shared his story, but also our industry story and the tremendous growth we experienced as a result of technology and direct electronic access. Brodsky pulled up a famous Ameritrade television commercial from the past featuring “Stuart,” for a humorous showing of the influence of technology on trading.

We also had Terry Duffy of the CME, with a soft cast on his forearm after recent surgery. Duffy is always engaging and counterintuitive with his comments to the interns about their choices for career paths. He also took some questions and spoke convincingly about why the CME had to buy the CBOT and NYMEX to survive.

And, Tom Cashman, the person most responsible for my entry into the futures markets spoke on his experiences as a soybean pit broker, the influence of his family on his success and many of the key days in the history of the soybean contract at the CBOT.

* * *

We have two more sessions of the Summer Intern Education Series, Thursday and Friday. We will hear from Jim McNulty, John Ruth, Jr., Jamie Farmer, Ethan Kahn and Jeromee Johnson on Thursday. Johnson replaces Bryan Harkins from BATS.

On Friday we will hear from Mike Gorham, Matthew Scharpf, Steve Crutchfield, Donnie Roberts, Craig Donohue and Julie Winkler

The interns, who mostly showed up early, were rewarded with some industry swag before the program began. On Friday, we have a special treat, live music courtesy of professional musician and Eurex executive Matthew Scharpf.

Our final session will be followed by a social session at a local establishment.


Ray Cahnman’s Top Summer Reads and Must Sees
Transmaket Group Chairman Ray Cahnman says his firm’s interns and staff are encouraged to read, watch and learn.
Here is his essential summer reading and must-see list of movies and videos. Some of it is core financial reading and viewing but others are more general. The last on the list, “This CEO is out for Blood” could easily be the first and best read of all, an inspiring story about Theranos, a company started by a 19-year-old Stanford University student and her professor, which may well change the face of healthcare in the U.S. and beyond.

***** Ray references “Trading Places” as one of his favorites for showing how the markets worked back then. Relive that with our retrospective from last year, When Joe O’Neill Went Hollywood: “Trading Places” 30 Years Later.


ISE Gemini Celebrates First Anniversary
ISE Gemini announced today that it successfully completed its first year of operation, having launched on August 5, 2013 as the twelfth options exchange in the U.S. and also as the second options exchange under International Securities Exchange Holdings, Inc.

***** It did turn out that Jupiter aligned with Mars.


CME presents Risk Ranch
Thomas Dixon – Futures Magazine
Any kid might be able to understand that food doesn’t just magically appear before them, but how much can they tell you about how it gets there? CME Group, in partnership with the National 4-H Council, is aiming to close this gap this summer by rolling out its new agriculture education app, Risk Ranch. The app is designed to show kids 8 to 14 what it takes to bring a steer to the market as they grow it for four seasons.

***** I played Risk Ranch and won a blue ribbon. How well can you do?


CFTC shows U.S. commodity manipulation laws have teeth: Kemp
John Kemp – Reuters
By extracting a $13 million penalty and imposing tough restrictions on future oil trading by Arcadia and others, the U.S. Commodity Futures Trading Commission (CFTC) this week sent a powerful signal that laws against market manipulation still have teeth.

***** What kind of teeth? $13 million in the oil markets of 2008 is just noise.


If you do not want to do the time, prevent the crime
John Kay – Financial Times
Regulators have followed the ineffectual route of imposing agreed penalties on corporations because they believe it is too hard to secure convictions against either individuals or companies. This can change only with “strict liability” – individuals are responsible for what happens under their supervision, full stop.

***** There is a another strategy which is mostly employed and has the acronym CYA.


FIA And FIA PTG Comment On Modernizing CFTC’s Surveillance
Press Release
FIA and the FIA Principal Traders Group sent a letter to the Commodity Futures Trading Commission yesterday, urging the CFTC to leverage existing resources as it works to develop a 21st-century surveillance system.

***** Don’t waste your money on duplicative systems. How many times do we have to say this?


Fidessa group announces interim results
Key results:
* Revenues from the derivatives business doubled over the last six months. It now accounts for 6% of total revenues
* New derivatives signings continued
* Derivatives functionality expanded
* Also, strong demand for service-based offerings

***** Those are the kind of results that makes you want to go to work for Fidessa.



MarketsWiki Page of the Day
Jonathan Spall

MarketsWiki Recent Updates


Jonathan Spall; Greg Voetsch; Ray Cahnman

Companies, Organizations and Groups

London Platinum and Palladium Fixing Company; ConvergEx Group, LLC; London Metal Exchange


Futures Magazine


Commitments of Traders Report; Commercials


51,680,740 pages viewed, 8,012 articles, 185,017 edits
MarketsWiki Statistics

Lead Stories

Bats Said in SEC Settlement Talks Over High-Speed-Trading Perks
Sam Mamudi – Bloomberg
Bats Global Markets Inc. is in negotiations with U.S. regulators to settle accusations that Direct Edge, the stock exchange operator it bought in January, gave unfair advantages to high-frequency traders, according to a person familiar with the matter.

CME to Start EU Gas Futures as Trayport Remains Independent
Isis Almeida – Bloomberg
CME Group Inc. (CME) plans to start U.K. and Dutch natural gas futures while keeping the energy trading platform it agreed to buy from GFI Group Inc. (GFIG) independent. The world’s biggest derivatives exchange may offer gas trading at the U.K.’s National Balancing Point and the Title Transfer Facility in the Netherlands as early as next month, Martin Fraenkel, CME’s managing director for International Energy, said yesterday. The expansion means the Chicago-based bourse will rival other exchanges that feed prices into the Trayport Ltd. system it agreed to buy last week.

High-frequency trading takes root in U.S. securities class actions
Jonathan Stempel – Reuters
Investors have wasted no time making high-frequency trading, the subject of Michael Lewis’ recent best-selling book “Flash Boys: A Wall Street Revolt,” a focus of securities class-action litigation, according to a study released on Wednesday.

Trader Arcadia unbowed by CFTC oil-rigging deal
David Sheppard – Reuters
Well before settling a long-running oil price manipulation case this week, global oil trader Arcadia had shrunk itself to a leaner operation with an almost singular focus: trading the very contracts U.S. regulators accused them of rigging.

British Bank Standard Chartered Faces Action, Again, by New York State
Two years after state and federal authorities punished the British banking giant for doing business with countries like Iran, Standard Chartered has once again landed in the government’s cross hairs for failing to weed out other risky transactions flowing through its American operations.

FIA proposes alternative algo flag model
Futures & Options World
FIA Europe and FIA Epta have voiced their concerns that Mifid II could have a hugely detrimental impact on the efficiency of European derivatives markets in their response to Esma’s calls for market feedback. Over 340 firms submitted responses to the European Securities and Markets Authority following the issuance of a Consultation Paper and Discussion Paper into the update to the Markets in Financial Infrastructure Directive (Mifid II) set to come into force in 2017.


Britain eyes regulation for virtual currencies
William James – Reuters
Britain on Wednesday took its first steps toward regulating the rapidly expanding use of virtual currencies, launching a study to look at the opportunities and risks presented by digital currency Bitcoin and its rivals.

Funds fear extended wait in FCA’s AIFMD queue
Kris Devasabai –
AIFMD authorisation backlog means hundreds of UK hedge funds are unable to market in Europe and lawyers say some firms may have to wait months for the all clear

ESMA Publishes Report On Staffing And Resources For CRA Supervision
The European Securities and Markets Authority (ESMA) has submitted a report outlining its staffing and resources needs in relation to its responsibility for supervising credit rating agencies (CRA) in the European Union.

ESMA Releases Responses To MiFIDII/MiFIR Consultation And Discussion Papers
The European Securities and Markets Authority (ESMA) has made public the responses it received to its Consultation and Discussion Papers on MiFID II/MiFIR. In total ESMA received 344 responses to its Consultation Paper and 240 to the Discussion Paper. It is publishing those submissions where respondents opted to make them available to the public.

US Agencies Provide Feedback On Second Round Resolution Plans Of “First-Wave” Filers
The Board of Governors of the Federal Reserve System and the Board of Directors of the Federal Deposit Insurance Corporation announced the completion of reviews of the second round of resolution plans submitted by 11 large, complex banking organizations in 2013. The agencies have issued letters to each of these banking organizations.

UK’s Financial Conduct Authority Sets Out Its Approach To Financial Promotions In Social Media
The Financial Conduct Authority (FCA) has today launched a consultation which is intended to clarify its approach to the supervision of financial promotions in social media.

Exchanges & Trading Facilities

Nasdaq changes priority game
Rob Daly – The Trade
Beginning this month, the Nasdaq OMX PSX equities exchange has returned to trading all symbols using its Price Setter Pro Rata matching logic. Nasdaq OMX originally launched the pro rata model on Nasdaq OMX PSX in October 2010, but retired it in May 2013 when the exchange’s market share fell below 1% in favor of focusing on the trading of exchange-traded funds and exchange traded notes.

Toronto Exchange Signs Deal to Boost High-Speed Trading Role
Ben Dummett And Bradley Hope – WSJ
Canada’s flagship stock-exchange operator jumped into the high-speed trading race with a deal to acquire a microwave network linking markets in Toronto, New York and Chicago. Global Trading Systems LLC Chief Executive Ari Rubenstein said Tuesday that TMX Group Ltd., operator of the Toronto Stock Exchange and Canada’s main derivatives market, agreed to buy its StrikeNET network.

IEX’s Katsuyama on HFT, Full Exchange Ambitions: Video
Brad Katsuyama, chief executive officer of IEX Group Inc., talks about high-frequency trading on the company’s platform and issues surrounding IEX’s ambitions to become a full exchange. He speaks with Erik Schatzker and Alix Steel on Bloomberg Television’s “Market Makers.” (Source: Bloomberg)

Listings revival fails to boost HKEx trading revenue
Josh Noble in Hong Kong – Financial Times
A revival in new listings has failed to boost trading revenue this year at Hong Kong Exchanges & Clearing, highlighting the weakness of the exchange operator’s core business at it prepares for a period of transformation.

BATS finds no demand for transparency feed
Rob Daly – The Trade
As market regulators, institutional investors, broker-dealers and exchange operators continue to discuss how to improve the US cash equities market’s transparency, BATS Global Markets found that few are willing to pay for it.

Eurex service to bolster block trade execution
John Bakie – The Trade
Eurex has expanded its trade entry services distribution to cover BrokerHub, ITG RFQ-Hub and Vectalis.

NZX Update Re LPC Trades On Friday 1 August
Due to significant public interest in the matter, NZX would like to provide an update on its review of trades in the ordinary shares of Lyttleton Port Company Limited (LPC) on Friday 1 August 2014 that matched in the period between the release of a substantial security holder (SSH) notice and the time at which NZX placed a trading halt in the security.

BOX Options Exchange August 2014 InBOX
This is the August issue of InBOX, your news source from inside the BOX Options Exchange. This monthly publication will provide convenient summaries of recent developments at BOX.

Interest rate derivatives take another hit in July
Jon Watkins – The Trade
NYSE Liffe’s short-term interest rate derivatives saw the biggest decline, with activity dipping below one million contracts a day on average, down 56% compared with July 2013.

ICE volumes fall as Euribor slumps 68%
Joe Parsons – Futures & Options World
IntercontinentalExchange (ICE) reported a 23.7% decrease in volumes to 94.6m contracts traded on its platforms during July, as interest rate derivatives on the London-based Liffe platform continued their slump. On Liffe trading of interest rate derivatives more than halved in comparison to the same month last year, with 23.3m contracts changing hands.

Intercontinental Exchange Reports ICE And NYSE Volume For July
ICE’s July average daily volume (ADV) for futures and options was 4.3 million contracts, a decrease of 23% compared to July 2013.

LME revenue offsets HKEx derivatives fall
Joe Parsons – Futures & Options World
Hong Kong Exchanges and Clearing (HKEx) reported a 4% increase in earnings in the first half of the year, driven by growing revenues from the London Metal Exchange (LME). Total revenues for the group increased by $181m to reach $4.6bn during the first six months, of which LME earnings was up 6% to $645m as average daily volume increased 3% to 719,435 lots.

HKEx 2014 Interim Results, Interim Dividend And Closure Of Register Of Members

HKEx Monthly Market Highlights – July 2014

HKEx: On-Floor & Off-Floor Trading Statistics

HKEx Condensed Consolidated Financial Statements For The Six Months Ended 30 June 2014 (Unaudited)

NASDAQ OMX July 2014 Volumes

Ljubljana Stock Exchange: Monthly Statistical Report July 2014

Borsa Italiana Monthly Update – July 2014

Summary Of July 2014 Activities At Tokyo Commodity Exchange – TOCOM July Volume Averaged 76,579 Contracts Per Day, Down 2.2% M-on-M

BM&FBOVESPA Publishes July Market Performance

Hedge Funds & Managed Futures

Goldman Sachs Pulls Money Out of GSIP Hedge Fund
Juliet Chung – WSJ
Goldman Sachs Group Inc. is pulling cash from one of its largest internal hedge funds to comply with rules limiting how banks invest their own money, according to people familiar with the matter.

Billionaire Dan Och’s Hedge Fund Firm Is Getting Really Big
Nathan Vardi – Forbes
Billionaire hedge fund manager Dan Och has not been impressing Wall Street with fantastic returns in recent years, but he has been excelling at another key aspect of the hedge fund game: raising money from outside investors. Depending on how one views the assets of the largest hedge fund firms, an argument can be made that Och is now the world’s second-biggest hedge fund manager.

Och-Ziff Vexes Some of Its Clients
Juliet Chung – WSJ
When Och-Ziff Capital Management Group LLC told its shareholders in March it was the subject of a civil and criminal investigation, it didn’t separately notify the investors in its hedge funds, according to people familiar with the matter. Months later, that decision has continued to rankle some of the firm’s clients and raise questions about the trade-offs of investing in hedge funds run by public companies, the people said.

Hedge funds amass short positions in private equity-backed IPOs
Miles Johnson, Hedge Fund Correspondent – Financial Times
Hedge funds are building up multimillion pound bets against companies recently listed by private equity after a number of high-profile flotations this year have fallen sharply in value, leaving institutional investors nursing large losses.

Northern Lights and Treasury Group of Australia are set to merge
Mike Foster – Financial News
US-based asset manager Northern Lights Capital Management and Australia’s Treasury Group will merge to create a firm with investment stakes in 21 boutiques across the world, managing a total of A$49.6 billion ($46.3 billion).

Keeping private equity’s velvet rope up
Becky Pritchard – Financial News
If you’ve got a spare $50,000, then Carlyle wants your money. The US buyout firm and other large US firms, such as Kohlberg Kravis Roberts, have been vying to increase their assets under management by getting middle class savers into their funds.

Banks & Brokers

ConvergEx snaps up three new execs
Jon Watkins – The Trade
Brokerage firm ConvergEx Group has hired three executives to its senior management team in New York. Industry veterans Greg Voetsch, Charles Galligan and Oliver Sung have all taken senior positions and will serve on the firm’s executive committee.

Banks down, but not necessarily out, in commodities
Mark Pengelly –
Hammered by slender revenues, cumbersome regulation and higher capital requirements, banks are continuing their retreat from the commodity market. The latest example is Credit Suisse, which on July 22 announced it would exit its commodities business, citing the need to reduce risk-weighted assets under Basel III capital rules.

Capital One Says Subpoenaed Over Anti-Money Laundering
Elizabeth Dexheimer – Bloomberg
Capital One Financial Corp. (COF) said it received subpoenas from the New York District Attorney’s Office as part of a money-laundering probe. The request relates to “certain check-casher clients of the commercial-banking business,” the McLean, Virginia-based firm said yesterday in a regulatory filing. Capital One said it’s cooperating with the investigation.

Big Banks’ ‘Living Wills’ Get Failing Grade
Jesse Hamilton – Bloomberg
Wall Street banks spent two years asking U.S. regulators what they should put in hypothetical bankruptcy plans to prove they aren’t “too big to fail.” The agencies broke their silence yesterday with a grade: Fail.

Clearing & Settlement

CEO of DTCC global trade repository to leave
Joe Parsons – Futures & Options World
Sandy Broderick, chief executive of the Depository Trust & Clearing Corporation’s (DTCC) global trade repository, is set to leave at the end of August and will be replaced by Chris Childs..

IOSCO expands access to central clearing repository
Rob Daly – The Trade
The International Organization of Securities Commissions (IOSCO) has opened access to its information repository for central clearing requirements for OTC derivatives.

DTCC promotes two to Fill Global Trade Repository Executive Roles
The Trade
The Depository Trust & Clearing Corporation (DTCC) has made two executive management appointments in its Global Trade Repository business, including Chris Childs as CEO of DTCC Deriv/SERV (the OTC derivatives asset servicing and repository subsidiary) and Ian McLelland as CEO of DTCC’s European Trade Repository (DDRL Europe).

Indexes & Products

MTS And ICAP Add Eurozone Index To RepoFunds Rate
MTS, a leading fixed income electronic trading venue in Europe and ICAP Information Services (IIS), the information business of ICAP plc announce today that they are expanding the RepoFunds Rate indices to include RepoFunds Rate Euro (RFR Euro), a daily repo index for Eurozone sovereign bonds.

Tokyo Stock Exchange: New ETF to be Listed on August 26, 2014 (Tue.) -Nikko Asset Management- “Listed Index Fund Nikkei Leveraged Index”

NASDAQ OMX Lists First Trust Enhanced Short Maturity ETF – Actively Managed Strategy That Invests In Short-Duration Securities

FTSE Introduces New Global Factor Index Series


How Financial Institutions Buy Technology
Candyce Edelen – TABB Forum
In order to make technology purchases, financial services firms need content to inform their decision process. But FinTech sales and marketing teams are often unaware of the complexity of the decision process taking place behind closed doors. Here’s insight into the technology buying process that could help vendors close the deal.


SEC Charges Four Promoters with Manipulating Marijuana-Related Stocks and Other Microcap Companies
The Securities and Exchange Commission today charged four promoters with ties to the Pacific Northwest for manipulating the securities of several microcap companies, including marijuana-related stocks that the agency has warned investors about in recent weeks.

Cobalt to fight SEC corruption allegations
Tom Burgis in London – Financial Times
US regulators have told Cobalt International Energy that they intend to bring charges against the Goldman Sachs-backed company after a three-year investigation into alleged corruption in its Angola operations.

U.S. judge reluctantly approves SEC-Citigroup $285 mln deal
Joseph Ax – Reuters
A U.S. judge on Tuesday reluctantly approved a $285 million fraud settlement between Citigroup Inc and the U.S. Securities and Exchange Commission, two months after an appeals court voided his decision to reject it as inadequate.

AMF takes action against Jean-Patrice Nadeau

Environmental & Energy

John Kerry: Climate Change Will Make Combating World Hunger More Difficult
Caroline May, Breitbart
Climate change and a growing world population will make staving off world hunger more difficult in the future, Secretary of State John Kerry told an audience convened for a panel on “Resilience and Food Security in a Changing Climate” at the U.S. Africa Leaders Summit Monday.

Turning carbon dioxide emissions into chemicals, fibres and jet fuel
Bernie Bulkin, The Guardian
When fuels are burned, the products are carbon dioxide, water, and heat. Lots of heat.

***LB: Also in this story “Liquid Light, a spinout from Princeton University, uses electricity and catalysts (what they are is a secret), to make chemicals from carbon dioxide, and seems to have progressed to having a near-commercial process to make ethylene glycol, a key component of anti-freeze and, more interestingly, a building block of polyester bottles and fibres.”

Column: EU energy restrictions on Russia are mostly “sanctions theatre”
John Kemp, Reuters
EU sanctions on Russia’s oil sector will not seriously hamper the development of new oil resources in either the short or the long term, though they leave open the possibility of further escalation if relations with Russia deteriorate in future.


Reform of Japan’s Public Pension Fund Still Has Far to Go
Eleanor Warnock – MoneyBeat – WSJ
Japan’s JPY126 trillion ($1.25 trillion) public pension fund is well on its way to creating a more diverse, aggressive investment portfolio, but the debate on how it should be run is still far from settled.

Hong Kong Confidence Builds as Stock Hedges Get Cheaper
Jonathan Burgos and Kana Nishizawa – Bloomberg
For Hong Kong options traders, the stock rally has room to run. Investors are betting that low valuations for the city’s stocks and a government plan to link its bourse with Shanghai will drive further gains. Policy makers will allow overseas investors to trade Chinese shares through Hong Kong and wealthy mainlanders to buy the city’s stocks. A similar 2007 proposal, later scrapped, helped push the Hang Seng Index to a record.

MAS and SGX map next phase of securities market rules
Simon Osborne – The Trade
The Monetary Authority of Singapore (MAS) and Singapore Exchange (SGX) have issued their response to the joint consultation paper on the Review of the Securities Market Structure and Practices, published on 7 February 2014.

SGX welcomes Chiwayland International to Mainboard

Presentation By HKEx Chief Executive Charles Li And Group Chief Financial Officer Paul Kennedy On 2014 Interim Results Announcement

Frontier Markets

Seychelles exchange launches futures market
William Mitting – Futures & Options World
The Seychelles Securities Exchange has launched a derivatives market, becoming the latest African nation to move into listed derivatives.

Rabobank provides Singapore access to DME
Futures & Options World
Rabobank has been approved to provide Singapore traders access to Middle East crude oil futures traded on the Dubai Mercantile Exchange (DME). The approval of the Dutch-headquartered bank comes as firms based in Singapore continue to extend their regional reach by demanding access to more exchanges throughout Asia.

Rising interest rates may revive appetite for Islamic commodity deals
Bernardo Vizcaino and Melanie Burton – Reuters
A return to an era of higher interest rates could derail attempts by Islamic finance to create alternatives to a short-term funding instrument that has dominated the industry, but which some scholars and regulators want to see replaced.

A critical autumn nears for EM currencies
Delphine Strauss – Financial Times
A year ago, emerging market investors were in full flight, as the US Federal Reserve’s plans to taper stimulus exposed economic imbalances many had previously been inclined to overlook. This summer, international capital has been flooding back.

SEBI Signs MoU With 27 European Regulators
The Securities and Exchange Board of India and securities market regulators of 27 member States of the European Union (“EU”) / European Economic Authority (“EEA”) signed bilateral Memorandum of Understanding (MoU) concerning consultation, cooperation and the exchange of information related to the supervision of the Alternative Investment Fund Managers (AIFMs). The bilateral MoUs were signed on July 28, 2014.

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