John Lothian Newsletter: CME, LME compete to provide alternative to London silver 'fix'; China plans to launch nickel, tin futures this year; High-Speed Trading Perks Said to Be Focus of CFTC Review

May 30, 2014

First Read

Avoiding Unintended Consequences
Gary DeWaal
Well this week went by very quickly. And now it’s time for me to step aside and let the Jedi Master, John Lothian, return next week to his rightful role as editor of this daily news publication.

However, I am able to discuss one more topic while here, and today it is “unintended consequences.”

If I have one wish involving our industry it is that lawmakers and regulators not simply impose new requirements based on the political hot potato du jour. Instead they should step back and consider any new proposed measure holistically and endeavor to anticipate how fixing one issue may inadvertently cause many more.

Time has already questioned (or at least Michael Lewis has) whether the way regulators encouraged the dispersion of equities trading among numerous venues, including dark pools, was the most effective way to enhance price discovery. Did yesterday’s effort to promote fairness pave the way for smart low latency traders to take advantage of physical laws to access some trading venues faster than others?

Time will also tell whether it was preferable post the 2008 financial crisis to concentrate in just a few global clearing houses what previously was dispersed counterparty credit risk from OTC swaps. Would a better solution have been to leave the credit risk dispersed, but mandate trade and price transparency; daily mark to markets; posting of collateral to support trades; and licensing and capital requirements for swap dealers?

Will the effort to promote customer safety by requiring FCMs to post their own funds to cover clients’ temporarily unmet margin calls in fact prompt FCMs to require at least some customers to post more funds with them and thus increase (not decrease) these customers’ exposure to their FCM?

Time will tell too, whether measures proposed internationally to slow down low latency trading, or to restrict the quantity of certain products permitted to be traded by certain market participants (i.e., through position limits) truly enhance liquidity and maintain narrow bid ask spreads.

Unfortunately lawmakers and regulators don’t have crystal balls, and can’t always predict whether measures they institute to correct one problem won’t create another. But this is why it’s important not just to consider the costs and benefits of each new proposed law or regulation, but also the likelihood that a proposed new rule will have a unanticipated detrimental impact on another area of regulatory concern. Only after it can be assessed that it is more likely than not that a new measure will not have such an extraneous unintended consequence, should the rule be implemented.

Otherwise, in just a few years, lawmakers and regulators may have to address still more unintended consequences (although it may give Michael Lewis plenty more opportunities to write more books).

Ok, enough of my musings. John, welcome back. Being an editor of a daily, comprehensive publication like The John Lothian Newsletter is a lot harder than it seems – particularly in a slow news week like this one! I am even more an admirer of yours (as well as your great team – thanks, gang!) after sitting in your seat for these past four days! I hope I have been a good apprentice! Carry on Obi-Wan!


NYSE Executive Joseph Mecane To Leave Firm
Bradley Hope And Scott Patterson – WSJ
Joseph Mecane is the latest executive set to depart from the New York Stock Exchange, according to people familiar with his plans.


Tranquil markets are enjoying too much of a good thing
Gillian Tett – Financial Times
Something peculiar is happening in western capital markets. This month almost every measure of volatility has tumbled to unusually low levels. If you look at the degree of actual (or “realised”) price swings – and projected (or “implied”) future movements – investors are behaving as if the world is utterly boring.

***GDW: Low volatility is bad for markets and news publications. I am thinking of renaming my weekly blog “Bridging the Weak” because there seems to be less and less to report on each week these days. Do I hear cries of “bring back Gary Gensler?”


Index Evolution: Guillermo Cano Looks at the New Generation of Equity Indexes
Equity indexes have come a long way over the past few decades, says Guillermo Cano of Russell Indexes.

While market cap-weighted indexes still capture the lion’s share of volume, new investment choices include such things as sector weighting, factor modeling and so-called “smart beta ” which aims to blend active and passive investing.

Watch the video »


Judge Blocks Subpoenas to Protect Informant in Market-Manipulation Case
Christian Berthelsen – WSJ
A federal judge has blocked subpoenas for evidence that could reveal a confidential informant’s identity in an enforcement case alleging manipulation of oil markets. The ruling by Judge William H. Pauley III of U.S. District Court in New York also criticized the U.S. Commodity Futures Trading Commission for its handling of evidence in the case, and allowed some subpoenas to move forward. The judge said that the CFTC’s failure to adequately review materials nullified claims to confidentiality.

***GDW: If the address of the informant is Moscow — is Edward Snowden involved in financial services too?


MarketsWiki World of Opportunity Summer Intern Series Goes to London
John Lothian & Co. is pleased to announce the MarketsWiki World of Opportunity Summer Intern Education Series is coming to London on July 1st and 2nd, 2014 with the generous support of the CME Group


Leigh: Mayoral Luncheon 2014 Teasers &emdash; CMEmayoralawards_2014_9
(photo by ThinkLeigh Photography)

CME Group to Present $79,000 in Scholarships to Chicago Public School Seniors as Part of Mayoral Awards Program
Chicago Mayor Rahm Emanuel will join CME Group CEO Phupinder Gill in honoring 79 Chicago Public School high school seniors who will be receiving a $1,000 achievement award based on essays they wrote about innovation, as well as their academic standing and extracurricular activities. A number of students also will receive summer internships at CME Group clearing firms.


MarketAxess and BlackRock Partner to Provide iShares Fixed Income ETF Information and Electronic Basket Trading Technology
The consolidated iShares content on the MarketAxess trading system enables ETF market makers to trade baskets of iShares ETF constituent bonds using MarketAxess’ patented list trading functionality. Bid and Offer Wanted lists can also be sent via Market Lists, MarketAxess’ Open Trading protocol, to access the liquidity pool of over 1,000 institutional investor and broker-dealer firms.


Global Trends In Derivatives Markets, Remarks By Walt Lukken, President And CEO Of FIA, Shanghai Derivatives Market Forum, May 28, 2014
Walt Lukken, President and CEO of FIA, delivered remarks on global trends in derivatives markets on May 28 during the Shanghai Derivatives Market Forum in Shanghai, China. Lukken praised the development of the derivatives market in China, saying, “Shanghai is well on its way to becoming a leading center for price discovery and risk management, not only in China but in the whole world.”

***GDW: I first visited China in 1987. To see the country grow from then to now is truly breathtaking.


Shaved heads for a good cause
Robby Lothian
Hello, this is Robby Lothian, John Lothian’s youngest son. I’m writing this because I’m on a travel baseball team and we’re going to Omaha, Nebraska for a huge tournament and for the College World Series. In order to go we’re having a fundraiser. What we’re doing is shaving our heads and having people give $10 pledges. But the fundraiser isn’t just for baseball. Half of the money we earn is going to cancer research because one of my teammate’s mom has been diagnosed and treated for cancer. Each player is suppose to get 10, 10-dollar pledges. I would love to get more! So if you can pledge, that would be terrific! My dad can give you the details on where to send the money; send email to



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Lead Stories

CME, LME compete to provide alternative to London silver ‘fix’
Clara Denina – Reuters
Major metal exchanges emerged as contenders in developing an alternative to the London silver price benchmark, or “fix”, after the century-old system for setting the globally recognised price is disbanded in August.

***GDW: Transparent markets are of course a better forum to discover prices. Doesn’t the word “fix” say it all. Everytime I hire a plumber to fix something, I need a second plumber to repair the ”fix.”

China plans to launch nickel, tin futures this year -report
The Shanghai Futures Exchange is planning to launch China’s first nickel and tin futures this year, local media reported on Friday, as part of steps to internationalise the country’s commodity markets.

High-Speed Trading Perks Said to Be Focus of CFTC Review
Matthew Leising – Bloomberg
The Commodity Futures Trading Commission is seeking detailed information on the incentives that U.S. derivatives exchanges such as CME Group Inc. and IntercontinentalExchange Group Inc. offer to spur trading, according to a person familiar with the matter.

Brazil exchange to launch new coffee futures contract
Brazil exchange operator BM&FBovespa SA plans to launch a new coffee futures contract later this year in an attempt to increase the commodity’s liquidity, which has fallen gradually in recent years.

Listed derivatives trading back on the rise
Anish Puaar View – Financial News
Global derivatives volumes traded on exchanges grew by over 7% in 2013 with greater activity in futures and options based on commodities and interest rates helping to reverse the previous year’s declines.

U.S. Said to Seek More Than $10 Billion Penalty From BNP
Tom Schoenberg and Fabio Benedetti-Valentini – Bloomberg
BNP Paribas SA (BNP) fell the most in 15 months in Paris trading after a person familiar with the matter said U.S. authorities are seeking more than $10 billion to settle federal and state investigations into dealings with sanctioned countries including Sudan and Iran.

U.S. probing 15 banks, payment processors for fraud
Aruna Viswanatha and Emily Stephenson – Reuters
U.S. prosecutors have opened criminal and civil probes into at least 15 banks and payment processors as part of a wide-ranging consumer fraud investigation, according to documents released on Thursday by a congressional committee.

The Risks of Communication on Wall Street
Wall Street & Technology
Regulators are increasing surveillance of all forms of communications, including social media, instant messaging, and more. Is your firm ready to comply?

***GDW: Such a shame that Maxwell Smart’s “Cone of Silence” could never be used on Wall Street. Fortunately I think shoe phones are capable of being recorded.

BlackRock rejects U.S. concerns on securities lending agreements
Emily Stephenson – Reuters
BlackRock pushed back on Thursday against a U.S. report that raised concerns about asset managers and securities lending, arguing in a paper sent to regulators that its activities do not pose outsized risks.

Singapore Again Ranked as World’s Best City for Business
Pooja Thakur – Bloomberg
Singapore held on to the top ranking as the best place in the world to do business, the Economist Intelligence Unit said.


SEC Names Stephanie Avakian as Deputy Director of Enforcement
The Securities and Exchange Commission today announced that Stephanie Avakian has been named deputy director of its Division of Enforcement.

Systemic insurers to delay structural reform
Hugo Coelho –
Systemically important insurers will stop short of committing to thorough restructuring plans until regulators fix global capital rules that will apply to risky activities, lawyers say.

Moody’s Warns on EU New Banking Rules
Josie Cox – WSJ
Moody’s Investors Service Inc. has become the latest of the three big debt rating firms to warn that new European Union rules could make stakeholders more vulnerable to losses in any future banking crisis.

Unfinished rules likely to cause continued hedging woes
Mark Pengelly –
Post-crisis financial legislation is generating deep uncertainty for industry participants, making life difficult for companies that rely on commodity markets as a vital way of managing their risk

CFTC policy chief defends US regulator’s extraterritorial rules
Viren Vaghela –
One of the architects of the Commodity Futures Trading Commission’s (CFTC) US person rules has defended his agency’s extraterritorial stance as necessary due to a lack of finalised rules by other jurisdictions including Europe.

Making innovation work for firms and consumers
Speech by Martin Wheatley, Chief Executive, the FCA, at Bloomberg, London.

Financial Innovation-Driven Complexity: Creating A Dynamic Landscape
A Speech By Greg Medcraft, Chairman, Australian Securities And Investments Commission To The Stockbrokers Association Of Australia (SAA) Annual Conference, 30 May 2014

Remarks At Municipal Securities Rulemaking Board’s 1st Annual Municipal Securities Regulator Summit, SEC Commissioner Daniel M. Gallagher, Washington, DC, May 29, 2014

Remarks Of Acting Chairman Mark P. Wetjen Before The Derivatives, Securitization And Project Finance Committee Of The DC Bar’s Corporation, Finance And Securities Law Section

Exchanges & Trading Facilities

BATS Exchange Unveils New Pricing for Listings Business; Announces Lead Market Maker Program
BATS Exchange, a leading U.S. equities exchange operated by BATS Global Markets, today announced new pricing for its U.S. listings business. With the new pricing, exchange-traded products (ETPs) that trade more than 400,000 shares per day will be eligible for a free listing on BATS Exchange.

New S&P 500 End-of-Month Options to Launch in July
Matt Moran – CBOE Options Hub
On July 7 CBOE plans to add new S&P 500 End-of-Month Options to its SPX options product line in response to requests from asset managers who want to more precisely match SPX option expirations to end-of-month fund cycles and fund performance periods.

CBOE To Launch SPX End-of-Month Options In July
Chicago Board Options Exchange, Incorporated announced today that on Monday, July 7, it plans to introduce PM-settled, End-of-Month options series — with expiration dates falling on the last business day of the month — for its S&P 500 Index options.

CBOE Holdings To Present At Sandler O’Neill 2014 Global Exchange & Brokerage Conference On Thursday, June 5

NASDAQ OMX Orders Ortivus To Pay A Fine

NASDAQ OMX Closes $500 Million Senior Notes Offering

Direct Edge Trading Notice #14-19: Reminder: Connectivity Available To EDGA/EDGX Certification Ports In NY5 Effective June 2, 2014

MIAX Technical Alert – Reminder: MIAX Options Exchange Will Be Conducting Disaster Recovery Testing On Saturday, June 7th

Hedge Funds & Managed Futures

Pimco may be turning corner on money outflows – CEO
The world’s biggest bond fund, Pimco, may be about to end a net outflow of client funds that reached 22 billion euros ($30 billion) in the first quarter, its Chief Executive Douglas Hodge told a German newspaper.

Investment Chief Named for New York City Pensions
Scott Evans, a former head of asset management for TIAA-CREF, will be the next chief investment officer of New York City’s $150 billion pension system, according to the city comptroller, Scott M. Stringer.

Fund Within a Fund Creates a Conflict
WILLIAM D. COHAN – Dealbook – NY Times
It is taken for granted that hedge fund investors expect superior returns. What other justification could there be for paying routine fees of 2 percent of assets and 20 percent of any profits, or sometimes even more? But what if those returns pale in comparison to the returns that the partners of a hedge fund earn in a separate, secretive fund that is set up specifically for their benefit and not available to the outside investors?

Have bond investors become too big?
Louise Bowman – Euromoney Magazine
The biggest bond funds now dominate the market for good or ill. Just how much muscle they now wield in the primary market is, however, a matter of some dispute.

Asset Managers To Ramp Up Oversight Automation To Manage Operational Risk, According To Research By Milestone Group
Asset managers are feeling unprepared for future challenges despite already making strides to improve fund oversight, according to a survey of North American institutional asset managers. The research, carried out by Milestone Group, surveyed leading organizations and showed that 40 percent of respondents felt their current operation was unprepared to meet anticipated regulatory changes and desired an increase in automation.

UK pensions lifeboat embarks on £200 million levy restructure
Mark Cobley – Financial News
The UK’s Pension Protection Fund, which pays pensions to workers whose firms go bust, unveiled a dramatic overhaul of its £695 million-a-year levy on businesses, which will see big winners and losers among UK companies.

Banks & Brokers

Mediobanca Bolsters Roster in London With Ex-Barclays Banker
CHAD BRAY – Dealbook – NY Times
The Italian bank Mediobanca said Friday that it has hired Francesco Canzonieri, a former Barclays and Goldman Sachs banker, to bolster its investment banking roster in London.

Post-bonus exits hit Nomura
Matt Turner – Financial News
The co-head of the telecoms research team and the head of the autos research team are among a number of departures from Nomura’s ranks in the past week, following the payment of annual bonuses at the Japanese bank.

Banks deny KKR buyout loan amid regulatory crackdown
Lauren Tara LaCapra, Greg Roumeliotis and Michelle Sierra – Reuters
Three longtime banks for private equity firm KKR & Co LP (KKR.N) have snubbed a request for a $725 million buyout loan over concerns it is too risky to pass muster with U.S. regulators, sources familiar with the situation said on Thursday.

BGC Sued by Broker Who Refused Water-Throwing Initiation Ritual
Kit Chellel – Bloomberg
BGC Partners Inc. was sued by a former broker who said he was subjected to a campaign of abuse after refusing to take part in a “boorish” initiation ritual called “the run.”

Goldman Sachs Conference Call to Announce Second Quarter 2014 Results

Goldman Sachs Announces Tender Offer for 6.345% Capital Securities of Goldman Sachs Capital I

BGC Partners Announces Upcoming Investor Webcasts
BGC Partners, Inc., a leading global brokerage company servicing the financial and real estate markets, today announced two upcoming investor webcasts.

Clearing & Settlement

Ian Axe bid farewell to LCH with E4m pay
Tim Cave – Financial News
The former chief executive of LCH.Clearnet received nearly E4 million in compensation during 2013, having helped to seal the clearing house’s acquisition by the London Stock Exchange Group.

Traiana to Provide Pre-Trade Credit Checks to Buy-Side Firms Trading on SEFs
Marina Daras – WatersTechnology
Traiana has added capabilities to its pre-trade credit checking hub CreditLink to enable streamlined post-trade processing for buy-side firms trading electronic credit default swaps (CDSs) and interest rate swaps.

No easy fix for CCP investment loss issue, banks fear
Cecile Sourbes –
UK-based CCPs have to pass investment losses to members and BoE says it would be logical for returns to be shared as well. But market participants say that will not win CCP shareholder support

Indexes & Products

The ‘Hotel California’ Flap: ETF Investors Should Take It Easy
Eric Balchunas – Bloomberg
A recent article by Tracy Alloway in the Financial Times turned heads when it compared exchange-traded funds to the Eagles song “Hotel California,” in that investors can get in anytime they like but they can never leave. While using rock lyrics to explain the world of finance is fun to do, saying you can “never leave” an ETF is a stretch akin to Michael Lewis saying the entire stock market is “rigged.”

NASDAQ OMX Lists PowerShares Multi-Strategy Alternative Portfolio ETF
NASDAQ OMX today announced that PowerShares launched a new exchange traded fund, PowerShares Multi-Strategy Alternative Portfolio ETF, which is listed on The NASDAQ Stock Market.

ASEAN Exchanges Introduces Three New Tradable ASEAN Indices

New ETF Included in Dissemination of “TSE Indicative NAV” and PCF file on the TSE website


Is FIX Protocol Use Declining?
Wall Street & Technology
FIX may be the dominant standard for buy-side to sell-side electronic trading around the world, but binary protocols such as OUCH have gained traction among high-speed traders. Now the rise of Bitcoin and crypto currencies is fueling the next stage of evolution.

IBOR Serves as Single Source of Truth for Investment Managers
Wall Street & Technology
In order for an IBOR to provide consolidated views from the front-to-back office, disparate systems must be able to communicate seamlessly.

Empirasign Bows MyData Excel Integration Web Service
Max Bowie – WatersTechnology
Empirasign Strategies, a New York-based provider of fixed income dealer offerings and trade color, has rolled out Empirasign MyData, which allows users to upload a list of bond tickers to Empirasign’s website and have the vendor return updated prices for each by searching the user’s proprietary datasets and sources they subscribe to.

First Derivatives extends Delta Flow to include integrated FX Trade Surveillance capabilities
First Derivatives, a leading provider of software and consulting services to the capital markets industry, announces the launch of its integrated trade execution, risk management and surveillance solution for FX markets.


SEC Charges Chicago-Based Investment Fund Manager With Stealing Investor Money and Conducting Ponzi Scheme
The Securities and Exchange Commission today announced fraud charges and an asset freeze against a Chicago-based investment fund manager accused of stealing money he raised from investors to pay personal and business expenses.

Mexican Authorities Arrest Head of Company Tied to Bank Fraud
ELISABETH MALKIN – Dealbook – NY Times
Amado Yáñez Osuna, who headed Oceanografía, the oil services company at the center of a $400 million fraud involving Citigroup’s Mexico subsidiary, has been arrested, according to Mexico’s attorney general’s office.

New Zealand’s Financial Advisers Disciplinary Committee Decision – Record Keeping

Environmental & Energy

Goldman Sachs to Host North American Energy Summit
Goldman Sachs will host the North American Energy Summit at the firm’s headquarters in New York on June 11, 2014.


Singapore Accounting Standards Council and SGX say Singapore-listed companies to embrace full convergence with IFRS in 2018

HKEx: Exchange Publishes Guidance Letter On Its Reverse Takeover Rules

Dalian Commodity Exchange: Notice On Adjusting The Standard Of The Minimum Trading Margin For The Blockboard Product

Frontier Markets

Qatar Stock Exchange Breaks All Records On Day Of MSCI Emerging Markets Upgrade
Qatar Stock Exchange had an exceptional trading session today to mark the introduction of the MSCI Qatar Index into the MSCI Emerging Markets index. Total volume traded reached QR 4,583,738,718.83 shattering the previous record volume of QR 2.351bn on June 9th, 2008 while the QE Index finished on an all-time closing high of 13,694.19. Other significant milestones established today include daily trades (22,170) and orders (44,951).

Bid to break infrastructure-financing impasse in Africa
Kanika Saigal – Euromoney Magazine
The African Development Bank’s Africa50 fund aims to attract institutional investors to commercially viable infrastructure projects in the continent, but there is still a huge gap to fill, say infrastructure experts.

MCX Weekly Market Report – May 23, 2014 – May 29, 2014

Malawi Stock Exchange Weekly Trading Report – 30th May, 2014

Updated List Of Shariah-Compliant Securities By Securities Commission Malaysia ‘s Shariah Advisory Council


To Get an A in Philanthropy Class, Give Away $50,000
WILLIAM ALDEN – Dealbook – NY Times
Vinay Sridharan must make it through microeconomic theory and the writings of Proust before the end of his senior year at Northwestern in June. But in one course, the final project is far less abstract: give away $50,000. It is also far more difficult than it may seem.

Need a Book for the Beach? Here’s J.P. Morgan’s Summer Reading List
Emily Glazer – MoneyBeat – WSJ
Summer is nearly here and that’s means sand, surf, sun and a pile of books with which to relax.

John Lothian Newsletter

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CEO, Trading Technologies

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