John Lothian Newsletter: Europe agrees on high-speed trading regulation; IEX to Reveal Dark Pool Operations Data in Challenge to Peers; U.S. SEC to release long-awaited 'crowdfunding' rule

Oct 23, 2013

First Read

John’s Kaleidoscope Column of Comments
Pat Kenny, my friend I designated The Most Interesting Man in the World, was recently diagnosed with a cancerous mass on his tonsils. Pat had the mass successfully removed and will be undergoing radiation and chemotherapy in the next several weeks. The prognosis is good and Pat will be working all while undergoing his treatment. It is business as usual for Pat. Please keep Pat and his family in your prayers. I am sure he will find something interesting to do even while undergoing his treatment.

If not before, then it will be at CQG’s Second Annual Charity Softball Game on November 5, during the FIA EXPO in Chicago, in support of Futures for Kids. This friendly game of 16 inch softball is between teams from the US and from Europe. It will be held in Grant Park on Softball Field #1 from 2 to 4 PM. Pat is slated to be captain of the US team.

Tom Steinert-Threlkeld, former editorial director of Traders Magazine and Securities Technology Monitor, was killed Sunday afternoon in a bicycle accident.

China Merchants Securities Investment Management (HK) Co., Ltd bought memberships on the CME, CBOT and NYMEX recently, getting position to directly clear trades on these exchanges.

Do you know GTC Chicago Inc.? They are a firm composed of former Chicago exchange executives who are training Chinese futures professionals. They have developed a series of webinars on subjects relevant to expanding Chinese markets. They have three free seminars coming up in Chinese, and with a translator. The topics and instructors are Options on Derivatives Products Risk Management (Steve Mazur), Options Product Technical Considerations (Larry Nawrot) and Operational Implications on Options Products (Miles Szczurek). You can find out more at

I am moderating a panel discussion of leaders from Asian exchanges for Phillip Futures USA on Tuesday, November 5. This Trading Asia Symposium will feature representatives from six exchanges who will provide details on the unique products offered by their exchanges and any trading promotions they offer.

The debate at the panel for the MSRI award on Monday at the W Hotel in Chicago was about using batch auctions to fight some of the issues raised by high frequency trading. This has been a popular subject in academic circles recently, but has little traction in the markets.

Leo Melamed, Chairman Emeritus of the CME Group, and David Eisenbud, Director of Mathematical Sciences Research Institute (MSRI), on Monday presented Bengt Holmstrom, the Paual A. Samuelson Professor of Economics at Massachusetts Institute of Technology with the 2013 CME Group – MSRI Prize in Innovative Quantitative Applications.

John Lothian News team members Jeff Bergstrom and Sarah Rudolph are in London today and will be traveling to Paris later in the week. They will be back to work on Halloween.

Lastly, on October 28 I am headed to Mexico City for the World Federation of Exchanges Annual Meeting. I am moderating a panel there: Exchange sector outlook – convergence & divergence. The organized market operators’ perspective. The discussion will include corporate developments in the exchange industry including mergers, new products, converging/diverging destinies of equity and derivative exchanges. I will also return on Halloween.


SEC Criticizes Management at Options Clearing Corp.
Jacob Bunge –
The clearinghouse that handles all U.S. options trading was hit with a wide-ranging critique of the way it manages risk and handles compliance, following an examination by the Securities and Exchange Commission.

***** The choice of Craig Donohue to be chairman makes even more sense now.


NYSE to Host Annual Floor Broker Charity Trading Day
NYSE Euronext (NYX) today announced the annual New York Stock Exchange (NYSE) Floor Broker Charity Trading Day will take place on Friday, October 25, 2013. All net transaction fees on orders executed by floor brokers in NYSE and NYSE MKT securities on the day will be donated to St. Jude Children’s Research Hospital, one of the world’s premier centers for the research and treatment of pediatric cancer and other life-threatening childhood diseases.

***** If they did this on the CBOT floor for futures, it would be about twelve bucks.


A Tale of Two SEFs: Javelin and TrueEX on Swap Trading
Ivy Schmerken – Wall Street & Technology
Two startups, Javelin Capital Markets and TrueEX, are taking different approaches to offering interest-rate swaps on their new swap trading venues, which could spark debate on whether to list the most liquid contracts or the entire interest rate curve.

***** Listen to the tale, but don’t trade anything with a tail.


Trading Technologies to Establish Connection to NASDAQ OMX’s Nordic Derivatives Market
Trading Technologies International, Inc. today announced that TT will introduce connectivity to NASDAQ OMX’s Nordic financial derivatives market in Stockholm in the fourth quarter of 2013. As the third largest derivatives exchange in Europe, NASDAQ OMX offers trading in Swedish, Danish, Finnish and Norwegian equity and index futures and options.

***** And I just heard TT will have the Swedish Bikini Team in their booth at EXPO to demo the connection.


A Chance to End a Billion-Dollar Tax Break for Private Equity
A recent court case has given the federal government a chance to sidestep Congress and eliminate private equity’s billion-dollar tax break. The question is whether the Obama administration takes up the fight.

***** A gotcha moment for the administration.


MarketAxess Reports Third Quarter 2013 Revenues of $61.1 Million, Pre-Tax Income of $26.4 Million and Diluted EPS From Continuing Operations of $0.48
MarketAxess Holdings Inc., the operator of a leading electronic trading platform for fixed-income securities, and the provider of market data and post-trade services for the global fixed-income markets, today announced results for the third quarter ended September 2013.

***** MarketAxess shows the pros of being a SEF leading up to SEFCON.


Gary Katz

Born Under a
Good Sign: Gary Katz Says ISE Gemini Off to Fast Start

Gary Katz, president and CEO of the International Securities Exchange (ISE), has seen the options markets change dramatically since he co-founded the all-electronic options exchange in 2000. Now with the launch of ISE Gemini in August, the ISE is looking to add another exchange model that differs from the flagship exchange. Gemini also represents the 12th US options exchange. Katz sat down with JLN editor-in-chief Jim Kharouf about the new exchange, which garnered 2 percent marketshare of the total industry options volume in its first month.

Watch the video »



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Lead Stories

Europe agrees on high-speed trading regulation
Philip Stafford –
European policy makers have reached a tentative agreement over plans to regulate high-speed trading as they strengthen the region’s markets in the face of rapid technological change.

IEX to Reveal Dark Pool Operations Data in Challenge to Peers
Sam Mamudi – Bloomberg
IEX Group Inc., a dark pool that plans to convert into a U.S. stock exchange, is breaking with tradition by publicly releasing the normally private regulatory filing that explains how it operates. IEX, which opens for business on Oct. 25, today put its Form ATS on its website, detailing how requests to trade are prioritized, the types of orders available, price structure and ways to access the market.

U.S. SEC to release long-awaited ‘crowdfunding’ rule
Entrepreneurs and start-up companies looking for backing will be able to solicit small investments over the Internet from the general public under a new proposal to be released by U.S. regulators on Wednesday.

NYSE Euronext lists Gold Bullion Securities in Brussels
NYSE Euronext has announced that it has began listing Gold Bullion Securities, the world’s first physically-backed gold ETP on its Brussels market. GBS is a product of ETF Securities, one of the world’s leading, independent providers of Exchange Traded Products.

Banks Said to Seize ‘Footnote 513’ to Keep Swaps Private
Robert Schmidt & Silla Brush – Bloomberg
Wall Street, trying to preserve profits from swap trading in the face of tougher scrutiny from Washington, has found a new way to keep some of its overseas deals private. It’s called Footnote 513.

CFTC Asked Major Forex Banks to Scrutinize Records
Katie Martin and Chiara Albanese –
The Commodity Futures Trading Commission has asked major currency-dealing banks—including Deutsche Bank AG and Citigroup Inc.— to trawl through their records as part of a global probe into possible currency-market manipulation and hand over any evidence of wrongdoing, according to people familiar with the matter.

Dutch lender Rabobank to face near-$1 billion Libor charge: FT
Rabobank could face a near $1 billion fine next week from British and U.S. regulators looking to settle allegations that the Dutch lender helped manipulate the Libor and other benchmark interbank lending rates, the Financial Times reported, citing three people familiar with the matter.

Deeper probe of HKMEx boss urged
The Standard
Former Hong Kong Mercantile Exchange chairman Barry Cheung Chun- yuen is suspected of possessing a bogus document linked to a convicted Malaysian businessman.

12 Million Reasons to Learn From Knight’s Mistake
Dave Lauer – TabbFORUM
While mistakes in software development will always happen, the industry needs to do better in terms of comprehensive, real-time risk management to avoid another Knight Capital disaster. Here are 4 steps to improve system monitoring and operational surveillance.


U.S. farm state lawmakers urge CFTC to examine volatile RINs market
Thirteen U.S. lawmakers on Tuesday urged the derivatives market regulator to examine fraud and manipulation in the cash market for ethanol blending credits known as RINs, the latest sign of intensified political scrutiny of the market following an unprecedented 2,900 percent spike in prices earlier this year.

Regulation descends into a Kafkaesque bureaucracy
William Wright – Financial News
If you were in any doubt about the volume and complexity of financial reform in Europe, just try typing “Esma work programme 2014” into Google and see what comes up.

CFTC Seeks Public Comment on Certification from trueEX, LLC to Implement Available-to-Trade Determinations for Certain Interest Rate Swaps

CFTC Adopts Rule Amendment to Clarify that Prohibition against Swap Dealers and Major Swap Participants Associating with Persons Who Are Statutorily Disqualified Does Not Apply in the Case of Clerical and Ministerial Employees

Risk USA: Foreign banks cannot escape swap dealer status, warns CFTC’s Barnett
Peter Madigan –
The Commodity Futures Trading Commission (CFTC) will seek out foreign banks that have not registered as swap dealers and force them to comply with the Dodd-Frank Act, according to one of its top staffers.

Risk USA: Regulators cannot hide from bank models, says Osfi’s Zelmer
Duncan Wood –
Attempts to remove internal models from the bank capital framework will only push them into a regulatory “netherworld”, according to Mark Zelmer, deputy superintendent at Canada’s Office of the Superintendent of Financial Institutions. Supervisors would need to take more responsibility for setting appropriate capital levels for each institution, and this would be based on private discussions about modelled numbers.

A plea for certainty in regulation
Mark Pengelly –
Clear and unambiguous rules have the potential to satisfy advocates of sterner regulation, as well as regulated firms

Remarks At National Society Of Compliance Professionals National Membership Meeting, SEC Chair Mary Jo White, Washington D.C., Oct. 22, 2013

Keynote Remarks Of CFTC Chairman Gary Gensler Before The Americans For Financial Reform And Georgetown University Law Center’s Financial Transparency Symposium

Derivatives 2013: The Future Comes Into Focus – A Speech By Cathie Armour, Commissioner, Australian Securities And Investments Commission, At The ISDA Annual Australia Conference, 17 October 2013

ESMA publishes amended EMIR Q&A clarifying the use of LEI identifiers

Exchanges & Trading Facilities

Ice Brent changes prove a hard pill to swallow
Alexander Osipovich –
Ice says a plan to shift the expiry dates of futures and options on Brent crude oil is an important fix that will tighten the link between the physical and futures markets. However, carrying out the necessary changes could be painful for market participants.

Nasdaq OMX and Moscow Exchange join forces for tech start-ups
Anna Irrera – Financial News
Nasdaq OMX and the Moscow Exchange have teamed up to support Russian technology and biotechnology start-ups, joining a number of leading stock exchanges launching initiatives to help smaller companies access funding.

LSE joins race for $60bn Alibaba listing
Paul J Davies in Hong Kong –
The London Stock Exchange has joined the queue of venues trying to attract the multibillion dollar listing of Alibaba, China’s biggest ecommerce company, after Hong Kong rejected it on corporate governance concerns.

Nasdaq quarterly profit rises, helped by acquisitions
Transatlantic exchange operator Nasdaq OMX Group on Wednesday reported a higher third-quarter profit, helped by recent acquisitions and higher market data revenues.

Hedge Funds & Managed Futures

Hedge funds hunger for lost oil volatility
Gregory Meyer in New York and Ajay Makan in London –
Clive Capital has thrown in the towel. Deep into its third year of losses, what was once one of the world’s largest commodity hedge funds shut down late last month.

Blackstone Unit Wins in No-Lose Codere Trade: Corporate Finance
Stephanie Ruhle, Mary Childs & and Julie Miecamp – Bloomberg
GSO Capital Partners LP provided a loan to Spanish gaming operator Codere SA (CDR) in June with terms that gave it a guaranteed return on credit-default swaps, outmaneuvering sellers of the protection.

Cohen’s SAC will close London office by year-end: memo
Steven A. Cohen’s SAC Capital Advisors will shut its London office by the end of the year as the hedge fund downsizes in response to a long-running insider trading investigation, according to a memo sent to staff on Tuesday.

SAC Capital Retrenches as Insider Trading Inquiry Drains Firm
As federal authorities bore down on the SAC Capital Advisors hedge fund, its owner, Steven A. Cohen, assured his team of traders that the investigation would not affect its business. On Tuesday, SAC’s top brass acknowledged for the first time that the insider trading case had exacted a heavy toll.

You’ll never be a Yale superman
Dan McCrum | FT Alphaville
David Swensen is an investing superman. His pioneering use of alternative investments after he took over the Yale endowment in 1985 prompted a thousand imitators and created an industry. Indeed, the Yale model became the endowment model, so widely was it embraced. Then, with alternative investments legitimised as suitable for big investors, pension funds began to follow his lead, albeit tentatively. Yet you can never be David.

Hedge funds rebel against their ‘archaic’ label
Harriet Agnew – Financial News
Just as Proteus, the sea god of ancient Greek mythology would change shape as soon as he came under pressure, so the hedge fund industry – feeling the strain over fees, liquidity, high investment minimums and regulation – is evolving.

Rogge expands with currency specialist hire
Sophie Baker – Financial News
Global fixed income specialist Rogge Global Partners has hired a former currency chief investment officer at JP Morgan Asset Management to its asset allocation group as part of a continued expansion.

Former hedge fund manager aims to coach traders like athletes
Harriet Agnew – Financial News
Boris Pilichowski, a former proprietary trader and hedge fund manager, has set up a new firm that sets out to coach and motivate traders as if they were professional athletes.

Banks & Brokers

Goldman Sachs hires new Asia Pacific e-trading head from Citi: memo
Goldman Sachs has hired Ian M. Smith from Citigroup as head of GS Electronic Trading in Asia-Pacific, according to an internal memo seen by Reuters on Wednesday.

DEALTALK-After JPMorgan, banks seek protections in future bailouts
As the U.S. government closes in on a $13 billion settlement with JPMorgan Chase & Co over its mortgage practices, lawyers specializing in bank mergers are looking for ways to protect their clients from big losses in similar cases in the future.

Risk USA: Link compensation to ‘risk awareness’, say CROs
Kris Devasabai –
Banks and hedge funds are formally linking compensation to employees’ risk and compliance track record in an effort to create a stronger risk culture.

JPMorgan close to $6 billion settlement with investors: source
JPMorgan Chase & Co is nearing an agreement worth close to $6 billion with a group of institutional investors to settle claims over shoddy mortgage-backed securities issued in the run-up to the financial crisis, a source familiar with the talks said.

Wanted: 770 ECB banking supervisors within a year
Fabrizio Dicone had just one day to decide if he wanted to leave Rome and help create “the third big bang” – a new watchdog for Europe’s troubled banking industry. Within a few weeks Dicone had cleared his desk at the Bank of Italy, said goodbye to his family and friends, and moved to Frankfurt – where the European Central Bank must set up the supervisory body from scratch by this time next year.

UK property experts urge lending reform to prevent future crash
Lenders to Britain’s property sector must change the way they value real estate to avoid a repeat of the meltdown that helped to cause the financial crisis, a report by banking and property experts said on Tuesday.

Boutique Moelis Weighs an IPO in Its Vision of Future
At a recent Columbia Business School event to recruit talent to his mergers-and-acquisitions firm, Ken Moelis told students that deal making had long passed its heyday at big banks and that anyone who tells them otherwise is misleading them.

Clearing & Settlement

Bloomberg’s SEF completes first-ever cleared bunched trade
Bloomberg’s SEF has completed the first-ever cleared bunched derivative trade. The trade was executed by MKP Capital Management through its futures commission merchant Credit Suisse Securities, and CME Clearing provided clearing services.

CCP frontloading: the pricing nightmare
Fiona Maxwell –
From early next year, European derivatives users will have to clear any trades executed between the point a central counterparty is authorised and the date of a clearing obligation determination by the European Securities and Markets Authority, known as the frontloading requirement. But dealers remain confused about how it will work in practice, and the pricing impact it will have for customers.

Indexes & Products

VimpelCom Ltd. To Join The NASDAQ-100 Index Beginning October 29, 2013

New FTSE-BOCHK Offshore RMB Bond Index Series


Faster HTFs: Trading Under a Microsecond
Zarna Patel – Wall Street & Technology
Exablaze, based in Melbourne, Australia, has created a network interface card, a piece of hardware that connects a computer to a network, with capabilities that allow high-frequency trading to be executed in under a microsecond, called ExacNIC X4.

National Australia Bank Improves Trading Efficiencies with Adoption of Thomson Reuters Eikon Across Hong Kong Trading Floor
Thomson Reuters today announced that National Australia Bank, one of its long-term clients and one of the four largest financial institutions in Australia, has adopted next generation financial markets desktop Thomson Reuters Eikon across its trading floor in Hong Kong to improve staff productivity and cross-market communication.


Deloitte to pay $2 million to settle charges over audit rule violations
Deloitte & Touche will pay a $2 million penalty to settle civil charges that it violated federal audit rules, in one of the largest civil penalties ever imposed by the U.S. audit watchdog.

SEC Charges Diebold With FCPA Violations
The Securities and Exchange Commission today charged an Ohio-based manufacturer of ATMs and bank security systems with violating the Foreign Corrupt Practices Act by bribing officials at government-owned banks with pleasure trips in order to illicitly win business.

Judge Orders Goldman to Pay Ex-Programmer’s Legal Bills
A federal judge has ruled that Goldman Sachs must pay the legal fees of a former computer programmer accused of stealing code from the bank, a decision that wades into a hot-button issue as more and more Wall Street employees find themselves ensnared in lawsuits and investigations.

BCSC panel finds that computer hardware company and two B.C. men illegally distributed securities

Environmental & Energy

U.S. Rejects Rigid Rules as ‘Roadblock’ to Climate Treaty
Rigid rules and emissions targets may hinder efforts to draft a new climate treaty by 2015, the lead U.S. envoy said, calling for a more flexible approach for nations to set individual goals.

India, U.S. dig in against EU air carbon charge
India voiced firm opposition on Tuesday to EU plans to impose a scaled-back carbon charge on flights over European airspace while a senior U.S. lawmaker said the EU proposal runs afoul of a law intended to shield U.S. airlines from such charges.

Why We Don’t Care About Saving Our Grandchildren From Climate Change
Time Magazine
You want to know what the biggest obstacle to dealing with climate change is? Simple: time. It will take decades before the carbon dioxide we emit now begins to have its full effect on the planet’s climate. And by the same token, it will take decades before we are able to enjoy the positive climate effects of reducing carbon-dioxide emissions now.


Dalian Commodity Exchange: Brisk Trading On 1st Day Of Iron Ore Futures’ Listing
The iron ore futures was officially listed and traded on Dalian Commodity Exchange (DCE) last Friday. On the first day of its listing, the trading volume of iron ore exceeded 338,700 lots, its turnover was RMB 33.034 billion, and its position-holding volume was 78,000 lots.

[OSE] Introduction of CNX Nifty Futures
Considering needs of investment in and hedging against India’s rapidly growing capital market, Osaka Securities Exchange Co., Ltd. will introduce futures based on CNX Nifty which is a major Indian stock index used as a benchmark in various financial instruments.

[OSE] Outline of Specifications for CNX Nifty Futures
Osaka Securities Exchange, Co., Ltd. (OSE) has made the outline of the specifications for CNX Nifty Futures, which will be listed at the same time as the integration of derivatives markets of OSE and Tokyo Stock Exchange, Inc. scheduled on March 24, 2014*. OSE will invite public comments on this matter.

[OSE] Developing Fee Schedule in Connection with the Integration of Derivatives Markets
Regarding the fee schedule after the integration of the derivatives markets of Osaka Securities Exchange Co., Ltd. (OSE) and Tokyo Stock Exchange, Inc. scheduled on March 24, 2014*, OSE has made the outline of the rules. OSE will invite public comments on this matter.

China bond market emerges from the shadows
Josh Noble in Hong Kong –
Since the days of Marco Polo, China has been stuck with the label of the world’s largest untapped market. While the success of Louis Vuitton, General Motors, KFC and others has chipped away at that notion, there is one place the description remains apt: the bond market.

South Korea Denies Australia, New Zealand, Switzerland Currency-Swap Talk
Kwanwoo Jun – MoneyBeat – WSJ
While South Korea really is interested in signing currency-swap deals with trading partners, officials aren’t at all pleased about news of reportedly imminent deals. Such reports could jeopardize future negotiations, they say.

Shanghai’s Hongkou District Aims to Be Hedge-Fund Central
Chao Deng – MoneyBeat – WSJ
In another bid to make Shanghai a stronger financial center, the city is trying to establish a beachhead for China’s fledgling hedge-fund industry. The northern district of Hongkou plans to draw in several dozen hedge funds to set up offices by the end of next year.

TSE: Decision of Resuming Date of 20-year JGB Futures Trading
With respect to “Resumption of 20-year JGB Futures Trading” which was notified on June 18, 2013, Osaka Securities Exchange Co., Ltd. has decided the starting date of trading as follow.

[OSE] Notice regarding Abbreviation of New Trade Name and Corporate Logo

Frontier Markets

Ondo Approves Process to Establish Commodity Exchange, Articles
The Ondo State Government has approved the process for the establishment of the state Commodity Exchange with cocoa as its first commodity. The state Commissioner for Information, Mr. Kayode Akinmade, disclosed this at the post-exco briefing held in Akure yesterday.

Emerging markets rebuild forex reserves after recent turmoil
Delphine Strauss –
Developing country central banks have rebuilt foreign exchange reserves that were depleted defending their currencies, reflecting a resumption of significant capital flows into emerging markets.

MCX inducts 5 new directors
Business Line
The Multi Commodity Exchange board, which met here on Tuesday, approved the appointment of three shareholder directors and two independent directors.

Jignesh Shah refuses to budge, won’t quit MCX board
Financial Express
While several board members of the Multi Commodity Exchange of India Ltd on Tuesday demanded that Jignesh Shah resign from the board, Shah held on to his position. Shah is the promoter of Financial Technologies — the holding company of the National Spot Exchange —currently embroiled in a R5,600-crore payment crisis.

Dubai Financial Market – Announces The appointment Of Its New Chairman

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