John Lothian Newsletter: Flawed Fee Model Distorts U.S. Trading, Virtu Says; International exchange operators expand in Asia; Despite Possible Volcker Reprieve, Some Banks Move Ahead On CDO Sales

Jan 2, 2014

First Read

I Still Believe in the Futures Industry Model
By John J. Lothian

I still believe in the futures industry segregated funds model. In fact as strange as it may seem, my own experience, or that of my former firm with Refco and MF Global, has only strengthened my belief in the structure and wisdom of the model. However, there is a flaw to the model which has weakened faith in the futures markets and the model. That flaw is the lack of stewardship from our regulators and bankers and the lack of what I will call a customer fund dislocation scheme.

Recently we received the news that MF Global customers in the US would receive 100% of their funds back. Several years ago, a fund The Price Group represented had over $200 million stolen from it by Refco right before Refco went bankrupt. Through the diligence of Tom Price, all those funds and more were returned to customers.

All it took to get the money back was time, application of the laws and a waste of customer goodwill. A customer fund dislocation scheme for the industry could have benefited both the Refco and MF Global bankruptcies. Instead, the industry has squandered its hard earned reputation for customer fund safety and we are paying the price for that lack of stewardship.

The Peregrine Financial Group case continues to go on and I believe there will be a recovery of significant assets from the custodian bank, which I believe was derelict in its regulatory responsibilities. A customer fund dislocation scheme would have helped here too.

(To read the rest of the essay, visit the John Lothian Newsletter blog at jlne.ws/KmeKWc )

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New Subscription Policy for New Readers in 2014
By John J. Lothian

It is time for a new subscription format for 2014.

In 2003 when I started charging a fee to subscribers of the John Lothian Newsletter, I introduced the concept of voluntary pay subscriptions. Since then the John Lothian Newsletter has been offered in this unusual manner. But what exactly does “voluntary pay” mean?

The inspiration for this came from the world of software development and a desire to keep the growth of the newsletter viral. Start up software developers would offer their developing products first as “freeware” and then as “shareware” as they received feedback from early adopters and improved their product.

Users of shareware were asked to pay a fee for the software if they found it valuable after they tried it out. Eventually they charged for their software and provided support and regular updates.

When I settled on this approach in the 4th year of the newsletter, I wanted to keep the viralness of the John Lothian Newsletter and encourage people to forward it to their friends and colleagues. I wanted to maximize the utility of the newsletter for the industry, not for myself. I wanted people to pro-actively forward the newsletter without a second thought to those who would find the information useful in their professional or personal lives to grow the readership and its impact.

And that is the key to paying.

(To read the rest of the article, visit the John Lothian Newsletter blog at jlne.ws/Kmd7b5 )

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Anthony Belchambers

Finding Our Differences: FOA’s Anthony Belchambers Says Regulation Has Long Way to Go
JohnLothianNews.com
European regulatory changes continue to move forward, but there are significant differences between the US and EU, and also between the European states themselves. The Futures & Options Association’s Anthony Belchambers spoke with John Lothian News about where Europe stands in the rulemaking process and the challenges that still remain. Belchambers said that the issue of extraterritoriality continues to concern EU regulators and market participants.

Watch the video »

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You Can’t Stop Market Rigging by Ignoring It
Bloomberg
Scandals surrounding the setting of some of the world’s most important financial benchmarks, which influence the prices people pay for everything from oil to mortgages, have shaken confidence in vital markets. The latest shenanigans, affecting currency markets, show how difficult restoring trust will be.
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***** The Wolf of Wall Street? How about the Idiots of Wall Street, or Lombard Street or wherever.

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A Stock Exchange Expands Its Global Reach
NATHANIEL POPPER – NYTimes.com
The face of the global stock market used to be the classically proportioned exchange building on Wall Street. In the future, it may well be a squat suburban office building in Lenexa, Kan., outside Kansas City, where BATS Global Markets is based.
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***** BATS has changed the game.

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8 reasons to simplify exchange connectivity, Part two
FOW
In the second of his two part series, Steve Woodyatt, chief executive and chairman of Object Trading, explores why brokers should view simplifying exchange connectivity as a way to improve overall business performance.
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***** People love lists, and this is the number one reason why.

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TSE faces international challenge
The Japan News
Japan Exchange Group Inc. (JPX), which was formed through integration of the Tokyo Stock Exchange and the Osaka Securities Exchange on Jan. 1, 2013, marks the first anniversary of its establishment Wednesday.
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***** See our Special Report on Asia from 2013 for more on the challenges in Asia.

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Bitcoin Is a High-Tech Dinosaur Soon to Be Extinct
Stephen Mihm – Bloomberg
For all the regulatory crackdowns on Bitcoin in recent weeks, the cryptocurrency’s advocates remain unfailingly optimistic. Bitcoin is the future, they tell us; it heralds a future where private, stateless currencies will dethrone the dollar and other monetary dinosaurs. Sorry, but Bitcoin isn’t the future.
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***** It is hard to fight a monopoly, especially one who makes up the rules.

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MarketsWiki

MarketsWiki Page of the Day
Korea Exchange
jlne.ws/1k4ou7N

MarketsWiki Recent Updates

People

Kathryn Meyer; Wolfgang Münchau; Allan Schoenberg; Dr. Craig Pirrong; Thomas W. Sexton, III; Kyung-soo Choi

Companies, Organizations and Groups

Advantage Futures; Borsa Istanbul; Interactive Data 7ticks

Statistics

46,231,714 pages viewed, 7,731 articles, 170,933 edits
MarketsWiki Statistics

Lead Stories

Flawed Fee Model Distorts U.S. Trading, Virtu Says
Sam Mamudi – Bloomberg
Regulators could stem the migration of U.S. equity trading to dark pools by coordinating a cut in trading fees, an action exchanges are unlikely to take on their own, according to one of the biggest high-frequency firms.
jlne.ws/1dr0rdM

***** Or, you could put a limit on the order size that could be executed in a dark pool and save the public’s orders the pleasure of being executed there.

Magazine-International exchange operators expand in Asia
Oliver Jones – The Asset
International exchange operators are expanding in Asia, led by Deutsche Borse’s Eurex Exchange which is set to buy 12.92 million shares in Taiwan Futures Exchange (TAIFEX) for US$42.74 million from Yuanta Financial Holdings. Approvals are anticipated in the first half this year.
jlne.ws/1dr0rdR

Despite Possible Volcker Reprieve, Some Banks Move Ahead On CDO Sales
Andrew R. Johnson – MoneyBeat – WSJ
Some banks aren’t waiting for the dust to settle on a hotly contested provision of the Volcker rule before selling assets.
jlne.ws/1dr0ru5

HKEx’s AHFT To Include Block Trading, Mini HSI Futures And Mini HHI Futures From 6 January 2014
Hong Kong Exchanges and Clearing Limited (HKEx) will introduce Mini Hang Seng Index (Mini HSI) and Mini H-shares Index (Mini HHI) Futures as well as its Block Trading Facility (BTF) to its After-Hours Futures Trading (AHFT) session starting on Monday, 6 January 2014.
jlne.ws/1dr0oyr

Community Chatter: Most Commented Articles of 2013
Wall Street & Technology
When community members start commenting on an article, the comments usually come in bunches. This year articles about cybersecurity, high-frequency trading, Elizabeth Warren and big data generated a lot of interest and comments. Here are the articles you were talking about in 2013.
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Baum on Money: Journalistic Hit Job
Caroline Baum – Bloomberg
Happy New Year. The celebrating is over. It’s time to get back to work — and your daily reads.
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What you missed while you were away
Financial News
Here is a round up of the big stories you may have missed over the festive period, including an M&A hat-trick for Goldman, a new CEO at Optiver, analysis of the City’s shift in sentiment towards junior bankers’ work hours and a look at Neil Woodford’s new backers.
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Morning MoneyBeat: A Year About Nothing
Paul Vigna – MoneyBeat – WSJ
Last year, in case you didn’t notice, wasn’t exactly the most normal year in the market.
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Billionaires Worth $3.7 Trillion Surge as Gates Wins 2013
Matthew G. Miller and Peter Newcomb – Bloomberg
The richest people on the planet got even richer in 2013, adding $524 billion to their collective net worth, according to the Bloomberg Billionaires Index, a daily ranking of the world’s 300 wealthiest individuals.
jlne.ws/1dr0rub

Regulatory

2013 TOP STORIES: HFT Checkmate – The Alpha in Order Types
Haim Bodek – TabbFORUM
Despite REG NMS’s aim to strengthen the market structure and protect long-term investors, the explosion of special order types helped high-frequency traders win the game before most of the other players even understood the rules. Here are five order matching engine practices that served to preference HFTs over public investors.
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CFTC’s Division Of Market Oversight Issues Time-Limited No-Action Relief Relating To Certain CDS Clearing-Related Swaps Executed Pursuant To A CDS Settlement Price Process
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NFA Notice to Members I-13-46
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Exchanges & Trading Facilities

BME: The Spanish Stock Exchange Traded E60.2 Billion In December, Up 5.45% Year On Year
The equity trading volume on the Spanish Stock Exchange in 2013 totalled E703.6 billion, up 0.67% from a year earlier. The trading volume in December came in at E60.2 billion, down 10.1% from the previous month and up 5.45% year on year.
jlne.ws/1dr0rug

Nasdaq Delays New Feeds Test
Max Bowie – WatersTechnology
Nasdaq OMX has delayed the start of testing for enhanced versions of its US equity datafeeds covering its Nasdaq Stock Market, BX and PSX marketplaces until the end of January.
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Six Year High For London Stock Exchange IPOs
jlne.ws/KiFzKK

Bahamas International Securities Exchange Adds A New Sponsor Member
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Warsaw Stock Exchange: WIG30short And WIG30lev Published As Of 2014
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Athens Exchange: Market Operations Committee Decision
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Hedge Funds & Managed Futures

Berkshire Seen Failing Buffett 5-Year Test for First Time
Noah Buhayar – Bloomberg
Warren Buffett probably missed his target for the first time in 44 years. Berkshire Hathaway Inc., his $292 billion company, is poised to report that it failed to increase net worth more rapidly than the Standard & Poor’s 500 Index during the past five years, according to analyst estimates. It would be the first time the billionaire investor fell short of the goal since he took over the Omaha, Nebraska-based company in 1965.
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Funds shrug off default risk in dash for emerging company bonds
Reuters
When Brazilian oil firm OGX tried to tap bond markets for $2 billion in 2011, investors were ready to hand it $5.5 billion. Two years on, OGX is in default and the debt trades at less than 10 cents of its original face value. The spectre of such defaults spreading across emerging markets has not yet dimmed investor enthusiasm for the corporate debt sector, which saw record-high bond sales of $330 billion-plus in 2013 and more than 150 first-time borrowers.
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SAC Capital Outperforms Peers in 2013
WSJ.com
Steven A. Cohen is exiting the hedge-fund stage with a 2013 performance that is ahead of the pack. As the beleaguered hedge fund manager’s SAC Capital Advisors prepares to return outside money and manage only its billionaire founder’s cash beginning next month, it is closing in on a banner year relative to its peers.
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Ten Market Guarantees for 2014
Paul Vigna – MoneyBeat – WSJ
Here, then, are ten predictions we can absolutely, positively guarantee will come true in 2014. They definitely will improve our success rate when this year’s predictions get tallied up. They may even help you in the market.
jlne.ws/1dr0oOV

Banks & Brokers

Merrill taps rich investors for ex-convict social-impact bond
Reuters
Merrill Lynch and U.S. Trust reached out to some high-powered clients this quarter to invest in a social-impact bond whose proceeds finance a program to lower recidivism rates among ex-convicts in New York.
jlne.ws/1dr0oOY

Euro Supporter Credit Suisse Joins Bears: Currencies
Lukanyo Mnyanda – Bloomberg
Credit Suisse Group AG went against the consensus in June and correctly called the euro’s rally. Now, the bull has turned into a bear, with the firm predicting the common currency’s biggest annual drop in almost a decade.
jlne.ws/1dr0rKC

Clearing & Settlement

Frontloading fears remain despite Esma guidance
Fiona Maxwell – Risk.net
Dealers say they still do not know how to price swaps that could be caught by so-called frontloading requirements in Europe – under which a trade that has already been executed may have to be sent to a clearing house months or years later. That is despite new guidance provided by the European Securities and Markets Authority (Esma) on December 20, which narrows the window of uncertainty.
jlne.ws/1dr0rKD

ISDA In Review – Year-End 2013
jlne.ws/1dr0oP0

Indexes & Products

Standard & Poors Dow Jones Launch A Stand Alone County Index For Palestine – Palestine Exchange Being Reviewed By FTSE Indices For Inclusion As Frontier Market
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Technology

5 Technology Challenges for Investment Banks in 2014
Becca Lipman – Wall Street & Technology
In the opinion of Jonathan Firester, managing director of capital markets at Accenture, if you look broadly at the financial landscape we are in the latter years of a series of transformations that started after the ’08 crisis.
jlne.ws/1dr0rKE

SWIFT Announces 2013 Rebate Of EUR 33 Million
Global Financial Messaging Cooperative Announces 2013 Rebate To Users- Message Price Reductions Drive Traffic Volumes To Record High Of Five Billion Messages A Year – Further Substantial Price Reductions Enter Into Force On 1st Jan 2014
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Enforcement

NFA orders Westminster, California commodity trading advisor Cap Ex Partners LLC to permanently withdraw from NFA membership and sanctions its principals, Keith R. Bramlett and Ralph H. Johnson
Bramlett and Johnson are prohibited from applying for NFA membership or associate membership for a period of two years from the date of their withdrawals. In addition, Bramlett and Johnson are prohibited from acting as a principal of any NFA Member for a period of three years from the date of their withdrawals.
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SAC’s Cohen Focus of Trial as Martoma Rebuffs U.S.
Bob Van Voris – Bloomberg
Mathew Martoma may have the one thing prosecutors have been unable to find in their probe of SAC Capital Advisors LP: a direct link between founder Steven Cohen and insider trading. Having refused to cooperate, Martoma now faces trial for what the government claims was the biggest illegal trade in U.S. history.
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Asia-Pacific

Dalian Commodity Exchange’s New Progress In Banking-Futures Cooperation
On December 26, Dalian Commodity Exchange (DCE) announced that the two banks of Shanghai Pudong Development Bank (SPD Bank) and Industrial Bank have been added to the list of the designated futures margin depository banks.
jlne.ws/1dr0rKH

China’s Banks Adopt ‘Living Wills’ to Plan for Less Predictable Future
MoneyBeat – WSJ
China’s banks are starting to look to the hereafter. Last week, China Merchants Bank Co., the country’s sixth-largest lender by assets, took a page from its Western counterparts and drafted a so-called “living will.” It didn’t have much to say about the contents, but in a filing to the Shanghai exchange it said the bank’s board had approved management’s proposal.
jlne.ws/1dr0rKJ

Monetary Policy in Japan: Finally on Track
PHILLIP SWAGEL – NYTimes.com
Japan’s central bank, the Bank of Japan, is finally taking the action long suggested by outside economists as a remedy for two decades of stagnation: a prolonged period of substantial monetary expansion to end deflation and reverse the drag on business and consumer spending induced by deeply embedded deflationary expectations.
jlne.ws/1dr0oP9

China trusts bring contrasting fortunes
Simon Rabinovitch in Shanghai – FT.com
Jilin Trust and Ping An Trust both operate in the shadows of the Chinese financial system, providing loans to borrowers deemed too risky by banks, but that is where the similarities end.
jlne.ws/1dr0oPa

Thailand Futures Exchange Reports 2013 Strong Growth, Aims To Increase Liquidity In 2014
jlne.ws/1dr0rKO

Dalian Commodity Exchange Maintains Listed Products Well
Refining Listed Products, Improving Capacity For Market Service – Systems To Be Adjusted And Perfected, Including Introduction Of 3-Step Delivery
jlne.ws/1dr0oPb

Frontier Markets

NSEL scam derailed commodity market this year
Post
The year began with Finance Minister P Chidambaram imposing 0.01 percent commodity transaction tax (CTT) in budget on non-agri products and processed food items, a development that did not go well with the industry.
jlne.ws/1dr0rKS

Corruption Scandal Puts Turkish Stocks, Currency Under Pressure
Tommy Stubbington – WSJ.com
Turkish assets were once again under pressure Thursday, as investors continued to fret about a corruption scandal that has engulfed Turkey’s ruling party.
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Colombian banks spread their wings
Andres Schipani – FT.com
In December 1993 Pablo Escobar, the notorious drug trafficker, was shot while fleeing across a rooftop in his home town of Medellín, at a time when the city was known for cocaine money and violence. Twenty years later and Colombia’s second city is more often associated with prosperous companies and impressive architecture, something exemplified by the headquarters of Bancolombia, the country’s largest commercial bank by assets, which is a gleaming $200m building the size of a cruise liner.
jlne.ws/1dr0rKT

Libyan financial sector regulator established
Libya Herald
The Minister of Economy, Mustafa Abufunas, announced at a press conference yesterday, held at Tripoli’s Stock Exchange in Hay Al-Andulus, the establishment of a new financial regulation authority.
jlne.ws/1dr0s1b

Saudi Stock Exchange (Tadawul) – Annual Statistical Report – 2013
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