John Lothian Newsletter: ICE Announces CEO Duncan L. Niederauer to Retire from NYSE; IMC Financial Markets to Buy Goldman Sachs NYSE Floor Trading Business; BofA Scrapping Market-Making Unit Amid Trading Scrutiny

May 22, 2014

First Read

The operational risk enigma
Alun Green – SunGard
Risk is on everyone’s minds nowadays. Although our industry has very sophisticated models and tools for areas such as market risk and counterparty exposure, we have made much less progress on operational risk. Maybe it’s because we don’t willingly take operational risks, since they’re not revenue driven.

The European Commission defines operational risk as “the risk of a change in value caused by the fact that actual losses, incurred for inadequate or failed internal processes, people and systems, or from external events (including legal risk), differ from the expected losses.” As long as people, systems and processes remain imperfect, operational risk cannot be fully eliminated.

As firms look to reduce cost by outsourcing or offshoring, there is always a concern that the lack of control or experience might impact the business. Balancing the seemingly conflicting demands of quality and cost is a difficult exercise, and it’s hard to see how this can be solved by a broad brush approach.

Instead, there needs to be a considered assessment of business functions or even the activities contained within them to assess the operational risk and client impact. Maybe one of the premium services for FCMs could be for a “white glove” client services experience.

A key trend among regulatory-ready firms is the distinctive move to a decentralized model and an increased front office role in mitigating operational risk. This is being fueled by a need for greater proactive measures, risk modeling and forecasting, as well as controls and processes that better align to the business. There’s no doubt that operational risk is one of those industry bugaboos that still needs to be addressed. Firms that are able to analyse and quantify operational risk within their operating model will be at an advantage in the coming years.


Update from John
John Lothian
From the looks of things, everything has gone well in my absence. While I was out getting my pain exercised and my vertebrae fused, the guest editors have done a nice job of keeping readers amused and informed.

Thank you Martin, Nils-Robert and Alun. I look forward to hearing from Gary DeWaal next week too.

***AG: Great to hear that you are doing well John. I look forward to seeing you back in the editor’s chair assuming you can get Gary out of it.


OCC and the U.S. Options Exchanges adopt new pre- and post-trade risk controls principles
OCC and the U.S. options exchanges announced today the adoption of pre- and post-trade risk control principles that are designed to enhance the monitoring of trading activity on a real-time basis and reduce the risk of errors or other inappropriate activity that poses a material risk of significant market disruption.


CME Group fails in bid to shrink board
CME Group Inc shareholders defeated a company-backed proposal to trim its massive board by halving the number of directors representing Chicago Mercantile Exchange users, Executive Chairman Terry Duffy said on Wednesday.


CME Group Inc. Announces Preliminary Results from its 2014 Annual Meeting of Shareholders
Press Release


Walt’s Kilt Challenge Update
FIA president and CEO Walt Lukken will be donning a kilt at next month’s IDX Gala dinner, picking up the tradition started by Jeremy Grant and whose past challengers include our own John Lothian. Proceeds go to Futures for Kids, a most worthwhile organization that raises money for several charities benefiting children. Walt has raised over 50 percent of his £5,000 target, but IDX is fast approaching. Click the link below to learn more, or click HERE to visit his donation page.

***AG: Surely with the readership of this newsletter we can get Walt over the 100 percent mark of this worthy cause? I am going off to donate now. Let’s see where a Lothian bump can get him.


Through train could expand to bonds and currencies, HKEx chief says
South China Morning Post
The upcoming tie-up between the Hong Kong and Shanghai financial markets could expand from stocks to fixed-income and currency products, Hong Kong Exchanges and Clearing chief executive Charles Li Xiaojia said.


Is high-frequency trading tainting Canadian markets with the ‘dirty R word’?
Barbara Shecter – Financial Post
Perhaps not surprisingly, regulators and bankers at the annual TMX Trading Conference in Toronto on Wednesday concluded that Canada’s financial markets aren’t rigged. But there were some interesting points raised that counter the popular view arising from Michael Lewis’s well-marketed book Flash Boys that capital markets are infected by the “dirty R word” as a result of high-frequency trading.


Now There’s a Novel About High-Frequency Trading
Bradley Hope – MoneyBeat – WSJ
A high-frequency trading thriller has hit the bookshelves, a sign that the once rarefied world of market structure has gone mainstream.

***AG: I haven’t read the book but the comment that “The systems are so complex and intricate and so finely tuned that I think they are fundamentally unstable” seems odd to me. Would that also apply to say Swiss watches?

***DA: At a CBOE event last year, the giveaway was a thriller called The Fear Index by Robert Harris. No spoiler here, but let’s just say the combination of HFT and machine learning algorithms can create a chilling tale.


Hard sell: why fund managers underperform
John Authers –
Here is the good news. On the whole, fund managers who are good at working out which stocks to buy, and when, are not difficult to find. The bad news is that the great majority of them are terrible at timing when to sell. Now, behavioural economists are trying to devise cures.

***AG: A very interesting read.


London FX Investigator-in-Chief Says Nothing Surprises
Suzi Ring – Bloomberg
“Manage your guilt.” That’s Tracey McDermott’s strategy for not beating up on herself about missing dinner at home with her kids or skipping exercise, which the director of enforcement and financial crime at the U.K.’s Financial Conduct Authority has plenty of opportunity to do these days.


OptionsCity Charity Event and Texas Hold ‘Em Poker Tournament
Eat, drink, and play with us for a great cause! OptionsCity is hosting a Charity Event and Texas Hold ‘Em Poker Tournament at W Chicago City Center on Thursday, May 29th from 4:30pm – 9:00pm.

Event proceeds will benefit the Chicago-based non-profit organization Santa for the Very Poor, which delivers food and clothing to those in need during the holiday season. Each $100 donation covers food, beverages, and a seat in our free poker tournament with a starting stack of chips. Re-buys can be purchased on site.

To register and for more details, please visit



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Lead Stories

ICE Announces CEO Duncan L. Niederauer to Retire from NYSE, Remain President of ICE through August 2014; Thomas L. Farley, Current COO, Named As NYSE Successor
IntercontinentalExchange Group, the leading global network of exchanges and clearing houses, announced that, in light of the rapid integration of ICE and NYSE, Duncan Niederauer, CEO of NYSE Group and Co-President of ICE, has accelerated his planned departure. Niederauer will continue as President of ICE, contributing to the companies’ integration, through August 2014. Niederauer served as CEO of NYSE Euronext from 2007 through late 2013, when the acquisition by ICE was completed. Thomas W. Farley, the COO of the NYSE and former ICE Futures U.S. President, will succeed Niederauer, taking the title of President of NYSE Group, effective immediately.

***JK: The NYSE world no longer runs on Duncan.

Dutch Firm IMC Financial Markets to Buy Goldman Sachs NYSE Floor Trading Business
Bradley Hope And Justin Baer –
IMC Financial Markets, a Dutch high-speed trading firm, agreed on Wednesday to acquire Goldman’s rights to operate as a designated market maker in more than 600 NYSE-listed stocks, according to Scott Knudsen, IMC’s Chicago-based head of trading. IMC will also hire about 15 floor brokers from the Wall Street firm.

BofA Scrapping Market-Making Unit Amid Trading Scrutiny
Sam Mamudi and Hugh Son – Businessweek
Bank of America Corp. is dismantling an electronic market-making unit created last year to serve the lender’s Merrill Lynch wealth-management division, said two people with knowledge of the decision.

CME vows to keep trading pits open if electronic platform fails
CME Group Inc on Wednesday pushed back against calls for it to close open-outcry trading if its electronic platform fails, saying that most traders have access to the pits.

Cinnober seeks takeover of Boat to reverse profit decline
Philip Stafford –
Cinnober is planning to reverse a steep decline in profitability by using its proposed takeover of a European trade reporting service as a platform to supply more trading tools to cost-conscious banks.

FTT could be split in two
Anish Puaar – Financial News
The proposed European financial transaction tax could be split into two separate pieces of legislation that cover different financial instruments, in order to ensure the levy is introduced at the start of 2016.

More Brokers Break Away to Form Independent Firms
On a Friday in early May, financial adviser Herman Rij put on his Merrill Lynch tie—pink, with light blue bulls—and went to work at the brokerage’s third-floor office in Bethlehem, Pa. He met with a client who had flown in from Arizona. Then he went in to see his boss—and resigned. Merrill Lynch had no advance notice, but there was nothing sudden about the move.

Finra Probes Trading Tied to Credit Suisse
Market regulators are scrutinizing ties between Credit Suisse Group AG and a number of trading firms over concerns the Swiss bank enabled potentially improper trading, according to people familiar with the probe. The Financial Industry Regulatory Authority, Wall Street’s self-regulator, in the past few weeks sent inquiries to Credit Suisse regarding hundreds of suspect trades by clients of the firm, these people said.

New Faces Behind Fed Dots Seen Roiling Markets as Forecasts Move
Jeff Kearns – Bloomberg
Turnover among Federal Reserve policy makers gives investors more reason to heed Chair Janet Yellen’s advice: don’t pay too much attention to officials’ interest-rate forecasts.

In which Mohamed El-Erian compares the Fed to a Disney villain
Izabella Kaminska | FT Alphaville
From Mohamed El-Erian’s latest offering to Project Syndicate: Like Princess Anna in Frozen, it will take time for markets to recognize that their relationship with the Fed is changing (and should change); and, similar to the movie, some sort of shock may be involved in socializing the new understanding.

German Regulator BaFin Finds First ‘Evidence’ of FX Manipulation
Profit & Loss
Germany’s Federal Financial Supervisory Authority claims to have found evidence of attempted manipulation across several currencies and involving more than one institution.


SEC probes Schwab, Merrill, for anti-money laundering violations – sources
U.S. regulators are investigating Charles Schwab Corp and Bank of America Corp’s Merrill Lynch brokerage over whether they are doing enough to learn about their clients’ identities, sources said, the latest sign a crackdown on money laundering is expanding.

Esma plans new infrastructure for dark pool caps
Anish Puaar – Financial News
Europe’s securities regulator wants to set up IT infrastructure in conjunction with trading venues and other market participants to ensure new rules limiting dark pool trading are adequately enforced.

Fund chief warns on competition between regulators
Sarah Krouse – Financial News
Financial regulators in Europe and Asia have been “emboldened” following the financial crisis as the US has lost its place as the world’s top watchdog, according to the chief of US fund manager OppenheimerFunds.

Finra: poor controls around HFT a big concern
Jessica Meek –
Technology getting out of control is the biggest concern with high-frequency trading (HFT), the US Financial Industry Regulatory Authority’s (Finra) chief information officer told delegates at the North American Financial Information Summit in New York yesterday.

BoE and Citadel clash over Sifi status for funds
Kris Devasabai –
Asset managers face growing liquidity risks – the result of reforms that have made banks less able to play their traditional market-making role – and the financial system is not well equipped to manage them, according to Sarah Breeden, head of the markets, sectors and inter-linkages division in the financial stability unit of the Bank of England (BoE).

Energy traders seek flexibility in CFTC position limits
Mark Pengelly –
Panellists representing energy trading firms called for the US Commodity Futures Trading Commission (CFTC) to take a more flexible approach to implementing position limits under the US Dodd-Frank Act at Energy Risk Summit USA on May 21.

US crackdown on patent trolls collapses
Aaron Stanley in Washington –
A fervent effort by Silicon Valley and Congress to crack down on litigious patent “trolls” came to an abrupt end on Wednesday when the Senate committee considering the legislation announced that it was removing the bill from its agenda.

Remarks At The Financial Accounting Foundation Trustees Dinner, SEC Chair Mary Jo White, Washington D.C., May 20, 2014

AMF Launches Public Consultation On Amendments To Takeover Bid Rules In Book II Of The General Regulation

Exchanges & Trading Facilities

Euronext and Flandersbio celebrate the 10th edition of Knowledge for Growth
On Thursday, May 8, 2014, FlandersBio organized the 10th edition of its annual life sciences conference Knowledge for Growth in Ghent. Over 1,100 participants and more than 130 companies rallied behind the theme of Knowledge for Growth 2014: Biotech for society 2024: what will be the key societal challenges in 2024 and how will the life sciences sector help to address them?

Euronext Lisbon signs protocols of cooperation with NERA and ACRAL
On 14 May 2014, Euronext Lisbon will sign new protocols of cooperation with two associations from the Algarve region, NERA –Entrepreneurial Association of the Algarve Region, and ACRAL – Business and Services Association of the Algarve Region. The agreements aim to contribute to the development and promotion of the capital markets, particularly the Alternext market, by combining the efforts, means, experience and knowledge needed to that end.

MGEX Top May Open Interest Day Recorded
MGEX, a Designated Contract Market (DCM) and Derivatives Clearing Organization (DCO), reports open interest at number 11 on the daily Exchange open interest records after yesterday’s trade date. This is the top open interest day in May.

IMC Financial Markets to Become Designated Market Maker on the NYSE
The New York Stock Exchange (NYSE) and IMC Financial Markets (IMC), a global market making firm, today announced IMC Chicago LLC is expected to become a Designated Market Maker (DMM) by acquiring the Goldman Sachs DMM trading rights.

Eris Exchange: May News

Wizz Air says to float on London Stock Exchange

TSX Markets Top 20 Largest Consolidated Short Position Report – May 15, 2014

Direct Edge Regulatory Notice #14-02: Amendment To FINRA Rule 8312 Regarding BrokerCheck Disclosure

Hedge Funds & Managed Futures

For Sale: 20% Stake in Hedge Fund. Terms: Complicated
It should be an easy sell. One of the prime assets that the estate of the bankrupt Lehman Brothers still has to sell is a 20 percent stake in the $22 billion hedge fund D. E. Shaw. But so far, Lehman has found no takers.

Private equity and hedge funds face higher payouts
Becky Pritchard – Financial News
Private equity firms and hedge funds could find themselves paying out larger severance packages to disgruntled partners, following a Supreme Court ruling today.

Norway’s $33 Billion Man Steps Up Search in Asia Real Estate Bet
Saleha Mohsin and Mikael Holter – Bloomberg
Karsten Kallevig, the head of real estate at the world’s biggest sovereign wealth fund, has at least $33 billion to spend.

Former SAC, Och-Ziff Manager Said to Consider Own Hedge Fund
Bei Hu – Bloomberg
Ken Xu, a former managing director at SAC Capital Advisors and Och-Ziff Capital Management Group LLC (OZM), is considering setting up his own hedge fund in Hong Kong, said a person with knowledge of the matter.

EQT Deal Caps Off Strange Month for Private Equity Exits
Dan Dunkley – MoneyBeat – WSJ
Things are taking a turn for the slightly strange in the world of private equity. Nordic private equity firm EQT Partners has sold one of its portfolio companies, the sports data firm Sportradar, to another of its own funds, adding to a month of surprising and unconventional exits for private equity firms in Europe.

KKR Error Raises a Question: What Cash Should Go to Investors?
KKR & Co. has made several erroneous disclosures about its ties to an in-house consulting unit, a lapse that highlights a broader issue of private-equity firms’ duties to pass along fee income to investors.

Political Interference Clips Hedge Funds’ Desires to Trade on Mega Mergers
A wave of megadeal activity in Europe isn’t providing the trading opportunities many hedge funds had hoped for.

The debt that’s only for those on the A-list
Ayesha Javed – Financial News
Nobody likes gate-crashers. Least of all private equity firms keen to keep a firm grip on portfolio companies that are at risk from aggressive debt holders.

Banks & Brokers

European CEO James Rowsell to exit Cantor Fitzgerald
Giles Turner – Financial News
The chief executive of US brokerage Cantor Fitzgerald’s business in Europe, which has suffered a series of loss-making years, is leaving the group.

Jain takes stock amid Deutsche’s Frankfurt fracas
Vivek Ahuja – Financial News
Deutsche Bank’s co-chief executives Anshu Jain and Jürgen Fitschen endured a boisterous start to the bank’s AGM this morning as they attempted to chart the “unprecedented” change under way at the group since they took over.

Deutsche Bank to defend capital increase at annual meeting
Deutsche Bank (DBKGn.DE) will defend plans to raise 8 billion euros ($11 billion) in equity on Thursday when management stands before shareholders at an annual general meeting, less than a week after announcing the surprise plan.

Fuel hedgers bemoan bank retrenchment from commodities
Alexander Osipovich –
Hedgers such as Delta Air Lines are having a harder time managing their exposure to fuel prices as banks retreat from commodity markets, attendees at Energy Risk Summit USA heard in Houston on May 21.

Final Reminder: BGC Partners Plans to Host Investors and Analysts on May 29, 2014

Investment service FutureAdvisor raises $15.5 million to fund its growth
FutureAdvisor, a San Francisco-based investment advisory service geared toward investors with between $100,000 and $1 million to invest, said it raised $15.5 million in funding to build its business.

Clearing & Settlement

CME lowers initial margins for live cattle futures

Indexes & Products

Scenes from an Independent Brokerage Firm
Joshua M Brown | The Reformed Broker
I consider non-traded REITs or nREITS to be part of the group of investments that are just absolute murderholes for clients – they pay the brokers so much that they cannot possibly work out (and they rarely do wihout all kinds of aggravation and additional costs). Further, I have yet to hear a single credible explanation as to why a broker would recommend a non-traded REIT over a public REIT other than compensation.

Liffe to Launch FTSE 100 Equally Weighted Index Futures; ‘Smart Beta’ Indices Available via Bclear
IntercontinentalExchange Group, the leading global network of exchanges and clearing houses, today announced that Liffe will introduce futures based on the FTSE 100 Equally Weighted Net Total Return (NTR) Index.


The Next Wave of Innovation in Capital Markets Technology
Wall Street & Technology
Post financial crisis, most banks have been focusing on survival rather than innovation. That’s changing, however, as more technology startups are entering the financial services scene.

Liquid, ConvergEx Pen Agreement
Timothy Bourgaize Murray – WatersTechnology
OEMS provider Liquid and prime services division of ConvergEx have signed a joint marketing agreement wherein Liquid will be offered to ConvergEx’s roster of hedge fund, family office, mutual fund, and registered advisor customers.

Volta Data Centres Announces Team Expansion To Strengthen Commitment To London Businesses

Calastone Celebrates Success Of Proquote Connection With Investec Wealth & Investment


SEC Charges Sarasota-Based Private Fund Manager With Stealing Investor Money and Conducting Ponzi Scheme
The Securities and Exchange Commission today charged a Sarasota, Fla.-based private fund manager with defrauding investors in a Ponzi scheme that ensued after he squandered their money on bad investments and personal expenses.

CFTC Charges Florida Residents Cindy and Paul Vandivier and Their Company, Mintline, Inc., with Fraud in Connection with Illegal, Off-Exchange Commodity Transactions
The U.S. Commodity Futures Trading Commission (CFTC) today announced that it obtained an emergency court Order on May 13, 2014, freezing and preserving the assets under the control of Cindy Vandivier, Paul Vandivier, and their company, Mintline, Inc. (collectively, the Defendants), all of Coconut Creek, Florida.

Banned hedge fund manager Micalizzi arrested in Italy -prosecutors
Italian police have arrested a former university lecturer and ex-hedge fund manager who was fined 3 million pounds ($5.1 million) in 2012 for concealing massive losses to investors, Milan prosecutors said on Wednesday.

ASIC Bans Jeremy Kaviraj Nambiar for 8 years for False AUD/USD Trades Made to Conceal $1M loss
Forex Magnates
The Australian Securities & Investment Commission (ASIC) announced today that it has banned a former Sydney trader, Jeremy Kaviraj Nambiar for a period of 8 years from providing financial services, after an ASIC investigation discovered he had allegedly created a series of fictitious trades as well as a falsified document.

Environmental & Energy

Russia’s Putin signs 30 year gas deal with China
BBC News
The deal between Russia’s Gazprom and China National Petroleum Corp (CNPC) has been 10 years in the making. No official price has been given but it estimated to be worth over $400bn.

EU tells Putin Russia is responsible for ensuring European gas supplies
European Commission President Jose Manuel Barroso told Russian President Vladimir Putin in a letter on Wednesday that it is up to Gazprom to ensure gas is supplied to Europe in contracted volumes, the European Commission said.

Modi exploring breakup of Coal India, opening up sector-sources
Krishna N Das, Reuters
Newly elected Indian premier Narendra Modi is exploring breaking up state behemoth Coal India Ltd and opening up the sector to foreign investment to boost output and cut imports, said two sources with knowledge of the matter.

***LB: Also in this story “The government will also explore international private-sector partnership in a significant way.”


China Welcomes Foreign Investors
China’s top economic planner said Thursday that foreign investors can participate in a batch of infrastructure projects that have been opened to private investment.

China, the Fragile Epicenter of a Digital-Finance Revolution
Michael J. Casey – MoneyBeat – WSJ
China is not one, but two economies, each fueled by a competing financial system. There’s the old, centrally planned economy dominated by too-big-to-fail state-owned enterprises and politically connected property developers. It’s kept afloat by cheap loans from state-run banks subsidized by repressed Chinese savers. It’s on a collision course with a second economy powered by cutting-edge technology.

Korea retail flows push China volatility to a record low
Viren Vaghela –
Korean retail investors buying autocallable structured products on the Hang Seng China Enterprises Index (HSCEI) are pushing China volatility down to record lows despite a China slowdown and increased risk on the horizon.

Japan’s trading houses shift focus
Emiko Terazono –
The recent tumble in the price of iron ore, a vital steelmaking ingredient, has probably been worrying for Japan’s leading trading houses, the sogo shosha. The companies, which trade everything from coal to noodles, have invested heavily in resource assets, including stakes in iron ore projects alongside the big miners such as BHP Billiton.

Thomson Reuters Wins The Asian Banker Financial Markets Awards 2014 – Thomson Reuters Honoured For Strong FX Trading And Reference Data Capabilities

HKEx: Stock Exchange Participants’ Market Share Report

SGX Welcomes Listing And Depository Of Hainan Airlines Offshore RMB Bond

Shenzhen Stock Exchange Implement Pricing Block Trading After Trading Hour

Frontier Markets

Ivory Coast and Ecuador to return to bond markets
Elaine Moore in London and Javier Blas in Kigali –
Two frontier countries with a chequered history of debt defaults are returning to sovereign bond markets just five years after they last suspended payments to investors.

African sovereign sukuk to take off this year
Kanika Saigal – Euromoney magazine
During a discussion on capital market development at the annual meeting of the African Development Bank in Rwanda, panellists argued sovereign sukuk issuance will finally take off this year in a bid to diversify sources of long-term dollar financing away from the Eurobond market.

Israeli hedge funds outperform with significant growth in assets
The Israel hedge fund industry has seen a 33 per cent growth in assets in the past two years to USD2.7 billion under management, according to a survey by Tzur Management.

John Lothian Newsletter

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