John Lothian Newsletter: JPMorgan settles forex manipulation lawsuit; Ponzi Victims Seek to Query Madoff Before It’s Too Late; Swap Markets Debate Anonymous Trading in SEFs

Jan 6, 2015

First Read

Bits & Pieces
by John J. Lothian

Every year the CBOE holds a press lunch in Chicago in January. It is normally a very nice affair with a good turnout of Chicago-based industry journalists.

It was after last year’s press lunch that I wrote a column titled “The CME Should Buy the CBOE Soon.”

On January 24, 2014 the price of the CBOE stock was about $50. It closed that day at $50.03. The lowest it has traded since that day is $46.73. Yesterday the shares in CBOE Holdings, Inc. hit $65.00.

That is up 30% in about 12 months, after being up 76% in 2013 and still no deal. Oh well, I guess I was wrong.

Speaking of anniversaries, Doug Ashburn has been with John J. Lothian & Company, Inc. for four years. He has turned into quite a journalist, even if he will not admit it himself.

Next week is the Securities Traders Association of Chicago 89th Annual Mid-Winter Meeting at the Hilton on Michigan Avenue. See here for details

The 2015 Options Industry Conference is not next week, or in winter. It is May 6 to 8 at the Fontainbleau Hotel in Miami, FL. The BOX is the host exchange this year and they have asked me to reprise my role as moderator of the exchange leader panel. It should be fun.

In the coming days and weeks we will be sending out invoices to our readers for their 2015 subscriptions. We have returned to the policy of voluntary pay. If you find this newsletter valuable, you are asked to pay for it. We ask $150 for a 2015 individual subscription and $100 per reader for firms with five or more subscribers.

We did not make this change to maximize revenues, but rather to maximize the readership of this newsletter. In maximizing the readership, we maximize the viral nature of the of the information. More people will see the newsletter, more people will share it and a greater good will come from having this information to manage your non-price oriented risks. So if you know of people who would find value in JLN, please forward it along and encourage them to check us out.

We believe in market-based solutions. We believe in markets. We also believe music can save your mortal soul.


Mr. Koutoulas Needs to Prove His Allegations
Dear Members –
On December 31, 2014, the John Lothian Newsletter published Mr. Lothian’s own opinion regarding the allegations James Koutoulas has made and publicized about the nominations of public directors by the NFA Board’s Executive Committee. Mr. Lothian was right on point.

***** Melinda Schramm, Chair of the National Introducing Brokers Association, which endorsed James Koutoulas’ candidacy for the NFA Board of Directors as a CTA/CPO representative, has come out with a member message which agrees with my commentary about Mr. Koutoulas. I am still trying to remember the last time Melinda Schramm agreed with me.


CBOE Holdings Reports Record Trading Volume for 2014
CBOE Holdings’ 1.3 Billion Contacts is New All-Time High
CBOE, C2 and CFE Set Annual Volume Records
SPX Options, VIX Options and Futures Experience Best Years Ever
CBOE Holdings, Inc. (NASDAQ: CBOE) reported today that trading activity reached new all-time highs in total volume and average daily volume (ADV) in 2014.

***** Like I was saying.


Beware of Nervous Fund Managers; A Study Shows That Gun-Shy Investment Pros Do Worse, and Risk Losing Job
By William Power
When it comes to mutual-fund managers, the adage may be true: No guts, no glory. Investment professionals who are too scared about losses tend to perform more poorly overall, hurting both their investors and their own careers, contends a soon-to-be published study.

***** Sweaty palms in a mutual fund manager is never a good thing.


An economist’s advice to astrologers
Martin Wolf Martin Wolf, FT
The world economy shows growth prospects for the year’
As the late John Kenneth Galbraith remarked: “The only function of economic forecasting is to make astrology look respectable.”

***** Mr. Galbraith had some of the best lines about economics and trading.


What wealth does to your soul; Getting rich won’t make you happy. But it will make you more selfish and dishonest.
By Michael Lewis, The New Republic
WHEN I WAS 14, I met a man with a talent for restoring a sense of fairness to a society with vast and growing inequalities in wealth. His name was Jack Kenney, and he’d created a tennis camp, called Tamarack, in the mountains of northern New Hampshire. The kids who went to the Tamarack Tennis Camp mostly came from well-to-do East Coast families, but the camp itself didn’t feel like a rich person’s place: It wasn’t unusual for the local health inspectors to warn the camp about its conditions, or for the mother of some Boston Brahmin dropping her child off, and seeing where he would sleep and eat for the next month, to burst into tears.

****** Michael Lewis moves on from Flash Boys into soul searching. I wonder what the influence of writing another profitable best seller did to him.


Ulrich Beck, visionary theorist of globalisation and its risks
Obituaries, FT
Looking up from time to time to see the sunlight sparkle on the waters of Lake Starnberg, German sociologist Ulrich Beck wrote his book about the risks posed by mankind’s technological innovations in an atmosphere of pastoral simplicity.
In Risikogesellschaft, published in Germany in 1986, Beck, who died aged 70 on New Year’s Day, argued that the theme of freeing humanity from its traditional constraints was being eclipsed by a new imperative; the need to manage the risks created by mankind’s technological advances.

***** I like Ulrich Beck.


Bitcoin exchange Bitstamp halted after security breach
Murad Ahmed, FT
Europe’s leading bitcoin exchange has been forced to suspend operations after losing millions of dollars worth of the virtual currency due to an apparent hack.

***** Another startling success story for Bitcoin.


Bridging the Weeks by Gary DeWaal: December 22, 2014, to January 2 and 5, 2015 (Disruptive Trading, Block Trades, Customer Protection, NDF Clearing, MF Global)
Katten Muchin Rosenman
Happy new year and welcome back!
New proposed rules and an amended proposed guidance regarding an old rule: 2014 ended with two affiliated exchanges proposing slightly different new rules on disruptive trading (which themselves were each slightly different from a new rule adopted earlier in 2014 by another exchange and under US law), while one exchange amended proposed new FAQs related to an existing rule on block trades just days after its initial proposal. Also, both futures and securities regulators brought enforcement proceedings against firms for violating customer assets protection rules, while one legacy action involving MF Global was finally resolved. As a result, the following matters are covered in this week’s Bridging the Weeks:



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Lead Stories

JPMorgan settles forex manipulation lawsuit
Gina Chon in Washington and Tom Braithwaite in New York, FT
JPMorgan Chase became the first bank to settle civil lawsuits claiming damages for the alleged manipulation of foreign currency markets, which could put pressure on other groups to follow suit.

Goldman Says JPMorgan Should Break Itself Into Pieces
By Hugh Son, Bloomberg
JPMorgan Chase & Co. (JPM)’s parts are probably worth more to investors than the whole after regulators proposed tougher rules penalizing firms for size and complexity, according to Goldman Sachs Group Inc.

Ponzi Victims Seek to Query Madoff Before It’s Too Late
By Phil Milford and Dawn McCarty, Bloomberg
Four people claiming they lost their life savings to Bernard Madoff’s $17 billion Ponzi scheme asked a Delaware court to order the jailed 76-year-old investment manager to submit to formal questioning so his testimony can be preserved before he dies.

Swap Markets Debate Anonymous Trading in SEFs
Ivy Schmerken, WallStreet & Technology
Capital Markets Outlook: With more than a year of SEF trading up and running, swap participants are looking at standardized Market Agreed Upon or “MAC” swap products, to fuel anonymous order book trading next year.

HKEx Jumps on Report China’s Li Backs Shenzhen Stock Link
By Kana Nishizawa, Bloomberg
Hong Kong Exchanges & Clearing Ltd. (388) jumped the most in a month after a report that Chinese Premier Li Keqiang said a stock link with Shenzhen should be established.

Love Him or Hate Him, Bill Ackman Now Runs the World’s Top Hedge Fund
By Katrina Brooker, Bloomberg
Lunch was a bit awkward. It was around 1 p.m. on a warm October day in New York. A group of Wall Street investors were tucking into chicken in a red-wine demi-glace and Brussels sprouts at the Plaza Hotel. They’d convened for Jim Grant’s fall conference, hosted by the influential editor of Grant’s Interest Rate Observer.

Steven A. Cohen’s Point72 Earns Big 2014 Trading Profit; Investment Firm Recorded Roughly $3 Billion In Gross Profits
By Rob Copeland
Steven A. Cohen’s investment firm earned a huge trading profit last year, a person familiar with the matter said Monday, despite a series of high-profile staff departures and the pressure of a continuing civil case against its founder for failure to supervise employees later found guilty of insider trading.

Wall Street wallflowers: Bankers sit out the boom; Despite soaring stock market, financiers burdened by regs, cost-cutting.
By Aaron Elstein
The stock market hits new heights, and unemployment in New York City has sunk to its lowest level since the dark days of 2008. Yet the city’s bankers, who historically have enjoyed the boom times more than most, are sitting out the party.

Who Is a Whistle-Blower? The Courts Weigh In
By Peter J. Henning, NY Times
The 18th century German leader Otto von Bismarck once remarked that “laws are like sausages, it is better not to see them being made.” Figuring what a law means can be no less problematic.


SEC approves Finra background check rule; Expanded requirement faces some industry pushback, but could help firms avoid rogue hires
By Mark Schoeff Jr., Investment News
The Securities and Exchange Commission has approved a Finra proposal that requires brokerages to strengthen the background reviews they conduct on new hires.

Q&A: Scott O’Malia, CEO, ISDA

Could a Corporate Accounting Change Cost Millions of Jobs?
By Marvin Phaup, The Epoch Times
A modest change in an accounting rule is normally too much inside baseball to attract notice. But a proposal by the institutions that set accounting standards for publicly traded companies is prompting criticism from Congress and corporate America, backed by estimates that the change could kill millions of U.S. jobs.

Regulatory predictions for 2015
Annette L. Nazareth and Gabriel D. Rosenberg, FT
Davis Polk lawyers believe Volcker rule will dominate first half
A year ago we offered our regulatory predictions for 2014. We correctly predicted a busy year of financial reform implementation, as well as intensified discussions of the relationships among international regulators. Many of these themes will continue this year.

Self-Regulatory Organization (SRO) Rulemaking and National Market System (NMS) Plans
ICC: Notice of Filing of Proposed Rule Change to Revise the ICC Risk Management Framework (Release No. 34-73980; File No. SR-ICC-2014-24)
NASDAQ: Notice of Filing and Immediate Effectiveness of Proposed Rule Change to Impose a Minimum Fee for Execution Venues Operating a Trading Platform or Multiple Platforms That Utilize NASDAQ Proprietary Depth Data on a Non-Displayed Basis (Release No. 34-73978; File No. SR-NASDAQ-2014-125)
NYSE: Notice of Filing and Immediate Effectiveness of Proposed Rule Change Amending the Fees for NYSE BBO and NYSE Trades (Release No. 34-73985; File No. SR-NYSE-2014-75); see also Exhibit 5
NYSEMKT: Notice of Filing and Immediate Effectiveness of Proposed Rule Change Amending the Fees for NYSE MKT BBO and NYSE MKT Trades (Release No. 34-73986; File No. SR-NYSEMKT-2014-113); see also Exhibit 5
OCC: Notice of No Objection to Advance Notice Concerning the Implementation of a Committed Master Repurchase Agreement Program as Part of OCC’s Overall Liquidity Plan (“Release No. 34-73979; File No. SR-OCC-2014-809; January 2, 2015”)

ASIC’s MoneySmart New Year financial resolutions – make 2015 your best year yet
ASIC is encouraging people to make a positive start to 2015 by taking steps to set and achieve their financial goals.

ISDA Takes Caesars Default Query to Expert Panel
By Katy Burne, WSJ
For the first time since the financial crisis, a Wall Street trade group has asked a panel of outside experts to decide whether holders of credit-default swaps will collect on what some creditors contend was a default at Caesars Entertainment CZR -8.12% Operating Co.

Exchanges & Trading Facilities

MarketAxess Announces Monthly Volume Statistics for December 2014
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 total monthly trading volume for December 2014 of $68.7 billion, consisting of $42.5 billion in U.S. high-grade volume, $19.3 billion in other credit volume, and $6.9 billion in liquid products volume.

CME Group Announces the Launch of Physically Delivered Gold Kilo Futures
CME Group, the world’s leading and most diverse derivatives marketplace, today announced the launch of physically delivered Gold Kilo Futures contracts (contract code GCK) to begin trading on January 26, 2015, pending all regulatory review periods.

CME Hong Kong gold contract to start trading this month
CME Group Inc’s planned Asian gold kilobar contract will begin trading in Hong Kong on Jan. 26, a new entrant in the regional race to provide a price benchmark.

– Exchange Posts Second Consecutive Record Year as Total Volume Tops 10.9 Million
– Average December Block Trade Size was 394 (39,400 share equivalent)
CHICAGO – January 5, 2015 – OneChicago, LLC (OCX), an equity finance exchange, today announced its December 2014 volume of 1,087,256, a decrease of 7% year-over-year. Continuing its growth momentum from the previous year, 2014 marked the first year volume exceeded 10 million contracts. OneChicago is a CFTC and SEC regulated exchange offering Single Stock Futures (SSF), a Delta One product, on approximately 1,500 equities, including ADRs and ETFs.

Euronext Announces Monthly Trading Volumes For December 2014

BOX Options Exchange Price Improvement Activity for December

IEX Bolsters Information Security With Top Hire From BlackRock
Ivy Schmerken, WallStreet & Technology
Benjamin Smith joined IEX as the private trading venue’s head of information security last week. In a Q&A, Smith discusses his new role, Regulation SCI, and what exchanges and ATSs can do to combat hackers in 2015.

CBOE Futures Exchange Reports Record Trading Volume for 2014
The CBOE Futures Exchange, LLC (CFE®) today reported that annual trading volume for total exchange-wide activity and for futures on the CBOE Volatility Index® (VIX® Index) reached new all-time highs in 2014, with multiple trading records set during the year.

Hedge Funds & Managed Futures

Hedge fund firm Tudor Investment closes oldest fund -source
Paul Tudor Jones, the founder and chief investment officer of the roughly $13 billion hedge fund firm Tudor Investment Corp, has closed his firm’s oldest fund, a source familiar with the matter said on Monday.

”Opening Up The Whole World To Investors” – In An Interview André Buck, Head Sales SIX Swiss Exchange, Explains The Advantages Of The New Segment “Sponsored Foreign Shares”

5 Bond Myths Investors Should Know
US News & World Report
Do you really need to choose between individual bonds and bond funds? The answer is “No.”

Some traders are betting on $20 oil
By William Watts, MarketWatch
Here’s how bearish some traders are getting on oil these days. Even before Nymex WTI crude futures on Monday dipped below $50 a barrel in the latest stage of the crude rout, Stephen Schork, editor of the widely followed Schork Report, took note of trading in well out-of-the-money put options (puts give you the right, but not the obligation, to sell the underlying futures contract at a specific strike price).

NY police charge son of dead hedge fund founder Thomas Gilbert
Claer Barrett and Stephen Foley, FT
The son of Thomas Gilbert, the biotech hedge fund manager who was found shot dead in his Manhattan apartment on Sunday, has been charged with his murder.

Deflation is a rising threat for markets
John Plender, FT
The world is prey to the growing problem of deficient demand
Why did so many market pundits fail to foresee the decline in yields across the developed world in 2014?

Banks & Brokers

Morgan Stanley fires broker for stealing thousands of clients’ data; Up to 10% of all wealth management clients affected, says brokerage giant
By Bruce Kelly, Investment News
Morgan Stanley on Monday said it had fired a broker in its wealth management group who had stolen client data and posted some of it online.

Morgan Stanley reveals theft of client data
Tom Braithwaite in New York, FT
Morgan Stanley said that up to 10 per cent of its wealth management clients had their account information stolen by an employee who may have been looking to sell it.

Fired Morgan Stanley Adviser Didn’t Sell Data, Lawyer Says
By Michael J. Moore, Bloomberg
A fired Morgan Stanley (MS) financial adviser accused of stealing client data never intended to sell the information and “is extremely sorry for his conduct,” his lawyer said.

Deputy Chief Executive Departs Royal Bank of Scotland Earlier Than Expected
By Chad Bray, NY Times
Chris Sullivan, the deputy chief executive of the Royal Bank of Scotland, has left the bank earlier than expected, departing several months after his testimony to a Parliament committee was criticized.

ICAP Electronic Broking Volumes – December 2014

30 Under 30 Finance: The Top Young Traders, Bankers And Dealmakers
By Samantha Sharf and Nathan Vardi, Forbes
The rising stars of finance are making their mark on Wall Street, working at big banks like Goldman Sachs, hedge funds like Coatue Management, and private equity firms like KKR. The 30 men and women on Forbes’ 30 under 30 Finance list show yet again that some financial professionals are accumulating a tremendous amount of responsibility on Wall Street at the age of 29 or younger. Their accomplishments are impressive.

Clearing & Settlement

The need for a resilient global network of FMIs
Banking Technology
Never before in the history of financial markets have so many depended so much on so few. Financial market infrastructures are playing a more central role in the financial markets than ever before, and the trend looks set to continue. The only caveat is whether this trend will be accompanied by a medium-to-long term consolidation of FMIs, or by their proliferation. But the evidence available suggests that, whether they multiply or merge, FMIs must proceed on the basis that they create international as well as merely national dependencies.

ICBC (Thai) designated as renminbi clearing bank in Thailand
The Industrial and Commercial Bank of China (Thai) Public Co., Ltd. has been appointed as the renminbi clearing bank in Thailand, the Bank of Thailand (BOT), or Thai central bank, announced Tuesday. The renminbi clearing bank in Thailand would “provide an alternative channel for financial institutions in Thailand in conducting renminbi settlement other than through corresponding bank channel,” the BOT said in a statement.

Indexes & Products

ValueAct takes swipe at MSCI as activists flex muscles
Stephen Foley in New York, FT
MSCI, the stock market indexes company, has become an early target for what is expected to be a wave of hedge fund activism in 2015.


Verizon Is Said to Approach AOL for Possible Takeover, Venture
By Alex Sherman and Scott Moritz
Verizon Communications Inc. has approached AOL Inc. (AOL) about a potential acquisition or joint venture with the Internet company to expand its mobile-video offerings, people with knowledge of the matter said.

Facebook Buys Voice-Recognition Startup; Purchase Seen Giving the Social Network More Information for Targeted Ads
By Reed Albergotti
Facebook Inc. said it had acquired a voice-recognition startup that claims to “turn speech into actionable data,” a move that could give the social network more information for targeted advertisements.

CNBC to Stop Using Nielsen for Ratings; Business-News Network Says Its Out-of-Home Audience Needs to Be Counted
By Joe Flint, WSJ
Financial news network CNBC will no longer rely on TV ratings specialist Nielsen to measure its daytime audience, beginning later this year. Instead, it has retained marketing and research firm Cogent Reports for the task.


British Regulators Fine Former Banco Espírito Santo Unit
By Chad Bray, NY Times
British regulators have fined the former investment banking business of the troubled Portuguese lender Banco Espírito Santo for failing to disclose the departure of central staff members from one of its capital markets teams in 2013.

Abbotsford man ordered to pay $4.3 million to B.C. Securities Commission
An Abbotsford man has been ordered to pay almost $4.3 million to the B.C. Securities Commission (BCSC) and has been permanently banned from B.C.’s capital markets for making false stock reports. BCSC announced the decision Monday against Colin Robert Hugh McCabe, 30, who previously published the monthly Elite Stock Report from his home in Abbotsford.

Executives at parent firm of Credit Suisse’s China partner summoned in probe
By Engen Tham, Reuters
The parent of Founder Securities, Credit Suisse AG’s brokerage venture partner in China, said four of its executives were ordered to cooperate with an official investigation, stirring concerns as a dispute heats up with a major shareholder.

Who was fined most by the FCA in 2014? Which banks and institutions received the biggest fines last year?
City A.M.
2014 was a busy year for the UK’s financial regulator, the Financial Conduct Authority (FCA), which brought in a record £1,471,431,800 in fines – more than twice the previous record year.

The War On Dodd-Frank Whistleblowers — How Wall Street Gags, Intimidates And Fights The Fraud Fighters
Attacks on whistleblowers have moved beyond just firing and blackballing them. Many companies now are undertaking aggressive new steps on two fronts: One tactic aims to prevent whistleblowers from reporting misconduct to the Securities and Exchange Commission or the Commodity Futures Trading Commission. The other seeks to demolish the protections against employment retaliation that Dodd-Frank offers to whistleblowers (along with substantial awards).

FCA fines Execution Noble & Company Limited £231,000 for failings as a sponsor
The Financial Conduct Authority (FCA) has fined sponsor firm Execution Noble & Company Limited (ENCL) £231,000 for breaches of the listing rules in relation to sponsors.

eFloorTrade LLC, Diamond Head Capital LLC, John Alan Moore and Christopher Thomas Moore
NFA Regulatory Actions

Environmental & Energy

S. Korea to open carbon trading exchange next week
By Kim Eun-jung – Yonhap
South Korea will open a carbon trading system next week after years of delay, but the road ahead remains bumpy due to resistance from the business community and weak confidence in the nascent program.

Global carbon market to reach record volumes by 2017
Commodities Now
The value of the global carbon market grew by 15 percent during 2014 to 45 billion euros, according to the latest analysis from the Point Carbon team at Thomson Reuters.

EU Carbon Market Has First Volume Drop Amid Supply Cut
By Mathew Carr – Bloomberg
Buying and selling of European Union carbon allowances on ICE Futures Europe declined for the first time last year after the bloc began withholding supply to reduce a surplus that’s built up since 2008.

Natural Gas No Savior for Investors Seeking Oil Refuge
By Zain Shauk
A warm start to winter is disappointing investors who bet U.S. natural gas producers would offer a refuge from falling oil prices.

Climate change groups split on fossil fuel divestment
Pilita Clark in London, FT
A rift is emerging among investors in some of the world’s biggest energy companies over a global campaign that aims to combat climate change by making fossil fuels as unpopular as tobacco.

Fukushima Rice Passes Radiation Tests For First Time Since Disaster
Fukushima rice passed Japan’s radiation checks for the first time since the 2011 nuclear disaster that prompted international alarm over the region’s produce, a prefectural official said.


SGX securities trading tumbled 25% in 2014, derivatives volume rose 7.4% to record
Straits Times
The Singapore Exchange (SGX) said on Tuesday that shares trading grew in December but tumbled 25 per cent for the year – the most since trading plunged by 37 per cent in 2008 at the height of the global financial crisis.

SGX plans derivatives trading and clearing upgrade
The Trade
SGX TITAN, the upgraded platform, has been designed to increase efficiency and lower trading and clearing costs for market participants, according to the exchange.

China Fast-Tracks $1 Trillion in Projects to Spur Growth
By Bloomberg News
China is accelerating 300 infrastructure projects valued at 7 trillion yuan ($1.1 trillion) this year as policy makers seek to shore up growth that’s in danger of slipping below 7 percent.

Frontier Markets

RBI: Multinational cos’ arms can hedge FX risks via derivatives
By Reuters, The Economic Times
Subsidiaries of multi-national companies residing in the country can hedge foreign exchange risks through derivative contracts on the back of guarantee of its non-resident group, the Reserve Bank of India said on Tuesday.

Securities and Exchange Board of India Notices
Interim order in the matter of Silicon Projects India Limited
Order against M/s Sai Prakash Organic Food Ltd. and its promoters/directors

John Lothian Newsletter

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Past JLN Newsletters

CME to permanently close most trading pits

CME to permanently close most trading pits

First Read $40,626/$300,000 (13.5%) Anonymous ++++ Hits & Takes John Lothian & JLN Staff Without fanfare or amplification from its executives, the CME Group shut the books on most -- but not all -- of its floor trading history Tuesday afternoon with the...

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