John Lothian Newsletter: Nasdaq boosts NLX to break rates duopoly; Hedge funds gripped by crisis of performance; Esma yields to pressure on futures reporting

Jul 29, 2013

Nasdaq reports heavy cash support used to develop business for its new NLX London exchange unit. The hedge fund industry faces sour looks in all directions, from issues with recent and ongoing lackluster performance to questions about the legitimacy and legality of past profits. Europe’s regulator ESMA appears to be bowing to industry pressure, and may delay the start of new derivatives regulation by at least a year.

First Read

Intern Education Series Concludes Tomorrow
John Lothian
Tuesday, our summer Intern Education Series will conclude. The event, originally scheduled to take place at the CBOT will in fact be a larger space at the CBOE at 401 South LaSalle. Due to the change in venue, some room is available for additional attendees. Contact me at if you are interested.

Our series concludes with presentation by Richard Sandor, Terry Duffy, Rick Lane, Sam Mele, Ben Van Vliet and June Furlan. Sign-in for the program begins at 3 PM and the security procedures are different, so attendees should come early. We will begin the program at 3:15 with my comments and lead off with Richard Sandor at 3:30 PM.

I would like to thank all of our speakers who have given their time to present to our audience of industry interns. I would also like to thank all the firms, exchanges, clearinghouses and regulators who sent interns to our series. The feedback we have received has been great and there’s already talk about what to do next year.


A ban on banks holding physical commodities could backfire
Gregory Meyer –
In 2012, the banking industry commissioned a study in the hope of showing commodity trading houses such as Glencore and Vitol were too big to fail. The shoe is now uncomfortably on the other foot, as a policy debate over what big banks are doing in the murky world of commodities erupted this week. The end result may be the opposite of what the banks wanted: Goldman Sachs, JPMorgan Chase and Morgan Stanley may no longer be able to touch oil, gas or copper.

***** This is getting really fracked.


For the Masters of commodities at JPMorgan, a sense of deja vu
Jonathan Leff | Reuters
Fifteen years ago, a boom in global commodity trading was underway, and JPMorgan was late to the game. Trying to catch up with Wall Street rivals, JPMorgan recruited a young trader, Danny Masters. Within a few years, it had built a global platform that eclipsed its peers. At last it was a major player in markets from oil to metals.

***** Maybe JPM should sell its commodity business at the top of the commodity cycle. Hmmm.


Robots are rusty when they compete with human traders
St. Louis Post-Dispatch
Humans are proving more adept than computers in reacting to the Federal Reserve’s mixed messages on when policy makers will reduce their unprecedented stimulus.

***** Remember, don’t run in a straight line when being chased by an alligator.


Remove the carrot and the rabbit will hop away
Philip McBride Johnson – FOW
Alas, it turns out that large banks own commodity storage facilities! The Federal Reserve evidently blessed this practice some years ago. Now, large users of aluminum claim that those facilities horde that metal and make it time-consuming to remove it from storage.

***** How about a new rule that says you can’t have more that 10% of the warehouse for any one commodity? How about some competition?


CME Group Announces New Australian Dollar-Denominated Wheat Swaps
CME Group, the world’s leading and most diverse derivatives marketplace, today announced the launch of two new centrally cleared, over-the-counter wheat swaps to be denominated in Australian dollars. Pending CFTC review, both the AUD Chicago Soft Red Winter Wheat Swap and the AUD KC Hard Red Winter Wheat Swap will be available for clearing on CME ClearPort on Monday, August 12, 2013.

***** The Aussies always love to hedge in Chicago.


High-speed trader Infinium Capital gets new boss -sources
Tom Polansek and Ann Saphir | Reuters
A veteran of Chicago’s agricultural markets has come out of retirement to become the new leader of high-speed U.S. trading firm Infinium Capital Management, three people with knowledge of the situation said on Friday.

***** It was kind of a giveaway when we had George Hanley speak at our Intern Education Series and we listed him as Principal of Infinium. George was terrific at our event. He left INTL Hanley Group earlier this summer after his 3 year contract ended, very successfully I am told. We will publish George’s presentation and all the others this fall.


When it comes to regulation, US banks have a selective memory
William Wright – Financial News
Level playing fields are great, particularly when they are sloped in your favour. Jamie Dimon, the unofficial spokesman-in-chief for Wall Street, was back on fine form this month when he slammed US proposals to impose a leverage ratio of as much as 6% on big banks, double the ratio required under Basel III.

***** It is funny, there are Trust Banks and then there are banks.


A European Consolidated Tape: How Much Longer Must We Wait?
David Morgan – TABB Forum
The original MiFID Directive achieved its objective of creating competition among trading and clearing venues, but it failed to provide the transparency that market participants need. This transparency is vital if buy-side firms are to take proper advantage of the new competitive landscape, and the need for a consolidated tape remains paramount.

***** This should be measured in half lives.


Bridging the Week: July 22-26 and 29, 2013
Gary DeWaal and Associates LLC
This week Gary DeWaal’s Bridging the Week reviews a significant NFA action against a Chief Compliance Officer and AML officer that results in his fine and suspension from acting in these capacities. In addition, this week’s Bridging the Week reviews: a CFTC, UK FCA, and CME enforcement action against an algorithmic trader for spoofing; a UK FCA enforcement action against RBS for failures regarding transaction reporting; a House Agriculture Subcommittee hearing on the CFTC where some customers again criticize the CFTC’s anti-customer and anti-FCM proposal that could result in customers taking more financial exposure with FCMs in the guise of enhancing customer safety; and the importance of a strong firm reputation and compliance culture: the meaning of US v. SAC.


U.S. chief executives can’t break cost-cutting habit
A disconcerting trend lurks beneath the recent round of solid profit forecasts announced by com
panies ranging from United Technologies Corp to Wendy’s Co: More than three years into the recovery, CEOs are still relying on cost cuts to prop up earnings.

***** We cut out the M&Ms in the office to prop up profits and decrease waist lines.


If the law supposes that … the law is a[n] ass—a idiot
Streetwise Professor
Earlier in the year I wrote about the obscure, but very important, regulation of futures commissions merchants that essentially requires them to hold enough of their own money to cover shortfalls in customer margin accounts. This “residual interest” rule has caused a wholesale freakout among FCMs and market participants, and for good reason, as I pointed out in that post.

***** See our video on the residual interest issue from early this year. It was one of our most watched videos.


How much time do you have?
Joshua Brown – The Reformed Broker
If you had twenty five years left to live, how much time would you spend worrying about the daily ups and downs of the stock market?

***** I have time for a beer. Where do you want to meet?



MarketsWiki Recent Updates


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Companies, Organizations and Groups

Commodity Futures Trading Commission; LiquidPoint, LLC


Commitments of Traders reports


42,181,570 pages viewed, 7,603 articles, 162,492 edits
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Lead Stories

Nasdaq boosts NLX to break rates duopoly
Tim Cave – Financial News
Nasdaq OMX injected $54 million into its new London futures exchange during the second quarter, an amount equivalent to just over 60% of the group’s net profits between April and June.

Hedge funds gripped by crisis of performance
Dan McCrum in New York –
Hedge funds have a performance problem. Since the turn of the decade, Wall Street’s master stock pickers have spectacularly failed to beat the market. The crisis of performance comes as the industry is under intense scrutiny over the source of past returns, with SAC Capital facing criminal insider trading charges that threaten to undermine the record of one of the world’s most successful hedge funds.

Esma yields to pressure on futures reporting
Anish Puaar – Financial News
Europe’s top securities regulator is set to delay the start of key derivatives reporting rules by up to a year following intense pressure from industry participants.

Analysis: What next for the ‘Wall Street Refiners’ as JPM exits physical commodities?
David Sheppard | Reuters
As JPMorgan Chase & Co (JPM.N) prepares to exit physical commodities trading, the spotlight is turning to the future of the two banks that have dominated Wall Street’s involvement in the natural resources supply chain for 30 years.

JPMorgan Commodities Exit May Sap Liquidity Until Others Step in
Edward Welsch & Joe Richter – Bloomberg
A decision by JPMorgan Chase & Co. (JPM) to exit its physical commodities business would temporarily reduce market liquidity before other companies quickly take its place, according to analysts and traders.

Investors Are Lab Rabbits in Central Bank Experiments
Rich Miller & Jennifer Ryan – Bloomberg
The European Central Bank and Bank of England are emulating Ben S. Bernanke’s experiment in offering monetary-policy guidance to financial markets. Investors could well end up being the guinea pigs.


Firms Set Curbs on Trading
U.S. companies are beginning to change the way they police trades by executives and other insiders in their company stock. The changes involve preset trading plans that spell out certain times, or certain target prices, when corporate executives intend to buy or sell shares of their own company.

Lack of swaps detail sparks asset protection anxiety
Anish Puaar – Financial News
Asset managers that trade over-the-counter derivatives are being urged to push for clearer detail from the European Securities and Markets Authority on segregated collateral accounts so they are able to make more informed decisions on a range of different models being offered by clearing providers.

SIFMA Proposes ‘Execution With Diligence’ Standard For Municipal Trading
SIFMA today issued its proposed execution-with-diligence standard for municipal trading, following its initial proposal to the MSRB in June 2013 that an execution-with-diligence standard be applied to trades in municipal securities. This is a higher standard for dealers to meet than what is currently in place.

[Japan] FSA publishes Weekly Review No.56

Exchanges & Trading Facilities

Direct Edge Eyes Data Vendor Expansion
Max Bowie – WatersTechnology
Jersey City, NJ-based equities exchange Direct Edge is embarking on an initiative to sign up more data vendors to redistribute its data, to make it easier for trading and investment firms to access Direct Edge’s data without needing to connect to direct feeds from the exchange.

Eurex trading volumes weigh on Deutsche Börse profits
Anish Puaar – Financial News
Lower derivatives trading volumes and increased costs due to ongoing projects drove down profits at Deutsche Börse in the second quarter.

Aquis Exchange To Offer Access Via BT Radianz Cloud
Aquis Exchange Limited, the proposed pan-European stock exchange*, today announced a new agreement with BT that allows its Members to access its trading platform via the BT Radianz Cloud.

Record Trading Month – NZX Dairy Futures
NZX Dairy Futures has registered a record trading month with volume for July now standing at 5,225 lots, surpassing the previous highest traded month (March 2012) by 1,050 lots.

NYSE Liffe to list equity options on bpost

Toronto Stock Exchange, TSX Venture Exchange, TMX Select, Alpha And Montreal Exchange Closed For Civic Holiday

New Structured Products On Warsaw Stock Exchange

TOM MTF Statistics Week 30, 2013

[CBOE] Trader E-News

Hedge Funds & Managed Futures

China wealth fund downgrades commodities
Simon Rabinovitch –
China’s sovereign wealth fund has switched emphasis away from commodities to financial stocks in its overseas equity holdings over the past year. The investment shift by China Investment Corp is notable because the fund is uniquely placed to make a call about the global commodities market, with Chinese demand one of the biggest drivers of prices.

Darwin, Japan and the origin of outperformance
Merryn Somerset Webb –
Things that there are too many of. It’s a long list. But if you turn your thoughts to the financial industry you will see that the standout is investment funds. I have no idea how many funds there actually are available to chip away at your savings in the UK, but you can choose between over 2,000 at the top fund supermarkets alone. On that basis I would guess at 7,000-10,000 in total.

KKR’s second-quarter earnings plunge on fund values
KKR & Co LP said on Friday that its second-quarter earnings declined by 74 percent as a lower appreciation in its private equity funds overshadowed a quadrupling in the cash it received from the profits its funds generated.

Big hedge funds enjoy buyers’ market for recruitment
Harriet Agnew – Financial News
Large hedge funds are capitalising on a difficult environment for start-ups by hiring portfolio managers who might once have set up on their own. Marshall Wace, Millennium Management, CQS and BlueCrest Capital Management are among the firms recruiting.

Ex-Glencore, Goldman oil trader to launch new commodity fund
A former energy trader at Glencore Xstrata Plc and Goldman Sachs Group Inc is launching a commodities hedge fund focused on trading price spreads between different crude oil and petroleum products, people familiar with the matter said on Friday.

Fund managers aim to convert UK to US-style pensions
Mark Cobley – Financial News
Three of the biggest US asset managers have set their sights on bringing US-style target-date pension funds to the UK market, taking on the likes of domestic insurers Legal & General and Scottish Widows.

Mixed bag for managers as asset growth tails off
Harriet Agnew – Financial News
Financial News’ annual survey of the biggest hedge funds in Europe shows managed futures funds were often caught off guard in the past 12 months, while investors continued to favour the biggest funds and outstanding performance was driven by big bets on US housing and activism.

Hedge Funds Raise Gold Bets as Goldman Sees Decline: Commodities
Hedge funds raised wagers on a gold rally as speculation that the Federal Reserve will hold off on curbing stimulus drove prices toward the biggest gain in 18 months. Goldman Sachs Group Inc. expects the rally to reverse.

The End of Hedge Fund Terrorism
Thursday’s indictment of SAC Capital Advisors on insider-trading charges may be a tipping point, signaling the beginning of the end of an era of hedge fund terrorism. It’s about time that this industry is held accountable for the coldly-calculated damage it’s done.


CFTC Commitments Of Traders Reports Update

Banks & Brokers

J.P. Morgan to Explore Strategic Alternatives for its Physical Commodities Business
Press Release
JPMorgan Chase & Co. announced today that it has concluded an internal review and is pursuing strategic alternatives for its physical commodities business, including its remaining holdings of commodities assets and its physical trading operations.

Is Bank of America Merrill Lynch back on track?
William Wright – Financial News
It is not so long ago that Bank of America was in such a bad way that the host at a charity auction joked that the Bank of North Carolina could have afforded to make a more generous donation. But in the past year – whisper it – it looks like Bank of America Merrill Lynch might finally be on track to become one of the handful of post-crisis global full-service investment banks.

A question of competence at investment banks
William Wright – Financial News
One of the many problems that investment banks face as they try to rebuild their credibility is what you might call the “paradox of competence”.

Competition rises for clients who stick
Farah Khalique – Financial News
The global financial crisis and an anaemic economic climate have prompted banks to ramp up their commitment to transaction banking, a business built on long-term relationships that provides stable revenues and a good return on equity.

Goldman Sachs Actually Holds Close to 25% of the US Aluminum Supply, Maybe More
Goldman’s claim that it held only 3% of the world’s aluminum supply was utterly misleading. I now have determined that it holds in its own warehouses–the Metro subsidiary of Goldman Sachs some amount of aluminum that is less than 25% of the aluminum available for delivery in the U.S.

Barclays to give capital plans update on Tuesday
Reuters via Yahoo! Finance
Barclays confirmed it will set out how it plans to meet tougher UK rules on capital on Tuesday, responding to media reports it is considering selling new shares.

Barclays Slips as Bank Seen Planning Fundraising to Lift Capital
Barclays Plc , Britain’s second-largest bank by assets, fell by the most in almost a month in London as the lender considers plans to bolster capital by selling new shares or contingent convertible bonds.

Clearing & Settlement

First Trade Delivered Through Traiana’s Harmony CCP Connect Link To LCH.Clearnet
Traiana, the leading provider of pre-trade risk and post-trade processing solutions, announces today that the first interdealer non deliverable forward (NDF) trade has been delivered to LCH.Clearnet Ltd’s (LCH.Clearnet) ForexClear service through the recently established link with Traiana’s Harmony CCP Connect. The trade was a USD/KRW NDF with HSBC as one of the trading parties.

Aberdeen, Artemis And Schroders Entrust Investment Fund Settlement To Euroclear UK & Ireland
Euroclear UK & Ireland (EUI) has been selected today by three leading investment fund houses in the United Kingdom to settle transactions in their funds: Aberdeen Asset Management, Artemis Fund Managers and Schroders Investment Management. All three already use EUI for automated fund order routing.


CMEGroup – Gold Forwards in New Settlement Price File(s) Beginning August 12, 201

CMEGroup – NYMEX Options Expiration Operational Procedures for the Trading Floor and Clearing Members (9G) Effective Monday, July 29, 2013

Indexes & Products

Fidelity’s early ETF strategy leans heavily on BlackRock
Fidelity Investments disclosed on Friday its plans to use U.S. money manager BlackRock Inc as subadviser on a slate of 10 new sector-oriented exchange-traded funds.

Three new iShares bond index ETFs launched on Xetra


Lincoln Financial Group Selects PAM for Investments to Enhance Portfolio Accounting for International Holdings, Sophisticated Investment Instruments
Princeton Financial Systems, a part of State Street Global Exchange, today announced that Lincoln Financial Group has signed on to its PAM for Investments solution for their investment accounting needs. Lincoln Financial is already a PAM for Mortgages client, and the company chose to expand its partnership by upgrading its portfolio accounting to handle complex instruments such as fixed income.


SEC Charges Houston-Based Investor Relations Executive With Insider Trading in Stocks of Clients
The Securities and Exchange Commission today charged the former CEO of a Houston-based investor relations firm with insider trading in the securities of multiple firm clients.

Manager of defunct hedge fund pleads guilty to fraud
Reuters via Yahoo! News
By Terry Baynes – A former hedge fund manager pleaded guilty on Friday to defrauding investors in a $12.6 million scheme, more than five years after the fund collapsed under the weight of failed real estate loans. Lloyd Barriger, who operated Gaffken & Barriger, a Monticello, New York-based investment fund, pleaded guilty in White Plains federal court to charges of securities fraud

Environmental & Energy

Sapient, EEX Tackle REMIT Reporting
Waters Technology
Sapient Global Markets is now a certified implementation partner of the Leipzig, Germany-based European Energy Exchange, which is beefing up its transparency and reporting portal to help wholesale energy providers comply with mandated Regulation on Energy market Integrity Transparency (REMIT) rules.

European Union, China Agree on Solar-Panel Shipment Deal
European Union and Chinese negotiators reached an agreement to curb EU imports of solar panels from China in exchange for exempting the shipments from punitive tariffs.

**RKB — The accord would set a minimum price for imports of the renewable-energy technology from China. In return, Chinese manufacturers would be spared EU levies meant to counter below-cost sales, a practice known as dumping. The EU import taxes target more than 100 Chinese companies including Yingli Green Energy Holding Co., Wuxi Suntech Power Co. and Changzhou Trina Solar Energy Co.

EU, China resolve solar dispute – their biggest trade row by far
China and the European Union defused their biggest trade dispute by far on Saturday with a deal to regulate Chinese solar panel imports and avoid a wider war in goods from wine to steel.


Asian debt market staggers back to life
Josh Noble in Hong Kong –
The past few months have been full of frustration for Hong Kong’s debt bankers. Aside from the stifling heat and incessant summer downpours, deal flow has virtually ground to a halt since Federal Reserve chairman Ben Bernanke first uttered the word “tapering”, an eventual downsizing of asset purchases by the US central bank.

Abenomics Starts Losing Its Allure
Nick Hastings – MoneyBeat – WSJ
Japan’s miracle cure may not be working. And investors are growing nervous.

Frontier Markets

Sebi pushes online trading of rupee bonds | People & Markets
The Securities and Exchange Board of India met with market players this month to hear suggestions on improving the online trading volumes of domestic corporate bonds on the stock exchanges.

Malawi Stock Exchange Weekly Report – Week Ending 26th July, 2013


Federal Reserve ‘Doves’ Beat ‘Hawks’ in Economic Prognosticating
As the U.S. emerged from recession in the summer of 2009, Janet Yellen, then president of the Federal Reserve Bank of San Francisco, took a grim view of the economy’s prospects.

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