John Lothian Newsletter: Bats IPO Makes Exchange Built by Wall Street Public; CFTC rule sounds death knell for FIA-Isda trilateral give-ups; Volcker Says U.S. Needs Reforms in Finance, Government

Mar 22, 2012

BATS exchange issues its IPO today. Recent CFTC rules prevent dealers and clients from using a standardized clearing model proposed by the FIA and ISDA. Paul Volcker, in a speech yesterday, reiterated calls to reform financial and governmental systems. It was a sleepy news day, but the top box today is bursting with fresh content: commentary by Sarah Rudolph of JLN Options exploring the value of CBOE’s new VIX of VIX; a MarketsWiki.TV interview with Tom Callahan of NYSE Liffe US; an interview from HFT Review with Leo Melamed; and a sharp analysis of Dodd-Frank by Merton-Sholes via OpenMarkets.

Observations – Statistics – Commentary

JLN Options: Is a VIX of VIX Too Many Derivatives?
By Sarah Rudolph

Last week at the FIA conference in Boca Raton, the Chicago Board Options Exchange announced a new CBOE VIX of VIX Index (VVIX) that measures the volatility of the CBOE Volatility Index (the VIX index). The VIX index itself is a measure of the market’s expectation of future volatility implied by the prices of options on the S&P 500 stock index.

Who are the likely users of the index? Anyone who trades volatility products or watches the VIX index, according to Catherine Shalen, director, research and product development, for CBOE. “It is a natural offshoot of the VIX; it uses the same methodology but applies it to a new asset class.”

Currently, there are no futures or options traded on or planned for the VVIX index, according to Shalen. It can be used as an indicator, in particular to capture volatility risk premium for those who trade a portfolio of VIX options. VVIX measures the price of a portfolio of VIX options, just as the VIX measures the price of a portfolio of S&P 500 options, she said. The CBOE has noticed that, historically, if you sell the portfolio on a consistent basis, you can expect, on average, to earn a volatility risk premium.

Mark Wolfinger, a former CBOE market maker and author of The Rookie’s Guide to Options, said he thinks the new index will be a success for the CBOE because of the volatility of the VIX index, but said he expects the VVIX to be used mostly for speculation rather than hedging, and he prefers to think of options as a hedging tool.

For the rest of the commentary and news from the options industry, visit the JLN Options website at http://jlne.ws/GEL6IX

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JLN Interview: Tom Callahan, CEO, NYSE Liffe U.S.
NYSE Liffe U.S. recently released a video touting its products and mapping out expectations for the next year. JLN Managing Editor Christine Nielsen talked with NYSE Liffe U.S. Chief Executive Tom Callahan about main points of focus, the competitive landscape and the soon-to-be-launched DTCC GCF Repo Index.

Watch the video >

**** Here is the special video interview I promised you.

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Innovation and Risk in Today’s Financial Markets: An interview with Leo Melamed
HFT Review
In this interview for the High Frequency Trading Review, Mike O’Hara talks to Leo Melamed, financial market innovator, writer, lecturer and international authority on futures markets. Mr Melamed is recognized as the founder of financial futures and is Chairman Emeritus of the CME Group, Inc.

HFT Review: Leo, welcome to the HFT Review. With such a long and distinguished career in the futures industry, you probably need no introduction to most of our readers. But for those who may not be familiar with your work, could you tell us who you are and what you’re currently working on, particularly anything relevant to HFT?

Leo Melamed: I am Chairman of Strategic Steering at the Chicago Mercantile Exchange, so I look more at long range plans than at the immediate nature of trading. I’m presently concentrating on expanding our market presence into China and more generally into Asia, as well as into Eastern Europe. That’s my most focused area of responsibility at this time.

HFTR: And electronic trading, computer-based trading, is presumably quite a large part of that?

LM: Yes it is. We believe that our Globex system rivals anything in the world. So we try to get the nations that don’t have an electronic system capable of doing international trade to consider placing some of their contracts on our Globex system, which would give them international presence and of course it would expand our reach into that nation too.
http://jlne.ws/GEyddr

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Merton and Scholes: The Good and Bad of Dodd-Frank
OpenMarkets
Two Nobel Prize winning economists believe Dodd-Frank may have missed the mark when it comes to financial reform.
It has been at least five years since the first signs of the financial crisis began to appear. Despite the passage of time, there is no consensus about what caused the debacle, which culminated in the collapse of Lehman Brothers, a freeze in the credit markets, and a worldwide recession.
http://jlne.ws/GGLEal

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The Conundrum of MF Global
Philip McBride Johnson – FOW
I was asked recently by one of the New York Times’ best financial reporters why, four + months after the demise of MF Global where $1.6bn of supposedly “segregated” futures customer funds have “gone missing,” no one is in jail. The short answer is that criminal prosecutions require proof of deliberate violation of the “seg” requirement and the disclosed evidence to date portrays a company in chaos during its final days when decisions were made swiftly and not necessarily in an orderly fashion.
http://jlne.ws/GPxCpb

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Orc, Neonet and CameronTec to be operated as separate companies
Orc Group, a leading provider of technology and services for the global financial industry, announced today that the Group will separate its businesses to enable the three operating companies to better focus on their respective product and customer niches. Orc, Neonet and CameronTec will continue its operations as before. Thomas Bill, CEO of the Orc Group, has decided to leave the company, following a phase where he will be driving the structural separation of the Orc Group into three well-defined and more focused businesses.
http://jlne.ws/GPxCFv

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Infinium Capital Management Names Scott Rose Chief Executive Officer
Business Wire via Yahoo! Finance
Infinium Capital Management, a proprietary trading firm, today announced that Scott Rose has been named Chief Executive Officer, effective immediately. Rose most recently served as the Head of Trading at Infinium.
http://jlne.ws/GPxCFD

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FSA managing director to join PwC
By Caroline Binham and Brooke Masters – Financial Times
One of the UK’s most prominent busters of insider trading rings is moving from the financial regulator to join PwC as its new general counsel. Margaret Cole, the Financial Services Authority‘s managing director, will join the accounting group after September, she confirmed on Tuesday, following much speculation over her next move when she resigns at the end of this month.
http://jlne.ws/GPxFBb

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Goldman Scans Internal Emails for ‘Muppet’: Sources
CNBC
Goldman Sachs has begun scanning internal emails for the term “muppet” and other evidence that employees referred to clients in derogatory ways, Chief Executive Lloyd Blankfein told partners in a conference call this week, according to people familiar with the call.
http://jlne.ws/GPxzK7

**** One tweet I saw said it best, “some things you just can’t make up.”

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DealBook: On Wall St., Keeping a Tight Rein on Twitter
New York Times
Financial firms must monitor communications to ensure that they are in compliance with securities regulations as they tiptoe into the fast-paced world of social media.
http://jlne.ws/GPxFBp

**** When it reins, it pours.

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How To Become an Successful Entrepreneur
Clarke Camper – Inside the Beltway
Everyone in America loves entrepreneurs. Wall Street celebrates them; Washington strives to encourage them; Silicon Valley nurtures them. But where exactly do they come from and which ones are most likely succeed? A new study released by the Kauffman Foundation, a leading research organization on entrepreneurship, provides some insight.
http://jlne.ws/GPxA0C

**** If you don’t follow Clarke’s blog postings, you should.

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MarketsWiki Page of the Day
Philippos Sachinidis
http://jlne.ws/GIKLDz

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MarketsWiki Recent Updates

People

Philippos Sachinidis

Companies, Organizations and Groups

Interactive Data Corporation

Miscellaneous

Upcoming Events; Flash Crash

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20,831,891 pages viewed, 6,750 articles, 138,229 edits
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Lead Stories

Bats IPO Makes Exchange Built by Wall Street Public
Bloomberg
Bats Global Markets Inc., founded by a high-frequency trader and nurtured by the world’s top securities firms into the third-largest U.S. stock exchange operator, will seek more than $100 million for its owners today.
http://jlne.ws/GPxFRO

CFTC rule sounds death knell for FIA-Isda trilateral give-ups
Peter Madigan – Risk Magazine
The Commodity Futures Trading Commission (CFTC) has voted to adopt rules that will prevent dealers and clients using one part of a controversial standardised clearing document published last June by the International Swaps and Derivatives Association and the Futures Industry Association (FIA).
http://jlne.ws/GGMYAw

Volcker Says U.S. Needs Reforms in Finance, Government
Bloomberg
Paul Volcker, the former Federal Reserve chairman whose name was given to a provision of the Dodd-Frank overhaul of financial rules, called for reforms of both government and the financial system in a speech yesterday.
http://jlne.ws/GPxFRX

ECB eyes exit for E40bn crisis fund
By Ralph Atkins in Frankfurt and Mary Watkins in London – Financial Times
The European Central Bank is falling behind on a E40bn asset purchase programme launched at the height of eurozone crisis, in a sign it could be dropped as a first step towards unwinding huge emergency support for the region’s financial system.
http://jlne.ws/GPxCWj

Europe’s Debt Woes Getting a Spanish Accent
BusinessWeek
From bad loans to surging government debt, Spain is now the euro nation causing investor concern
http://jlne.ws/GPxDcB

Environmental Trading News

EU Airline Carbon Tax Friction Is Hint Of New Climate Politics
Gerard Wynn – Reuters
That slow rate of progress underscores how multilateral climate action has faded over the past decade. It also underlines why it would be madness to expect the U.N. body, the International Civil Aviation Organisation (ICAO), to galvanise global action to curb carbon emissions from passenger jets, as countries asked them to do 15 years ago.
http://jlne.ws/GFDULl

**JK – Key legal point here from Wynn. “Regarding the notion that its charges are a tax on jet fuel (not allowed under the 1944 Chicago Convention on aviation), it says emissions permits are not the same thing because an airline can avoid paying at all if it undercuts its free quota by becoming more efficient. On both these counts the bloc won a landmark case at the European Court of Justice in a judgment favouring Brussels against U.S. carriers last December.”

Heads in sand on emissions trading
FT.com
Sir, Poland’s veto, at the European council of environment ministers on March 9, on increased ambition for Europe on climate change will alarm all who see the need for the world to move quickly to a low-carbon or no-carbon future.
http://jlne.ws/GDECG8

**JK – Henry Derwent chimes in.

Carbon Plan Could Pay Off for Airlines
NYTimes.com
Emirates, an airline based in wealthy Dubai, has been among the outspoken opponents of a system making airlines account for their pollution on all flights using E.U. airports.
Yet Emirates could make a modest profit of 1.5 million euros, or $2 million, from a small surplus of permits, each representing a ton of carbon dioxide, that airlines can trade as part of the system.
http://jlne.ws/GDh6c3

For more environmental trading news, subscribe to the Environmental Markets version of the John Lothian Newsletter edited by Jim Kharouf.
Visit http://www.jlnenvironmental.comto subscribe.

Exchange & ECN News

Deutsche Boerse appeal seen having “near zero chance”
By Luke Baker – Reuters
Antitrust lawyers see scant chance that Deutsche Boerse AG will win its appeal against the European Commission’s rejection of its merger with NYSE Euronext, saying it may be challenging the ruling only to ease the way for future deals.
http://jlne.ws/GPxDcK

CBOE Holdings, Inc. Announces Date of First-Quarter 2012 Earnings Release and Conference Call
CBOE Holdings, Inc. (NASDAQ: CBOE) will announce financial results for the first quarter of 2012 after the market closes on Tuesday, May 1, 2012. A conference call with remarks by CBOE Holdings, Inc. senior management will begin at 3:30 p.m. Central Time. A presentation will be referenced during the call and will be available on the Investor Relations section of our website at www.cboe.com under Investor Relations, Events & Presentations.
http://jlne.ws/GPxDt6

SGX introduces dual currency trading
Singapore Exchange (SGX) today introduced dual currency trading which enables listed securities to be traded in two different currencies. This additional functionality on its trading engine aims to deliver greater cost efficiency to investors as they are able to trade foreign-denominated securities in their local currency.
http://jlne.ws/GPxDtk

NYSE Euronext Welcomes Ziggo On Its European Market – Largest IPO In Europe In Almost A Year
http://jlne.ws/GPxGoK

CBSX Trader News Update CBSX Announces Changes to Pricing
http://jlne.ws/GPxGoR

BME: Carbures To Start Trading On MAB Tomorrow – It Is The Nineteenth Company To List On The MAB’s Growth Segment
http://jlne.ws/GPxGp1

Irish Stock Exchange Joins BT Radianz Cloud Community – Irish Stock Exchange Data Feeds Now Available To Users Of The BT Radianz Cloud
http://jlne.ws/GPxGFo

London Stock Exchange Welcomes Scotland’s Energy Assets Group Plc To The Main Market
http://jlne.ws/GPxGFu

SIFMA Market Close Recommendations for Good Friday and U.K. Easter Monday Holidays in the US, the UK and Japan
http://jlne.ws/GPxE0m

Admission Of New Luxembourg State Issue On The Luxembourg Stock Exchange
http://jlne.ws/GPxEgE

NASDAQ OMX Commodities And Nord Pool Spot Monthly Market Report – February 2012
http://jlne.ws/GPxHco

Banks, Brokers & Dark Pools

BofA’s Orcel to Join UBS
BY DANA CIMILLUCA – WSJ
Bank of America Corp.’s Andrea Orcel plans to leave the big U.S. lender’s European operation to become co-head of UBS AG’s investment-banking unit, according to people familiar with the matter.
http://jlne.ws/GPxHsM

BofA’s McNiff Said to Resign From Mortgage-Trading Unit
Bloomberg
JPMorgan Chase & Co. (JPM) and Bank of America Corp. , the two biggest U.S. banks, are cutting senior mortgage traders and salesmen amid a decline in the asset-backed securities market , people with knowledge of the moves said.
http://jlne.ws/GPxHt2

Instinet And J.P. Morgan Sign Reciprocal Liquidity Agreement In Asia
Instinet Incorporated, a global leader in electronic trading and agency-only brokerage services, today announced a reciprocal liquidity agreement between its Asia-Pacific broker-dealer units and J.P. Morgan, broadening the Asian liquidity access opportunities available to each firms’ institutional clients.
http://jlne.ws/GPxHJl

Nomura controls in spotlight in Japan trading probe
Reuters via Yahoo! Finance
Japan’s largest investment bank, Nomura Holdings , faced questions about its internal controls on Thursday as the leaking of insider information by an employee highlighted a breakdown in the firewall supposed …
http://jlne.ws/GPxENH

Morgan Stanley May Swallow Citi’s Smith Barney Whole, Not In Pieces
By Matthias Rieker and Brett Philbin, Of DOW JONES NEWSWIRES
Why buy a part of a brokerage when you can buy the whole thing? For Citigroup Inc. (C) and Morgan Stanley (MS), striking a deal for all of Citi’s stake in their Morgan Stanley Smith Barney joint venture might well be too attractive to ignore.
http://jlne.ws/GPxENK

Deutsche Bank changes legal status of U.S. unit
Reuters via Yahoo! News
Germany’s Deutsche Bank AG changed the legal status of its main U.S. subsidiary, Taunus Corp, as a way to avoid injecting billions of dollars of capital into the unit by 2015.
http://jlne.ws/GPxHZY

Deutsche Bank Financial-Institutions Banker Hammes Said to Leave
Bloomberg
Wolfgang Hammes, the co-head of European financial-institution investment banking at Deutsche Bank AG (DBK) , has left Germany’s biggest lender, according to two people with knowledge of the matter.
http://jlne.ws/GPxIgl

HSBC To Shut Down Consumer Finance Business In Canada
FOX Business
HSBC Bank Canada, a unit of U.K.-based HSBC Holdings PLC, said Wednesday it will wind down its consumer finance operation, throwing 500 people out of work after it failed to find a buyer.
http://jlne.ws/GPxF4g

Ex-Bear Stearns Employees to Get $10 Million in Settlement
Bloomberg
Thousands of former Bear Stearns Cos. (BSC) employees will share a $10 million settlement of lawsuits claiming they lost money on the bank’s stock in their retirement accounts.
http://jlne.ws/GPxIgr

Regulatory News

The SEC News Digest
The SEC News Digest provides daily information on recent Commission actions, including enforcement proceedings, rule filings, policy statements, and upcoming Commission meetings.
http://www.sec.gov/news/digest.shtml

Written Testimony Of Under Secretary Lael Brainard Before The Senate Committee On Banking, Housing, And Urban Affairs On “International Harmonization Of Wall Street Reform: Orderly Liquidation, Derivatives, And The Volcker Rule”
http://jlne.ws/GPxFkF

Testimony, Hearing On H.R. The Swap Data And Clearinghouse Indemnification Correction Act Of 2012 Before The Subcommittee On Capital Markets And Government Sponsored Enterprises, Committee On Financial Services, United States House Of Representatives, CFTC General Counsel Dan M. Berkovitz
http://jlne.ws/GPxIgC

Federal Reserve Governor Daniel K. Tarullo, Regulatory Reform Before The Committee on Banking, Housing, And Urban Affairs, U.S. Senate, Washington, D.C.
http://jlne.ws/GPxFkW

Speech By SEC Commissioner Luis A. Aguilar: Why Seniors Are More Vulnerable Now As Targets For Financial Abuse
http://jlne.ws/GPxKVv

Testimony Concerning Indemnification Of Security-Based Swap Data Repositories – By Ethiopis Tafara Director, Office Of International Affairs, U.S. Securities And Exchange Commission, Before The Subcommittee On Capital Markets And Government Sponsored Enterprises, United States House Of Representatives
http://jlne.ws/GPxINn

Testimony Of CFTC General Counsel Dan M. Berkovitz, Hearing On H.R. – The Swap Data And Clearinghouse Indemnification Correction Act Of 2012 Before The Subcommittee On Capital Markets And Government Sponsored Enterprises, Committee On Financial Services, United States House Of Representatives
http://jlne.ws/GPxINw

Written Testimony Of Secretary Tim Geithner Before The House Committee On Oversight And Government Reform On “Europe’s Sovereign Debt Crisis: Causes, Consequences For The United States And Lessons Learned”
http://jlne.ws/GPxINz

Testimony By CFTC Chairman Gary Gensler Before The U.S. Senate Appropriations Subcommittee On Financial Services And General Government, Washington, DC
http://jlne.ws/GPxINC

“Market Madness” Speech Of CFTC Commissioner Bart Chilton Before The Exchequer Club, Washington, DC
http://jlne.ws/GPxLc5

ISDA Statement On CFTC Final Rule On Customer Clearing Documentation, Timing Of Acceptance For Clearing, And Clearing Member Risk Management
http://jlne.ws/GPxLcf

CFTC Revokes Registrations Of Richard Allan Finger, Jr. And His Company, Black Diamond Futures, LLC Based On Criminal Action
Press Release
The U.S. Commodity Futures Trading Commission (CFTC) today announced that it filed a Notice of Intent to Revoke the Registrations (Notice) of
http://jlne.ws/GPxJ47

NFA orders California firm Intercapital Markets Corp. and its principal to withdraw from NFA membership
http://jlne.ws/GPxJ48

FSA secures £32 million High Court judgment against three land banks but victims are unlikely to get their money back
The Financial Services Authority (FSA) has won an important victory in the battle against unauthorised businesses after the High Court declared that James Kenneth Maynard, Countrywide Land Holdings Limited (Countrywide) and Plateau Development & Land Limited (Plateau) operated a collective investment scheme without authorisation and sold plots of land unlawfully to UK consumers. Regional Land and Countrywide were trading names used by Maynard.
http://jlne.ws/GPxJko

[BCSC] Investor Alert: Securities regulators warn Medwell Capital investors of possible ‘Recovery Room’ scheme
http://jlne.ws/GPxJkr

Investments – Indexes – Managed Futures – Managed Funds

Goldman Sachs Trader Raj Sethi Said to Quit, May Join Hedge Fund
Bloomberg
Raj Sethi, a managing director in Goldman Sachs Group Inc. (GS) ‘s commodity-derivatives trading group, quit after 14 years and may join a hedge fund, according to a person with knowledge of the matter.
http://jlne.ws/GPxLsK

HEDGE FUND RECRUITER: If You Come From This Fund, No One Else Will Want You
Business Insider
Having investing experience with Bridgewater-arguably the largest and most successful hedge fund in the world-should mean the opening of many employment doors in the financial industry.
http://jlne.ws/GPxLJ3

Top-Earning Fund Managers Struggle To Beat Rally
Forbes
The stock market is again outperforming the hedge fund business.
http://jlne.ws/GPxLJ8

Ohio accuses Cargill and Morton of salt plot
By Gregory Meyer in New York – Financial Times
The state of Ohio has accused two road salt vendors including Cargill of conspiring to inflate prices in one of the US’s snowiest regions, putting a spotlight on an obscure corner of the commodities business.
http://jlne.ws/GPxJB3

Sorry Felix Salmon, But You’re Wrong About Tech IPOs
Business Insider
Felix points out that the tech IPO market is broken (he’s right) but instead of trying to come up with ideas to fix it, he says we should do away with it altogether. This is because financial markets demand quarterly performance and are full of algorithmic traders.
http://jlne.ws/GPxLJl

High-frequency trading distorts commodities prices
Dairy Herd
High-frequency traders have caused U.S. commodity futures prices to disconnect from market fundamentals of supply and demand since the 2008 financial crisis, according to one of the authors of a forthcoming U.N. report.
http://jlne.ws/GPxLZC

Buffett gains ground in hedge fund bet
CNN Money
Four years into a 10-year wager that the S&P 500 index will return more than a selection of hedge funds, Warren Buffett has almost caught up with his competition.
http://jlne.ws/GPxLZI

Van Eck Adds a Small-Cap Indonesia ETF
ETF Trends via Yahoo! Finance
Van Eck Global’s Market Vectors exchange traded fund division launched the first U.S.-listed ETF that follows Indonesia’s small-cap equities market Wednesday.
http://jlne.ws/GPxJRw

Three new Lyxor bond index ETFs launched on Xetra
http://jlne.ws/GPxJRE

Eurex to offer new futures on French government bonds
http://jlne.ws/GPxK7Y

UBS Launches ETN with High Monthly Income Potential and Leveraged Exposure to International Real Estate Securities
http://jlne.ws/GPxMga

Reports

Briefing.com Economic Calendar
http://www.briefing.com/Investor/Public/MarketAnalysis/Calendars/EconomicCalendar.htm

USDA Today
http://www.nass.usda.gov/Publications/index.asp

CBOE Events Calendar
http://www.cboe.com/AboutCBOE/EventCalendar.aspx

Economic Release Calendar
The Economic Release Calendar (PDF) is a schedule of government, academic and industry economic releases, provided as a service to CME customers.
http://www.cmegroup.com/tools-information/calendars/

Asia-Pacific News

HKEx: Stock Exchange Participants’ Market Share Report
http://jlne.ws/GPxK86

HKEx: Arrangements For Adjustment Of Hong Kong & China Gas Futures And Options
http://jlne.ws/GPxMgd

Monetary Authority Of Singapore: Voluntary Liquidation Of Lehman Brothers Singapore Pte Ltd And Lehman Brothers Pte Ltd
http://jlne.ws/GPxMgg

Shenzhen Stock Exchange: Pushing Forward Sponsoring Service Idea Innovation And Supporting Three-Rural Enterprises And West China Economy Development
http://jlne.ws/GPxKoE

Frontier Markets

Saudi Market Opens Up, but Gradually
New York Times
Given the authorities’ measured approach to freeing up the economy, steps to attract international funds will take months, if not years, to develop.
http://jlne.ws/GPxKoG

EU Liquidity Spurs Middle East Investing: Trader
CNBC
European Central Bank liquidity measures are spurring investment in the Middle East , the head of an Abu Dhabi-based foreign exchange and commodities trading firm told CNBC Wednesday.
http://jlne.ws/GPxKEY

Bursa Malaysia Proposes To Extend eDividend Facility
http://jlne.ws/GPxKF3

ADX Takes Part In The UAE Global Investment Forum
http://jlne.ws/GPxMN7

Tel Aviv Stock Exchange Launches 3 New Corporate Bond Indices And Upgrades Bond Index Methodology
http://jlne.ws/GPxNAF

John Lothian Newsletter

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