First Read

Bits & Pieces
By John J. Lothian

Mark Hemsley has had to withdraw from our MarketsWiki Education event in London due to conflicts created by the CBOE/BATS deal. We hope to name a replacement soon. I blame Ed Tilly for this. TILLY!!!!

Separately, we have added Tim Edwards, senior director, index investment strategy at S&P Global to the line-up in London for our October 31 event. Tim will be speaking on whether it is – or isn’t – easy to beat the market.

Steve Grob of Fidessa, one of our speakers in London, has a new blog post titled “Anyone for MiFID 3?” He is always a good read and even better in person.

A movie long in development is getting ready for release called “Futures Past,” featuring the markets and Leo and Jordan Melamed. See a link for the trailer below.

Our friends at WILD are having their 5th Annual (how can that be?) Symposium. This one will feature opening remarks by Craig Donohue and an interview he will conduct with CME Board member Terry Savage. There is also a panel discussion and some social time. Men are welcome, though there is a tax for being a non-WILD member or having the wrong chromosomes.

Our friends at FOW will be promoting a new white paper in this newsletter next week with a sponsored content section of this box. Be on the lookout.

The LaSalle Street Trading Tech Awards, what once was the LaSalle Street Dinner to support the Boy Scouts in Chicago, will be held November 10. If you would like to attend, here is the brochure for the event. Matt Haraburda of XR Trading and I are the co-chairs of this year’s financial industry fundraising event for the Boy Scouts, now in its 45th year.

Lastly, please don’t forget to help us promote our London MarketsWiki Education World of Opportunity event. It is through you that we help the industry tell its story and help recruit the next generation of talent into the industry.

OK, one last thing for real. I fell asleep last night with the Chicago Cubs down 5 to 2 in the 4th game of the baseball playoffs. My wife and son (Robby) woke me up to tell me the Cubs scored four runs in the 9th inning while I was asleep to win the game. Based on the news reports this morning, their story appears to be true. And there you have it, the most dramatic come from behind in this round of the playoffs, and I was asleep. Go Cubs!


Futures Past
Movie Trailer
Filmmaker Jordan Melamed returns to his former career as the pits at the Chicago Mercantile Exchange are being silenced by computer trading

**JK: Here it is. Can’t wait to see the whole thing.


LBMA announces Cinnober’s Boat as the chosen provider for trade reporting and transparency project
The London Bullion Market Association (LBMA) announces today that Boat Services Ltd, in a joint submission with Autilla, has been selected as the chosen provider in the LBMA’s Request for Proposal (RfP) process.

**JK: A gold metal for Cinnober and Autilla.


FIA Announces Finalists In Fintech Innovator Competition
FIA announced five finalists for the Meet the Innovators competition at the Futures and Options Expo in Chicago on Oct. 18-20. The five companies were chosen from a pool of 18 fintech startup companies that will be featured at the Innovators Pavilion, a showcase for forward-thinking solutions for the futures, options and cleared swaps industry.

**JK: Why don’t we turn Rob Creamer into Mark Cuban or Kevin O’Leary and make this a fintech Shark Tank?


Anyone for MiFID 3?
Posted by Steve Grob – Fidessa
I was chatting with the Reg folks here at Fidessa Towers yesterday and the spectre of MiFID 3 came up. Before you all jump off the window ledge there is no official notion of this yet, but when will the regulators feel that their work really is done? The direction of travel has been clear for a while – dismantle the current industry and replace it with something that is utilitarian, uniform and, above all, safe.

**JK: A short missive that makes you wonder about the future of this industry. He will be telling us much more about the future at our Marketswiki Education event in London as one of our speakers. Your interns and students won’t want to miss the bionic man.


Justin Schack, Rosenblatt Securities – Making Modern Market Structure

“The whole point of Reg NMS was to deal with the 10 years of change that had already happened — that of course made things even more complex. And there are things about Regulation NMS that we’re dealing with today that some people find problematic. But it is not a new thing and it’s just another block in what I like to call the Jenga tower of market structure.”

It always pays to have an understanding of history, especially when mass media latches onto a storyline and refuses to let go. In the wake of the financial crisis, one of those storylines was equity market structure. In this video, Justin Schack, managing director at Rosenblatt Securities, revisits the events that led to the market’s current state.

A Rube Goldberg machine is the best analogy for the current equity markets, according to Schack. If someone were tasked with designing market structure anew, the result would be far from the current structure. But regulations have unintended consequences, and attempting to surgically remove a previous, problematic “Jenga block” could set off a domino effect that leads to an even more complex situation.

Despite its negatives, Schack points out that the current market structure has lowered transaction costs for institutional investors. Looks like the Frankenstein monster has a nice smile.

Watch the video »

****This is the seventh of our ten New York 2016 presentations. We recently released Gary DeWaal of Katten Muchin Rosenman LLP, Bill Looney of CBOE, Kristin Boggiano of Guggenheim Partners, Bill Harts of the Modern Markets Initiative, Adena Friedman of Nasdaq. and Kenny Polcari of O’Neil Securities We will finish out the New York run just as the team steps onto the plane for London.


GreenKey to Launch Mobile ‘Turret’ App for Traders and Brokers
Green Key Technologies
GreenKey, creator of an award-winning voice workspace platform for global financial market participants, today announced that the firm next month will launch a mobile application for iOS and Android devices.

**JK: Hard to believe you can play Clash of Clans and broker an interest rate swap at the same time. Thanks GreenKey.


Trading Firms Beware: Those That House Spoofers Can Be Held Strictly Liable
In US tort law there is a rigid legal doctrine known as ‘strict liability’ which is frequently used by consumers to hold manufacturers of defective products legally responsible for any harm caused by their products. Consumers who bought and used the product and were injured are able to file suit against the manufacturer and seek damages without having to prove that the manufacturer had reckless, negligent, or bad faith intent in producing the product (hence, the rigidity of the doctrine).
Much to the dismay of trading firms, this legal doctrine has now found its way into the world of financial regulation. The CME Group recently announced that it held Geneva Trading strictly liable for the actions of two of its traders who had allegedly engaged in spoofing-like activity, and ordered the firm to disgorge trading profits of $91,241.

**JK: “I’m sorry {enter your trader’s name here}, I’m afraid you can’t do that…”


Tuesday’s Top Three
Yesterday’s runaway winner for most read story was The Trade’s piece on SynSwap, titled “Blockchain startup aims to replace clearing houses. In second place is a story about more drama in this year’s presidential election, Leaked emails show tension inside Clinton inner circle. Remember when elections used to be boring? The third most read story is from a weekly regular on JLN, Bridging the Week by Gary DeWaal: Strict Liability; EFRPs; Block Trades; Inflated AUM


MWE Europe 2016


Lead Stories

Treasury market plumbing in focus as JPMorgan pulls back; BNY Mellon left standing to settle transactions across US government bonds and funding market
by: Joe Rennison in New York
And then there was one. A crucial US funding market will soon be dominated by just one bank, sparking concern over the integrity of the vast plumbing system that keeps fixed income trading flowing.

***** If you have one of something, it needs to be really really good at what it does.

‘Flash-Crash’ Trader Faces End of Road in U.K. Extradition Fight
Suzi Ring – Bloomberg
Navinder Sarao will ask judge to reconsider extradition appeal; Sarao charged in U.S. with making millions spoofing markets
Navinder Singh Sarao hasn’t ventured outside London for more than a year due to bail restrictions imposed after his arrest for spoofing markets. That could all change should his final appeal fail Friday, forcing his extradition to stand trial in the U.S.

London gold market boosts transparency with new platform; In 2017 physical gold trades by LBMA members will be reported to a platform run by Boat Services
by: Henry Sanderson
The London Bullion Market Association, which oversees the city’s $5tn gold market, has named the financial technology firms that will run its electronic platform in an effort to bolster trading transparency for the precious metal.

Sterling Is Trading Like an Emerging Market Currency; The Not-So-Great British Pound.
Sid Verma – Bloomberg
Is the British pound the new Mexican peso?
U.K. markets are now dancing to an emerging-markets beat as the violent sell-off in the pound this month has triggered a rise in government bond yields as investors look to reprice U.K. sovereign risk.

Data security concerns force banks up into the cloud
Neil Munshi – FT
You have been among the industry’s chief advocates for the cloud — how has the industry responded? What have been the obstacles to adoption? Rick Lane: We’ve been saying for years that new technology is the way forward for the industry. We initially made that statement more reservedly because our customers are some of the most conservative people on the planet. There were a lot of concerns — both justified and irrational — about that type of technology. But those concerns were unfounded in hindsight. Today just about every major bank who is a customer of TT’s is leveraging the cloud in some capacity. The reason they’re doing that, and why this transition happened relatively quickly, is that they wanted do it themselves and physically own the infrastructure and the network in order to be safer.

**JK: Interesting interview with TT’s CEO Rick Lane.

The New Plan to Bail Out ‘Too-Big-to-Fail’ Banks; As part of ‘living wills,’ lenders create new structures to allow most important units to keep functioning, even if parent has to file for bankruptcy
Regulators want to prevent taxpayers from having to ever again bail out big banks. Their latest idea: make the banks bail themselves out.

Tradeweb and FTSE Russell named as providers of Gilt and Treasury Bill end-of-day reference pricing by the UK Treasury
Tradeweb Markets, the leading global marketplace for electronic fixed income, derivatives and ETF trading, and FTSE Russell, the global index provider, today welcomed the decision by the UK Treasury naming Tradeweb and FTSE Russell as the joint future providers for end-of-day reference prices for Gilts and Treasury bills.

Hong Kong Knows More About Money, but France Is Better at Managing It; A global survey of who’s best at handling their finances left out Americans, which turned out to be just as well.
Ben Steverman – Bloomberg
When it comes to abstract financial concepts, people in Hong Kong know their stuff.
It’s the French, however, who rank highest in the world on their overall skill with money, according to an almost-global study released Wednesday by the Organization for Economic Cooperation and Development.

RegNMS: Rules of Engagement for an Electronic Era
Chris Kelly – Fidessa
The technological advances that swept financial markets in the mid-1990s fundamentally changed the way securities were traded. The vast majority of these changes were positive – electronic trading lowered costs and made it possible to execute trades with unprecedented speed and accuracy, and across a growing number of venues and market centers.
The full potential of electronic trading, however, took some time to realize.

A $7 Trillion Moment of Truth in Markets is Just Three Days Away
Tracy Alloway – Bloomberg
If the London Interbank Borrowing Rate was a musical artist, or an actor, or a sports team, we’d be calling 2016 its comeback year. Not since the financial crisis of 2008 has Libor, to which almost $7 trillion of debt including mortgages, student loans and corporate borrowings, is pegged — experienced such a surge. The three-month U.S. dollar Libor rate has jumped from 0.61 percent at the start of the year to 0.87 percent currently — a 42 percent rise — ahead of money market reform that’s due to come into effect on Oct. 14.

Germany’s Banking Problem Is Bigger Than Deutsche Bank; Too many banks are fighting in the same space, while political and legislative hurdles make consolidation difficult
Germany may be Europe’s economic and political powerhouse, but you wouldn’t know it from its banks.

UK faces £1.2bn tax loss after Lehman ruling; High Court rejects Revenue case over £5bn in payments to European arm’s creditors
by: Vanessa Houlder – FT
Up to £1.2bn of tax has been put at risk by a court ruling in favour of the administrators of the European arm of Lehman Brothers.


The pound’s longer, sharper Brexit shock; Sterling’s sharp sell-off represents a challenge by forex markets to the UK government
by: John Authers – FT
The result of June’s Brexit referendum was a shock for the foreign exchange markets, one of the biggest ever. It is now clear that the news at the beginning of this month that new prime minister Theresa May was prepared for a “hard Brexit”, forsaking access to the EU single market in return for taking control of immigration, has administered an even greater shock.

The crash in the pound punctures the delusion that Brexit Britain will flourish
Aditya Chakrabortty – The Guardian
For the most acute comment on the outlook for Brexit Britain, look neither to bankers nor economists – but to the British Museum’s former director. Speaking in Germany last week, Neil MacGregor described his compatriots’ habit of swaddling themselves in their past as if it were a blanket.

Dollar-sterling exchange rate: The plunging pound is the only thing standing between Britain and a “hard Brexit”
Jason Karaian – Quartz
Three months, some bad trading days, and one “flash crash” after the UK voted to leave the EU, the British pound is down around 17% against the dollar, hovering near multi-decade lows. And how’s this for a coincidence? In a new poll of British voters, support for the Conservative party is also bucking historical trends: The party of prime minister Theresa May, charged with taking the UK out of the EU, is now 17 percentage points ahead of the opposition Labour party. This margin has been wider only once since 1992, according to pollster ICM.

Currency Vigilantes Circle U.K. With Pound in Thrall to Politics
Lukanyo Mnyanda – Bloomberg
Pound is main way investors are expressing Brexit concern: DZ; Its rally from near a 31-year low underscores political links
Currency traders are seeking to make their presence felt in the battle over the direction of Britain’s departure from the European Union.

Brexit is making Britons poorer, and meaner
The Economist
THESE are exciting times for Britain’s currency, and not in a good way. On the eve of the vote on whether to leave the European Union, back in June, a pound bought you $1.48. Sterling has since declined by more than 16% against the dollar, to $1.22. Nearly half of the drop has occurred in the last week or so, as the Conservative government has outlined plans for a “hard” Brexit: one which shoves Britain right out of the single market in exchange for the ability to do more harm to itself by reducing migration.

Deutsche Bank News

Deutsche Bank’s Woes Show Up in the Money Markets
By Mark Gilbert – Bloomberg
Deutsche Bank is in trouble. It’s embroiled in talks with the U.S. Justice Department to negotiate down a $14 billion fine for mortgage-market naughtiness. Its share price has halved in the past year. It was granted special treatment in July’s stress tests, according to the Financial Times. And in the European money market, its funding costs are almost twice as much as those of its peers.

Deutsche Bank shakes up investment bank to regain lost ground
Pamela Barbaglia and Sophie Sassard – Reuters
Deutsche Bank promoted a group of its senior investment bankers on Tuesday, part of an internal reshuffle as it tries to boost its flagging performance in corporate mergers and acquisitions and capital markets. The German bank, threatened with a multi-billion-dollar fine from U.S. regulators, saw its global investment banking fees fall nearly 30 percent to $2 billion in the first nine months of the year, slipping behind its nearest European rival Barclays (BARC.L) to seventh position in the investment banking league tables, according to Thomson Reuters data.

Exchanges, OTC and Clearing

How To Value The Bombay Stock Exchange?
Agam Vakil – Bloomberg
India has seen a host of distinct businesses go public in 2015-16. What makes them unique is the lack of listed peers, be it insurance firms, manufacturers of enzymes or diagnostic service providers. Valuing such business models, however, can be a challenge with no clear benchmarks to go by.

ASX Responds To Regulatory Expectations And Updates Its Code Of Practice
ASX has updated its Cash Equities Clearing and Settlement Code of Practice (Code) to align with the set of Regulatory Expectations released today by the Council of Financial Regulators (CFR).

Australia Revises Guidelines for Equities Clearing, Settlement
Adam Haigh – Bloomberg
Minimum conditions for clearing license set out by regulator; ASX updates its code of practice on post-trade services
Australia’s government announced steps to break down ASX Ltd.’s monopoly of clearing and settlement of stock transactions and in return said it would make it easier for the exchange to raise capital.

HKEX Announces Chief Executive of its Commodity-trading Platform in Qianhai
Hong Kong Exchanges and Clearing Limited (HKEX) has appointed Guo Xiaoli as Chief Executive of the commodity-trading platform it is building in the Qianhai Shenzhen-Hong Kong Modern Service Industry Cooperation Zone of Mainland China. It is a new position.

Fresenius Medical Care is celebrating its 20th anniversary at the Frankfurt trading floor;CEO Rice Powell opened trading the stock exchange bell
Deutsche Boerse
On the Frankfurt Stock Exchange this morning was celebrated the 20th anniversary of Fresenius Medical Care and the associated 20-anniversary of listing the DAX Group. Here Rice Powell, CEO of Fresenius Medical Care, the trade has opened with the traditional stock market bell.


Lael Brainard, a Fed governor in the political glare; Board member has become the talk of DC as possible Clinton treasury secretary — and campaign donor
Sam Fleming – Financial Times
In the middle of meetings of the world’s central banking elite in Wyoming’s Jackson Lake Lodge in August 2015, Lael Brainard sat down with activists who were denouncing calls for tighter monetary policy amid America’s sluggish wage growth. As the Federal Reserve Board member listened intently over the course of about an hour, protesters from New York ranging from fast-food employees to a worker on film sets talked about the difficulties of making ends meet on rock-bottom wages in a high-cost metropolis, recalls Shawn Sebastian, field director of the Fed Up coalition that arranged the meeting.

Why we’d all love Donald Trump’s “clean coal,” but carbon capture and storage doesn’t ensure it
Cassie Werber – Quartz
“There is a thing called clean coal. Coal will last for a thousand years in this country,” said Donald Trump, the US Republican presidential candidate, at the debate on Oct. 9. Trump had been asked how to meet the country’s energy needs while protecting jobs in the sector. But what is “clean coal,” and what role does it have in the future energy mix? Firstly, so-called “clean” coal is not a thing, it’s a process.

Investing and Trading

Sterling Is Trading Like an Emerging Market Currency
Sid Verma – Bloomberg
Is the British pound the new Mexican peso? U.K. markets are now dancing to an emerging-markets beat as the violent sell-off in the pound this month has triggered a rise in government bond yields as investors look to reprice U.K. sovereign risk. Amid rising fears that the U.K. will take a big economic hit from its move to leave the European Union, the correlation between the pound and an index of emerging-market currencies has jumped to levels last seen since the run-up to the Brexit vote.

UK government bond trading volume gets a huge Brexit boost
The volume and value of UK government bonds changing hands since Britain’s decision in June to leave the European Union has soared by as much 400 percent, figures on Tuesday showed. The frenetic trading in UK sovereign debt comes as investors try to chart a path through the uncertain outlook for British economic growth, inflation and interest rates in the coming months and years after the June 23 Brexit vote.

Steven Cohen Promises Traders Much Bigger Bonuses—With a Catch; Point72 Asset Management’s president says change is designed to lure new staff during a potential shake-up of the hedge-fund industry
Steven A. Cohen is boosting the bonuses he pays to the top traders managing his $11 billion family fortune, but only if they beat the market.

World’s Biggest Wealth Fund Says Jump in Withdrawals Manageable
Mikael Holter – Bloomberg
Norway’s wealth fund dismissed suggestions by lawmakers that it’s approaching a “critical” point in enduring outflows as the government steps up its raids on the world’s biggest sovereign piggy bank.


Lloyds Banking Group cuts 1,230 jobs as part of strategic overhaul
State-backed Lloyds Banking Group (LLOY.L) said on Wednesday it planned to ax 1,230 jobs as part of a three-year restructuring plan aimed at cutting costs and improving returns for shareholders.

MOVES-Citadel hires top UBS ETF trader Kirk
Citadel Securities LLC said on Tuesday it has hired Haddon Kirk, who has been head of exchange-traded funds trading for UBS AG’s U.S. investment bank.


JP Morgan, Barclays and ICAP invest $30m in cloud technology firm; Cloud9 Technologies sees $30 million in funding which will be used to expand operations into new markets.
By Hayley McDowell – The Trade
Cloud9 Technologies has secured $30 million in funding from the likes of JP Morgan, Barclays, ICAP and Point 72 Ventures.

DongXing Securities selects Horizon for option trading
Automated Trader
Horizon Software (Horizon), the leading global technology provider for electronic trading and investment management, announced today that Chinese broker, DongXing Securities (DongXing), has chosen Horizon for its equity trading, market making and algorithmic trading. The deal is a major extension of Horizon’s use by DongXing Investment, a subsidiary of DongXing Securities, which has a market cap of USD 9.5 Billion and is named as one of the Forbes 2000 largest companies in the world.


Appeals Panel Deals Setback to Consumer-Watchdog Agency
Brent Kendall and Yuka Hayashi – WSJ
A federal appeals-court panel ruled the structure of the Consumer Financial Protection Bureau is unconstitutional, setting aside an enforcement action against a mortgage lender and handing a blow to the five-year-old agency. The decision Tuesday by a three-judge panel of the U.S. Court of Appeals for the District of Columbia Circuit said the consumer-finance watchdog violated the Constitution’s separation of powers because its director isn’t sufficiently answerable to the president.

The European Securities and Markets Authority (ESMA) has published an updated questions and answers (Q&A) document on the application of the Undertakings for the Collective Investment in Transferable Securities Directive (UCITS).

The European Securities and Markets Authority (ESMA) will hold an open hearing in the context of its Consultation on draft technical standards under the Benchmarks Regulation.

SEC Announces Enforcement Results for FY 2016; Increase in Actions Involving Investment Advisers, FCPA Violations; Most Ever Whistleblower Money Distributed in a Single Year
The Securities and Exchange Commission today announced that, in fiscal year 2016, it filed 868 enforcement actions exposing financial reporting-related misconduct by companies and their executives and misconduct by registrants and gatekeepers, as the agency continued to enhance its use of data to detect illegal conduct and expedite investigations.

Sebi to come down hard on illiquid commodities; Sebi has been focusing on improving the risk management of commodity exchanges
Rajesh Bhayani – Business Standard
Commodity markets regulator Securities and Exchange Board of India (Sebi) might suspend trading in commodities or contracts that are illiquid, according to sources. A decision is likely in the next few weeks, sources added.


IMF: Sub-Saharan Africa’s GDP economic growth will fall to its worst level in two decades
Abdi Latif Dahir – Quartz
The economic outlook for Africa keeps getting worse. Growth in the 45 countries that make up Sub-Saharan Africa will drop to its lowest level in more than 20 years, says the International Monetary Fund. It projects a drop to 1.4% this year, less than half last year’s 3.5% and way below the 5% plus the region enjoyed between 2010 and 2014.

Sydney Stock Exchange and APX Settlement respond to Council of Financial Regulators Policy Statements on competition
Sydney Stock Exchange Limited (SSX) and APX Settlement Pty Limited (APXS), members of the Asia Pacific Exchange Group, have today welcomed the announcements by the Council of Financial Regulators’ (CFR) and Treasurer the Hon. Scott Morrison in relation to the regulation of Australian cash equities clearing and settlement services.

Avelacom, a global network service provider, entered into a new partnership with Dubai Gold & Commodity Exchange (DGCX)
The partnership expands options for financial services industry to speed up their trading and identify new arbitrage trading opportunities across key financial and commodity derivatives markets.

Dubai Financial Market issues draft rules on sharia-compliant hedging
Dubai Financial Market (DFM), the Gulf’s only listed stock exchange, has published draft rules covering sharia-compliant hedging, part of broader efforts to develop Islamic business in the emirate.


Rising Sea Levels and a Falling Margin of Safety
Tadas Viskanta – CFA Institute Blog
Our changing climate is having real-world effects.* Miami Beach, Florida, is experiencing increased flooding as a result of rising sea levels. All along the Eastern Seaboard in the United States, cities, towns — even naval bases — are battling an array of problems caused by increased coastal flooding and encroaching tides. Indeed, some scientists speculate that Manhattan — an island, by the way — could at some point find itself under water.

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