11 min read

Exchange Invest Weekly Podcast 028

Bombay Stock Exchange, a curious announcement on new product: they're looking to introduce a futures contract on Brent crude oil.

The first deals of the year the first results of the year. Everybody's out there executing.

This is the Exchange Invest Weekly podcast.

Hello Ladies and Gentlemen, welcome back to issue 28 of the Exchange Invest Weekly podcast. We begin with an investigation into rebates. The Financial Times was spot on this week in its opinion pages: “an investigation into rebates for brokers is much needed,” Yale school Professor Jonathan Macy noted, “but NYSE and the other exchanges are putting their thumbs on the scale by offering brokers rebates. I think they are kickbacks on the fees charged for placing certain kinds of trades.”

Think about it for a moment there, parishioners, Libor or was a shambles, where the industry paid insufficient attention to the Pinocchio stretching of interest rate. benchmarks by a few lags. And look where that ended up. The risk is clear here too with the American stock market. If you can't perceive it, I'll happily indulge you by writing a few tabloid headlines of how this will look when it blows up.

Broker rebates and the egregious bribes for order flow paid by broker dealers, amount to little more than a form of ‘payola’ according to Professor Macy. If, finally, the dark stuff hits the wind turbines, this is going to blow back and with the broker dealers payola for order flow scam, enabling i’free’ brokerage. That one will expire within 120 days of the top of the next bull market. One-800-my-broker-scammed-me-with-free-commission will be the number one number being dialed by retail punters at that time.

On broker rebates. If they are useful, the industry must make a clear case for them, within, and well beyond, the parish. I am struggling to justify what the point is to these rebates, but then again, US equity trading is such a dog's dinner you have to be certified OCD to even get a copy of cash exchange equity rules. I believe life is way too short to spend so much time complexiifying any stock market, but then again where rebates go, you must make a case or rid us of their presence. Then so too a lot of the US market structure needs a big bonfire to rationalize what is merely a big binary at its transactional heart overlapped overlapped gift wrapped, coddled and swaddled in ridiculous additional rules, regulations and complexity.

US equity trading remains an over regulated hubristically complex mess. Rebates need to go but then again, the market needs a lot of reform from top to bottom. That is surely, Ladies and Gentlemen, what we have GOP governments here to achieve?

Gosh, I feel so much better after that! On to our second story, and it relates to Well, something else that could very easily pique the rantometer: Brexit, Ladies and Gentlemen.

Reuters led us into the week with a very happy headline, “UK financial firms sentiment improves for the first time in four years, according to a survey” #despiteBrexit, or indeed perhaps because we now have some degree of clarity. Brexit is happening, although we don't quite know what the rules and regulations are going to be. And there have been some rather sanguine articles doing the rounds, noting how the UK Government is probably going to have to completely change their attitude. And let's face it, so will the good folks of Brussels too, if we're going to reach some sort of an EU trade deal. At the same time, Reuters also followed up through the offices of the excellent AFME: “Global banks urge the EU to improve market access as Brexit looms.” The interesting shift here is how the Europhile industry bodies like AFME have stopped throwing their toys out of the pram in recent months, as they denied the inevitability of Brexit and began to concentrate constructively on breaking down the negativity and protectionist control frequency of the Brussels blob, while the original industry body petulance, arguably fueled Brussels in net intransigence, the new find maturity of AFME et al, is to be applauded, as it is good for financial markets across the globe, and will hopefully encourage the EU not to harm its member economies.

Meanwhile, a degree of pragmatism in Brexit to a third headline from Reuters: “Brexit deal stalls exchange plans for Euro share trading move.” Aquis Exchange and the London Stock Exchange group are wisely mothballing their Paris and Amsterdam entities respectively, so as not to dissipate liquidity as we await the Brexit deal. Who knows, in due course, it may prove that we don't even need those continental entities. But of course, that awaits the wisdom of Brussels and how they want to actually fund their future and indeed fund the future of Europe.

Wow. A whole Brexit story and no ranting It's incredible dear Ladies and Gentlemen.

Euronext completed another deal this week, the sale of Nordpool, shares so their suzerainty has been completed. Meanwhile, the London Stock Exchange slightly perplexed me they sent the $27 billion Refinitiv deal to EU regulators. In one sense, I'm not even sure they needed to, why didn't they just sit and wait out the clock on this one after all Brexit is going to take place etc etc. The problem here I suppose, is the lack of agreement on benchmarking for this deal. That strikes me as a fatal flaw. Therefore, the EU have got loads of wiggle room to say nasty and horrible things and therefore, in their rather perverted worldview, they could if they want to be nasty enough, say no, or cause some problems for this deal.

Given the fact this deal will likely preoccupy years of London Stock Exchange group management time a little further delay to achieve that basis for discussion would have been wise. Then again as we know when LSEG sends a deal to the EU, and it falls for elementary antitrust reasons, the LSE management themselves never feel the after effect. So I suppose the self interested C suite aren't feeling threatened.

Over in Ukraine, the PftS:  Half of their equity has been bought by the Chinese exchange Bohai Commodity Exchange, extending part of an ongoing plan. They previously bought a Ukrainian Development Bank a couple of years back. In talks that are ongoing, interesting to see born from the cooperation of MILA, that was the inter linkage of various exchanges in Latin America, there could be a sort of Well, I suppose it could be MilaNext, the Colombian Stock Exchange is studying a merger with Chile and Peru.

The Saudis, fresh and emboldened from the magnificence of their IPO for Tadawul (oops I say Tadawul clearly I meant Aramco!) which just completed, of course, a very, very rapid and well facilitated add on issue just last week; they're seeking a London location for their offices. They want to establish a UK outpost in a bid to draw more institutional investors from overseas to the kingdom’s capital market. I've said it before Ladies and Gentlemen, I'll say it again. London office overseas Saudi Arabian Stock Exchange #despiteBrexit. Last week, we were getting very excited about the NSE. an IPO seemed to be underway. Well, that lasted all of about 24, maybe 48 hours before there was another Sebi probe. This time, it seems the NSE may have been leaking some documents. It seems quite incredible within T plus two, every time NSE seems to announce another push for an IPO...

Hey presto, the magical powers of Sebi. investigate more wrongdoing. This one will clearly run and run.

In crypto Land of the stories this week, I suppose the most interesting was deribit. That's an Estonian based derivatives exchange for crypto assets. They're worth, well, getting on for nine figures in valuation. They sold 10% of their equity but more interestingly they rapidly decided to move to Panama. They're leaving the EU entirely. It worries me because cryptocurrency exchanges any way look like a flaky cousin of the exchange parish. And that may of course lead to us seeing an outflux from the EU due to overregulation. The crypto kiddies are not wrong about over regulation within the EU per se, but it always worries me that their motives given the many longstanding lapses in standards by cryptocurrency parishioners compared to legacy markets suggests that they're more keen on avoiding regulation rather than raising standards or building better markets.

And finally, this week, we got a divorce. It came on to the very very saccharin headline update on dtcc Euroclear global collateral joint venture since DTCC, Euroclear global collapse was formed in 2014. We have been very pleased with industry receptiveness to the Margin Transit Utility MTU and the Collateral Management Utility CMU began this fascinating if somewhat dry, as per the usual, DTCC press release, but it went on with a little sting in the tail. “As a result, DTCC and Euroclear have jointly decided to separate the two products and dissolve the joint venture DTCC Euroclear global collateral effect of March 10 20, DTCC and Euroclear are carefully managing this process to ensure the transaction is seamless, and that there is no impact to clients.” Even by the often Z-grade standards of parish agitprop this release is, I believe, a classic. It's an ‘everything's going so well. We're getting divorced.’ Gosh, it's a line even the delusional wokesters Harry and Megan haven't tried as they try to weasel their way out of being royal this week. And that brings us neatly to live for the “Deadline To End Use Of Libor In Doubt As Banks Stall On Software Changes” Reuters trumpeted.

True, the central bank regulatory Nexus had this concerted push for around 18 months ending in q4 last year, when they started to throw the quest for solutions back into the faces of the industry that does not look to be ending well as the risk of fragmentation is growing again. The simple truth is that Libor is tarnished and limited. But we're in danger of seeing horses replaced by donkeys in the haste for a resolution. When no doubt some bright spark is working on the ‘automotive revolution’ in benchmarks somewhere on the horizon. Meanwhile, the Bank of England and the UK FCA weren't letting up with the threats. The UK Working Group on Sterling risk free ref Rates reported on Thursday: “The next steps for Libor transition in 2020.” With the underpinning headline, “the time to act is now.”

Equally, the UK FCA and the Bank of England issued another press release saying “we encourage a switch from Libor to Sonia for Sterling interest rate swaps from spring 2020.

One result this week and mega results they were from IHS Markit which retains ticker symbol INFO. They beat their Q4 earnings and revenue estimates quite spectacularly.

People news this week, one huge headline: the TMX CEO Lou Eccleston is retiring early. At the same time, the board has said it found no evidence of sexual harassment  Of course referring to the many allegations that have come in, by Business Insider and others, about how Mayor Mike Bloomberg was running his company. TMX have said Chief Financial Officer John Mackenzie will take on the duties of interim CEO as the board searches for a replacement. Eccleston's contract was due to expire at the end of 2020. What we know is: when Mayor Mike announced his Newswire was the new Pravda with slavish, unquestioning propaganda for Democrats, but no limits to anti Trump salvos. It struck me they were just publicly codifying what newshounds could already read in plain sight for years. Anyway, in the immediate aftermath of the candidacy announcement by Mayor Mike as he seeks the Democratic nomination, the stories of a frat boy culture emerged from Bloomberg’s storied history. In the midst of the tall tale allegations, some wafted close to the fragrant presence of the nowt outgoing TMX CEO. TMX are clearly to be commended for their rapid response, as we reported an Exchange Invest Weekly 1632 on the 29th of November, “Canada's TMX group says it is looking into past conduct of CEO.” And indeed on December 23, we reported in Ei issue 1651 that “TMX has a high profile lawyer Janice Ribbon to investigate claims against the CEO before he joined.” Now we have an interesting correlation, which is clearly being discussed in dealing rooms across the globe. Lou Eccleston has been cleared, but has anyway announced his departure all in one press release.

I think two things can be said irrefutably:

1) Farewell, Lou.

2) It's tough to see that either of the obnoxious self entitled quasi-regal wokesters, Har-Meg are qualified to run TMX. So I don’t think that this retirement announcement is in any way related to the Meghan debacle and that they're lining up either Harry or Megan to run the TMX exchange in the near future.  One other job announcement this week. Of course, there were dozens of others within the pixels of the Exchange Invest Weekly newsletter,...ICE have appointed an FCM veteran Jamal Hodge as president of ICE Futures Abu Dhabi the new exchange ICE is launching in Abu Dhabi global markets to host the world's first oil futures contracts based on ADNOC Murban crude oil, Jamal joins ICE from RJ O'Brien where he has worked for 14 years.

Meanwhile, in regulation: It was a quiet week as doubtless the blobsters are polishing their skis ahead of some pointless indulgence over the canapes at Davos. However, there is one cheer to be raised from parishioners for SEC Commissioner Hester Pierce, who noted “regulation can stifle the creative juices in people.” A good headline, a great headline. Yep, yep. And thrice Yep, we cry. “stifle” is arguably an understatement!

Technology news this week: Sebi, the Indian regulator slammed the market infrastructure institutions over cyber security. So that probably gives us a theme for the year, to what Sebi will be looking for in exchanges depositories, clearing corporations and other market infrastructure institutions as it seeks to concentrate on cyber security issues.

The Qianhai Mercantile Exchange which is a division of Hong Kong Exchanges Group, they're going to be using blockchain technology from Chinese megatech Ant financial to provide verifiable warehouse receipts. And finally in technology this week, Dash Financial, they have launched a new ATS and various enhanced liquidity solutions for US listed options, smart routing, trading over.

In products perhaps the biggest news of the week was once again in Hong Kong. Tthere the index compiler of the Hang Seng is opening the door for Chinese tech giants to join the index itself. It's a very interesting move, potentially cementing further the Hong Kong gateway to China play just when London and others are at best, finding their feet, creaking under the pressure of a slamming door in front of them when it comes to accessing the Chinese mainland directly from Europe and elsewhere.

Meanwhile, over at the Bombay Stock Exchange, a curious announcement on new product: they're looking to introduce a futures contract on Brent crude oil. Now that is an interesting idea, albeit how will BSE garner volume from mainstream users of Brent, given that Indian rules exclude many investors, and indeed it makes others jump through tedious hoops. Few, particularly in the oil industry will want to subject themselves to the strictures of another regulatory body, particularly Sebi... leaving this a curious orphan of Indian whim and things unless the contracts end up placed in GIFT, and guarantee open access in that international financial center. Either way, it may promote some internal Indian interest in Brent oil. I don't see what's in it for the Brent market per se. And of course, don't forget, unless it's listed in GIFT city, the contract will have to be denominated in Indian rupees. And while we've talked in the past about the idea of internationalizing, the Indian rupee and the soft power that India is losing from not managing to make its rupee an international currency... Frankly, it's very difficult to see how this product is going to get off the ground other than amongst a few crazed Indian punters. That said, the damp squib launch of the week, where clearly there were no Japanese traders doing their traditional vanity trades was to be found in an area with had previously been trumpeted: the Chicago Mercantile Exchange launched Bitcoin options and saw 54 contracts traded, somewhat derisory and presumably slightly delaying what the CFTC Chairman was saying in the past week that “regulated derivatives will legitimize crypto.” Bitcoin legitimization clearly has some way to go if it can only raise 54 options in one day on the giant Chicago Mercantile Exchange.

And so Ladies and Gentlemen, we come to the end of this week's brief review. All the stories in much more detail is of course in Exchange Invest Weekly every day, the newsletter delivered to your inbox for a daily read of all aspects of the business. However, let's finish with one little thought. A headline from Barron's: JP Morgan have taken “a big step in finding the valuation of Saudi Aramco at $2 trillion.” Perish the thought Ladies and Gentlemen, anybody could ever infer this valuation was discerned as a result of client pressure. It's the market naturally doing its invisible.booty shake thing.

Well, let's face it. If Adam Smith had been a contemporary rapper, I'm sure he would have been talking about the invisible booty Shake thing. Much, much, much easier to remember than the invisible hand. And on that note, Ladies and Gentlemen, I wish you a great week in markets. Thank you for joining me, Patrick L Young, discussing the Bourses Business Week, review, the Exchange Invest Weekly