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John Lothian Newsletter: Deutsche Bank to Face British Lawsuit Over High-Speed Trading; Welcome to the Crisis Economy, Where Tumult Reigns; Big Ideas 2016 Chicago looks to boost next-generation financial firms

First Read

One FIA is here
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Getting Squeezed: Introducing Brokers Numbers Waning, Growth Wanting, Future Questioned
New Introducing Broker numbers hit historical low; IB Numbers Shrink 17 percent Since Financial Crisis
By John J. Lothian

There is a funny story about former MF Global CEO Jon Corzine, when he held his first all company conference call with employees. He said he was impressed with how many investment bankers the firm had, having no clue that the number of IBs affiliated with MF Global actually meant introducing brokers. The fate of the company was probably sealed right then and there.

While investment bankers have had their own problems in recent years, it is introducing brokers whose best days seem behind them. A combination of factors, from regulation to technology along with user preferences have changed the structure, relationships and future between futures commission merchants and IBs.

Last year produced the lowest number of new IBs of any year since the firm category was established. Just 80 new IBs registered with the National Futures Association in 2015, a dramatic drop of 47.7 percent from 153 in 2014 and further still from the 185 launched in 2013, according to data from the NFA.

The number of NFA registered IBs has fallen to 1,236 at the end of 2015, down 17.6 percent from 1,500 in 2008. Meanwhile, FCM numbers have seen a steep drop since the Global Financial Crisis, with just 61 at the end of 2015, down from 139 in 2008, according to NFA data.

And here is what it looks like with what is left. Of the 61 FCMs still out there, just 13 FCMs have IB relationships, according to industry sources. And of those, about 80 percent of the IBs clear through just two firms, ADM Investor Services (ADMIS) and R.J. O’Brien

For the rest of the commentary, click here

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Gareth Parker, FTSE Russell – The Boring Bit of the Investment Management World, And Why It’s Not
MarketsWikiEducation.com

“Smart Beta is essentially the indexing of interesting ideas. These index guys are turning expensive good techniques into cheap good techniques.”

Picture if you will a time and place where there is no such thing as an index – no Dow Jones Industrial Average, Russell 2000, no FTSE 100. How would you measure relative performance? The answer is, you wouldn’t, and it was not so long ago that we didn’t.

Gareth Parker takes through a brief history of indexing, what he calls the “boring bit” of the investment world. As the talk progresses, we see that, not only is the the always evolving world of indexing not boring, it can be lucrative, for both job seekers and investors.

Watch the video »
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The Big Shock – Yesterday’s Top Three
Doug Ashburn – JLN
As we continue this daily exercise of researching and rerunning the top stories from the previous issue of JLN, we have noticed some interesting trends about reader habits. Yesterday, for example, was rather interesting. First, it was a market holiday in the U.S., so it would stand to reason that our open rate would be lower. It was, but not by much. Overall click counts, however, were up, perhaps as those who did open the newsletter had more time to read and ponder.

But not too deeply, apparently, as the top stories tended toward the light and whimsical rather than the deep market structure issues. Numbers one and three were the argument between Politico and the Roosevelt Institute over the movie “The Big Short.”

What ‘The Big Short’ Gets Wrong – Politico
What The Big Short Gets Right (and What Politico Gets Wrong) – Roosevelt Institute

Sandwiched in between was Lynne Marek’s story on the idea of a Chicago fintech hub – a great idea whose time has come. Chicago is, in many ways, leading the fintech revolution, but in a less formalized way than, say, London, Singapore or Silicon Valley. It is time to remedy that.

CME, Morningstar CEOs mull financial technology hub – Crain’s

All in all, it has been interesting to watch these reader trends, especially as we combine it with the results of our survey, now live and gathering results. If you have not taken it, please click HERE and give us three minutes of your time.

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Bridging the Week by Gary DeWaal: January 11 – 15 and 19, 2016 (Part 30; Short Sales; Attempted Manipulation; Another Exam; More Capital, Billions)
Katten, Muchin & Rosenman LLP
Last week a non-US broker was sanctioned by the Commodity Futures Trading Commission for purportedly dealing with two institutional US customers without being registered as a futures commission merchant or exempt from registration. In the United States, a broker-dealer was sanctioned for alleged breakdowns in its compliance with Securities and Exchange Commission rules regarding short sales. Also, industry organizations tried to help the court in a CFTC enforcement action by pointing out that the CFTC is trying to use an incorrect standard to prove a charge of attempted manipulation. I also review Billions, the new Showtime serial drama about a fictional US Attorney and a highly successful hedge fund manager. As a result, the following matters are covered in this week’s edition of Bridging the Week:
bit.ly/1ODhBV6

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Lead Stories

Deutsche Bank to Face British Lawsuit Over High-Speed Trading
By JACK EWING – NY Times
Deutsche Bank, already troubled by lawsuits and official investigations, faces another challenge. A group of lawyers said on Monday that they planned to sue the company in British court, accusing the bank of using high-speed trading software to profit in foreign currency markets at the expense of customers.
nyti.ms/1RxyrL6

Welcome to the Crisis Economy, Where Tumult Reigns
By STEPHEN FIDLER – WSJ
Myriad sources of anxiety are roiling global financial markets and political capitals: a weakening Chinese economy; collapsing oil prices; escalating tension in the Middle East that has spawned a refugee crisis in Europe; the possibility of financial dislocation as U.S. monetary policy tightens.
on.wsj.com/1PCWxhw

Big Ideas 2016 Chicago looks to boost next-generation financial firms
Meg Graham – Chicago Tribune
Entrepreneurs and leaders in financial technology want to knock down walls in 2016.
“You’re going to, for the first time, see the fin-tech community come together in Chicago in a cohesive manner,” said David Weinstein, founder and managing partner of Freshwater Advisors.
trib.in/1RxyxSX

Basel rules to cost banks EUR40m-EUR120m each, says study
Laura Noonan, Investment Banking Correspondent – FT
Global banks will have to spend between EUR40m and EUR120m each to implement global regulators’ latest rules on trading book capital, a new study from consultants Oliver Wyman claims.
on.ft.com/1U99Qu3

IEA Sees Risk of World Drowning in Oil
Grant Smith – Bloomberg
Iran could restore 600,000 barrels a day of output by mid-year; Agency cuts 2016 global demand outlook, raises non-OPEC supply
Global oil markets could “drown in oversupply,” sending prices even lower as demand growth slows and Iran revives exports with the end of sanctions, according to the International Energy Agency.
bloom.bg/1nhWaTb

Beware self-fulfilling prophecy of crashing markets, IMF warns as growth is cut again
By Mehreen Khan- Telegraph
The International Monetary Fund has been forced to slash its global growth outlook after just three months, as market turmoil over China and the perilous effects of the oil price collapse weigh down on the world.
bit.ly/1QkPLlp

U.S. Yields Near 2% Make Traders Wonder Where Animal Spirits Are
Wes Goodman – Bloomberg
America’s economic potential is waning, Sumitomo Mitsui says; Low yields don’t automatically mean recession, BNP says
Treasury benchmark yields that fell to 2 percent this month are raising concern the U.S. economy is losing momentum.
bloom.bg/1Zyg5ZJ

Dark pool figures show growing global demand despite controversy; Despite increasing political pressure, dark pool trading was stronger than ever in 2015.
By John Bakie – The Trade News
Dark pools have continued to see record trading volumes in 2015, with regulatory proposals to curb the practice failing to prompt any early withdrawal by the buy-side.
bit.ly/1T13vSQ

Dark pool operator Liquidnet Europe enjoys record trading year
Philip Stafford – FT
Trading at Liquidnet Europe, the block trading venue, hit a record last year as local fund managers embraced making deals away from incumbent exchanges and rivals were hit by regulatory fines.
on.ft.com/1OD5hnT

Clive Palmer Under Pressure From Commodity Prices; Australian businessman loses control of Queensland Nickel as metal prices tumble
By RHIANNON HOYLE – WSJ
Clive Palmer’s resources bets helped to underpin an empire that ranged from animated dinosaur parks to a political party that held the balance of power in Australia’s upper house.
on.wsj.com/1ZJBAMs

Regulatory

EU sees deal with U.S. over derivatives rules in H1-top official
Reuters
The European Commission expects to reach within six months an agreement with Washington that would allow it to declare U.S. rules for clearing derivatives equivalent to its own, a senior EU official told Reuters. The two sides are introducing rules to make derivatives such as credit default swaps more transparent after their opacity played a key role in exacerbating the financial crisis that rocked global markets in 2007-09.
reut.rs/20bsqFm

Dodd Frank has boosted liquidity and cut costs, says BOE
IFRe
The impact of post-financial crisis legislation to move trading of standardised swaps onto electronic venues has been overwhelmingly positive, boosting liquidity and cutting costs, according to a Bank of England staff paper. The impact suggests that the Dodd Frank mandate should be extended to cover more asset classes, the paper says.
bit.ly/20bsWDc

China’s top market regulator may be resigning
Quartz
The head of China’s top market regulatory agency, the China Securities Regulatory Commission (CSRC), has offered to step down, Reuters reports, citing market and political sources. Xiao Gang, 57, tendered his resignation last week, but it’s not clear whether it has been accepted, according to Reuters.
bit.ly/20bvXn2

GC16/1: Proposed guidance on voluntary redress schemes under the Competition Act 1998
UK FCA
We invite views on the proposed guidance, which explains how we will exercise our powers to approve and enforce redress schemes under CA98.
bit.ly/1U99NhN

Proposed Rules
SEC
Access to Data Obtained by Security-Based Swap Data Repositories and Exemption from Indemnification Requirement (Release No. 34-76922; File No. S7-15-15])
jlne.ws/1JoVeWA

Self-Regulatory Organization (SRO) Rulemaking and National Market System (NMS) Plans

    • CBOE: Notice of Filing and Immediate Effectiveness of a Proposed Rule Change to Amend the Fees Schedule (Release No. 34-76923; File No. SR-CBOE-2016-002); see also Exhibit 5
    • NASDAQ OMX BX: Notice of Filing and Immediate Effectiveness of a Proposed Rule Change to Amend Exchange Rule 7018 (Release No. 34-76915; File No. SR-BX-2016-001; January 14, 2016); see also Exhibit 5
    • NYSE Arca: Notice of Filing and Immediate Effectiveness of Proposed Rule Change Amending the Fees for NYSE Arca Integrated Feed (Release No. 34-76914; File No. SR-NYSEArca-2016-03; January 14, 2016); see also Exhibit 5
    • OC: Notice of Filing of Proposed Rule Change Relating to the Summary Imposition of Fines (Release No. 34-76920; File No. SR-OC-2015-03); see also Exhibit 4

jlne.ws/1JoVeWA

Exchanges & Trading Facilities

Dalian Commodity Exchange: Notice On Adjusting The Premiums And Discounts Of The Corn Futures For Designated Delivery Warehouses
MondoVisione
It has been decided after discussion that DCE will adjust the premiums and discounts of the corn futures for the designated delivery warehouses.
bit.ly/1n7nToT

Politics

Republican candidate Rubio: Fed needs clear rules to guide rate hikes
Reuters
U.S. Republican presidential candidate Marco Rubio said on Monday that the Federal Reserve should approach interest rate increases according to clear rules to make future hikes predictable.
reut.rs/23c6NHl

Hedge Funds & Managed Futures

Alarm bells ring louder on US inflation
Sam Fleming in Washington and Robin Wigglesworth in New York – FT
Even as the Federal Reserve was lifting short-term interest rates last month, several policymakers were expressing misgivings about tightening in the absence of inflation. Since then alarm bells have rung louder as measures of expected inflation have sunk in the markets, alongside a further slide in the oil price and sharp volatility in global equities and bond prices.
on.ft.com/1JeYJPC

Cohen’s Point72 Seeking to Hire Up to 70 for London Office
Nishant Kumar & Will Wainewright – Bloomberg
Steven A. Cohen’s wealth fund leased space in St. James’s; Jonathan Jones to be responsible for `talent’ management
Point72 Asset Management, the firm that oversees billionaire Steven A. Cohen’s wealth, is seeking more than 40 traders and analysts as it expands its London office.
bloom.bg/1PnNxMX

Banks & Brokers

Merrill’s Broker Herd Eyes Greener Pastures; Expiration of retention packages has brokers considering exits from BofA unit, while Morgan Stanley challenges for top brokerage revenue
By CHRISTINA REXRODE and MICHAEL WURSTHORN – WSJ
Can Bank of America Corp. finally corral Merrill Lynch’s “thundering herd”? This year marks an inflection point for the bank, which seven years ago bought Merrill Lynch & Co.—and dubbed the firm’s brokerage unit the crown jewel of the deal.
on.wsj.com/1PnNErO

JPMorgan shuffles senior ranks at European investment bank
BY ANJULI DAVIES – Reuters
JPMorgan (JPM.N) has bolstered the senior management team at its European investment bank as it seeks to increase its advisory business amid a buoyant M&A market, according to a memo seen by Reuters on Monday.
reut.rs/1V4zpwq

Barclays Completes Sale of Controlling Interest in Trust Business
By CHAD BRAY – NY Times
The British bank Barclays has completed the sale of a controlling stake in its trust business to an independent investor group led by the Nielsen and Sarikhani families for an undisclosed amount.
nyti.ms/1V4AbcE

IG Group chief backs improved performance despite profit fall
Harriet Agnew – FT
IG Group, the UK spread betting company, has reported a drop in profits even as revenues increased in its first set of half-year results under chief executive Peter Hetherington.
on.ft.com/1OD6P17

Bank of America’s quarterly profit rises 9.8 percent; A Bank Of America ATM is pictured in the Manhattan borough of New York in this Reuters
Bank of America Corp reported a 9.8 percent rise in profit for the final quarter of the year, helped by lower expenses even as revenue growth remained sluggish.
reut.rs/1lqziiy

Credit Agricole confirms regional bank plan to boost capital
Reuters
Credit Agricole SA (CAGR.PA) on Tuesday confirmed a report that it was looking at the possibility of selling stakes in over three dozen regional banks, saying it would bolster its capital and help finance dividends.
reut.rs/1ni46E0

Clearing & Settlement

Mizuho starts clearing through SwapClear
GlobalCapital
As part of plans to grow its derivatives business, Mizuho International has begun to clear Euro and US dollar interest rate trades through LCH.Clearnet’s SwapClear.
bit.ly/20bswg8

Keler in running to establish regional clearing house
The Budapest Business Journal on the web
Hungary’s central depository and clearing house Keler is competing to become the foundation for a regional clearing house, recommended by the European Bank for Reconstruction and Development (EBRD), Keler said today, according to Hungarian news agency MTI.
bit.ly/20bsLrG

Indexes & Products

Tokyo Financial Exchange And S&P Dow Jones Indices Sign A License Agreement For DJIA Index
MondoVisione
Tokyo Financial Exchange Inc. (TFX) and S&P Dow Jones Indices LLC have signed an agreement which allows TFX to list DJIA Margin contracts based on Dow Jones Industrial Average (DJIA) on TFX.
bit.ly/1lqv76q

3 Facts You Didn’t Know About the S&P 500
The Motley Fool
Investors have trillions of dollars in investments that track the S&P 500, and the index is among the most popular benchmarks not only in terms of index-tracking investments but also in measuring investment performance in the stock market. Yet even though it’s incredibly important for investors, the S&P 500 has some little-known aspects to it. Let’s take a look at three facts that most people don’t know about the S&P 500.
bit.ly/20bu0ac

The Big Number – WSJ
58.3%
Average loss on junk bonds of energy and mining issuers ranked lowest on governance
In the struggling high-yield bond market, how a company handles governance matters may be a predictor of returns. That’s especially true in beaten-down commodity sectors, including energy and mining.
on.wsj.com/20btLvL

The bear is back: Experts warn the FTSE 100 is on the brink as global market volatility continues
City A.M.
Fears that the FTSE 100 could be dragged into bear market territory deepened yesterday as global equities were gripped by volatility in another day of torrid trading. The FTSE 100 has so far managed to fend off falling into the bear trap, trading around 19 per cent off its all time high of 7,103 in April last year. However, experts have warned that London’s premier index is now on the brink.
bit.ly/20btSrc

For E.T.F. Traders, Lessons From the Panic
By CONRAD DE AENLLE – NY Times
A selling point of exchange-traded funds over traditional mutual funds is that they can be traded at any time during a market session, but when stocks plunged as soon as trading began on Aug. 24 — that feature of E.T.F.s became a bug.
nyti.ms/1RQWpl2

The Rieger Report: Munis Rich or Cheap? It’s all relative
Indexology – S&P Dow Jones Indices
Are U.S. municipal bonds rich or cheap relative to other fixed income asset classes? It is all relative. As of January 15th 2016, the yield to worst of investment grade bonds tracked in the S&P National AMT-Free Municipal Bond Index was a 1.8% (tax-free yield). The Taxable Equivalent Yield (TEY) of those bonds using a 35% tax-rate assumption would be 2.77% (the required yield of a taxable bond to keep the same interest income after taxes).
bit.ly/20bu3CX

Technology

WhatsApp and Instagram shift business models
Murad Ahmed in Munich and Robert Cookson in London – FT
WhatsApp and Instagram unveiled changes to their business models on Monday, as the Facebook-owned apps look to find ways of turning their wide user bases into substantial businesses.
on.ft.com/1n7mChC

UK tech start-ups set for £500m Chinese fund boost
Hugo Greenhalgh, Wealth Correspondent – FT
Chinese investors are on the hunt for the UK’s next unicorns — start-ups that reach a $1bn valuation — with the launch of a £500m, London-based venture capital fund to invest in European technology companies.
on.ft.com/1Zyhsrg

MAS to actively promote financial innovation
TODAYonline
Technology will challenge existing players in the finance industry but it also presents opportunities that the Monetary Authority of Singapore (MAS) is keen to tap on to build a Smart Financial Centre that is vibrant, innovative and efficient.
bit.ly/20bsHrM

As More Pay by Smartphone, Banks Scramble to Keep Up
The New York Times
Americans in their 20s and early 30s, analysts say, offer a glimpse of tomorrow’s banking market. “Their relationship with the financial system is very different — it’s an electronic one, on their smartphones,” said Mark Zandi, chief economist at Moody’s Analytics. “That can and will be very disruptive to the banking system.”
nyti.ms/20bu8Xs

Enforcement

Seize gains in HDFC MF front-running case: Sebi; The said 2000 case allegedly led to unlawful gains to seven entities of two different groups
Business Standard
Capital markets regulator Securities and Exchange Board of India (Sebi) has issued an order to seize allegedly unlawful gains made by six entities in a case involving India’s largest mutual fund house, HDFC MF.
bit.ly/1WquAPa

Environmental & Energy

2015 a ‘tipping point’ for climate change: experts
By Marlowe Hood – Phys.org
When future generations write the history of humanity’s faltering quest to repair Earth’s climate system, 2015 will have its own chapter.
bit.ly/1ntXjXq

A carbon price will reduce emissions more than computer models predict
By Noah Kaufman – Eco-Business
How much would a carbon tax reduce U.S. emissions?
bit.ly/1losimd

EU Market: Carbon prices crash through 7 euros to post another 10% weekly drop, enter bear market
Carbon Pulse
EU carbon hit a 10-month low on Friday to continue the rocky start to 2016, which has wiped almost 20% off EUA prices since the end of 2015.
bit.ly/1RPLFDg

US becomes net natural gas exporter next year, predicts EIA
By Karen Thomas – LNG World Shipping
New LNG-export capacity will turn the US into a net exporter of natural gas from the middle of next year, according to the latest Energy Information Administration (EIA) Short-term Energy Outlook.
bit.ly/1Qjd9Q7

China Plans A Floating Nuclear Power Plant
By James Conca – Forbes
China is working on a floating nuclear power plant that could sail to specific sites and anchor offshore to produce power for various needs.
onforb.es/1U7NgBZ

Asia-Pacific

The Economic Outlook of Hong Kong
The Market Mogul
In the first three quarters of 2015, Hong Kong’s Gross Domestic Product (GDP) expanded by 2.5% year-on-year in real terms with a stable inflation rate and a slightly decreasing unemployment rate. However, just after the huge plummet in stocks market in August, major funds and investors have withdrawn their capital from Hong Kong. According to UBS Group AG, Hong Kong’s growth next year could slow to just 1%, the lowest level since the global financial crisis of 2009.
bit.ly/20buAF5

Hong Kong banking on a big role in financing China’s One Belt, One Road plan linking Asia to Europe and the Middle East
South China Morning Post
Hong Kong’s biggest banks and private equity players are moving fast to position their strategies to capture infrastructure financing opportunities that will emerge under China’s ‘Belt and Road’ initiative that is estimated to create a US$8.5 trillion market in the coming decade.
bit.ly/20bw1Dj

China’s growth hits quarter-century low, raising hopes of more stimulus
Reuters
China’s economy grew at its weakest pace in a quarter of a century last year, raising hopes Beijing would cushion the slowdown with more stimulus policies, which in turn prompted a rally on the country’s rollercoaster share markets.
reut.rs/20bw95I

Current financial-market turbulence doesn’t displace longer-term picture in Asia: Tharman, Technology
THE BUSINESS TIMES
THE current turbulence in financial markets doesn’t displace the longer-term picture in Asia – that its markets are expanding faster than the rest of the world, and technology innovation is key, said Deputy Prime Minister Tharman Shanmugaratnam, speaking in London at the Entrepreneur First (EF) Singapore launch event on Tuesday.
bit.ly/20bwdlX

Frontier Markets

Commodity collapse has more to go as funds make bear bet
Bloomberg
The commodity meltdown that pushed oil to a 12-year low and copper to the cheapest since 2009 isn’t over yet. At least, that’s how hedge funds see it.
bit.ly/1P2wdkP

Almond prices crushed by demand slump and bumper harvest
Emiko Terazono – FT
After several years of defying gravity, almond prices have been crushed.
The market for standard almonds, which hit a record high of $4.70 a pound last August, has almost halved to $2.60 as the market was taken by surprise by a larger than expected harvest last year.
on.ft.com/20bpsRi

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About Author

Doug Ashburn is a former editor-at-large of John Lothian News. He left in late 2016 and is now the managing editor of T3 Custom.