Breaking News

VIX Manipulation Costs Investors Billions, Whistle-Blower Says; High-Speed Traders Profit From Return of Loophole at CME; Tighter monitoring for computer trading demanded

First Read

Hits & Takes
JLN Staff

The SEC’s 2019 budget request of $1.658 billion is a 3.5 percent increase over 2018. The majority of that extra funding, $45 million, would go to “technology enhancements to support the agency’s cybersecurity capabilities, risk and data analysis, enforcement and examinations, and automation of business processes.”~SD

The CFTC’s budget request of $281.5 million for fiscal year 2019 would support 716 full time employees. CFTC Commission Brian Quintenz pointed out that in FY 2016, the agency had 714 full time employees, 689 in 2017 and 670 this year.~JK

Economist/Stanford professor/auction theorist Paul Milgrom received his CME Group-MSRI prize yesterday. Ever watched TV? Are you using your phone to look at this newsletter right now? Well, Milgrom’s work is integral to spectrum auctions, the process by which providers have divvied up the airwaves. For more on Milgrom, see Why Paul Milgrom is an Economist You Should Know.~SD

The MarketsWiki page on NYSE National, the fourth NYSE exchange under the ICE umbrella, has been updated. Did you know it traces its roots back to 1885 and became the first all-electronic stock market in the US?~JK

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Call the Guinness Book – Trading Records at CME Continue
Spencer Doar – JLN
The hit parade continues over at CME Group.
Its markets didn’t need a volatility spike to continue their volume and open interest trends, but CME got one anyway and benefitted, especially in the interest rate options complex. The exchange group already had record electronic daily activity in its interest rate options in January.
/goo.gl/RK4VWi

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Antidote to financial infidelity is honesty
Reuters
Among couples who have combined finances, more than two in five people admit to hiding cash or bills or purchases, or outright lying about earnings and debt, according to new survey data from the National Endowment for Financial Education (NEFE).
jlne.ws/2EFkfPQ

**This story, the day before Valentine’s Day?~JK

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FIA statement on Indian exchanges restricting access to indices and data by foreign exchanges
FIA
FIA today released the following statement in response to the announcement by three Indian exchanges that they will impose restrictions on the licensing of indices and market data for use by foreign exchanges to offer derivatives based on Indian stocks.
/goo.gl/dZoTwJ

**Let’s be open and honest about this.~JK

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Monday’s Top Three
The top read story yesterday was The Economist piece Insider trading has been rife on Wall Street, academics conclude, which used a picture from the movie “Trading Places.” An insider trading movie, yes, but the Oliver Stone classic ”Wall Street” would have been a better fit. Second went to the Bloomberg story on the Indian index bombshell in Singapore Bourse Seeks to Defuse Tensions With Indian Counterpart. Third went to our friend Gary DeWaal‘s Bridging The Week column which looked at more regulation talk about cryptocurrencies.

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Lead Stories

VIX Manipulation Costs Investors Billions, Whistle-Blower Says
Brian Louis, Nikolaj Gammeltoft – Bloomberg
Flaw lets traders whip VIX around without trading, letter says; Wild trading session last week turned spotlight on Cboe index
A whistle-blower told U.S. regulators that a scheme to manipulate the VIX, the volatility gauge thrust into the spotlight last week during a wild trading session, costs investors hundreds of millions of dollars a month.
/goo.gl/dQmmLd

****JB: For other stories on this see the Financial Times article Anonymous ‘whistleblower’ claims ‘rampant manipulation’ of Vix index and/or the Reuters article ‘Whistleblower’ alleges VIX manipulation, urges regulatory probe

High-Speed Traders Profit From Return of Loophole at CME; Tiny gap between private trade confirmations and public data feed can be exploited to detect market moves, critics say
Alexander Osipovich – WSJ
Five years ago, the world’s largest exchange operator vowed to fix a flaw in its systems that allowed high-speed traders to infer the direction of the futures market a fraction of a second before everyone else.
/goo.gl/p1nG7V

CME Group Files Patent for Flexible Blockchain System
Arnab Schome – Finance Magnates
One of the core philosophy behind the introduction of the blockchain technology is its resilient nature to any change of data on the blocks. However, in regards to real world application, this becomes a huge roadblock towards implementing the technology across various applications, as they need to be flexible. Consequently, CME Group has been working to develop a flexible blockchain technology.
jlne.ws/2EjOhW8

Tighter monitoring for computer trading demanded
Philip Stafford – Financial Times
UK regulators have told banks to step up their supervision of computer trading systems that dominate equities and are pushing into other markets.
The warning from the Bank of England’s Prudential Regulatory Authority, and the Financial Conduct Authority, covers the development, audit and monitoring of trading algorithms, which generate quotes for securities automatically without human intervention.
jlne.ws/2EZQ5EL

Deutsche Bank to Pay $4.4 Million Over Traders Who Misled on Bonds
WSJ
Deutsche Bank AG DB 2.76% agreed to pay more than $4.4 million to settle regulatory claims that it failed to supervise traders who misled customers about the price of commercial mortgage bonds.
jlne.ws/2EFjDtw

Market Volatility Strikes Exchange-Traded Products, Alarming Investors and Regulators; Short-volatility products performed exactly as they were designed amid market’s swings, but that is little comfort to investors
Asjylyn Loder and Dave Michaels – WSJ
The recent implosion of two exchange-traded products is renewing questions about the impact of fast-growing passive funds on the markets they are meant to track.
/goo.gl/FntNmc

The Lessons of Black Monday
Barry Eichengreen – Project Syndicate
When interpreting sharp drops in stock prices and their impact, many will think back to 2008 and the market turbulence surrounding Lehman Brothers’ bankruptcy filing. But a better historical precedent for current conditions is the huge one-day drop on October 19, 1987.
jlne.ws/2EZlk2C

’50 Cent’ VIX Trade Just Paid Off to the Tune of $200 Million
Luke Kawa – Bloomberg
Hate it or love it, the underdog’s on top: patiently waiting for the VIX to explode has finally been rewarded in a big way.
/goo.gl/rzD8C7

Bitcoin Investors Aren’t Paying Taxes on Cryptocurrency
Jen Wieczner – Fortune
Despite months of warnings to pay their taxes on cryptocurrency profits, American Bitcoin investors aren’t in a hurry to tell Uncle Sam what they owe.
Early data from one popular tax preparation service shows that only a minuscule proportion—just .04%—of U.S. tax filers have reported their cryptocurrency gains and losses to the Internal Revenue Service so far this year. That’s far fewer than the 7% of Americans who are estimated to own Bitcoin or another cryptocurrency, and who are likely to owe taxes to the IRS on those investments.
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Exchanges, OTC and Clearing

SGX shares fall 9% after Indian bourses rein in offshore trading
Business Standard News
Shares in Singapore Exchange Ltd (SGX) plummeted as much as 9 percent Monday as brokers cut their earnings estimates after a move by India’s three main bourses to stop licensing their indexes and securities to foreign exchanges.
jlne.ws/2EYAKo3

Nifty Stock Futures: Indian Stock Futures Off To A Slow Start In Singapore
Bloomberg
Indian stock futures were off to a slow start on the Singapore Exchange Ltd. today with only 11 out of 50 scrips witnessing any sort of trading interest.
jlne.ws/2stb3JC

CFTC Issues Order Of Registration To ICE Futures Singapore To Permit Trading By Direct Access From The U.S.
Mondovisione
The Commodity Futures Trading Commission (CFTC) announced the issuance of an Order of Registration (Order) to ICE Futures Singapore Pte. Ltd. (ICEFS), a Foreign Board of Trade (FBOT) located in Singapore. Under the Order, ICEFS is permitted to provide its identified members or other participants located in the U.S. with direct access to its electronic order entry and trade matching system.
jlne.ws/2EXGbDF

LME says likely to make fee cuts permanent after volumes rise
Peter Hobson – Reuters
The London Metal Exchange (LME) was likely to make fee cuts permanent on short- and medium-dated carry trades after volumes on those trades rose in January, despite slightly weaker overall turnover, it said on Friday.
/goo.gl/hkprn4

Singapore Exchange shares fall most in nine years after end of India licensing pact
Japan Times
Singapore Exchange Ltd. stock fell the most since November 2008 in early trading Monday as investors reacted to the National Stock Exchange of India Ltd.’s move to end its licensing pact with the Lion City bourse.
/goo.gl/i3822o

Cboe Global Markets Reports Week of Record Trading Activity
Cboe
Cboe Global Markets, Inc., one of the world’s largest exchange holding companies, today reported its busiest week ever with several new trading records across Cboe’s exchanges and products.
/goo.gl/jTZLRs

SIX Swiss Exchange Statistical Monthly Report
SIX
In 2018 to date, a total of 5’949’142 transactions have been executed on SIX Swiss Exchange. This marks a year-on-year rise of 41.6%.
jlne.ws/2EE6HnW

CME Group Announces New Heads of Sales for Europe and Asia
PRNewswire
CME Group, the world’s leading and most diverse derivatives marketplace, today announced it has expanded its international client development and sales efforts with two senior sales appointments in Europe and Asia.
/goo.gl/tLwBqs

Fintech

Why Governments Might Join the Cryptocurrency Craze
David Tweed – Bloomberg
With crypto mania sweeping the world, a handful of countries have stirred at the possibility of issuing their own virtual currencies based on blockchain, the technology behind Bitcoin. For now, the idea seems most popular among autocrats looking to evade or undercut international sanctions that are enforced, in part, through the global banking system. But advocates of government-backed cryptocurrencies (so-named because they rely on cryptography for security) say that if the movement takes hold — which is by no means assured — it could irrevocably change the international monetary system as we know it.
/goo.gl/WgPJMj

Bitcoin Mania Triggers Miner Influx to Rural Washington; Small towns confront surge in power demand as firms that generate new cryptocurrency units ask to set up shop
Alison Sider – WSJ
In Wenatchee, Wash., a bitcoin invasion is under way. Home to hydroelectric dams that harness the flow of the Columbia River, north central Washington has some of the cheapest power in the U.S.
/goo.gl/UoJyhH

Bitcoin energy use in Iceland set to overtake homes, says local firm
Chris Baraniuk – BBC
Iceland is facing an “exponential” rise in Bitcoin mining that is gobbling up power resources, a spokesman for Icelandic energy firm HS Orka has said.
/goo.gl/ARZHMS

Cryptocurrency investors flock to Puerto Rico Investment Summit
Nick Brown – Reuters
Puerto Rico’s annual investment summit, a two-day conference to woo investors to the bankrupt U.S. territory and the first since Hurricane Maria devastated the island, sported some new faces, particularly from the fast-growing cryptocurrency world.
/goo.gl/XeWuhQ

Cryptocurrency mining site hijacked millions of Android phones
Jon Fingas – Engadget
Smartphone users are just as vulnerable to cryptocurrency mining hijacks as their PC counterparts, and sometimes on a dramatic scale. Malwarebytes has detailed a “drive-by” mining campaign that redirected millions of Android users to a website that hijacked their phone processors for mining Monero. While the exact trigger wasn’t clear, researchers believed that infected apps with malicious ads would steer people toward the pages. And it wasn’t subtle — the site would claim that you were showing “suspicious” web activity and tell you that it was mining until you entered a captcha code to make it stop.
jlne.ws/2EmyQ3v

Politics

Trump’s $4.4 Trillion Budget Boosts Defense With More Red Ink
Justin Sink – Bloomberg
President abandons GOP goal of balancing budget over a decade; Pentagon spending would rise 13 percent; EPA cut 25 percent
President Donald Trump proposed a $4.4 trillion federal budget on Monday for fiscal 2019, a plan Congress is expected to all but ignore that would slash entitlements and other domestic programs in favor of higher spending on the military and immigration enforcement.
/goo.gl/sboH9j

Regulation

Investor Protection, Capital Formation and Market Integrity Are Top Priorities in SEC Budget Request
SEC
The Securities and Exchange Commission today announced a $1.658 billion budget request for fiscal year 2019 to support its core mission and expand oversight and enforcement in emerging areas such as financial innovation, market structure and cybersecurity. The SEC’s funding is offset by matching collections of fees on securities transactions and is budget and deficit neutral.
jlne.ws/2EZErKf

As a legal case looms, the past returns to haunt Barclays
Philip Augar – Financial Times
The corridor outside the chairman’s office on the 31st floor of Barclays’ head office in London is lined with portraits of the previous incumbents. Stern-faced Victorians, bewhiskered Edwardians and more softly painted chairmen of the modern age offer a sober reminder of the bank’s long history.
jlne.ws/2ErJvd5

U.S. investment adviser gets prison for insider trading on Pfizer-King deal
Reuters Staff – Reuters
A Long Island, New York, investment adviser was sentenced to six months in prison on Monday after he pleaded guilty to insider trading in connection with Pfizer Inc’s (PFE.N) $3.6 billion acquisition of King Pharmaceuticals Inc.
jlne.ws/2F2kXol

Coincheck reports to regulators over cryptocurrency heist as investors withdraw $373 million
Thomas Wilson and Taiga Uranaka – Reuters
Japanese cryptocurrency exchange Coincheck Inc, under pressure to better safeguard investors after the daring theft of $530 million (£381 million) of digital money last month, said it had on Tuesday filed a report with regulators on the hacking.
jlne.ws/2Eo7mdB

Deutsche Bank, trader settle U.S. SEC charges over bond prices
Jonathan Stempel – Reuters
Deutsche Bank AG (DBKGn.DE) will pay nearly $4.5 million to settle U.S. Securities and Exchange Commission civil charges that it failed to police traders and salespeople who lied to customers about bond prices, the regulator said on Monday.
jlne.ws/2EZlOG3

Barclays charged a second time over Qatar cash injection; Serious Fraud Office charges lender with giving unlawful financial assistance
Martin Arnold, Barney Thompson and Cat Rutter Pooley – FT
Barclays has been charged a second time by UK authorities over its 2008 emergency fundraising, raising the stakes for the British bank in its legal battle over the cash injections it arranged from Qatari investors to survive the financial crisis.
/goo.gl/iTMjXM

Deutsche Bank to Repay Misled Customers
SEC
The Securities and Exchange Commission today instituted an enforcement action against Deutsche Bank Securities Inc., which has agreed to repay more than $3.7 million to customers, which includes $1.48 million that was ordered as disgorgement.
jlne.ws/2EZGwWz

South Korea Considers Cryptocurrency Exchange Approval System
Eli Meixler – Fortune
In a turnaround from its hardline approach to Bitcoin and other cryptocurrencies, South Korea is mulling a licensing system to help regulate the country’s virtual currency exchanges.
Authorities may introduce a system based on the Bitlicense model, developed in New York, Business Korea reports, but a final decision isn’t expected until June.
jlne.ws/2EpaOoB

Remarks of CFTC Chief of Staff Michael Gill at the National Press Club, CFTC Kiss Policy Forum, Washington, D.C.
CFTC
Thank you. And, I want to thank The Risk Desk for hosting this forum.
/goo.gl/neaqzC

CFTC Orders AMP Global Clearing LLC to Pay $100,000 for Supervision Failures Related to Cybersecurity of its Customers’ Records and Information
CFTC
The Commodity Futures Trading Commission (CFTC) today issued an Order filing and simultaneously settling charges against AMP Global Clearing LLC (AMP), a registered Futures Commission Merchant since 2010, for its failure between June 21, 2016 and April 17, 2017 to supervise diligently the implementation of critical provisions in AMP’s information systems security program (ISSP).
jlne.ws/2G68saA

CFTC’s Technology Advisory Committee Announces Agenda for February 14 Public Meeting
CFTC
The Commodity Futures Trading Commission (CFTC) today announced the agenda for the upcoming Technology Advisory Committee (TAC) public meeting that will be held on Wednesday, February 14, 2018 at CFTC’s headquarters in Washington, DC (for attending, viewing, and listening instructions, see CFTC Press Release 7690-18).
jlne.ws/2EWZg8Q

SEC Launches Share Class Selection Disclosure Initiative To Encourage Self-Reporting And The Prompt Return Of Funds To Investors
SEC
The Division of Enforcement of the Securities and Exchange Commission today announced a self-reporting initiative that seeks to protect advisory clients from undisclosed conflicts of interest and return money to investors.
/goo.gl/xF7QWi

Ex-Nomura trader must face SEC charges over bond price lies: judge
Jonathan Stempel – Reuters
The U.S. Securities and Exchange Commission may pursue its civil lawsuit accusing a former senior trader at Nomura Holdings Inc of lying to customers about bond prices in order to boost profit and his bonus, a federal judge ruled on Monday.
/goo.gl/icwfwc

Investing and Trading

Two thirds of investment shops ‘fail to publish full details of charges’
Sam Brodbeck – The Telegraph
The vast majority of fund groups, investment “shops” and wealth managers do not openly declare the full extent of their charges, new research has discovered.
Since the start of the year a European Union directive has forced firms to disclose to new customers the full range of fees they can expect to pay, and the impact they will have on returns.
jlne.ws/2Elyl9I

Does Private Equity Really Beat the Stock Market?
WSJ
Private Equity vs. Public Markets
The above chart shows a comparison method that looks nice and simple—it is like calculating the value of $100 invested in a theoretical average private-equity fund over time versus the total return of the S&P 500 index.
jlne.ws/2EBpDU5

Why Private Equity Risks Tripping on Its Own Success
WSJ
The world of investing is going private—but long-term returns are under threat.
The past decade has seen a flood of capital into hard-to-see, less liquid assets, transforming the scale and scope of the private-equity firms managing this money.
jlne.ws/2EDDt8o

How Volatility Trades Shifted at a Record Speed; Speculators now hold the largest bet in favor of the VIX on record
Jon Sindreu – WSJ
Investors’ bet on calm markets shifted to a record trade in favor of volatility last week, new data shows, a move that unleashed a wave of selling that analysts say fueled the worst equity rout in years.
/goo.gl/7X1R9Q

Investors await Goldman’s $5 billion answers as trading picks up
Catherine Ngai – Reuters
Last year, Goldman Sachs Group Inc executives met with some skepticism after unveiling an ambitious plan to grow revenue by $5 billion, whether or not markets remained subdued. Now that trading has picked up, Wall Street is hoping the bank can do even better.
jlne.ws/2EnsW1Y

Institutions

Investors await Goldman’s $5 billion answers as trading picks up
Reuters
Last year, Goldman Sachs Group Inc executives met with some skepticism after unveiling an ambitious plan to grow revenue by $5 billion, whether or not markets remained subdued. Now that trading has picked up, Wall Street is hoping the bank can do even better.
jlne.ws/2EnsW1Y

Barclays charged a second time over Qatar cash injection
Financial Times
Barclays has been charged a second time by UK authorities over its 2008 emergency fundraising, raising the stakes for the British bank in its legal battle over the cash injections it arranged from Qatari investors to survive the financial crisis.
jlne.ws/2EB5HRw

Citi, Goldman Plan ETFs Tied to Riskiest Bank Bonds
Alastair Marsh, Tom Beardsworth – Bloomberg
New products will track additional Tier 1 bank bond market; Broader access may lead to volatility: Cairn Capital
Citigroup Inc. and Goldman Sachs Group Inc. are among firms seeking to set up exchange-traded funds tracking the riskiest European bank bonds, according to people familiar with the matter.
/goo.gl/BLEJPh

Why New Barclays Fraud Charge Isn’t the Threat it Appears; U.K. bank faces new charge against the unit that holds its license to operate: that is a risk to its business, in theory at least
Paul J. Davies – WSJ
Barclays BCS 0.47% was slapped with another fraud charge by U.K. investigators Monday, following last summer’s charges against the company and former executives, including its former chief executive. Luckily for Barclays’s investors, this new element sounds more serious than it probably is.
/goo.gl/mU1zRy

Steven Cohen’s Point72 Is Accused of Sexism in Workplace
Miles Weiss, Sail Kishan – Bloomberg
Federal suit filed against investment firm by current employee; Point72 ’emphatically denies’ allegations in the lawsuit
Just as billionaire Steven Cohen stages a comeback as a hedge fund manager, a current employee sued his Point72 Asset Management accusing it of discriminating against women and promoting a culture of sexism.
/goo.gl/8aj7FD

Ex-Nomura trader must face SEC charges over bond price lies: judge
Reuters
Reuters) – The U.S. Securities and Exchange Commission may pursue its civil lawsuit accusing a former senior trader at Nomura Holdings Inc of lying to customers about bond prices in order to boost profit and his bonus, a federal judge ruled on Monday.
jlne.ws/2EE7Z2g

Regions

China Forgets That Oil Is Liquid; Capital controls present a sticky hurdle for local-currency crude futures.
David Fickling – Bloomberg
If China is about to start setting the global price of oil, why isn’t it setting the price of metals?
/goo.gl/iTUPqv

Aso becomes Japan’s longest-serving finance minister since the war
Japan Times
Taro Aso on Monday became Japan’s longest-serving finance minister since the war, marking 1,875 days in office, a day more than Kiichi Miyazawa, the previous record-holder.
/goo.gl/w2frhb

Brexit

Europe speaks its own post-Brexit English
Michael Skapinker – Financial Times
“When push comes to shove.” It was a jolt to hear this expression from a participant at a recent training event in Amsterdam because I had heard the same words at a Frankfurt session the week before.
Both events were in English, and those taking part were fluent and confident. The Dutch trainees’ English was close to a native speaker’s idea of correctness. But in 10 hours of teaching and listening in the two cities, those twin instances of “push comes to shove” were the only bits of metaphorical language that I heard.
jlne.ws/2EpHqye

Brexiters owe us clarity on the sovereignty dividend
Janan Ganesh – Financial Times
If Brexit does its worst, and Britain sags in relevance, those who suspect George Soros of a plot to overturn the referendum will come to pine for the days when global tycoons thought this country worth subverting. An outsider’s thumb on the scales of our politics is easier to tolerate than a shrug of indifference.
jlne.ws/2EoQzaD

Brexit alarm bells are ringing for British industry
Peggy Hollinger – Financial Times
Companies need to make profits to survive. This is such an obvious statement that one wonders why Japan’s ambassador to Britain felt he had to point this out to Theresa May when he visited the prime minister at Downing Street with some of his country’s business leaders last week.
jlne.ws/2EqGJVL

Miscellaneous

Euromoney sells market info unit to Chinese consortium for $180.5 million
Reuters
British business-to-business information company Euromoney (ERM.L) has agreed to sell its Global Markets Intelligence Division (GMID) to a Chinese consortium of CITIC Capital Partners and leading business news outlet Caixin for $180.5 million, it said on Monday.
jlne.ws/2EXyRb9

Bitcoin Industry Grapples With Age-Old Problem of Inheritance
Nate Lanxon – Bloomberg
Five years ago, Matthew Moody was killed during an observational flight when the two-seater plane he was in crashed flying over a canyon in Chico, California.
His father, Michael Moody, knew his 26-year-old son had been mining Bitcoins — today worth thousands of dollars each — but had no idea how many he had or how to find them. Michael Moody has spent the past three years seeking the answers.
jlne.ws/2Eo7SZ5

The Tech Giants Growing Behind China’s Great Firewall
Visual Capitalist
Every day, your feeds are likely dominated by the latest news about Silicon Valley’s biggest tech giants.
Whether it’s Facebook’s newest algorithm changes, Amazon’s announcement to enter the healthcare market, a new acquisition by Alphabet, or the buzz about the latest iPhone – the big four tech giants in the U.S. are covered extensively by the media, and we’re all very familiar with what they do.
However, what is less commonly talked about is the alternate universe that exists on the other side of China’s Great Firewall. It’s there that four Chinese tech giants are taking advantage of a lack of foreign competition to post explosive growth numbers – some which compare favorably even to their American peers.
jlne.ws/2EsaFQY

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About Author

Bergstrom is chief information officer of John J. Lothian & Co. He edits MarketsWiki and JLN Options.