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ETF News

ETF and ETP: Now a $3 Trillion Industry

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Back in the day, when “trillion dollar” was a phrase not even contemplated by film writers, and barely envisioned by financial industry wonks (other than in context of US government deficit), and when even being a billionaire was limited to a universe of less than two dozen people, (e.g. Warren Buffett and Bill Gates 25 years ago), few would have predicted that a category of financial vehicle known as exchanged-traded products (ETP), with a sub-sect comprised of exchanged-traded fund (ETF) would become mainstream. Well, ETPs and ETFs are so mainstream now, assets invested in these products have surpassed $3trillion in each of the past two years.

(Traders Magazine) Assets invested in Exchange traded funds and ETPs listed globally have broken through the $3 trillion milestone for the second time at the end of Q1. At the end of May 2015 the assets in ETFs/ETPs listed globally first exceeded the $3 trillion milestone.

During March 2016, ETFs/ETPs listed globally gathered $45.30 in net new assets, according to research from ETFGI, a London-based market research firm. This marks the 26th consecutive month of net inflows. The Global ETF/ETP industry had 6,240 ETFs/ETPs, with 12,042 listings, assets of $3.07 trillion, from 277 providers listed on 64 exchanges in 51 countries, according to preliminary data from ETFGI’s March 2016 global ETF and ETP industry insights report.

“U.S. equities rebounded in March ending the month up 7 percent. Emerging markets and Developed ex US markets also had a strong March ending up 12.5 percent and 7.2 percent respectively. Based on comments from the Fed there is a growing belief that interest rates will be held lower for longer than previously anticipated. The European Central Bank cut rates and announced additional stimulus will begin in April, accelerating the rate of bond purchases from 60 to 80 billion euros per month,” according to Deborah Fuhr, managing partner at ETFGI.

Some ETF numbers, via ETFGI:

In March 2016, ETFs/ETPs saw net inflows of $45.30 Bn. Equity ETFs/ETPs gathered the largest net inflows with $26.30 Bn, followed by fixed income ETFs/ETPs with $14.80 Bn, and commodity  ETFs/ETPs with $2.42 Bn.

In March 2016, 71 new ETFs/ETPs were launched by 27 providers and 30 ETFs/ETPs were closed.

iShares gathered the largest net ETF/ETP inflows in March with US$20.97 Bn, followed by Vanguard with US$9.74 Bn and SPDR ETFs with US$6.25 Bn in net inflows.

YTD, iShares gathered the largest net ETF/ETP inflows YTD with US$24.54 Bn, followed by Vanguard with US$17.82 Bn and SPDR ETFs with US$8.78 Bn net inflows.

S&P Dow Jones has the largest amount of ETF/ETP assets tracking its benchmarks with 27.5 percent market share; MSCI is second with 14.6% market share, followed by FTSERussell with 12.4 percent market share.

Keep reading Traders Magazine story via this link

ETF News, Global Macro Strategy, Strike Price

Global Macro Gut Trade: China ETF

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For those following global macro think tank Rareview Macro’s “Sight Beyond Sight”, you already know that the firm’s chief strategist Neil Azous is on a roll and the firm’s model portfolio is outpacing many who have an ax in global macro style investing. Today’s edition of the firm’s commentary caught the attention of MarketsMuse curators in our ETF and Strike Price departments when noticing a Gut Trade view re the top China ETF: FXI. Below is the extract from today’s edition of Sight Beyond Sight and reproduced with permission..

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Neil Azous, Rareview Macro

Usually, we do our best to provide solid supporting evidence and some underlying insight for every trade we put forward in these pages.

It does not happen very often, at least for us, but sometimes this business is also about a gut feeling, instead of cold analysis, and nothing more. When it strikes, we act.Yesterday, we said that Monday was a top 3 performing day of the year in the model portfolio and that we are going to take that outsized performance for a spin and ramp things up a bit more directionally than normal. So you will see a subtle change in our tone and some of the things we do going forward. It will be a bit more aggressive.

Well, yesterday turned out to be even better than Monday and on account of again closing at a new high watermark for 2016, we feel it’s time to shift into a higher gear.

As we were walking out of a meeting yesterday afternoon we had a “gut feel” that the unwind related to all the voodoo we wrote in yesterday’s edition on a “mini-inflation scare” was going to accelerate and we were not big enough in the positions we had on.

New Position: Long iShares China Large-Cap ETF (FXI)

We make a living by entering trades when no one else is willing to, or by going places where no one else is willing to go. Today is no different.

Let’s go to China.

On March 30th, we added a long FXI position to our watch list.

Last night, the Hang Seng Index showed the largest positive risk-adjusted return across ALL regions and assets.For the avoidance of doubt, the FXI and the Hang Seng, in correlation terms, are virtually one and the same thing. While mainland China indices move and regularly make our risk -adjusted return monitor it is very rare to see the Hang Seng on that screen. We are well aware the data has stabilized in China, their political communication strategy is now more effective than last summer, and they have done a masterful job weakening their currency basket while holding steady vs. the US dollar. But what was missing was some action in the stock market following all that , especially the non-mainland such as Hong Kong.

Our interest is now piqued.

The structure we initially added to our watch list was to go long on the FXI August 38 call options. One structure we like even more is as follows:

1.Buy the FXI Aug 37.5 calls

2.Sell the FXI Aug 28 puts

After last night’s move in Asia, we doubt we will get the chance today as China is bid up.

At yesterday’s closing prices you could add this risk-reversal for even money on account of the puts trading 12 implied volatility points rich to the calls. Selling that expensive skew and knowing that the low in February was $28.44 (vs. the 28 put strike) is a better proxy for getting long than just buying the spot FXI outright. Besides, if we are wrong, and China implodes, we have massive convexity in our book overlays via being long on SPX puts and S. Korea credit default swaps (CDS).

We will see if we get the chance to put this on today for even money, or at least a similar structure. Otherwise, we may have to chase the bid and pay up if we want to participate. It is not going to help our entry point that JPMorgan raised MSCI China to overweight, but at least they downgraded Taiwan to neutral, which we are short of their currency.   Real time updates as to this position and all others are posted via our Twitter feed @NeilAzous

 

Neil Azous is the Founder and Managing Member of Rareview Macro, an advisory firm to some of the world’s most influential investors and the publisher of the daily newsletter Sight Beyond Sight®. Neil has close on two decades of experience across the financial markets, and is recognized as a thought leader in global macro investing. Prior to founding Rareview Macro, Neil was a Managing Director at Navigate Advisors where he specialized in constructing portfolios and advising on risk. His daily commentary was highly regarded by the institutional investing community and his success in delivering a forward-looking viewpoint on global markets helped lay the foundation for Sight Beyond Sight® to be built. On Wall Street, his career included roles at UBS Investment Bank and Donaldson Lufkin & Jenrette, where his responsibilities comprised of trading derivatives, hedging solutions, asset allocation and fundamental securities analysis. He began his career at Goldman Sachs in Fixed Income, after completing both the firm’s Analyst and Associate training programs, widely acknowledged as the pre-eminent and most coveted learning ground for undergraduate and graduate students. Neil completed graduate level coursework for a MS in Real Estate at New York University and received his BA in Business Administration from the University of Washington, where he is a member of the University of Washington Bothell Board of Advisors and was the recipient of the Bothell Business School 2013 Distinguished Undergraduate Alumnus Award. He is active in various charity and community organizations.

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Tech Talk

NYSE Uses Sharp Elbows to Box Out IEX; Hijacks Technology

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The electronic exchange playing field is not for boy scouts. All is fair in love and war. That’s the message NYSE is sending to upstart “Investors Exchange” aka IEX, as the world’s most formidable financial market trading platform is simultaneously lobbying SEC regulators to block IEX’s application to be designated as a full blown exchange because its speed bump technology slows down important liquidity providers from the HFT world, and at the same time, ICE-controlled NYSE Group is picking the pockets and hijacking IEX’s most compelling order technology for its own use. IEX, which developed a new discretionary peg order type known as “D-Reg” and designed to deliver even sharper pricing for those executing block trades is a secret sauce that purportedly delivers a noticeable $68k in savings on a typical $1bil portfolio execution strategy. Pennies perhaps, but pennies add up when being counted by both buy-side and sell-side commission revenue bean counters. And it’s the buyside who count the most, simply because they provide the fuel that feeds the Wall Street trade execution engine.

In case you’ve been asleep for the past several years, IEX, whose brand was burnished when the firm was profiled in the HFT-slam book “Flash Boys”, is backed with nearly $100mil provided by buy-siders for this value proposition: “Unlike all other U.S. equities trading venues, IEX does not adhere to the principle of price-time priority. Instead, the IEX prioritizes orders by price, followed by broker trades, and lastly time.”

When considering the not-so-subliminal Bronx Cheer filing made recently by NYSE to SEC to promote a new application based on IEX technology, the NYSE unabashedly stated: “we want to create a new order type based on IEX technology. The new order would allow market participants “to serve their customers better, thereby protecting investors and the public interest,”

Brad Katsuyama, IEX
Brad Katsuyama, IEX

Fintech wonks might like to believe that intellectual property means something that protects proprietary innovation that others cannot infringe on, but in the regulated world of financial markets, the so-called “what is in best interests of investors” always trumps IP. The take-away message for Brad Katsuyama, the former electronic trading and sales wonk for RBC Capital Markets and brain child of IEX of the ‘altruistic’ platform backed with nearly $100 mil thanks to a group of buy-side flavored investors  “All is fair in love and war when it comes to so-called intellectual property within the world of regulated financial markets.”

IEX investors include an assortment of buy-side firms, along with world-famous technology entrepreneurs and even casino magnate Steve Wynn. That said, MarketsMuse curators have a personal note for Wynn:

Dear Steve: Good news. Playing in the world of electronic stock markets is a contact sport. Get your elbow pads on.”

Gretchen Morgenson of the New York Times tells the story in detail via her 10 April NYT column here

 

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ETF News, Tech Talk

Fintech 201: ESG Investing with Algos

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If you are into fintech, that means you ‘get the joke’ when it comes to using algorithms aka “algos” and for institutional investors having an ax with regard to environmental, social and governance factors (commonly known as ESG investing), Arabesque Partners, a new player in the fund management space might have a solution for you.

(NYT)-Cracker Barrel Old Country Store, the company behind a chain of down-home restaurants, might not seem an obvious model for advanced financial technology. Its specialty is vintage: vintage food, and in its gift shops, vintage toys and vintage music in the form of hymnal CDs.

ESG-InvestingYet an upstart fund manager called Arabesque Partners has determined that Cracker Barrel is among the most attractive investments out there in a special category that takes into account environmental, social and governance factors — known in the industry as ESG.

And even more intriguing: The calculation was not made by a human analyst, but by a robotic one.

In the most recent full quarter for which data was available, Cracker Barrel represented 1.31 percent of the Arabesque Prime fund, which factors in a company’s sustainability and corporate responsibility track record before investing. That was more than any other stock, including more obvious suspects like Unilever, the consumer goods giant that is obsessed with sustainability, and Xinyi Solar Holdings, a big maker of solar panel components.

Arabesque is one of a growing number of investors that are leaning on mountains of new data about companies’ environmental, social and governance performances in hopes of making more profitable trades.

New firms like Arabesque are making ESG data a core part of their strategy. Goldman Sachs has filed with the Securities and Exchange Commission to start an ESG-focused exchange-traded fund. And the biggest money managers in the world, including BlackRock, now regularly incorporate ESG analysis as they compose their portfolios.

Keep reading the NYT DealBook column by David Gelles here

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ETF News, Fixed Income

Experts Eye Equity Options v Credit-Default Swaps

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Violent price swings across financial markets this year have forced corporate bond investors to re-evaluate their portfolio allocations, and subsequently, their hedging strategies. Diminishing liquidity in credit-default swaps has led many traders to delve into equity options.

(TABB Group) by columnist Callie Bost– Imagine you’re a corporate-bond trader and the world is falling apart around you. Your portfolio’s bonds are in freefall and you desperately need to cap your losses. Can you trust traditional credit hedges to come through for you in times of distress? Will you be able to purchase or redeem protection when you desperately need to stay solvent?

Many fixed income investors have run through the same thought process when deciding how to hedge their portfolios. However, the choice to use traditional fixed-income hedges over other instruments hasn’t been so obvious recently.

As banks continue to adapt to regulatory initiatives designed to rein in balance sheet risk, liquidity in CDS markets will continue to dwindle. While the decline of the CDS markets is a grim story for banks and dealers, it has been a beneficial shift for options market participants.

credit-default-swap payoutTraditionally, CDSs have been the favored hedge for corporate bond portfolios. However, regulatory restrictions and capital requirements for US banks stemming from the Basel III accords have crimped their ability to deal over-the-counter (OTC) credit derivatives. And several other rules and restrictions have further limited these banks from operating as traditional providers of liquidity and immediacy in the over-the-counter market.

To continue reading, please click here

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Fixed Income, People Profiles

Corporate Debt Watch: Toyota Landmark Deal

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On the heels of this past week’s near record-breaking investment grade corporate debt issuance courtesy of multiple Fortune companies who are seizing the moment insofar as the current low rate regime, Toyota Motor Credit Corp (TMCC), the financing arm of the world’s largest car maker did something different yesterday in the course of floating a 3-tranche, $2.5billion offering: TMCC designated the industry’s top five minority firms who specialize in debt capital markets to co-lead the 3 part transaction, for which Citigroup Global Markets served as stabilizing lead.

Why did TMCC defer underwriting and distribution of a $2.5bil issuance to minority-certified dealers who can only aspire to “6-Pack” notoriety and presence? After all, a $2.5bil isn’t just chopped liver. One reason is that the leaders of Toyota’s North American division have long held that a corporate culture that puts diversity and inclusion (D&I) on a pedestal is a critical component to being a best-in-class corporation. They aren’t alone. SoCal Ed, Exelon, Entergy, Southern Companies are other non-financial companies that promote this notion. In the financial industry, BNY Mellon, Citi and Goldman are most frequently mentioned for their embracing the importance of diversity across their ranks.

That said, TMCC has made it a point of repeatedly demonstrating they ‘get the joke’ when it comes to D&I. This is best illustrated via their global employee count, the profiles of their dealership operators and obviously, their customer base. Corporate Leadership experts have repeatedly documented via an assortment of metrics that the most successful companies within industry peer groups are those whose intellectual and financial investment towards promotion of D&I are the greatest.

This isn’t to suggest there are not a big bunch of big name companies who claim to embrace D&I, yet in reality, merely pay lip service to the concept. After all, nearly every Fortune 100 company and many of the ‘500’ have a senior executive whose title is Head of Diversity & Inclusion. It makes for great branding and corporate communications. That said, when it comes to capital market transactions (versus vendors who provide office supplies), mandates are handed out to minority firms in a manner similar to handing out crumbs ala a Charles Dickens novel. A large number of Fortune CFOs and Corporate Treasury officers generally defer to their lead 6-pack banks for underwriting and will posit that any D&I goals their companies might have “don’t include their job responsibilities.”

Many will argue that type of attitude is a big mistake, if only because, as TMCC executives have long acknowledged, the importance of placing bonds or new issue stocks with middle-market investment managers, such as public plan sponsors is a critical objective. Issuers want to place their offerings with folks having long term outlooks vs. opportunistic or activist managers. And, because bulge-bracket investment banks now primarily focus on the largest investment management firms, those 2nd and 3rd tier investment management firms often do not get covered by the big banks, and consequently, do not have the opportunity to participate in primary debt issuance. Too frequently, they are relegated to buying safer fixed income products in the secondary market–at a mark-up vs. the original issuance.

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Ron Quigley, Mgn.Dir. Mischler Financial Group

As noted in a post-transaction color commentary courtesy of Ron Quigley, Head of Fixed Income Syndicate for TMCC co-lead manager Mischler Financial Group, the sell side’s oldest service-disabled veteran owned/operated firm:

“Toyota’s Treasury team made their objectives and ground rules abundantly clear last week on a joint call.  TMCC’s National Manager, Debt Capital Markets, Kate Oddo said, “TMCC is looking at this deal for best execution and via underwriters who meet our corporate needs insofar as diversity and includsion. Towards that objective, we are looking to differentiate our investor base from the bulge bracket underwriters. As markets continue to evolve and shift while remaining volatile, TMCC also sees a shift in its front end strategy.  We are no longer seeing the typical front end reverse inquiry that we saw in the past.”  Ergo TMCC announced yet another D&I or Diversity and Inclusion new issue. “

The minority firms selected in TMCCs group for the third time included Mischler Financial Group, Inc., the nation’s oldest Service Disabled veteran broker-dealer and 3x winner of Wall Street Letter’s Annual Award for Best BrokerDealer/Research along with, CastleOak Securities, Lebenthal & Co., LLC, Samuel A. Ramirez & Company, Inc., The Williams Capital Group, L.P.

For the full commentary and deal drill down courtesy of Mischler’s Ron Quigley, please click here

 

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People Profiles, Tech Talk

BNP Paribas Gets Blockchain for Crowdfunding

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(RaiseMoney.com)-French broker-dealer BNP Paribas “gets the joke” when it comes to fintech applications for equity crowdfunding and is embracing blockchain technology to advance their vision.

A subsidiary of BNP Paribas Group has announced a partnership that will find it leveraging blockchain technology to enable private companies to issue securities via equity crowdfunding.Revealed today, the partnership finds BNP Paribas Securities Services, its asset services division, working with investment platform SmartAngels on a pilot the firms said would be launched in the second half of 2016, pending regulatory approval.

In statements, BNP lauded the effort as a “major step” in advancing crowdfunding. The project will see BNP Paribas developing and managing a registry for shares in private companies using the blockchain that in turn will automatically register securities issued by SmartAngels.

Smart Angels will serve as a secondary market for shares registered on the BNP platform, a move the partners said would make it easier for startups and small businesses to access financing.

“Investor payments will be processed immediately and e-certificates will be issued to them straight away. Financial transactions made via the platform will therefore be performed simply, quickly, securely and for a lower cost.”

 

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Philippe Ruault, Head of Clearing, Settlement and Custody Solutions, BNP Paribas Securities Services

Philippe Ruault, head of product for clearing at BNP, emphasized his belief the program would accelerate trading in the private securities market.

“This is a major innovation for the custody and account-keeping of unlisted securities,” he said.

The project is not the first that finds a major financial firm seeking to leverage the blockchain as a way to ease aspects of the private securities process. The effort notably follows Nasdaq Linq, a pilot designed to allow entrepreneurs the ability to issue and manage private shares using a private blockchain system.

For the full story, please click here

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ETF News, Tech Talk

BATS Takes 2nd Stab at IPO

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The second time is hoping to be a charm for exchange operator BATS Global Markets as it announced a 2nd stab at an IPO, which will be led by Morgan Stanley and Citi and enable an exit for investors that include BAML and Knight Capital.

Bats Global Markets announced the launch of its initial public offering Monday, with a price per share expected to be between $17 and $19. The offering, which could value the company as high as $1.8 billion, comes as the U.S. IPO market has seen its slowest start in seven years.

The IPO has been widely anticipated in part because market observers have been looking for activity in this year’s slow IPO market. Just nine companies launched IPOs in the U.S. in the first quarter of the year, the lowest number in a quarter since 2009, according to data from Dealogic.

The valuation is more than double the size of Bats Global Markets’ attempted IPO in 2012. That effort, which was halted due to a technical glitch shortly after shares started trading, valued the company at around $760 million, according to Bloomberg.

The company has grown significantly since its last IPO attempt. In January 2014 it acquired Direct Edge Holdings LLC, including the two exchanges EDGX and EDGA. In March of last year it acquired Hotspot FX Holdings, the operator or an electronic FX trading platform. Then last September, Bats expanded its Hotspot acquisition by launching a Bats Hotspot platform in London. Last November the company launched the EDGX Options trading platform. It has also significantly grown its exchange traded product (ETP) trading in the past few years.

In its prospectus the company said it is the second largest exchange operator in the U.S. by market share (after the New York Stock Exchange) with a 21.1 share of the overall U.S. equity market as of Dec. 31, 2015. It is also the largest exchange operator of exchange traded funds (ETFs) and other ETPs by market share with a 22.4 percent share of ETP trading last year. The company also had a 9.6 percent share of the U.S. equity options market last year. In Europe, its Bats Europe was the largest European exchange operator as measured by notional value traded as of Dec. 31 of last year.

The prospectus listed several potential growth strategies for the company, including increasing penetration in U.S. options with new products and services, expanding its global FX platform into other currency instruments, and building strength in U.S. equities by leveraging its position in ETPs to expand listings. The company also said it aims to fully monetize the value of its market data and connectivity.

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ETF News

Canadian Exchanges Face-Off Over ETF Listings

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Last week, Canadian upstart exchange Aequitas NEO announced its first ETF listing, and in response to that PR promotion, Toronto Stock Exchange (TSX), a subsidiary of TMX Group fired back with a slapshot, thanks to TD Asset Management (TDAM) listing and launching six new ETFs.

(TradersMagazine) Executives from TD Asset Management opened trading of its new exchange traded fund business at the Toronto Stock Exchange. Last week, TDAM’s six new passive ETFs began trading on TSX, including products designed to track the performance of Canadian fixed income markets as well as Canadian, U.S. and international equities.

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Lou Eccleston, CEO TMX Group (photo via Bloomberg)

“TSX is proud to welcome TD Asset Management ETFs to our Exchange. TDAM has been a great sponsor of the industry and our firm for many years,” said Nick Thadaney, president & CEO, Global Equity Capital Markets, TMX Group.

He added, “We have a rich history in supporting the successful growth of the ETF marketplace and we remain committed to serving this segment into the future. ETFs have become a vital part of Canada’s markets and a great example of the dynamic and diverse products we offer to investors.”

To celebrate the listing on TSX, Tim Wiggan, CEO, TDAM, joined Thadaney to open trading this morning.

As of February 29, 2016, there were 384 ETFs and exchange traded notes listed on TSX with a combined market capitalization of over $98 billion.

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ETF News

ETF Momentum for Canada Exchange Aequitas NEO

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(TradersMagazine) The TSX is getting a run for its money. This week the Aequitas NEO Exchange (which only launched one year ago) signed its first listed security. Invesco Canada’s PowerShares DWA Global Momentum Index ETF, trading under the ticker DWG, took that honor and is also the first ETF listed on a Canadian exchange other than the TSX.

In a press release issued by the exchange, the company stated “DWG began trading on the NEO Exchange on Tuesday, March 22, 2016. The first week of trading was flawless and allowed market participants to confirm readiness. The quality of liquidity provision during these first days of trading was particularly notable.”

“Our first momentum-based ETF has been trading for over a week and we have been pleased with the early level of liquidity and investor interest,” said Chris Doll, Vice-President, Product & Business Strategy, PowerShares Canada. “We are very proud to celebrate this important milestone with the NEO Exchange. The idea of increasing competition in Canada makes perfect business sense to us. We are always looking for ways to be more efficient with our PowerShares ETF listings and we are strong believers in competition driving efficiency and innovation. As a shareholder, we have closely monitored the growth of the NEO Exchange since its launch, and with the development of our Global Momentum Index ETF, we determined the time was right to list on this new exchange.

About Aequitas NEO Exchange

The NEO Exchange is a new Canadian stock exchange using a bold new blueprint that puts investors, businesses looking to raise capital and dealers first. Launched in March 2015, the NEO Exchange currently offers an innovative trading venue and a value added listing venue for companies and investment products. Aequitas NEO Exchange Inc. is a wholly owned subsidiary of Aequitas Innovations Inc., a company founded by a diverse group of prominent investors representative of all Canadian capital market stakeholders. For more information, please visit www.aequitasneoexchange.com

 

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People Profiles, Tech Talk

Blockchain Babe Blythe Masters in Repo Deal with DTCC

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Blythe Masters, the former grand dame of derivatives for investment bank JP Morgan, who after a less-than-glorious exit from her senior role overseeing credit derivatives for House of Morgan and who reinvented herself as a blockchain babe and leads digital ledger startup Digital Asset Holdings, has proven that every cute cat has nine lives. In a press release issued this week, Depository Trust & Clearing Corp. aka DTTC, the industry-owned utility that processes transactions across the multi-$trillion repurchase agreement and government securities markets has entered into an agreement with the startup to test their blockchain application for use within the $2.6tril repo market sleeve so that lenders and borrowers across the often illiquid repo market can have a more efficient tool to track securities and cash flowing between counterparties.

Digital Asset Holdings, for which Masters is Chief Executive Officer, is considered one of the top 3 fintech companies focused on leveraging digital ledger technologies, the basic foundation of the cryptocurrency bitcoin. R3 Blockchain Group, whose investors include a consortium of 42 investment banks and financial service firms and is led by former inter-dealer broker David Rutter, along with Symbiont, the creator of Smart Securities and sponsored by merchant bank SenaHill Partners, are considered to be the other leading players in the space seeking to ‘institutionalize’ the value proposition of the technology that powers bitcoin.blythe-masters-marketsmuse

(WSJ)-Depository Trust & Clearing Corp., a firm at the center of Wall Street’s trading infrastructure, is about to give the technology behind bitcoin a big test: seeing whether it can be used to bolster the $2.6 trillion repo market.

DTCC said in a statement Tuesday that it will begin testing an application of blockchain, the digital ledger originally used to track ownership and payments of the cryptocurrency bitcoin, to help smooth over problems in the crucial but increasingly illiquid corner of short-term lending markets known as repurchase agreements, or “repos.”

Repos play a critical role in the financial system by keeping cash and securities circulating among hedge funds, investment banks and other financial firms.

DTCC, an industry-owned utility that helps settle trades in the repo market and elsewhere, wants to apply blockchain technology to the market, so that lenders and borrowers can keep track of securities and cash flowing between firms in real time.

To test blockchain’s ability to improve repo trading, DTCC has tapped Digital Asset Holdings LLC, a startup run by former J.P. Morgan Chase & Co. executive Blythe Masters. Earlier this year, DTCC invested in the firm focused on blockchain applications, along with a range of banks including J.P. Morgan, Goldman Sachs Group Inc., and others.

 

For the full story from WSJ, please click here

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ETF News, Tech Talk

BATS Global is Batty About ETFs-Buys ETF.com

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While many people are “koo-koo for Cocoa Puffs”, BATS Global is batty about ETFs. On the heels of launching a dedicated electronic exchange platform for ETF products dubbed BATS Marketplace,  BATS Global Markets announced yesterday that is even more batty about ETFs and to prove it, the exchange operator is acquiring the ETF industry’s leading provider of exchange-traded fund news, data and analytics, ETF.com.

“This is a brand burnishing 201 case study for an otherwise staid electronic exchange industry as operators seek innovative, content-specific applications to distinguish themselves

(MarketWatch.com) Exchange operator BATS Global Markets said Tuesday it would buy ETF.com, a provider of data about the market for exchange-traded funds. BATS CEO Chris Concannon said the purchase “underscores [BATS’s] commitment to the ETF industry and our focus on providing unique, value-added content for issuers, brokers, financial advisors, market professionals and investors.”

ETF.com’s data will add to BATS’s existing proprietary market data and analytics offerings, according to a news release. BATS operates four stock exchanges in the U.S., which represent the largest venue for trading ETFs in the country when taken together, says BATS. Financial terms were not disclosed. The deal is set to close on April 1, according to the statement. The acquisition comes as Lenexa, Kansas-based BATS is trying to grow its ETFs listing platform. The exchange operator last year launched BATS Marketplace, offering to pay ETF providers as much as $400,000 to list on its exchange.

BATS listed 30 new ETFs on its US market last year─11 in December alone, more than any other US market, officials say─bringing its total ETF listings to 56, says the deal will expand the proprietary market data and analytics that BATS offers to support market participants in making “educated trading nad investment decisions.” ETF.com will become an independent media subsidiary of BATS Global.

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ETF News

Best Execution Wack-A-Mole Aims at Wholesalers

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When it comes to gauging best execution, that exercise is akin to a game of whack-a-mole when calculating in the role of wholesalers aka over-the-counter market-makers whose business model includes leveraging maker-taker rebate schemes. MarketsMuse credits below excerpted observations from TabbForum and courtesy of Stanislav Dolgopolov, Decimus Capital Markets, LLC

(TabbForum) Compliance with the duty of best execution is typically focused on customer-facing brokers, but the stringent standard of best execution may pop up several times in the transactional chain. One critical issue already getting—and deserving—more attention is the extent to which the duty of best execution applies to off-exchange market makers, commonly referred to as ‘wholesalers’ or ‘internalizers,’ and whether conflicts of interest are keeping them from meeting these obligations.

One illustration of potential conflicts of interest is monetization of maker-taker arrangements for certain types of orders – typically, nonmarketable limit orders – by off-exchange market makers through secondary routing, which may potentially come at the expense of execution quality, given that a substantial portion of orders directed to them consists of such orders. Furthermore, a typical major player in the wholesaling segment is in the spotlight to demonstrate the adequacy of execution within its affiliated dark pool(s), given a bevy of concerns, such as toxicity, slowness, or leakages of customer order information. Yet another consideration from the standpoint of the very definition of “best execution” is whether there are self-interested or otherwise avoidable delays counter to the requirement of prompt execution.

Finger-pointing in connection with achieving and maintaining execution quality is not necessarily an easy task. Compliance with the duty of best execution is typically focused on customer-facing brokers, as illustrated by the level of scrutiny of retail brokerages, including lawsuits, in connection with payment for order flow and maker-taker arrangements. At the same time, the stringent standard of best execution may pop up several times in the transactional chain. One critical issue already getting—and deserving—more attention is the extent to which the duty of best execution applies to off-exchange market makers, commonly referred to as “wholesalers” or “internalizers.”

This assumption of the duty of best execution may be rooted in contractual arrangements—sometimes called “order handling agreements”—between off-exchange market makers and customer-facing brokerage firms. Pursuant to the applicable agreement, an off-exchange market maker may in fact discharge agency-based functions in addition to trading in the principal capacity. By contrast, market making on securities exchanges has been “de-agentized” in the sense that designated market makers have been relieved of their traditional agent-like duties to investors. In fact, some order handling agreements specifically mention the best execution standard. Even when this standard is not spelled out, the scope of the applicable relationship is likely to bind that off-exchange market maker as a true “executing broker” subject to the duty of best execution.

To read the entire article, please click here

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Strike Price, Tech Talk

NASDAQ To Buy ISE Options Mart

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(Bloomberg)-In what merger-arbitrage experts might call a ‘take-under’, Nasdaq Inc. is paying less than half the price for what ISE traded for in its last price setting after it agreed to buy Deutsche Boerse AG’s International Securities Exchange for $1.1 billion, catapulting it to the top of the U.S. options market.The transaction could also help Deutsche Boerse fund another acquisition. The Frankfurt-based company is in merger talks with London Stock Exchange Group Plc. Deutsche Boerse has been trying to sell ISE, which it bought for $2.8 billion in 2007, since at least 2014.

ISE runs three options markets, and so does Nasdaq. Together, those six exchanges handled 38 percent of U.S. volume in February, which exceeds the current leader CBOE Holdings Inc.’s 27 percent, according to data compiled by Options Clearing Corp. However, CBOE arguably retains the jewels of options trading: exclusive rights to contracts on the Standard & Poor’s 500 Index and the VIX, a CBOE product that tracks investor fear.

“We are going to have the size and scale that competitors don’t have,” Nasdaq Chief Executive Officer Bob Greifeld said in a telephone interview Wednesday. “We’ve paid attention to ISE for a long

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Bob Greifeld, NASDAQ

period of time.”Nasdaq sees the deal closing in the second half of the year and plans to fund the transaction with debt and cash, according to a statement Wednesday. This is the New York-based company’s fourth acquisition in recent months, following deals for an investor-relations business in Canada, the Chi-X Canada stock market and SecondMarket, a platform for trading shares of private companies.

Deutsche Boerse is keeping two parts of ISE: its ownership interests in Bats Global Markets Inc. and Digital Asset Holdings LLC, according to an e-mailed statement. Bats runs exchanges for stocks, options and currencies. Digital Asset Holdings is trying to use blockchain, the software underpinnings of bitcoin, to dramatically speed up the processing of financial transactions.

A stake in a key options-market utility will shift over to Nasdaq through the acquisition. Both Nasdaq and ISE own 20 percent of Options Clearing Corp., the clearinghouse for all trades of stock options on U.S. exchanges.

“We think that’s an incredible organization and asset certainly as time goes on,” Greifeld said. “We’re very pleased with that part of this transaction.”

Shareholders of OCC recently began receiving dividend payments, compensation for a regulatory mandate requiring its owners to contribute more capital to support the organization. Bats Global Markets, which handles just over 10 percent of U.S. options trading, has complained it’s unfair it doesn’t get those dividends because it’s not an OCC owner.

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ETF News, Strike Price

I’m Afraid There Is a New Fear Index

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Exchanges Battle Each Other to Create Competing Fear Index Products, out of fear of losing market share.

Another index product to “measure” investors’ fear?? Are they bats?! As MarketsMuse Chief Curator says, “Yes, Matilda, I’m afraid to say there is yet another new fear index” intended to compete with the now famous VIX product. Dubbed SPYIX (pronounced “Spikes”) by its creators (a joint venture between electronic exchange operator BATS Global Markets and research provider T3Index, the index tracks the price of options linked to the world’s biggest exchange-traded fund, the SPDR S&P 500 ETF Trust.

When equities markets are more volatile than ‘normal’–which inevitably means share prices are nose-diving or as my investing grandmother would say “in the midst of a price correction”,  tsuffice to say most investors sh*t the bed with fear when the. Despite the fact that CBOE, owner of the VIX trademark aka Chicago Board Options Exchange Volatility Index says that  “VIX measures expectations for price volatility in the Standard & Poor’s 500 Index during the next 30 days”–that definition is often off-base. Professional options traders will stipulate that VIX is not much more than a real-time diaper check that measures people’s current level of fear, and that index can be 50% lower (or higher) within a matter of hours, once the panic that triggered a spike in the index settles down (or becomes even more magnified thanks to an overnight event that leads investors to liquidate positions the following day).

Here’s the excerpt from Bloomberg LP coverage-

Bats Global Markets Inc. is introducing its own volatility benchmark for U.S. stocks called the Bats-T3 SPY Volatility Index, an attempt to muscle in on CBOE Holdings Inc.’s VIX territory. Dubbed SPYIX (pronounced “Spikes”) by its creators, the index tracks the price of options linked to the world’s biggest exchange-traded fund, the SPDR S&P 500 ETF Trust.

Though they’re calculated in different ways, the indexes are similar enough that the price of the SPYIX should closely resemble the VIX, one of the most closely watched benchmarks in finance.

Creating a successful index could open the door for Bats, which is planning an initial public offering, to create its own options products. The fiercely competitive equity-trading business has compelled exchange operators to seek alternative sources of revenue.

The core of the Bats sales pitch is automation. While trading pits where business is done in person are largely extinct, some options used to calculate the VIX are still transacted by human traders at CBOE’s market in Chicago. The SPYIX is derived from options bought and sold electronically. Bats argues that this means its product would have stayed online on Aug. 24, when CBOE’s index was unavailable for 30 minutes because of enormous market volatility.

“The SPYIX is designed to withstand the most turbulent market conditions,” according to Bats, which developed the new benchmark with T3Index.

For the full story, click here

 

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ETF News, Global Macro Strategy

BlackRock Botches Gold ETF; IOU for IAU

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Administrative oversight left BlackRock unable to meet demand for its Gold ETF, IAU; Suspends New Issuance.

(WSJ) –BlackRock Inc. said it suspended the issuance of new shares in IAU, its roughly $7.7 billion gold exchange-traded product due to an administrative oversight, in the latest bruise for the exchange-traded-fund industry and its largest provider.

Analysts said the move on Friday threatens to drive business to competitors and intensify scrutiny of the $2 trillion ETF business in the U.S. It also underscores concerns that these products—baskets of assets that trade intraday like stocks—are vulnerable to breakdowns.

Friday’s suspension came after a 20% run-up this year in the price of gold. The rally had spurred increased demand for the iShares Gold Trust, which is traded on the New York Stock Exchange under ticker symbol IAU. Some analysts said the surge in gold-futures prices likely drove up demand for the product for use both in bets that gold would rise and bets that it would fall. Those wagers came amid uncertainty over the health of the global economy and concerns about resilience of the financial system in the face of negative interest rates in Europe and Japan.

BlackRock wasn’t able to issue new shares to meet the demand because it failed to file the appropriate Securities and Exchange Commission paperwork, the firm said.

The breakdown could prevent the fund from accurately reflecting the value of gold, interrupting a key process that lets investors arbitrage any difference between the quoted price of the ETF and the value of the underlying assets.

The suspension could mean the price of the fund would rise faster than the price of gold until share creation resumes. Investors are “going to be paying more of a markup,” said Mohit Bajaj, director of ETF trading at WallachBeth Capital LLC, which trades iShares Gold Trust. “I think people are going to be trading GLD instead of IAU now,” he said, referring to the ticker symbol for SPDR Gold Trust, which is run by a unit of the World Gold Council and marketed by State Street Corp.

In the week ended Thursday, investors put more than $1.1 billion into the iShares product’s key rival, the about $32 billion SPDR Gold Trust, more than any other exchange-traded product, according to FactSet data.

For the full story from WSJ, please click here

 

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Fixed Income, Global Macro Strategy, People Profiles

World’s Biggest Bank Gets It; Gives It Back

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BNY Mellon ‘Gets It’ and Also Gives It Back.

With close-on $29Trillion in deposits and $1.3Trillion in AUM, BNY Mellon (NYSE:BK), the oldest bank in the U.S. is not just the country’s biggest, it ranks as one of the world’s biggest banks. Hundreds of financial industry professionals now working across the financial markets ecosystem are alumni of BNY Mellon, long-recognized as the top training ground for those who aspire to long-term professional careers within financial services.

While many “BNY” alum (including MarketsMuse senior editor) fondly recall an on-boarding process in which mentors made humorous reference to Alexander Hamilton’s orders to his top executives immediately prior to his ill-fated duel with Aaron Burr (“Don’t do anything until I return..”), most followers of BNY Mellon know that its culture is driven by perseverance and a focus to make sure no stone be left un-turned in the course of overcoming a challenge. In that spirit, a young, London-based BNY Mellon exec by the name of Charlie Thompson, a former professional Rugby star who cashed-in his sports career in favor of banking, deserves a hero’s award for re-uniting an industry colleague and highly-decorated Vietnam War hero with an invaluable piece of his personal history.

While Thompson was on holiday last year touring Vietnam, he came across a souvenir hut hawking assorted items that included a set of US military dog-tags. Intrigued, Thompson purchased the tags with the goal of hopefully tracking down the owner and/or family members and returning them. It turns out those dog-tags had been lost nearly 48 years ago by former US Marine Infantry Officer Rick Tilghman, who while serving in Southeast Asia, was awarded not one, but two Purple Hearts and The Bronze Star (with Valor).

Making the story more inspiring, the new personal bond between Thompson and Tilghman is coincident to a long-standing bond market relationship between Thompson’s employer and Tilghman’s firm, the boutique investment bank Mischler Financial Group (the industry’s oldest minority broker-dealer firm owned/operated by Service-Disabled Veterans), where Tilghman, now one of the municipal bond industry’s elder statesmen, oversees the firm’s Public Finance Underwriting group.

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Colleen Krieger, BNY Mellon

To their credit, BNY Mellon, long an advocate of Veteran-centric initiatives, has made hay with this story and since went to great lengths to help Thompson coordinate a formal return of Tilghman’s dog-tags, and along the way, produced a documentary story that has since been profiled by multiple news media outlets, including this week’s 10-minute interview of Thompson and Tilghman by Fox and Friends and broadcast via multiple FOX News affiliates.

Here’s the corporate documentary profiling the story that was produced by BNY Mellon. Rolling credits are not included, but a special salute goes to Colleen Krieger, Associate Director of Corporate Communications for BNY Mellon.

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People Profiles, Tech Talk

Pay-to-Play Rebate Schemes Confuse Smartest Traders

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Within the context of market structure, the ever-evolving rules of the road for those attempting to navigate how and where to secure best pricing when executing equities orders has become so convoluted thanks to pay-to-play rebate schemes, its not only the curators at MarketsMuse who are scratching their heads, even the most sophisticated traders from both the buy-side and sell-side are confused.

As noted in today’s NYT article “Stock Exchange Prices Grow So Convoluted Even Traders Are Confused” by  reporter Nathaniel Popper, one of the sharpest knives in the drawer when it comes to distilling both technology and regulatory policy issues that impact financial markets, “computer-driven American stock markets have become so complex that any moment in time more than 800 different pricing possibilities are being offered to trading firms across 12 official exchanges, according to a report prepared by Royal Bank of Canada (RBC).”

Here are some of the noteworthy extracts from Popper’s piece:

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Mehmet Kinak, T.Rowe

“The level of complexity has grown to such an extent that it is unknown to most market participants,” said Mehmet Kinak, the head of electronic trading at T. Rowe Price Group, and a client of RBC with which the research has already been shared. “Instead of finding natural buyers and sellers, we’re finding intermediaries who come in and are benefiting from the complexity.”

“When we trade we don’t even know what it will cost us,” said Rich Steiner, the head of electronic trading strategy at RBC.

The prices are far from the only factor introducing complexity into the markets. Twelve public exchanges are now in operation, compared to a time when the markets were largely ruled by one: the New York Stock Exchange.Then there are the dozens of so-called dark pools, where stocks can be traded privately away from the public exchanges.

All of these trading venues offer many different types of orders that determine how and when a stock can be traded. A 2014 research report identified 133 unique order types, including some for particular times of the day and others for trades of a particular size.

RBC and other critics of the stock market structure argue that the rebates given out by exchanges can skew the incentives of brokers and banks, encouraging them to trade where they can get the largest rebate, rather than where they can get the best price for their client.

The pricing structures that RBC details in its new report are a result of the efforts by exchanges to calibrate the rebates they offer to some customers and the fees they charge to others.

In one example given in the report, the BATS-Y stock exchange — one of four stock exchanges run by BATS Global Markets — sent out a fee notice at the end of March 2014 announcing that it would offer 15-thousandths of a cent to traders buying certain stocks, thus bettering the 14-thousandths of a cent that Nasdaq BX had been offering. Fifteen minutes after the BATS-Y filing, Nasdaq made its own filing matching the new BATS-Y price. The next morning, BATS-Y filed again, increasing its offer to 16-thousandths of a cent.

Between 2012 and 2015, RBC found 362 filings with regulators announcing changes to trading fees, with some of the filings including multiple fee changes. The number of pricing tiers proliferates quickly because each tier can apply to similar trades in different ways depending on how frequently a trader uses a particular exchange.

Vimal Patel, who oversaw the research at RBC, said that he had no idea how tangled it had become until he began trying to sketch it out last summer. “It snuck up on people that the world is this complicated,” he said.

According to Popper, the new research from RBC is likely to strengthen the hand of an upstart company, IEX, that is currently asking regulators for approval to become an official stock exchange. Although IEX Founder/CEO Brad Katsuyama is a alumni of RBC, the report issued by the bank and scheduled to be submitted this week to a Senate Committee investigating market structure issues makes no reference to IEX.

For Popper’s story published by the NY Times, click here