The FinTech aka financial technology revolution continues to advance across the financial industry landscape, as dozens of startups from block chain to bond trading initiatives work towards securing a presence within the institutional financial services ecosystem. And, as profiled in a brilliant column this week from Institutional Investor spotlighted by MarketsMuse tech talk curators, the City of London is quickly carving out a leading role for being Europe’s epicenter for incubating the next greatest applications. The question now is, “How soon will London’s Silicon Roundabout squeeze out Silicon Alley and Silicon Valley?”
The excerpt from II’s Charles Wallace latest report, “FinTech Startups Flock to London’s Silicon Roundabout” is below. A link to the entire article follows accordingly.
Raja-Palaniappan
Raja Palaniappan worked at Credit Suisse in London as a bond trader for a number of years before deciding to go out on his own and launch an online marketplace called Origin Markets, which seeks to revolutionize private placement bond issuance by eliminating intermediaries like Goldman Sachs Group. Although American by nationality, Palaniappan decided to open his platform in London because he felt the city offered greater opportunity than New York or Silicon Valley for a new financial technology, or fintech, company (see “ Former Trader Raja Palaniappan Sees Fintech Opportunity in Bonds”).
“London does have a competitive advantage in fintech because you’ve got technology in Old Street and finance on Liverpool Street and they’re about three quarters of a mile apart,” Palaniappan says, referring to two areas of the City of London financial district. “In the U.S. technology lives on the Left Coast and finance on the Right Coast, and there’s little consolidation between the two.”
According to consulting firm Accenture, Europe is the world’s fastest-growing area for fintech funding, with spending rising 215 percent last year, to $1.48 billion. London had the largest share of that investment, some £342 million ($530 million), according to London & Partners, a government-funded agency supporting the London economy. Although the U.S. continues to lead overall fintech funding, with $2 billion in 2014, much of that was Silicon Valley–based investment in business-to-consumer start-ups like LendingTree, an online exchange that connects consumers with lenders; in London much of the activity is targeted at institutional financial services such as banking, insurance, trading and asset management.
“Since the Industrial Revolution, London has been the center for international commerce, and the melting pot that you have in terms of people and talent is pretty unique in the world,” says Sean Park, a Canadian who runs Anthemis Group, a firm that advises and invests in fintech start-ups from offices near Oxford Circus in Soho.
London’s growth as a fintech hub is not exactly surprising. The city is the world’s leading center for international wholesale financial services. It boasts more banks than Hong Kong or New York, leads the world in foreign exchange trading, has vibrant asset management and insurance sectors, and is home to the Eurobond market. In addition, fintech enjoys strong support from the British government, which sees the financial services sector as essential to the health of U.K. Plc and technology as critical to maintaining London’s competitive edge. Financial services employ some 2 million people, or about 7 percent of the country’s workforce, and generate 10 percent of the U.K.’s gross domestic product. Continue reading →
MarketsMuse news curators have spotted dozens of commentaries from leading equities and debt market pundits opining about global mining giant Glencore. There is only one comment that offered a truly rare view that struck a chord, and it is courtesy of this morning’s edition of global macro newsletter “Sight Beyond Sight”, which is published by global macro think tank Rareview Macro LLC. The title of today’s edition:
Tentacles from Glencore Extend Well Beyond the Naked Eye…Quarter-End Flight to Quality
Neil Azous, Rareview Macro
Today’s edition of Sight Beyond Sight is going to sound aggressively Bearish to some people. At the same time, the tone is insensitive to the countries, companies, and employees involved. If that bothers you, that is too bad. This is a financial services newsletter, not the United Nations or the Red Cross. We are not trying to disparage anyone or call someone out. Our goal is to try and help you make or save money.
When I traded credit derivatives at Goldman Sachs back in the late 1990’s, the way we separated our bond business between investment grade, high yield and distressed was very simple. If an issuer’s bond price was trading above 80 cents on the dollar you were investment grade. Conversely, if an issuer’s bond price was trading below 80 cents on the dollar you were high yield. Anything below 50 cents on the dollar, you were distressed. Below 20 cents…don’t ask.
Glencore EU1.25b notes due March 2021, one of the most recently issued and liquid tranches of their debt outstanding, dropped six cents to~76 cents on the euro today, effectively crossing over into high yield territory even though it still maintains its BBB credit rating. Headline writers argue that most of the weakness today in Glencore’s stock and bond price is the result of comments made by Investec Plc, where it warned that there would be little value for shareholders should low commodity prices persist. This echoes a key research note last week from Goldman Sachs that said: “If commodity prices were to fall 5% from current levels–which we do not consider to be a far-fetched assumption given the downside risk to commodity consumption in China–we believe that concerns about its IG credit rating would quickly resurface.
Under this scenario, we estimate that most of Glencore’s credit rating metrics would fall well outside the required ranges to maintain its IG rating, and that could happen as early as the next reporting period (FY15).”
From here, this is where those who throw bombs for a living believe is what is coming up next:
Commodity prices drop another 5%;
Rating agencies downgrade Glencore to high yield
(by Friday);
Glencore’s trading desk receives margin/collateral call immediately as commodities are T+0 settlement for margin (i.e. remember Duke&Duke in Trading Places);
Like AIG, the re-insurer of the credit markets, a significant amount of derivative contracts tied to commodities become an unknown.
MarketsMuse Global Macro merges with Strike Price seers with sage excerpt from 18 Sept edition of “Sight Beyond Sight”, the daily newsletter published by global macro think tank Rareview Macro and authored by Managing Member Neil Azous and rising star Michael Sedacca…For fans of the film Draft Day, this excerpt will resonate in a resounding way..For those who option traders who understand what VIX really is, and respect ideas that make sense, the following is a solid read.. The entire SBS edition can be found via link below..
Volcano Trade Cont. – No Matter What, Vontae Mack
Neil Azous, Rareview Macro
Today, we are going to use a metaphor from a football movie to get our point across. Please note we expect to receive significant push back in this view, given we are going against the grain here. We are prepared for whatever you want to throw at us.
The movie, Draft Day, starring Kevin Costner, was an interesting (supposed) peek into the shrewd world of power plays among National Football League (NFL) general managers as they jockey to make the best deals on the yearly NFL Draft Day.
What grabbed the attention of viewers was the final, big reveal on a visual tease that ran through the whole movie involving a Post-It note. Kevin Costner’s character, Sonny Weaver, Jr, in only his second year as the General Manager for the Cleveland Browns, is feeling Herculean pressures from all sides – the arrogant owner, the difficult coach, and the even more difficult fans – to elevate the pitiful Browns into a team of national contenders. He has to make big, smart plays, which means we glimpse the political maneuverings at work, the salary cap issue, the various strengths and weaknesses of the key players his staff has been researching, as well as the poker game he must play with other GM’s in the NFL who are playing poker right back at him.
But all along, we see Sonny continually referring to the same little Post-It note he started with earlier that morning before he even left his house. He wrote the note himself, stuck it in his pocket, and then keeps referring to it as the day wears on and the stress level rises.
The draft begins. By making a painful trade that puts the entire future of his franchise on the line, Sonny secures the enviable #1 pick of the first round. Perfect, now he can get the obvious choice, the much-hyped #1 quarterback candidate. Instead, to the astonishment of all he unilaterally chooses the strong, but less regarded linebacker, Vontae Mack.
And this is what touched most viewers. At the end, after weathering the draft day storm, regardless that we all knew Costner would come out on top, it turns out what matters is that Post-It note. When he lays it on the table for the viewer, to finally read, it simply said:
No. Matter. What. He carried it with him all day. He clutched it in his fist when the heat was hottest and the fog was thickest. He fumbled it, strayed from it, even doubted it, but in the end, that simple determination governed him, guided him, through the storm. When no one supported him or even thought he was sane, the fictional Sonny Weaver, Jr, had one thing, his No Matter What.
This is how I feel about the VXX put options we hold in the model portfolio.
You can insert CNBC in place of the Cleveland fans, my inner circle of trusted advisors in place of the coach, and our paid subscribers as the arrogant owner. But at the end of the day, we want to see how these moves lower in volatility plays out into next week. While we know we can book an additional 30-60 bps of PnL in the model portfolio in short order, we are looking to make a significantly larger amount if volatility continues to come in at the pace that has been witnessed over the last few days. The key point being, if VXX closes at 18 next Friday the below Volcano Trade would contribute an additional +4% to the NAV, on top of the 60 bps already realized. That is an opportunity we can’t ignore and we want to be a pig about it.
Yesterday before the Federal Reserve monetary policy statement we adjusted our short US equity volatility position for a second time.
Below is the sequence of trading events since the inception of this strategy but as a reminder the definition of the “Volcano Trade” is as follows: After an asset has had a large move in your favor and the option you own approaches a ~70 delta, you are able to roll the position to an out-of-the-money strike in two or three times the size, and capture an increasingly larger amount of profit if the move continues.
September 1st: Bought 10,000 VXX 9/18/15 $25 put options for $0.95 (VXX spot reference ~$30.50)
September 15th:Volcano Trade
Sold 10,000 VXX 9/18/15 $25 put options at $1.61 (vs. 0.95 cost basis)
Bought 20,000 9/18/15 $23.50 put options for $0.78 (VXX spot reference ~$24.20)
Net Credit: $0.03 or $30,000
September 17th a.m.:Super-Volcano Trade
Sold 20,000 VXX 9/18/15 $23.5 put options at $1.76 (vs. $0.78 cost basis)
3,520,000 premium taken in
Bought 30,000 VXX 9/25/15 $20.50 put options for $0.57 (VXX spot reference ~$22.00 at 9:57 a.m.)
Net Credit: $1.81 or $1,810,000
*Locked in 60 bps of PnL to the model portfolio
**The roll and the remaining options are FREE.
September 17th p.m.:Super-Volcano Trade Cont.
Bought 10,000 VXX 9/25/15 $20.5 put options for $0.36 (VXX spot reference $22.80 at 4:10 p.m.)
Current position: 40,000 VXX 9/25/15 $20.5 put options for $0.5175.
*Playing with House Money: Current premium $2,070,000 or 69 bps to the NAV.
Time Stamp: All updates were sent in real-time via Twitter.
Here are the following reasons for taking these actions:
The FOMC rate decision and approaching expiration date (i.e. today) had caused this week’s options to carry an implied volatility about double that of next week’s expiration.
The notional of the put options reached 150 bps of the model portfolio NAV, which considering they were less than 48 hours from expiration breached our rules-based discipline.
As a result we were able to accomplish three things.
We were able lock in profit whilst keeping a comparable amount of short delta. At the time of the sale we were synthetically short 1.5mm shares of VXX. By rolling the options our new synthetic short position was the equivalent of 835,000 shares.
We increased our gamma exposure to a further decline in US equity volatility by rolling down and out into larger size (i.e. 40,000 put options versus 20,000 put options).
We significantly reduced our vega risk by shifting into options with half of the implied volatility.
So far, this is nothing more than us sticking to our rules-based discipline. In fact, this was “text-book” trading and a classic example of adjusting a position on numerous occasions at the most opportune time. Following the FOMC release yesterday, the VXX even broke below our new strike and traded at $20.04.
Our view remains the same as it did on Wednesday when we introduced the “volcano trade” to you – that is, we expect US equity volatility to continue to decline into the end of the quarter. Additionally, the VIX curve continued to shift towards contango, with it trading inverted for a portion of yesterday’s session.
While headline writers want to suggest that uncertainty around the path of Fed policy is negative for risk assets the fact remains that investors believe lower-for-longer interest rates trumps that view and, as a result, they are not long enough market beta if the bounce back in risk into the end of the quarter continues. After all, that would be the biggest Bronx cheer (i.e. middle finger) of all right now.
We are mindful that hanging around this long may be overstaying our welcome, but hopefully the “volcano” will continue to explode through this new lower-lower strike with four versus two times the leverage since inception and dispense burning lava all over the nearby villages filled with dogmatic perma-bears who are looking for high volatility once again because they did not get unshackled from the Fed handcuffs.
Feel free to turn the CNBC volume to full blast, call our office, or send us angry emails to change my mind. But remember where I am coming from today and what our Post-It note says.
Neil Azous is the founder and managing member of Rareview Macro LLC, a global macro advisory firm to some of the world’s most influential investors and the publisher of the daily newsletter Sight Beyond Sight.
MarketsMuse editors were relieved yesterday after the Fed announcement for two reasons; the first being we were reminded that at least half of Wall Street’s Fed-watching pundits who get paid big bucks to predict events can be replaced by anyone who can flip a coin, as half of the pundits were wrong and arguably, at least half of those who were right, were probably right for the wrong reasons. One would need to have a transcript of the entire meeting to know what those Fed governors were thinking and saying.
The second relief comes from having watched a post-announcement color commentary on CNBC “Fed Winners and Losers”..which had sober and well-thought out thoughts from Rareview Macro’s Neil Azous and SocGen’s Larry McDonald
MarketsMuse Global Macro curators always look for substantive and objective observations from outlets that are truly substantial within the context of presenting thoughts and comments from experts followed by the most discerning investors. With that in mind, we salute the folks at UK-based Substantive Research for this morning’s note, which includes the following kudos to a global macro pundit who MarketsMuse takes credit for spotlighting early on….
Giving up on the European recovery theme?
Neil Azous from Rareview Macro published a great note that encapsulates a couple of big themes; Inflation targeting by central banks, and the impact of QE on equity markets, and in particular, European equities. There’s a big question about the relevancy of inflation targeting in today’s central bank user manual and Rearview has neatly put together a collection of quotes and academic work from central banks on this. with their own take on what this might mean for policy making in the future. How does this relate to European equities? If inflation targeting is no longer an effective policy tool it certainly limits policy options for the ECB. Azous also notes that European equities haven’t had the same tail winds that the US and Japan markets have had whether that is the direct result of QE policy, or corporate actions. This ”underperformance” shouldn’t signal less faith in the European recovery story, and he produces a laundry list of reasons to back the view for being long european equities here.
In the wake of recent weeks’ volatility and pricing dislocations across the exchanged-traded product space, news media and Mutual Fund marketers are having a field day putting the feet to the fire–and those toes being torched are connected to the universe of juiced-up and levered ETF and ETN products, as well as hedge funds that specialise in so-called “risk-parity funds” that employ lots of leverage. Is it fair to bash these ‘alternative’ strategies, or should the SEC require that the prospectuses (or is it “prospecti”?) for these protein-enhanced products have a coverage page that displays Caveat Emptor in caps? For those not fluent in Latin, the phrase means: Buyer Beware.
NYT Dealbook columnist Landon Thomas Jr. poses that issue in his a.m. piece: “Investment Strategies Meant as Buffers to Volatility May Have Deepened It”–and before pointing MarketsMuse readers to that article, MarketsMuse editors remind our readers that ETF red flags are nothing new. Levered products, often in the form of ETNs (exchange-traded notes) that seek to either mitigate risk or enhance returns via the use of futures products are notorious for being fit for trading market professionals only; not retail investors and not even for so-called sophisticated institutional investment managers.
Corporate bond ETFs have also been put on ‘watch lists’ in recent months, even though they are all the rage for many of the right reasons, including offering exposure and ‘greater liquidity’ for those needing to allocate investment funds to corporate debt issues across various industry sectors and ratings categories. That said, Apocalypse Watchers warn that when interest rates spike, corporate bond investors will all run for the exits together (to avoid mark-downs in their holdings) and the market-makers who specialize in ETF products connected to this asset class will be overwhelmed with nowhere to go–and no [reasonable] bid to offer to those sellers–simply because the glass-is-half-empty crowd contends those market-makers will be unable to find buyers for the underlying constituents as a means to hedge their purchase of the cash ETF product. That particular thesis has not yet been fully tested, but it does offer an agenda for spirited debate.
The Dealbook column does put context into the discussion with the following:
Defenders of risk-parity investing say that these investment styles are not set in stone and that portfolios can be recalibrated on fairly short notice to make them less vulnerable.
As for E.T.F.s, practitioners say that the funds to date have held their own despite some concerns over how portfolios were being valued during the very sharp market sell-off late last month.
Some of the more exotic E.T.F.s that rely on leverage to juice investment returns could in some instances be the “tail that wags the dog,” said Steven Schoenfeld, an early pioneer in E.T.F. investing and founder of BlueStar Global Investors.
“But the fundamental advantage of E.T.F.s — transparency, liquidity and variety — that remains,” he said.
What remains unclear, however, is how an investing community that has become accustomed to churning out safe and steady returns in a low interest rate, low volatility environment adapts to the new reality of wild market swings.
Such sharp ups and downs in the market are expected to become more frequent as the time approaches for the Federal Reserve to push interest rates higher.
People might as well get used to them, says Nicolas Just, a portfolio manager at Natixis Asset Management, a French fund company that oversees $904 billion in assets.
“These types of sudden market swings will become more and more frequent,” he said. “So you have to be prepared for them at any time.”
For RIAs who want to be smarter (and at the same time, earn CFP and CE credits, MarketsMuse points you to the Sept 17, Forbes Advisor Playbook iConference. Why? Well for one, Shark Tank shark extraordinaire Kevin O’Reilly a newbie ETF Issuer of exchanged-traded funds firm “O’Shares” (whose first product is OUSA) will be a guest speaker, along with a list of other industry luminaries that include Schorders’ Head of US Multi-Sector Fixed Income Andy Chorlton, Tim Palmer, Head of Global Interest Rates for Nuveen, Luciano Siracusano, Chief Investment Strategist for WisdomTree.
What does the day long session include? 6 timely topics ranging from Capital Markets and Game Theory to debating Optimal Active vs. Passive Portfolio Construction. MarketsMuse knows this will be a must-attend simply because the program is being coordinated by Julie Cooling of RIAchannel and our favorite ETF journalist, Todd Shriber aka ETF Godfather will be one of the program’s moderators.
What’s In It For You? 6 CFP and 6 CIMA CE Credits!
It doesn’t take a “markets muse” who speaks in tech talk to know that Fintech is not only fashionable, its now mainstream. And, whilst the early “jibber jabber” surrounding Bitcoin was fodder for Wall Street naysayers, including JPM’s Jamie Dimon, “the worm has turned” according to NYT columnist Nathaniel Popper, a bitcoin expert and the author of “Digital Gold: Bitcoin and the Inside Story of the Misfits and Millionaires Trying to Reinvent Money.”
For earlier MarketsMuse coverage of the bitcoin and blockchain movement, click here
In Popper’s most recent NYT column profiling the cadre of banks, along with assortment of startups founded by banking expats, the fintech fascination is less about bitcoins as a currency, and all about the blockchain technology that powers the virtual currency.
MarketsMuse Editor Note: Though some of skeptics sitting on the MarketsMuse editorial stools suggest that these fintech applications should be targeting industries that actually embrace innovation, such as online gambling and adult entertainment, we won’t diss anyone by selling near-term straddles.
“…Nowhere, though, are more money and resources being spent on the technology than on Wall Street — the very industry that Bitcoin was created to circumvent.
“There is so much pull and interest on this right now,” said Derek White, the chief digital officer at Barclays, the British global bank, which has a team of employees working on about 20 experiments that explore how the technology underlying Bitcoin might change finance. “That comes from a recognition that, ‘Wow, we can use this to change the fundamental model of how we operate to create our future.’”
For people like Mr. White, Bitcoin isn’t just a digital token to use for online purchases. Instead, many of the top minds in finance have come to believe that the software that brought the virtual currency into existence also enables a fundamentally new way of transacting and maintaining records online — allowing people and banks to directly exchange money and assets like stocks and bonds without having to rely on a long chain of expensive middlemen…”
A few banks have gone public with their work, but most of the activity has been happening behind the scenes. At one private meeting, held in April at one of the Manhattan offices of Bank of America, executives from more than a dozen large banks gathered to confidentially discuss how the technology underlying Bitcoin could be used to change foreign currency trading, the largest financial market in the world, according to people who attended the meeting.
Central banks like the Federal Reserve and the Bank of England have their own teams looking at the technology.
“A year ago, it was more of an idea,” said Max Neukirchen, the head of corporate strategy at JPMorgan Chase. “Now, it is a real opportunity. You test it and realize that this can play a big role in our thinking about how our own infrastructure will evolve.”
Who are the players to watch? Aside from the secretive projects inside of each of the 6-pack shops (including JPM!), major exchanges including NASDAQ and NYSE owner ICE are actively throwing resources at blockchain technology applications. On the startup scene, Dave Rutter, a former inter-dealer broker who was a head capo at Prebon Yamane, and then CEO OF ICAP before starting electronic broker LiqudityEdge is now wearing two hats via his role at blockchain wannabe R3CEV LLC. Not to be outsmarted is Mark Smith’s “Smart Securities” product, created by his startup Symbiont. Smith is the former co-founder and COO of Lava Trading and a certified tech wonk with a keen FX markets expertise. His company, with help from fintech merchant bank SenaHill Partners has so far outfoxed R3CEV by having already set the stage to facilitate the first corporate bond issuance using the blockchain technology.
For Nathaniel Popper’s latest commentary “Bitcoin Technology Piques Interest on Wall St”., please click here
When ETFs were first launched in 1993, the ‘framers’ might not have fully appreciated what would happen to the respective ETF cash index in the event of a lopsided market opening when the underlying constituents had not yet opened for trading, despite the easy recall of October 1987..
Since that time, market structure experts and the cast of exchange characters regulated by the SEC have introduced a litany of steps, including NYSE’s Rule 48 that are designed to serve as circuit breakers to bring calm to the chaos caused by out-sized volatility, particularly during market openings. According to observations in the wake of the most recent market turmoil, when ETF market-makers stepped back and provided wide-as-a-truck pricing because constituent issues had yet to open, the CEO of BATS Global Markets, the electronic trading platform that has grown from the size of mouse to being one of the bid kids on the block, sent a signal to the media that led many, including MarketsMuse editors, to infer that he believes that humans are no longer relevant in the new age of Wall Street, computer horsepower and smart algorithms.
As noted by the WSJ in its Sep 1 story by Bradley Hope , “…in a strongly worded rebuke to its rival and NYSE operator Intercontinental Exchange on Tuesday, BATS Chief Executive Chris Concannon said that NYSE Group’s process for opening trading on stocks listed at the exchange was “broken” and that major changes needed to be made to protect investors from future problems. “No one on the planet operates that way, and no one should operate that way,” he said in an interview, adding that he sees “very limited value” in the use of humans on the trading floor
Some traditional market experts have since quietly suggested that Concannon “could have bets in his belfry if he believes that computers should be taken out of the equation.”
NYSE officials and floor brokers have argued for years that they serve a crucial role providing slower trading within today’s high-speed, electronic markets.
“The debate is about whether we need a slower market structure or a faster market structure on days with large systemic volatility,” said David Weisberger, managing director at market-analytics firm RegOne Solutions. The slower version is driven largely by people, whereas the faster one is controlled by computers and trading algorithms, he added.
The NYSE spokeswoman defended the exchange’s approach by contrasting it with a notable failure that BATS experienced itself with its own initial public offering.
Here’s the two points of Rule 48 and what the debate is based on.
IN A NORMAL MARKET: Market makers indicate where a stock might open. That helps investors modify buy and sell orders.
IN A VOLATILE MARKET: Market makers don’t have to indicate where a stock might open. That should make it easier for stocks to open quickly. But investors have less information about the market prices for securities.
Ted Weisberg, a longtime floor trader and founder of floor brokerage Seaport Securities Corp., said invoking Rule 48 can speed up the opening of stocks but leads to less transparency.
“When you invoke Rule 48, you’ve opted for speed over price discovery and speed over transparency,” he said. “‘What’s in the public’s best interest is transparency and time to react.”
An NYSE spokeswoman said: “Rule 48 allows us to expedite the opening of stocks on volatile days while maintaining the hallmark transparency that we are known for.”
BATS is accustomed to Donald Trump-style brashness In prior MarketsMuse coverage ,they are strong advocates of “pay-to-play” kickbacks that provide rebates in exchange for orders sent to their electronic venue as opposed to sending to competing electronic trading venues. Here’s an excerpt from that story: Continue reading →
MarketsMuse.com ETF snapshot takes another bite into the topic of Bitcoin, the dominant digital currency that continues to gain traction with leading brokerdealers and many, [but not all] from across the ETF universe, despite the currency’s 74 percent decline since November 2013. Below is excerpted from 07 April coverage courtesy of NewsMax.com
Big-time traders and investors are starting to participate in the bitcoin market, The Wall Street Journal reports. The list of participants includes Citadel Securities, KCG Holdings and Wedbush Securities. Citadel is a heavyweight investment firm led by Ken Griffin. KCG is the massive brokerage firm formed by the merger of Knight Capital and GETCO.
Citadel, KCG and Wedbush have offered bids to buy shares of the Bitcoin Investment Trust (BIT) since it was listed on the OTC Markets in March, The Journal reports. The BIT holds bitcoin in a trust in which accredited investors can then buy shares. Trading could begin as soon as this week.
KCG is “actively exploring various opportunities related to” bitcoin, its spokeswoman Sophie Sohn tells The Journal.
Some experts say use of the bitcoin by investors and traders will help to further legitimize the currency and increase its usage throughout the economy.
To be sure, there is some skepticism about the BIT. The fund’s manager, Grayscale Investments, charges a 2 percent annual fee for administration and safekeeping, CNBC reports. That’s more than what most exchange-traded funds (ETFs) charge. One skeptical sell-sider has this to say about that..
“BIT investors may end up paying 5 percent more for shares of the fund than if they simply bought bitcoin on an exchange”, Eric Mustin, vice president of ETF Trading Solutions at WallachBeth Capital, tells the news service.
“People who read tabloids deserved to get lied to, and that’s how I feel about someone buying a bitcoin ETF,” he notes. “If you’re confident in this currency that you want to buy it, but you can’t take the 30 seconds to set up a wallet, which is incredibly easy, then you deserve to pay the 5 percent or whatever. I’m not cynical about bitcoin, but I just think it’s a goofy way to trade it.”
In an effort to reign in a powerful campaign to launch secret sauce ETFs that have no business being used by ordinary investors, the SEC scored a smackdown on the creation of non-transparent ETFs in a recent ruling that blocks plans by ETF giant BlackRock as well as Precidian Investments to issue ETFs’ whose underlying constituents would otherwise be, well, non-transparent.
The topic of non-transparent ETFs has been a focus of several MarketsMuse articles in recent months. As reported last week by Bloomberg LP, The U.S. Securities and Exchange Commission rejected plans by BlackRock Inc. and Precidian Investments to open a new type of exchange-traded fund that wouldn’t disclose holdings daily, setting back efforts to bring more actively managed ETFs to market.
The SEC, in preliminary decisions announced yesterday, denied BlackRock’s September 2011 and Precidian’s January 2013 requests for exemptive relief from the Investment Company Act of 1940. The move puts on hold plans by the firms to start the first non-transparent ETFs.
The Precidian proposal falls “far short of providing a suitable alternative to the arbitrage activity in ETF shares that is crucial to helping keep the market price of current ETF shares at or close” to its net asset value, Kevin O’Neill, a deputy secretary at the SEC, wrote in the letter.
The ruling hinders plans by asset managers to sell funds run by traditional stock-picking managers in an ETF package. Firms including Capital Group Cos. have asked for similar regulatory approval as they seek to expand offerings in the fastest-growing product in the asset-management industry.
Money managers have been discouraged from introducing active ETFs, which combine security selection with the intraday trading and some of the cost-saving features of traditional ETFs, because the SEC’s requirement for daily disclosure of holdings would make it easy for competitors to copy, and traders to anticipate, a manager’s portfolio changes.
‘Not Surprised’
“We want to work with the SEC — we believe it’s part of the process,” Daniel McCabe, Precidian’s chief executive officer, said in a telephone interview. “We’re not surprised by the fact that they have questions, but questions can be answered.”
ETF providers must disclose holdings every day to enable market makers to execute trades that keep the share price in line with the underlying value of the fund’s assets. Firms including BlackRock, Precidian and Guggenheim Partners LLC proposed structures that they say would allow the funds to remain priced in line with assets, without revealing specific positions.
T. Rowe Price Group Inc. in Baltimore and Boston’s Eaton Vance Corp. are also among fund firms seeking SEC approval for non-transparent active ETFs. None of the applications has been approved.
“We are still pursuing our own proposal to offer non-transparent active ETFs,” Heather McDonold, a spokeswoman for T. Rowe, said in a telephone interview.
Commercial Opportunity
Melissa Garville, a spokeswoman for New York-based BlackRock, and Ivy McLemore, a spokesman for Guggenheim, declined to comment. Robyn Tice, a spokeswoman for Eaton Vance, and Elizabeth Bartlett for State Street Corp. didn’t immediately respond to an e-mail and telephone messages seeking comment.
BlackRock was one of the first U.S. fund managers to ask the SEC for approval, after spending three years crafting the product. Their leading role in seeking approval for a non-transparent active ETF has spurred excitement within asset management for the product’s prospects, according to Todd Rosenbluth, director of mutual-fund and ETF research at S&P Capital IQ in New York.
Mark Wiedman, BlackRock’s global head of its iShares ETF unit, said in May that the firm was confident the products would work, “but we don’t actually think it will be much of a commercial opportunity.”
For the full story from Bloomberg reporter Mary Childs, please click here
