All posts by MarketsMuse Curator

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Fixed Income, Tech Talk

UST Trading Invaded by HFT Firms

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The high-frequency arms race, aka “Battle Between Wall Street-style Transformers” has extended to trading in USTs and HFT firms are invading the US Treasury market, according to latest from BusinessInsider..

(BusinessInsider)-High-frequency traders have taken over the market for US Treasuries, and a bunch of market participants say they’re alarmed by the change.  

The US Treasury recently asked for public comments on changes to the largest government bond market in the world. The responses have been flooding in.

The topic is a weighty one. The US government bond market makes up around 30% of the fixed income market, according to a letter from the Securities Industry and Financial Markets Association and American Bankers Association.

The Treasury market is “the most important global benchmark for pricing and hedging spread asset classes and is a key transmission mechanism for US monetary policy,” they wrote.

Several Wall Street players took the opportunity to get in a dig in over the growing role of principal trading firms and high-frequency specialists. 

The general consensus among this group is that regulation has discouraged Wall Street banks from making markets in US government bonds. While banks have pulled back, high-frequency trading firms have piled in and these firms are more flighty in times of stress.

Here is Mike Zolik from prop trading firm Ronin Capital pointing the finger at leverage ratios:

Why are primary dealers retreating from the US Treasury market? Participating in the US Treasury market no longer generates a profitable return on capital for those primary dealers that are subject to regulatory leverage ratios. Most primary dealers have been designated as G-SIBs (Global Systemically Important Banks). The lack of diversity in primary dealer membership means that regulation targeting the “too big to fail” problem has the unfortunate side effect of reducing liquidity in US Treasuries.

Shane O’Cuinn, a managing director at Credit Suisse, highlighted the impact of regulation on bank balance sheets for example, saying it had curtailed banks’ ability to participate in the market. He said: 

These traditional sources of liquidity have a reduced capacity to warehouse risk, and therefore banks have to become more dynamic in their provision of liquidity. This has, in turn, led not only to a definitive, structural reduction in market depth but also increased sensitivity of liquidity provision to price volatility. New sources of liquidity, such as HFTs, are a potentially unstable and unpredictable source of liquidity in times of volatility.

It’s worth remembering that Wall Street banks have an axe to grind here. They’ve seen revenues for the government bond trading business tank over the last five years.

But it’s certainly true that the high-frequency traders are now much more active in this market, and some investors say they’re making life difficult.

Here is fund manager Prudential Fixed Income: 

PTFs—or those conducting high-frequency trading tactics—have generally been an impediment within the Treasuries market. These firms generally impede dealers’ ability to provide liquidity to end users. In our opinion, suggestions that PTFs could eventually replace dealers are tenuous because most of these firms are less regulated than dealers, hold minimal amounts of capital, and the potential failure of one, or several, of these entities could contribute to widespread systemic risk.

In September, Risk.net published a confidential list ranking the top 10 firms by volume traded on BrokerTec, an ICAP-owned trading platform for US Treasurys that is believed to make up 65% to 70% of interdealer market volumes.

Eight of the top 10 firms on the platform were not banks, including KCG, Spire-X, XR Trading, DRW and Rigel Cove, according to the report. This research was highlighted by several of the respondents to the US Treasury report, who used it as evidence of the growing influence of principal trading firms. 

These firms trade in and out of markets at speed, usually in small sizes, and they don’t hold positions overnight. Some establishment players believe that these funds disappear when liquidity is needed most.

Here is The Securities Industry and Financial Markets Association and the American Bankers Association

With these changes in market structure has also emerged a class of market participants who largely remain outside of the current regulatory framework, and whose business models are fundamentally different than those of traditional, principal-based participants that used to be responsible for the majority of the volume in the market. The result can be higher volumes and lower trade sizes. However, while these participants are responsible for increases in volumes, this does not mean that such participants are establishing and holding positions or willing to meaningfully provide liquidity during stress events. These factors tend to exacerbate volatility in rapidly changing markets, even absent fundamental catalysts.

And here is Deirdre Dunn, head of North America G10 rates at Citigroup:

While the arms race for speed is in the best interest of any individual trading firm, Citi agrees that it is not in the best interest of the overall market. Arguably, it worsens liquidity and social welfare with no benefit to the investor or end user, while potentially advantaging firms with larger technology budgets.

Not everyone is so concerned. Some of the respondents were keen to point out, for example, that trading continued during the US Treasury Flash Crash in October 2014, and that the proliferation of high-speed traders in the US Treasury market was nothing to worry about. 

You can read what they all of the respondents had to say here. 

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ETF News

Deutsche Börse Gets Into ETF Block Trades

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(MarketsMedia)–European exchange-traded fund (ETF) issuers have welcomed a new service from Deutsche Börse which aims to make it easier to trade large ETF orders on the German exchange.

Deutsche Börse has launched Xetra Quote Request which allows investors to send quote requests for large orders to all registered market makers of a selected ETF, rather than having to negotiate ETF transactions bilaterally over-the-counter or through request-for-quote systems.

The market makers respond by updating their quotes in the Xetra order book, Deutsche Börse’s electronic trading platform. Investors can generally receive a response within 120 seconds of the submission of a quote request although less liquid funds may require more time than highly liquid products according to the exchange.

The process is designed to achieve a high degree of automation with straight-through processing, clearing and settlement, which reduces operational and counterparty risks, while ensuring compliance with best execution requirements for large orders.

Deutsche Börse said in a statement: “Investors therefore benefit from a potential price improvement over execution against a single market maker quote, and ensure best execution by simultaneously interacting with the full liquidity available in the order book.”

Jürgen Blumberg, head of European capital markets at Source, told Markets Media that the European ETF issuer very much liked the Deutsche Börse initiative. “In Europe approximately 70% of ETF volume is traded over-the-counter and liquidity is invisible. If there is more visibility then ETFs will be even more widely used,” he added.

Lansing agreed that the European market will benefit from more on-exchange trading.

“A number of ETP issuers (including us) have long recommended the creation of a consolidated tape (a comprehensive record of both on-exchange and OTC trades),” Lansing added. “Given that that is still in process, more trading on-exchange will go a long way to promoting greater liquidity, price discovery and transparency.”

MiFID II is due to introduce mandatory reporting for ETFs but the new regulations covering European financial markets have been delayed by one year to 2018.

For the full article from MarketsMedia, please click here

ETF News

A New Social Media ETF :$BUZ

Not to be confused with yet another social media ETF comprised of social media companies, the latest flavor in the creative world of exchange-traded funds is courtesy of ALPS Advisors and Sprott Asset Management; an ETF that tracks the performance of the BUZZ Social Media Insights Index, which in turn, identifies U.S. companies that rank highest in terms of  ‘positive public perception’ as measured by ‘the buzz’ on social media platforms.

The ticker symbol at NYSEArca is $BUZ, and while our very own MarketsMuse senior editor suggested  a better ticker symbol would be “BUZZ”,  that ticker is rumored to have been reserved by former NYMEX Chairman Richard Shaeffer in connection with his backing of Americanex Corp, an upstart electronic exchange platform for cannabis growers and distributors, and run by former Tullett Prebon FX broker Steve Janjic.

Still don’t get the value proposition of buying an ETF comprised of companies that inspire positive social media generated vibes via their brands? Especially when a single snarkly tweet from a much-followed celeb or political candidate (e.g. Trump) can cause a company’s share price to plunge in a nanosecond? MarketsMuse curators canvassed an assortment marcom experts who also understand the nuances of investing and the senior resident at   The JLC Group distilled the description of the ALPS ETF with this comment, “..the presumption presumably is that companies having a high rank insofar as perception (aka

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Fixed Income, Tech Talk

e-Bond ATS “OpenBondX” Promotes Maker-Taker Rebates

Start-up corporate bond trading system OpenBondX is hoping to pull a rabbit out of its hat and jump start activity by emulating what the universe of equities-centric electronic exchanges and ATS platforms do in order to attract order flow to their respective venues: pay broker-dealers for orders given to them buy customers (retail and institutional) and offer a Chinese menu of kickbacks for those who ‘make’ liquidity and those who ‘take’ liquidity, otherwise known as maker-taker rebates.

Before dissecting the proposal by OpenBondX, which is open to buy-siders and sell-siders alike, for those following the ongoing discussions with regard to maker-taker rebates offered by exchanges and the assortment of ATS (alternative trading systems), you already know that the topic has increasingly become a big issue with regulators and buy-side investment managers, who are somehow just beginning to understand the implications within the context of fiduciary obligations and the ever-evolving definition of ‘best execution.’

That said, electronifying the corporate bond market so that buyers and sellers can transact in the secondary market in a way similar to how equities are traded has been a holy grail quest going back more than 20 years, starting with a platform known as “BondNet”, which started its life in 1995 as an inter-dealer-broker (IDB) system and soon thereafter, was acquired by Bank of New York Mellon, with the vision to roll out the platform as an ATS and invite institutional corporate bond traders to have direct access to the dealer market place.  When that acquisition, along with BNY’s strategy was announced the biggest banks on Wall Street, along with many of the nearly 90 regional BDs subscribing to that platform put BondNet in the penalty box and pulled the plug on the computers to protest BNY “disintermediating” the relationships those banks and brokers had with the buy-side firms, and more importantly to punish BNY for even contemplating that buy-siders should be able to see wholesale pricing that was available only within the inter-dealer marketplace.

The challenges encountered by the close on 40 different initiatives, 98% of which have failed within 12 months of their respective launch are a matter of historical record. Other than cultural and political issues, the most important obstacles can be found in the fact that “bonds are sold and stocks are bought.” Meaning: institutional investors rely on sell-side institutional sales people to sell them on a particular bond,  simply because buy-side portfolio managers don’t have the time or resources to filter through the many thousands of bonds that have been floated and now trade in the secondary market, each with different terms and conditions, different structures, different ratings and assortment of other criteria that goes into calculating the ingredients for a corporate bond portfolio.

The other big item that has been lost on the assortment of “Wall Street electronic trading veterans” and the many entrepreneurs who have attempted to create a robust and liquid electronic trading market for bonds is the simple fact that buy-side managers are most often interested in being on the same side of a trade as their peers; they don’t tend to take each other out of positions. Which is where Wall Street dealer desks had, until the past few years, always played an integral role. Alas, tose big banks have been legislated out of the market-making business courtesy of post financial crisis regs that prohibit banks from holding any significant inventories that can be sold to buy-siders, and hence, they are not able to purchase any significant amounts from institutions unless they have a buyer for those bonds in hand.  Today, 98% of corporate bonds are held by institutional investors and the notion of creating a system by which they could trade among each other is still a pipe dream that has passed along from one generation of electronifiers to the next. But, OpenBondX thinks they can be different. Here’s the news release issued this week:

OpenBondX Electronic Trading Platform Rolls Out New Rebate/Fee Structure For Fixed-Income Trading

Recently-launched electronic bond-trading venue OpenBondX, LLC (www.openbondx.com) is implementing an innovative pricing strategy that previously has helped transform other markets.

Alistair-Brown-openbondx
Alistair Brown, CEO OpenBondX

A twist on the “Maker-taker” rebate pricing model that propelled the successful electronification of markets in other asset classes, OpenBondX (OBX) will incentivize initiators of order flow with rebates that are built into the trade’s settlement.  Dealers whose streaming prices result in executed trades on OpenBondX are also eligible for rebates.

Currently live with high-yield and investment-grade U.S. corporate bonds, the OBX Alternative Trading System (ATS) now offers the following rebate/fee structure for liquidity providers and seekers:

  • Order initiators of an RFFQ® (Request for Firm Quote®) will be rebated 2 basis points of the notional value per trade (or $200 per million).
  • Order responders will be charged only 2.5 basis points of the notional value per trade (or $250 per million).
  • Post trade, the rebate or fee is applied to the net settlement value, i.e., the initiators’ cost is adjusted by the rebate of $200 per million dollars and the responders’ cost is adjusted by the fee of $250 per million dollars.
  • No additional ticket, transactional or monthly terminal access fees are incurred. This is less than half the typical pricing at electronic venues.
  • As OpenBondX is an “all-to-all” platform (open to both buy- and sell-side traders), any subscriber can earn rebates by initiating an RFFQ.  And access to the platform is free for all.
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Fixed Income, Global Macro Strategy, People Profiles

To Whom It May Concern: Inflation Risk Is On

Memo: To Whom It May Concern: Inflation Risk is Back In Play

Below is a special edition of global macro commentary courtesy of Stamford-based think tank Rareview Macro LLC, the publisher of “Sight Beyond Sight.” The following has been excerpted by the curators at MarketsMuse and republished with permission from the author, Neil Azous.

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Neil Azous, Rareview Macro

For the last two years the expectations around the path of Federal Reserve policy swing from one side of the spectrum to the other every six to eight weeks.

This time is no different, and as that pendulum reaches an extreme, it just comes down to trading probabilities.

Right now, our models spit out the following – inflation risk is back in play.

Now, we do not care whether the Fed raises interest rates or not at the upcoming meetings. We only care that the market begins to believe the Fed will be at some point shortly on account of being behind the curve on inflation.

What we mean by that is that from the first speeches after next Wednesday’s FOMC meeting – which usually start on the Friday following – the tone from the various policymakers on the FOMC will begin to sound more hawkish.

A new drumbeat from the Committee will unlock the Treasury market to move away from the range it has been trading in for the past two months.

At the end of the day: the fixed income market needs to price in the inflation impulse that all other assets are reflecting.

 

The Rareview Macro Toolkit

Below is a list of five illustrations that describes our process that we use to determine the probabilities of Fed action over the next 12 months. Included is an explanation for each chart.

The first chart looks at the implied probability of a hike “BY” a certain meeting, which is the cumulative probability of every meeting before that point (i.e. adding them all up to a certain point).

The second chart looks at the unconditional probability of raising interest rates “AT” a certain meeting, which is specifically the probability of an individual meeting.

The third chart is our ‘decision tree’ illustrating the process we use to calculate answers to the following:

rareview-macro-decision-tree-inflation-risk

 

  • What is the probability of the Fed raising rates at BOTH the June and September meetings?

 

  • What is the probability of the Fed raising rates at the June meeting and NOT at the September meeting?

 

  • What is the probability of the Fed raising rates at the September meeting and NOT the June meeting?

 

  • What is the probability of the Fed NOT raising rates at EITHER the June or September meetings?

 

From there, we use options on Eurodollar futures to recreate these four scenarios digitally.

 

The decision tree starts with two generic questions:

What is the probability of the Fed raising rates at the June meeting?

What is the probability of the Fed raising rates at the September meeting?

Once we know the probability assigned to each of those two outcomes, by following the flow of the decision tree, we can determine the mathematical probability of the outcome of our original four questions.

To read the entire piece from Rareview Macro’s Sight Beyond Sight, please click here

 

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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ETF News, People Profiles

Bitcoin ETF: Navigating SEC Spider Web: Spider Woman

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Call it a Rat’s Nest, a Rabbit Hole, or a Rubik’s Cube, but no certified marketsmuse can dispute the fact the ETF industry has become a Spider’s Web of complexity when it comes to the assortment of products being promoted. And, who more qualified to advocate on behalf of a Bitcoin ETF than Kathleen Moriarty, who is often referred to as the Spider Woman of the ETF marketplace for her long history of traversing the SEC in the course of championing innovative products.

(Reuters) –When one of the first exchange-traded funds launched in 1993, securities lawyer Kathleen Moriarty received a gift from her legal assistant: a Spider-Man comic-book cover altered to depict the superhero facing off against a hulking Securities and Exchange Commission.

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Kathleen Moriarty, Esq. (photo courtesy of Reuters)

Twenty-three years later, Ms. Moriarty’s ability to navigate the arcane rules that govern financial markets and products has built her a reputation as a top lawyer in the ETF business and earned her the nickname “Spider Woman.” Her latest challenge is convincing regulators that a bitcoin ETF is appropriate for the market. That isn’t necessarily an easy sell, given the explosion of ETFs across the market and their fraught role in a market meltdown last August.​

“I tend to concentrate on more exotic products,” Ms. Moriarty said. “Zero of my plans include retirement.”

ETFs have grown to become one of Wall Street’s most popular product categories by offering investors low-fee access to wide swaths of the market.​Investors had close to $3 trillion in assets across nearly 4,500 ETFs globally as of March, according to London-based research firm ETFGI.

“I don’t think anyone would have thought it was going to be this big,” said Ms. Moriarty, a partner at Kaye Scholer LLP, in an interview this year at her Midtown Manhattan office, which was adorned with decorative arachnids and the framed comic.

Ms. Moriarty, who turned 63 Tuesday, helped launch what is still the largest U.S.-listed exchange-traded fund—the SPDR S&P 500 ETF, or SPY—paving the way in 1993 for a booming industry.

“If you’re going to try to do something unique and novel in that space, you’re going to call Kathleen,” said Jim Ross, who heads State Street Global Advisors’ line of SPDR ETFs.

ast year, the agency proposed new rules that could limit ETFs’ growth and even slim down the current lineup, such as curbing the use of derivatives by mutual funds and ETFs and limiting their holdings of assets that are illiquid, or tough to buy and sell.

An SEC spokeswoman declined to comment for this article.

Ms. Moriarty said regulators’ concerns about the products’ proliferation is “extreme.”

“How many more mutual funds do we need? Nobody ever asks that question,” said Ms. Moriarty. (There are more than 8,100 mutual funds and about 1,600 ETFs in the U.S. as of February, according to the Investment Company Institute, a fund industry group.)

Ms. Moriarty cited bitcoin’s volatility as a risk in the filing she co-wrote. She said her proposed ETF’s structure is similar to that of the $32 billion exchange-traded gold product, the SPDR Gold Trust, that she helped launch in 2004 because it aims to give investors access to the commodity without having to hold it. The fund, GLD, has risen sharply along with gold prices this year.

“I’m optimistic,” Ms. Moriarty said about the bitcoin application.

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ETF News

JP Morgan Takes Stake in ETF firm Global X

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Big Banks and Broker-Dealers Continue to Carve Out Stakes in ETF Ecosystem

(Reuters) JPMorgan Chase & Co’s (JPM.N) asset management arm said it has taken a passive, minority stake in New York-based exchange-traded fund (ETF) provider Global X Management Co LLC.

Traditional asset managers have been eager to build ETFs, which are typically lower cost and have been gaining assets at a faster clip than other investment products. ETFs account for $3 trillion globally.

Legg Mason Inc (LM.N) said it January it had taken a stake in ETF company Precidian Investments.

JPMorgan Asset Management, which manages $1.7 trillion, launched its first seven U.S. ETFs over the last two years, raising $339 million, according to Lipper. JPMorgan Chase also backs the $3.2 billion JPMorgan Alerian MLP ETN (AMJ.P).

Global X, founded in 2008, offers over 40 ETFs and is currently developing an ETF that will attempt to profit on consumption habits of people in their twenties.

The company also offers funds based on JPMorgan indexes, including the Global X JPMorgan Efficiente ETF (EFFE.P).

(This story has been refiled to correct to show backer of Alerian MLP ETN refers to JPMorgan Chase, not JPMorgan Asset Management in paragraph four)

 

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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