047 Exchange Invest Weekly Podcast

Transcript

SGX, the big loser of the week as the city state of Singapore loses a vast portfolio of MSCI indexes to Hong Kong exchanges, CME appears to commit an elementary product design error, and Liquidnet looks to be offering itself for sale. Lockdown driven research reckons stock floors are of little value in a digital age as the iconic New York Stock Exchange floor reopens. My name is Patrick Young Welcome to the bourse business weekly digest it's the Exchange Invest Weekly Podcast.

Lockdown is coming to an end it seems in most major locales and a great many minor ones too! The major temples of commercial capitalism are reopening: the New York Stock Exchange emerged Tuesday with social distancing and masks aplenty, while perhaps the most historic open outcry market of all, the Grand Bazaar in Istanbul is preparing to reopen as this podcast is recorded. About 20 Stock Exchange offices and jewelers have been able to ply their socially distanced trade from Constantinople during lockdown.

I remain fairly cynical about the value added by exchange floors to the parish per se. Rings remain a different issue of course. But the psychological boost of the New York Stock Exchange reopening was considerable for the parish and that moment of 0930 Eastern Time campanology last Tuesday on Wall Street served as a moment for everybody in the parish to reflect and remember Governor Cuomo’s recollection of the frontline medical staff across the world. But also it was an opportunity for our parish to applaud the excellent operational brilliance of market leaders such as ICE, Hong Kong Exchanges, NASDAQ, London Stock Exchange Group and others. Sadly, CME and DB1 had some issues during the lockdown but nonetheless they were mostly there, most of the time, during the depths of lockdown. Clearly the debate on floors will continue with or without masks.

The Cushing crisis festers on: in India they've managed to get software which allows them to have negative pricing, although of course, West Texas Intermediate did seem to settle in a much more orderly fashion just the other week. However Wisdomtree, the fund manager, they're shutting their oil ETPs after Shell terminated a swap steel, it's a clear backlash in the aftermath of the Cushing crisis.

Elsewhere, huge arguments about China this week, various plans being put together by the United States of America as they are increasingly annoyed about issues such as laws for China, which appear to, well, run a bit of a Coach and Horses through previously agreed 50 year legally binding commitments to the United Kingdom of Great Britain's government.

What will happen to Hong Kong in the future? Nobody can guess... it won't happen overnight but nonetheless, there could be issues with Chinese companies listed on stock exchanges. And ultimately, by the end of the week, we were looking at stories discussing the ultimate problem of Hong Kong itself and how that SAR would actually be viewed by the United States in terms of trade and other financial issues.

Only one set of results this week, excellent news from the Tel Aviv Stock Exchange, Israel reporting the results of the first quarter revenue up 26% on a 49% rise in trading and clearing revenue driven by recent volatility in the US.

A curious tale of legal issues from Sydney to the United States of America. Isignthis we've discussed previously they're trying to acquire the National Stock Exchange of Australia. Indeed, they say they've lifted their stick during the course of this week. However, they're squaring up against the monopolist incumbent ASX and indeed, ASX has a long ongoing beef with Isignthis: unsatisfactory responses and a threatened removal from the ASX list are now floating around. This is clearly a cause for concern given the deal for Isignthis to troll the National Stock Exchange minnow competitor to the ASX.

Of course in one sense, the ASX has lost a lot of credibility over the years particularly with its recent problems at the CSD, which resulted in a rather unprecedented ASIC edict for traders to restrict their activity in busy times. However, it's tricky to believe that the Australian Stock Exchange is somehow so terrified of Isignthis trying to turn the minnow NSX into an Australian NASDAQ that they would seek to stop an attempt to buy that exchange through some form of ongoing regulatory process.

Elsewhere in the United States of America, the Charles Schwab - TD Ameritrade merger has been hit by no less than eight lawsuits concerning filings which are alleged to include misleading registration statements.

On offer this week, bid now or hit the buy button, Liquidnet, the original dark pool operator and I mean the block trading kings as they once were of the world, are said to be exploring a $1 billion sale. That of course sounds like a big number. But then again, bear in mind that in 2005, Liquidnet was valued at $1.5 billion when it received 250 million dollars of investment from TCV partners and summit. The long standing vision of Seth Merrin may be changing into an exit option for what remains a core product of genius somewhat sidelined by many less inspiring decisions over the years. There is considerable value in the Liquidnet business alongside some more challenging issues. It was a genius first app which never really expanded and ultimately failed to move with the times. There are lessons for everybody in the status of Liquidnet after its initial inspired concept. It's a tale with many facets, a drama, a page turner, not least of which has been a classic innovator's dilemma played out over 21 years since the company's foundation in 1999.

Elsewhere, NASDAQ: they have incorporated the CSD of Iceland alongside their Baltic CSDs. That means that Lithuania, Latvia and Estonia will now also have Iceland added to their portfolio. Interesting because while that comes under one unified management of Indars Ascuks, it's fascinating because, of course, Iceland sits outside of the 27 nations of the European Union and indeed doesn't look likely to join at any stage in the near future. One snippet from MSCI, and we'll get back to them later, they completed their private offering of a billion dollars worth of 3.875 Senior unsecured notes due 2031.

I mentioned MSCI just a moment ago and well what Singapore loses, Hong Kong gains: the Hong Kong exchanges have made an incredible offer; they have swept no less than 37 MSCI futures and options products under license replacing the incumbent Singapore exchange, which was listing them previously. That’s a huge next step in the Hong Kong Exchange’s international strategy as outgoing CEO Charles Li opined. It's a fascinating deal altogether. as Charles Li said “in running any financial market for any international financial center, the rule of law is very important. The clarity of law is very important.”

...As he of course couldn't get away the underlying issues pertaining to the city state or at least the city SAR during the course of the last week. Nonetheless, this is a clear blow to SGX. Their shares instantly collapsed. They were around $10 earlier in the week and they're closer to 8 bucks as I speak.

It's been a terrible and damning indictment of frankly management incompetence at SGX. I have a lot of sympathy for the derivatives head Michael Syn. He's proven a cool strategic head but alas, the C suite at SGX have failed miserably: they've allowed Hong Kong Exchanges to swoop in where CME back when they still did strategy understood the value of keeping licensed index ETDs under some form of suzerainty, hence, their various deals to take over and control different businesses such as S&P, and Dow Jones, etc. A wise and pragmatic SGX management would have had the foresight to perceive the risks of Product franchise stability. Moreover, they happen to be next door to Singapore's Sovereign Wealth Fund, Temasek, who manage no less than $300 billion. Might there not have been an opportunity to perhaps use a little SGX cash and then leverage that perhaps with a wodge of Temasek capital to invest in the attractive MSCI asset? Even this week, the whole business is worth sub $30 billion, a strategic shareholding could have warded off a hostile removal of the MSCI portfolio from Singapore's Exchange, and that was after all, a central element of SGX’s derivatives portfolio. We're talking about a huge blow: not only have the shares dropped more than 20%. ...at this juncture, the SGX has already shaved 10 to 15% off its profits after 23 years with MSCI as a partner,

Singapore exchange left the door open - wide open - to this logical move by Hong Kong Exchanges who have demonstrated once again admirable strategic thinking, whereas SGX has lost face and a very, very valuable franchise.

Elsewhere. Lots of speculation, obviously about those Chinese laws being changed and how that might affect the Hong Kong financial center and indeed, HKEx itself.

In one sense, even the Financial Times was saying China tensions could actually boost the Hong Kong exchange through driving a large number of listings that can go to the USA into the SAR.

On the mainland, Shanghai exchange itself is mulling the first revamp of its benchmark stock index in 30 years. Amongst other things, a major move would be towards a free float calculation that would move the Shanghai index into line with world's best practices amongst the likes of the S&P 500 for one.

Elsewhere, Brokertec and TriOptima have collaborated to deliver their first end to end repo workflow solution. Bravo I say.

At the same time the CME Group are launching options on their super liquid highly successful micro e mini s&p 500 and micro e mini NASDAQ 100 futures. It was interesting to note in the release that I could not find a reference to individual or retail investors.

They were clearly mindful in the CME PR department of Terry Duffy's CNBC denial recently, that CME caters for this category of client. Of course, that was also contradicted by Terry Duffy's opening remarks to the last quarterly analysts call. However, the bit that gets me about this product is how CME appears to have made what strikes me as an utterly elementary product design error, leaving many excluded from properly being able to use the product set when it's permitted, in presumably the autumn, under the US regulatory system. This is a logical and sensible roll out to complement a popular and highly liquid feature set. It's surprising to me that CME didn't spot their error in the proposed specs which will restrict trading in these S&P and NASDAQ index options. It also adds to pressure on CME that they need a bit more thinking power outside the box or indeed the barrel, to ensure they can power their monopoly positions going forward.

Finally, this week in product news, “bitcoiners go wild'' went the headline in the South China Morning Post but not for good reasons. After Goldman Sachs defied expectations with a report which dismissed the cryptocurrency. In some ways, they said at Goldman's, it was akin to the tulip mania of the 1600s. I think that's rather generous to the tulip mania in many respects. Heaven forfend, of course, that the savvy dudes of Goldman might spot holes in the already somewhat archaic technology of Bitcoin, See also Victory or Death where I place Bitcoin in perspective.

And speaking of which,

If you are looking for some reading during lockdown:

“Meanwhile, if you’re seeking inspiration in these hyper volatile times for markets where career paths are often looking decidedly imprecise, I have a recommendation. If you’re trying to get a handle on how technology is affecting life and markets there’s a new book to help you.

“Twenty years on from the excitement of the original fintech bestseller “Capital Market Revolution!” it’s time to look at some of those loose strands hanging around which need a spot of perspective whether you are an exchange parishioner, a fintech professional, or anybody just trying to stay abreast of where technology is now driving investments and finance.

“Victory or Death” - Blockchain, Cryptocurrency & the FinTech World is an easy read explaining the differing and diverging role of banks and exchanges, explaining the winning business models of the new world order and placing in perspective just what Bitcoin, Blockchain and cryptocurrency mean for markets. It's 70,000 words of pure play PLY pith, pacily discussing matters of moment and revisiting the original trailblazing first fintech bestseller “Capital Market Revolution!” which when published in 1999 proved, even if I say so myself: rather prescient!

It’s a binary world - your career will sustain or collapse in the next stage of the digital world, hence the title “Victory or Death” lest you need reminding of the exciting times for finance in which we are living.

Victory or Death is published by DV Books and is distributed by Ingram worldwide.”

Meanwhile, while you're waiting for your copy of Victory or Death to arrive, after the podcast, try our pug cast. IPO-VID, “In Patrick's Opinion” comes to the small screen with a dose of investor video, including my guest star Toby the pug: now on YouTube.

In regulation news this week, the UK regulator has been flagging the perils of bankers and traders working from home. Of course they're concerned about surveillance when we have lockdowns. It's fair to wonder but at the same time the current situation hardly strikes me as a hotbed of potential criminality.

At the same time the French regulator the IMF has said that Systematic Internalizers’ contribution to transparency is very limited. Well, that gave us of course, in Exchange Invest Daily, the newsletter of the bourse business, the first opportunity this month to add a retort from Captain Louis Renault, the police chief in Casablanca.

Elsewhere, the European Union needs to get its capital markets in gear to help COVID hit companies. That was the topic of a discussion, which was essentially in lieu of the canceled FESE convention for this year. David Wright and Sean Berrigan are coherent types one can do business with who have a good overall vision for the EU. Alas, unfortunately the politicians then enter and dawdle, or at least that has been the historical precedent. The FESE Secretary General Rainer Riess correctly noted during the course of the discussion, the need for “a game changer” to aid European recovery. But then the sanguine voice of David Wright acutely noted, “this is the moment all the stars are aligned. But there is one thing missing unless there is political agreement at the highest level on a package with deadlines monitored and enforced. It's not going to happen and it will be death by 1000 bureaucratic cuts”. Alas, the voice of realism fell to commission staffer, Sean Berrigan, who noted the possibility of a paper on these actions... in September!

I've long argued the EU will die due to a dearth of execution amidst the muddy political waters.

People use this week one great hero of the parish over many decades, David Hardy, the former chief executive of LCH Clearnet - indeed the man who brought LCH and Clearnet together has joined ADE as chairman.

The crypto derivatives exchange ADE is a vertical silo built by some of the folks associated with such ventures as Communicating limited amongst other entities. It's an interesting business and with the former LCH Group Chief onboarded, has significant heft. Parish nerds will also recall David was responsible for the LCH’s then controversial but subsequently deemed inspired, move to CCP clear OTC derivatives long before the 2008 meltdown, pushed the blob to endorse the concept.

David stands as chairman alongside a non executive director Alex Wilkinson, thus ADE clearly has grown ups around the enterprise, which is all too rare amongst the current crypto markets, with a few honorable exceptions such as, for instance, the Swiss exchange, which is being chaired by the former Swiss exchange boss Christian Katz.

Suddenly, condolences on the passing of Ishiguro Toru He was an external governor of JPX’s regulatory entity in Japan.

Elsewhere. Knorr Bremse: They are proposing a series of three new board members. One of them happens to be a parishioner.:Theodor Weimer looks to be adding another appointment. At least he has a personal strategy, even if we don't know actually if for what the DB1 strategy might be. Actually this board of Knorr Bremse might be good for him as Klaus Mangold is an exceptionally talented chairman. Indeed, the finest Chairman I've ever sat on a board with.

Elsewhere the Justice Department closed after a mere matter of days, insider trading investigations into three senators, including, of course, the junior senator for Georgia Kelly Loeffler. Eagle Eyed readers, or indeed eagle eared listeners in this medium. will note a paucity of coverage on this news which was as expected... the clearance that is. I suppose many people also probably expected the fact there'd be no news media thereafter. There's a culture war in America and the UK which will ultimately destroy a dismal media or society. It's an ugly binary. Anyway, good to see what we knew being confirmed, Kelly Loeffler adhered to a significant structure of share trading as per the requirements of the New York Stock Exchange chairman and its considerable regulatory requirements.

And that brings us pretty much to the end of this week's discussion. Argentina is in default. No, you didn't hear that anywhere else did you? Everybody's too busy talking about well, some sort of cultural agenda and something to do with Donald Trump sunset, there might be an election looming in the United States of America. This nobody bothered paying attention to that default or indeed news that Argentina is cracking down on local Bitcoin trading, of course, on an attempt to try and stop people getting their money out of the beleaguered almost permanently good during the course of my lifetime Argentine peso...and indeed Finally, ladies and gentlemen, “step up your no deal plans for Brexit” the European Union has told banks in Britain … and on that hardly surprising piece of news if you've been listening to this podcast or reading the Exchange Invest daily newsletter about a no deal Brexit, which we've been talking about for the course of years now.

Ladies and gentlemen, I wish you all a great week in markets. My name is Patrick L Young. do join us for the subscription newsletter Exchange Invest delivered to your mailboxes every day. Alternatively, we'll be back here next Saturday with another Exchange Invest Weekly Podcast reviewing the best of the pith from the week's bourse Business News.

LINKS

After Rare Silence, Istanbul’s Grand Bazaar Prepares To Reopen

Pulse Ghana)

Coronavirus Shutdown Casts Doubt on Value of Exchange Trading Floors

WSJ

WisdomTree Shuts Oil ETPs After Shell Terminates Swap Deal

Risk

China Warns Audit Plans Will Drive Companies From US Exchanges

Financial Times

Congress Could Kick China Listings Off US Stock Exchanges , But It Won't Happen Overnight

MarketWatch

The Tel-Aviv Stock Exchange Reports The Results Of The Financial Statements For The First Quarter