080 Exchange Invest Weekly Podcast February 6th, 2021

TRANSCRIPT

This week in the parish of forces and market structure. GameStop GameStop, GameStop. London Stock Exchange, optimism on equivalence and more, as NASDAQ thank the cloud for reliability while selling eSpeed to Tradeweb. Robinhood raise billions and seek a settlement revolution…. Or what we've been proposing for the past 25 years.

Meanwhile, China launches peanut futures!

My name is Patrick L. Young. Welcome to the bourse business, weekly digest. It's the Exchange Invest Weekly Podcast, episode 80.

Further to my comments last week, what most perplexes me about the Gamestop story of last week was not how It raised controversy, but the sheer lack of insight into financial markets by so many people, I mean, things got so bad, the legacy media was actually doing a decent job in some quarters. The stories were often flawed. The messages amounted to nonsense, and the questions raised usually appeared elementary with appalling, flawed conclusions. In that respect, it was difficult to tell the scheduled news, the legacy media, the politicians, and indeed the late night comedians apart in terms of their overall conclusions.

Bipartisanship with Senator Ted Cruz and Congressman Alexandra Ocasio, Cortez, agreeing on an issue leads me to immediately presume that anything that rather wacky pair believe has to be plainly wrong. Meanwhile, Maxine Waters demonstrated almost total financial illiteracy by attacking hedge funds when it seems some hedges were donating umpteen billions into the hands of retail investors. Or was it all smoke and mirrors in terms of a hedge fund on hedge fund proxy war with a kind of retail frontend on the GUI?

Nevertheless, Melvin Capital alone lost half their capital, but funnily enough, amongst others, Citadel rode to its rescue... At the same time, given Representative Waters is chair of the Financial Services Committee of Congress, that fills me with a certain grim foreboding. It's an ugly situation. The conclusions have already been drawn by the usual crowd of comedians, politicians, and journalists.

Yet nobody is really asking coherent questions. Although we might yet see an end to “payment for order flow.” Perhaps for the wrong reasons. And Robinhood is now likely to be company of the year at the annual Bar Council Awards for attracting such an influx of funding into class actions suits across the brokerage community.

Short-selling may take a pasting which is shortsighted, but then again, some of the sellers appear to have been somewhat egregious in their actions. But all in all it is a sort of perfect storm for incoming SEC chairman Gary Gensler. Can he value better markets over scoring political points?

I have long being committed to the free Robinhood, gaining stock execution by selling orders to Citadel, Virtu et all being on the high end of the “This will end in tears” priority list. Now we have Gary Gensler coming in at the SEC on the whole Gamestop farago to boot, which is going to be a lot more difficult to unpick.

However, I think those $10 bounties for skewing retail orders off exchange in vast bulk and giving a payment for order flow is going to be very, very dead indeed, Very, very soon, indeed. And that's even before we get to considering the politics here. Committed hard-line Democrat Gensler would be removing a U S specific product line, which is provided by Vertu QV it's supremo Vinnie, Viola, who was almost Secretary Of The Army under president Trump, until he withdrew from consideration. And Citadel, run by a GOP mega donor, Ken Griffin: That's the sort of payment for order flow ending side effect, which will be deemed AOK by AOC.

Meanwhile, having accepted an invitation to Congress to pool ignorance with the finance committee, RobinHood's CEO has had a form of real time epiphany: it's time for real time settlement, he argues. While based on a dubious, rebranding of “free.” Vlad- hood is right in this Robinhood activity. The whole clearing layer before settlement in equities, reflects the archaic banking system and there is no reason for it in the modern age, other than stasis.

However, as leaders in real-time settlement have shown when Moscow and Kazakhstan wanted to sell their products to the West, they ended up going backwards from T plus zero to T plus two, in order to accommodate the banks and the many other entities... Sure. The consultants are salivating at the idea of time Clearing moves coordinated through the DTCC in the USA. And indeed I wrote a white paper on precisely that topic a few years back towards a real client, starting in towards a real time global market. However, now a millennial has pointed out what PLY has been noting for a couple of decades, the legacy media are getting very excited.

Good day, ladies and gentlemen, this is a very brief reduction of highlights amongst the key headlines from the week in market structure. The analysis of the week’s many events and happenings can be found in Exchange Invest Daily subscriber newsletter. The unique guide to the bourse business sent daily to your inbox.

More details on how you can get a free trial for 30 days. at ExchangeInvest.com. “Trading shares on dark pools. can save money,” says Britain...Now that it's becoming free of European Union rules. That's great news for the block trading platforms based in London as the UK FCA look to remove various simply dumb MIFID II provisions, which complexified stock dealing with no benefits to investors Anything which enables less friction for substantial block transactions is good. The process of systematic internalization I find more difficult to agree with. The playing field leveled with periodic auctions ought to enable a better market for stocks from London, particularly if the EU retains the MIFID II great west of time legislation.

In results this week, it was a mega busy week for results in the parish. All the details were in Exchange Invest Daily, The newsletter no person can afford to be without in capital markets and market structure. For the sake of this podcast, let's just skim through the edited highlights, great numbers, actually coming in all round from the exchanges, Japan exchange group, Bursa Malaysia, DFM in Dubai, disappointments from MSCI whose Q4 earnings and revenue missed estimates. Meanwhile, lots of predictions that similarly due to miss their estimates is going to be the Chicago Mercantile Exchange, coming soon.

Deal news this week, finally, it's over! The London Stock Exchange completing their $27 billion Refinitiv takeover or as CNBC went on to note Refinitiv-LSEG integration will provide scale and singularity of services in data technology.

Language is a wonderful thing. Thus, we can, for instance, look at the broad sweep of history easily. “After the D-Day landings from June the seventh, 1944…” allows us to skip over a logistical exercise of unprecedented scale. Now there is media blindly inferring “after the LSEG Refinity integration…” which sounds a lot like that D-Day micro synopsis to me, albeit the allies had coherent generals and strategy. The London Stock Exchange Group is reliant on multinational consultants. Moreover, CNBC has a fascinating syntax within the story. They mentioned the Refinitiv-LSEG integration in a fashion, which opens a whole new area of potential horror that in due course, the London Stock Exchange Group will end up a kind of Stockholm syndrome of management case studies. Gaunt hollowed out figures will walk the Paternoster C-suite corridors haunted by the notion they could ever actually control the amorphous blob of Reuters financials, 20,000 headcount, amorphous kind of middle managed zombie legacy business. The London Stock Exchange Group doubtless think they have a plan, but as the not overly regarded as a management consultant, Mike Tyson previously noted “everyone has a plan until they get punched in the mouth.” The 4X LSEG legacy payroll Refinitiv workforce doesn't need to resort to physical violence...Even though they already vastly outnumber the incumbent LSEG 5,000. Of course, Refinitiv has a much more nefarious playbook to grind down naive management types who think mergers and acquisitions is all maths & PowerPoint.

Of course, this also raises the whole future of the terminal business. Bloomberg have maintained a winning attitude long enough to become the market leader from originally being the rank outsider. Having said that they became the market leader in terminals. Remind me a second: What, what was the terminal again?

Anyway, while Reuters retained a losing mindset long enough to somehow de facto swallow the London Stock Exchange, it hasn't exactly been all plain, well, swimming before David Schwimmer came along to rescue the Refinitiv deal by paying a significant premium to black rock at all. Now David Schwimmer must prove he is not “out of his depth Dave” by trying to turn around a once great name which has been tarnished by decades of management incompetence. However, on one optimistic note, the London Stock Exchange Group’s, CEO, David Schwimmer has noted. He expects the EU to give clearing equivalence to the UK.

...Probably not immediately, but he believes that it is going to be happening soon enough. Cheering optimism during a week when the European Union suffered its most extreme meltdown of the Von Der Leyen presidency, which is after all only itself, months old.

Amongst a myriad of other Deals, we had all the details in ExchangeInvest this week. Remember go to ExchangeInvest.com to sign up for that. Robinhood, they rapidly raised an additional $2.4 billion from their investors, Plus an additional one billion earlier in the week, pumped into the online brokerage to help it ride out the trading frenzy in popular stocks, including Gamestop… a lot of that of course, having to go into the collateral for the clearing of T+2 trades.

One key deal this week, structurally interesting from start to finish. NASDAQ, they've agreed to sell their US trading business in treasuries to Tradeweb for $119 million. Paying $190 million in cash somehow or other the mathematical boffins of the accounting department have got that up to the equivalent of $700 million proceeds, thanks to the retention of various pieces of regulatory capital, other tax write-offs, et cetera. Nonetheless, the acquisition of. eSpeed, as it was, by Tradeweb from NASDAQ closes a chapter, an unfortunate chapter, which was not the most successful deal in the history of the development of NASDAQ under Bob Greifeld.

Indeed the Tradeweb purchase of eSpeed was an inevitable NASDAQ disposal as it became clear that one of the few failings by Bob Greifeld as CEO - while he was turning a bulletin board into a stock exchange group - was misunderstanding the difference of the pure binary, AKA stocks, equal binary market; bonds, equal binary market...But jumping to the ergo, they're the same as they're both binary markets...was a quantum leap that proved flawed. It also reminds parishioners and investors just how jolly complex this exchange business can be. One overhang from the Bob Greifeld era. NASDAQ has always been, what do we do with a problem like Maria? I mean, eSpeed and many of us thought it might've been passed as a right off during Adena's honeymoon. She went some way straight out of the box with a $578 million bond branding hit. With the accountants pulling a blinder and relatively early in the quarter, too, so potentially something may yet offset it, NASDAQ have offloaded - as long expected - the eSpeed business... to Tradeweb ...by accounting for $700 million on the top line. It's much better than the expected return for a business, which alas never meshed into the NASDAQ mix, despite it being an interesting purchase at the time. At the same point the post eSpeed BGC elements have a lovely windfall in stock and ultimately Tradeweb gains a lovely dose of connectivity for the princely sum of $190 million.

As I mentioned previously, however, if eSpeed is worth $190 million on a connectivity play. How on earth is Liquidnet worth 575 to $700 million? Obviously the truth of Liquidnet is: it isn't worth that amount of money. The whole scenario with the Liquidnet acquisition reminds me of Kerry Packer's sale of Nine network to Alan Bond for a record 1.05 billion Australian dollars in 1987.

Packer would subsequently buy back the asset for only 250 million Australian dollars. Three years later. On this Liquidnet takeover, how long before Seth Merrin, the Liquidnet founder is able to quip “you only get one Allen bond. I mean, one TP ICAP in your lifetime, and I've had mine.” At the same time the deal made for lucky or perhaps unlucky timing for management and shareholders as the deal for Tradeweb to acquire Nasdaq’s eSpeed bond business came the day after TP ICAP, gave their okay to the bottom line - Politely termed - irrational, exuberance of the crass dilution of the TP ICAP stock in order to pay for their Liquidnet acquisition. What we're looking at there, Of course, as I said before, as the stock flirts with two Pounds: the rights will dilute two for five at 140 Pence. Presumably private equity interest is likely to emerge soon enough...I would imagine the region of 150 to 170, maybe on160 to 180 Pence.

New markets, Nigerian commodity exchange. It's apparently going to be live in 90 days, according to the Nigerian central bank. Sharp intake of breath there, but don't hold onto it because we knew that project has been delayed for many, many years indeed.

Meanwhile, trading in the new Zengzhou Commodity exchange kicked off with peanut futures…

and in crypto land news of a new Japanese stock exchange! Financial Titans, SBI holdings, Sumitomo Mitsui financial group are looking to launch a digital stock exchange with a blockchain backbone.

In product news this week, one important piece of information. Swiss stocks are finally trading in London. Once again: Thanks to Brexit.

Technology. Unfortunately, the New Zealand exchange, they got a rap over the knuckles and a bit more from the Financial Markets Authority over their response to the DDoS attacks of last year, which crippled New Zealand’s financial markets infrastructure for days.

Well, in crowdfunding, we have a mergers and acquisitions case going to the UK antitrust authorities, the CMA. Seedrs and Crowdcube are looking to merge. And at the risk of sounding churlish, here - the two largest crowd funding platforms in the UK itself. The largest crowd funding market in Europe - are complaining that they must merge in order to achieve scale, to get profitability.

Well, parishioners of the world of bourses and market infrastructure. Listen to the prices that are charged by Crowdcube and Seedrs. If you successfully fund on Crowdcube, they will take 7%. Yes, 700 basis points of all the money raised! Seedrs, they're slightly better value: they're only taking 600 basis points of the money raised, and yet they can't turn a profit! I think the antitrust authorities would be right to avoid enabling a merger where the rationale is.

‘ If you don't agree to us continuing with high fees, we might go bust.’ In Regulation news this week. Well, irony of ironies! Bafin - They're the German financial regulator. They filed a criminal complaint against someone insider trading on Wirecard...and here's the rub. They were an employee of Bafin at at the time!

This is surely such a deliciously appropriate footnote to a crisis which has cost Bafin its credibility, having hounded people across the financial industry for short selling or talking down Wirecard when there was no fraud. Um, no conspiracy, except there was right there in the Dax 30: Wirecard itself! Bafin anyway, finally found a culprit, one of their own staff who sold short just before the truth finally emerged that Wirecard was a mega Ponzi scheme!

Career news this week: worrying information about S& P global. Only weeks after they'd been announcing their takeover of IHS Markit, S&P global laid off some 700 staff all from the S and P global market intelligence group around the world.

Meanwhile, ladies and gentlemen, Robinhood, they have been very excitingly enjoying the Gamestop times. And while of course, r/wallstreetbets has been the place to be looking on Reddit for a lot of financial gossip in the stock market, silver and more. It's interesting to report that in Japan, there's general incomprehension about what this whole mass Reddit movement has been all about. Elsewhere China's online trading platforms find themselves landing in a nerds versus Wall Street battle as their army of small investors demand the opportunity to get in on the GameStop mania.

How fascinating, Chinese punters demanding a stock connect for the year's biggest stock disconnect!

And on that mysterious and magnificent note, ladies and gentlemen, my name is Patrick L. Young. Thank you for joining me for this. The 80th weekly Exchange Invest podcast we’re back all through the week with the Exchange Invest newsletter...

It only remains for me to say: see you again here. Next week, we look forward to your being able to listen to our podcast. Don't forget on Tuesday's our live stream IPO-vid live at 6:00 PM. London time that comes out every Tuesday. Thanks again for listening. My name is Patrick L. Young, have a great week in life and markets.

LINKS

It's Time for Real-Time Settlement

Robin Hood

Trading Shares In 'Dark Pools' Can Save Money, Says Britain Free Of EU Rules

Reuters

Japan Exchange Group, Inc. And Consolidated Subsidiaries: Consolidated Financial Results For The Nine Months Ended December 31, 2020

JPX

Bursa Malaysia Posts Record FY20 Earnings

The Star Online

DFM Company Posts Dh137.9M Net Profit In 2020

Khaleej Times

MSCI Q4 Earnings & Revenues Miss Estimates, Shares Dip