Archive for August, 2007

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Consolidation-Junction what’s your function?

Friday, August 17th, 2007

We all knew it was a matter of time before all of the exchanges in the whole entire world began consolidating — which, of course, will one day lead to only two super exchanges — one in Europe and one in Chicago — that’s right, I said Chicago.

When the Chicago Mercantile Exchange’s (CME) merger with the Chicago Board of Trade (CBOT) became final, the warning signal for the “other” exchanges considering consolidation went up to ORANGE.

Now simply considering some type of strategic move is no longer acceptable—it’s time for action.

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Credit market woes

Thursday, August 16th, 2007

Equities markets continue to take a beating as weakness initially stemming from failure in the subprime credit market takes hold throughout the economy. And despite Thursday’s late rally that eliminated a more than 300 point loss, the full affect of the fallout from the credit crisis has probably not yet been seen.

We discovered an interesting item in a letter from failed hedge fund Sowood Capital Management to its investors. Sowood dropped more than 50% in July and sold its remaining portfolio to Citadel Investment Group according to the letter. As their losses from their exposure to credit markets grew deeper in mid and late July, Sowood Managing Partner Jeff Larson noted that the collateral put up to back trading positions was being downgraded by counterparties. Larson wrote, “Our counterparties began to severely mark down the value of the collateral that had been posted by the funds.”

So they not only had exposure to credit markets in their positions but also the collateral used to establish those positions were subject to massive market adjustments.

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Cotton goes down, takes WEB ICE with it

Thursday, August 16th, 2007

Jurgens Bauer, a cotton trader at the New York Board of Trade – a regulated subsidiary of the Intercontinental Exchange (ICE) – is reporting that cotton prices went limit down today, and that the ICE trading platform (which lists Nybot’s contracts) went down with it.

“The only thing in the building that was going up today was the elevator. Even the escalator was broken on the second floor,” he wrote in an e-mail. More importantly, he writes that a serious flaw was exposed in ICE electronic trading platform: once cotton was offered at the limit, Web ICE shut down as a result.

“What happened was that trades on ICE continued to take place below limit. It was announced that any transactions that took place below limit would be nullified and canceled. This not only impacted out-right transactions, but also spreads in which one leg, or both, used inappropriate price levels. This created a nightmare for some, as they didn’t know their position. But worst of all, following the announcement trades below the limit continued to occur.”

More as the story develops.

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CFTC's fast response…

Thursday, August 16th, 2007

In July, Gregory Mocek, director of the division of enforcement at the Commodity Futures Trading Commission (CFTC), sent a letter to the Washington Post in regard to a piece it ran that he said contained several inaccuracies regarding the case filed by the CFTC against Amaranth Advisors LLC.

Mocek said in the letter that the CFTC began investigating Amaranth in June 2006, which was, “well before its collapse and before congressional inquiries. To characterize a 14-month investigation of Amaranth as a response to political pressure demonstrates a lack of appreciation of how enforcement cases are brought at agencies such as the CFTC,” adding, “Rest assured, when we find evidence of manipulation or artificial prices, we investigate and bring appropriate action, as demonstrated by our ongoing investigations of more than 100 individuals and companies for possible manipulation in the energy markets. Enforcement, together with our comprehensive futures market surveillance program, has proved to be an effective form of deterrence, signaling to market participants that illegal conduct will be uncovered and prosecuted.”

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Nymex launches ethanol swaps

Wednesday, August 15th, 2007

The New York Mercantile Exchange has launched two new ethanol swaps contracts to compete with ethanol swaps on ChemConnect, which was recently acquired by the Intercontinental Exchange (ICE) and CME Group’s ethanol futures and cash settled ethanol swaps, which it recently acquired by purchasing the Chicago Board of Trade (CBOT).

“It’s going to be interesting to see if there is enough interest to become viable contracts. I expect them to be more of a slow burn,” says Rick L. Kment, ethanol and biofuels analyst for DTN. “The thing that has made RBOB and crude oil so successful is not commercial traders, while they are an important part of it. It’s really the investment and the non-commercial trader that takes that offsetting position; and especially with swap contracts, that kind of limits itself to being commercially driven.”

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Is tax man coming?

Tuesday, August 14th, 2007

Every other year or so a U.S. president presents a budget to Congress with a user fee on futures to fund the Commodity Futures Trading Commission (CFTC). Such fees are invariably pulled out before the budget becomes law after sufficient pressure from the futures industry is placed in high places.

This year may be different. The Senate Permanent Subcommittee on Investigations (PSI) in its report, “Excessive Speculation in the Natural Gas Market” released in June recommended such a fee in order to bolster the CFTC’s ability to monitor markets.

In addition the White House Office of Management and Budget issued a statement supporting the measure. “The House should also approve the proposed transaction fee on futures and options contracts.” The statement cited the PSI report and added, “[the] CFTC is the only Federal financial regulator that does not derive its funding from the specialized entities it regulates … it is appropriate for those participants to contribute toward their cost.”

Perhaps President Bush heard about CME Group Executive Chairman Terry Duffy’s endorsement of Sen. Hillary Clinton (D, N.Y.) for president.

House minority leader John Boehner (R, Ohio), who in the past confidently stated such fees would be dead on arrival at industry gatherings and who is a close friend of Duffy, would not provide such a guarantee when asked about the fee in March.

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Credit squeeze affecting Sentinel Management Group

Tuesday, August 14th, 2007

Sentinel Management Group, a cash management firm, has halted redemptions of its funds, which according to sources are pooled and may be more affected if a large client takes out funds. The company sent a letter to investors explaining the problems.Download file
One source believes one of the problems with Sentinel’s portfolio is that is is pooled, and if one large client pulls out, or if some paper defaults, it would affect the entire portfolio. Further, in looking at its Prime porfolio as of July 30, 2007, the average weighted maturity is 396 months, or 33 years, which is a far less liquid market. Download file. The group also has a 125 portfolio.Download file

The CME Group also made a statement that Sentinel had $1.5 billion under management, of which none was held by the CME. Sentinel is not a clearing member of CME Group or any other exchange. In its release it noted that “Sentinel provides investment advisory and investment services toinstitutional and corporate clients, including a limited number of CME
clearing member firms. Total investments under management by Sentinel are
approximately $1.5 billion. None of these funds are on deposit with CME
Clearing to support performance bond or collateral requirements. Sentinel
is registered with the Securities and Exchange Commission (SEC) pursuant to
the Investment Advisors Act of 1940, and is also registered with the CFTC
and the National Futures Association (NFA) as a non-clearing futures
commission merchant (FCM).” And that all clearing members had met their clearing obligations.”

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Nymex to move?

Monday, August 13th, 2007

The rumor is not only is the New York Mercantile Exchange (Nymex) looking to sell its building, but it could move to the New York Stock Exchange, which is already rearranging its floor for the new tenant. The NYSE in the run for Nymex is a bit of an oddity, with the most likely player for Nymex’s affection being the Chicago Mercantile Exchange or CME Group. Last November, prior to the InterContinental Exchange’s failed run at the Chicago Board of Trade, a CME official noted with confidence that Nymex would be the next target after the CBOT purchase was finished. Seems some at Nymex are hoping for it, especially floor traders who are said to be having a morale issue. Whatever happens it probably will be soon as Nymex is on a trajectory to sell its building and put itself on the block. With Nymex products trading on Globex already, CME Group seems the right fit, while Nyse/Euronext might be better off going after ICE.

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Dueling spin

Monday, August 6th, 2007

One of the things I liked about working on the trading floor was no matter how bad of a day you were having, when the bell rang the day was over and after checking fills you could go home. Electronic trading and for-profit exchanges have changed all that, even the exchanges’ communications staff are working overtime.

An example of this is the two press releases we received over the weekend with varying interpretations of a Friday decision by the Delaware Chancery Court.

Both the Chicago Board Options Exchange and CME Group claimed victory in the battle over Chicago Board of Trade exercise right privileges (ERPs) after the court made its ruling. The court ruled in favor of CBOE, rejecting a motion by two CBOT members asking for a temporary restraining order to prevent CBOE from enforcing rules restricting leasing privileges of CBOT members. The court also granted a CBOE request to suspend proceedings until the Securities and Exchange Commission (SEC) takes action on the CBOE rule changes that claim the CME/CBOT merger extinguishes the CBOT member ERPs.

While apparent victories for CBOE, the court also offered an opinion on its authority to rule on the CBOT complaint regarding the exercise right. The opinion states, “Despite the CBOE’s urgings to the contrary, the Court retains jurisdiction to determine whether the Defendants’ actions have the operative effect of divesting the Plaintiff-class of a vested economic and property interest.”

So there will be no restraining order and the Delaware Court will wait on an SEC decision before taking up the case. As far as the spin coming from each exchange, we won’t attempt to offer a legal opinion. The market however appears to be siding with the CBOE interpretation as a CBOE seat traded today for a record $2.7 million.

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Trading floors on the way out, really

Thursday, August 2nd, 2007

At least that’s what it seems like in New York, where Nymex Holdings, the parent of the New York Mercantile Exchange (Nymex), is slashing costs through the next three months, specifically targeting the population of its trading floor, which has seen volume dwindle as more contracts are traded through an electronic alliance with the Chicago Mercantile Exchange (CME).

Floor trading volume dropped by half in the second quarter of 2007 compared with last year, when Nymex agreed to start trading its contracts on the CME’s Globex electronic system. Energy futures and options volume averaged 257,000 contracts on the Nymex in the second quarter, compared with 537,000 in the same period last year. Meanwhile, electronic trading volume soared more than 400%.

Nymex Chairman Richard Schaeffer indicated in a conference call this week that changes involving the trading floor may be coming sooner rather than later. A Forbes story quotes Schaeffer as saying, “These [changes] aren’t things that are going to be put off for six months.”

(more…)

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