Friday, March 24

Amex to Join the Living

The Amex, faced with the question: "sink or swim?", changes it's mind and starts to paddle...
NEW YORK (Reuters) - The member-owned American Stock Exchange said on Thursday it intends to convert into a for-profit corporation and likely move toward an initial public offering -- becoming the latest exchange to revamp its structure as investor demand for the sector heats up.

Thursday, March 16

Exchange Stocks Getting Spanked

After big runups since their IPO's, these stocks take a needed breather to shake out some of the weak holders and form sound bases. From a Yahoo.Reuters story:
CHICAGO, March 23 (Reuters) - The shares of two high-flying financial exchanges, International Securities Exchange Inc. (ISE.N: Quote, Profile, Research) and CBOT Holdings Inc. (BOT.N: Quote, Profile, Research), plunged on Thursday in profit-taking and worries about competition.

ISE, the largest U.S. equity options mart, led the way as it continued a steep decline from its March 15 high of $52.84.

But CBOT finished as the day's biggest loser on the New York Stock Exchange after analysts at Jefferies & Co. said some profit-taking should not come as a surprise for the parent of the No. 2 U.S. futures mart.

In the above article Frederic Ruffy comments that the NYX Group, which now includes the Pacific Exchange, could become a serious competitor for the ISE.

The ISE makes note of the NYX and it's potential for drawing away some of it's order flow:
"Consolidations and alliances among our current competitors may create larger liquidity pools than we offer. The resulting larger liquidity pools may attract orders away from us, leading to a decline in our trading volumes and liquidity, which would lead to decreased revenues," ISE said.

ISE also said that, with other exchanges now running hybrid open-outcry/electronic trading systems, "certain qualities of our market are becoming more common."

As competitors improve their market quality, "commoditization of electronic trading in the options industry may begin, which could lead to an increase in price competition," the company said.

Here is a quick look at the graphs for some of the exchange related stocks.

NYX, why look abroad?

Is New York losing it's market share in financial capital to the rest of the world? Daniel gross says yes over at
According to the most recent monthly report from the World Federation of Exchanges, the NYSE and Nasdaq combined had $16.9 trillion out of the world's $41 trillion in stock market capitalization in December 2005, or 41.2 percent of the world's total. That's impressive. But it's down sharply from January 2001, when the NYSE and Nasdaq combined held 48.4 percent of the world's stock market capitalization.

One of the reasons cited is Sarbanes-Oxley. A merger with the LSE could help this once geographically challenged institution get around that. Financial centers throughout the world are in competition with each other to attract capital, not only with the technologies and services that they provide, but also with the regulatory environment that goes along with it.

If the managment at NYX is smart, they will be looking for a way to limit the risk that the same idiots who passed Sarbanes-oxley will be coming back with even more well-intentioned legislation in the future.

An LSE merger would be a good start.

In the minds of politicians no one ever reacts to the regulatory burdens that they impose.

In the real world it's hard to find anyone that doesn't.

Maybe there oughta be a law against that, too.

Saturday, March 11

NYX Rival Bids for LSE

From Reuters on Yahoo, the LSE rejected the Nasdaq's bid as too low as the NYX gets busy consolidating it's merger.
This was the third bid received by the LSE in 15 months and its rejection of Nasdaq's offer fueled speculation it might not be the last, with the New York Stock Exchange -- the world's largest stock exchange and Nasdaq's arch rival -- rumored as a potential buyer.

Nasdaq's approach comes just two days after the NYSE Group Inc. (NYSE:NYX - News), owner of the Big Board, went public by sealing its purchase of electronic rival Archipelago Holdings.

The competition for dominance of the International exchange market continues at a hectic pace.
But Repetto expects the NYSE to come up with a rival offer and thinks that among U.S. players the Chicago Mercantile Exchange Holdings Inc. (NYSE:CME - News) could be a "longshot" to put in an offer.
These newly public companies now have a pile of cash and their own stock, with which to buy other exchanges and catch their competition napping.

It's like a game of street basketball where the captains are picking their teams before the big showdown. Leaving the best players for the other guy to pick up could be the fatal mistake.

Wednesday, March 8

The Pacific Exchange's Future?

What will become of the options trading floor in San Francisco now that it is owned by the NYSE? Carolyn Said, from the SF Chronicle:
Margaret Nagle, a spokeswoman for Archipelago, said the Pacific's electronic option-trading, which now uses a system called PCX Plus, will change to an entirely new electronic trading platform in the middle of this year, to be based on Archipelago's technology. "The new platform that we're rolling out includes there being a physical (trading) floor," she said.

In response to conjecture that the trading floor might close this year, she said: "I know nothing of any plans of it being phased out in the near future, meaning anytime this year. That would be news to me. My understanding was that the floor, I can't say will remain in place in perpetuity, but there are no plans to phase it out this year."

So far it appears that the NYSE trading floor will remain in operation along side of it's "Hybrid" electronic trading platform, so the management of the NYSE Group, NYX, must see at least some value in physical trading floors.

But then what does this quote from mean?:
Thain has expressed confidence in the hybrid program and appears to be poised to take advantage of the exchange's newfound independence from its seat holders. The former Goldman Sachs president hopes to expand the NYSE's offerings to include derivatives trading, including equity options side-by-side with sales of the stocks themselves, as well as corporate bond trading.

Will they be traded side by side in New York, or San Francisco, or both?

If both, wouldn't that be redundant? Perhaps San Francisco will be allocated some underlying products and the New York trading floor, others. Perhaps San Francisco will get to trade all of the Nasdaq stocks along side of their options...
In the future, it's possible that floor traders could not only trade NYSE-listed stocks, but also those listed on the Nasdaq. With NYSE-listed stocks already electronically traded on Nasdaq, as well as Archipelago, the NYSE could not only retain some of its own market share, but also eat into Nasdaq's.

Or perhaps foreign equity products along with their derivatives...
Thain has also said he is still considering expanding the NYSE's operating hours in order to compete with European markets, though that has run into some resistance from traders on the West Coast, who are already in the office at 6:30 a.m. Pacific time for the opening bell.

Foreign exchanges trade some of our equities, perhaps we will be trading more of theirs in a bid to capture more worldwide order flow.

But what would be the impact on the Pacific Exchanges trading floor if the following happened?
Alternatively, the NYSE could go after the Chicago Board of Options Exchange or the International Securities Exchange in order to get a bigger piece of the options and derivatives trade.

If the CBOE was aquired perhaps the two floors could once again divide up the optionable stocks like the days of old and reduce the competion between them for the same order flow, loosening up the sometimes very tight spreads on the more actively traded options.

The one underlying certainty for the options trading floor in San Francisco is this, out from under the thumb of the stifling "public-institution" bureaucracy, it now has at least a chance of finding it's niche, getting an edge, and joining the world of profit driven innovation that has been whirling around it for the past twenty years.

Saturday, March 4

Perceptions of Inflation

Tom Au with a note on inflation, or rather, inflations.

China's foreign currency reserves too big?

From a member of an advisory body to the Chinese government:
"China's foreign exchange reserve hit 818.9 billion dollars at the end of last year but what China really needs should be no more than 250 billion dollars," economist Xiao Zhuoji told the Shanghai Securities Times.

"The current (holdings are) way above actual needs," he said.

Chinese reserves should be cut by more than two-thirds from current levels, said Xiao, who is also a member of the Chinese People's Political Consultative Conference (CPPCC), an advisory body to the government.

When the biggest buyer of your bonds becomes the biggest seller, yields are going higher.

If this were to happen, you would have the American central bank driving up the short end of the yield curve, and the Chinese central bank driving up the long end.

Not much left for market forces to do. Maybe the ideologies of governing officials in the two countries aren't so far apart after all, at least where government intervention is concerned.

Silver ETF Coming Soon

Silver prices moved above $10 a troy ounce for the first in more than 22 years buoyed by strong buying in metal and energy markets.

Traders said investors were also buying into the metal in the hope of a favourable US regulatory ruling on the launch of a proposed silver-backed exchange traded fund. Barclays Global Investors has filed with the Securities and Exchange Commission to list a silver backed ETF, which potentially opens up the silver market to new investors.

Continued at Silver pushes to new 22-year high

Friday, March 3

China... Has a Dark Side?

Hat tip: Tyler Cowen at Marginal Revolution.

If you are one of those very knowledgable people who are gung ho on China and can't wait to throw your 401k money into the latest China fund, you may want to take a look at this article by Minxin Pei at Foreign Policy, the mouthpiece for the New World Order establishment types.

Then again, if you've already sent your money to China, you may want to finish your lunch first, because after reading The Dark Side of China’s Rise you may not be able to swallow for an hour or so.

Pei steps past the piles of steaming hype, and takes a realistic look at the "engine of future world growth" to reveal the darker side of this neo-Lenninist state, where monopolies, corruption and one-party rule are the norm.

Behind the glowing headlines are fundamental frailties rooted in the Chinese neo-Leninist state. Unlike Maoism, neo-Leninism blends one-party rule and state control of key sectors of the economy with partial market reforms and an end to self-imposed isolation from the world economy. The Maoist state preached egalitarianism and relied on the loyalty of workers and peasants. The neo-Leninist state practices elitism, draws its support from technocrats, the military, and the police, and co-opts new social elites (professionals and private entrepreneurs) and foreign capital—all vilified under Maoism. Neo-Leninism has rendered the ruling Chinese Communist Party more resilient but has also generated self-destructive forces.

Oh, and I know you don't want to hear about this...
But China’s tentacles are even more securely wrapped around the economy than these figures suggest. First, Beijing continues to own the bulk of capital. In 2003, the state controlled $1.2 trillion worth of capital stock, or 56 percent of the country’s fixed industrial assets. Second, the state remains, as befits a quintessentially Leninist regime, securely in control of the “commanding heights” of the economy: It is either a monopolist or a dominant player in the most important sectors, including financial services, banking, telecommunications, energy, steel, automobiles, natural resources, and transportation. It protects its monopoly profits in these sectors by blocking private domestic firms and foreign companies from entering the market (although in a few sectors, such as steel, telecom, and automobiles, there is competition among state firms). Third, the government maintains tight control over most investment projects through the power to issue long-term bank credit and grant land-use rights.

China’s business cycle is therefore driven by Beijing. Private-sector firms have very limited access to finance or new markets. The state even dominates many ostensibly deregulated sectors, such as the brewing industry, the retail sector, and textiles. Of the 66 publicly traded retailers in the country, only one is private. There are only 40 private firms among the 1,520 Chinese companies listed on domestic and foreign exchanges.

While the rest of the world has been buying into the PR campaign of the Big Red Pig from the Far East, The Moon and the Sixpence is one of the few stalwarts who stand firmly on common sense.

No matter how much lipstick you put on her, she's still just a butt-ugly pig.

Thursday, March 2

End of the Currency Carry Trade's Steve Johnson reports that BNP Paribas' FX Strategy Indicator is turning negative on the carry trades.

Carry trades are simply borrowing money in a country/currency with low rates and lending it in a country/currency with high rates, capturing the difference.

The spread between the two rates is the source of profit, when it shrinks so does the payoff.

The U.S. dollar has been the beneficiary of the carry trade because of the higher yields available on U.S. debt securities. With the decline of the carry trade there will be less demand for the dollar.

These kinds of gifts to the market are often the result of central bankers attempts to evade reality by "liquifying" their economies and keeping rates artificially low in order to induce more economic activity and allow their politicians to stay in office for just a little while longer.

For example, rates in Japan were held down to zero while they attempted for years to end the deflationary spiral that was the consequence of their own prior action.

So while they created credit and pumped out new money 24/7, smart banks and hedge funds were borrowing that money for nothing and lending it to the U.S. treasury--and pushing up the dollar in the process. Note that the Japanese central bank was pumping it out hoping it would be spent domestically to the benefit of the Japanese economy and instead that money ends up financing the U.S. budget deficit thank you very much. No wonder their reflation attempts were not having the desired effects.

And that doesn't even count the direct purchase of U.S. dollars or government debt by their central bank held as foreign currency reserves.

The end of the carry trade? Don't worry about it, if history is any guide there will be ten more central bank freebies out there to take it's place.