news

Written by Katarina Taurian

Thursday, 13 August 2015

6/08/2015

MARKETS

U.S. regulators could levy large fines over alleged wrongdoings
Credit Suisse’s settlement under discussion could lead to the largest fine ever levied against an operator of a private trading venue. ENLARGE
Credit Suisse’s settlement under discussion could lead to the largest fine ever levied against an operator of a private trading venue.
By BRADLEY HOPE, EMILY GLAZER and CHRISTOPHER M. MATTHEWS
Updated Aug. 11, 2015 7:17 p.m. ET

Credit Suisse Group AG and Barclays PLC, two of the biggest operators of “dark pools,” have entered settlement negotiations with the New York attorney general and the Securities and Exchange Commission over allegations of wrongdoing in the private trading venues, said people familiar with the matter.

Credit Suisse is in talks to pay a fine in the high tens of millions, which would be the largest fine ever levied against an operator of a private trading venue, and the Barclays discussions also suggest a large fine, the people said.

Deals with the banks could come as soon as the next several weeks, though talks could still fall apart, they said.

Representatives of Credit Suisse and Barclays declined to comment.

Dark pools, which allow buyers and sellers to swap shares with greater anonymity than they can on the stock market, have come under scrutiny from regulators in the past several years, and enforcement activity has been heating up lately.

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Analysts say that while the pending settlements could lead to tighter regulation of off-exchange trading, they are unlikely reduce the amount of dark-pool trading.

READ MORE

ITG Ousts CEO Gasser After Probe (Aug. 3)
UBS to Pay $14 Million to Resolve Dark Pool Case (Jan. 15)
N.Y. Attorney General: Barclays Isn’t Cooperating with Dark-Pool Probe (Jan. 21)
Dark pools, along with so-called internalizers who execute trades on behalf of retail brokers, account for nearly 40% of all stock trading, according to the market-research firm Tabb Group LLC.

“This may serve to finally sterilize dark pools,” said Larry Tabb, chief executive of Tabb Group, referring to the likelihood that operators disclose more information about trading activity and stay in compliance.

The size of fines against dark-pool operators is on the rise.

Investment Technology Group Inc., a New York brokerage, said last month it had set aside $20.3 million to settle allegations of wrongdoing related to its dark pool, Posit, with the SEC.

The largest case before that was against UBS Group AG, which in January agreed to pay $14 million to settle allegations with the SEC it created an uneven playing field inside its dark pool.

Credit Suisse operates the largest dark pool in the U.S. Called CrossFinder, it matched more than 430 million shares during the week beginning July 20, according to data from the Financial Industry Regulatory Authority.

The case against Credit Suisse includes allegations that it provided unfair advantages to some traders, violated rules against pricing of stocks and didn’t adequately disclose to investors how CrossFinder works, according to the people familiar with the matter.

Regulators also are scrutinizing Credit Suisse’s system of auctioning the right to trade against retail stock-market orders to trading firms in the dark pool.

The setup resembled a waterfall, said people familiar with the matter, in that the first firm to trade against the flow would pay one price and subsequent auctions to other traders would go down in price.

Barclays was accused by the New York attorney general in July 2014 of lying to clients about the extent of high-speed trading in its dark pool.

In one example in the lawsuit, a Barclays executive allegedly instructed two employees to mislead a large institutional investor about how much of its trading was done in the dark pool and how often those trades were with high-frequency firms.

When one of the employees provided the accurate information to the investor anyway, the employee was fired, according to the suit.

Barclays has denied it defrauded customers and fought to have the case dismissed. The civil case, filed in New York State Supreme Court, is ongoing.

Institutions, including hedge funds and large mutual funds, use dark pools to buy and sell stock without having a large impact on the price. If a firm is trying to make a purchase of 100,000 shares, it is preferable to try to find another large institution looking to sell rather than take it directly to the stock market.

“Investors believe there is value to trading in the dark,” said Alex Green, president of the consultancy FuturePoint Advisors LLC and a former head trader at hedge funds. “The regulators are exposing some of the things that have gone on, but there will still be a demand to trade in dark pools.”

Most orders on stock exchanges, for instance, are publicly displayed to all other investors in the form of a bid or an offer. The institution’s name isn’t given, but their buying or selling intent is broadcast to others.

In a dark pool, a firm’s bid or offer also is anonymous and is only executed if another firm puts in a matching order.

However, over the years dark pools have become more complicated and included facilities for a broader swath of traders to access the venues. Regulators have been probing a range of firms on whether they adequately disclosed the rules of trading to participants and whether any traders—including high-frequency traders—were given advantages over others.

Deutsche Bank AG, Morgan Stanley and Goldman Sachs Group Inc. also have been investigated by the New York attorney general. The banks declined to comment.

—Jean Eaglesham contributed to this article.

Write to Bradley Hope at bradley.hope@wsj.com, Emily Glazer at emily.glazer@wsj.com and Jean Eaglesham at jean.eaglesham@wsj.com

Date: 08/12/2015 20:10

By James Glynn
SYDNEY–Household balance sheets in Australia are riskier than they used to be, something that is likely to weigh on an economic recovery in the country, the Reserve Bank of Australia said Wednesday.
“I think it is difficult to escape the conclusion that household balance sheets are, on average, a little more risky that they once were,” Philip Lowe, the RBA’s deputy governor, told an audience in Perth.
And pinning hopes of stronger economic growth on household spending might carry an element of danger, he added.
“Given the position of household balance sheets, it is unlikely to be in our long-term interest for a consumption boom to be financed by a pickup in household borrowing,” Mr. Lowe added.
In previous property booms, consumers were able to borrow against rising house values to fund spending, but conditions have become more stretched as house prices soar, borrowings increase, and wage growth sinks to record lows, he said.
“With slower expected future income growth and increased concerns about future housing costs, the response to higher housing prices looks to be smaller than it was previously,” Mr. Lowe said.
“This smaller response is affecting overall spending in the economy,” he added.
The comments suggest the RBA, while leaving the door open to further interest rates, sees limited benefits in doing so.
Soaring land prices are a factor behind the jump in household debt, Mr. Lowe said, citing a 40% increase in population since 1989 and constrained land supply as key factors.
Increased infrastructure spending might be an answer, he added.
“Increased investment in infrastructure, including in transport, probably also has a role to play here. Done properly, it could help lift the return to other forms of investment in a wide range of industries across the economy,” Mr. Lowe said.
The comments come amid forecasts for weak growth for Australia in the coming years as falling commodity prices hurt profits, government revenues and confidence.
Warnings that an asset-price bubble is inflating in Sydney have grown in recent months, prompting the banking regulator to move to quash surging investor demand.
With interest rates already at record lows and the government struggling to rein in a yawning budget deficit, economists have warned that the amount of scope to lift growth through the usual policy channels is limited.
Ratings agency Standard and Poor’s recently ramped up warnings about a decline in the government’s budget position, saying risks to the Australia’s AAA-rating will grow if deficit reduction isn’t ongoing.
Low interest rates aren’t an answer to Australia’s growth predicament, Mr. Lowe added.
“Monetary policy is, ultimately, not a driver of medium-term economic growth,” Mr. Lowe said.
“While low interest rates are currently helping the economy through a period of transition, an extended period of low interest rates implies ongoing low returns to savers and low underlying returns on assets,” he said.
“This is not a world to which we should aspire,” he added.
RBA Governor Glenn Stevens warned recently that cutting interest rates further might stoke instability in the country’s banking system, something that would have broad consequences for the economy.
Write to James Glynn at james.glynn@wsj.com

(END) Dow Jones Newswires
August 12, 2015 06:10 ET (10:10 GMT)
Copyright (c) 2015 Dow Jones & Company, Inc.

A whimsical observation no doubt, but I’m often disappointed that what passes for educational financial press is just as likely a sales document for a product sector. My dear old Dad always impressed on me as a kid that you don’t lift yourself up by dragging others down. He was primarily regaling against militant labour unions in this regard, but the point was made. So when I see an article espousing the many benefits of buy and hold investing through say ETF’s, an author often finds it necessary to denigrate market timing, high conviction or alternate fund management styles. Vanilla ETF’s serve a wonderful purpose as a cornerstone in any investment portfolio. However if index investing is so good why the need to belittle investment styles the author is invariably ignorant or incapable of achieving? The financial advice industry seems to sometimes operate as a propaganda machine for the large “asset under management” accumulators. With their “no-one will notice me” index hugging investment styles that don’t deviate from a benchmark, investment monoliths feel a degree of safety. However The Future Fund and some Industry Funds have shown that throwing away benchmarks has liberated their asset managers to outperform the market by a fair margin. Comments by Future Fund Managing Director David Neal should be seen as a possible watershed for thoughtful fund allocators: “[The absence of a] benchmark just completely frees us up to go and build the right portfolio”. Also Alan Kohler wrote in the Weekend Australian that “having enough retirement superannuation is about higher returns and not necessarily saving more”.

The Hedge Fund sector often despairs at being benchmarked to stock indices. I can sympathize but even more absent in this conversation is the absolute performance and drawdown reporting of index investing. If a writer can espouse the low costs of an ETF, surely drawdowns must be reported to give the investing public a more complete picture. The wilder beast theory shows it is human nature for a fund manager to seek safety in a pack of index investors, however there is also an argument for and benefits in various investment styles and products. The race for lower fees could possibly lead to more generic offerings from fund managers, but I can’t imagine that less diversification will help anyone’s investment goals.

Tim Hobill Cole

Barwon Managed Discretionary Accounts

TOM KENNEDY, ECONOMIST AT JP MORGAN

“I’d characterise today’s number as probably a little bit underwhelming relative to expectations. The unemployment rate really helps you look through a little bit of the volatility around movements in the participation rate, so out of the measures provided it is probably the best measure for what is happening.

“That said, we’re still well within the range of the past six months. We saw a 6.3 percent in January I think so it’s not like we’ve broken out that range and unemployment is going off the charts, that’s not the case.

“It’s just relative to where we were and what we were expecting, it is a bit softer.”

SKYE MASTERS, HEAD OF INTEREST RATE STRATEGY, NAB

“There’s something for everyone in this release. There was a very large rise in employment, but also a big jump in the participation rate. After being surprisingly steady for so long, unemployment rose to where many thought it should be.

“Yet it doesn’t change the overall view that there’s plenty of spare capacity in the labour market and the economy in general. We still see the RBA holding steady for some time to come. It has sounded like the urgency to act on rates has waned recently at the central bank.”

MICHAEL TURNER, STRATEGIST, RBC CAPITAL MARKETS

“The unemployment rate has crept up a tiny bit higher but we don’t want to read too much in the data because it has become less reliable in the past year. Employment looks a bit firmer than what the majority of indicators have been suggesting.

“We think unemployment will still grind higher, but it won’t go too much higher, perhaps to 6.5 percent.

For the RBA, a rate above 6 percent still implies a fair amount of slack in the economy and rates need to be accommodative. Whether they need to be lowered again depends on what labour demand looks like ahead. We think it will be pretty soft. We still have another cut in the fourth quarter and another by mid-2016.”

ST GEORGE SENIOR ECONOMIST JANU CHAN:

“We did see the unemployment rate rise but given job growth has also been quite strong it’s still a positive. The jump in the unemployment rate was because the participation rate jumped, and that means more workers are looking for jobs.

“This data supports the view that the labour market is on solid footing, and if anything it’s probably lessening the chance of another rate cut.”

–RBA Policy Bias Remains For Further Easing But Hurdle High
–RBA Likely Considered Cash Rate Cut At Tuesday Meeting

By Sophia Rodrigues

SYDNEY (MNI) – The Reserve Bank of Australia may have refrained from
jawboning the Australian dollar lower in the cash rate statement but that
shouldn’t be taken to mean that it no longer welcomes a further fall. Nor should
it suggest the RBA no longer has an easing bias.

The policy bias remains for further easing although the hurdle for such a
cut remains very high.

It is likely the RBA considered whether it should lower the cash rate at
the board meeting Tuesday, and decided that staying on hold was an appropriate
thing to do.

It may be recalled that not too long ago, on July 22, Governor Glenn
Stevens said “The question of whether they (cash rate) might be reduced further
remains, as I have said before, on the table.” It is therefore unlikely, without
any major news from then to now, that his view had changed.

A rate cut would have been on the table Tuesday because there is still
spare capacity in the economy, and domestic inflationary pressures are contained
due to very slow growth in wages. The RBA also said that overall inflation is
forecast to remain consistent with the target over the next one to two years,
even with a lower exchange rate.

But at this stage, the RBA isn’t convinced about the benefit of a further
cut and is still worried about the risks it would bring, especially to the
housing market.

A hold was therefore considered an appropriate option, with cut options
likely to be revisited at upcoming meetings to gauge whether there are signs of
any significant weakness in the economy, and whether some of the risks seen in
lowering the rate further have abated.

The RBA will also be watching the labor market closely because it is likely
that it is still forecasting a rise in the unemployment rate.

The full details of the RBA’s new forecasts that guided Tuesday’s rate
decision will be published in the quarterly Statement on Monetary Policy, due
Friday.

On the exchange rate, the RBA made a very conscious decision to omit the
line included in previous statements that “further depreciation seems both
likely and necessary, particularly given the significant declines in key
commodity prices.”

By replacing it with “The Australian dollar is adjusting to the significant
declines in key commodity prices,” the RBA is hoping the currency will keep
doing what it needs to do without further jawboning. The RBA also hopes a rate
hike by the Federal Reserve would put downward pressure on the currency. The RBA
doesn’t consider the timing of the hike – whether in September or later in the
year – to be an important factor for Australia.

What the RBA is not suggesting is that the exchange rate is at a fair
level. A further fall would be welcome, remains its message, judged by the fact
that it expects inflation to remain within target even if the exchange rate
falls further.