EES: Splitting Pennies now in US Trade Paperback

5/24/2016 COLUMBIA SC - Elite E Services today has released "Splitting Pennies - Understanding Forex" in a new softcover US Trade edition.  This is the best edition yet!  It's 6x9 and includes recent articles such as the Big Red Forex Button.   Click here to get it at the Createspace store for only $14.98

Click here to get it at the Createspace store for only $14.98

2nd Circuit in Libor case v. banks: Rigging rates is price-fixing collusion

Common sense has prevailed at the 2nd U.S. Circuit Court of Appeals in litigation over an alleged conspiracy among 16 global banks to manipulate the London Interbank Offered Rate (Libor), a key interest rate benchmark. The appeals court held Monday that price-fixing collusion among competitors is a violation of antitrust law, even if it takes place in the context of an ostensibly cooperative rate-setting process.
The 2nd Circuit’s 61-page opinion, written by Judge Dennis Jacobs for a panel that also included Judges Reena Raggi and Gerard Lynch, vacated a controversial 2013 decision in which U.S. District Judge Naomi Reice Buchwald of Manhattan tossed classwide antitrust claims because the Libor rate-setting process is collaborative, not competitive. The ruling revives the banks’ exposure to potentially billions of dollars in damages from investors who say they were victimized by artificial Libor rates.
Rate and market-rigging class actions against banks have become all the rage among antitrust plaintiffs’ lawyers, who’ve won nearly $2 billion in settlements in consolidated litigation over alleged tampering with the market for credit default swaps and hundreds of millions of dollars in settlements tied to manipulation of foreign exchange benchmarks. The 2nd Circuit’s Libor decision will only make the class action bar more excited about claiming collusion in the rate-setting process.
International regulatory and criminal investigators have levied about $9 billion in fines and penalties against some of the banks involved in the Libor rate-setting process, including Barclays, Deutsche Bank and UBS. Internal documents released in government probes have shown some defendants manipulated the rate-setting process to make themselves appear more stable in the financial crisis and to give particular traders an advantage over counterparties. To derive the Libor rate, banks would submit reports of the rate at which other banks were willing to lend them money; those rates were winnowed and averaged to come up with a daily Libor figure.
Judge Buchwald had said plaintiffs could not show their injury was tied to antitrust violations because banks did not compete with one another in the rate-setting process. The 2nd Circuit, however, said her reasoning was flawed. As sellers of securities that incorporated the Libor rate, the banks are competitors. Investors in Libor-pegged instruments, according to the appeals court, are buyers affected by the conspiracy. Plain and simple.
“Schematically, appellants’ claims are uncomplicated,” the appellate opinion explained. “They allege that the banks, as sellers, colluded to depress LIBOR, and thereby increased the cost to appellants, as buyers, of various LIBORbased financial instruments, a cost increase reflected in reduced rates of return. In short, appellants allege a horizontal pricefixing conspiracy, ‘perhaps the paradigm of an unreasonable restraint of trade.'”
The panel rejected as “immaterial” the banks’ arguments that Libor itself is not a product or a price and that the rules for setting the rate were implemented by the British Bankers’ Association, not by the banks. “The crucial allegation is that the banks circumvented the LIBOR-setting rules, and that joint process thus turned into collusion,” the 2nd Circuit said. Investors “have alleged an anticompetitive tendency: the warping of market factors affecting the prices for LIBORbased financial instruments. No further showing of actual adverse effect in the marketplace is necessary.”
The 2nd Circuit also held there’s no question that investors have raised plausible claims of a conspiracy so their case can’t be dismissed as inadequately pleaded. “Close cases abound on this issue, but this is not one of them,” the opinion said. “These allegations evince a common motive to conspire – increased profits and the projection of financial soundness – as well as a high number of inter-firm communications, including Barclays’ knowledge of other banks’ confidential individual submissions in advance.”
The one sliver of hope for the banks in the appellate opinion is a remand to Judge Buchwald to determine whether investors in Libor-pegged financial instruments are the right plaintiffs to enforce antitrust law. As the panel pointed out, plaintiffs have to meet two requirements to establish antitrust standing: They have to show an antitrust injury and they have to show that they are “efficient enforcers.” Judge Buchwald never reached the second issue in her 2013 decision. Now she will have to decide what the 2nd Circuit called “a closer call” than the question of whether investors properly claimed an antitrust injury.
The banks, taking a cue from the appeals court, will doubtless argue on remand that governments around the world are already punishing them for Libor transgressions. “There are many other enforcement mechanisms at work here,” the appellate opinions said. “This background context bears upon the need for appellants as instruments for vindicating the Sherman Act.”
And even the 2nd Circuit agreed that private litigation may turn out to be a bust if, for instance, “the corrupted LIBOR figure on competition was weak and potentially insignificant, given that the financial transactions at issue are complex, LIBOR was not binding, and the worldwide market for financial instruments – nothing less than the market for money – is vast, and influenced by multiple benchmarks.”
Nevertheless, the 2nd Circuit opinion answers a question about benchmark rates and antitrust claims that has divided trial judges in federal court in Manhattan. At least one of Judge Buchwald’s colleagues followed her reasoning, in a 2014 opinion dismissing a case alleging manipulation of Japanese yen Libor. But, as I’ve written, Judges Lorna Schofield and Jesse Furman squarely rejected Judge Buchwald’s interpretation of antitrust injury in more recent decisions. Schofield and Furman, in cases involving supposed tampering with the foreign exchange and ISDAfix benchmark rates, took care to distinguish the facts the in class actions before them from the Libor allegations. In particular, they emphasized that the forex and ISDAfix rates were determined through actual trades, not just by banks’ voluntary submissions.
They also, however, said Judge Buchwald had misread U.S. Supreme Court precedent to reach her conclusion. In Monday’s opinion, the 2nd Circuit agreed. The important cases to consider, the 2nd Circuit said, are 1940’s U.S. v. Socony Vacuum Oil, the seminal ruling on the per se illegality of horizontal price-fixing schemes; and 1982’s Blue Shield of Virginia v. McCready, which said consumers can sue over supposedly collusive schemes that ended up costing them money.
Investors in the various Libor classes had to go to the U.S. Supreme Court to win the right to bring an interlocutory appeal of Judge Buchwald’s antitrust decision to the 2nd Circuit. Thomas Goldstein of Goldstein & Russell, who won the Supreme Court case, argued for plaintiffs at the appeals court as well. (It took an additional nine pages to list all of the plaintiffs’ firms and amici involved in the 2nd Circuit appeal.) Robert Wise of Davis Polk & Wardwell, who argued at the 2nd Circuit for all of the banks, declined to comment.
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The CME Admits Futures Trading Was Rigged Under Old System

Ask any trader what they believe to be the hallmark feature of any "rigged market" and the most frequent response(in addition to flagrant crime of the type supposedly demonstrated every day by Deutsche Bank and which should not exist in a regulated market) will be an institutionally bifurcated and legitimized playing field, one in which those who can afford faster, bigger, more effective data pipes, collocated servers and response times - and thus riskless trades - outperform everyone else who may or may not know that the market is legallyrigged against them.
Think of it as baseball game for those who take steroids vs a 'roid free game, only here the steroids are perfectly legal for those who can afford them. Or like a casino where the house, or in this case the HFTs, always win.
However, as it turned out, the vast majority of the public had no idea that a small subset of the market was juicing, despite our constant reports on the topic since 2009, until the arrival of Michael Lewis' book Flash Boys, which explained the secret sauce that made all those HFT prop shops into unbeatable "trading titans": frontrunning.
That's really all one had to know about the mystical inner working of the modern market. All Reg NMS did was legitimize and legalize frontrunning at a massive scale for those who could afford (and hide) it, all the while the technology race ran in the background making it increasingly more expensive to stay at the top: fiber optics, microwaves, lasers, FPGAs, PCI-Express and so on.
And, as we have also discovered in recent years especially since the advent of IEX, for many exchanges providing a two-tiered marketplace was the lifeblood of the business model: the bulk of the revenues for "exchanges" such as BATS and Nasdaq would come from selling non-HFT retail and institutional orderflow to HFT clients. Since the HFTs made far more than the invested cost in permitting such perfectly legal frontrunning, they were happy, the exchanges were happy too as they betrayed only those clients who didn't pay up the "extra fee", and only the true outsiders lost. And any time they complained how rigged the system was against them, the HFTs would scream that "they provide liquidity" as they are the real modern-day market makers.
Except that's not true: the only time HFTs provide liquidity it when it is not needed. When liquidity is truly scarce and required in the market, such as on days like the May 2010 flash crash, or August 2015...  they disappear.
Meanwhile, nothing changes, because the regulators are just as corrupt as the exchanges and the HFTs, and their role is not to bring transparency to a broken, manipulated market, but to keep retail investors in the dark about just how rigged everything is.
It appears that the CME was doing just that as well.
According to Bloomberg, the CME Group - the world’s largest exchange operator - just completed an "upgrade" traders said would eliminate a shortcoming that gave some participants an advantage.
Under the old system, data connections that linked customers to CME - where key products like Treasury futures and contracts tied to the Standard & Poor’s 500 Index trade - had noticeably different speeds, opening up the potential for gaming, according to traders and other experts. Those who knew how to gain faster access could increase their odds of being first in line to trade.
The new design supposedly stamps that out.
Oh, so it was a design glitch that allowed those who "knew" how to frontrun everyone else to do so. That's the first time we have heard of the particular excuse. Usually the scapegoat is a "glitch", only in this case the CME didn't even bother.
"It’s an excellent step forward,” said Matthew Andresen, co-owner of Headlands Technologies LLC, a quantitative trading firm. “The new architecture is flat and fair, a great improvement,” said Andresen, whose knowledge of market infrastructure goes back to the 1990s, when he worked for electronic trading pioneer Island ECN.
But, wait... if it is an "excellent step" that some traders can no longer frontrun other traders on the CME, why is it not a "poor step" that virtually every other exchange still enables precisely this kind of tiered marketplace, which is neither flat nor fair?
Actually, scratch that: that's precisely what IEX is trying to resolve. The reaction? An exchange which explicitly profits from providing a two-tiered market and charging an arm and a leg for those who can afford it (and thus frontrun everyone else) namely the Nasdaq, has threatened to sue the SEC if it permits IEX to become a full-fledged stock exchange.
As Bloomberg adds, the situation involving CME’s data connections highlights a fresh set of difficulties ensuring a level playing field in the era of light-speed markets, in which even the smallest bits of a second matter. The race to shave off milliseconds has spurred efforts to carve through mountains, span continents with microwave networks and prompted a backlash championed by the likes of IEX Group Inc., the upstart stock market that delays trading to impose fairness.
Unlike some of today's state of the art means of being faster than everyone else, frontrunning orderflow on the CME was more of a "brute force" mechanism: CME customers are allotted data connections to the exchange. Some have more, some have less. Given that their speeds varied noticeably under the old architecture, the more lines a trading firm had, the better odds it could find a faster one. Trading firms with a lot of links had the chance to fish around for the fastest way to get trades done. Other firms that didn’t have as many connections or the computer programming resources to test around and find the quickest, most efficient way in were at the mercy of the connections they had.
“The performance could vary widely” with data connections under the former CME architecture, Andresen said. By which he meant that those who could afford to pay much more than everyone else, would also be able to frontrun almost everyone else.
But no more. The new system “is an important innovation that will set a new standard for fair and efficient access to the futures markets,” said Benjamin Blander, managing member of Radix Trading, a Chicago-based trading firm.
CME declined to comment on claims the old system was unfair, Bloomberg adds. “We are continuously enhancing our infrastructure in order to provide the latest and best technology architecture for our clients,” said Michael Shore, a spokesman for CME.
CME has been installing the new architecture since February. The last group of futures and options became available on the new system last week, according to CME. Traders aren’t required to switch over to the new system and can keep trading the old way if they want.
This isn’t the first time CME revamped its systems to stamp out an imperfection. Before an upgrade more than two years ago, traders were notified that their own orders were completed before everyone else found out, potentially giving initiators of transactions time to buy or sell on other exchanges with knowledge of their executions.
We expect more violations of "accidentally" rigged markets to be uncovered in time, both on the CME and elsewhere, although we wonder at this time does it even matter: besides central banks trading with other central banks (especially courtesy of the CME's own Central Bank Incentive Program), does anyone else even bother? If judging by the total collapse in trading volumes over the past decade in virtually every product class, the answer is clear.

Hedge the Headwinds with FX ETF options

Forex continues to mystify many investors, and accountants too. Yet, Forex becomes every day more and more, the most significant tail risk to any portfolio. British stocks?Here's a potential Brexit smashing the GBP. Only invest domestically? Just wait for another otherwise excellent company to report billions of losses due to "Currency Headwinds." Checkout the latest Forex blunder, from SABMiller (OTCPK:SBMRY):
SABMiller (Xetra: BRW1.DE - news) 's total beverage volumes grew 2% during the year, with lager volumes up 1% and soft drinks volumes up 6%. Reported EBITA dropped 9% to $5.8bn and grew 8% organically and at constant currencies, with adjusted earnings per share down 6% on a reported basis and up 12% on an organic basis to 224.1 cents. SABMiller blamed the reported declines on the depreciation of "key operating currencies" against the US dollar.
In different accountant-speak, more pure and not changed into recognizable English language by editors and reporters:
...the group delivered "good results" for the financial year, despite currency volatility hitting the bottom line. For the year under review, revenue decreased 10% to $19.8-billion, with group net producer revenue (NPR) falling 8% to $24-billion, as the strengthening dollar against operating currencies had a material negative impact on the reported results. However, underlying revenue and NPR grew 7% and 5% respectively as group beverage volumes increased 2% during the year under review.
Which class did we miss in College that teaches accountant-speak? Just rough calculations, an 8% fall to $24 Billion is about $2 Billion, so by their language, losing $2 Billion is 'good results' - I'd hate to see a bad quarter. But it's popular now on Wall St., blaming "Currency Headwinds" on a lack of Forex knowledge & education, and losing Billions. Forex hedging is cost effective, and with a qualified manager, simple to implement; as explained in Splitting Pennies - Understanding Forex. It's not even necessary to open a forex account - you can hedge with currency ETFs and ETNs.
So if Forex is confusing to you, don't worry. It's also confusing for multi-billion dollar global corporations. But that doesn't mean you can't profit from it, or protect your portfolio. There are a number of ways to do it, without even opening a Forex account. One way is to leverage Forex ETFs, available right in your equities brokerage account. Forex ETFs include (NYSEARCA:FXY), (NYSEARCA:UUP), (NYSEARCA:FXE), (NYSEARCA:FXA), (NYSEARCA:EUO), (NYSEARCA:CYB), (NYSEARCA:DBV), (NYSEARCA:FXF), (NYSEARCA:YCS), (NYSEARCA:FXC), , (NYSEARCA:DRR), (NYSEARCA:USDU), , (NYSEARCA:FXB), (NYSEARCA:UDN), (NYSEARCA:CEW), (NYSEARCA:FXS), (NYSEARCA:BZF), (NYSEARCA:CROC), (NYSEARCA:CNY), (NYSEARCA:ICN), (NYSEARCA:ULE), (NYSEARCA:FXCH), (NYSEARCA:YCL), (NYSEARCA:CCX), and others. We'll take a look at just as an example, because of its popularity. trades like a stock - you can buy or sell at any time, without restriction, and pay a stock commission. Some brokers may charge an extra fee because it's an ETF, but most don't.
What's great about these contracts is the options. Just like you can buy and sell calls and puts on major companies like (NASDAQ:AMZN) and (NASDAQ:AAPL), you can too, for .
Option volume & statistics for :
(click to enlarge)
There's a lot of volume for puts and calls, this was "Today's Volume" on Friday, May 20th. Now look at the option chain for January, 2017 options for :
(click to enlarge)There's a lot of activity, and as you can see - plenty of options, at the money, out of the money, and deep out of the money. That means, that by playing deep OTM options on , it's possible to speculate on rare low probability, high impact 3 sigma events, like the Brexit vote coming up, or such as happened with the CHF revaluation.
The best Great British Pound ETFs are and (NYSEARCA:GBB) - is actually an ETN. More about :
The Currency Shares British Pound Sterling Trust ETF is designed to provide a simple means for investors to obtain exposure to the profit potential in the value of the British pound sterling as measured against the U.S. dollar. The trust issues shares that represent units of fractional interest in the GBP/USD exchange rate that shows the U.S. dollar price of the British pound sterling. The value of the shares increases in correlation to increases in the GBP/USD exchange rate.
For to bet on a Brexit or non-Brexit, Jan 2017 are good options, with good Delta and Theta (good meaning, not too much, not too little).
It should be an interesting week in FX. This statement can be repeated every Sunday before the markets open. This week's key points to watch:
  • USD stages recovery as Fed rhetoric lifts June rate-hike prospects
  • Easing of Brexit fears could spell further near-term GBP recovery
  • CHF weakest vs euro since Jan 2015 revaluation, look to long USDCHF on dips
  • Bulls will look to stay long USDCAD as long as it stays well above 1.3000
  • Spot traders could look to fade EURGBP rallies into 0.7700 area for try below 0.7600
  • Options traders might set long EURGBP put spreads or long GBPJPY call spreads
  • Traders will look to buy AUDCAD dips for a try back toward 0.9600-0.9700 zone
In conclusion, don't fear Forex, it's easy to implement a hedging program, and can be done with minimal cost and effort. The best place to start - is right in your own equities account.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

The Biggest Bitcoin Arbitrage Ever?

Do you remember when you were growing up and all your friends were allowed Atari game consoles but you weren’t?
Well, I do and the things seemed as foreign to me as Venus. Mostly because the little time I managed to spend on the gaming consoles when my friends weren’t hogging them I found it all a bit silly. I never “got” computer games, and to this day still have poor comprehension of things like Angry Birds.
I suspect that many people around the world view Bitcoin in the same way as I view Angry Birds: with mild amusement and a general lack of understanding as to what the hell all the fuss is about.
I was thinking of this since a buddy of mine recently started taking notice of Bitcoin. Here’s a hedge fund manager who has been known to investigate some of the more out of the box investment opportunities around and Bitcoin is on his radar.
He figured out pretty quickly how to buy, store, and trade the currency. It’s extremely simple and certainly much easier than opening a typical brokerage account. But I wondered if the broader market saw it the same way?
What about Joe Sixpack who’s seen the Bitcoin checkout option on Amazon and thinks it’s another version of PayPal? Or the desk jockey who’s heard about it from his wayward teenage son and thinks it’s the domain of terrorists and crack dealers? What would it take to provide legitimacy to Bitcoin or any cryptocurrency in the eyes of the masses?
To answer my curiosity I googled it and found an article where some know-all was saying that Bitcoin isn’t a “real” currency because it’s not issued by an authority. This may strike a chord but I think the last time someone was so wrong he was standing in front of a tank in Tiananmen Square.
What gives Bitcoin value is largely the very fact that its NOT issued by any such “authority”.
But being an ardent student of history and lover of psychology I understand that there’s a fair few (the majority actually) among us who find comfort in a man in a uniform with a fluttering flag behind him. If it can’t be ISSUED by an authority, then would some such authority ostensibly legitimising it perhaps do the trick? The local government of a Swiss canton perhaps?
Zug Bitcoin
Or what about a listed investment vehicle that you can buy through your Roth?
Surely the folks at the SEC who are in charge of what gets to be listed and accessible to mainstream investors wouldn’t allow crack peddling currencies onto their exchange. So if the SEC OKs it then that is authority we can trust, right?
And this is where the intersection between what is available on an authorised exchange and what can be freely bought in the open market collides. And in this collision space lies a simply huge arbitrage opportunity.
A quick search on the Internet reveals an interesting animal: the Bitcoin Investment Trust (BIT). Only qualified accredited investors can buy BIT but everyday Joe can buy it as GBTC on the OTC market without restrictions.
Presumably, since it trades on a regulated and known platform, investors sense it is somehow more stable, more authorised, and more safe. It allows institutions and retail investors to have a proxy ownership in Bitcoin. I see nothing wrong with any of these things.
Some people like buying gold ETFs as a proxy for gold, others like the shiny metal in their grubby hands, and yet others prefer futures contracts. It all depends on what you’re looking to achieve so why not Bitcoin?
When I first looked at Bitcoin Investment Trust I had to do a double take. The price didn’t reflect the price of Bitcoin so I double checked the mandate. But no, they simply invest in Bitcoin. It’s specifically meant to track the price of Bitcoin. The thing is, it trades at over a 60% premium!
Bitcoin and Bitcoin Investment Trust
In any other market on this planet, were we to have an asset priced at one level in one place and an entirely different price some other place, the price discrepancy wouldn’t last very long. Traders would buy the asset where it is cheaper while simultaneously selling the asset where it is more expensive and pocketing the difference. Something also known as an arbitrage.
Arbitrage opportunities exist in public markets all the time but the discrepancies are typically extremely small and even more so with higher liquidity. It’s also pretty rare for them to last for any real length of time. Years ago I worked with traders whose sole focus was on arbitrage trading but today algorithmic trading trading has almost eliminated these opportunities and jobs.
Bitcoin’s market cap is now over $7 billion so it can no longer be considered “illiquid”. To have such a huge margin of price difference would be like having Icahn Enterprises (IEP) trading at 54 bucks on the NASDAQ while simultaneously trading for 86 bucks on another exchange, say the LSE. We’d all make a fortune with such an opportunity.
I therefore humbly ask any of the Joe Sixpacks out there who’ve invested in this Bitcoin ETF to provide me a borrow as shorting it is not currently available.
Take another look at the above chart and tell me you, too, wouldn’t want to arbitrage this anomaly?