P&L February 2013 preview

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FEBRUARY 2013 VOL. 14 / ISSUE 138 www.profit-loss.com

PREVIEW

LMAX Looks Ahead After MBO Retail FX: NFA Targets Brokers

JP Morgan Unveils Multi-Asset Class Platform

David Puth on CLS:

A PRIVATE COMPANY PERFORMING A PUBLIC SERVICE Taking the helm of CLS six months ago, CEO David Puth joins the company at a critical juncture. Having been deemed as systemically important and cited numerous times in the US Treasury始s exemption of FX swaps and forwards, Puth talks to P&L about his vision for the future of the utility.

CHANGE AT THE TOP OF THOMSON REUTERS FX

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PROFIT & LOSS

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PROFIT & LOSS IN THE CURRENCY & DERIVATIVE MARKETS

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Profit & Loss

PROFIT & LOSS IN THE CURRENCY & DERIVATIVE MARKETS

FEBRUARY 2013

INSIDE THIS MONTH:

editor’s note

39: NFA Targets Brokers

41: Regulation Dampens Enthusiasm for Retail FX in Singapore

25: Phil Weisberg is named to set the direction for Thomson Reuters’ foreign exchange business

S

o 2013 has got off to an interesting start, markets seem to be offering opportunities for profits which is a huge advance over much of 2012, although volumes still seem a little sporadic, albeit at healthier underlying levels.

This will be of importance to the subject of our feature this month which looks at the sundry developments in the multi-dealer portal industry. With rumours abounding that Hotspot FX is on the block and that options platforms are in demand, this always interesting side of our industry could be the most fascinating segment in 2013.

Certainly I believe that consolidation is inevitable, but maybe not through mergers and acquisitions, rather through natural wastage, or survival of the fittest if you prefer. The options industry in particular looks very appetising at the moment if you are an intermediary in financial markets looking for an opening into the first FX markets to be mandatory-cleared and SEF-traded, so that segment may buck the trend.

Also this month, we take a look at the impact of the National Futures Association in the US taking a more aggressive stance with US retail brokers.

This has led several to leave the US market prompting some angst among sections of the client base. Overall though I have to commend the NFA for its actions – after all, if regulation is proven toothless, there is more harm done in keeping it than dropping it. That said, it could have probably gone about its work in better fashion – nobody likes a change of tack at a moment’s notice.

Ultimately, however, if the US wants to have a strong regulatory environment it needs to support its words with actions. And lest we forget, the end investor is the one being protected – too many times over the past five years we have seen and heard of examples where this has not been the case, and the result is, to use political terminology, the lowest approval rating for financial markets in living memory.

I would just like to take a moment to wish the deputy editor of Profit & Loss, Kirsten Hyde, good luck as she departs on maternity leave, she moves to a world where she is responsible for others and has to clean up after them, from a world....well you get the picture!

As this is the start of the year, we are very soon going to be launching the 2013 conference program. We start in March with our FX Growth Markets series which sees us host our third Colombian conference in Bogota on March 5th. This event, which is always a highlight, is part of a roadshow that moves to Mexico City on March 7th.

Forex Network gets underway in London in late April, after which we will unveil the Digital FX Awards winners, so a busy quarter awaits us. As always, details of how to attend the conferences can be found either in this issue or on our website, www.profit-loss.com, and as always we look forward to seeing as many of you as possible at our events this year.

Have a good month.

44: Harris Exits 360T

www.profit-loss.com facebook.com/profitandloss Profit & Loss Forex Network @Profit_and_Loss

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Contents

On the Cover...

David Puth on CLS: A Private Company Performing a Public Service Taking the helm of CLS six months ago, CEO David Puth joins the company at a critical juncture.

Having been deemed as systemically important and cited numerous times in the US Treasury’s exemption of FX swaps and forwards in November, Puth talks to P&L’s Julie Ros about his vision for the future of the utility. ...................................................................12

28 39 33 FEATURE:

12 25

Under the Hammer?

The P&L editorial team reports on events in the multi-dealer platform industry as a state of flux appears imminent.

Getco Buys Knight Capital.......................................................19 Where Now for Hotspot? .........................................................20 GFI Rebrands Fenics Trader to Meet SEF Rules................20 Options Platforms Likely to Move Centre Stage .............21

P&L’S SQUAWKBOX:

The Year of Living Dangerously.............................................22

News from Around the Globe ..................................................8

TRADING ROOM: 10 Years Ago in Profit & Loss.

Headlines from February 2003 ..............................................24 Singh Leaves Thomson Reuters, Weisberg Appointed Global Head of FX............................25 DTCC Challenges CME Rule.....................................................25 Banks Rush Through the Door to Swaps Registration.....................................................................26 ACI Singapore Unveils First Speakers for 2013 World Congress..........................................................26

I February 2013 I Profit & Loss I www.profit-loss.com

Confidence to build That’s what developers and their investors and lenders can achieve when they’re smart about managing risk.

And smart managers work with CME Group, the world’s leading derivatives marketplace. Businesses and financial institutions around the world partner with us to help them manage every kind of risk. Interest rate fluctuations, stock market movements, changing currency valuations, energy costs – whatever the risk, we help the world advance beyond it. Learn more at cmegroup.com/advance.

How the world advances

CME Group is a trademark of CME Group Inc. The Globe logo is a trademark of Chicago Mercantile Exchange Inc. All other trademarks are the property of their respective owners. Copyright © 2013 CME Group. All rights reserved.

Contents

DIGITAL MARKETS LMAX Exchange Looks Ahead after Management Buyout......................................................28 Streambase Survey Signals Increased Use of Algorithms ..................................................30 CRT Capital Launches FX Trading Business with Industry Veterans..............................................................31 What’s New? .................................................................................32 JP Morgan Unveils Cross-Asset Platform ...........................33

MARKET OF THE MONTH

Years Ago in Profit & Loss

GBP Without the Safe Haven Bid

By Valentin Marinov, G10 FX Strategist, Citi .....................34

Headlines from February 2003

24

MONEY MANAGEMENT In Brief.............................................................................................36 Record Sees Assets, Clients Grow in Q3 .............................37 ADS Securities Launches New Institutional FX Trading Platform..........................................38 C-View Adds Program and Staff ............................................38

38

34

RETAIL RADAR NFA Targets Brokers ...................................................................39 NFA Bars Strategic and Principals.........................................40 Regulation Dampens Enthusiasm for Retail FX in Singapore ........................................................41 On the Radar ................................................................................42 FXCM to Launch Phoenix Platform ......................................43

28 MOVERS & SHAKERS People on the Move ..................................................................44

THE LAST WORD The last word on some of the themes covered in P&L’s Squawkbox, through your correspondence...........48

43 I February 2013 I Profit & Loss I www.profit-loss.com

P&L’s Squawkbox: News from around the globe

CHICAGO of market participants, including CTAs and ICE adds two FX products. funds, has been growing in recent years,” IntercontinentalExchange (Ice) plans to says ICE Futures US vice president, Ray launch two new cash-settled foreign exchange McKenzie. futures contracts on ICE Futures US for the “As the first US exchange to list a rupee trade date of Monday 28 January, 2013. contract, we are offering The new contracts are the customers the ease of doing Brazilian real/US dollar and business in a regulated futures Indian rupee/US dollar. Ice was environment for execution and the first US exchange to announce clearing,” he adds. it would offer an Indian rupee The contracts will be listed on the futures contract, CME followed ICE platform and are initially suit closely after (see related story eligible for the waiver of exchange page 10). The Ice contract sizes and clearing fees for electronically are 100,000 real and 2,000,000 Ray McKenzie executed currency pair futures. rupee.

The contracts also are available for “The addition of the Indian rupee exchange-for-physical (EFP) transactions and and Brazilian real futures contracts block trading. There are no EFP surcharges recognises the significant and increasing beyond the standard exchange and clearing commercial importance of these nations. In fees of $0.30 per contract side for emerging particular, interest in emerging market nonmarket currencies, ICE says. deliverable forward currencies from a range

WASHINGTON Well they would, wouldn’t they? The World Federation of Exchanges (WFE), representing 59 stock, futures and options exchanges and associated clearinghouses, has called on international regulatory bodies to modify capital standards to “appropriately reflect” the liquidity and efficiency of exchange traded derivative (ETD) markets.

In a letter to the Financial Stability Board and other policy organisations, the body encourages global standard setting bodies to demonstrate continued support for G20 commitments to bring greater transparency and central clearing to derivative markets by ensuring that the costs of ETD markets are not unnecessarily increased.

The WFE says that the Interim Capital

Standards proposal from the Basel Committee on Banking Supervision (BCBS) would, “clearly undermine the G20 OTC market reform commitments.”

According to the letter, the proposal seeks to apply a blanket five-day margin period or risk standard to highly liquid and transparent ETDs, which conflicts with current margin standards for highly liquid ETDs, resulting in increasing costs for users of exchange traded markets.

“This may force exchange users such as manufacturers, food producers, employee pension funds and investors to either discontinue critical hedging practices or move activity to the less transparent OTC derivative markets. Such outcomes would clearly undermine the G20 OTC market

reform commitments,” the WFE letter states.

The FSB, an international body established by the G20 nations in 2009 after the global financial crisis, is working in coordination with other international organisations such as the International Organisation of Securities Commissions and the BCSB to develop global capital and margin standards for both exchange traded and over-the-counter derivative instruments.

“The WFE respectfully requests global standard setters to eliminate the five-day margin period of risk banking capital standard for exchange traded derivatives and demonstrate international support for the more appropriate current standards for the highly liquid, transparent, and efficient exchange traded derivative markets.”

address a lack of detailed information on the potential costs and benefits associated with various insurance alternatives. It will be completed in the spring.

The insurance study is the latest in a series of initiatives taken by the futures industry in 2012 to enhance customer protections and address the concerns raised by the collapse of MF Global and Peregrine Financial Group.

New rules and systems have been put in place to provide customers with more information about the status of their funds and the financial condition of their futures commission merchants.

In addition, the industry’s self-regulatory organisations are now putting in place systems to receive daily confirmations from

all depositories holding customer segregated funds and implementing new rules that will strengthen internal controls and hold senior executives accountable for authorising the movement of customer funds and preventing any misuse.

“This study will help to inform policy makers and the public by providing a thorough analysis of various insurance programs,” says FIA president and CEO Walt Lukken.

“As an independent educational foundation, the IFM strongly believes that this study will provide an important contribution to the public policy dialogue on customer protections in the futures industry,” adds IFM chairman Peter Borish.

CHICAGO Well they should, shouldn’t they? CME Group, the Futures Industry Association, the Institute for Financial Markets and the National Futures Association have revealed that they have jointly commissioned a study of the costs and benefits of adopting an insurance regime for the US futures industry.

The four sponsoring organisations have selected a team of experts brought together

by Compass Lexecon to conduct the study under the leadership of Christopher Culp, an expert in derivatives, risk management, insurance and clearing.

The study will examine various models for providing insurance in the futures industry and assess a range of variables for each model. The sponsors expect the study to

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P&L’s Squawkbox: News from around the globe

LONDON Now that’s a lot of notional. Icap’s OTC derivatives post-trade risk management provider, TriOptima, says that the triReduce portfolio compression service eliminated $80.5 trillion in interest rate swap notionals and $3.5 trillion in credit default swap (CDS) notionals in 2012.

Of the $80.5 trillion, almost $72 trillion in reduced interest rate swap notionals were the result of ongoing efforts by LCH SwapClear, its member institutions and TriOptima to reduce outstandings in the clearinghouse, says the company.

TriReduce is a portfolio compression tool for interest rate, credit and energy derivatives and credit event management services. Portfolio compression – which eliminates trades that offset each other without affecting risk profiles – helps banks simplify their exposures to each other. Regulators have suggested that this practice can support moves to improve transparency and the infrastructure of the derivatives market.

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Peter Weibel, CEO of triReduce, says, “We continue to work with the banks and clearinghouses to reduce gross notional exposure as final rules are published by the global regulators. We are pleased that market participants continue to compress CDS and bilateral interest rate swaps while also focusing on cleared trades.

“We also began collaborating with SGX in 2012, and look forward to supporting other clearinghouse initiatives as they develop.

Our 2013 plans include expanding the range of emerging market currencies for interest rate compression, adding products eligible for triReduce commodities and introducing cross-currency terminations,” Weibel adds.

TriOptima introduced the triReduce service in 2003. Since inception, more than $322 trillion in notional principal outstandings have been eliminated, representing $245 trillion in interest rate swap notionals and $77 trillion in CDS notionals, respectively.

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P&L’s Squawkbox: News from around the globe

LONDON Citi buys a piece of i-Swap. Citigroup has taken an equity stake in Icap’s interest rate swaps trading platform, i-Swap Limited.

Citigroup has joined as an investing partner and will support the platform with streaming prices alongside the other shareholding banks: Barclays, Bank of America Merrill Lynch, Deutsche Bank and JP Morgan. Icap says the potential exists to expand the number of banks participating in the i-Swap initiative further.

Jason Cohen, head of euro swaps trading at Citigroup, says, “In the new regulatory environment, dealers are looking for greater automation in certain segments of the market with increased transparency and lower transaction costs which i-Swap provides. The market is seeing increasing

volumes of swaps executed electronically and i-Swap is very well placed to be a market leader in this space.”

Michael Spencer, group chief executive officer of Icap, adds, “We welcome Citigroup’s participation. We look forward to working together with them and our other partners to launch US dollar interest rate swaps on the platform in the new year.”

Launched in September 2010, i-Swap is a multilateral trading facility for OTC interest rate swaps trading. The platform, which is managed by Icap, is regulated as an MTF by the UK’s Financial Services Authority and is subject to the European Union’s Markets in Financial Instruments Directive. Following Citigroup’s investment, Icap will retain a 41.3% share of i-Swap Limited’s post-tax earnings.

CHICAGO Margin efficient IRS contracts. US futures market Eris Exchange has launched quarterly interest rate swap futures contracts that are expected to offer margin savings of 40-80% compared to cleared OTC interest rate swaps.

The contracts, called Eris Standards, are two-, five-, 10- and 30-year swap futures contracts with quarterly effective dates, predetermined fixed rates and cash settlement upon maturity that are cleared by CME Clearing using SPAN margin methodology.

Margin offsets are available with correlated positions in CME eurodollars, treasury tutures and deliverable interest rate swap futures, enabling market participants to further reduce their initial margin requirements.

The exchange says it will continue to offer its Eris Flexible Futures, which are customisable swap futures cleared by CME Clearing using the HVaR margin methodology.

It adds that Eris Standards and Eris Flexes can be traded electronically on the Eris SwapBook platform, which launched on 3 December 2012, with market makers streaming continuous, two-sided markets at benchmark points. Execution is also available through bilateral negotiation of block trades and EFPs, subject to Eris Exchange rules.

End users can also trade two-legged spreads without execution risk. In addition to curve trades and calendar rolls between Eris Exchange swap futures, the platform provides market participants with “riskless execution” of inter-market swap spreads between Eris Exchange swap futures and onthe-run US government debt securities.

The exchange claims some unique features for the new contracts in the use of familiar over-the-counter trading protocols, with bids to pay fixed and offers to receive fixed in

traditional swap NPV. It also says they have embedded price alignment interest (PAI), daily settlement based on the CME Clearing OTC swap curves, and the flexibility to be held in futures form for the full two-, five-, 10- or 30-year life of the contract without physical delivery of an OTC swap.

“Faced with the increasing complexity and cost of trading OTC swaps, market participants are discovering compelling value in the familiar regulatory framework and capital-efficient model of futures,” says Neal Brady, CEO of Eris Exchange. “The unique design of Eris Standards takes the recent trend of the futurisation of swaps to its logical conclusion. End users can trade in and out of the quarterly contract with the ease of automatic netting, or hold a position and let it roll down the curve as a capitalefficient future replicating swap economics for up to 30 years.”

reciprocal of the spot Indian rupee per US dollar exchange rate as determined and published by the Reserve Bank of India, and will feature daily pays and collects calculated and banked in US dollars.

“With the rapid rise in growth economies like India, there has been an increase in demand for flexible, capital-efficient tools that market participants can access to participate in and act on emerging opportunities,” says Derek Sammann, CME Group, senior managing director, interest rates and FX products. “Working closely with our customers, CME has developed

these rupee contracts to address their needs and enable participation in the rapid growth of one of the world’s leading emerging markets.”

The launch of the INR/USD futures contracts completes CME’s product suite for trading all Brick – Brazil, Russia, India, China and Korea – currencies.

“People tend to think about Brick as a complex,” says Sammann. “This isn’t just an Indian rupee launch, this is potentially opening the door to a suite of index products that we can launch over time to really give our clients choice in how they want to trade.”

CHICAGO CME adds INR. CME Group has followed ICE by launching new foreign exchange futures contracts based on the Indian rupee.

CME says the target launch for the contracts is for a trade date of Monday, 28 January the same day that rival ICE launches its own INR contracts (see related story page 8). The standard-sized contract will have a notional amount of five million rupees while the emicro contract will be one-fifth of the size of the standard-sized contract with a notional amount of one million rupees.

Both contracts will trade on CME Globex, will be cash settled at final expiry to the

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P&L’s Squawkbox: News from around the globe

STOCKHOLM Nordic buy-side gets clearing. Nasdaq OMX Nordic says it will introduce the clearing of SEK denominated interest rate swaps for end client trades in the Nordic market in February 2013.

While clearing has been available for trades between participating members since November 2011, Nasdaq OMX and the Nordic member community have been negotiating the legal and technical framework for a successful introduction of interest rate swaps clearing for end client trades.

“We’re confident that cleared interest rate

swaps will be a strong addition to our current product suite of cleared interest rate derivatives in the Nordic market,” says Jens Henriksson, head of Nordic fixed income, Nasdaq OMX. “We currently have an average daily clearing volume in excess of $20 billion. The first stage to expand the product scope includes interest rate swaps, forward rate agreements and overnight index swaps denominated in SEK. The next phase is to provide the market with the clearing of interest rate swaps and related derivatives denominated in DKK, NOK and EUR.”

3.9 trillion in Australian dollar denominated swaps, and the international members of the service have expressed strong support for Swapclear’s expansion in Australia, says the company.

The clearing house would serve as competition to the Australian Securities Exchange (ASX) for the clearing of the AUD 14 trillion OTC derivatives market.

In a statement detailing the plans, LCHC says, “In other markets where clearing competition has been introduced, there has been a positive impact by bringing choice, transparency, liquidity growth, the introduction of new products and lower costs to end users without an increase in overall risk. By joining Swapclear, Australian banks will gain the liquidity and netting benefits that comes from access to a global service.”

Speaking at an International Swaps and Derivatives Association conference in Sydney in October, Malcolm Edey, assistant

governor (Financial System) of the Reserve Bank of Australia, observed that international banks active in the Australian market were generally already actively clearing AUDdenominated interest rate swaps via offshore entities that participate in LCHC’s SwapClear or CME Clearing in the US (P&L’s Squawkbox, 21 October).

LCH will not have it its own way however, for the ASX’s plan to clear OTC interest rate swaps has taken a step forward as seven domestic and international banks in Australia signed non-binding commitments to help develop the new service.

The first phase of ASX’s OTC Interest Rate Derivatives Clearing Service will be delivered by mid-2013. ASX says it has been working closely with customers over the last six months on the design of an Australian clearing solution. The service will provide central counterparty clearing for OTC traded A$ interest rate derivatives, a market with a turnover of almost A$18 trillion.

while options volume at exchanges regulated by the Securities and Exchange Commission (SEC) fell by 12.3% to 4 billion contracts from 4.6 billion, says the FIA. Interest rate futures volume fell 21.1% in 2012, foreign currency futures volume fell 9% and equity index futures volume fell 20.0%.

Open interest, which represents the number of contracts outstanding at any one moment in time, stood at 337.7 million contracts on US exchanges at the end of December, a 10.1% decrease from 375.8 million at the end of December 2011.

November data for non-US futures and options volume, the most recent available, showed a decline of 24.4% to 1.1 billion

contracts from 1.4 billion contracts. For the first 11 months of 2012, total non-US futures and options volume fell by 17.3% to 13 billion contracts from 15.7 billion contracts.

During that period, non-US futures-only volume fell 9.3% to 7.7 billion contracts from 8.5 billion while options volume fell 26.6% to 5.3 billion contracts from 7.2 billion.

FIA collects volume and open interest data from 76 derivatives exchanges on a monthly basis. The data are provided by the exchanges on a voluntary basis and are subject to revision by the exchanges. FIA’s figures represent the number of contracts that are traded or cleared by exchanges, not the notional value of the contracts.

SYDNEY LCH to target Australian banks, with competition. International clearinghouse LCH.Clearnet (LCHC) plans to extend its clearing business for OTC interest rate instruments to Australian banks.

The company will apply for an Australian clearing and settlement facility licence which would enable it to offer the Swapclear OTC interest rate swap clearing service. Four of Australia’s five domestic banks have submitted letters of intent to use the service, says LCHC. “LCHC is excited by the possibilities of expanding in the Australian market and is very interested in continuing to pursue opportunities with Australia-based clients,” says Ian Axe, Group CEO. “While all business plans are subject to regulatory approval, our discussions with the Australian regulators continue to be very positive, and we are planning to submit our application in the first quarter of next year.”

Its Swapclear service currently clears AUD

CHICAGO It’s not all good news for exchanges. The number of futures and options traded on US exchanges fell 13.2% in 2012 to 7 billion contracts, down from 8.1 billion the previous year, says the Futures Industry Association (FIA).

In December 2012, total volume for US futures and options fell by 2.8% to 517.5 million from 532.2 million contracts during the comparable month in 2011.

Futures-only volume during 2012 fell by 15.1% to 2.6 billion contracts from 3.1 billion. Options volume at US exchanges, regulated by the Commodity Futures Trading Commission (CFTC), fell by 10.1% to 449 million contracts from 499.6 million in 2012,

www.profit-loss.com I Profit & Loss I February 2013 I

Cover

David Puth on CLS:

A PRIVATE COMPANY PERFORMING A PUBLIC SERVICE

Taking the helm of CLS six months ago, CEO David Puth joins the company at a critical juncture. Having been deemed as systemically important and cited numerous times in the US Treasuryʼs exemption of FX swaps and forwards in November, Puth talks to P&Lʼs Julie Ros about his vision for the future of the utility.

Julie Ros: You joined CLS in August, about a month after CLS was deemed a systemically important Financial Market Utility (FMU) by the Financial Stability Oversight Council (FSOC).

Then, November’s decision by US Treasury Secretary Geithner to exempt FX swaps and forwards cited CLS 28 times in its post-exemption document. Was CLS actively involved in this process through conversations with Washington?

David Puth: We were indirectly involved as the industry represented the importance of CLS extraordinarily well in those discussions. While we did engage wherever possible, we were less visible than many of the industry representatives. It was very clear to CLS from the outset that its role in the market was going to play an important part in whether the Treasury exemption went through or not. We’ve had the good fortune of having a Treasury Secretary who both truly understands the currency markets and as well, truly understands CLS. I try to make sure that people make note of the fact that the Treasury exemption can be revoked if we as an industry don’t continue to find ways to improve on our risk management or we slip back. We consider that a very important part of our responsibilities at CLS. JR: Having been deemed systemically important, is there a concern that CLS has become too big to fail?

DP: That responsibility has always been borne by CLS since inception. While significant investments have been made over the years to enhance what CLS is able to do, the designation was something we feel was well earned and was the product of 10 years, probably closer to 15 years, of a great deal of effort. But I don’t honestly consider it a burden; this is what we were built to do.

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JR: In the midst of Lehman Brother’s collapse in 2008, CLS functioned as it should and all trades were settled. Until then, however, a number of people were sceptical about CLS, in no small part because of the large costs borne by member banks. What is your take on the industry’s perception of CLS today?

DP: I think during the early years of CLS, people regarded it as an important part of the marketplace, but 2008 demonstrated CLS was an essential part of the marketplace.

JR: Part of why some say CLS worked when Lehman collapsed in 2008, was largely because one of the member banks stepped up and fulfilled its third party obligations. What would happen if a bank does not step up to fulfil its obligations in the future?

What processes are in place?

DP: The entire way CLS operates is to ensure that the market is essentially left whole in the event of a member’s inability to pay.

In that case, the loss would be borne by that member who was not able to pay, but that is the basis on which CLS has been built – it is that the troubled party would not introduce risk into the system as a consequence of CLS – the whole basis of simultaneous payment versus payment.

JR: CLS has lately introduced a dedicated currency programme team, as well as legal and regulatory teams, how are these groups progressing?

DP: Over the last 18 months, one of the things that CLS has accomplished is the creation of a dedicated currency team. That team’s mission is to help us actively expand the number of CLS currencies there are around the world today from 17 to some larger number in the years ahead.

Cover

“We have seen many examples where becoming a CLS currency is critical for the growth of activity in a country”

In addition, we have invested significantly in our risk management resources. Our risk management team has enabled CLS to work together with our members to look at the current and future risks associated with settlement.

Our potential work with CCPs would be another example of areas where our risk, corporate development and legal teams have come together to do the kind of work that, frankly, I don’t think would have been possible at CLS several years ago.

Then, above all, our on-going investment in technology and working in close partnership with IBM ensures that our performance and capacity are never in question. This permits our member banks to have full confidence in, not only what CLS can do today, but what we hope CLS will be able to do tomorrow.

Our Strategy, IT, Operations and Risk teams work together on strategic issues to further enhance the service we provide to our members. We are organised in a cohesive manner with all

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Feature

Under the Hammer?

The P&L editorial team reports on events in the multi-dealer platform industry as a state of flux appears imminent.

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Feature

Getco Buys Knight Capital Following the technology problems at Knight Capital in 2012, the group has been forced into the arms of Getco, raising questions about the future of Hotspot, as Alice Attwood reports.

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S broker-dealer Knight Capital has accepted a $1.4 billion merger deal with Getco, which could lead to the creation of one of the largest electronic trading and market making companies in the world.

The company, which would be renamed KCG after the merger, will form a new publicly traded holding company offering market making and agency brokerage in a number of geographies and asset classes, say Knight and Getco.

Existing Knight shareholders will have a choice to take $3.75 in cash per Knight share, or one share of common stock of the new holding company. The deal is expected to be completed in the second quarter, subject to regulatory and shareholder approval. If the merger is terminated, Knight or Getco may be required to pay the other party a $53 million fee, the two firms say.

The deal will see the companies combine and strengthen capabilities, a spokesperson tells Profit & Loss. Work to build a team to handle the integration is already underway, although the merger is subject to what seems to be the ever-present threat of legal action from a shareholder who believes Getco is underpaying.

“The resulting company will benefit from Knight’s deep

customer franchise and Getco’s leading edge technology platform, resulting in a company extremely well positioned to serve customers across multiple products globally,” Knight and

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Feature Editorial Comment:

Where Now for Hotspot?

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lthough no public announcement has been made about the future of Hotspot FX, which could easily be taken as indication Getco intends to keep the platform in its portfolio, there are widespread expectations that the platform will be put on the block.

The problem for Getco is that – as several other new ventures to the market have found out – it will be trying to sell it in a very different market to that which existed just a year ago. 2012 was not a good year for many of the multi-dealer platforms and those that did witness year-on-year growth were either new to the market, thereby building from a zero base, or they operated a model radically different to Hotspot.

And the model could be another problem for Getco, because a great number of bankers say that while they are not writing off the anonymous ECN model, they are deliberately pricing less aggressively to those venues than they are to the so-called relationship venues. This in turn is making it harder for these venues to maintain year-on-year volume growth, something already difficult in an increasingly competitive environment.

All of this leaves selling what remains a popular platform somewhat more difficult that it first appears, in spite of widespread rumours of buyers circling the platform.

It is very easy to throw out names regarding prospective buyers of an FX platform, but history shows that very few actually get to be sold. As was found with Atriax in 2002, and Centradia a few years later, finding a buyer at the right price is difficult, even with the support of some major organisations in the FX industry. Prior to closing the platform, CME and Reuters discussed several possibilities for its ailing FXMarketSpace platform – one would imagine that a possible sale would have been one option discussed.

One barely goes a month without hearing of one platform or another being “open to the possibility” of a sale. In other words, if the price is right you have a deal, but it remains a buyer’s market.

It is also impractical to treat Hotspot like other platforms that have been sold in the past. The two major sales over the last decade have been Currenex and FXall, and both have significantly broader business models than Hotspot. It is also significant, for those expecting a quick sale, that negotiations to

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GFI Rebrands Fenics Trader to Meet SEF Rules Alice Attwood reports as the inter-dealer broker rebrands Fenics Trader.

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FI Group’s foreign exchange options multi-bank trading platform, Fenics Trader, will now be operated by regulated subsidiaries of GFI and will be renamed GFI Direct.

The transferral of GFI’s request-for-quote (RFQ) FX options platform comes ahead of changes to the markets’ regulatory landscape set for introduction through the Dodd-Frank Act and the regulations issued by the CFTC, says GFI.

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Paul Millward, head of FX e-commerce at GFI Group, says, “Our GFI Direct customers will continue to receive the high level of service that they currently receive from Fenics. In addition, we will develop the GFI Direct product as a key part of GFI's FX ecommerce strategy.”

Richard Brunt, managing director of Fenics, adds, “We are making these changes in response to US regulations enacted as

Feature

Options Platforms Likely to Move Centre Stage Colin Lambert discusses the differences between the FX options and cash FX space – and the likely implications for platform owners.

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lthough doubts exist over the potential sale of Hotspot FX, one area that is attracting a lot of attention is the large number of firms offering FX options trading capabilities.

The dawning of the year 2013 brought with it the reality that FX options and NDFs need to be traded under a different set of rules. It could be that some believed it would never happen, that someone would come to the “rescue” of the market in the style of old Hollywood Westerns, but the reality is they didn’t. Under Dodd-Frank, FX options and NDF markets have changed forever.

While there has been a proliferation of FX options multi-dealer platforms (MDPs) over the past year, growth – in terms of volumes – has been next to stagnant, partly because of the uncertainty around a potential US Treasury exemption but mainly while people, both technologically and emotionally, came to terms with the changing world.

Now things are likely to be different. These platforms are likely to

Under Dodd-Frank, FX options and NDF markets have changed forever

attract more volume, but more importantly, they are likely to attract the attention of firms without a major electronic presence in FX options, or indeed without a presence in the FX market full stop.

Firms seeking to enter the FX space, especially those with an exchange-type, cleared, approach to financial markets are said to

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part of the Dodd-Frank Act. This transition will not inconvenience our clients or our liquidity providers with no change to their existing workflow. GFI Direct will be available as a trading venue via the Fenics Professional desktop, with auto population of order requests to GFI Direct and STP of post trade details for risk management and downstream processing.

“This is a natural step for the product to position itself under the GFI regulated entity,” Brunt explains to Profit & Loss.

“Fenics will power the application with its technology and continue to develop it as the requirements dictate. GFI will licence the software from Fenics and we will support them to the

high standard that we would any other customer.

“The transition has been very smooth so far. We started in the last quarter of 2012 and it is already live under the new branding,” he adds.

Brunt also stresses that clients will see no changes to their workflow systems, reiterating that it is a seamless transition for end users.

The interdealer broker launched Fenics Trader in February 2011 as a single point of access to multi-bank liquidity for foreign exchange options, available to clients via the Fenics Professional platform (Profit & Loss, March 2011).

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Feature

The Year of Living Dangerously Colin Lambert reports on what was generally a tough year for FX platforms

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he dawning of 2013 could not come soon enough for the FX trading platforms if the results published by those transparent enough to do so are anything to go by. Only FXall bucked the year-on-year trend by recording a rise in average daily volumes of $92.3 billion during 2012, compared to $83.3 billion in 2011.

Elsewhere, the picture was not a pretty one with EBS, CME Group, Thomson Reuters and Hotspot FX all reporting a decline in that precious lifeblood of a platform – volumes.

As expected, given the trend was already signalled half-way through the year, EBS saw the biggest decline, averaging just over $112 billion per day in 2012, compared to $158.9 in 2011. CME also declined, from something like $124.5 billion per day in 2011 to around $105.4 billion in 2012 – CME’s data is often published by contract volume, rather than notional, so the notional numbers published here may be subject to minor changes.

Thomson Reuters, which aggregates average daily volumes across three of its dealing services – Matching, Dealing 3000 and RTFX – saw volumes drop to $128.2 billion from $150.7 billion.

At time of writing, Hotspot FX had not published December data, but year-on-year to November it was sharply lower and there seems little reason why this trend would not have continued in December.

Whilst FXall appears to be the success story of the year, as indeed it is among those platforms that publish data, it needs to be remembered that its data cannot be compared like-for-like to the other platforms as they report spot turnover only, whereas FXall’s data includes forward and FX swap transactions.

Nonetheless, FXall can be heartened by good growth.

2013 - The Year of Challenges The full year data will increase the pressure on platforms to bounce back from the decline, or at least to slow the downward

The “magic number” for a platform is -16%. Volumes down less than that mean you had a comparatively reasonable year, drop more than 16% and the pressure is on trend. As a wider benchmark for market activity, CLS Group full year data shows the utility handled an average of $4.7 trillion per day through 2012, compared to $4.78 trillion in 2011. Thus the “magic number” for platforms is a drop of 1.7%% – volumes down less than that mean you had a reasonable year, drop more than 1.7% and the pressure is on because the volume has likely gone elsewhere.

The challenges are unlikely to slow either, for whilst FXall had

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Trading Room

Years Ago in Profit & Loss

Headlines from February 2003 Delivering on a Promise he February 2003 issue of Profit & Loss featured the fourth annual survey of bank e-commerce offerings. It was notable that year that in contrast to the turbulence in the multibank portal industry witnessed in 2002, particularly the exit from the market of Atriax, a more serene development path had been witnessed for the proprietary bank platforms.

Our survey found that many banks had been busy finessing their offerings, and that the buy side was showing its appreciation of e-trading by putting an increasing percentage of its business online. We argued that 2002 was the first year in which the investment in bank proprietary platforms started to pay off as banks committed, as one interviewee put it, to delivering on all the hype around FX e-commerce.

Connectivity and pricing and risk engines were on the agenda as banks sought to take what was a cautious, but significant step forward in the electronic era.

All banks reported significant year-on-year volume growth, although sadly there was early evidence of playing one’s cards close to the chest as several declined to give numbers as they had in previous years. What was evident was a greater number of currencies being priced on the platforms, more products as banks started to dip their toes in the FX options water, and the first shoots of internalisation.

More than one interviewee commented on how banks had worked hard to get their customers on the platform, but were now working hard to capture business from within their own institution.

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And Speaking of Building Bank Offerings he Royal Bank of Scotland enhanced its FX options offering on its proprietary platform, making it one of a very select group of banks to offer such functionality at that time.

The original offering from RBS supported delta-hedged options; the bank added live pricing in single options up to four legs, risk reversals and strangles and straddles. More exotic products, such as knock outs, knock ins as well as European and US digitals were also in the pipeline, the bank said.

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CLS Extends to Custody he CLS Custody Working Group helped Continuous Linked Settlement widen its services to the custodial side of the market as volumes from there continued to grow.

“Custody is responsible for a very large part of FX market volume,” Profit & Loss was told, “It is very important that we add services for this segment now and not at an unspecified

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stage in the future. A lot of our members are in the custodial business and want to be able to use CLS to its maximum potential.”

Two major problems existed in extending CLS’s services to the fund community. The first was that its infrastructure had been built to identify 11 digit bank identifier codes (BIC). The second was that the custody arrangement is on behalf of the fund itself and not the fund manager. In effect, what this meant was that the custodian had an ID for the fund, but that the counterparty to the FX trade had a completely different code, hence a difficulty in matching instructions at CLS Bank.

The solution was the custodian fund identifier (ID), which was to be used by all parties in the chain and solved the issue of different IDs. The CLS solution took the first 11 characters of the custodian’s fund ID, which uniquely identified the original counterparty – the fund – and meant that all funds had a unique code which made this the de facto BIC.

First Interview with a Future Hall of Famer

he February 2003 issue of Profit & Loss included the magazine’s first interview with future Profit & Loss Hall of Famer Cliff Lewis, as he took over the reins at what was then a troubled Currenex.

The change of leadership, with the departure of Lori Mirek as CEO, was seen as signaling a shift in the focus of Currenex, Lewis told P&L, “Currenex started out with a technologyorientated staff in California, but is now evolving into a more mature business. We have a different agenda now, which requires a prosaic value add for our customers. We have achieved a critical mass on the buy side – the previous management team did a tremendous job there – but we have to have better contact and integration with the sell side.”

Lewis stressed that the increased focus on the sell side would not impact on Currenex’s standard of service to its existing clients, adding that the latest round of funding which accompanied his appointment, would be partly aimed at developing deeper products for this segment. “We want to look at integrating smaller banks that would become de facto buy side customers,” he explained.

Ten years on, the business was built to the value of $556 million and Lewis is now ensconced as head of State Street’s eExchange business – not a bad decade really…

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Trading Room

Singh Leaves Thomson Reuters, Weisberg Appointed Global Head of FX Kirsten Hyde reports as Phil Weisberg is named to set the direction for Thomson Reuters’ foreign exchange business as Jas Singh departs. as Singh, managing director, Marketplaces at Thomson Reuters, has left the company amid a reorganisation of the Marketplaces executive team that sees Phil Weisberg, chief executive of FXall, become global head of foreign exchange.

According to an internal memorandum to staff on 17 December, the contents of which were confirmed by a spokesperson, Weisberg’s team will “set the direction for Thomson Reuters’ foreign exchange business and ensure winning propositions are delivered for each of the FX user segments.”

Thomson Reuters acquired FXall in August 2012 for about $625 million and

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merged the company with its Marketplaces business, which includes FX trading platforms Thomson Reuters Dealing, Matching and RTFX. The vendor says that Singh took the decision to leave after a decade with the company. Singh joined Reuters in 2002 when it Phil Weisberg bought AVT Technologies, a technology start-up that he founded in 1997. At the end of last year he was promoted to head Marketplaces, a new

Jas Singh

group that Thomson Reuters created to bring together its global financial markets

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DTCC Challenges CME Rule Whilst the fog around the regulatory landscape appears to be clearing, some legal processes are not. he Depository Trust & Clearing Corp. (DTCC) filed a complaint letter with the US Commodity Futures Trading Commission (CFTC) in early January, urging the regulator to reject CME Group’s proposed Rule 1001, which it says would alter the regulatory reporting structure for over-the-counter derivatives.

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The DTCC states that if implemented, the new rule would inappropriately tie CME’s swap data repository (SDR) and clearing services, eliminating market participants’ choice over their preferred SDR. The DTCC says that CME’s rule would decrease transparency and increase risk in the financial system, undermining the

intent of the Dodd-Frank Act. It also says that the proposal would alter the CFTC’s well-established rules, disrupting the already-undertaken preparations for reporting to participants’ preferred SDR. This would add to the likelihood of duplicating and fragmenting reported data, increasing opportunities for misreporting and

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Digital Markets

LMAX Exchange Looks Ahead after Management Buyout Cut loose from Betfair, the platform is seeking to build on momentum, as Colin Lambert finds out.

David Mercer

avid Mercer, CEO of the firm, wants Lmax Exchange to be seen differently. He is keen to stress that it is not an ECN – it is a regulated multilateral trading facility (MTF) that supports the trading of spot foreign exchange – and that its technology provides it with a real differentiator when potential clients are selecting their trading venue.

The last five years have seen Lmax travel a somewhat rocky road, with a genesis in 2007 from the Betfair – retail client-toretail client – model, which struggled from the start, through a relaunch in mid-late 2011, to a management buyout in late 2012 as Betfair’s board decided it wanted to rationalise its business. In 2010, Goldman Sachs took a minority stake in the company, but as it struggled to build liquidity and volumes, senior members of the management team, including CEO Robin Osmond, left the

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company. Goldman sold its investment in Lmax Exchange in late 2011.

Mercer joined the firm in April 2011 with the task of analysing what was going wrong and in September/October 2011, what he calls “the real re-launch” occurred.

Since then times have been good, it seems. “We studied the business and it was apparent that the client base needed tweaking,” he explains. “We tweaked the client segments we were going after, from the true end-user retail client, to the retail brokers that serviced them.

“Volumes since have been growing healthily – and I know we are coming from almost a zero base, but they are still heartening,” he adds.

Six months after the re-launch, Mercer says average daily volumes were in the one-to-two billion per day range, at the tail end of 2012 they were closer to five billion per day on a single count basis. By any standards, that growth sits well alongside an industry that appears to be seeing declining volumes, or at very best (with one or two exceptions) flat volume profiles.

It is against this background that Lmax Exchange was sold to members of its management team by Betfair for £2.4 million.

The deal, which was ratified by the UK’s Financial Services Authority (FSA) in mid-January, results in Betfair retaining a 33% stake in the company. The sale is part of a strategy by Betfair to cut costs, sell off non-gambling assets and focus on ‘core business investments’ under new chief executive, Breon Corcoran. The transaction has been under discussion for several months, Lmax officials say.

The 67% management buyout has been led by Mercer and is backed by private investors including Betfair co-founder Ed

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Digital Markets

CRT Capital Launches FX Trading Business with Industry Veterans Klaus Said, Seth Garrett and Alan Stuart previously managed FX operations at a range of top tier financial institutions. They are now running the new FX business at CRT Capital, offering a niche, service-oriented model. Kirsten Hyde reports.

RT Capital Group, an independent institutional brokerdealer based in Stamford, Connecticut, has launched a foreign exchange trading business to complement its range of client services.

Industry veterans Klaus Said, Seth Garrett and Alan Stuart are running the business, which clears transactions through a prime brokerage agreement with Citi. Between them the three have headed FX operations at a range of top tier financial institutions.

Said, head of foreign exchange at CRT, previously worked as head of markets at Standard Bank. He joined Standard Bank in New York in the summer of 2009 from Credit Suisse, where he was responsible for the global FX, money markets and precious metals businesses. Before joining Credit Suisse in 2001, he spent 17 years at JP Morgan in a range of roles that included overseeing interest rates, currencies and equities at LabMorgan, the bank’s e-finance unit.

Garrett, who is head of FX trading at CRT, previously ran the FX group at Standard Americas. Prior to this he was a sales trader at Societe Generale, global head of FX trading at Credit Suisse and a vice president of FX at Goldman Sachs. Stuart, head of FX sales at CRT, previously served as head of the FX agency desk and co-head of institutional FX sales at Societe Generale. Before this, he was a managing director at Bear Stearns. The trio are joined by a team of execution, sales and transaction structuring professionals.

“This is very much a partnership venture,” explains Said. “Seth, Alan and I conceived the business together; everyone has a role to play but when I think of our relationship and how we run this venture, it is a partnership.”

The new business offers an institutional global client base a

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suite of FX product choices, including spot, forwards, nondeliverable forwards, futures and options and precious metals, and operates a 24-hour trading desk for seamless order execution with one contact point across all time zones.

“The FX market, as far as the interaction between banks and their clients is concerned, has become infinitely less profitable, instantly more electronic and it has been characterised by an ever increasing attempt by the big banks that still run this market to shed their cost base,” says Said. “What we firmly believe – and have good reason to believe from clients who are supporting us in this venture – is that these developments have opened the door for a much more niche, service-oriented FX operation. What we do is deal with clients that we know well, that we have close relationships with, and provide three things, each of which has different relative importance to different clients: service, anonymity and best price execution.

“Our focus is to offer a bespoke service and have a senior person on the line to each of our clients. We run our own 24-hour desk in New York, staffed at all times by our own people, and every one of them has at least 10 years’ experience in the business. They know what they are doing, and client orders are handled in the single most professional way.

“With anonymity, we clear through Citi but we deal as a principal; we don’t offer an agency desk, we don’t just put two counterparties together. We have been told by many clients that it is increasingly necessary for them to be able to deal in a way that when they have the next tranche of positions to go, the market doesn’t see them coming a hundred miles away. This is something that should be of great benefit to some clients,” says Said.

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Retail Radar

NFA Targets Brokers The US National Futures Association is getting aggressive when it comes to enforcing the rule book. Colin Lambert reports. he US National Futures Association stands accused of forcing retail FX brokers out of the US market as it seeks to reinforce regulatory rules. The NFA has hit a number of brokers with enforcement notices, some of which come on the back of what is claimed in some circles as “an overnight change of direction” by the regulator.

In a high profile move, the NFA issued a member responsibility action notice against retail broker FXDD, which orders the company to pay $3.3 million into an escrow account pending resolution of a complaint by the NFA’s Business Conduct Committee (BCC) that alleges it engaged in price slippage practices that were to the benefit of the firm and to the detriment of its customers.

As well as targeting the alleged slippage practices, the NFA says the $3.3 million payment is to ensure FXDD can pay restitution to its clients – if necessary – and at the same time stay within NFA rules which state it has to have $20 million of adjusted net capital, plus 5% of all liabilities owed to customers over $10 million, available at all times.

Aside from a rollover of existing customer positions, FXDD will not be able to execute customers’ orders; it will have to liquidate all positions held by principals, employees and affiliates; and it will be barred from distributing or transferring funds, except to existing customers, without the NFA’s approval.

The case against FXDD follows similar cases against Gain Capital, Forex Club and Ikon Global Markets.

The BCC complaint alleges that FXDD did not pass on price improvements to the customer when the market moved in their favour. Instead, it refused the trade and executed customer trades at the original price if the market moved in favour of FXDD – so-called 'asymmetric slippage'.

Although the $3.3 million amount is the NFA’s estimated restitution due to clients – assuming the case against FXDD is proved – it raised alarm bells elsewhere within the NFA, which claimed that the payment of such a fine would see FXDD slip under the

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$20 million net capital floor required under NFA rules.

According to the NFA, FXDD’s excess net capital was not $5.8 million, as reported by the firm at the end of October, but rather negative $3.6 million.

The discrepancy, the NFA says, was the result of FXDD reporting its adjusted net capital on a consolidated basis, including that held by subsidiaries, when it was obliged to hold $20 million on its own.

FXDD confirmed to NFA that $9 million of capital held by a subsidiary, Avatar, was included in the October data and transferred $6 million in capital to the main account on 3 December. The NFA claims, however, that even with the $6 million transfer, the firm remains $300,000 under the threshold.

The NFA also highlights what it terms “additional concerns about the firm’s ability to make restitutions to customers”, claiming that since FXDD became an NFA member in December 2009, it has “consistently made sizable capital withdrawals over the last several years”.

The NFA says FXDD has conducted withdrawals totalling $14.6 million between December 2009 and February 2012. “This activity, especially if repeated again before the resolution of the BCC case, raises further concerns about FXDD’s financial condition, as well as the firm’s ability to make restitution to customers,” the NFA states in the member responsibility action.

The $3.3 million in an escrow account will not be allowed to count against FXDD’s capital position. The NFA states that while the company is currently in

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accordance with capital regulations, the $3.3 million has been ordered to ensure the company can recompense customers.

Side Effects A side effect of the NFA’s clampdown has been the exiting from the US of several retail FX businesses and a scramble to sell client lists to those happy to stay the course. Gain Capital Group, the US arm of the global retail and institutional FX broker, Gain Capital Holdings, has acquired the retail customer accounts held at GFT Forex’s US subsidiary.

The transfer of GFT’s US-based accounts to Gain’s retail unit, Forex.com, took place on Friday 7 December, after the close of trading. In a notice to clients on 10 December, GFT explained that forex trading accounts have been returned to normal status. Customers are able to continue trading as normal on the Dealbook or MetaTrader4 platform and trading histories are still available. Open positions and pending orders remained intact through the transferral process.

Glenn Stevens, CEO of Gain Capital, said, “We are pleased to be in a position to offer GFT’s US-based retail customers the ability to continue trading forex with an established US regulated firm, with no interruption in service. We will work closely with the team at GFT to ensure a smooth transition of their customer’s accounts and assets to our retail division, Forex.com.”

Gary Tilkin, chairman of GFT, added, “Gain is one of our industry’s oldest and most respected companies and we’re

Retail Radar

Glenn Stevens, Gain Capital

confident that our accounts will receive the same high level of service and trading execution that they’ve experienced with GFT.” GFT announced at the beginning of December that it would cease supporting US retail FX trading and focus on its institutional relationships which exist in the US and globally. It was widely reported that GFT was also warned by the NFA over its capital position.

Its departure from the US retail FX market follows that of Advanced Markets, which relinquished its US retail broker registration at the end of September in order to focus on its institutional business (Profit & Loss, November 2012).

GFT has also exited the retail market in Japan and has reportedly struck a deal with Planex Japan to transfer its Japanese client accounts to it.

According to a statement on the Forex Magnates website, Tilkin said: “Based on the long-term economic trending and leverage changes in the US and Japanese markets we made the strategic decision to stop offering retail forex trading from the United States. These coupled with the extremely low level of

market volatility drove the decision.

“We are moving to a far more focused approach on our institutional relationships in the US, Japan and our other important operations around the world,” he added.

“We are obviously disappointed to be leaving any markets where we compete and certainly are thankful for the time and resources invested by our teams globally to build them to this point. After careful evaluation of the global markets and the challenges our industry is facing today, we made the strategic decision to change how we compete in these two retail markets. I want to assure everyone around the world that GFT is focused on growing an efficient sustainable business, and committed to serving our accounts at the highest level.

“For regions outside of the US and Japan we maintain a ‘business as usual’ approach for retail and institutional operations. We have aggressive growth goals and look forward to growing market share and expanding our business,” he said.

Mixed Emotions The more strident approach on the part of the NFA has drawn a mixed response from observers. While some believe it is being over-aggressive and trying to squeeze the life out of the US retail FX market, others see its actions as being a prudent move to protect end investors.

One user of retail FX platforms says that while firms may complain about the capital adequacy rules, for the end investor, they provide a much needed safety net in troubled times. “I can understand where they [NFA] are coming from,” the investor says. “A lot of these firms are Hydras, with different operations all over the world. If they [the firms] want our business they should be able to operate openly, transparently and without the need to shift funds around the world. I think the US retail market

NFA Bars Strategic and Principals he National Futures Association (NFA) has permanently barred New York-based commodity trading advisor, Strategic Trading Associates (STA), and temporarily barred Francis Littleton, a principal and associated person of the company.

The bans follow an NFA complaint filed in September and a settlement offer submitted by STA and Littleton.

Neither STA nor Littleton admitted or denied the charges. As well as charging

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STA and Littleton with failure to supervise, the complaint, issued by the Business Conduct Committee, stated that the company violated a number of NFA requirements.

These violations included acting as a commodity pool operator without registration, acting as a forex firm without NFA approval, failure to file required pool reports, failure to file disclosure documents, use of misleading promotional material,

has been lucky the NFA has caught some of these firms under-provisioned, if this continued it would have ended badly.”

This viewpoint gets support from the head of a small Asian-based trading firm, who notes, “We use retail platforms for our FX trades because it’s easier from a business perspective. The one thing we are paranoid about, however, is our funds with the broker. We have seen one too many broker-dealers use customer funds illegally to feel comfortable, so if the NFA want to clamp down on this, all power to them. People shouldn’t forget that the man in the street is still waiting – probably in vain – to get his money from MF Global and Peregrine.”

While the NFA’s action would appear to met with approval by many end customers, others are less than happy, seeing the move as squeezing competition out of the market. “The only thing that will result from this will be wider spreads and worse service,” grumbles a trader who professes to have accounts with five brokers. “Prudent investing and trading means you spread your risk, and it’s just as prudent to have a plan B in case the service at one of your brokers is unacceptably poor – you need some leverage over your broker. If NFA squeezes too many firms out of the market, we will be left with a duopoly – and that is probably only good for the regulator who doesn’t have enough staff to cope with the current size of the industry.”

Certainly it seems as those several brokerage firms are voting with their feet, and other firms spoken to acknowledge that the stringent regime in the US market means they are unlikely to offer services there in the future. For all that, if the NFA can get the balance right it might, as the regional head of one retail broker puts it, “deliver what the US authorities have always wanted – a well-functioning, safe, retail FX market with just enough competition to keep people on their toes.”

failure to properly present and support hypothetical performance and failure to supervise the use of promotional material.

Littleton, who has no current NFA status, is prohibited from applying for NFA associate membership for two years and NFA membership or principal status with any NFA member for five years. Littleton has also agreed to pay a $5,000 fine before applying to the NFA in any capacity once his membership bars have expired.

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Retail Radar ON THE RADAR

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Saxo Reorganises, Launches Prime axo Bank has promoted Gustave Rieunierto as global head of foreign exchange, a role previously held by Ted Voorhees, who has now left the company. Meanwhile, the group is reducing its global workforce by nearly 20% as it makes 266 job cuts globally due to what it terms the uncertainty of the future of financial markets.

The cuts will affect all Saxo offices and the headquarters alone will see 168 departures amid the headcount reduction. A spokesperson confirmed the cuts to Profit & Loss, adding, “Activity in the financial markets is at its lowest for many years. Nobody knows how long this situation will last and lowering our cost base is the only prudent thing to do.”

The spokesperson says that the adjustments being made to the organisation will not influence Saxo’s trading activities, nor will the services or product offerings be affected by the changes. Product development, however, is set to be scaled back slightly but will remain at a “significant” level. Plans to introduce new products in 2013 will go ahead, the spokesperson says.

The cuts are being made despite the fact that year-to-date, Saxo’s pre-tax profits were DKR190 million, DKR76 million of which was made in the first six months of the year, and client deposits have risen 21% since the beginning of 2012.

New FX head Rieunier, who reports to Claus Nielsen, head of markets, is based in the group’s offices in Hellerup, He joined the options and spot team in 2010 after working at State Street, Commerzbank and Calyon. He has more than 15 years of experience in FX options trading.

Following the promotion, Nana Dahlerup, head of FX spot, will take on the additional role of deputy head of foreign exchange. She will report to Rieunier and is also based in Hellerup.

In addition to Rieunier and Dahlerup, the trading management team at Saxo is now made up of: Henrik Villberg, deputy head of markets; Søren Nedergaard, head of CFD and listed products; Aditya Laroia, deputy head of CFD and listed products; Steen Samuelsen, treasury; and Kurt vom Scheidt, COO of markets.

Nielsen tells Profit & Loss, “I was of course sad to say goodbye to Ted who was an important contributor over the last five years in building our option product further.

However, I am very happy we have a very strong colleague to take over and head up the FX desk.”

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Saxo Prime In a separate development, Saxo has launched Saxo Prime, an FX prime brokerage service, using connectivity from algorithmic trading software and co-location site provider, MarketFactory.

Saxo Prime will offer institutional clients direct market access (DMA) to major liquidity providers and venues in the global foreign exchange market. The offering combines prime brokerage functionality from Saxo with connectivity services from MarketFactory.

The new offering serves as an expansion of Saxo’s existing product offering for asset managers, proprietary trading companies and retail brokers with the provision of FX DMA. Saxo’s application programming interface (API) connectivity tool, Saxo Direct, already provides access to Saxo’s own cross-asset liquidity sources.

The DMA offering is built on MarketFactory’s FX aggregator, providing a single API for normalised connectivity to major market making banks and ECNs. Saxo’s clients are not exposed to changes, updates or access agreement across a number of feeds, and the API preserves the individual features of each venue, in order to deliver continuous connectivity, says the company.

Lucian Lauerman, head of API business at Saxo, says, “With Saxo Prime and DMA, we enable our institutional clients to easily and efficiently tap into the major liquidity venues. Saxo Prime gives our clients direct access to the liquidity pools that power the FX markets, from a range of ECNs or to pools of tier one bank liquidity.”

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Ex-Alpari Managers Team Up for ForexTime

The company plans to roll out the new brand during the first quarter of the year. ndrey Dashin, one of the founders of the Alpari Group, has hired a number of ex-Alpari Financial Services management employees for his new company, ForexTime.

Olga Rybalkina joins the company as chief executive officer. Rybalkina was chairman and CEO at Alpari.

George Giannoulakis is the new chief operating officer after previously serving as CEO at Alpari.

He joined Alpari in August 2011.

The company’s new chief sales officer is the former head of sales at Alpari, Peter Leonidou. He joined Alpari in April 2011 after serving as a senior technical analyst and dealer at Easy Forex for nearly four years.

George Stylianou has joined as chief marketing officer. He was head of marketing at Alpari for nearly two years. Before this he was the global websites manager for FxPro and also spent four years as an online campaign developer at Easy Forex.

Meanwhile, Antonia Droussiotou is the company’s marketing coordinator. She spent a year in a similar role at Alpari.

ForexTime received its license to begin operations in Cyprus from securities regulator, CySec, in December. The company plans to roll out the new brand during the first quarter of the year. It had been operating as a small MetaTrader 4 company in New Zealand following Dashin’s purchase of the ForexTime brand.

Dashin remains a major shareholder in Alpari.

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Retail Radar

Regulation Dampens Enthusiasm for Retail FX in Singapore The number of retail foreign exchange traders operating in Singapore is down 20% following the introduction of new regulatory requirements, according to a new report from Investment Trends.

Alice Attwood reports. arket research company Investment Trend’s latest report, Investment Trends 2012 Singapore Contracts for Difference & FX Report, says the number of new traders entering the CFD and FX markets has declined following the introduction of the Customer Account Review (CAR) and Customer Knowledge Assessment (CKA) rules by the Monetary Authority of Singapore, which came into effect in January 2012.

Of the surveyed traders who intend to trade CFDs over the next year but are unsure about passing the CKA, 47% said that they would trade other leveraged products if they did not pass the assessment’s criteria. The report states that 71% of those who intend to start trading CFDs during the next year are aware of the CKA. In the 12 months to September 2012, the number of traders in the Singapore FX market fell to 20,000 from 25,000, down 20%. With 14,000 having left the market since the previous year, the market failed to replenish its numbers with only 5,000 new traders entering the market, down from 7,000 in September 2011, and only 4,000 former traders returning to the market in this period.

Despite this, the number of CFD traders in Singapore has remained steady over the 12 months to September 2012.

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During this time, 11,000 traders left the CFD market, offset by 5,000 former traders returning to the market and 6,000 new traders that entered the market. The number of new traders has declined since the previous study by 14%, from 7,000, specifically after the introduction of the CKA regulation, says the report.

Uwe Helmes, senior analyst at Investment Trends, says, “The regulations appear to have had a noticeable impact on new trader numbers in the industry.”

Within the surveyed period there was no change in the top three FX providers in Singapore. IG Markets, Oanda and CMC Markets hold 13%, 12% and 12% of the primary market share, following increases of 4%, 3% and 4%, respectively, over the last year.

Following the collapse of MF Global last year, the largest CFD providers in Singapore have seen increases to their market share, with Phillip CFD, CMC Markets and IG Markets seeing increases of 1%, 5% and 3%, respectively. Phillip CFD remains the largest CFD provider in the country, holding 25% of the market – up 1% from the previous report – with 41% of active traders having placed trades with the company in the past 12 months.

“Since MF Global’s collapse, traders are having an increased focus upon the

Tradable Inks Citi Deal oreign exchange platform Tradable has announced a partnership with Citi, which will allow brokers on its platform to transact with the bank through CitiFX TradeStream.

The partnership focuses on liquidity provision and margin solutions, allowing Tradable brokers a counterparty relationship with the bank.

CitiFX TradeStream helps small to mid-sized institutions improve their FX trading operations by providing a one-stop solution from Citi for counterparty relationships, as well as liquidity sourced from multiple contributors.

“Citi is excited to partner with Tradable,” says Alex Knight, global head of FX margin trading at Citi. “We share Tradable’s vision of an open platform that benefits the broker, the liquidity provider and the end-client. The industry is looking for something new, and we are happy to be one of the early adopters of a model that we think is going to drive innovation and help to reshape the industry.”

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financial strength and security of providers when choosing who they want to trade with. However, the FX market in Singapore remains very fragmented,” says Helmes.

The recent proliferation of improved mobile-based technology can be seen throughout the country. The report says that 59% of frequent CFD traders now use smart phones and/or tablets to manage their trading portfolio, up from 35% last year.

Earlier this year, the MAS proposed to raise the minimum margin requirement for some CFD and FX products from 2% to 5%. According to the report, when asked how raising the minimum margin requirement might affect trading behaviour, 26% of FX traders said that they would look for alternatives to trade at lower margins. This figure is 19% among CFD traders.

Oanda Expands Management Team oreign exchange trading services provider Oanda has expanded its management team with the hires of Jesper Bruun-Olsen and Stacey Grant-Thompson.

Bruun-Olsen joins the company as managing director, northeast Asia and head of Oanda Japan. He was most recently at Tradeweb Japan, serving as managing director for Asia Pacific.

Before this he was the chief sales manager at Nordea Bank AB. K Duker, chief executive officer of Oanda, says of the hire, “With Jesper at the helm in north-east Asia we benefit from his deep experience in leading and managing teams, as well as working with Asian and Japanese investors and financial regulators. His energetic, entrepreneurial approach to business and shared commitment to our corporate values of fearless integrity, excellence, and collaboration make him an ideal leader as we realign that strategic regional hub within our global growth plan.”

Grant-Thompson joins Oanda as chief marketing officer for the firm worldwide. Before this she was at Rogers Communications, serving as vice president and general manager for Chatr, a discount prepaid wireless business. She has also held roles at ING Direct Canada and McKinsey & Co.

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Retail Radar

FXCM to Launch Phoenix Platform Online foreign exchange trading provider, FXCM, is launching a new multi-asset cross margining trading platform. Alice Attwood reports.

XCM’s latest offering, Phoenix, is due to launch before the end of the quarter and will be fully introduced to clients during the first half, according to Brendan Callan, CEO for Europe at FXCM, speaking at a media briefing in London in January.

The platform will be Web-based, utilising HTML5 technology and is, “the last piece of the FXCM puzzle,” says Callan. The platform is currently undergoing in-house testing and will be launched globally – apart from in the US – later this year.

“The advantage to Phoenix for FXCM is that we can offer CFD products, and single share CFDs in particular, which are not allowed in the States,” says Brandon Mulvihill, head of sales for FXCM Europe. “Regulatory changes to the market in the US have caused a shift in focus, and therefore, other regions have grown and taken over.”

Phoenix is a multi-asset product targeted at the trading community which demands the option to trade seemingly across asset classes, and that wish to have their positions cross margined, says the company. FXCM will initially offer Phoenix to its current customer base of on-exchange traders, while the primary focus remains on delivering the offering to its institutional partners and prospects that demand this product for their customer base.

Mulvihill explains to Profit & Loss, “What differentiates our service remains our execution model in FX and CFDs. The additional products Phoenix can provide allows traders to receive the

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benefits of ‘No Dealing Desk’ trading in FX and no re-quote trading CFDs, along with on-exchange traded products in one vehicle with cross margining capabilities. There is no-one who offers Brendan Callan that model yet in today’s market.

“For white label partners we see several key differentiators, namely the flexibility in clearing arrangements across products. We have seen great demand from partners that wish to take our FX and CFD clearing arrangement but who also wish to clear additional products through their own arrangements, for instance cash equities or futures. This type of flexibility and uniqueness provides our white label partners with options to have a “best in breed” model. In this regard, Phoenix will be the first of its kind,” says Mulvihill.

FXCM has been working on the Phoenix development for around five months, although the concept of introducing a multi-asset platform has been a focus of the company for some time. After a beta launch in late Q1, FXCM will begin to transfer clients, including ex-ODL customers, over to the new platform and existing platforms for on-exchange instruments will be decommissioned, says Callan.

FXCM acquired ODL Group, one of

FXCM Extends Mirror Trading Offering nline foreign exchange trading provider, FXCM, and developer of the FX Mirror Trader platform, Tradency, have upgraded their business co-operation to offer Mirror Trader to FXCM’s entire client base.

The new agreement will see FXCM’s registered traders able to log in to the Mirror Trader platform using their existing details, trading through their live trading accounts. The new business structure supports the conversion process of the Mirror Trader platform into a mass market trading platform, says the company.

The business co-operation between

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the companies will see FXCM able to offer advanced mirroring capabilities to its clients. The new trading concept will also provide clients with a new way of participating in FX trading while allowing an easy transition to live trading.

Drew Niv, founder and chief executive officer of FXCM, says, “FXCM focuses heavily on helping our customers, novice and savvy alike, to become better traders, and with the new Mirror Trader model FXCM can achieve that and grow our activation level and trading volume at the same time. Mirror Trader is a very marketable

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Brandon Mulvihill

the UK’s largest retail foreign exchange brokers, in May 2010. The deal saw FXCM take over the firm in order to expand its global operations (Profit & Loss, June 2010).

Looking forward, Callan believes that FXCM remains an important player in the market, “While volumes and revenues, and therefore profits, are down across the industry, we remain profitable due to the global scale and reach of our business. This reduction in volumes will serve as a driver for consolidation over the next 12 months,” added Callan.

Mulvihill considers the future of the soon-to-launch platform, telling Profit & Loss, “Potential changes within the regulatory landscape may require further builds to functionality of software for all of us within the market. A key advantage with Phoenix lies in its technical flexibility, thus we are able to update functionality to meet local regulatory demand and/or to address larger, sweeping regulatory changes across whole regions.”

platform with a high client lifespan, which can help us attain clients previously out of reach.”

Lior Nabat, Tradency’s CEO, says, “We strive continually to improve and [di]versify our offering to brokers; this is the prime reason for the conceptual change to our business model earlier this year. We had successfully turned the Mirror Trader platform into a mass market product.

We are now presenting FXCM with a platform that encompasses a full spectrum of traders from novice to the experienced. All traders benefit from the vast amount of knowledge they have at their fingertips inside the platform.”

Movers & Shakers

Harris Exits 360T hil Harris, the New York-based CEO of 360 Trading Networks (360T), has left the firm, according to sources. He joined the Frankfurt-headquartered multicontributor FX portal in early 2009.

Harris was responsible for the overall business direction for the Americas as the company expanded from its roots as a regional German and European corporate platform into a global platform spanning multiple geographies and market segments.

Harris joined 360T from Phil Harris speaking at Profit & Loss FXMarketSpace, where he was senior vice FX Growth Markets Mexico 2012 president. Previous career roles included director, FX products at CME Group and senior sales manager for Lava Trading. He was a founding partner of Plimsoll Capital, an investment and FX trading firm and also served as senior vice president, business development and sales for GFI Group.

He is believed to be moving to another opportunity. 360T declins to comment.

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LaScala Steps Up at Deutsche as Knight Departs reg Knight has left his role as co-head of spot foreign exchange trading at Deutsche Bank in London.

Knight. who shared the role with Philip Wood and reported to Kevin Rodgers, Deutsche’s recently appointed global head of FX, had been with the bank for more than 17 years. Previously, he was head of FX spot trading in North America.

His role will be assumed by Russell LaScala, who will work in partnership with Wood to run the global spot business. LaScala is currently head of FX in Japan, based in Tokyo, and will retain this role in tandem with the new position.

LaScala relocated from New York to Toyko in 2009 when he was promoted to head Deutsche’s FX business in Japan (Profit & Loss, July/August 2009). He joined the German bank’s New York office in 2003 as head of spot trading from Citigroup where he was chief FX dealer. A spokesperson for the bank declined to comment on the changes.

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Durrant Trades DealHub for FXall enry Durrant has joined FXall, now part of Thomson Reuters, in London as a relationship manager. He reports to David Mellor, head of client services for Europe, Middle East and Africa, and James Watson, head of EMEA. Durrant was previously with technology vendor DealHub (Option Computers), which he joined in 2011 after graduation, to work in sales.

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Brook-Walters Exits RBC atasha Brook-Walters has left her role as managing director and global head of macro FX sales at Royal Bank of Canada (RBC) Capital Markets in London.

A spokesperson confirmed her departure from the team. During her time at the bank, she reported to Ed Monaghan, global head of FX, also based in London.

Brook-Walters joined the bank in 2009 as managing director and global head of institutional FX sales (Profit & Loss, March 2009). Before this she worked at Morgan Stanley for six years in FX sales to hedge funds, central banks and global funds. She left the bank in 2008. She has also held roles at State Street Bank and Trust and Bankers Trust.

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Zilenaite Joins SurfacExchange in London ina Zilenaite has joined SurfacExchange in London as business development manager, reporting directly to Ine Calvache Hoekstra, head of business development for Europe, at the company.

In the new role she will help SurfacExchange address a backlog of clients waiting for onboarding, with a focus on the growing European demand for the company’s FX derivatives trading platform, says the company.

Zilenaite was most recently at FXall where she spent a year as a sales director, promoting the company’s products to API and GUI users in the EMEA region.

Before this she held various roles at Marex Spectron in its FX middle office and institutional FX sales teams.

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And Finally

The Last Word…

The last word on some of the themes covered in Squawkbox last month, through your correspondence…

By Colin Lambert

In one of the early columns of this year I revealed that a friend of five years was actually a high frequency trader – and that I only just found out. The point of the column was not to highlight how useless I can be at the details, but more about a strategy the firm was investigating for its first foray into the FX market.

The strategy involved buying on one venue and selling on another at the same time, knowing that one price will be different to another. Most respondents argued this was an impossible strategy because the nature of the market changes by the micro second and as such there would be no way of knowing where such arbitrage opportunities would exist.

I tend to agree, but still can’t get away from the fact that it seems to be a form of latency arbitrage and as such that says two things to me. Firstly, it could well work, and secondly, the firm will be squeezed tight by the liquidity providers the first chance they get after realising what the game is.

I rarely repeat a column in its majority in this space, but on this one occasion I have to, if only because I want a permanent record of what is a sad day in the Lambert household (OK for me then). Meson los Barrilles, the Tapas bar in London’s Spitalfields Market, has closed its doors thanks to a greedy landlord.

The bar was affectionately known by a select circle as “The Black Hole”, mainly because it was easier to get out of one of the solar system’s finest than it was this bar in one piece. As I explained to Squawkbox readers, to understand the magnitude of this, I need only explain that about 70% of my business meetings took place there (it was a real problem when you explained how “you’ve heard” it’s a good place only to be greeted with “Hola Colin” as you walked in), and over the past two decades I would argue about 75% of my social meetings took place within its walls.

A sad, sad day, that leaves me wondering why I would ever go to London again…

Just quickly, a couple of things that you didn’t expect to see in the column. Firstly, and in loose relation to the final piece in this column, in contrast to the thoughts of many of you, I did not use the phrase “Salvation Army” in the column for a bet!

Secondly, in a rant against the parasites that use our programs, one competitor has now resorted to using our database illegally to try to launch a competing conference to our very successful Forex Network Chicago, I used the phrase “sleep with one eye open, we know who you are”. This prompted several witty responses, all along the same lines. Unfortunately, being my readership – and in many cases my friends – all are unprintable in a family magazine such as this!

And finally, are traders gamblers? I raged against the insinuation during the trial of UBS rogue trader Kweku Adoboli, that all traders were gamblers. I noted that while the job of trading could be seen as gambling in the strictest sense of the word, the bank desk on which Adeboli worked was not meant to take positions. Rather it was there to manage risks – and that is what separates good traders (and gamblers I suppose) from bad – and Adeboli was just a bad trader who went rogue.

Well the response was heartening. Several of you offered to bet me that there would be at least three rogue trading incidents in 2013, a couple of others faked out of office replies claiming they were at the bookies.

I give up….I just give up.

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