WSJ : ‘Inverted’ Model Said to Be Considered for NYSE’s Newest Exchange

‘Inverted’ Model Said to Be Considered for NYSE’s Newest Exchange
Such exchanges flip the standard fee model of U.S. equities trading

The New York Stock Exchange is considering a time-honored move to boost market share: copy an innovation from competitors.
NYSE has approached market participants about launching a so-called “inverted” exchange, a move that would borrow from the playbook of rivals Nasdaq Inc. and Bats Global Markets Inc., people familiar with the situation said.
Inverted or “taker-maker” exchanges flip the standard fee model of U.S. equities trading on its head.

Most U.S. exchanges collect a “taker” fee for each incoming trade that immediately executes against a standing buy or sell order posted on the exchange, removing it from the exchange’s order book. Meanwhile, the exchange pays a “maker” rebate to the firms that posted those orders in the first place. The idea of the model, called “maker-taker,” is to encourage firms to quote more competitive prices for the securities traded on the exchange.
In contrast, an inverted exchange pays rebates for incoming trades that execute against standing orders, while charging the firms that posted those orders -- the opposite of maker-taker.
For instance, if an investor decides to buy 100 shares of General Electric Co. at the lowest price being quoted in markets, his or her broker could route that order to NYSE’s flagship exchange, which has maker-taker pricing. NYSE would charge the broker about 30 cents. Meanwhile, the GE seller on the other side of the trade—oftentimes an electronic trading firm that continually posts buy and sell orders, a “market-maker”—would collect a rebate of around 22 cents from NYSE.
Alternatively, the broker could send the investor’s order to Bats’ BYX exchange, an inverted venue. There, BYX would pay the broker a rebate of 10 cents for the order, while charging the market-maker a fee of 18 cents.


Of the dozen U.S. exchanges currently in operation, Bats’s BYX and EDGA and Nasdaq’s BX are inverted. Together they had 9.2% of U.S. equities trading volume in January, according to data from brokerage Rosenblatt Securities Inc.
Adding an inverted venue could help 224-year-old NYSE capture some trades that are now flowing to younger players in the hypercompetitive U.S. stock-exchange landscape.
NYSE is said to be considering applying the taker-maker model to the former National Stock Exchange, or NSX, the most recent addition to its collection of four equities exchanges. NYSE’s three other stock exchanges use maker-taker pricing.

Intercontinental Exchange Inc., the parent company of NYSE, agreed to buy NSX in December. NYSE has renamed the exchange “NYSE National” and halted its operations in preparation for a reboot. It hasn't yet announced its plans for NYSE National.
“NYSE will engage with NSX members, buy-side participants and retail brokerage firms before finalizing operational plans for the exchange’s relaunch,” NYSE said in a Jan. 31 press release.
Inverted exchanges tend to be smaller than standard maker-taker exchanges, but they can be attractive to brokers who handle trades for institutional or retail investors. Such customers will often decide to buy or sell shares at the best price displayed in the markets rather than waiting for the price to improve. When investors submit such orders, brokers typically send them to inverted exchanges first, in hopes of capturing a rebate, before routing them to maker-taker exchanges that would charge the broker a fee, market experts say.
That has led some critics to complain that inverted exchanges skew brokers’ incentives so they don’t always send trades to the venue that offers the best result for the customer.
“You’ve got this hidden piping system in which brokers are able to take revenue out of orders that the customer doesn’t know about,” said Larry Harris, a finance professor at the University of Southern California’s Marshall School of Business.
Others say big exchange groups are simply offering customers a variety of pricing schemes, and that the emergence of a complex, fragmented marketplace with maker-taker and taker-maker exchanges is the result of regulation.
While the maker-taker model dates back to the late 1990s, its inverted cousin is a more recent development. Nasdaq introduced the first taker-maker pricing scheme on an equities exchange in 2009, and Bats followed suit in 2010.
The Big Board has shown a willingness to borrow ideas from competitors before. In January it said it would add a 350-microsecond “speed bump,” a feature that imposes a delay on orders, to another one of its smaller exchanges. The speed bump was pioneered by IEX Group Inc., the upstart exchange made famous by Michael Lewis’ 2014 book “Flash Boys.”

>>> Safran activist TCI responds to company's defence of proposed Zodiac acquisi


Safran activist TCI responds to company's defence of proposed Zodiac acquisition

Safran [EPA:SAF] activist TCI Fund Management has published five new documents to its website dedicated to arguing against the company's offer to acquire Zodiac Aerospace [EPA:ZC], which can be accessed here.
Two documents appear to be presentations of the activist's arguments, updated since Safran's most recent response.
A letter regarding Safran's corporate governance dated 27 February and signed by TCI's Sir Chris Hohn is available here.
A letter from Hohn on 27 February calling for the French market reguator AMF to regard Zodiac's family shareholders, the French government, FFP and Fonds Strategique de Participations as "concert parties" in relation to Safran, is available here.
A fifth document instructs Safran shareholders on how to qualify for double voting rights.

>>> LSE/Deutsche Boerse's regulatory problems may be due to French political pre

LSE/Deutsche Boerse's regulatory problems may be due to French political pressure - report

The European Commission’s (EC) late request for the London Stock Exchange Group [LON:LSE] to sell its majority holding in the Italian exchange business MTS as a condition of approval for the LSE’s proposed merger with Deutsche Boerse [ETR:DB1] may have been due to political pressure from France, The Times reported.
The newspaper cited a source close to the LSE who said “the French” may have wanted, in addition to the acquisition of LSE’s French clearing business LCH SA by Euronext, control over all European platforms and trading.
The LSE said on 26 February that the EC had requested the MTS disposal, a request that Deutsche Boerse and the LSE were not expecting, according to the report.
Deutsche Boerse and the LSE had agreed to sell LCH SA to Euronext [EPA:ENX] for EUR 510m (GBP 434m) as a concession to the EC, as previously reported.
The LSE has indicated that it cannot agree to sell its shareholding in MTS as it considers the measure to be disproportionate and might put its relationship with Italian regulators at risk, The Times report said.
There remains a slim chance of the proposed merger proceeding, although that is unlikely because the EC has already dismissed the LSE’s proposal of another remedy other than selling its MTS stake, the item said.
A report from this news service yesterday cited a person familiar with the situation who said the EC's statement of objections indicated that the regulator wanted to ensure that repo trading feeds provided by MTS would still go through LCH SA after the proposed merger.
The EC wanted MTS sold specifically to Euronext, a second person familiar added.
A Financial Times report mentioned talk that the US-based exchange operators CME Group [NASDAQ:CME] and InterContinental Exchange [NYSE:ICE] might make offers for either Deutsche Boerse or LSE, in light of the likelihood of their proposed merger being blocked by the EC.
A separate report in The Times, however, said suggestions of an offer from ICE for the LSE were considered unrealistic due to the UK government’s apparently protectionist stance.
The Daily Telegraph quoted one banker working on the deal who said he considered an offer from ICE or CME to be unlikely.

FT : Norway’s oil fund up 6.9% in 2016

Norway’s oil fund up 6.9% in 2016

The world’s largest sovereign wealth fund overcame sluggish markets at the start of last year to deliver a return of 6.9 per cent in 2016.

Norway’s $905bn oil fund was boosted by strong stock markets in the second half of the year with equity investments returning 8.7 per cent. Fixed income returned 4.3 per cent in 2016.

Yngve Slyngstad, chief executive of Norges Bank Investment Management, the manager of the fund, said:

“The return in 2016 was characterised by falling international interest rates in the first half of the year and strong equity markets in the second half. The year began with a downturn in the markets, and uncertainty regarding developments in China.”

The fund had 62.5 per cent of assets invested in equities at the end of the year but is expected this spring to be given permission to increase that to 70 per cent. Fixed income assets accounted for 34.3 per cent and real estate 3.2 per cent.

The biggest contributors to the return in equities were Royal Dutch Shell, Glenmore and Apple with the worst performers being Novo Nordisk, Credit Suisse and Lloyds Banking Group.

The worst performance among its big government bond holdings was for UK gilts, which lost 5.1 per cent. Measured in local currency, however, UK gilts returned 11 per cent.

WSJ : A New Way to Look at Crazy Stock Valuations

A New Way to Look at Crazy Stock Valuations
Valuations have been inflated by a collapse in profits for oil companies

The swinging price of oil has played havoc with forecasts for the economy and inflation over the past two years. Now it may also be messing with the heads of investors by pushing the most popular tool for U.S. stock-market valuation to the highest in more than a decade.

The S&P 500 stands at almost 18 times estimated operating earnings, the highest forward PE ratio since 2004 and a figure which was higher before that only during the late 1990s dot-com bubble and its aftermath.

Yet, the valuation has been inflated by a collapse in profits for oil companies. Because analysts expect little in the way of earnings over the next year, but a recovery later, the ratio of price to year-ahead earnings for oil stocks is elevated. The energy sector stands at more than 30 times Thomson Reuters IBES’s estimate of operating earnings over the next 12 months, higher than any time from when the sector data started in 1995 up to last year—when it briefly reached an extreme of almost 60 times.

There are other reasons to think future returns from stocks might be low, but investors who rely on the overall valuation of the index as a signal for future returns would be misled if they ignored the collapse in oil-sector profits.

Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, puts the overall market at 18.1 times this year’s estimated operating earnings. When the energy sector—containing six of the seven S&P companies forecast to lose money this year—is excluded, the forward PE stands at 16.6, a much less frightening figure.


There are lots of ways to compute the forward PE, and the gap is slightly narrower on IBES figures used by Société Générale’s quantitative equity team. But either way, valuations are lower when the oil sector is stripped out, and look little different to two years ago.

There are both conceptual and practical objections to taking this as a signal that stocks are at a reasonable level. The conceptual problem is that it looks like manipulation of the figures to justify buying shares, a practice with a long and dishonorable history on Wall Street.

In reality, whether to include or exclude the oil sector amounts to a question about whether its profits will recover. If oil prices and profits plunge again, then the sector is truly expensive, and it should be included in the overall figures. Excluding energy from valuations amounts to an assumption that oil sector profits will recover, implying prices won’t fall much below $50 a barrel.

The practical issue is more worrying. Even without energy, valuations are pretty high. Stocks were expensive two years ago and are still expensive today, with valuations high compared with most of history. Investors are pricing in a lot of good news for earnings, notably U.S. corporate tax cuts, and not a lot of bad news.


The main explanation for pricey shares is the same as it was two years ago, too. Low interest rates tend to lead to higher valuations, since the same future profits are worth more when discounted back into today’s money. Profit margins are elevated by cheap debt, and investors think that will continue.

The Federal Reserve may have started raising U.S. interest rates, but it has barely kept up with the rise in inflation, and investors expect money to remain easy pretty much forever.

If today’s market is a bubble, it is a particularly joyless one. Cheap money has pushed every sector to be pricey, but none to be extraordinary. Indeed, the most expensive sector after energy is consumer staples, made up of boring-but-reliable earners.

We’re promised news on Donald Trump’s “phenomenal” tax cut in his speech Tuesday, which could reverse at least some of the postelection stock rally if the corporate tax plans disappoint. The real threat to valuations, though, would come if it looked like inflation was running out of control, and the Fed were forced to get serious with rate increases.

Investors expect oil to stay calm, energy-sector profits to recover and inflation to be subdued. If any of those turn out to be wrong, high valuations may yet be a problem.

WSJ : Snap IPO: A $22 Billion Test for the Unsocial Social Network and Its Elusi

Snap IPO: A $22 Billion Test for the Unsocial Social Network and Its Elusive Founder
Snap defiantly operates unlike most Silicon Valley outfits, where collaboration and wide-open office spaces are prized

Mark Zuckerberg says he created Facebook Inc. to make the world more open and connected. Twitter Inc. says it wants to give everyone the power to share ideas instantly.

Snap Inc., which this week could become the biggest technology public offering in years, is the unsocial social-media company. Not only does its app feature messages that disappear, the company defiantly operates unlike most Silicon Valley outfits, where collaboration and wide-open office spaces are prized.

Former employees say often the only way they knew co-founder and CEO Evan Spiegel was at work was by seeing his chauffeured SUV. He avoids holding companywide meetings and prefers to dispense information to individuals or small groups, they say.


In contrast to the big, open campuses of Facebook and Alphabet Inc.’s Google, designed for employee collaboration, Snap doesn’t have a headquarters. Its main offices are scattered around Venice, Calif., keeping employees siloed and making communication difficult, the former employees say. The company in its IPO filing listed the lack of a headquarters as a risk factor that could hurt morale, prevent adequate oversight and cost talent.

So far, Snapchat has won legions of teenage users, who like that what they share now won’t define them permanently—and that it keeps their parents out of their business. And it has attracted advertisers who want to reach a young audience, setting the stage for Snap’s initial public offering. The listing on the New York Stock Exchange is expected to take place this week and could value the company at as much as $22 billion, which would make it the biggest U.S. tech IPO in years.

A Snap spokeswoman declined to comment or make Mr. Spiegel available for this article, citing the company’s quiet period ahead of the public offering.

The question is whether this management style and focus on privacy will help the company compete with television networks and challenge the Facebook juggernaut. Mr. Spiegel’s approach at times has left staff in the dark about important initiatives, the former employees say. And it has made the company resist giving advertisers the ability to narrowly target users based on their behavior and preferences, a strategy that has enabled Facebook, Google and others to mint enormous profits.

‘Doesn’t talk much’
“Evan doesn’t talk much,” says Hemant Taneja, managing director at venture-capital firm General Catalyst, an early Snap investor, saying confusion can stem from the fact that Mr. Spiegel doesn’t always feel compelled to explain his concepts to the public.

In September, he surprised potential investors when he began publicly calling Snap “a camera company” instead of a social-media company. Some investors wondered if Snap was suddenly becoming a hardware company, but Mr. Taneja says the camera concept wasn’t new.


Rapid growth and increasingly intense competition are putting Mr. Spiegel’s management style to the test. Snap’s full-time workforce tripled during last year to 1,859 as it expanded internationally.

It is competing head-to-head with the global social-media giants, especially Facebook, whose Instagram unit already has emulated Snap’s features with some success, such as the Stories feature it rolled out over the summer. Snap in its public filing attributed part of its slowing user growth to increased competition.

Part of the competition is about the race to hook users first. Instagram is more popular than Snap internationally, and people could be inclined to stick with Instagram if they are already using Facebook, or with Snap if they landed there first. “You aren’t going to switch if you are satisfied with what you are using,” says Wedbush Securities analyst Michael Pachter.

Snap is also vying with traditional television networks to woo young viewers and advertising. Young people have been drifting away from television to their smartphone screen, where hours of videos from friends can be played.

Meanwhile, Snap must continue to generate unusual and captivating content—much of which has been meticulously managed by Mr. Spiegel, former employees and business partners say.

Like many tech executives, Mr. Spiegel attended Stanford University. But that is about where the comparisons end. He was more social than secretive when he arrived at college in 2008, friends recall, even though his high-profile lawyer-parents had had a rancorous and public divorce when he was in high school in Los Angeles. Far from geek, he was the life of the party, they say, and his style was more hipster than hoodie: skinny jeans, V-neck T-shirts, flip flops.

These days, Mr. Spiegel, who is more of a product designer than a computer scientist, eschews many of the tech industry’s habits, preferring to be away from what he has described as the bubblelike culture of Silicon Valley.

As he got to college, Facebook was taking off. In just four years since its launch in 2004, the social network had gained 58 million active users (it now has 1.9 billion monthly active users). In February 2009—during Mr. Spiegel’s freshman year—it added the Like button. From the start, Mr. Spiegel wasn’t a fan, friends recall. He would come to see it as a form of social pressure, where people create falsely perfect worlds in the quest to rack up likes.

Mr. Spiegel said Snapchat was much more, a place for spontaneous interaction that evaporates in the same way a real conversation would. It was also about creativity and fun: Photos and video could be animated in whimsical and ridiculous ways using its functions to make selfies that vomit rainbows, sport puppy and bunny ears, and wear banana faces.

In most cases, photos and videos that users send in messages disappear after they are viewed, and other content disappears after 24 hours, although some items can be saved.

In the recent company video, created for its IPO, Mr. Spiegel says the ephemerality is “why people love creating Snaps. Because there isn’t pressure to feel pretty or perfect. Self-expression isn’t a contest, it’s not about how well you can express yourself, it’s about being able to communicate how you feel, and doing that in the moment.”

Conceived for mobile
Also key to Snap’s success, and unlike incumbents such as Facebook and Twitter: Its design and concept is mobile-only. Content is presented vertically, to fill a smartphone screen; location-based tags and filters are popular; and bite-size content is swipeable.

As Facebook was trying to transition to mobile in 2012, Snapchat sped out of the gate, catching the bigger company by surprise. Mr. Spiegel saw the smartphone as the new movie screen. When Mr. Zuckerberg offered $3 billion to buy Snapchat in 2013, Mr. Spiegel turned him down.

Mr. Spiegel’s talent combining a Hollywood approach to content with a keen business sense is admired by many who know him.

“For someone of his age, he operates with much more wisdom than anyone else I have seen. I find him to be a very, very clear thinker,” Eric Schmidt, executive chairman of Alphabet, said in an email. When faced with critical decisions on issues like funding and partnering and selling, Mr. Schmidt says, “he gets it right every time.”

He says Mr. Spiegel, a former student of his at Stanford, is now a friend and customer. Snap has a five-year, $2 billion contract for Google to provide cloud-data storage.

Other people note Mr. Spiegel’s timing on the dominance of mobile, getting ahead of Facebook and the recognition that social media was getting boring.

Revenue is generated by brands placing short video advertisements and simple location-linked overlays called “geofilters,” plus more elaborate “Lenses”—Taco Bell made a Lens that turned faces into tacos being doused with hot sauce.

More than two dozen media and entertainment outlets, including The Wall Street Journal, also provide news, sports, fashion and features. Advertisements are sold to place in the content the media companies produce.

Snap’s revenue last year jumped more than 500% to $404.5 million. Its net loss widened to $514.6 million, and its user growth slowed somewhat, rising 48% to 158 million in the fourth quarter from the same period a year earlier.

That revenue is a fraction of the $27.6 billion last year at Facebook, which also booked $10.2 billion in profit.

Mr. Spiegel has been wary of advertising from the start, worrying that it would feel intrusive. As his business marketing team was crafting presentations for prospective advertisers and business partners, Mr. Spiegel didn’t want to explain the app to them, said one of the former employees. He preferred that CEOs learn it—not from a presentation but from their children. It was “difficult for a salesperson to run that one up the flagpole,” the former employee recalls. A product demonstration is now part of the meetings.

When Snapchat’s first ads made their debut in October 2014—Facebook was already generating $12.5 billion in annual revenue by that year—Mr. Spiegel’s ambivalence was evident in a company blog post. It told users if they didn’t want to watch the ads, which were in a different section, “No Biggie.” The company wouldn’t place ads in personal communiqués because that would be “totally rude.” It wanted Snapchat advertising to be “the way ads used to be, before they got creepy and targeted.”

In the past, he has resisted efforts to collect and share information that would enable advertisers to target the app’s individual users. Lately, he has made concessions. In January, for example, Snap signed a deal with Oracle Corp. to help marketers use data from offline purchases, such as supermarket loyalty cards, to target Snapchat users with more relevant ads.

Ad targeting
Snap is still far away from the more aggressive approaches of Facebook and Google, which have used precise ad targeting to make billions in profits. As a result, the giants can outspend Snap on talent and fresh content, and bankroll development of potentially expensive new products, such as hardware that taps into augmented reality, or tech that blends computer images onto a user’s real view of the world.

Because of Snap’s vision of ads as less intrusive than most digital advertising—more like old-fashioned television spots made for a broader audience—Snap ads must have a wider appeal, with high production values, and be spliced into the rest of the app in an interesting way. During the Super Bowl, for example, users could choose to adorn their selfies with either Falcons’ or Patriots’ football helmets or cascade gushers of colorful Gatorade over their heads.

Snap’s requirements set a high bar for its partners. The small group of media and entertainment outlets that appear on Snapchat have tough targets to meet, according to a person familiar with the process. If Snap isn’t happy, it suggests changes to the content, and if the material doesn’t get enough traffic, the providers fear they could be booted off the app, according to a current and a former editor of content for Snapchat Discover, the section of the app where publishers post content.

Until lately, a lot of Snap’s advertising has come directly from brands like Coca-Cola Co. and Yum Brands Inc.’s Taco Bell. It has been slow to woo Madison Avenue’s big ad agencies, which have bigger budgets and can commit to longer contracts, and to form partnerships that would enable advertisers to measure the effectiveness of their campaigns. Last summer, Snap hired Viacom’s Jeff Lucas to help court big deals.

As the IPO has neared, Snap has signed deals with Oracle Data Cloud, Nielsen and others to ramp up its use of metrics that will dispel some of the mystery that has enshrouded the effectiveness of advertising on the app.

The stock-exchange listing will force more transparency about the business, including regular updates on user and engagement data. Even so, Mr. Spiegel will continue to keep a tight grip on the company after it goes public. Snap is selling to the public only shares that have no voting power. Afterward, Mr. Spiegel and co-founder and chief technologist Bobby Murphy will retain more than 90% of the voting shares.

Reuters - Saudi Arabia wants oil prices to rise to around $60 in 2017 - sources

Saudi Arabia wants crude oil prices to rise to around $60 a barrel this year, five sources from OPEC countries and the oil industry said.

This is the level the OPEC heavyweight and its Gulf allies - the United Arab Emirates, Kuwait and Qatar - believe would encourage investment in new fields but not lead to a jump in U.S. shale output, the sources said.

The Organization of the Petroleum Exporting Countries, Russia and other producers pledged last year to cut production by about 1.8 million barrels per day (bpd) from Jan. 1. The first cut in eight years is intended to boost prices and get rid of a supply glut.

Crude prices LCOc1 have risen by more than 14 percent since the November pact but are still only trading around $56 a barrel despite record compliance by OPEC and non-OPEC members.

OPEC officials have repeatedly said the group does not target a specific oil price and their focus is on drawing global oil inventories and helping the market to re-balance.

But behind closed doors, Riyadh and its Gulf OPEC allies hope to see a higher level because the low price has pressured their finances and stoked fears of a future supply shortage.

However, they do not want the price to be so high that it encourages rival U.S. shale producers, which were hard hit by the slump in oil prices, to ramp up production again. Advances in technology have made it easier for them to adapt quickly to oil price fluctuations.

"They (the Saudis) want to see oil prices at $60 towards the end of this year. It's good for (oil) investments," said a Gulf oil industry source familiar with the matter.

Another non-Gulf industry source said "OPEC and particularly the Saudis want higher prices" not just for investment but also as Riyadh as it seeks to offload a stake in state-owned oil giant Saudi Aramco‎.

Over $1 trillion worth of oil projects have been canceled or delayed since mid-2014. A decline in investments in future oil projects triggered worries that this could lead to a supply shortage and spike in oil prices.

Oil fields take around four years to develop before production can start whereas U.S. shale oil can now be extracted within a few months of a decision.

"In general, something around $60 this year is good. $60 will not encourage that big increase in shale," said one OPEC source, adding that shale oil production is expected to grow by about 300,000 bpd this year.

ABSORBING SHALE

U.S. shale producers started to grow production again when crude prices first topped $50 a barrel in May 2016 after a two year price slump due to a global glut starting in mid 2014.

U.S. drillers have added more than 280 oil rigs since the end of May, and the U.S. Energy Information Administration (EIA) has forecast that U.S. domestic production will rise by 430,000 bpd between December 2016 and December 2017.

Despite the advances in technology, another OPEC source said that shale producers who survived the downturn may be cautious about responding quickly to a change in oil prices.

A third OPEC source said it was difficult to see oil prices rising to $60 or above this year due to a lingering oversupply.

That source also said that even if shale oil production rose by more than 300,000 bpd the market could absorb it if it comes during the cold winter season when demand peaks.

"The catch is the timing. If this happened, as it is widely projected, during the fourth quarter, the impact will be manageable and could be absorbed by the market," the source said.

OPEC could extend its oil supply-reduction pact with non-members or even apply deeper cuts from July if global crude inventories fail to drop to a targeted level, OPEC sources have told Reuters.

The Gulf industry source said OPEC and non-OPEC members may extend the supply curb pact because a return to a pump-at-will oil policy would crash prices and destabilize markets again.

"If we go back to a race to raise production, then we haven't achieved anything and prices will fall again," the source said.