European Central Counterparty Limited (EuroCCP) announced today it has again leveraged its economies of scale to restructure its fees and set a new low clearing price standard for European equity trades.

EuroCCP’s new transparent fee structure – starting from 3 euro cents ($0.030) per side and decreasing to one-fifth of a euro cent ($0.002) – represents Europe’s most competitive pricing. With volume discounts at a participant level and no hidden fees, it delivers significant value to the growing number of high-frequency trading firms now operating across multiple markets. EuroCCP’s new pricing model is effective from 1 October 2009.

The announcement is part of a major EuroCCP programme of innovation, including the launch of new products and expansion into further market sectors, which will help position EuroCCP strongly as the European market moves towards interoperability. According to Diana Chan, EuroCCP’s CEO, “The market is looking for pricing to be simpler and more transparent, enabling traders to build predictable clearing costs into their models. With the launch of our enhanced tiered fee structure, we’re bringing US high volume pricing to Europe, and offering a safe and low-cost service to help our customers and partners achieve further economies of scale.”

EuroCCP’s value proposition is that it operates on an at-cost basis, with tiered tariffs that apply to the clearing volumes of each participant rather than to the aggregate clearing volume of EuroCCP, ensuring that each firm can benefit directly from its own volume growth. EuroCCP customers can also be certain of no hidden charges elsewhere, with no charges for fails, no additional netting fees, and all interest earned on cash margins being returned to participants.

“At EuroCCP, we’re particularly responsive to changing market needs, and our new fee structure is just one in a series of developments aimed at ensuring EuroCCP and its customers are best placed to take advantage of the drive towards interoperability,” said Chan. “Offering the most competitive prices will clearly prove attractive as traders seek the clearing model that best matches their business.

Combined with our superior risk management capabilities, we’re well positioned to support both participants and their trading venues, and we expect our new pricing to be a key factor in driving clearing volume growth for EuroCCP over the coming months.

“EuroCCP was the first organisation that initiated the drive for lower clearing prices when it established its European operations in Q1 2007. Our new model demonstrates our continuing commitment to align with our participants and trading platform partners to deliver a compelling pricing solution that will help stimulate growth in trading volumes,” added Chan. “To support this we’re also extending our clearing and settlement services into other markets for example, our partnership with Omgeo to create a pan-European equities CCP service for hedge fund transactions. We have also entered into a Memorandum of Understanding with NASDAQ OMX to provide clearing services for its exchanges in Copenhagen, Helsinki and Stockholm starting in January 2010.”

At present EuroCCP clears equity trades in 15 countries and in seven different currencies. EuroCCP currently provides central counterparty services for equity trades on the Turquoise, SmartPool, NYSE Arca Europe and Pipeline trading platforms. For more information on EuroCCP and the revised fee structure.

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People often wonder why the trading volume slows so dramatically during the middle of each trading day. The most common explanation for the midday inactivity is that it is lunch time and while it is certainly part of the reason, it is not as though the specialists and market makers all head out to a liquid lunch and forget about their business for the day. Most serious traders I know eat their lunch at their desk so they don’t miss an opportunity and to maintain a better feel for how their positions are trading.

Consider a market maker with a day order to buy 1 million shares of a stock for an institutional customer. The market maker cannot just go in and buy the full position in the first two hours of the day and then leave his desk to go play golf. Market makers are evaluated by their customers for the quality of trade execution; did they get a fair price for the customer? The most common method of used to analyze the quality of a trade execution is to compare the price the order was filled to the Volume Weighted Average Price (VWAP). The VWAP is calculated by dividing the dollar volume of a stock by the share volume over a given period of time. Simply put, the VWAP is the average price that each share was executed over the period of time being studied. There are several ways to calculate the VWAP in RealTick, the analysis and trading software I use. I prefer VWAP analysis with a moving average, in particular for shorter term day trades on a one day chart of the equity I am trading.

The VWAP is considered to be a fair benchmark for comparison of the institutional trade desks ability to execute trades on behalf of the customer. If the brokerage purchases were made at a price less than VWAP then they did a good job for the customer. If the price paid was greater than the VWAP they may lose that customer for future transactional business. The daily VWAP is a number which changes as orders are transacted at varying prices throughout the day.

Here is a simple example of how an institutional trader might manually execute an order for the purchase of 1 million shares. Let’s say the stock closed the previous day at $40/share. The morning the broker receives the buy order he may offer 5 or 10,000 shares at 39.90 or lower while simultaneously bidding for shares at a lower price. The first trick this broker may use is to show the full size of the offer while only showing 100 shares bid with a larger number of shares in reserve meaning that he may be really bidding for 5000 (or any other number they choose) shares. By showing a larger number of shares for sale and a small amount of demand in the pre-market, the broker may induce weaker holders to sell their shares in fear that there could be a real seller looking to get a head start on their
selling that day. This type of activity is pure manipulation and it happens all the time!

The one-minute chart of Google Inc (GOOG) shows a declining VWAP for most of this day, showing the sellers dominance.

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The yen rose to the highest level in eight months versus the dollar on prospects Japanese exporters are repatriating profits before the fiscal first half ends this week.

Japan’s currency also advanced against all of its 16 major counterparts on speculation the nation’s government won’t intervene to stem the currency’s gain. The Australian dollar fell to its weakest level in eight months versus the New Zealand currency on speculation the smaller South Pacific nation’s central bank will raise rates from a record low.

“Japanese firms are continuing to bring home profits,” said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. “The government’s stance on a strong yen is careless, as it doesn’t benefit the nation’s export- driven economic structure.”

The yen climbed to 88.99 per dollar as of 9:24 a.m. in Tokyo from 89.64 in New York on Sept. 25. It earlier touched 88.24, the strongest level since Jan. 23. The currency rose to 130.66 per euro from 131.70, after earlier rising to 129.83, the highest since July 14. The dollar traded at $1.4690 per euro from $1.4689.

The Australian dollar bought NZ$1.1991, the least since Jan. 13, before trading at NZ$1.2025 from NZ$1.2069 in New York on Sept. 25.

Japan’s currency gained on expectations the nation’s exporters are taking advantage of an April 1 rule change that waives taxes on repatriated profits. Under previous laws, companies had to pay a combined 40 percent tax on overseas earnings. The first half of Japan’s fiscal year ends Sept. 30.

Yen Forecasts
Large manufacturers in Japan forecast the yen would average 94.85 per dollar in the 12 months to March 2010, according to the Bank of Japan’s quarterly Tankan survey released July 1.

Japanese Finance Minister Hirohisa Fujii said last week he didn’t support a weak yen, fueling speculation Japan won’t resort to intervention to curb yen’s appreciation. Central banks intervene in foreign-exchange markets by selling and buying currencies.

In a survey released by Japan’s Cabinet Office on April 22, exporters said they can remain profitable as long as the yen trades at 97.33 per dollar or weaker. A rising currency hurts exporters by making their goods more expensive to foreign buyers and reducing the value of profits earned abroad. Exports account for 12 percent of Japan’s economy, compared with 6 percent in the U.S.

The New Zealand dollar has been considered the high-yield currency among the majors for years. And, even though its benchmark lending rate is at a discount to its Australian counterpart, speculators still recognize the specialty the kiwi retains as a high income currency whereas others are graded for their growth potential and the health of their financial markets.

This elevates the influence of this currency amongst its peers and makes the RBNZ policy decision a meaningful event for the broader FX market.

The RBNZ Holds
It should come as no surprise to fundamental traders that the policy authority decided to keep the Official Cash Rate unchanged at for the third consecutive meeting at 2.50 percent. The economy is still struggling to pull itself out of recession yet inflation is still close to close to the central bank’s target level. More importantly, Governor Alan Bollard has issued commentary over the past months that have been relatively transparent with his intentions. Nonetheless, heading into the event, overnight index swaps were pricing in a 10 percent probability that the rate would be cut by 25 bps.

Putting the Decision into Context
When the decision to maintain the benchmark rate was announced, the market had to make the fine adjustment for the modest premium afforded to the possibility of a cut. More important, was the accompanied the decision. In regards to growth the first stepping stone to a turn in interest policy and therefore the kiwi dollar the prognosis was slightly more optimistic but certainly cautious. Bollard noted evidence that the recession was easing; but that the subsequent recovery was going to be slow and choppy. Looking into specific sectors, he said retail spending and residential housing had stabilized; but there was limited scope for a recovery in employment and investment. With an outlook for medium term inflation to remain within a reasonable range, there was little need to act on rates.

There were a few particular comments that struck a cord with traders though. The Governor said that he would be disappointed with further appreciation in the currency. This isn’t new as he has tried to jawbone and intervene for months and done so unsuccessfully for some time. More interesting was the suggestion that he doesn’t think further rate cuts would have much impact on the kiwi dollar a suggestion that he wouldn’t use policy to influence exchange rates. To offset this bullish notion, he went on to say that he expects to keep the benchmark lending rate unchanged until late into 2010. This seems to put a cap on the yield opportunities; but we have seen in the past that RBNZ is quick to change its stance and act on rates. Clearly, the market thinks his outlook somewhat unrealistic as Credit Suisse overnight index swaps are still pricing in nearly 100 basis points worth of hikes over the coming 12 months. Considering their habit for successful and large rate changes, this is still somewhat reserved and suggests they will not start until early or mid 2010.

Market Reaction
Volatility immediately picked up after the release; and the initial move was for a drop in the New Zealand dollar. Concerns over the appreciation of the nation’s currency and warnings that the benchmark rate can be held at its current level for another year or more is certainly bearish. However, comparing the sentiment following this event to previous rate decisions and Bollard commentary, this was relatively reserved if not a modest shift to the center. With signs that individual sectors of the economy are showing improvement, we are laying the ground work for a global recovery. Armed with the knowledge that the RBNZ can on a dime when it comes to interest rates, the kiwi would slowly appreciate after the event.

The Federal Reserve Open Market Committee (FOMC) Wednesday said that the economy has improved, but kept the benchmark interest rate target at all-time lows, indicating that it is determined to nurture a budding economic recovery by providing liquidity to the financial sector.

Economic activity is “picking up,” the Fed statement said. The statement was a more upbeat assessment of the economy than comments from Federal Reserve Chairman Ben Bernanke last week, warning that the recovery is likely to be anemic.

The central bank also said it intends to extend purchases of $1.45 trillion in long-term government bonds into the first quarter of 2010.?? It originally had scheduled those purchases to be completed by the end of the year.

By lengthening the deadline, the Fed is signaling that Bernanke and other members of the committee believe the economic recovery is on firm footing.

Signs of a fledgling recovery have shown up recently in government reports that show the housing industry is stabilizing, retail sales are slowly on the mend and utilization of industrial capacity is increasing.

Consensus projections by economists have forecast U.S. gross domestic product (GDP) growth will hit 2.9% in the third quarter, up from a 1% estimate in July, according to Bloomberg News.

“The bottom is no longer falling out, but the recovery is still at a very early stage,” Mark Gertler, a professor of economics at New York University told Bloomberg, who studied the Great Depression with Bernanke before he became Fed chairman. “There is no need to expand the balance sheet now, but it is a bit too early to begin shrinking it.”

By keeping interest rates steady, the central bank signaled that inflation is not a current threat to the economy, and that the recovery still needs fiscal stimulus.

The Fed lowered the benchmark lending rate to a range of zero to 0.25% at the Dec. 16th, 2008 meeting and has left it unchanged since.?? It later adopted a policy of “quantitative easing” authorizing the purchases of the long-term government bonds.

The announcement to stretch the purchase of long-term government bonds was expected by analysts and means the Fed is unlikely to withdraw government funds from the system until at least the second quarter in 2010.

Draining funds from the system now could drive up interest rates on 10-year Treasury notes.?? That would likely increase the odds of higher mortgage rates which could crush the housing recovery.

“Probably two-thirds of the committee is concerned that being too quick to embrace the stronger growth story could lead the market to price in sooner rate hikes and tighter financial conditions than they would like,” Michael Feroli, an economist at JPMorgan Chase & Co. (JPM: 41.86 +0.54 +1.31%) in New York and a former member of the Fed’s research staff told Bloomberg.

And with unemployment at a 26-year high of 9.7% and forecast to reach 10.1% in the fourth quarter, the central bank has made it clear it’s too early to celebrate, because? “businesses are still cutting back on fixed investment and staffing.”

Some on the committee believe that with millions out of work and ample capacity to increase factory production, the economy has plenty of room to run before inflation becomes a threat.

“The Fed will move gradually and cautiously in reducing its balance sheet next year even as there are further signs of a sustained economic recovery,” UBS AG Securities (UBS: 17.32 -0.13 -0.74%) economist Maury Harris wrote in a research note obtained by Reuters.

The steady-as-she-goes approach has been a relief to investors.?? Stock markets have surged since bottoming out in March, and the blue chip Dow Jones Industrial Average has gained around 3300 points, or about 51%, as the Fed held interest rates at all time lows.

And it’s unlikely the Fed is going to shock investors by springing a surprise policy change on them anytime soon.

“The Fed has been pretty good about telegraphing what they’re going to do via speeches by the governors at conferences and things like that,” Marc Pado, of Cantor Fitzgerald LP, told The Wall Street Journal. “There’s just been no hint of a policy change lately.”

US Dollar Overdue for a Technical Bounce, But Fundamental Reversal…

The dollar was able to relieve the pressure of suffering its worst trend on recent record by clawing out the first bullish close in eleven consecutive trading days; but that does not mean the burdened currency is necessarily primed for a true reversal. While this currency is arguably oversold on a fundamental basis; the same drivers that ushered it to its yearly low last week are still in play.

Fundamental Outlook for US Dollar: Neutral
- Speculation for rate hikes deferred as fundamentals temper exuberant risk appetite
- The steady charge in risk appetite keeps the dollar on the short side of carry interests
- Sentiment can often run askew of fundamentals; but what do technicals say about the dollar?

The dollar was able to relieve the pressure of suffering its worst trend on recent record by clawing out the first bullish close in eleven consecutive trading days; but that does not mean the burdened currency is necessarily primed for a true reversal. While this currency is arguably oversold on a fundamental basis; the same drivers that ushered it to its yearly low last week are still in play. The pace of the economic recovery, growing financial concerns and a Fed struggling to keep pace are all prominent concerns when gauging the long-term health of the dollar; but all of that is overshadowed by the immediate and market-wide preoccupation of risk appetite.

Last week, a Bloomberg survey of investors found the market was the most bearish on the dollar in 18 months. Where does this speculative grade come from? The economy is still dealing with an economic recovery and government deficits are a genuine concern; but most of the world’s largest economies are suffering with the same dilemma. The real weight on the dollar is the steady revival of risk appetite over the past six months. Following the necessary period of consolidation after the worst of the financial crisis, capital started to slowly work its way back into the speculative arena. Initially, interest was from early adopters; but the draw of capital gains was strong enough to start the flow from deeper pools of wealth in risk free areas. Where do these funds go? It certainly finds its way to US equities and other relatively-risky assets; but when it comes to the yield bearing instruments, the American products can’t compete. The benchmark, 3-month Libor rate dropped to a new record low (0.28948 percent) this past week and subsequently was depreciated to a discount against its Japanese (0.34875 percent) and Swiss (0.29667 percent) counterparts. Does the dollar realistically make the ideal funding currency? No. The Fed will certainly turn to a hawkish policy stance well before the other two, it has the potential to take a more consistent hawkish path, deficits are a problem amongst all three and the foundation for a true recovery is most stable in the US. As soon as US rates recover, risk-seeking capital will once again flow into the world’s financial center.

In the meantime, we may see a shift in sentiment that could benefit the dollar’s safe haven status. The broader markets have rallied consistently for months despite a fundamental picture that has changed pace little since the initial reversal. Naturally, a wave of profit taking is highly probable. And, considering the advance to this point has been heavily dependent on steady capital gains, a correction could be sharp and aggressive. There are many different potential catalysts for such a turn; but in the end, the shift in optimism will likely develop naturally. Nonetheless, we should keep an eye on a few specific developments. Reports suggest that lending to consumers has dropped at its fastest pace since the Great Depression; yet leverage has returned to levels last seen since before the 2007 meltdown. This is an imbalance that will lead to problems later down the line if not corrected. Also, the Federal Reserve and White House have both voiced concern over the commercial real estate debt market. The former is looking into major banks exposure to this asset class; but the term “stress test” is not being used.

Though it is vital to keep abreast of the health of risk appetite; we shouldn’t ignore the influences of data and growth forecasts. The economic docket is light next week; but durable goods orders and housing data (existing sales, new home sales) can supply short-term volatility. It is the FOMC that tops the list not with a possible change in the benchmark, but commentary that can move up the time table for a hike. Data aside, the US/China trade spat hints at a growing concern with protectionism which may come under scrutiny at the September 24/25 G20 Meeting. Exit strategies, financial regulation, banking compensation are all on the topic list; but not currencies. – JK

Euro: Not as Strong as the EURUSD’s Trend Suggests

Is the euro the fundamental powerhouse that the EURUSD would suggest or is the euro merely playing the compliment to the rest of the market. If we were to look at the world’s most liquid currency pair alone, we see a six month trend, recent rally and the highest overall level for the exchange rate in nearly a year. However, the easy read on the major is clouded when we look at the crosses.

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Select the current time upward adjustment of the RMB benchmark interest rates for what is considered?
In the Party Central Committee and State Council, under the correct leadership of the current round of macro-control the integrated use of economic instruments, legal means and necessary administrative means, and achieved good results, macroeconomic and financial operations to continue to control the desired direction. Recent economic and financial operations there are still some contradictions and problems, in order to control the outcome of the consolidation of the previous stage, the People’s Bank reported by the State Council agreed that the decision to raise benchmark interest rate of RMB.

Upward adjustment of the RMB benchmark interest rate is conducive to further economic means to play in resource allocation and macro-control role; helps prevent excessive corporate funds to ease the tight liquidity situation of some enterprises, reducing CPB funding; is conducive to optimizing the economic structure, improving economic efficiency, and maintain a sustained, rapid, coordinated, and healthy development momentum.

Why in the interest rates at the same time, it is necessary to relax the financial institutions lending rate floating range?
The Third Plenary Session of the party’s 14 put forward a market-oriented interest rate reform, the basic idea of the party’s National Congress and the Third Plenary Session of the 10 series of important decisions for the market-oriented interest rate reform and further specified in the right direction. From 1998 to 1999, the People’s Bank of three financial institutions to expand the floating scope of lending rates. January 1, 2004, approved by the State Council, the People’s Bank of financial institutions to further expand the floating scope of lending rates. Financial institutions are no longer in accordance with the nature of firm size and ownership, but according to the credibility of enterprises, risk factors such as determining reasonable lending rates, and gradually formed a risk of loans in accordance with the pattern of the cost differential pricing.

Loans from financial institutions as interest rates tend to improve the management system, continuously improve the pricing power, financial institutions gradually establish a risk management system is no longer a ceiling on the lending rate to financial institutions can better determine the risk of loans in accordance with the level of interest rates, further support the development of SMEs, to relieve the employment pressure. However, taking into account urban and rural credit cooperatives financial competitive environment is still not perfect, in a period of time, the People’s Bank to its lending rate cap still in place management, floating coefficient of the highest benchmark lending rate 2.3 times.

All financial institutions should strictly enforce the adjusted benchmark interest rate and floating scope, strengthening the interest rate risk management, in accordance with its own operating conditions, the cost of capital and business risks and other factors to determine a reasonable deposit and loan interest rates to prevent the blind to raise lending rates to curb usury act, the maintenance of economic and financial stability of operation.

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