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Foreign Exchange

Buying back Vermont

Dear Headmaster: The dog ate my homework and as a result I got some of my sums wrong. It wasn’t totally my fault and I will keep an eye on the rotter to try and make sure it doesn’t happen again.

Even before the release of figures this week showing an unexpected rise in the UK CPI figure above 3% triggered another load of predictions about an increase in interest rates, most people will have believed that a move by cable through 2.00 was inevitable. Such levels act like magnets. Whether or not sterling deserves to be trading up here in the longer term remains to be seen. As the monthly chart below shows, on the previous two occasions that cable managed to poke its nose above 2.00 it soon got a bit of a bashing. Who knows, it might be third time lucky, but the move doesn’t appear to be too much about sterling strength, more about dollar weakness.


Not surprisingly, the UK press had a field day, pointing out how cheap goods in the US are now in comparison with the UK. Personally, I’d like to go a stage further than buying things like iPods and then sneaking them back into the UK without paying duty. With cable at this level, it might be a good time to start considering making a few bigger investments into the US.

I have found a ski property for sale in Vermont for a mere $1.75 million. This included a 400-acre “mountain”, a ski lodge and various working lifts. I reckon if I get a few of my City muckers together, we could club together and buy the whole state of Vermont, let alone some run-down ski resort. All I need them to do is sell up in Verbier and sign up for the switch into Vermont, which might take some persuasion. Vermont is beautiful, but it’s a fair way from Europe and the snow can be a bit icy, if I remember correctly.   

Anyway, the last time cable was up here was back in early September 1992. It got a right pasting soon after, as the then chancellor, Norman Lamont, supposedly sang in his bath and prime minister John Major did a massive swerve to avoid the fallout as the UK crashed out of the ERM.

Talking about swerves, the rise in UK CPI above 3% resulted in Bank of England governor Mervyn King having to write a letter to chancellor Gordon Brown explaining why inflation had deviated by more than a percentage point above its 2% target. Neither letter is particularly interesting. For those who haven’t read them, here is my summary.

Dear Headmaster, The dog ate my homework and as a result I got some of my sums wrong. It wasn’t totally my fault and I will keep an eye on the rotter to try and make sure it doesn’t happen again, Yours sincerely, Mervyn Dear Swervyn, Many thanks for admitting it was your fault and not mine. I for one will be vigilant and disciplined in the future, so see it doesn’t happen again. Keep up the good work, Yours sincerely, The Headmaster

I don’t need to tell my readers that as a result of the spike in inflation, most analysts rushed out changes in their predictions about the UK rate cycle. It seems that a 25 basis point increase is inevitable and many are now predicting further rises through the rest of the year.

Anyway, the fun and games this week has prompted a return visit from Harry Hindsight. He sent an e-mail to HSBC. “Did you hedge my dividend at 1.9260 with that forward extra I told you about? It was obvious cable was going up,” he asked. It really is easy dealing backwards, isn’t it? [see FiX: Urgent Update from March]

                                                                            Back to Whether or not sterling deserves...

ISE launches electronic options

It will have probably escaped most people in the market’s notice, but this week trading in FX options by the International Securities Exchange (ISE) started. The exchange has listed options on USD/EUR, USD/GBP, USD/JPY and USD/CAD.

Timber Hill will serve as the primary market maker, and Citigroup Derivatives Markets, Lehman Brothers and Optiver US will act as competitive market makers. So what, is the resounding cry I hear from my sell-side muckers.

Personally, I think ISE has made a bit of a mistake in the design of the contracts – they are listed as inverses, I guess to make cash settlement in dollars easier. However, ISE should not be under-estimated. It is another exchange, like the similar sounding ICE, which has played a major role in dragging the US markets kicking and screaming into the electronic era. It now accounts for a significant percentage of the US equity option business, with the vast majority of this stemming from retail punters.

In the background work I’ve been doing for next month’s bumper Euromoney issue, a few things have stood out. Looking ahead, many are predicting that the retail sector will play an increasing role and while the big banks are all quick to point out that electronic trading of FX options is not something new, it is something expected to grow. One very active buy-side participant tells me he can’t wait for a multibank portal to be launched that he can access, something that still seems some way off because of the banks’ reluctance to publish their full vol services on anything other than their own portals.

So ISE is worth keeping an eye on – it has built a phenomenally successful business delivering options to an eager retail audience. I am also starting to wonder what impact Mifid will have on the options market, when it is finally implemented and its full scope and coverage is understood. From what I understand – and please feel free to update me on what the current state-of-play is – FX options will be covered by Mifid. I wonder if that means that banks will have to demonstrate best execution to some clients, depending on their classification, driving greater electronic trading and, who knows, perhaps even acting as the catalyst for a multibank portal open to the buy side?

General Atlantic invests in Getco

Back in January, I reported on rumours that Global Electronic Trading Company (Getco) had put itself on the block. I have to stick my hand up now and say I got this one slightly wrong – I thought that a deal had been done with an investment bank.

In fact, Getco has secured funding from General Atlantic (GA) for a minority equity interest. Neither party has disclosed how much was paid for the stake. In a press release, Stephen Schuler, Getco’s co-founder, said: “We are partnering with General Atlantic because of our shared vision for the evolution of capital markets, the firm’s understanding of the impact of technology on financial services, its experience supporting growth companies in our industry and its extensive global network.”

Bill Ford, GA’s chief executive, and Rene Kern, its managing director, will join Getco’s board adding these, I’m told by a well-connected VC source, will add real firepower to Getco’s board.

“Getco has a strong management team, a demonstrated track record of impressive growth and deep expertise that gives it unique strength in the rapidly growing electronic trading segment of the financial services industry,” said Kern.

GA has been steadily investing in the financial services sector. It has taken stakes in what it describes as innovative, technology-driven companies, E*Trade, NYSE Euronext, Nymex and Saxo Bank.

Goodfellas Part 2. Tullett moves in on eSpeed

News this week that Tullett Prebon has made an approach to buy eSpeed prompted one of my contacts to send in what he swears is a true tale. “Remember that old story about the broker that went over to the States years ago?” he wrote. “He was sitting at the board table discussing a troublesome account when he asked: ‘Why don’t we take him out?’

“‘Dat’s a bit over the the f**kin’ top,’ was the reply. The broker was an Aussie – he was talking about going out for a few sherberts or dinner with the client, not having him killed.”

There are some undoubtedly colourful characters at Cantors/BGC/eSpeed who are known for their use of fruity language. I would have loved to have been a fly on the wall listening to the reaction to Tullet’s approach. I’m sure it might even make a good scene in a film like Goodfellas 2:

Scene 1: After a period of relative calm, trouble comes stalking when combative Cockney Terry Smith tries to muscle in on their turf.

“Dat Terry Smith, wot is he, a f&*kin’ clown? What does he f&*kin’ mean, we're f&*kin’ foony. How is our f&*kin’ corporate f&*kin’ structure f&*kin’ foony? In what f&*kin’ way is that f&*kin’ funny.”

“Yeh, f&*k that f&*kin’ f&*k! Who da f*&k does he f&*kin’ think he f&*kin’ is. The f*&K.”

While this is clearly a product of my over-fertile imagination, what follows below is a genuine response to Tullett Prebon’s approach by Robert Chapman, managing member of Chapman Capital, the advisor to two investment funds that own 9.3% of eSpeed’s Class A shares.

“Chief executive Howard Lutnick’s three-kingdom reign over Cantor Fitzgerald, eSpeed and BGC Partners appears so infested with potential conflicts of interest and incestuous inter-company transactions that a completely new set of corporate governors may be required to exterminate any vermin from eSpeed’s board room,” he said in a written statement.

Anyway, with talk of exterminations I am, as they say, out of here.

People moves: What's going on at HVB, Citi, Merrill, Brevan Howard, Barclays Wealth? Premium subscribers find out now.

Ron Johnson

Sadly, I have to report the funeral today of Ron Johnson. Ron, who used to run Tullet and Tokyo’s (as it then was) spot business, was a very popular figure in the market.

Ron, who was 69, passed away suddenly on April 4 while playing golf with some old friends from the market. Ron had a great sense of fun and he will no doubt have smiled at the fact that one of his former lieutenants went to his funeral last week by mistake. His family held a private ceremony this morning, which will be followed by a service to celebrate his life. Many of his friends from the market are expected to see him off. The Weekly FiX: What's going on in the world of FX this week? Get your FiX to find out.       

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  Lee Oliver can be contacted at           
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