Financial Times Europe - 10.10.2019

20 ★ Thursday10 October 2019

Larry Harris

Markets Insight

Johnson & Johnson as under pressurew
after a Philadelphia court awarded $8bn
in damages to a man who started to grow
breasts while taking the company’s
schizophrenia treatment, Risperdal.
The jury concluded that J&J had failed
to sufficiently warn doctors of the side-
effects. J&J called the award “grossly
disproportionate”, with agreed
compensatory damages of $680,000, and
said it was confident of overturning the
judgment on appeal. As of its 2018
end of year, J&J had Risperdal lawsuits
from 13,400 plaintiffs pending.
Netflix lipped after Rosenblatts
Securities cut earnings forecasts on
competition worries.
Reinvestment of revenue growth is
Netflix’s flywheel, with the business
model predicated on spending more on
programming to attract more subscribers,
Rosenblatt said.
However, a wave of new cheaper
services threatened to hold back the
Netflix subscriber count, erode its pricing
power and increase competition for new
content, the broker said. “The shift in
market sentiment has turned Netflix into
a show-me story and we are unlikely to
know the initial actual impact of
competition until January earnings.”
Roomba makeriRobot lipped on as
Raymond James downgrade, which cited
fears of cut-price competition.Bryce Elder

Wall Street Eurozone London

Cellnex f Spain rose for a second day ino reaction to its €2.5bn purchase of UK telecoms masts fromArqiva. The company “is now assuming an unassailable position when it comes to bidding for tower company assets”, said Jefferies. The UK deal left Germany as “the last major geographic blind spot” for Cellnex and an asset-for-equity swap withDeutsche Telekom as lookingw increasingly likely, it said. Adidas ained after Macquarie forecastg a reassuring message for third-quarter earnings next month. Quarterly profit will be lower year-on- year as 2018 had the benefit of “ultra high-margin” Yeezy trainers but a rebalancing of operating costs should help power a sharp improvement in the fourth quarter, said the broker, which raised its price target on Adidas to bring it into line withNike’s recent surge. Dutch groupTakeaway.com ose on anr in-line trading update, which showed acquisitions compensating for disappointing growth in its home market. The company said it remained on track to complete the purchase of UK peerJust Eat y the year-end.b Ahead of results next Wednesday,ASM International as the top performer in aw technology sector, buoyed by reports that China was amenable to a partial trade deal with the US.Bryce Elder

London Stock Exchange as the FTSEw 100’s biggest gainer after JPMorgan Cazenove restored its “overweight” recommendation. The broker had suspended coverage on LSE last month after being drafted in to help fend offHong Kong Exchanges and Clearing’s £32bn bid. The plan A of buyingRefinitiv will“ transform the LSE’s franchise into a leading global market infrastructure player”, said JPMorgan. It estimated that the combined company will take more than half its group revenue from outside the UK and Europe. Hargreaves Lansdown as helped byw “buy” advice from Liberum Capital. The fund supermarket’s “leading brand, best-in-class service levels, agile technology platform and pricing strategy” can keep delivering returns even as revenue yields come under pressure, it said. Ladbrokes ownerGVC ed the FTSEl 250 gainers after raising full-year profit guidance, largely to reflect confidence that regulation of the German gambling market was unlikely before the year-end. GVC also said he UK’s imposition of at wager cap on betting terminals had boosted retail over-the-counter betting. Fellow bookmakerFlutter ell afterf Citigroupraised fears over weak trading in Australia and the UK.Bryce Elder

3 Wall Street rises ahead of US-China
trade meeting
3 Europe moves higher with broad-
based gains
3 Lira pinned lower after Syrian
offensive

Global stocks werehigher yesterday
following a rocky week onsigns of
progress in the long-running trade
dispute between Washington and Beijing.
By midday in New York, Wall Streetwas
higher with the S&P 500gaining 0.5 per
cent and the Nasdaq Compositeup 1 per
cent — the latter fuelled by arallyin tech
stocks.
The picture was also brighter across
the Atlantic y the close of trading withb
the Stoxx Europe 600 rising 0.4 per cent
and the FTSE 100up 0.3 per cent.
Frankfurt’s Xetra Dax advanced1 per
cent.
Theresults came as Chinese officials
offered to increase annual purchases of
US agricultural products as theysought
an interim trade agreement with
Washington.
The offerpreceded a meeting between
Liu He, China’s vice-premier and Beijing’s
lead negotiator, with US trade
representative Robert Lighthizer and
Treasury secretary Steven Mnuchin that
was due to start today in Washington.
If discussions go well, Mr Liu is

expected to meet President Donald Trumptomorrow. Earlier this week, theUS administration added 28 Chinese entities to a blacklist and imposed visa restrictions on government officials connected to the mass detention of Uighurs in western China, in what was perceived to be an escalation between the world’s two largest economies ahead of thetalks. The visa announcement on Tuesday triggered a late sell-off for US stocks.

Elsewhere in markets, US Treasuries weakened somewhat with the yield on the US 10-year note rising 6 basis points to 1.59 per cent. The Turkish lira was under pressure after Turkey launched air strikes in northern Syria, leaving the dollar trading at TL5.87. The Japanese yen fell against the dollar, suggesting no sign that the offensive was stirring demand for haven assets.FT reporters

What you need to know

Global shares tick higher ahead of trade talks after rocky week MSCI All-World index

Source: Refinitiv

Mon Tue

The day in the markets

Markets update

US Eurozone Japan UK China Brazil
Stocks S&P 500 Eurofirst 300 Nikkei 225 FTSE100 Shanghai Comp Bovespa
Level 2915.99 1497.02 21456.38 7166.50 2924.86 100547.
% change on day 0.79 0.46 -0.61 0.33 0.39 0.
Currency $ index (DXY) $ per € Yen per $ $ per £ Rmb per $ Real per $
Level 99.033 1.098 107.385 1.222 7.134 4.
% change on day -0.101 0.182 0.271 0.000 0.055 0.
Govt. bonds 10-year Treasury 10-year Bund 10-year JGB 10-year Gilt 10-year bond 10-year bond
Yield 1.570 -0.550 -0.210 0.378 3.118 7.
Basis point change on day 4.780 4.500 -0.400 4.700 -1.400 1.
World index, CommodsFTSE All-World Oil - Brent Oil - WTI Gold Silver Metals (LMEX)
Level 337.25 59.07 53.51 1505.85 17.56 2772.
% change on day 0.47 1.77 2.06 0.31 0.75 -0.
Yesterday's close apart from: Currencies = 16:00 GMT; S&P, Bovespa, All World, Oil = 17:00 GMT; Gold, Silver = London pm fix. Bond data supplied by Tullett Prebon.

Main equity markets

S&P 500 index Eurofirst 300 index FTSE 100 index

| |||||| |||||||| ||||| Aug 2019 Oct

2800

2880

2960

3040

| ||||||||||||||||||| Aug 2019 Oct

1400

1440

1480

1520

1560

| |||| |||||||| ||||||| Aug 2019 Oct

7040

7200

7360

7520

Biggest movers
% US Eurozone UK

Ups

Hess 3. Keysight 3. American Airlines 3. Applied Materials 2. Valero Energy 2.

Seadrill 4. Adidas 3. Telecom Italia 3. Schneider Electric 2. Bouygues 2.

London Stock Exchange 3.
Hargreaves Lansdown 2.
Anglo American 1.
Crh 1.
Astrazeneca 1.
%

Downs

Johnson & Johnson -2. Copart -1. L Brands -1. Allegion -1. Macerich (the) -1. Prices taken at 17:00 GMT

Man -2. Coloplast -1. Colruyt -1. Edf -1. Omv -1. Based on the constituents of the FTSE Eurofirst 300 Eurozone

Rightmove -3. Fresnillo -2. Halma -2. Sainsbury (j) -2. Centrica -1. All data provided by Morningstar unless otherwise noted.

U

S stockbrokers are waging a commission war. Broker- ages’share prices plum- meted ast week afterl Charles Schwabslashed tsi trading fees to zero,followed y rivalb TD Ameritrade, after years ofpressure. Such competition normally benefits the consumer by lowering the fees that they pay for services. The fall in brokerage company stock prices suggests that their customers are set to gain, to the detriment of shareholders. But the real storyis not so clear-cut. Exchanges and dealers commonly pay stockbrokers to send client orders to them. The clients frequently receive worse prices than they would were it not for these payments. The routing decisions depend on whether the transaction is a marketable order or a standing limit order. Inves- tors willing to trade at any reasonable price submit marketable orders. These orders generally complete, or “fill” immediately. Investors willing to wait for better prices submit standing limit orders. Thesestand until other traders are willing to deal at their limit prices. Many stockbrokers sellclients’ marketable orders to dealers who fill them off-exchange in a practice called pay- ment-for-order flow. Brokers also profit from payments that they receive from exchanges for directing their client’s standing limit orders to those bourses. Mostclients do know about these payments. The Securities and Exchange Commission equires brokers to dis-r close toclients whether they received payments from dealers when filling orders ut they do not have to report theb amount. Clients could look up thefees on exchange websites but few do. These payments distort the decisions that brokers make when routing orders.

Brokers often direct orders to maximise revenues rather than best serve lients.c When brokers send market orders to dealers, the dealers promise to match the best price shown at exchanges. They often provide better prices. But the client loses the opportunity to trade at even better, hidden prices that are often available at exchanges and alternative trading systems calleddark pools. The result? Clients thinkthey are getting a good deal because they trade commission-free. But they often obtain worse prices, evenadjusting for fees paid. Brokers regularly routeclients’ limit orders to exchanges that payfees if the

orders fill. But high-frequency traders can get ahead of these orders by trans- acting at inverted exchanges, which charge a fee to limit order traders and rebate the fee to market order traders. The HFTs can place limit orders at the same prices offered by brokerage customers at standard exchanges, but their orders trade first. That is because inverted exchanges pay market order traders to deal at their exchanges, whereas the same traders must pay fees to deal at standard exchanges. When prices are rising,HFTs often buy, andbroker customers cannot and thus fail to profit. Those who still want to trade must trade at higher prices.If prices are falling, the HFTs step aside andclients buy and wishthey had not. Either way, retail investors suffer. Some investors eventually realise that

they should use market orders instead of standing limit orders. Their switch from limit orders to market orders benefits dealers that pay for order flow. Limit order clients could obtain better prices on average if their brokers directed their orders to the inverted exchanges but the brokers will not pay the fees thatinverted exchanges charge. Brokers claimtheycould not survive if they did not provide the best prices to clients. But those customers cannot easily see what is going on and do not know they can obtain better prices when trading market orders at exchanges and on alternative trading systems. Likewise, when clients submit limit orders, recog- nising why their orders fail to trade is difficult. Investors can easily measure commissions, so they o not appreciated when they are getting worse prices. Bro- kerages thus lowercommissions and make up the revenue elsewhere. Thisbenefits brokers, dealers who pay for order flow, HFTs andcompanies that operate inverted exchanges — all at the expense of the brokerage clients. To fix the system, the SEC need only require that investors receive all payments and pay all fees associated with filling their orders. Doing so would ensure that brokers do not run into con- flicts about how to route clients’ orders. Investors would be better off, markets fairer and more brokerage clients would be willing to offer limit orders, which increase liquidity and lower the cost of trading for everyone. Brokers would still compete on commissions and the cus- tomer would still benefit from competi- tive brokerage markets.

Larry Harris is a professor of finance at the University of Southern California’s Marshallbusiness school. He isa board director at Interactive Brokers

Brokers are profiting

from investors, even

with zero commissions

Clients can easily measure

commissions, so theydo not appreciate when they

are getting worse prices

OCTOBER 10 2019 Section:Markets Time: 10/20199/ - 18:59 User:stephen.smith Page Name:MARKETS2, Part,Page,Edition:USA , 20, 1