Swiss Economy Past Worst, Deflation Risks Eased, Gerber Says

By Klaus Wille and Simone Meier

Oct. 21 (Bloomberg) -- The Swiss economy is probably past the worst of the recession and deflation risks have eased, the government’s head of economic affairs said.

“The recession has probably bottomed out but the situation isn’t without risks,” Jean-Daniel Gerber, who heads the State Secretariat for Economic Affairs, said in an interview in his office in Bern on Oct. 19. “A double dip is possible but the second dip wouldn’t be as severe as the first one. The risk of deflation is much lower than before.”

The Swiss economy is recovering after the central bank cut borrowing costs close to zero and purchased corporate bonds and foreign currencies to fight the worst slump in three decades and combat deflation. Swiss leading economic indicators last month rose to the highest in more than a year and the state secretariat raised its outlook for the economy.

Gerber also said that Swiss National Bank President- designate Philipp Hildebrand is “right” that the country needs stronger bank regulations. Hildebrand, who takes over from Jean- Pierre Roth in January, has suggested options including restricting the size of banks and possibly breaking them up.

UBS AG, which received government aid last year, and Credit Suisse Group AG were both forced to eliminate jobs to help reverse record losses. Gerber said the size of the financial- services sector as a proportion of gross domestic product has fallen to around 10.5 percent from more than 12 percent in 2007.

“We have to strike a balance between strong banks and their size,” he said. “What’s important for Switzerland is that regulations are carried out in a way that all the players have to abide by similar regulations.”

‘Many Clouds’

The state secretariat, part of the Economy Ministry, said last month that it expects GDP to drop 1.7 percent this year and increase 0.4 percent in 2010. That compared with contractions of 2.7 percent and 0.4 percent, respectively, forecast in June.

With exports accounting for about half of GDP, Switzerland’s economy is dependent on a global recovery. The International Monetary Fund said earlier this month that the global economy will shrink 1.1 percent this year. It also raised its forecast for 2010, projecting growth of 3.1 percent.

“We’re closely looking at what’s going on outside Switzerland,” Gerber said. “There are still many clouds but the situation has improved in all major world regions.”

Falling Prices

The Swiss economy has been contracting since the third quarter of last year after companies cut spending and eliminated jobs to weather the global slowdown. The slump eased in the second quarter, when GDP fell 0.3 percent after a 0.9 percent drop in the previous three months.

Consumer prices have fallen on an annual basis for the past seven months. The SNB expects prices to drop around 0.5 percent this year before rising 0.6 percent in 2010 and 0.9 percent in 2011. That’s still less than half its 2 percent inflation limit.

The SNB in March started selling Swiss francs to weaken the currency and fight deflation. Switzerland’s status as a haven during times of turmoil buoyed the franc during the financial crisis even as its economy slumped.

“Before, there was a strong appreciation which wasn’t due to fundamentals of the economy. It was due to other factors, safe haven for instance,” Gerber said. “The central bank got the franc back where it was.”

The franc has fallen 2 percent against the euro since the SNB began the currency intervention on March 12. It had gained almost 8 percent in the previous six months.

Central banks around the world are already starting to ponder exit strategies as the global economy emerges from its worst slump in six decades. Hildebrand, currently the SNB’s vice president, said on Sept. 26 that the bank “will do whatever it takes on the exit side at the right time.”

Swiss borrowing costs are currently at 0.25 percent, which compares with the European Central Bank’s 1 percent key rate and the Bank of England’s 0.5 percent benchmark rate.

“Providing liquidity to markets is much easier than withdrawing liquidity,” said Gerber, who previously worked for the World Bank in Washington. “It will be a tough exercise. There’s a risk that central banks don’t choose the right moment.”

To contact the reporters of this story: Klaus Wille in Zurich at kwille@bloomberg.net; Simone Meier in Dublin at smeier@bloombert.net.

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U.S., China Links May Determine Exit Strategy Timing, ING Says

By Shamim Adam

Oct. 21 (Bloomberg) -- The extent of an Asian economy’s integration with the U.S. or China may determine the timing of its exit from stimulus measures implemented to counter the global financial crisis, according to ING Groep NV.

Countries that have closer trade and economic links to China and are more dependent on it for growth will be among the first to raise interest rates, Tim Condon, chief Asian economist for ING, said in an interview today. He pointed at Australia as an example, and said South Korea will probably be next.

Australia’s central bank this month became the first among the Group of 20 countries to raise rates since the height of the global crisis, as the world emerges from its recession. Bank of Korea’s Governor Lee Seong Tae and Reserve Bank of Australia’s Governor Glenn Stevens are indicating they may raise borrowing costs at a faster pace in coming months.

“Australia, by virtue of its commodities orientation, is locked at the hip with the Chinese economy, and it’s for that reason it was the first to move on the exit strategy,” Condon said. “If the economy is more integrated with China, its central bank is close to implementing the exit strategy. If the economy is more integrated with the U.S., the timing is farther out.”

Australia’s proximity to Asia is helping its economy rebound faster than most other developed nations. Trade figures show the nation’s largest export customers this year are China, Japan, South Korea, India and the U.S. Six years ago, the U.S. was ranked second.

‘Very Powerful’

China’s rebound has been powered by 4 trillion yuan ($586 billion) of spending on railways, roads, power plants and public housing. Gross domestic product probably grew 9 percent last quarter, the fastest pace since the three months ended September 2008, according to the median estimate of 34 economists surveyed by Bloomberg News.

“China is responsible for the export-led recovery, ranging from very powerful in North Asia to somewhat indifferent in some parts of Southeast Asia,” Condon said. “The pace of the export-led recovery is going to determine the timing of the exit strategy” for the rest of the region.

Governor Lee last week said any future increase in South Korea’s benchmark interest rate can be bigger than the central bank’s usual 25 basis points. It cut rates by 3.25 percentage points from October to February, the most aggressive easing since it began setting a policy rate a decade ago.

China is the biggest buyer of South Korean goods, and overseas sales to its neighbor are more than double those to the U.S., according to government data. The South Korean central bank may raise rates in December or January, Condon said.

‘Cold Water’

In Hong Kong, the central bank “is trying to pour cold water on the property market” while Taiwan will probably raise interest rates some time after South Korea’s move, Condon said.

Thailand’s central bank may keep its key rate unchanged at a fourth consecutive meeting today to support the economy’s recovery from recession, according to all 26 economists surveyed by Bloomberg News.

The Southeast Asian economy is more integrated with the U.S. than China, Condon said. Thailand exports 11.4 percent of its goods to the U.S. while shipments to China make up about 9.2 percent, he said.

“The Bank of Thailand was Asia’s most slavish Fed tracker during the last Fed tightening cycle and we expect history to repeat itself,” Condon said. ING predicts the Bank of Thailand will raise rates in the third quarter of 2010.

Economic Recovery

In Malaysia, central bank Governor Zeti Akhtar Aziz has said interest rates are at an “appropriate level” and are supporting the economy’s recovery. Easing inflation allowed Bank Negara Malaysia to reduce its key rate from 3.5 percent in mid- November to a record low of 2 percent. It kept borrowing costs unchanged at its August meeting.

“A higher U.S. export-destination share tells us that Malaysia’s economy, like Thailand’s, is more integrated with the U.S. than with China,” Condon said. “We think this means Bank Negara Malaysia, like the Bank of Thailand, will remain on hold for an extended period.”

While Malaysia’s exports to China have been rising, “it’s not big enough to lift the whole economy,” Condon said.

The timing of rate increases in Indonesia is less dependent on its links with China or the U.S., and more contingent on its inflation outlook, the ING economist said.

Bank Indonesia kept its benchmark rate unchanged for a second month at 6.5 percent on Oct. 5 after nine consecutive cuts since December last year. Inflation may accelerate to between 4 percent and 6 percent next year compared with this year’s estimate of 3.5 percent to 5.5 percent, Bank Indonesia Senior Deputy Governor Darmin Nasution said Oct. 14.

“Indonesia investors are particularly inflation wary,” Condon said. “The central bank will act early next year in the face of accelerating inflation to signal that they are on the case and prevent inflation expectations from rising.”

To contact the reporter on this story: Shamim Adam in Singapore at sadam2@bloomberg.net

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Crude Oil Drops Before U.S. Report Expected to Show Supply Gain

By Rachel Graham

Oct. 21 (Bloomberg) -- Crude oil fell for a second day before a U.S. government report expected to show crude inventories rose last week.

Crude stocks rose 1.5 million barrels in the week ended Oct. 16 from 337.8 million the prior week, according to a survey of 15 analysts before the Department of Energy report, released later today. U.S. stocks are currently about 10 percent above last year’s level.

“We’ve come up quite quickly in the past couple of weeks,” Frank Schallenberger, head of commodities research at Landesbank Baden-Wuerttemberg, said by phone from Stuttgart. “The U.S. report should give the market new direction,”

Crude oil for December delivery fell as much as 90 cents, or 1.1 percent, to $78.22 a barrel in electronic trading on the New York Mercantile Exchange. The contract traded at $78.36 a barrel at 9:51 a.m. London time.

Crude prices have gained 11 percent this month, tracking rising global equity markets and a weakening dollar.

Futures traded at over $80 a barrel yesterday for the first time in over a year as the dollar index, which measures the U.S. currency against six currencies, fell to its lowest since August 2008. Some investors buy dollar-priced commodities to hedge against a weaker U.S. currency.

Brent crude oil for December settlement declined as much as 69 cents, or 0.9 percent, to $76.55 a barrel on the London-based ICE Futures Europe exchange.

A report from the industry-funded American Petroleum Institute yesterday showed crude inventories in the U.S. increased 3.85 million barrels last week.

The Department of Energy report may show gasoline inventories fell 850,000 barrels from 209.2 million the week before, the survey showed.

Supplies of distillate fuel, a category that includes heating oil and diesel, declined 1 million barrels from 170.7 million the prior week, according to the survey. Stockpiles in the week ended Oct. 2 were at the highest level since January 1983.

The Energy Department is scheduled to release its weekly report today at 10:30 a.m. in Washington.

To contact the reporters on this story: Rachel Graham in London rgraham13@bloomberg.net

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Caltex May Start Drug Testing at Sydney Oil Refinery Next Year

By Ben Sharples

Oct. 21 (Bloomberg) -- Caltex Australia Ltd. may start random drug and alcohol testing of employees next year at its Kurnell oil refinery in Sydney, the country’s second largest, after a ruling by the national workplace relations tribunal.

Fair Work Australia, an independent body that has the power to resolve workplace disputes, said Caltex can begin testing from Feb. 1, subject to safeguards, a ruling on the tribunal’s Web site shows. This includes counseling and a series of warnings to staff that fail a test, the ruling shows.

“Random testing currently applies to any safety critical role in Caltex’s terminals and aviation, and to members of the Caltex leadership team, including the CEO,” Georgie Wells, a Sydney-based spokeswoman for the refiner, said in an e-mailed response to questions today. Sampling will cover all staff, including contractors, regardless of their position, Wells said.

The tests are potentially discriminatory and can be “an invasion of privacy and civil liberties,” according to evidence presented to the tribunal on behalf of the Australian Workers Union and the Australian Institute of Marine and Power Engineers, which argued against random sampling, the ruling showed.

Andrew Casey, spokesman for the Australian Workers Union, wasn’t immediately available for comment.

Kurnell, in southern Sydney, has the capacity to process 135,000 barrels of crude a day, according to a Sept. 21 presentation. The plant produces petrol, diesel and jet fuels, the Caltex Web site shows.

To contact the reporter on this story: Ben Sharples in Melbourne at bsharples@bloomberg.net

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Bank of England Keeps Bond Consensus Until November

By Brian Swint

Oct. 21 (Bloomberg) -- Bank of England policy makers maintained consensus on the size of their bond-purchase plan this month, postponing a debate on the need for more spending until officials produce economic forecasts in November.

The nine-member Monetary Policy Committee, led by Governor Mervyn King, unanimously voted to keep the program at 175 billion pounds ($286 billion) and to leave the benchmark interest rate at a record low of 0.5 percent.

“There were differences of view among members of the committee on the balance of risks to the medium-term outlook for inflation and how it had shifted in recent months,” the minutes of the Oct. 8 meeting showed today in London. “All committee members, however, agreed that recent developments were not sufficiently compelling to justify revising the target level of asset purchases.”

King and David Miles had pushed for more spending in August, when forecasts showed that the inflation rate may not return to the 2 percent target in two years. King said yesterday that the outlook for consumer prices is volatile and that policy makers would look beyond the short term to determine how much spending the economy needs.

The pound extended gains against the euro and the dollar after the minutes were published. Britain’s currency rose 1.2 percent to 90.16 pence per euro as of 10:10 a.m. in London, and 1.3 percent to $1.6577.

November Forecasts

“The forecast round ahead of the November inflation report would provide an opportunity to assess more fully how the medium-term outlook for activity and inflation had evolved since August,” the minutes said.

The central bank should pause its bond-purchase program next month after Britain probably emerged from recession, the National Institute for Economic and Social Research said today. Gross domestic product will probably increase 0.7 percent in the last three months of the year, Niesr said.

While the U.K. economy may have returned to growth in the third quarter, policy makers have signaled that the recovery may be uneven. The statistics office will probably say Oct. 23 that the economy grew 0.2 percent in the July-September period, according to the median of 33 economists forecasts in a Bloomberg News survey.

Policy makers said that higher asset prices, lower short- term interest rates and the weakness of the pound would help economic growth in the future. London home sellers raised asking prices to a record high this month and led gains across the U.K., Rightmove Plc said Oct. 19.

The bond purchases had probably helped contribute to improvements including a narrowing of spreads, the minutes said.

“The evidence suggested that the effect on asset prices had been of the type that the committee had anticipated when it launched the program and had been substantial,” the minutes said. “The impact of the recent rises in asset prices would be to support spending, but only if sustained.”

The next policy decision is due on Nov. 5.

To contact the reporter on this story: Brian Swint in London at bswint@bloomberg.net.

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GDF Suez Says It Would Welcome Investment From Chinese Funds

By Tara Patel

Oct. 21 (Bloomberg) -- GDF Suez SA, the world’s second- largest utility, would welcome investment from Chinese sovereign funds, Vice Chairman Jean-Francois Cirelli said today at a conference in Paris.

The Paris-based company has been approached by a Chinese sovereign wealth fund about a possible investment, Liberation reported this week, citing an interview with Chief Executive Officer Gerard Mestrallet.

To contact the reporter on this story: Tara Patel in Paris at tpatel2@bloomberg.net

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BHP Sees Return to Full Output at Olympic Dam by End of March

By Rebecca Keenan and Jesse Riseborough

Oct. 21 (Bloomberg) -- BHP Billiton Ltd., the world’s largest mining company, expects full output from its Olympic Dam copper, uranium and gold mine in Australia to resume by the end of March after repairs to a damaged shaft.

“We anticipate that ore hoisting will be at approximately 25 percent of capacity” until then, Melbourne-based BHP said today in a statement, without specifying any output cuts. A study has begun to determine the extent of the damage, BHP said.

BHP said yesterday it had declared force majeure on some supply contracts at the world’s largest uranium deposit and the fourth-biggest copper lode after mechanical failure forced the shutdown of the main haulage shaft at the underground mine on Oct. 6. An extended outage is likely to push uranium prices higher because the mine accounts for about 5 percent of global supply, JPMorgan Chase & Co. said this month in a report.

Uranium rose 0.3 percent to $47.13 a pound, the highest in two months, on Oct. 16, according to MF Global Energy’s index.

First-quarter copper cathode output from the mine in South Australia state dropped 31 percent to 37,700 tons, while uranium production was little changed at 1,130 tons, the company said today in a production report. Gold output from the mine declined 5 percent to 26,006 ounces, it said.

The mine produced 181,800 metric tons of copper cathode, 108,039 ounces of gold and 4,007 tons of uranium oxide in the year ended June 30. A six-month repair period may cut BHP’s earnings before interest and tax by $31 million in the year ending June 30, 2010, JPMorgan said. An extended outage may also support copper prices, which climbed to a six week high in Shanghai yesterday, the bank said.

Global Customers

All gold and silver from Olympic Dam is sold to the Perth Mint in Western Australia. The copper goes to customers in Europe, Australia and Asia, and uranium oxide is sold to the U.K., France, Sweden, Finland, Belgium, Japan, South Korea, Taiwan, Canada, U.S. and Spain.

Ore is crushed underground before being hauled to the surface where it is fed into one of two grinding circuits, according to BHP’s Web site. Almost all the ore is normally hoisted through the Clark shaft and the secondary shaft, Whenan, is used when mining is close by, according to BHP. The company has been using the smaller shaft to haul ore since the incident.

Force majeure is a legal clause that allows a company to miss deliveries because of circumstances beyond its control.

BHP is considering an expansion that would convert the existing underground mine operation into an open pit. The mine is 560 kilometers (348 miles) north of Adelaide.

To contact the reporters on this story: Rebecca Keenan in Melbourne at rkeenan5@bloomberg.net; Jesse Riseborough in Melbourne at jriseborough@bloomberg.net.

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Gold May Advance in London, New York Trading as Dollar Weakens

By Stuart Wallace

Oct. 21 (Bloomberg) -- Gold, little changed today in London and New York, may advance as a weaker dollar spurs demand from investors seeking to hedge against further declines in the currency.

The Dollar Index, a six-currency gauge of the greenback’s strength, fell as much as 0.3 percent, extending its annual decline to 7.3 percent. Asian equities fell for the first time in three days and stocks in Europe were little changed. Some investors buy gold to diversify their portfolios.

“The yellow metal will continue to look to the dollar and equities for direction, with gold broadly tracking risk sentiment,” James Moore, an analyst at TheBullionDesk.com in London, said in an e-mail.

Gold for immediate delivery rose $3.30, or 0.3 percent, to $1,058.50 an ounce as of 9:05 a.m. in London. The metal reached a record $1,070.80 on Oct. 14 and is heading for a ninth consecutive annual advance.

Gold for December delivery added 50 cents, or 0.1 percent, to $1,059.10 an ounce on the Comex division of the New York Mercantile Exchange.

Holdings of gold in exchange-traded commodities of ETF Securities Ltd. fell to 7.99 million ounces from 8.1 million ounces the day before, according to figures on the company’s Web site today. Gold holdings in the SPDR Gold Trust, the biggest exchange-traded fund backed by bullion, were unchanged at 1,109.31 metric tons as of Oct. 20.

‘Moving Higher’

“There’s every reason to suggest gold will carry on moving higher,” David Baker, managing partner of Baker Steel Capital Managers, said in a Bloomberg Television interview. “We still see a lot of value in the market.”

Hedge funds and other large speculators are holding a record long position, or bets on higher prices, in U.S. gold futures, data from the Commodity Futures Trading Commission show. The biggest bet among options traders is for gold to reach $1,200 by December.

Among other precious metals for immediate delivery, silver added 5 cents, or 0.3 percent, to $17.545 an ounce, platinum gained $5.50, or 0.4 percent, to $1,356 an ounce and palladium dropped 20 cents, or 0.1 percent, to $336.30 an ounce.

Rhodium for immediate delivery added $50, or 2.8 percent, to $1,850 an ounce, according to prices from Johnson Matthey Plc on Bloomberg. That’s the highest since October last year.

To contact the reporter on this story: Stuart Wallace in London at swallace6@bloomberg.net

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Palm Oil Declines as Crude Oil Extends Drop From One-Year High

By Claire Leow

Oct. 21 (Bloomberg) -- Palm oil declined for a second day from its highest level in almost six weeks as crude oil extended its retreat from a one-year high, reducing palm’s appeal as an alternative fuel.

Palm oil for January delivery slipped as much as 1 percent to 2,159 ringgit ($637) a ton and traded at 2,168 ringgit by the 12:30 p.m. break on the Malaysia Derivatives Exchange. Crude oil for December delivery dropped as much as 0.8 percent to $78.46 a barrel in New York and traded at $78.68.

“We are optimistic on crude oil,” Nirgunan Tiruchelvam, a plantation analyst at Royal Bank of Scotland Asia Securities (Singapore) Pte., said by telephone today. “In such a context, palm oil does look undervalued.” The edible oil has gained 28 percent this year, less than half the 76 percent jump in crude, which reached a high of $80.05 a barrel yesterday.

“We reiterate our optimism on crude palm oil prices,” Tiruchelvam said. He forecasts an average of $717 a ton this year, implying about $800 for the rest of the year, he said. Crude oil has advanced for three weeks, gaining 19 percent to Oct. 16, and “a similar run-up of crude palm oil prices is in the offing,” he said.

Palm oil may climb to between 2,500 and 2,600 ringgit in the next three to four weeks as the drop in crude may be temporary, Harish Galipelli, head of research at Kochi-based JRG Wealth Management, which advises traders, said yesterday.

To contact the reporter on this story: Claire Leow in Singapore at cleow@bloomberg.net

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Japan’s Nikkei 225 Average Falls as Chip-Gear Makers Retreat

By Patrick Rial

Oct. 21 (Bloomberg) -- Japan’s Nikkei 225 Stock Average fell, led by chip-equipment makers after a measure of industry health declined. Japan Airlines Corp. led gains in the Topix index on speculation the carrier will get government funding.

Advantest Corp., the world’s biggest maker of equipment to test computer-memory chips, sank 1.6 percent after a ratio of sales to orders in the chip-equipment industry decreased to a three-month low. Mitsui Fudosan Co., Japan’s largest property developer, retreated 4.1 percent, and real-estate companies fell the most among the Topix index’s 33 industry groups. Japan Airlines, Asia’s biggest carrier, jumped 6.8 percent after the Nikkei newspaper said a government panel proposed more funding.

The Nikkei 225 lost 3.45 points, or 0.03 percent, to 10,333.39 at the close of trading in Tokyo. The broader Topix added 0.25 point to 913.70. About the same number of shares rose as fell on the benchmark.

“The economic recovery is still intact, but data is showing that the pace of the rebound has started to slacken,” said Kiyoshi Ishigane, a senior strategist at Mitsubishi UFJ Asset Management Co., which oversees the equivalent of $56 billion. “Investors haven’t forgotten the nightmare we had last year and are quick to sell when they get anxious.”

The Topix sank to a 25-year low on March 12 and has climbed 30 percent since then as governments and central banks moved to ease credit conditions and stimulate growth. Stocks in the gauge are valued at 5.7 times cash flow, compared with an average of 14 times during the past five years.

Book-to-Bill

Advantest fell 1.6 percent to 2,405 yen. Rohm Co., a chipmaker, dropped 2.1 percent to 6,000 yen after Citigroup Inc. cut the shares to “hold” from “buy.” Tokyo Electron Ltd., the world’s second-largest maker of semiconductor equipment, retreated 1.6 percent to 5,680 yen.

The book-to-bill ratio for Japanese manufacturers of chipmaking equipment fell to 1.28 in September, the lowest level since June, according to preliminary figures released by the Semiconductor Equipment Association of Japan.

In New York, the Standard & Poor’s 500 Index retreated from the highest level in a year yesterday, losing 0.6 percent. Housing starts rose 0.5 percent to an annual rate of 590,000 in September, a Commerce Department report showed, missing economists’ estimates.

Real-Estate Companies

Mitsui Fudosan sank 4.1 percent to 1,623 yen. Mitsubishi Estate Co., Japan’s biggest property developer by market value, lost 2.8 percent to 1,457 yen. They were the two largest drags on the Topix. A gauge of real-estate companies rose 14 percent in the past 10 trading days, the second-best-performing industry group in Japan during that period.

“There’s nothing to make overseas investors excited and spur them to increase holdings of Japanese stocks,” said Yoshinori Nagano, a senior strategist in Tokyo at Daiwa Asset Management Co., which oversees the equivalent of $96 billion. “With earnings coming up, investors want to first gauge the situation before stepping in.”

Japan Airlines Corp. jumped 6.8 percent to 126 yen, the sharpest gain in the Nikkei 225. A government panel recommended the airline receive 300 billion yen ($3.3 billion) in private and public funds, more than an earlier proposal for 150 billion yen, the Nikkei newspaper reported.

Nitto Denko Corp., the world’s largest maker of optical film for liquid-crystal displays, rose 4.8 percent to 2,820 yen. The company said in a preliminary earnings statement yesterday that operating profit for the six months to Sept. 30 totaled 25.5 billion yen, as sales recovered and exceeded analysts’ estimates. Profit also beat estimates.

Toshiba Upgrade

Toshiba Corp., the world’s second-biggest maker of flash memory chips, added 4 percent to 546 yen and was the biggest positive contributor to the Topix. CLSA Ltd. boosted the company’s investment rating to “buy” from “underperform,” on the view that rising use of so-called smart phones will boost demand for the company’s chips.

SanDisk, the biggest maker of flash-memory cards used in digital cameras and mobile phones, said fourth-quarter sales will probably be between $1.1 billion and $1.2 billion, compared with analysts’ estimates for 835.4 million. The shares surged 9.5 percent in late trading in New York.

Taiyo Yuden Co. slumped 4.3 percent to 1,074 yen, the biggest decline in the Nikkei 225, and Japan Aviation Electronics Industry Ltd. dived 3.9 percent to 494 yen. The makers of electronic components were cut to “neutral” from “buy” by Fumihide Goto, a Tokyo-based analyst at UBS AG.

To contact the reporter for this story: Patrick Rial in Tokyo at prial@bloomberg.net.

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Euro Retreats From 14-Month High; Officials May Warn on Gains

By Yasuhiko Seki and Ron Harui

Oct. 21 (Bloomberg) -- The euro was little changed against the dollar, retreating from the strongest level in 14 months, as some investors bet European policy makers will say they are concerned its strength may harm the region’s economic recovery.

The euro also snapped nine days of gains against the yen before speeches by French President Nicolas Sarkozy and European Commission President Jose Barroso. New Zealand’s dollar rose against the 16 most-traded currencies tracked by Bloomberg after central bank Governor Alan Bollard said its advance isn’t an obstacle to raising interest rates. The pound rose as Bank of England Governor Mervyn King said Britons should take “into account” a possible rate increase.

“European officials are expressing worry that the euro’s appreciation is making things difficult for their economy,” said Yuji Saito, head of the foreign-exchange group in Tokyo at Societe Generale SA, France’s third-largest bank. “This is causing the euro to undergo a downward correction.”

The euro was $1.4939 as of 7:43 a.m. in London from $1.4945 yesterday in New York, when it advanced to $1.4994, the highest level since August 2008. The euro declined to 135.46 yen from 135.66 yen. The dollar was at 90.68 yen from 90.78 yen.

New Zealand’s dollar was at 75.35 U.S. cents, from 74.96 cents yesterday, after earlier falling as much as 0.4 percent. It climbed to 75.76 yesterday, the strongest level since July 2008. The pound rose to $1.6411 from $1.6382.

‘Excessive Volatility’

The euro has strengthened 15 percent versus the dollar in the past six months, making the region’s exports more expensive to overseas buyers. European Central Bank President Jean-Claude Trichet said on Oct. 19 that “excessive volatility” in currencies is “bad for economic development.”

Sarkozy will hold a weekly cabinet meeting at 10 a.m. in Paris and European Commission President Barroso will speak to the European Parliament at 9 a.m. in Strasbourg, France.

The New Zealand dollar reversed losses after Radio New Zealand reported that Bollard told parliament the currency’s gains are being driven by a weak U.S. dollar and money markets. As recently as Sept. 10, he said he didn’t expect to raise interest rates until “the latter part of 2010.”

Traders are betting New Zealand’s central bank will boost its key rate by 2 percentage points over 12 months, according to a Credit Suisse Group AG index based on swaps.

Benchmark Rates

Benchmark interest rates are 2.5 percent in New Zealand and 3.25 percent in Australia, compared with 0.1 percent in Japan and as low as zero in the U.S., attracting investors to the South Pacific nations’ higher-yielding assets. The risk in such trades is that currency market moves will erase profits.

The pound gained after King wrote in an article for Scotland’s Herald newspaper that interest rates are “extremely low,” and Britons should prepare for increases “at some point.”

“I never thought King would talk about a rate increase,” said Takashi Kudo, director of foreign-exchange sales in Tokyo at NTT SmartTrade Inc., a unit of Nippon Telegraph & Telephone Corp. “King’s unexpected comments triggered buying of the pound.”

South Korea’s won slumped on concern the government will intervene to counter gains that may hamper exports.

Finance Minister Yoon Jeung Hyun said today he is “concerned” by the decline in retail and manufacturing jobs during the economic recovery. The Bank of Korea said last week it will curb volatility and “excessive herd behavior” in the nation’s currency.

The won dropped 1.1 percent to 1,179.10 per dollar, the biggest decline since Aug. 17. The won has risen 5.9 percent versus the dollar in the past three months, Asia’s second-best performer in the period.

To contact the reporters on this story: Yasuhiko Seki in Tokyo at yseki5@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net.

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Copper Pares Losses in Shanghai on China Outlook, Supply Curbs

By Glenys Sim

Oct. 21 (Bloomberg) -- Copper pared losses in Shanghai as optimism about China’s economic growth and concerns that supplies may be disrupted cut back a decline that followed weaker-than-estimated U.S. housing data and rising inventories.

China’s National Bureau of Statistics will probably report tomorrow that growth in the largest metals user accelerated to 8.9 percent, driven by the government’s $586 billion stimulus package, according to a Bloomberg News survey of economists.

“Chinese economic growth continues to be robust on the back of strong domestic-focused consumption and infrastructure- based stimulus spending,” BHP Billiton Ltd., the world’s biggest mining company, said today in a quarterly output report.

January-delivery copper on the Shanghai Futures Exchange ended the day down 0.4 percent at 50,030 yuan ($7,328) a metric ton, trimming a decline of as much as 0.9 percent.

Copper for delivery in three months on the London Metal Exchange rose as much as 0.8 percent to $6,470 a ton, and traded at $6,460 at 3:26 p.m. Singapore time. The December-delivery contract advanced 0.4 percent to $2.9440 a pound on the Comex division of the New York Mercantile Exchange.

“Prices managed to rise even during the slow summer seasonal period,” said Lu Wei, an analyst at Jiangsu Holly Futures Brokerage Co. “The bulls seem to be winning all year, and this momentum and the weaker U.S. dollar will keep prices supported.”

Copper has more than doubled this year as the Dollar Index, which tracks the greenback against six major trading partners including the euro and yen, dropped 7.3 percent. The dollar traded little changed against the euro today, after falling to the weakest level in 14 months.

Supply Disruptions

BHP yesterday declared force majeure on some copper-supply contracts after the closure of a shaft at its Olympic Dam mine in Australia, while copper production at its Spence mine in northern Chile continues at a “reduced rate” due to a strike.

Builders, the biggest users of copper in the U.S., began work on new homes at an annual rate of 590,000 units last month, compared with a median target of 610,000 in a Bloomberg News survey. The worst post-war recession has curbed demand for the metal used mainly in construction and automobiles, boosting London Metal Exchange stockpiles by 68 percent in the past year.

“There are signs of stabilization in developed economies, though there’s little evidence yet of sustainable metals demand emerging,” BHP said in the production report.

Among other LME-traded metals, aluminum rose 0.7 percent to $1,927 a ton, zinc gained 0.4 percent to $2,139.25 a ton, and lead advanced 1 percent to $2,321 a ton. Nickel added 0.8 percent to $19,000 a ton, and tin rose 1 percent to $14,549 a ton.

To contact the reporter for this story: Glenys Sim in Singapore at gsim4@bloomberg.net

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Asian Stocks Fall on Earnings, Crude-Oil Prices; Dollar Rises

By Masaki Kondo and Patrick Rial

Oct. 21 (Bloomberg) -- Asian stocks fell for the first time in three days, led by technology and material shares, as China Mobile Ltd. and China Telecom Corp.’s profit disappointed some investors and oil prices dropped. The dollar rose.

China Mobile, the world’s biggest phone carrier by market value, and China Telecom, the nation’s biggest fixed-line phone carrier, lost at least 1.4 percent in Hong Kong. Cnooc Ltd., China’s largest offshore oil producer, fell 1.8 percent as the Wall Street Journal reported the company’s nine-month profit slumped. Samsung Electronics Co. retreated 2.3 percent in Seoul after AT&T Inc. sued the company and other liquid-crystal- display makers for collusion to fix prices.

The MSCI Asia Pacific Index lost 0.3 percent to 120.84 as of 3:43 p.m. Tokyo time. The gauge has surged 71 percent from a five-year low on March 9 amid signs the global economy is rebounding from the worst slowdown since World War II. The index sank by a record 43 percent in 2008.

“Investors haven’t forgotten the nightmare we had last year and are quick to sell when they get anxious,” said Kiyoshi Ishigane, a strategist at Mitsubishi UFJ Asset Management Co., which oversees about $56 billion in Tokyo. “Company profits are gradually returning, but we need to discern whether the stock price already reflects the improvement or not.”

Japan’s Nikkei 225 Stock Average was little changed, while the Hang Seng Index dropped 0.4 percent in Hong Kong. South Korea’s Kospi Index declined 0.3 percent as Samsung SDI Co., the world’s second-largest maker of lithium-ion rechargeable batteries, slumped 3.9 percent on brokerage downgrades.

Toshiba Recommendation

Among stocks that rose today, Toshiba Corp., the world’s No. 2 maker of flash-memory chips, gained 4 percent in Tokyo after CLSA Ltd. recommended the shares. Japan Airlines Corp., Asia’s biggest carrier, jumped 6.8 percent after the Nikkei newspaper said a government panel proposed more funding.

Futures on the Standard & Poor’s 500 Index dipped 0.1 percent. The gauge sank 0.6 percent yesterday after a Commerce Department report showed housing starts rose 0.5 percent in September, missing economists’ estimates.

The dollar strengthened amid lower demand for higher- yielding assets. The dollar traded at $1.4936 per euro from $1.4945 in New York yesterday, when it touched $1.4994, the weakest level since August 2008. The yield on 10-year Treasuries fell one basis point to 3.33 percent.

China Mobile fell 1.4 percent to HK$77.65 in Hong Kong. Third-quarter net income rose 2.6 percent to 28.6 billion yuan ($4.2 billion), compared with the 29 billion yuan anticipated by analysts in a Bloomberg News survey.

China Mobile Profit

“It will be very tough for people to get very excited about this set of results,” said Wendy Liu, who rates China Mobile shares “hold” at Royal Bank of Scotland Group Plc in Hong Kong. “Is a 2 percent increase that much different from a 2 percent decline? It will be tough for people to say they have turned around a corner.”

China Telecom fell 2.1 percent to HK$3.74 after its third- quarter net income tumbled 47 percent to 2.98 billion yuan, missing the 3.16 billion yuan expected by analysts.

Cnooc lost 1.8 percent to HK$12.24 as crude oil futures in New York declined 0.6 percent to $78.65 a barrel in after-hours trading. The company’s nine-month pretax profit fell 46 percent from a year earlier on lower oil prices, the Wall Street Journal reported. Oil futures are at about half the intraday record of $147.27 reached in July 2008.

Sumitomo Metal Mining Co., Japan’s largest nickel producer, dropped 1.6 percent to 1,561 yen. The London Metals Index, a measure of six metals including copper and nickel, fell 1 percent yesterday, retreating from a two-month high.

Liquid Crystal Display

Samsung, the world’s biggest maker of liquid-crystal displays, lost 2.3 percent to 735,000 won. LG Display Co. dropped 0.5 percent to 32,750 won, while Taiwan’s AU Optronics Corp. slid 2 percent to NT$32.05.

AT&T, the biggest U.S. phone carrier, filed a complaint in federal court, claiming the companies were among those that “formed an international cartel illegally to restrict competition” in the LCD market in the U.S.

“The material impact on the panel stocks may be limited, since the lawsuit can drag on for several years,” said Bevan Yeh, who helps manage about $1.2 billion at Prudential Financial Securities Investment Trust Enterprise in Taipei. “It’s inevitable that there will be some knee-jerk reaction.”

Better-than-estimated economic and earnings figures have driven the MSCI Asia Pacific Index’s seven-month rally. Stocks in the gauge are priced at 23 times estimated earnings, compared with an average of 18 times in the past three years.

Central Bank Action

This month, reports showed the U.S. service industries grew for the first time in a year and an export decline slowed in China. Amid signs the global economy is strengthening, Australia’s central bank unexpectedly raised its benchmark rate on Oct. 6 and has signaled further increases in coming months.

The U.S. housing report from yesterday helped drag down Nissan Motor Co., which counts North America as its biggest market, by 1 percent to 666 yen. Advantest Corp., the world’s biggest maker of memory-chip testers, sank 1.6 percent to 2,405 yen. James Hardie Industries NV, the biggest seller of home siding in the U.S., lost 0.7 percent to A$7.52 in Sydney.

In Seoul, Samsung SDI fell 3.9 percent to 137,000 won. Daishin Securities Co. and Meritz Securities Co. downgraded the stock even after the company reported a 48 percent surge in third-quarter earnings.

Toshiba gained 4 percent to 546 yen in Tokyo. CLSA raised its investment rating on the stock to “buy” from “underperform,” citing rebounding demand for flash memory.

Japan Airlines jumped 6.8 percent to 126 yen, the sharpest gain in the Nikkei 225. A government panel recommended the airline receive 300 billion yen ($3.3 billion) in private and public funds, more than an earlier proposal for 150 billion yen, the Nikkei newspaper reported.

To contact the reporter for this story: Masaki Kondo in Tokyo at mkondo3@bloomberg.net; Patrick Rial in Tokyo at prial@bloomberg.net.

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Credit Suisse May Report Profit, Follow Deutsche Bank

By Elena Logutenkova and Aaron Kirchfeld

Oct. 21 (Bloomberg) -- Credit Suisse Group AG will probably follow Deutsche Bank AG in reporting a third straight quarter of profit after the lenders shunned state aid during the financial crisis and benefited from the rebound in bond and stock markets.

Net income at Credit Suisse, the second-largest Swiss bank, probably totaled 1.74 billion francs ($1.72 billion) in the third quarter after a loss a year earlier, based on the median estimate of 14 analysts surveyed by Bloomberg. Frankfurt-based Deutsche Bank said today it expects to report net income of about 1.4 billion euros ($2.1 billion), helped by tax credits, beating the 811 million-euro analyst estimate.

Both profited from the record-low interest rates that drove revenue from trading debt, currencies and commodities to a record at JPMorgan Chase & Co. and to the third-highest level ever at Goldman Sachs Group Inc. UBS AG probably missed out on the credit-market rebound after closing debt units and shedding employees, analysts said.

“Deutsche Bank and Credit Suisse are benefiting from the rebound in capital markets,” said Daniel Hupfer, who helps manage about $46 billion, including shares in all three banks, at M.M. Warburg in Hamburg. “UBS will also profit from a better environment, but not as much as the others because it’s still busy restructuring certain businesses.”

Credit Suisse, which publishes third-quarter results tomorrow, has risen 107 percent in Swiss trading so far this year to 59.10 francs, while Deutsche Bank has climbed 93 percent to 53.80 euros. Zurich-based UBS, the largest Swiss bank by assets, has advanced 29 percent to 19.11 francs.

A Year Later

Banks that navigated the crisis are piling up profits a year after the bankruptcy of Lehman Brothers Holdings Inc. spurred an unprecedented effort by governments around the world to save the financial system. New York-based JPMorgan earned $3.59 billion in the third quarter, while Goldman said net income more than tripled from a year earlier to $3.19 billion.

Credit Suisse Chief Executive Officer Brady Dougan told investors in London this month the bank’s interest rates business was the biggest contributor to revenue at the investment bank in the first half. The market environment for that business has been “better than historic levels,” he said.

The Zurich-based bank gained market share in underwriting global bond and stock sales in the first nine months of the year, data compiled by Bloomberg show.

Dougan, 50, announced a plan yesterday to boost salaries for 7,000 senior employees as a portion of total pay after Wall Street bonuses were blamed for contributing to the financial crisis. The bank will also introduce deferred equity and cash- based awards whose value will vary based on earnings.

‘Fragile’ Economy

Deutsche Bank, which is due to report detailed third- quarter earnings on Oct. 29, said it expects all business segments to report positive results. Pretax profit for the quarter will be about 1.3 billion euros, it said.

CEO Josef Ackermann said last month that Germany’s largest bank may gain share in areas including U.S. interest-rate derivatives, global fixed income and emerging-market debt after competitors dropped out or were bought.

While rising stocks and bonds led to a “significant improvement” in sentiment, the financial industry and economy remain “fragile” because of rising corporate insolvencies and unemployment, Ackermann, 61, said in a speech on Oct. 12.

Deutsche Bank’s securities unit, led by Anshu Jain, 46, and Michael Cohrs, 53, may have earned 811 million euros in the third quarter, helped by rising revenue from trading stocks and bonds, according to estimates from eight analysts before today’s announcement. The unit generated more than two-thirds of the bank’s pretax profit in the first half.

‘Big Swing Factors’

“For Deutsche Bank the big swing factors are write-ups of asset valuations and fixed-income trading,” said Christian Gattiker, head of research and strategy at Bank Julius Baer & Co. in Zurich.

Deutsche Bank’s debt unit may have generated revenue of 2.2 billion euros in the third quarter, the analysts estimated, compared with 2.8 billion francs at Credit Suisse.

“As long as interest rates are low, investment banks will have good earnings,” said Florian Esterer, who helps manage about $49 billion at Swisscanto Asset Management in Zurich. “If you get money from the central banks practically for free, it’s quite easy to reinvest it profitably.”

At UBS, CEO Oswald Gruebel, 65, said in August that rebuilding the fixed-income business may take nine more months after it cut risk and “lost key people.” The bank said that month that it added more than 20 senior bankers, including Dimitri Psyllidis, 43, formerly at Merrill Lynch & Co., who joined as head of foreign exchange and rates trading globally.

Money Outflows

UBS will book a charge to reflect an improvement in its own debt in the third quarter, Chief Financial Officer John Cryan said on Sept. 30. A 1.2 billion-franc charge on its own debt contributed to UBS’s second-quarter loss of 1.4 billion francs.

The bank may report a 281 million-franc third-quarter loss on Nov. 3, according to the median estimate of seven analysts. UBS had the biggest losses of any European bank from the credit crisis, data compiled by Bloomberg show.

UBS, which in August agreed to pass on data on as many as 4,450 accounts to the U.S. to settle a lawsuit related to tax evasion, probably saw further withdrawals from its wealth management business, analysts said. The outflows may amount to 19 billion francs in the third quarter, while Credit Suisse’s private bank probably attracted a net 11 billion francs, according to Sanford C. Bernstein Ltd.

To contact the reporters on this story: Elena Logutenkova in Zurich at elogutenkova@bloomberg.netAaron Kirchfeld in Frankfurt at akirchfeld@bloomberg.net

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German Stocks Pare Gains; Infineon, Deutsche Bank Shares Decline

By Sarah Jones

Oct. 21 (Bloomberg) -- German stocks pared gains, led by Infineon Technologies AG and Deutsche Bank AG.

The DAX Index fell 0.1 percent to 5,805.48 at 10:18 a.m. in Frankfurt. The gauge earlier rose as much as 0.6 percent.

Shares of Infineon dropped 3.9 percent to 3.73 euros, while Deutsche Bank lost 3.3 percent to 53.51 euros.

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U.K. Stocks Climb, Led by Tesco, Sainsbury; Wolseley Advances

By Sarah Jones

Oct. 21 (Bloomberg) -- U.K. stocks advanced for a second day this week, led by retailers as Nomura Holdings Inc. recommended shares of Tesco Plc and a report said Qatar may raise its stake in J Sainsbury Plc.

Tesco rallied the most in three months as Nomura raised its price estimate on Britain’s largest retailer 30 percent, citing prospects for increased profitability and foreign sales. Sainsbury gained 1.8 percent after the Financial Times reported Qatar Holding LLC may lift its 26 percent stake. Wolseley Plc climbed as BofA Merrill Lynch Global Research upgraded the heating and plumbing gear supplier to “buy.”

The FTSE 100 Index gained 15.67, or 0.3 percent, to 5,259.07 at 9:02 a.m. in London, paring some of yesterday’s 0.7 percent retreat. The FTSE All-Share Index rose 0.3 percent and Ireland’s ISEQ Index added 0.4 percent.

Tesco increased 2.3 percent to 392.20. Nomura raised its price estimate for the shares 30 percent to 526 pence. The retailer is a “disciplined, defensive, sustainable growth story that is significantly undervalued by the market,” analysts including Matthew Truman wrote in an e-mailed note. Services like banking will drive Tesco’s British growth as the grocery market matures, they said.

Sainsbury gained 1.8 percent to 353.9 pence. The Financial Times said Qatar Holding, the direct investment unit of the Qatar Investment Authority, may raise its stake in the U.K. supermarket chain. The newspaper did not say where it got the information.

Sainsbury rallied 5.4 percent yesterday after Qatar sold shares in Barclays Plc, stoking speculation the emirate may make a new bid for the retailer.

Wolseley climbed 3.2 percent to 1,459 pence, the best performer on the benchmark FTSE 100. BofA Merrill Lynch raised its recommendation on the stock to “buy” from “underperform,” saying “positive GDP growth should drive operational leverage.”

To contact the reporter on this story: Sarah Jones in London at sjones35@bloomberg.net.

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Drugstore.com, IMS, SanDisk, SLM, Yahoo: U.S. Equity Preview

By Lu Wang

Oct. 21 (Bloomberg) -- Shares of the following companies may have unusual moves in U.S. trading. Stock symbols are in parentheses.

Drugstore.com Inc. (DSCM US): The online seller of medicine and cosmetics said fourth-quarter sales will be at least $107 million, topping the average estimate of $100.4 million by two analysts in a Bloomberg survey.

IMS Health Inc. (RX US): The provider of prescription data to drugmakers and analysts, which is reported to be in takeover talks with private-equity firms, said it is exploring strategic alternatives.

SanDisk Corp. (SNDK US): The biggest maker of flash-memory cards used in digital cameras and mobile phones forecast sales that beat analysts’ estimates as chip prices rebounded.

SLM Corp. (SLM US): The biggest U.S. student loan company reported earnings excluding some items of 26 cents a share in the third quarter, more than five times the average analyst estimate, according to Bloomberg data.

Yahoo! Inc. (YHOO US): The owner of the second-largest U.S. search engine reported more third-quarter profit than analysts estimated after cutting costs by paring jobs and jettisoning businesses.

To contact the reporter on this story: Lu Wang in New York at lwang8@bloomberg.net.

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Dark Pools Face SEC Restraints Curbing Fastest-Growing Markets

By Jesse Westbrook and Whitney Kisling

Oct. 21 (Bloomberg) -- The Securities and Exchange Commission may halt the expansion of the fastest-growing stock networks in the U.S. with rules to improve transparency in so- called dark pools.

The SEC will today propose lowering the amount of daily volume in a company’s shares that can be executed on the systems before quotes must be made public to 0.25 percent from 5 percent, according to two people familiar with the matter. Dark pools are electronic, off-exchange platforms that investors use to avoid revealing who they are and what they are trading.

Democratic Senators Charles Schumer of New York and Ted Kaufman of Delaware are urging regulators to crack down on practices they say create an unfair advantage for the biggest investors. Regulators proposed banning so-called flash trades, in which some investors get a half-second glimpse at share orders before the public, last month.

“It will initially take money out of many dark pools’ pockets,” said Matthew Samelson, the Stamford, Connecticut- based founder of market research firm Woodbine Associates Inc. “They’re either going to have to adjust their pricing to be more competitive with the current displayed markets or that flow’s going” elsewhere, he said.

The proposal is the latest sign the SEC is toughening oversight of strategies spurred by the growth of alternative exchanges and advances in technology. Dark pools are sometimes used by so-called high-frequency traders, brokerages that execute thousands of orders in a second to profit from tiny price gaps.

Sigma X

Trading on dark pools such as Zurich-based Credit Suisse Group AG’s Crossfinder and New York-based Goldman Sachs Group Inc.’s Sigma X, the two largest, has more than quadrupled to 9.4 percent of all U.S. equity volume in three years, according to Tabb Group LLC, a New York-based financial-services consultant.

Under the SEC plan, dark pools will have to publicly report quotes once they handle 0.25 percent of a stock’s daily average volume. The electronic networks usually shut down trading in a security when they approach the existing 5 percent limit.

John Nester, an SEC spokesman, declined to comment.

NYSE Euronext and Nasdaq OMX Group Inc., operators of the biggest U.S. stock exchanges, may benefit from the rule change, according to Woodbine’s Samelson. Both have suffered market share losses as investors shifted to newer venues.

The New York Stock Exchange handled 28 percent of all U.S. equity trading in September, while Nasdaq processed 22.7 percent. Their combined share has fallen to 50.7 percent from 74.1 percent in March 2006.

Block Exemption

The SEC will exempt block trades, or orders exceeding a certain number of shares, from the new rule, according to one of the people, who declined to be named because the discussions were private. Firms specializing in blocks account for 8 percent of all dark-pool trading in the U.S., according to data compiled by Aite Group LLC, a financial-services consultant in Boston.

Transactions are biggest at New York-based Liquidnet Holdings Inc. and Pipeline Trading Systems LLC, where orders average 50,000 shares. That compares with 300 to 450 shares at venues such as Getco Execution Services, run by Chicago-based Getco LLC.

Dark pools reduce costs and benefit small investors by letting mutual funds buy and sell securities in private, Goldman Sachs said in a statement posted on its Web site yesterday.

“Institutional investors can improve their trading performance by executing in an anonymous manner that diminishes their footprint,” according to Goldman Sachs, the most- profitable securities firm in history. “In doing so, the clients of these institutional investors, for example mutual funds and pension funds where the bulk of small investors have their money invested, are direct beneficiaries.”

Siphoning Liquidity

Growth of the networks is hurting traditional markets, which face more regulation, the World Federation of Exchanges said in a letter last month to Mario Draghi, chairman of the financial-stability board of the Basel-based Bank for International Settlements.

“The more the dark pools exist without any comprehensive regulation, the more you’re going to see liquidity siphon off from exchange markets,” William Brodsky, the chief executive officer of the Chicago Board Options Exchange and chairman of the WFE, said at a conference in Vancouver on Oct. 7.

The new SEC threshold may push smaller orders off of dark pools and onto exchanges, analysts said.

“If you were to limit the dark pools to that small amount of trading, it will be much harder to find a counterparty,” said Dirk Hoffmann-Becking, a London-based analyst for Sanford C. Bernstein & Co. For stock exchanges, “if they would see less competition from the dark pool world, that would certainly be a positive for them.”

To contact the reporters on this story: Jesse Westbrook in Washington at jwestbrook1@bloomberg.net; Whitney Kisling in New York at wkisling@bloomberg.net.

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