Observations & Insight


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BOX’s Focus in 2017: Improved Tech and a Trading Floor

Ed Boyle
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Much of 2017 for BOX depends on whether the exchange will get approval for its proposed trading floor. In this video from the Options Industry Conference in Scottsdale, Ariz., BOX CEO Ed Boyle spoke about BOX’s motivation to open a floor, revamping the exchange’s matching engine and helping market makers do business.

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****SD: This is the fifth and final exchange leader video from the Options Industry Conference. If you missed them last week, here are links to the other four videos: NYSE Options’ Brown Discusses the Road Ahead, Nasdaq’s Kennedy Sees Plenty of Room for Options Industry Growth, Insight into the Bats Integration from CBOE’s Lowenthal and MIAX’s Brown on Number 15 and Complex Order Books


You’re Invited to FOW-John Lothian News Trading Chicago on June 28th!

Register here

This one-day event at the Swissotel on June 28th is aimed largely at the end-users of the markets: commodity trading advisors, asset managers, hedge funds and proprietary traders.

The conference will cover the issues that impact those firms directly – regulation, technology and market structure, with an underlying thread of trading in an age of uncertainty. All of this will be delivered in a variety of formats, from an Oxford-style debate on the Dodd-Frank Act’s repeal to TED-style talks to panel discussions.

The event is free to attend for CTAs, asset managers, props and hedge funds. For full conference information, click HERE.

Watch the preview »

Lead Stories

Market Makers in Equity Options Are Vanishing
Steven M. Sears – Barron’s
Of all the ways to make money on Wall Street, few are currently harder than options market-making. Implied volatility is historically low, so profit margins are almost nonexistent in most trades. Exchange rules exacerbate the difficulties. Dealers must post bids and offers in Byzantine market structures that technology has degraded into shooting galleries for ultrafast computers.

****SD: Steve Sears hits the big notes.

Stock options trading volume strong even as volatility dips
Saqib Iqbal Ahmed – Reuters
U.S. stock price volatility is at a more than two-decade low but you would hardly know that by looking at options trading volume, which is on pace to beat the last two years. Options contracts are used by traders to both protect themselves against big swings in the price of shares and to speculate on the direction of price moves, and when markets get quiet there is less reason to trade. Not so this year.

****SD: Take a look at CBOE’s options ADV over the last five months in our Exchanges section.

Trading blues? It’s just another kick in the vol
Jamie McGeever – Reuters
Executives at some of the world’s biggest banks are warning that challenging market conditions could lead to a fall in second quarter trading revenues, with much of the blame being laid at a familiar door: low volatility.

****SD: A historically convenient excuse, although this vol environment is exceptionally low.

Treasuries Market Ripe for Shocks as Volatility, Yields Collapse
Garfield Clinton Reynolds – Bloomberg
Morgan Stanley proposes trades to bet on rising volatility; Goldman Asset’s Moffitt sees opportunity in yield pullback
There’s a whiff of complacency around the world’s biggest bond market, according to strategists at Morgan Stanley and money managers at a unit of Goldman Sachs Group Inc.

Markets Face Three Big Geopolitical Risks This Week
Eric Lam and Isobel Finkel – Bloomberg
Investors hoping for the return of market volatility should be careful what they wish for this week, with geopolitical risks looming.
The decision by a Saudi-led alliance of four countries to sever ties with Qatar is just the first in a string of events with the potential to drive big market moves. The sudden isolation of the Gulf state helps it join a growing list of political hot spots that includes the Korean Peninsula and Brazil.

****SD: More on Middle Eastern developments from the Washington Post What’s going on with Qatar? The Qatar story is going to have wide-ranging effects — for just one interesting angle check out Reuters’ Qatar’s dispute with Arab states puts LNG market on edge

5 Reasons Why Fed Will Ignore NFP And Hike Again
Total U.S. nonfarm payroll employment increased by 138,000 in May, well below the earlier economists’ forecast, and the unemployment rate was little changed at 4.3%, the U.S. Bureau of Labour Statistics reported last Friday. Job gains in March and April were revised down by 66,000 collectively. Job gains occurred in health care and mining last month.
The figures do not change the picture of U.S. economy growing steadily and closing in on full employment. It is unlikely to deter Fed’s rate hike in 10 days. It may casts doubt over the policy outlook in the coming year given persistently sluggish inflation numbers, but not for now.
Here are 5 reasons why Fed will continue to hike its policy rate by 25bps in ten days:

Exchanges and Clearing

Listing of stock index options on horizon
Meng Fanbin – China Daily
China plans to introduce its first option contracts in stock indexes, in an effort to provide the regulator another method to hedge the risks of Shanghai and Shenzhen stocks markets, according to an official from China’s top securities regulator.

CBOE Holdings Monthly Volume & Revenue Per Contract/Net Revenue Capture Report – 6/5/17
CBOE Holdings, Inc. today reported May monthly trading volume and average revenue per contract (RPC)/net revenue capture data

****SD: Options ADV over the first 5 months of the year at CBOE — January = 4.6 million; February = 5.1 million; March = 6.9 million; April = 7.1 million; May 7.0 million. Seems like good progress.

ICE’s Volumes Largely Static in May, FX Bounces off Yearly Lows on Volatility
Finance Magnates
Intercontinental Exchange (NYSE: ICE), a global network of exchanges and clearing houses, has reported its aggregated trading statistics for May 2017. In light of European and US market jitters, volumes were lower across the board with the exception of foreign exchange (FX) figures, given the impact of market volatility during the month.

Intercontinental Exchange Reports May Statistics; ICE ADV up 27% y/y Driven by Financials ADV up 33% y/y and Energy ADV up 29% y/y; Open Interest up 12% y/y
Intercontinental Exchange
Intercontinental Exchange, Inc. (NYSE:ICE), a leading operator of global exchanges and clearing houses and provider of data and listings services, today reported May 2017 trading volume and related revenue statistics, which can be viewed on the company’s investor relations website at http://ir.theice.com/ir-resources/supplemental-information in the Monthly Statistics Tracking spreadsheet.

Intercontinental Exchange Does a Lot of Acquisitions—Meet the Lawyer Responsible For Them
Jonathan Ringel – Daily Report
In 2003, David Clifton was an associate at McKenna Long & Aldridge when he started working on deals for Intercontinental Exchange, then an upstart, Atlanta-based owner of marketplaces and commodity exchanges. He continued to serve ICE when he moved to Paul Hastings in 2006.

Regulation & Enforcement

Supreme Court limits SEC’s power to recover ill-gotten gains
Sarah N. Lynch and Lawrence Hurley – Reuters
The U.S. Supreme Court on Monday scaled back the Securities and Exchange Commission’s power to recover ill-gotten profits from defendants’ misconduct, handing Wall Street firms a victory and dealing another blow to the regulator’s enforcement powers.

Newest Criminal Spoofing Case Features Coordinated Spoofing and Front Running
Renato Mariotti, Thompson Coburn LLP
On last Thursday, June 1st, the Justice Department entered into a plea agreement with a trader named David Liew, publicly revealing the existence of the third-ever criminal spoofing case, which had been filed under seal on January 3rd.


NovaSparks Broadens Its U.S. Cash Equity Options Market Coverage
NovaSparks, the leading field programmable gate array (FPGA) market data company, today announced that it has added the two BATS Options exchanges, BZX Options and EDGX Options, to its list of supported markets. BATS Options feeds are among the most challenging options feeds for any market data feed-handler. In addition to the very high message rates, they also provide full depth information, thus requiring heavier processing to construct the book. With this expanded offering, NovaSparks confirms that banks and trading firms do not have to choose between speed and market coverage when upgrading their market data infrastructure.

OptionsCity Metro Connects To Fidessa
OptionsCity Software, a global provider of futures and options trading and analytics solutions, today announced that it has completed certification with Fidessa, allowing Fidessa brokers to receive order flow from OptionsCity’s Metro clients. This certification provides OptionsCity’s customers with access to Fidessa’s community of global customers and builds on OptionsCity’s customer reach within the futures options space.

Automated trading of commodity futures accelerating
Gregory Meyer – Financial Times
The machines are taking over markets for energy, metals and food. Automated trading systems now account for half the volume in many commodity futures after proliferating over the past two years, a government study has found.


Weekend Review of VIX Options and Futures – 5/30/2017
Russell Rhoads – CBOE Options Hub
VIX dropped slightly as the S&P 500 powered to more all-time highs last week. The slight drop in VIX can be attributed to the already extremely low level that it closed last week. The futures all dropped a little as well, which may be more about moving along in time than lower volatility expectations.

Weekend Review of Volatility Indexes and ETPs – 5/30/2017
Russell Rhoads – CBOE Options Hub
The VXST – VIX – VXV – VXMT week over week curve change only has one noticeable move. VXST was up nicely last week, but we are going to attribute the whole move to the 3 day weekend effect and say the curve was basically unchanged.

Weekend Review of Russell 2000 Options and Volatility – 5/30/2017
Russell Rhoads – CBOE Options Hub
Small caps had a nice week with the Russell 2000 (RUT) rising 1.67% while the Russell 1000 (RUI) was up 1.01%. The large cap lead narrowed a bit, but the RUT still lags RUI by just over 5% year to date.


Odd Lots: Why Everyone’s Talking About the VIX and 50 Cent
Tracy Alloway and Joe Weisenthal – Bloomberg
For the past few years, everyone in markets has been talking about nothing. Market moves have been subdued and the Chicago Board Options Exchange’s Volatility Index, better known as the VIX, recently sunk to its lowest in about three decades.

Bunge hires JPMorgan and Shearman & Sterling in Glencore defence
Neil Hume, Arash Massoudi and James Fontanella-Khan – Financial Times
Bunge, the US grain trader that is fending off takeover interest from Switzerland’s Glencore, has bolstered its defences with the appointment of advisers.
The New York-listed company is working with JPMorgan Chase and law firm Shearman & Sterling as it seeks to remain independent. Bunge, which signalled earlier this year that it was willing to be part of tie-ups in the sector, has said it is not in “business combinations” discussions with Glencore and has refused to comment further.

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