WFE Response to “the Committees”; Robinhood aims for IPO

Sep 7, 2018

Observations & Insight

Friday’s Notes
Spencer Doar – JLN

President Trump indicated he is has another $267 billion worth of Chinese goods to add to the tariff list “if he wants.”

In case you missed its publication in April, OCC President and COO John Davidson published A Decade After the Financial Crisis, These Lessons Can’t Be Forgotten. It’s worth a revisit now for obvious reasons.

There have been plenty of stories about the financial crisis and its aftershocks to highlight this week, but the following – Millennials Are Sitting Out the Bull Stock Market by Barry Ritholtz for Bloomberg – takes a different tack than most. It focuses on the GFC’s psychological effects on young investors. TLD;DR – my generation doesn’t like equities. (That’s news to me.)

When referencing yesterday’s shooting at the Fifth Third Bank in Cincinnati, I neglected to say that it was in fact in Cincinnati. I did not intend to mislead or inadvertently scare anyone. Apologies.


Lead Stories

WFE Response to “the Committees”
World Federation of Exchanges
….Most pressingly, the Committees should in our view prioritise globally co-ordinated action in two main areas: 1) recognition of the exposure-reducing effect of margin posted on behalf of clients, specifically within the leverage ratio, where segregation and limits on re-use of collateral apply – an issue across instrument types in all asset classes; and 2) the inappropriateness of referencing only the notional amount in calculating potential future exposure (PFE) numbers for options, as happens under the CEM, when the option’s delta is clearly the most relevant factor in determining PFE.

****SD: The above link goes to the WFE’s site where the paper can be downloaded. The excerpted text is from page 3 of the document under “General Considerations.”

Robinhood aims at IPO as the fintech startup seeks CFO
Josh Constantine – TechCrunch
Now valued at $5.6 billion, zero-fee stock trading app and cryptocurrency exchange Robinhood is starting preparations to go public. Just a year and a half ago, it was still largely under the radar. But then it raised a $110 million Series C at a $1.3 billion valuation in April 2017 and then just a year later scored a $363 million Series D, both led by Russian firm DST Global. Combined with the growth of its premium subscription for trading on margin called Robinhood Gold, the startup now has the firepower and revenue to make a viable Wall Street debut.

CyrusOne installs 350ft tower for fast wireless access to Illinois campus
Sebastian Moss – Data Center Dynamics
Data center real estate investment trust CyrusOne has added a new telecommunications tower to its Aurora campus in Chicago, Illinois.

****SD: Some more background on the new tower.

Constraints + Discipline = Innovation + Flexibility
David Kent – Optiver Tech Blog
In our previous post, we described how CME’s iLink upgrade would require us to rethink our trading systems. This shuffling of design priorities would force us to embrace technology new to Optiver, and reconsider previous priorities. To survive this change, we would have to innovate. Technological innovation is often associated with places like Xerox PARC, Microsoft Research, and Google X; unbridled creativity manifested in exciting visions of the future. But at Optiver we aim for a different type of innovation.

****SD: “The common knowledge about FPGA development is to expect timelines that are twice as long as software. In practice we have seen the opposite: our software engineers are often the ones racing to catch up to the progress of our hardware engineers.”

Commentary: Jittery investors feel butterflies as divergence replaces central bank put
Ash Alankar – Pensions and Investments
Investors are getting increasingly jittery as a new reality sets in. Since the global financial crisis, monetary policy has been the overriding factor moving market prices. The playbook for success in this one-dimensional era was “don’t fight the Fed,” a luxury that is now being taken away.

****SD: Mr. Alankar is not joined by Myron Scholes in this commentary as happens on occasion.

Tradeweb Monthly Volumes: August Continues Record Pace
Derivatives continue to grow: ADV in rates derivatives rose 199.0% year over year (YoY) due to increased market share of SEF interest rates swap volumes and growth in MTF volumes; ADV in credit derivatives rose 34.6% YoY despite a decline in overall SEF market volumes of 10.0 over the same period; ADV in equity derivatives rose 169.4% YoY attributable to RFQ trading in European equity options.

****SD: Consider that TradeWeb attributes much of its equity derivatives growth to European RFQ functionality and that the firm just brought that offering to the US, too.

Exchanges and Clearing

Cboe Global Markets Reports August 2018 Trading Volume
September 6, 2018 – Cboe Global Markets, Inc., one of the world’s largest exchange holding companies, today reported August monthly trading volume and average revenue per contract (RPC)/net revenue capture data.

ASX Reports Uptick in Futures Trading in August 2018; Members of the exchange traded 15 per cent more futures contracts year-on-year in August.
Finance Magnates
…In August, equity options weren’t as popular for members of ASX. During the month, single stock options average daily contracts traded was down by 18 per cent. The number of traded index options average daily contracts was barely up year-on-year, increasing by 1 per cent.

New Cboe Weeklys Options on MSCI EAFE and EM Indexes Launched on September 6
Matt Moran – Cboe
Cboe’s MSCI EAFE Index (ticker MXEA) and MSCI Emerging Markets Index (ticker MXEF) options can provide investors with large-sized, cash-settled index tools to help efficiently manage global equity risk. Cboe has made several enhancements to its MSCI product suite, including today’s launch of Friday-expiring Weeklys options.

Borsa Italiana – Monthly Update August 2018
Borsa Italiana

August thermal coal futures up 6.4% on month at 114 mil mt
S&P Global Platts
…Options made up 19.7% of the total volume of derivatives traded in August at 22.43 million mt.


Credit Suisse director and engineer departs after 20 years
Hayley McDowell – The Trade
One of Credit Suisse’s most senior technical managers and engineers has left the Swiss investment bank after more than 20 years, The TRADE understands.


Two Sigma Invests in Startup That Handles Unsexy Side of Data
Annie Massa – Bloomberg (SUBSCRIPTION)
The conventional wisdom that big data will transform investing misses one nagging detail: working with giant data sets can be a hairy, time-consuming mess.

****SD: The Trade here.


Midterm Elections Offer Promise and Peril
Gunjan Banerji – Barron’s
Thinking of betting on the midterm elections? Be careful.
While this fall contains a string of potentially explosive events for markets, options investors would be wise to wait before moving money around based on which way they think the political tide will turn.

Finally An Intelligent Approach To Black Swan Investing
Erik Kobayashi-Solomon – Forbes
Listening to investing practitioners and pundits talk, the lay person might get the impression that investing is a rational application of microeconomics and mathematical principles.
This impression is false.
The truth is that investing is as fad driven as a junior high school playground.

As Tech Selloff Worsens, Options Traders Brace for More Bleeding
Gregory Calderone – Bloomberg (SUBSCRIPTION)
U.S. technology stocks are on pace for their biggest weekly drop since March, and someone in the options market is betting that things are going to get worse before they get better.


Rural Mutual Insurance offers Dairy Revenue Protection to help farmers manage unexpected declines in milk prices
Press Release
Rural Mutual Insurance Company, the number one farm insurer in the state of Wisconsin, is excited to announce the offering of a new product, called Dairy Revenue Protection. This new product will allow Rural Mutual to add to their existing portfolio of products and continue to be a leader in the industry.

****SD: Let’s get our milk hedged!

Virtu Seeks to Reprice KCG Deal’s Outstanding Loan, Prepays Additional $74M
Aziz Abdel-Wader – Finance Magnates
U.S. electronic market maker Virtu Financial Inc., which acquired KCG Holdings in a landmark deal last year, is seeking to reprice its existing senior secured term loan.

Tages Capital launches new Tages Paladin tail hedge UCITS fund
…The Dublin domiciled UCITS fund launched with nearly USD20 million of institutional capital on 31 July 2018. Unlike most tail risk funds, Paladin is not based on a put option strategy but is comprised of a combination of systematic long volatility and convexity, momentum and mean reversion strategies, together with low beta carry strategies to compensate for time decay.

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