Observations & Insight

The year is dead. Long live the year!
Spencer Doar – JLN

Everybody feeling refreshed? Ready to continue barreling headlong into the unknown? Hope so – nothing will wait up for you.

Speaking of not waiting up, our JLN Options newsletter was on the shelf for the holidays and despite it being a slow period, there was still news pertaining to our markets. As such, there are a some stories sprinkled in today’s newsletter from the tail end of 2016.

Just before we signed off for 2016, we had Henry Schwartz of Trade Alert as a guest editor – our thanks again to Henry. He left us with a 2016 Top 10 list you can check out again below (click to enlarge).

(Click for larger image)

All we can say about 2017 is that it sure won’t be boring. I think that’s one of those rare predictions that everybody can agree on.

Lead Stories

2016: The Volatility Year That Wasn’t
Dave Nadig – ETF.com
Sometimes how we feel about the market bears absolutely no resemblance to reality. When I look back at 2016, I’m exhausted. And when I talk to many advisors, I hear similar comments: “What a year!” they say. “We had such an awful winter, and then all the craziness around the election!” But the reality is that this was actually one of the most placid years in recent history. Here’s the actual, 30-day realized volatility of the S&P 500 for the last 10 years:

****SD: Perception and feeling were different from the reality – can’t that be said about a lot of 2016?

The Zig and Zag of 2016’s Volatilities
Steven Sosnick – Barron’s
It is tempting to overweight recent post-election events, but a longer-term view is more informative. Considering that the year’s most significant moves contradicted conventional wisdom, an accurate tagline for the market year—some may say the key lesson of 2016—is “expect the unexpected.”

****SD: The old adage is that to get away from an alligator on land, run in a zigzag pattern. But the truth is that you should just run. Period.

Kate Spade Entangled in Insider Trading Allegations Following Sale Reports
The Fashion Law
Recent Kate Spade sale rumors are being coupled with reports of insider trading. Minutes before Dow Jones reported that Kate Spade is exploring a sale of its business, one options trader purchased nearly 2,000 calls – paid-for options to purchase the New York-based fashion brand’s stock at an already agreed-upon price – resulting in a quick $320,000 profit.

****SD: Relevant content from a fashion law and business blog – not all that common ’round these parts.

Investors brace for 2017 shocks after surprise 2016 run
Lewis Krauskopf and Chuck Mikolajczak – Reuters
After a late-year rally fueled by the U.S. election pushed stocks to surprising new peaks, investors are wary that the market could be primed for a spill to start 2017. The benchmark S&P 500 .SPX is set to post a roughly 10 percent price gain for 2016 and around 12 percent on a total return basis, including reinvested dividends. That tops the single-digit increase expected by market participants polled by Reuters a year ago, with more than half of the advance coming after Donald Trump’s Nov. 8 presidential victory.

The 2016 VIX Futures Term Structure: Extraordinarily Average
VIX and More
Two days ago, in The Year in VIX and Volatility (2016), I made no mention whatsoever of the VIX futures term structure. Traders of the full range of VIX products (futures, options and ETPs) hopefully know by now that the entire VIX product landscape is based — and priced — off of VIX futures and one of the most important aspects of VIX futures is the shape of the term structure.

****SD: Other blog mentioned can be found here

It’s the ‘Most Volatile’ Year for Political Risk Since WWII, Eurasia Group Says
Rainer Buergin – Bloomberg
U.S. unilateralism under Donald Trump, China’s growing assertiveness and a weakened German Chancellor Angela Merkel will make 2017 the “most volatile” year for political risk since World War II, according to Eurasia Group.

****SD: Well isn’t this lovely.

Mutual Funds Aren’t an Option at tastyworks, an Online Broker
Theresa W. Carey – Barron’s
Everything investors are being told today is wrong, says Tom Sosnoff, an entrepreneur and options trader. For starters, he bristles at the popularity of passive investing, calling for investors to become more involved with their portfolios, not less. Mutual funds? Not transparent enough. Robo-advisors? That’s akin to putting your money in “jail,” allowing it to languish for years without attention. Even beginning investors should start with stockpicking and options strategies. And Sosnoff’s latest effort encourages them to do just that.

****SD: Sign up now for a free beret! Press release – Tastytrade Team Launches Tastyworks – a New Brokerage Firm

Exchanges and Clearing

LSE Paves Deal Path With $533 Million Unit Sale to Euronext
John Detrixhe – Bloomberg
London Stock Exchange Group Plc agreed to sell its French clearing unit to Euronext NV for 510 million euros ($533 million) in cash, putting it on course to end a 13-year combination that the company hopes will pacify competition watchdogs.

Nymex consigns open-outcry pit trading to the history books
Alexander Osipovich – MarketWatch
The open-outcry trading floor of the New York Mercantile Exchange in lower Manhattan will shut down after markets close Friday, the latest step in the inexorable shift toward electronic trading.

How introduction of options will affect commodity markets
Economic Times
Commodity exchanges MCX, NCDEX and NMCE will be allowed to offer trading on options, once market regulator Sebi releases the framework for the same in the middle of January 2017. This is likely to result in the probable entry of new participants into the space, which may transform the commodity markets.

Indian exchange’s IPO under cloud, but unlikely to be derailed
Abhirup Roy and Rafael Nam – Reuters
The disclosure by the National Stock Exchange that some high-frequency trading brokers may have been provided unfair access to its servers is unlikely to derail the Indian bourse operator’s IPO plans, a senior regulatory source and investors said on Thursday.

Nasdaq Announces ISE Gemini Conformance Testing, Production Connectivity and UAT Details
As previously announced in Options Technical Update #2016 – 15, conformance testing is required for FIX, SQF, OTTO, and CTI in the Options Test Facility (“OTF”) environment prior to participants gaining production access to ISE Gemini. Conformance scripts, for certification are available.

DGCX Rounds Off A Record-Breaking Year
Dubai Gold and Commodities Exchange (DGCX), the region’s largest and most diversified derivatives bourse, closed the year on a high note, recording growth of 36% over 2015. In 2016, the Exchange reached its highest annual volume traded with an aggregate of 19.7 Million contracts, valued at US $ 439.5 Billion.

HKEx plans trading circuit breaker on January 16
Luke Jeffs – FOW
HKEx initially planned to launch the volatility mechanism on November 13
Hong Kong Exchanges and Clearing said it plans to launch a circuit breaker in its derivatives market in mid-January following a failed attempt to introduce the volatility control in November last year. The Hong Kong market said in a statement it will introduce the volatility control mechanism (VCM) to its derivatives segment on January 16 “to prevent extreme price volatility arising from trading incidents such as a “Flash Crash” or bad algorithms”.

Bourses to invest in Pakistan
China Daily
A Chinese-led consortium has successfully bid to buy a 40 percent strategic stake in Karachi-based Pakistan Stock Exchange (PSX), according to an announcement of the Shanghai Stock Exchange (SSE). This is the first time for a Chinese bourse to acquire shares of a foreign stock exchange.

****SD: Derivatives might be on the horizon for PSX.

Regulation & Enforcement

Financial Policy 2017 Outlook
Bloomberg via Tabb Forum
Regulatory change arising out of Brexit and Donald Trump’s election as US President will be of utmost consequence for financial-services firms in 2017. In the U.S., Dodd-Frank will be diluted, and regulators throughout the EU will focus on finalizing MiFID II. This analysis is by Bloomberg Intelligence analysts Sarah Jane Mahmud, Nathan Dean, Alison Williams, Jonathan Tyce and Ben Elliott. It appeared first on the Bloomberg Terminal and the Bloomberg for Enterprise Blog.

India says to allow bond options starting Jan 2017
The Reserve Bank of India said on Thursday it would allow the trading of bond options starting Jan. 31, 2017, in the latest move by the central bank to develop the country’s debt markets. The RBI said market participants would be allowed to trade both exchange-traded and over-the-counter bond options, including for market-making purposes.

****SD: Norms for the newly allowed commodity options should be around the corner sometime this month as well.

2016 – The Binary Options Conundrum and an Uncertain Future
Victor Golovtchenko – Finance Magnates
The passing year of the monkey has been a very challenging one on many fronts for the retail intermediary business. Starting with the Brexit black swan and the regulatory hardships in Europe and ending on a positive note with the election of Donald Trump and hopes about the US market, the trading industry has both positives and negatives on the year’s scale.

MIAX Options Exchange: MIAX PEARL Options Regulatory Fee
MIAX PEARL (“Exchange”) will implement an Options Regulatory Fee (“ORF”) of $0.0010 per customer contract at the commencement of trading on the Exchange.


Flexible Technology is Key to FX Traders Success
Ralph Achkar – Trader’s Magazine
While FX has always been a global market, it has been predominantly centered around New York, London and Tokyo. Now, Asia and in particular Singapore, is attracting market share of the FX trading volumes. We have already started seeing FX platforms establishing presence in the Asian markets, targeting Asian currency pairs. Together with this change in the market, we’re also seeing a change in the nature and behavior of FX participants, particularly in the way they are accessing FX liquidity in search for best prices from more FX destinations.

****SD: Or “flexible technology is key to anybody’s success.”


7 S&P Levels To Watch In 2017
Schaeffer’s Research
For the past few weeks, with the key 20,000 millennium mark on the Dow Jones Industrial Average (DJIA – 19,762.60) hovering just overhead, the S&P 500 Index (SPX – 2,238.83) trading around a half-century mark (2,250) — 10% above the 2015 close — the Russell 2000 Index (RUT – 1,357.13) and S&P MidCap 400 Index (MID – 1,660.58) trading 20% above their respective 2015 closes, and the Nasdaq Composite (COMP – 5,383.11) closing in on a level 10% above last year’s close, it was evident that equities were at risk of hitting a massive speed bump after an impressive post-election rally.

Five Volatility Market Lessons from 2016
Russell Rhoads – CBOE Options Hub
To be successful in any field we all need to keep learning. My job involves staying on top of all things index and volatility related which means I am always gaining new insights about the markets. Looking back at 2016, VIX settled into lower levels after starting the year hitting the mid-20’s as the stock market sold off. Despite the relatively tame behavior from VIX, there were some lessons to be learned last year.

Tech event in January could spur volatility, more Nvidia gains, Goldman says
Ryan Vlastelica – MarketWatch
It’s been quiet for stocks in the final trading week of the year, as is typical, but expect volatility to return early in 2017, particularly in the retail and technology sectors, Goldman Sachs wrote on Thursday.

Getting Past The Four Fears of Trading – Part 1
Bob Lang – CBOE Options Hub
As we embark on a new year, we can learn from the past to help us bolster our efforts into the future. Change is always good, but there are some things very tough to alter – our emotions. Try as we may to check our emotions at the door, as traders/investors there is often too much going on to just be emotionless. When money is on the line we suffer from the emotional responses of fear and greed. We are ALL wired this way and find ourselves somewhere on the spectrum – there is no escaping it. But if we can control and manage our emotions we can then turn our attention to becoming better than we ever thought possible.

Forex Traders Can Benefit from Sentimental Analysis
Abe Cofnas – Traders Magazine
Currency Traders focus on technical patterns and price action to strategize their next trades. Yet, there is another component of analysis that provides a different diagnostic lense:sentiment. Sentiment analysis includes a broad range of information that conveys whether expectations about direction are bullish or bearish. While the study of sentiment analysis is fairly new and the science of it is yet emerging, the volatility smile remains a key component to generate clues to the future direction of a currency. Even though many traders do not look at volatility smiles, it can make a difference in choosing direction. Let’s take a closer look.

Cross-commodity factbox: EMEA markets in 2017
The new year brings with it continued uncertainty and volatility for EMEA markets. Oil and agriculture are in the hands of the effectiveness of an historic OPEC/non-OPEC deal and regulatory policy across sugar and biofuels. European natural gas and LNG have healthy supply options and robust demand, while coal and gold will find it difficult due to Chinese coal output cuts and rising US interest rates and a firming dollar. Tighter capacity reserve margins might add further volatility to European electricity prices.

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