Observations & Insight

Last week’s notables

A lot happened last week in the options space. If anybody didn’t follow the week’s developments, here’s a little recap.

Big trends are continuing in the market making world. I wouldn’t say they are good. First, Interactive Brokers revealed in its earnings that the firm’s market making operations lost $22 million in Q1. (Remember that the company revealed a bit ago that they were shuttering their options market making operations — some of this loss is restructuring costs.) Second, the KCG/Virtu deal was agreed upon for $1.4 billion. It’s getting hard out there and these folks know that scale is one way to make life a bit easier.

The 50 Cent trader, nicknamed such because of his/her penchant for buying call options on the VIX regardless of strike so long as they’re priced around 50 cents, continues to lose money. Hopefully this is a giant hedge with the cost justified simply for the peace of mind it conveys. If not, this person/institution must be frantically biting their nails, especially after today’s reaction to the French election.

Then, perhaps the weirdest/saddest options story of the year pertained to the bombing of German soccer team Borussia Dortmund’s bus. Turns out, the motivation was not terror but profit. The man charged with the bombing purchased 15,000 put options on the team. (I was entirely unaware that soccer teams were publicly traded like that.) The stock of the team did not collapse and the options turned out worthless. This guy was a total numbskull for a variety of reasons.

Also, changes continued at OCC with David Hoag coming on as CIO. And yes, he spent time (11 years) with CME Group.

Lead Stories

Anxiety Dissipates After First Ballot: French Election Monitor
V Ramakrishnan – Bloomberg
Risk gauges across asset classes captured the sense of relief that washed over markets after centrist Emmanuel Macron won the most votes in the first round of France’s presidential elections.

Expectations for euro-dollar, US stock volatility plummet
Adam Samson – Financial Times
Expectations for US equities and euro-dollar tumult plummeted on Monday after Sunday’s French election result extinguished one potential near-term risk factor for investors. The Vix index, a measure of expectations for volatility over the next 30 days, dropped 3.3 points to 11.39 ahead of Wall Street’s opening bell. The biggest decline since November brings the so-called “fear gauge” back down to the low levels that persisted for much of the start of this year.

****SD: TradingFloor.com has Volatility Update: Euro Stoxx 50 volatility plunges and MarketWatch has VIX ‘fear’ gauge plummets as French election results spark global relief rally.

The Downside of Managing Downside Risk
Daniel Needham – Morningstar
Despite the postelection rally that delivered robust returns for U.S. equities, 2016 was a decidedly volatile year for markets. With heightened market volatility came increased discussions about risk management. This is a common response, and when volatility returns—which it always does—the popularity of risk-focused approaches and products will spike, too.

****SD: I think everybody will have an opinion on this story.

Virtu’s Viola seals biggest deal with military precision
Nicole Bullock and Arash Massoudi – Financial Times
Bamonte’s, the Italian restaurant in the heart of Brooklyn’s Williamsburg, is known for making a delicious seafood fra diavolo and appearing in scenes of the HBO series The Sopranos. It is also the favoured spot of one of the neighbourhood’s proud sons, Vincent “Vinnie” Viola, the billionaire founder of high-frequency trading group Virtu Financial, which this week agreed the biggest deal in its history: a $1.4bn takeover of KCG Holdings, one of its main Wall Street stock-trading rivals.

Exchanges and Clearing

CME sees mainland presence in commodities, derivatives rising
Duan Ting – China Daily
One of the top leaders of the world’s biggest derivatives marketplace-the Chicago Mercantile Exchange & Chicago Board of Trade-said that much greater participation from the Chinese mainland has been seen in the past two years in the global commodities and derivatives markets.

****SD: Well, they sure don’t see it growing in Europe, that’s for sure.

Regulation & Enforcement

Trump orders review of financial rules to prevent future crises
Pete Schroeder – Reuters
U.S. President Donald Trump ordered the Treasury Department on Friday to examine two powers given to regulators to police large financial companies following the 2008 financial crisis, Treasury Secretary Steven Mnuchin said.

Bring Back Glass-Steagall? Goldman Sachs Would Love That
William D. Cohan – NY Times
Among the many silly ideas floating around Washington these days about how to re-regulate Wall Street is that old chestnut about separating investment banking from commercial banking. It’s getting a fresh look after Gary Cohn, the powerful head of President Trump’s National Economic Council, supposedly told a private gathering of the Senate Banking Committee recently that the Trump administration would be open to the idea. The president has yet to confirm publicly that he would support such legislation.

Fraudsters filing fake email transfers to fool brokerages
Susan Antilla – CNBC
When a customer at the Doylestown, Pennsylvania, branch of Securian Financial Services Inc. emailed to ask for a $40,000 wire transfer back in 2015, employees sprung into action. Christopher J. Hackley, the stockbroker in charge of the account, forwarded the request to sales assistant Rosemary McGinley, who put the gears in motion to get the paperwork done. With the help of two other colleagues over the next six days, the broker and assistant swiftly processed that and two more wire requests totaling $147,000.

All about options trading in commodities (India)
Ram Sahgal – Economic Times
Market regulator Sebi could announce the operational framework for introduction of options in commodities.


FPGAs Can Help Latency Sensitive Traders Achieve Better Executions
John D’Antona Jr. – Traders News
In this Q&A with Traders Magazine, Louie De Luna, Director of Marketing at ALDEC, talks about trading technologies such as Field Programmable Gate Arrays, software and latency issues and how his firm looks to help high-frequency and other speed-dependent traders in their quest to achieve best execution.

Patrick Lau Assumes Leadership Of EMEA Sales At Redline Trading Solutions
Redline Trading Solutions, the premier provider of high-performance market data and order execution systems for automated trading, today announced Patrick Lau as Director of EMEA Sales, operating out of Redline’s office in the City of London.

Itiviti Rolls Out New MiFID II Certification Solution
Jeff Patterson – Finance Magnates
Itiviti, a provider of technological resources for the capital markets industry, has deployed a new Itiviti MiFID II Certification Solution, helping support onboarding and re-certification efforts for FIX protocol order flows ahead of upcoming legislative changes in January 2018.


Quants Fire Back at Paul Tudor Jones After His Attack on Risk Parity
Dani Burger – Bloomberg
Macro manager sees strategy as driver for next stock selloff; Risk parity didn’t dump all stocks in last correction: AQR
Paul Tudor Jones says automated trading strategies are poised to blow up the market when volatility returns. That’s not going over well at one of the biggest quant shops on Wall Street.
Speaking at a closed-door Goldman Sachs Asset Management conference earlier this month, the billionaire hedge fund investor said that a portfolio strategy known as risk parity will eventually act as “the hammer on the downside” when turmoil returns to equity markets.

****SD: More on the topic from Dani Burger in September 2016 – Quant Who Coined Risk Parity Says Wall Street Has It Wrong

Coping With a Market Biased to the Downside
Steve Sosnick – Barron’s
Is Mr. Market having a Nigel Tufnel moment? Why would the fictional lead guitarist in the movie This Is Spinal Tap be relevant here? For better or worse, I find one of his most famous quotes to be eerily reminiscent of the stock market’s valuation as earnings season commences:

Hedge Funds Jump on Gold for Life Raft as Dollar Ship Sinks
Luzi-Ann Javier – Bloomberg
There’s no stopping the gold bulls. Hedge funds increased their wagers on a gold rally to the highest since November, betting that this year’s 11 percent advance has more to go. Investors are also loading up on the metal through exchange-traded products, pouring $487 million into SPDR Gold Shares on Wednesday. That was the biggest daily inflow into the world’s top bullion ETF in seven months.

****SD: I know I’m being “that guy,” but let’s be clear: Gold would make for terrible life raft material.

Oil Investors Raise the Bet on Higher Prices and Lose
Mark Shenk – Bloomberg
The shale boom is making it hard to be an oil optimist. While hedge funds raised their bets on rising prices, the market tanked. Money managers boosted wagers on higher West Texas Intermediate crude for a third week as of April 18, U.S. Commodity Futures Trading Commission data show. The next day, futures tumbled after a report showed U.S. output rose for a ninth straight week. Prices continued to fall even after Saudi Arabia said exporters have reached an initial deal to extend production curbs past June.

Earnings Week of 4/24
Russell Rhoads – CBOE Options Hub
We hit the busiest part of earnings season this week. The stocks below have Weeklys available for trading and the numbers represent the last 12 quarters of one day price reactions to their announcement (with one exception – PYPL). As always double check the dates as none have been confirmed.


Weekend Review of Volatility Indexes and ETPs – 4/17/2017
Russell Rhoads – CBOE Options Hub
The VXST – VIX – VXV – VXMT curve is a textbook, “here’s what it looks like in front of an event”. The event being the first round (yes it doesn’t end Sunday) of the French Election. We will know when the markets open Monday morning who the two finalists are to be the next President de la Republique. I do expect VXST to fall back in line come Monday morning, either with the longer dated contracts rallying but more likely due to VXST dropping like the implied volatility of stock options after earnings.

Weekend Review of VIX Options and Futures – 4/17/2017
Russell Rhoads – CBOE Options Hub
April VIX was retired last week and May became the front month. We have a volatility event this weekend which has resulted in a bit of front month vs spot VIX backwardation. I have a feeling that will not be the case as the election results are digested starting Sunday night.

Weekend Review of Russell 2000 Options and Volatility – 4/17/2017
Russell Rhoads – CBOE Options Hub
Small caps had a good week last week as the Russell 2000 (RUT) rose about 2.5% which places it up 1.67% for the year. The large cap focused Russell 1000 (RUI) was up just under 1% and is not up 4.96% for 2017.


We asked 6 Wall Street recruiters about the hottest trends in hiring
Business Insider
It’s moving season on Wall Street. Bonuses have landed in bank accounts, freeing up bankers and traders to move to new employers. Big people moves on Wall Street often occur around this time of year.

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