Observations & Insight

Take Our Survey: Yeah, really
By Jim Kharouf, JLN Editor-in-Chief & CEO

If you’re like me, you’re about to roll your eyes but hang in there. We need your help on our annual survey. If you’re still reading, it’s really import.

This 3-minute survey helps us learn a bit more about our readers as well as what you like and what you don’t like about our publications and websites. It’s also a great place to leave us comments and suggestions for future content and services.

We’ve tried to sweeten the deal this year by offering a chance to win an Amazon Echo. So help us out please. It does make a difference.

Here’s the link to the survey. Thanks!


20/20 Vision: Richard Sandor, Inventor Of Market Solutions, Releases New Book On Environmental Markets
By Jim Kharouf, JLN Editor-in-Chief & CEO

There are few who change the world in a profound way. Richard Sandor, who brought us the first interest rate futures contract, also created the Chicago Climate Exchange in 2003. CCX launched a new set of greenhouse gas contracts as an innovative step to solving the issue of global warming.

In his latest book, “How I Saw It,” Sandor republishes many of the columns he wrote from 1999 to 2005 during that pivotal time in the development of environmental markets. Despite what some may think about carbon markets today – as a politically unpopular solution in Washington – it’s a market that has grown dramatically around the world. The Regional Greenhouse Gas Initiative (RGGI) among a number of northeast states was the first multi-state carbon market, while California has had to lead the way out west. But the idea and the products Sandor and his team designed and developed are also traded in Europe, as part of the European carbon market, not to mention a budding system of regional and national markets in China. CCX was sold to the Intercontinental Exchange in 2010.

To read the rest of this story, go here

Lead Stories

Bets for Higher U.S. Yields Wane as Options Show Trump Fatigue
Tanvir Sandhu – Bloomberg
Rate skew options fall near zero after rallying on Trump win; Tax reform, Fed rate trajectory next triggers for yield moves
Bets on a rise in U.S. Treasury yields are waning in option markets, on uncertainty over President Donald Trump’s fiscal policies, Federal Reserve rate rises and the French election.

Traders target ETFs and weekly options for growth
Julie Aelbrecht – FOW
ETF industry reached a new record high of $3.7 trillion assets invested in February
Panelists at the FOW Derivatives Tel Aviv event on Tuesday singled out exchange traded funds and weekly options as the biggest opportunities in the equity derivatives markets. “Expansion in the derivatives market is being led by exchange traded funds, with over $600 billion traded in Europe and more than $3 trillion in the US and it is a growing market. Also, with Mifid II, it is set to become a recognised trading instrument,” said Martin Frewer, global commercial director at ABN Amro Clearing UK.

A new breed takes over the trading floor
Samuel Agini And Tim Cave – Financial News
Gone are the days when the trading floors were dominated by booming voices and forceful personalities. The advent of electronic trading means the arena is the stomping ground of a new breed. “The job of the trader is now very, very technical,” said Vax Bahram, a director at headhunter Durlston Partners LLP. “A trader who used to be on the trading floor 15 years ago is now replaced by algorithms. … In some ways, the same job does not exist anymore.”

****SD: To think at one point Skynet embodied our fear… the truth of our technological demise is much more mundane.

Was The Catalyst Fund Really The Catalyst?
Peter Tchir – Forbes
There was a lot of discussion last week about how the $3.5 billion Catalyst Hedged Futures Strategy Fund (ticker: HFXAX) was possibly driving the entire stock market. To be frank it is disturbing to me that a fund of this size could be viewed as the key market driver for even a few days, but the chatter was so prevalent that I felt the need to explore it a bit further.

Most Things Are Relative
Fei Mei Chan – S&P Indexology Blog
The S&P 500 Low Volatility Index measures the performance of the 100 least volatile stocks in the S&P 500. In its latest quarterly rebalance (effective at the market close on February 17, 2017), the index scaled back weightings in Utilities, Health Care and Real Estate while adding weight from the Technology, Financials and Consumer Discretionary sectors.

Schaeuble Sees Financial Transaction Tax Riddled With Holes
Alexander Weber and Rainer Buergin
‘Even a Swiss cheese needs more than holes,’ Schaeuble says; 10 nations pursuing the tax met inconclusively in Brussels
German Finance Minister Wolfgang Schaeuble said a proposed European financial transaction tax is being hollowed out by increasing demands for carve-outs.

****SD: Oooh, Schaeuble with the burn!

Reshaping Financial Industry Through Intelligence and Automation
Siamak Amirghodsi VP, Data Management & Analytics, OCC
As the world’s largest equity derivatives clearing house, OCC delivers cost-efficient and world-class risk management, clearing and settlement services to the listed options market. Regulated counterparties (CCPs) such as OCC have historically performed well during times of market stress, which has led global policy makers to mandate that more financial transactions be centrally cleared through CCPs following the 2008 financial crisis.

Options on Futures Volumes See Significant Growth in Israel
OptionsCity Blog
As we drive from Ben Gurion Airport to Tel Aviv Beach for the FOW Derivatives Israel conference, we get a first-hand view of the physical growth of Tel Aviv with cranes and construction sites clearly indicating that this city is going through a rapid expansion. What may be less obvious is that Tel Aviv has also become an important hub for derivatives trading.

Exchanges and Clearing

CME Group sees Chinese hedge funds, state-owned firms driving Asia growth
Saikat Chatterjee and Michelle Price – Reuters
China’s 2015 market crash sparked a surge in Asian trading for futures exchange giant CME Group as Chinese funds hedged their risk offshore and growth prospects remain strong, the bourse’s head of Asia said on Tuesday.

****SD: I did not realize that China has roughly 8,000 domestic hedge funds. Context: the total number of hedge funds globally is 10,000ish.

Euronext Seeks Takeover Targets Amid Goliath Rival Tie-Up
John Detrixhe – Bloomberg
Euronext CEO Boujnah is intent on acquiring Clearnet; Company may have few other targets if deal doesn’t succeed
Pan-European market operator Euronext NV, faced with losing ground to bigger rivals, is intent on transforming the company.

****SD: “We don’t intend to sit on this pile of cash.” – Euronext CEO Stephane Boujnah

FCM retrenchment changing face of clearing – panel
Julie Aelbrecht – FOW
New financial regulations are set to force large banks further into retreat
The global retrenchment of banks in the derivatives is creating challenges for smaller firms and opportunities for non-bank futures commission merchants, market experts concluded at the FOW Derivatives Israel event on Tuesday. Keynote speaker Mark Phelps, global head of sales and marketing at GH Financials, set the tone when he pointed out that a number of larger banks were off-boarding small and mid-sized clients.

****SD: And that spells opportunity.

BM&FBovespa advances clearing migration plan
Luke Jeffs – FOW
The exchange said it wants its equities and derivatives clearing under one roof
The Brazilian exchange BM&FBovespa said it has started working on a technological project to migrate its equities and fixed income segments to its main derivatives clearing house. Sao Paulo-based BM&FBovespa said in a statement late on Friday it is working on various projects including one to consolidate its equities, fixed income and derivatives clearing into a single central counterparty.


CME to part ways with two senior US directors
Luke Jeffs – FOW
CME Group is to part ways with two US-based senior directors, marking the latest management changes at the US exchange giant under new chief executive Terry Duffy. The Chicago-based exchange giant is to part ways with Robert Zagotta and Umesh Gajria, two senior figures in the Merc’s US based team, though the timing of their departures is unclear.

Regulation & Enforcement

Trade associations comment on continuity of access to financial market infrastructures
FIA joined the Clearing House Association and the Securities Industry and Financial Markets Association (SIFMA) in a response to the Financial Stability Board’s Guidance on Continuity of Access to Financial Market Infrastructures (“FMIs”) for a Firm in Resolution.

India Widens Market for Foreigners Easing Derivatives Limits
Santanu Chakraborty – Bloomberg
A recent change to India’s trading rules has opened the door for fund managers to increase their holdings of derivatives in the country, loosening restrictions that had stifled trading.

Breaking: Dutch Regulator Prepares Binary Options, FX and CFDs Advertisement Ban
Finance Magnates
The Netherlands is officially becoming the next EU member state to make good on its promise for stricter regulation of retail financial products. The Dutch AFM (Financial Markets Authority) is preparing to limit the advertisement of certain financial products that the country’s government deem too risky. Today the Dutch regulator published a communique which effectively starts a period of consultation with the industry and clients of the financial services.

****SD: Another nail in the coffin for OTC binary options.


CrÈdit Agricole to overhaul FX and derivatives trading systems
Hayley McDowell – The Trade
CrÈdit Agricole CIB is to replace its trading legacy systems for interest rate derivatives and FX trading through a partnership with Orchestrade Financial Systems.

Redline Trading Solutions Doubles New York City Office
PR Web
Redline Trading Solutions, the premier provider of high-performance market data and order execution systems for automated trading, today announced its move to a larger office in lower Manhattan. The new 10th floor location at 55 Broad Street offers more than twice the prior floor space.


Putting Low Stock Volatility to Good Use (Guest Columnist at Barron’s)
Bill Luby – Vix and More
With spring training just getting underway in Florida and Arizona, I think it is appropriate that I once again have an opportunity to pinch hit for Steve Sears in his The Striking Price column for Barron’s. Today’s column is called Putting Low Stock Volatility to Good Use (my title suggestions always seem to end up on the cutting floor) and builds upon some of the ideas I presented three years ago in Low Volatility: How to Profit from a Quiet VIX.

****SD: He’s got a bit of a companion piece – SPX 1, 2 and 3-Year Returns Following Top and Bottom Five (and Ten) VIX Average Annual Readings

The Old Four Horsemen Are Riding High
Bob Lang – CBOE Options Hub
The four horsemen of the Apocalypse were so named in the New Testament of the Bible. They are a symbolic prophecy of the subsequent history of the Roman Empire. In today’s market world we often talk of the leading technology names, or ‘horsemen’ being Facebook, Amazon, Netflix and Alphabet (Google), which form the acronym FANG for which Jim Cramer and I together named this group back in 2013 on an episode of Mad Money.

How Traders And Investors Can Thrive In Low Volatility Markets
Brett Steenbarger – Forbes
Returns of hedge fund managers and short-term proprietary traders have been hard to come by in recent years. According to one report, investor satisfaction with hedge fund returns is at its lowest level in four years. It’s perhaps no coincidence that, over that time, market volatility has declined significantly, reducing the average size of market moves for active money managers. Steve Spencer, in a thoughtful blog post, cites a host of catalysts for this reduced volatility, including regulatory actions, central bank policies, and the rise of passive, factor-based investment strategies.

Traders Preparing for Volatility Shock Use Leveraged ETF: Chart
Cecile Vannucci – Bloomberg
With the CBOE Volatility Index near lows and the S&P 500 Index at a record, investors are increasingly using an exchange-traded fund that profits when stock swings jump. The number of shares and options traded on the ProShares Ultra VIX Short-Term Futures surged to records last week, as the fund had its biggest inflows since October, in the run-up to the presidential election.

Money Managers Are Long $21 Billion Of Crude Futures – What Now?
Seeking Alpha
Commodities: Traders are super long copper, cotton, and WTI crude oil. Gold and sugar are much less crowded. Currencies: Hedge funds haven’t been this long U.S. Dollar Index futures in five years. Stocks: Traders positioning in stock futures really isn’t as optimistic as you’d guess. Institutions are very short VIX futures.


Weekend Review of VIX Futures and Options – 2/13 – 2/17
Russell Rhoads – CBOE Options Hub
We’ve experienced several twists in the volatility markets this year where the futures don’t move in sync or in line with spot VIX. This occurred again last week as VIX rose almost 6% while the futures markets moved lower. Part of this may be attributed to February going off the board, at least with respect to March, but the farther date futures had been a bit elevated this year, but with the lack of any sort of volatility event appear to have started to weigh on the farther dated part of the curve.

Weekend Review of Volatility Indexes and ETPs – 2/13 – 2/17
Russell Rhoads – CBOE Options Hub
VXST and VIX managed gains last week while the longer dated volatility indexes (VXV and VXMT) both lost value. The curve created by charting out VXST, VIX, VXV, and VXMT has been steep for most of 2017 as the shorter dated indexes have been at very low levels. The price action last week narrowed the angle to more normal levels.

Weekend Review of Russell 2000 Options and Volatility – 2/13 – 2/17
Russell Rhoads – CBOE Options Hub
The Russell 1000 (RUI) gained about 1.5% last week and is now up over 5% for the year while the Russell 2000 (RUT) was up 0.8% and is trailing RUI up a tad more than 3% for 2017.


Tax Advantages to Trading Index and Non-Equities Options
Wednesday, Feb 22 3:30 – 4:30 p.m. CT
Bob Gordon, president at Twenty-First Securities Corp., will guide us through the unique and, sometimes, the most preferable tax treatment given to index and other non-equity options. Mr. Gordon also will discuss in-depth the taxation of options on indices, gold, MLPs, and other non-equities.

Covered Call Writing – Tax Traps and Opportunities
Thursday, Feb 23 3:30 – 4:30 p.m. CT
In his second discussion, Mr. Gordon will walk us through the unique, yet, sometimes cumbersome tax opportunities that arise when investors write covered call options. With a heavy focus on qualified covered calls, straddles, and holding periods, Mr. Gordon will introduce a useful tool to assist you with your tax questions on options.


Internationalisation Of The Rupee: How Near? How Far?
Jamal Mecklai – Bloomberg
Over the past twenty years or so, there have been many committees set up to assess the prospects and processes for capital account convertibility, and, more recently, internationalisation of the rupee. This second is more encompassing, including as it does, enabling Indian companies to sell to (and buy from) international customers (sellers) and/or to borrow from global investors in Indian rupees.

All Is Calm in Sweden’s Currency Market
Love Liman – Bloomberg
EUR/SEK 1-month implied volatility drops to lowest since 2014; Some investors may need to reduce exposure to volatility: SEB
A measure of anticipated swings for Sweden’s krona may slide further after dropping to the lowest level in more than two years, analysts say, as the nation’s central bank has indicated that it’s in no hurry to move away from its monetary accommodation.

****SD: This is the sort of Sweden news I’m accustomed to.

I trained as a binary options salesman for a day. It wasn’t pretty
Iacopo Luzi – The Times of Israel
I never imagined myself as an undercover reporter, but when I read The Times of Israel’s ongoing series of investigative articles into the plague that is Israel’s widely fraudulent binary options industry, I volunteered to apply for a job in one of the many firms that ply this trade.

****SD: The product may have changed, but the feel of the fraud is entirely the same as decades past.

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