Buy-side least optimistic about derivatives revenue increasing; A look at free trading apps

Apr 18, 2019

Observations & Insight

Finding the Perfect Match(ing Engine) – Jim Downs, Connamara Systems

Jim Downs spent nearly 20 years as a market maker on the CBOE floor. His background in electrical engineering helped him build software for his trading activities. That knowledge of trading systems he used as the foundation of his software engineering firm, Connamara Systems, in 1998. Connamara specializes in building exchanges – matching engines and all the necessary peripheral technology – as well as bespoke projects for FCMs, hedge funds and the like. Connamara was also an early contributor to QuickFIX, the open source FIX protocol implementation.

After years building similar engines, Downs and his team decided to build one technology, EP3, to be applied to any small or mid-sized exchange. In this video, Downs talks about the reasoning behind releasing EP3.

Watch the video »

Lead Stories

Report shows buy-side are the least optimistic about derivatives revenue increasing
John Brazier – The Trade
Buy-side respondents to a new survey appear they are least optimistic about revenues stemming from the derivatives market rising in the next three months, citing issues such as low volatility, regulation and Brexit as forming their opinion.

Free trading apps ó investment freedom or false economy? There are plenty of considerations beyond the raw cost of a transaction
Kate Beioley – FT (SUBSCRIPTION)
A new breed of fintech upstarts has thrown down the gauntlet to the giants of the UK investment platform market. For investors who want to deal in stocks, shares and other listed investments, a crop of commission-free trading services has sprung up that let them do so ó for nothing. App-based services such as Revolut and Freetrade are shaking up the investment market with free trading options and, they say, shining a light on the often hefty dealing fees imposed by companies such as Hargreaves Lansdown and Interactive Investor. These can add hundreds of pounds to investors’ bills each year.

The King of ETF Trading?
Paul Rowady – Alphacution
It’s a holiday shortened week and a lot of folks are OOO with brain settings dialed to low intensity. So, we will keep this one short, tight and appropriately entertaining: With the heavy lift of the Citadel Securities case study ink (mostly) dry, we now turn our attention to the next series of puzzles. Generally speaking, the puzzles that captivate in the immediate future include 1) the rankings of market makers, prop traders and quant players (both, buy-side and sell-side, wherever applicable) operating within our structural alpha zone, 2) the ranking of players that are dominant in options trading – the Option Gods, 3) the ranking of players that are dominant in ETF trading, and 4) the subset of these rankings where players are strong across all of these factors.

Investors Get Greedy as Nasdaq 100 Hits a Record
Luke Kawa – Bloomberg (SUBSCRIPTION)
Apple, Qualcomm deliver final push past August all-time high; Options show elevated expectation for more gains on earnings
The leaders of the decade-long bull run in U.S. equities are back at an all-time high. The Nasdaq 100 closed at a record of 7,680.72 on Wednesday, surpassing its August 2018 peak and extending its year-to-date gain past 21 percent. The last thrust was paced by just two stocks. Strip out Apple Inc. and Qualcomm Inc., which agreed on a settlement to resolve litigation, and almost all of the 0.3 percent gain would vanish. The equal-weight version of the Nasdaq 100 closed lower, indicating poor breadth.

Inside Volatility Trading: April 17, 2019
Cboe Blog
Cboe RMC Insights: 2019 U.S. Interviews
Did you miss this year’s Cboe Risk Management Conference in Carlsbad, California? Watch our video series to hear insights from our panelists of top traders, strategists, and researchers on the latest volatility trading models, hedging techniques, and equity derivatives use cases.

Exchanges and Clearing

Don’t fear the clearer; Wider use of CCPs not systemic threat – but participants do face hard-to-measure risks
Alexander Lipton –
The perils of widespread central clearing are real – system participants accept hard-to-fathom credit and liquidity exposure – but our analysis of this complex network suggests the tail risks are often overstated. Larger clearing members have enough capital to weather a crisis. Admittedly, smaller firms could be submerged in the waves created by a fellow member’s default, but even a chain of such losses would not threaten the system as a whole.

****Non-paywalled commentary.

Rosenblatt cuts Cboe, CME on tough 2019 start
Liz Kiesche, SA News Editor
Rosenblatt’s Kenneth Hill downgrades Cboe Global (NYSE:CBOE) to neutral from buy and CME Group (NASDAQ:CME) to sell from neutral, citing Q1 earnings moving lower overall.

Regulation & Enforcement

Leverage ratio “biased against derivatives” – Giancarlo
James Thursfield – Global Investor Group (SUBSCRIPTION)
CFTC chairman says applying the SLR to clearing customer margin reflects a flawed understanding of CCPs


Ion’s Deal for Allegro Worries Commodity Firms; Acquisition gives Ion a near monopoly in energy trading and risk software
Luke Clancy and Stella Farrington – WatersTechnology (SUBSCRIPTION)
Ion Investment Group’s acquisition of Allegro Development, the last major independent provider of commodity trading and risk management (CTRM) software, is stirring up concerns among some customers, who worry it could stifle development and lead to price increases.


Goldman Works Out Best Times to Enter, Exit Earnings Trades
Joanna Ossinger – Bloomberg (SUBSCRIPTION)
Liquidity is usually ample in five days leading up to results; Consumer discretionary industry is ticket to outperformance
As earnings season powers ahead, the question of when to enter and exit stock trades has been answered by Goldman Sachs Group Inc.

Big Shift in Interest Rate Expectations
Sage Anderson – tastytrade blog
…What initially grabbed the attention of the market was the fact that expectations suddenly shifted regarding interest rates. As most are already aware, the Federal Reserve uses interest rates as a tool to help manage the US economy.

How to Buy Goldman Sachs and JPMorgan Chase Stock on the Cheap
Steven M. Sears – Barron’s
Goldman Sachs Group has some of the world’s greatest traders. Yet many of them failed to perform as well in the first quarter as individual investors who own low-cost exchange-traded funds.


Bruised oil trader Andurand looks to take riskier bets; Hedge fund manager is launching a new fund that takes on more risk as a way to benefit from crude’s recovery
Georgi Kantchev – Financial News (SUBSCRIPTION)
Pierre Andurand, a prominent oil hedge fund manager who lost big during last year’s price slump, is launching a new fund that takes on more risk as a way to benefit from crude’s recovery.

Quants’ Quandary: Crossing the Chasm, Part 4 – Ugly Ducks & Chasm Spasms
Rick Roche, CAIA – Tabb Forum
Unlike the exaggerated media coverage and hype, quantitative investing is the Ugly Duckling of the investment management industry. In the first six months of 2018, investor flows into quant hedge funds were a paltry $4.6 billion. In part 4 of his 5-part series, Little Harbor Advisors’ Rick Roche describes the chasms quants must cross to move into the mainstream markets.

Health-Care Carnage Is Another Case of Crowded Stocks Unwinding
Tatiana Darie and Lu Wang – Bloomberg (SUBSCRIPTION)
Politics may be the root cause, but underlying the carnage in health-care stocks is a lesson investors seem to learn over and over: that too much love can be a bad thing.

****SD: From the story: “Money is rushing out of industry-focused exchanged-traded funds and options traders are scrambling for cover. It smacks of the drubbing absorbed by another crowded group, tech megacaps, in the fourth quarter.” WSJ has Health-Care Stock Rout Deepens Amid Political Pressure.

The Return of the Ag
RCM Alternatives
We’ve talked recently about African Swine Flu sending the Hog market for a ride, and that’s just the sort of thing we imagined in our 2019 Outlook whitepaper when we talked about the “return of Ag.” There’s been four straight years of volatility contraction for the Ag markets, and there’s a real threat that the increasingly connected global food supply and increase in the volatility of the weather causes some outlier moves in Ag markets.

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