CAT to boost cybersecurity threat?; FX markets stuck in low-volatility; Light trading volume in banks’ results

Oct 11, 2017

Lead Stories

Audit Trail Could Boost Cybersecurity Threat, Exchanges Say
Benjamin Bain – Bloomberg
CBOE’s Concannon sees little benefit gained for greater risk; SEC facing calls to delay CAT until security can be ensured
Stock exchanges could become more exposed to cyberattacks through a trade database being built to help U.S. regulators police markets, industry executives said Tuesday.

****SD: Not to be lost in this ongoing discussion: SROs helped write the requirements for the CAT.

FX Markets Are Stuck in Low-Volatility Quicksand With No Escape
Dani Burger – Bloomberg
Currency markets are trapped by low volatility and only a fundamental break of historic proportions can shake them free.

****SD: Pretty remarkable chart accompanying this article regarding the shifts in how currency pairs react to information over the past 15 years.

Light trading volume seen as black spot in banks’ results
Sinead Carew – Reuters
U.S. banks’ equity trading volume has been hit by record lows in volatility as investors have less reason to trade if stocks are not moving much. At the end of the third quarter, the quarterly average for the CBOE market volatility index .VIX, was at its lowest ever.

Bond Volatility At Rock Bottom
Seeking Alpha
Just like with markets and economies, humans go through cycles of emotion and turning points – it’s often the case that when someone hits “rock bottom” that it becomes cathartic, a self-limiting turning point. The conditions faced at rock bottom tend to sow the seeds for an eventual comeback. So in thinking about bond market volatility hitting rock bottom, it’s worth pondering whether these conditions are sowing the seeds of an eventual comeback in bond volatility…

****SD: Rock bottom is when you stop digging. Have people actually stopped digging?

Could excessive hedging sink the S&P 500?
Kathleen Brooks – City Index
There is an inherent tension in the stock market right now, on the one hand volatility remains at historically low levels, while on the other the amount of downside protection being bought is rising sharply. We question whether this hedging activity could actually be the canary in the coalmine for the US indices, and once hedging gets to an excessive level if it becomes a self-fulfilling prophecy.

Exchanges and Clearing

CME, Linchpin of Chicago Finance, Says It’s Not Tied to the City
Brian Louis and Nick Baker – Bloomberg
CEO Duffy notes exchange is based there for ‘legacy reasons’; But the Chicago native sees many great reasons to stay
CME Group Inc. has a message for Illinois legislators who see the $47 billion global derivatives trading giant as a piggy bank to help solve the state’s fiscal woes.

****SD: This isn’t “news” so much as a reminder that the Merc uses locational uncertainty for political leverage.

Before the Business Conduct Committee of the Chicago Board Options Exchange
In the Matter of Oppenheimer & Co.

****SD: The CBOE says in the letter of consent that over the course of seven years Oppenheimer had some 1.5 million instances of faulty reporting. The total fine is $700k, $625k of which goes to CBOE.

Nasdaq’s Strong Position In Options Market Should Boost Q3 Earnings
NASDAQ’s strong growth in equity options trading volumes continued in Q3, with around 364 million contracts traded in the U.S. market, about 5% more than the prior year Q3 trading volumes and overall U.S. equity options volumes (+2%). This was primarily due to a substantial gain in market share to over 41%, driven by the acquisition of ISE in 2016. Moreover, we believe the strengthening of the U.S. dollar and other macro factors contributed to increased volatility in the market, and consequently drove trading volumes.

Russell 2000 Goes Home Again – Inside the FTSE Russell Migration Back to CME
Tom Lehrkinder – TABB Forum
Moving a futures contract – or a family of contracts – from one exchange to another requires a great deal of preparation, lead time and cooperation from all the constituents involved. In the case of the FTSE Russell futures and options on futures contracts, it was a two-year endeavor. New products needed to be loaded to trading systems; reconciliation tools and file transfer protocols needed to be tested; and settlement and clearing platforms required updates. But perhaps most important, since there is no fungibility or direct transfer capabilities to simply move positions from ICE to CME, traders are required to enter into a risk-based trade to move their positions.

Regulation & Enforcement

US finance industry bemoans ‘massive headache’ of Mifid II
Robin Wigglesworth, US markets editor – Financial Times
Europe’s looming regulatory overhaul is inducing a “massive headache” for the US finance industry, which is still anxiously waiting for regulators to resolve crucial conflicts with American rules, according to representatives of US banks and investment groups.

****SD: The headache analogy falls short when thinking of remedies – there is no ibuprofen for MiFID.

D-E-A-D Means A-L-I-V-E: Proposed CFTC Reg AT to Be Reworked
Tom Lehrkinder – TABB Forum
Two years after the CFTC proposed Regulation Automated Trading, new CFTC commissioner Brian Quintenz declared the controversial rule dead. But D-E-A-D likely really means A-L-I-V-E – alive in the sense that many of the proposals in Reg AT that do make sense and add value to the process will be resurrected in focused and more easily digested proposals, says TABB Group’s Tom Lehrkinder.

****SD: Tom Lehrkinder just made me think about “Dead Alive,” the gore-fest Peter Jackson movie he made in ’93 before fame and fortune with the “Lord of the Rings” series. (Note: the link above is just to the flick’s IMDB page and not some crazy clip on Youtube, of which there are plenty.)

Industry groups support Protection of Source Code Act
FIA and the FIA Principal Traders Group (FIA PTG) joined with the Modern Markets Initiative (MMI), the International Swaps and Derivatives Association (ISDA), and the U.S. Chamber of Commerce in expressing support for Congressman Sean Duffy’s legislation to protect access to source code.

Global Regulators Play Bitcoin Whack-a-Mole as Demand Explodes
Olga Kharif and Camila Russo – Bloomberg
Regulators worldwide are finding that it’s incredibly hard to control the explosive growth of money tied to no nation.

****SD: It’d be a lot more fun to be a regulator if day-to-day activities involved comically large mallets.


People: Credit Suisse hires in equities, reshuffles senior management
Michael Ebert has joined Credit Suisse as global head of equity derivatives. Ebert will be based in New York, reporting to Mike Stewart, global head of equities, and Yves Alain Sommerhalder.

A tech veteran has joined Goldman Sachs after leaving the biggest hedge fund in the world
Frank Chaparro – Business Insider
Goldman Sachs is continuing to fill its ranks with top tech talent to cement its position as a leading technological force on Wall Street.


Intel delivers 17-qubit quantum computing chip to QuTech
Jordan Novet – CNBC
Intel’s new chip for quantum computing has a package that can keep it working for a longer period of time.
A quantum chip could come in handy for drug discovery or materials science research.


The Kelly Criterion and Option Trading
Euan Sinclair – Highly Evolved Vol
The Kelly criterion can be used to calculate the optimal size of a trade. Specifically, it gives the size that increases the trader’s account at the fastest possible rate. It is possible that a given trader might not actually want this. She might want some sort of volatility or draw down constraint as well, but traders should still understand the ideas and implications of Kelly sizing. And misunderstanding abounds.

****SD: Prepare to get your math hat on.

Enhancing enterprise value by trading options
Dilip B. Madan and Yazid Sharaiha –
Investment activities are enhanced by a regular positioning in options. Results are presented for the Standard & Poor’s 500 index as the underlying asset. Two base activities, long the index and a dynamic portfolio periodically rebalanced to a 60% equity stake, are considered for enhancement. In each case periodic targets that may involve untraded strikes are formulated. Option positions are sought in traded strikes with a view toward minimizing the capital charge for the risk remaining after the hedge.

****SD: The comment for Euan’s blog above applies here also. The paper in question can be found here. And then there’s this paper – Leverage and uncertainty – which similarly made the Journal of Investment Strategies and popped up on today. It also references kurtosis and Kelly theory. Don’t know if we’ve ever had two kurtosis-related pieces in the newsletter before.

Goldman Sachs: Here’s how to make a killing this earnings season
Business Insider
All earnings seasons are an ideal time to make money trading stocks. Investors are given a huge load of tradeable information, and the resulting price swings create major opportunities.

****SD: Goldman says buy straddles that cost less than the expected price swing in the underlying.

Mexican Peso Traders Seek Hedges as Election Talks Heat Up
Aline Oyamada and Daniela Guzman – Bloomberg
Growing speculation that a populist candidate stands a good chance to become Mexico’s next president is sending traders to the options market for protection against a selloff.


Google Buying Apple? Sorry, That Was Just a Test
Jaclyn Peiser – NY Times
The Dow Jones Newswire headline seemed too far-fetched to be true. And it was.
“Google to buy Apple for $9 billion,” it read.
Was there a hack? Had the tech world gone mad?
Neither, it turned out. The bogus headline was accidentally sent out to Dow Jones subscribers around the world on Tuesday morning. Before readers realized it was not true, there was a slight bump in Apple’s stock price.

Quant Hedge Fund Acrospire Shuts Down After Clients Pull Money
Hema Parmar – Bloomberg
Another hedge fund is calling it quits.
Acrospire Investment Management, which uses machine learning to wager on and against stocks globally, is shuttering and returning its capital to clients, according to a Sept. 29 email to investors seen by Bloomberg News. The Chicago-based quant firm, which ran $350 million at its peak, saw assets sink by about two-thirds as investors asked for their money back following the fund’s poor 2015 and 2016 performance.

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