Observations & Insight

Bits & Pieces from yesterday’s FOW-JLN Trading Chicago Event: Things ain’t great
Spencer Doar – JLN

First, if you’ve been in a cave, look at the VIX today – popped to over 15 and has now dropped into the 13 handle.

The options panel at the FOW-JLN Trading Chicago Event yesterday was a lively affair. The panel featured moderator Chip Dempsey, OCC SVP and Chief Commercial Officer; Euan Sinclair, partner at Talton Capital Management; Paul Jiganti, MD options business development with IMC; Steve Crutchfield, head of market structure at CTC; and Dash Financial CEO Peter Maragos. Some serious issues were discussed in detail (and there was even some intrapanel dissent!). Here are some takeaways:

-It’s known that there are three major banks doing the heavy lifting when it comes to options clearing, but did you know that means two OCC clearing members account for some 50 percent of the overall options volumes? The severity of bank capital rules is a dire situation and as Crutchfield said, the math “doesn’t make sense.” (Related: just three products represent 50 percent of the volume.)

-It’s hard to exactly quantify the decrease in options market makers, partly because of differing disclosures and semantics, but whether you say the community of options liquidity providers went from 70 to 40 or 60 to 15, the picture is not good. In the words of the panelists, if Susquehanna went under it would “not be good” and “let’s pray that doesn’t happen.”

-The options markets were compared to airlines: customers clamored for lower prices, which they got, but are now paying a price in terms of service. (Auctions are the parallel here.)

-IMC’s Paul Jiganti noted exchanges going public – shifting to a for profit model – helped lead to the fragmentation issues we see today. If opening another exchange is profitable, why not open one up?

-BOX’s proposed floor got some attention. Sentiment is that if approved it would represent a slippery slope leading to the proliferation of other options trading venues (which will likely happen anyway). It also represents an added burden to the market making community. Crutchfield said there are only 3 to 4 market makers with a presence on every floor.

-Key issues the panelists would like to see addressed are bank capital and auction reforms.

-The Options Regulatory Fee (ORF) remains at the heart of much of these conversations about exchange proliferation, since it in effect acts as a subsidy for exchanges.

-I learned the following (and a ton of other stuff) from the MiFID II panel. A prop firm might not be a “market maker,” but if it engages in “market maker activities or strategies” more than 50 percent of the time it will have to answer to MiFID as if it were a market maker. I’m guessing there is somebody out there programming a “we only have simultaneous bids and offers out 49 percent of the time” algorithm.


Lead Stories

Central bankers fuel volatility in FX and bonds
Dave Shellck – Financial Times
The European Central Bank attempted a damage limitation exercise following the sharp rise in the euro and sovereign debt yields sparked by comments from president Mario Draghi on Tuesday that were viewed by many as paving the way for a tapering of its stimulus measures. Senior figures in the ECB were reported to have signalled that the markets had “misinterpreted” Mr Draghi’s message — triggering a fresh bout of volatility.

****SD: VIX surging! (Revisit the short vol strategy story below.) Not options, but related, Money Markets Wake Up After Central Banks Turn Hawkish

Millennial investing in derivatives like options and futures
Akin Oyedele – Business Insider
Millennials are big users of some of the most speculative investing instruments in the stock market, according to TD Ameritrade.
The brokerage firm told Business Insider that the roughly 18-35-year-old demographic made up about 40% of its new customers. Almost half of their trades came from mobile devices, said Victor Jones, the director of trading at TD Ameritrade.

****SD: The “m” word gets clicks.

Tech Stocks Hit More Turbulence Than the Rest of the Market
Oliver Renick and Elena Popina – Bloomberg
Rotation into banks sends the Nasdaq 100 below 50-day average; Daily swings in the tech megacaps widest vs. S&P since 2014
Technology stocks’ alienation from the rest of the market worsened Thursday as another violent industry rotation left the Nasdaq 100 with a loss that was twice as big as the S&P 500’s.

Goldman: Don’t Hate On Short Volatility Strategies
Mark Melin – ValueWalk
Short volatility strategies have often been thrashed by more “traditional” quantitative asset managers as a “fat tail” strategy that contained significant hidden risk. But over the past year, that fat tail has occurred primarily in the positive returns department. A recent Goldman Sachs Options Research piece notes that one “short vol” strategy, as the concept is epistemically known, netted 197% over the past year. This raises the question: Is selling volatility a viable strategy? Or, as Goldman questions in the title of its June 28 piece: “Are Volatility Selling Strategies Crowded?”

****SD: We had this yesterday, but there’s a lot to digest and I have a few random thoughts. After all, a lot has changed in a day. First, for some context, XIV, the inverse VIX ETN, hit a 52-week high this week. But today, the VIX has surged and XIV is down around 8 percent (as of this writing). So anybody who decided to get in on the short vol party yesterday is likely in the fetal position. Second, LTCM comes up in this piece — was it cursed from the beginning because “long term” was in the name? I thought of that in light of the recent CFTC enforcement action against Wall Street Pirate Management, LLC and the March order against Zero Chaos Advisors. Yes, hindsight, etc., but names are important. Just see the study “Hedge Fund Flows and Name Gravitas” from earlier this year which is discussed in the following article – We Love Hedge Funds With Solid-Sounding Names.

EQDerivatives: “Attention Turns To German, Italian Elections As VSTOXX Solidifies Its Status As Event Risk Barometer”
Georgia Reynolds, EQDerivatives via Eurex Group
Despite the French elections coming to a close in June, liquidity in the Euro Stoxx 50 Volatility Index (VSTOXX) has continued to remain strong. The VSTOXX has this year solidified its position as the most efficient underlying to trade event risk in Europe, made evident by increased appetite in recent weeks in V2X Sept. futures as expectations increased for an Italian General Election in October. Georgia Reynolds sets out how market participants are progressively identifying the benefits of the VSTOXX when trading around events and why heightened liquidity in the underlying is here to stay.

Exchanges and Clearing

Lightspeed Trading Announces Introduction of Frequent Trader Program at CBOE
Press Release
Lightspeed Trading is always attentive to the needs of their customers and often incorporate customer feedback into their platform updates. Recently, a Lightspeed customer asked if the brokerage would be able to support the Frequent Trader program at CBOE, the largest options exchange in the U.S. Since many frequent traders turn to Lightspeed Trading for the cheapest option trading online, Lightspeed determined it would be beneficial to add this functionality to their software. By updating configurations within their systems, they were able to make the frequent trader program accessible to their clients.

SGX welcomes Shinhan Investment and Cathay Futures as new Derivatives Trading Members
Singapore Exchange (SGX) today welcomed Shinhan Investment Corp. and Cathay Futures Corp. as new Trading Members of its derivatives market.

Regulation & Enforcement

US Senate panel votes to advance CFTC chairman nomination to full Senate
Sarah Lynch – Reuters
The U.S. Senate Agriculture Committee voted on Thursday to advance the nomination of J. Christopher Giancarlo to lead the Commodity Futures Trading Commission to the full Senate for a vote to confirm him.

Majority of buy-side firms at risk of missing MiFID II deadline
Hayley McDowell – The Trade
Despite the deadline being mere months away, a significant 90% of asset managers have stated they are either at high or medium risk of non-compliance with MiFID II.

IG Group Endorses ESMA, FCA, Delaying CFD Regulations till 2018
Finance Magnates
IG Group Holdings (LON:IGG) has endorsed today’s announcements by the UK’s Financial Conduct Authority (FCA) and ESMA. More specifically, the group has thrown its support behind today’s decision to delay the revamped FX and CFD regulations until 2018. They had previously been set for implementation in June.

China’s high-frequency traders in retreat after court verdict
Gabriel Wildau – Financial Times
China’s nascent high-frequency traders (HFT) are in retreat following a regulatory crackdown on short selling and a broad legal interpretation of “market manipulation” that encompasses trading practices that are allowed in other markets.

Binary Options In Israel – The End? – Finance and Banking
In June 2017, the government of Israel approved a draft bill to amend the Securities Law that is intended to tip the scales in the battle being waged in the financial trading sector over binary options.

****SD: I don’t cover binary much, but the Israel developments are a good proxy for the industry internationally.


Machine Learning’s Mediocre Gains
Nishant Kumar – Bloomberg
Hedge funds using vast amounts of data, computing power, and machine-learning techniques to make money are drawing investors’ attention.


Collar: Cost-Effective Stock Protection
Kevin Hincks – The Ticker Tape
Even in the strongest of rallies, a stock can experience a pullback. And understanding that downturns are a natural part of any market doesn’t make them any more fun. Plus, there’s also the possibility that the pullback might actually be the end of the rally altogether, and the start of a bear market.

Benefits of Trading Weekly Options
Weekly options are short-term option contracts that allow traders to profit from quick moves in the underlying stock. When weekly options were first introduced, there were only four index-based options to choose from. Now, there are a wide variety of weeklies available to trade on popular stocks and exchange-traded funds (ETFs).


Fed gives big U.S. banks a green light for buyback, dividend plans
Pete Schroeder and David Henry – Reuters
The Federal Reserve has approved plans from the 34 largest U.S. banks to use extra capital for stock buybacks, dividends and other purposes beyond being a cushion against catastrophe.

****SD: And when that happens, things like this happen – Breaking Down 2 Huge XLF Options Trades

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