Observations & Insight

Run Gary Run
By Jim Kharouf

It has been almost two years since Gary Gensler left the Commodity Futures Trading Commission as perhaps its most talked about, debated and in some circles, despised chairman. To some, his unrelenting drive to pound home rules established by the Dodd-Frank Act was considered a declaration of war against the derivatives industry. To his supporters, his determination was lauded, and he was considered one of the guys who was ready to stand up to Wall Street and LaSalle Street all in the name of Main Street.

Now Gensler has grabbed attention this week at the FIA Expo in Chicago. On the Washington panel Thursday, Gensler’s name was brought up because of rumors that he is in the running to be the next U.S. Treasury secretary. CME’s Terry Duffy said he thought it was doubtful that Gensler, now an advisor to Hillary Clinton, would actually get the nod if she won the presidency, as there may be other qualified candidates that fit the profile. Jimmy Ryan, partner and co-founder of Subject Matter, said Secretary Clinton has made it clear that she would like more women in her cabinet, and Treasury secretary may well be one of the posts.

On the other hand, it’s been reported that Gensler has the support of Senator Elizabeth Warren, who has been laying into anyone and everyone connected to Wall Street. Her scathing attack on Wells Fargo CEO John Stumpf helped make him ex-CEO. Oddly, Senator Warren hasn’t weighed in on fellow Democrat Jon Corzine, who somehow managed to settle his case at a profit, and escaped the heavy hammer of Gensler while he ran the CFTC during the MF Global disaster.

So here we are, heading toward a likely Clinton presidency, and the one man in the industry who could actually qualify for Dancing With the Stars may become our next Treasury secretary. Who in this industry will be the first to shake his hand?


A Great Week
By John J. Lothian

It has been a great week in Chicago for the FIA EXPO and the financial services industry, culminating with a terrific turnout for The Great Steakout.

The industry and the EXPO crowd came out in force last night at the Chicago Hilton for the end of conference fundraiser to support the Greater Chicago Food Depository. There were even people there at the fundraiser who did not come to the EXPO.

The Steakout is proving to be an invaluable, innovative and brilliant way to end EXPO on a positive note. Beyond raising funds for a great cause, the Steakout allows attendees to network, enjoy great food and drink and even watch a little sports. The go-ahead home run by Addison Russell of the Chicago Cubs last night in the National League Championship Series versus the Los Angeles Dodgers drew a huge cheer from the crowd.

The great steakhouses of Chicago were on display last night, which proves valuable to them as these attendees come back to town in future months. It was a win-win all around, with even a big W for the Chicago Cubs.

I could not be more proud of the industry for the way they turned out and supported this fundraiser. As the co-chair of this year’s LaSalle Street Trading Tech Awards event for the Boy Scouts, I hope we can capture some of this momentum for our event.

Nice job people. Congratulations on a great week, and a good deed.


Women In Fintech Panel
Sarah Rudolph – JLN
Both women and men gave high marks to the Women in Listed Derivatives-sponsored panel on Women Who Shape Fintech, moderated by Diane Saucier, the president of WILD and client relationship manager at Fitch Learning.

Some of the takeaways were:
There is still a “confidence gap” between men and women. For example, women are often hesitant to apply for a particular job unless they meet 100 percent of the qualification requirements, whereas men often take a chance even if they only meet 70 percent.
Only about 7 percent of entrepreneurs getting funding are women. And there are even fewer in fintech.
In the real world, you have to sell yourself. Working hard while keeping your head down isn’t enough.
Get out of your comfort zone, and don’t be afraid to fail. With Fintech, there is always a real risk that it won’t work (at least at first).
Having an opinion means you get invited back to the table.
Game changers in the fintech world include blockchain, or distributed ledger technology. “We are sitting in the middle of a distributed ledger storm.” Among those working on using the technology are the Cook County Recorder of Deeds and real estate groups who are partnering with trading tech companies. And of course DRW.
If we want to help girls become interested in fintech, we have to start before middle school, and give them mentors and role models.

Lead Stories

Dealing with structural complexity in global derivatives markets
Katarina Klangby – Automated Trader
Much is made of the power of regulation to drive capital markets firms’ IT investment decisions. But active players in global derivatives markets are also being bombarded by mounting structural complexity, so much so that a recent TABB Group survey found that a full 50% of firms are looking to replace their trading platforms within the next three years. Regulation is playing its role in this growing complexity. But a number of other factors are involved, and combined they are creating a derivative trading landscape that is making traditional trading tools obsolete.

The VIX: Not So Fearsome After All?
Teresa Rivas – Barron’s
The CBOE Volatility Index (VIX) is known as the market’s “fear gauge,” but does it really deserve that reputation? In a nutshell, not really, says David Hait, the CEO of OptionMetrics. In his latest white paper, he writes that this research shows that some 98.8% of the variation the VIX comes down to a small set of variables—leaving a scant 1.2% of its daily movement to be influenced by market sentiment that’s not already on display in the S&P 500.

Treasury Yield Curve Flattens as Draghi Downplays Altering QE
Yun Li – Bloomberg
The Treasury yield curve flattened, with 30-year bonds outperforming shorter-dated debt, after Mario Draghi signaled the European Central Bank won’t stop its bond-buying program without tapering it first. The gap between five- and 30-year debt narrowed to the flattest in a week as the ECB left interest rates unchanged and prolonged its asset purchases at 80 billion euros ($88 billion) a month in its policy-setting meeting Thursday, as predicted by economists in a Bloomberg survey. In a press conference, Draghi said an abrupt ending to bond purchases is unlikely. German 30-year government bonds advanced.

****SD: Also see The ECB won’t talk, the UK wants to, but can’t

‘Brexit’ Holds Promise for Vol-Hungry Traders
Terry Flanagan – Traders News
Active traders feast on volatility, and as global securities markets continue to trend toward the placid side, the appetite for fluctuating valuations remains keen. One potential driver of volatility lies in the U.K.’s pending departure from the European Union, a plan that carries substantial, but unknown, implications for cross-border trade and economic growth.

****SD: Or “Brexit promises vol for hungry traders.”

KCG Drops On Surprise Q3 Loss
Teresa Rivas – Barron’s
Trading firm KCG Holdings (KCG) is down 8% on Thursday, after it swung to a surprise loss in its third-quarter earnings report. KCG said it lost 13 cents a share, on revenue that fell nearly 45% year over year, to $208.5 million. Analysts were expecting the firm to earn 6 cents a share on revenue of $235.6 million.

Asia’s oil markets are tightening as China cuts output, fuel stocks dwindle
Seng Li Peng and Mark Tay – Reuters
From sharp cuts to Chinese oil production to falling inventories of refined fuel products, signs are mounting that Asia’s oil markets are slowly returning to balance. Global inventories of refined products – made up from light and middle distillates like gasoline and diesel, as well as residual fuel such as fuel oil – have all fallen since the beginning of the month. They are now at or below levels seen this time last year, data in Thomson Reuters Datastream shows.

E*TRADE Reports Upbeat Q3 Earnings, Fueled by OptionsHouse Acquisition
Jeff Patterson – Finance Magnates
E*TRADE Financial Corporation (NASDAQ:ETFC) has released its financial results for Q3 2016, having reversed a recent decline in previous quarters en route to a rise across a number of key metrics, constituting one of its brightest quarters of 2016, per an E*TRADE earnings filing.

****SD: This does not surprise me after sitting in on a panel regarding the growing importance of retail trading in futures and options at FIA Expo yesterday, which featured Dan Ryba, vice president, futures brokerage at E*Trade/OptionsHouse. Nearly all of the matters discussed by the panel pointed to continued F&O growth in retail.

Attack on web provider disrupts some sites on U.S. East Coast
Jim Finkle and Dustin Volz – Reuters
Some major internet companies suffered service disruptions for several hours on Friday morning as internet infrastructure provider Dyn said it was hit by a cyber attack that disrupted traffic mainly on the U.S. East Coast. Social network Twitter (TWTR.N), music-streamer Spotify, discussion site Reddit and news site Vox were among the companies whose services were reported to be down on Friday morning.

****SD: Gizmodo has This Is Probably Why Half the Internet Shut Down Today


CBOE puts Vector launch “on hold” pending Bats deal
Luke Jeffs – Futures & Options World
US options giant CBOE Holdings has told clients it has put its new trading technology project on ice pending its proposed purchase of Bats Global markets which will involve CBOE moving to Bats systems. CBOE, run by chief exec Ed Tilly, said in a client circular seen by FOW this week that it has suspended the delivery and testing of its next generation trading system called Vector to avoid unnecessary work by its clients and technology partners.

****SD: This comes after the news on Monday from FOW that CBOE had committed to Vector.

Nasdaq Sets the Record Straight About the SIP
Jeff Kimsey – TABB Forum
This week, the SIP completes a technology upgrade that will tremendously strengthen and increase its speed, rendering latency between consolidated and proprietary market data feeds nearly indistinguishable. But what exactly is the SIP, how does it function, what specific changes are taking place, and who is responsible for those changes? Nasdaq’s Jeff Kimsey explains what you need to know about the SIP’s storied history and new enhancements.

ICE warms to expanding US clearing model
Joe Parsons – The Trade
Intercontinental Exchange (ICE) is currently exploring new direct clearing models for the US derivatives market. Hester Serafini, chief operating officer for ICE Clear US, told delegates at FIA Expo 2016 that it is looking to replicate its European “Sponsored Principal” model, which allows clients to become a direct counterparty to the clearing house with separate position, margin and asset accounts.

Euro Derivatives Clearing Emerges as London’s Soft Underbelly in Brexit Talks
Antonia Oprita – TheStreet.com
One of the biggest fears for traders in the City of London, which I highlighted in an article in December last year, is beginning to come true: Brexit could spell the end of euro derivatives clearing for London. Surprisingly though, despite the latest attempts to lure bankers away from the City — as London’s financial center is called — the big winner will not be Paris. It will most likely be New York. This kept cropping up in conversations with bankers on the sidelines of the annual International Banking Conference of the British Banking Association in London.

****SD: In the three or four conversations I had with folks at Expo where this subject came up, the general response was, “I really don’t see euro clearing leaving London.” But, people really didn’t see UK voters opting for Brexit.

Hong Kong exchanges closed due to typhoon
Julie Aelbrecht – Futures & Options World
Hong Kong Exchanges and Clearing has said there will be no securities and derivatives trading on Friday on account of typhoon alerts. As Typhoon Haima sweeps across Southern Asia, exchange operator Hong Kong Exchanges and Clearing (HKEx) has cancelled its trading activities for Friday October 21. Additionally, there will be no clearing and settlement services for the day, and no northbound Stock Connect trading

CME Group and Thomson Reuters Name Morgan Stanley as new LBMA Silver Price Participant
CME Group, the world’s leading and most diverse derivatives marketplace, and Thomson Reuters today announced that Morgan Stanley has joined the LBMA Silver Price as a new member. CME Group and Thomson Reuters operate the Silver Price.

Regulation & Enforcement

Brussels regulator European Commission to delay London Stock Exchange-Deutsche Boerse merger decision
City A.M.
Brussels regulators is set to extend the length of their investigation into the London Stock-Exchange’s merger with Deutsche Boerse.

CME: Lack Of Financial Crime Prosecutions Damages Entire Industry
Mark Melin – ValueWalk
Financial Crime Prosecutions – A panel discussion Thursday at the Futures Industry Association (FIA) Expo on the status of governmental policy boiled over when talk turned to the lack of Wall Street prosecutions. The issue is at a “tipping point,” according to CMEGroup Chairman and President Terry Duffy, as the lack of accountability is damaging the entire financial services industry. Duffy made the most candid comments on the topic in his 18 years at CMEGroup. Sounding like a financial reformer, he praised Dodd-Frank, called for “Wall Street Justice” and sharply questioned the lack of trials for obvious financial crimes.

****SD: The majority of people in my neighborhood who know what I cover for a living usually have some snarky retort about markets or people who work in them. (Either that or they greet “derivatives” with a blank stare.)

Best execution or better execution?
Hayley McDowell – The Trade
The European Securities and Markets Authority (ESMA) defines best execution under MiFID II regulation as a principle that all financial services firms trading on behalf of clients “must take all sufficient steps to obtain the best possible result, taking into account price, costs, speed, likelihood of execution and settlement, size, nature or any other consideration relevant to the execution of the order.”

Sprecher hopes Brexit to prompt Mifid review
Luke Jeffs – Futures & Options World
ICE chief executive said European regulators may reconsider Mifid due to Brexit
The chief executive of the Intercontinental Exchange has said Britain’s decision to leave the European Union could pave the way for better financial regulation in the UK and Europe. Jeff Sprecher, the chairman and chief executive of US-based ICE, told the FIA Expo conference in Chicago on Wednesday the prospect of the UK leaving the European bloc could lead to re-think of the vast Mifid II reforms that will apply across the European Union and in London until the UK leaves the group.

The Changing Investment Research Landscape – It’s Not Just MiFID
Jon Foster – TABB Forum
While unbundling of research and execution has gotten a lot of attention in the wake of MiFID II, the regulation isn’t the only driver shaking up the investment research sector. But research will be consumed in a completely different manner, and competition among providers will increase as asset managers become more selective about what they buy.

Varian Medical Systems draws well-timed option bets
Saqib Iqbal Ahmed – Reuters
Bullish options on Varian Medical Systems Inc (VAR.N) stock saw unusually heavy buying on Thursday before the shares spiked on an unsubstantiated report that General Electric (GE.N) could be in talks with the medical devices company about a possible takeover.

****SD: Included here because regulators keep an eye on pre-news trading flurries. I suppose it could be “strategy”…


Is now right to ‘buy-write’?
Brendan McCurdy, vice president at Goldman Sachs Asset Management – Professional Adviser
In today’s challenging market environment, US equity large-cap valuations are elevated versus history, European growth is questionable and forward-looking equity return expectations are muted. Such an environment is one where so-called ‘buy-write’ strategies could help deliver the yield, returns and volatility benefits many investors are seeking. Buy-write strategies offer exposure to equities but also seek additional income through call-option premiums. In times of flat equity returns, these strategies have often outperformed.

An Index with a Scary Name and a Serious Return
Reid Steadman – S&P Dow Jones Indices
Passive investors do not buy and sell single securities, but they are often active in another way, in their search for indices that provide compelling return profiles. This is why I’m befuddled that a certain index – which is up 300% over the past 5 years – attracts so little attention. I have a few theories why this is so. Here’s the simplest one: this index’s name convinces people that it is beyond comprehension. This is the name: S&P 500 VIX Mid-Term Futures Inverse Daily Index

****SD: How could I adapt the S&P 500 VIX Mid-Term Futures Inverse Daily Index into a Halloween costume?

Intel Shares on Sale
Steven M. Sears – Barron’s
Investors can often get the options market to pay them to buy a stock. Thanks to a steep fear premium, they have that opportunity now. Intel ‘s post-earnings report weakness creates an opportunity to buy a global leader when it has been pushed back on its heels. The shares have lost about 6% of their value since the company said Tuesday that fourth-quarter earnings would be muted. Intel got little credit for solid third-quarter results.

Rabo flags ‘buying opportunities’ in soy, warns against cocoa price gloom
Rabo flags ‘buying opportunities’ in soy, warns against cocoa price gloom
Rabobank flagged “buying opportunities” in soybean futures, while warning investors against getting too pessimistic on cocoa – but stuck with a downbeat outlook for arabica coffee price, and cautioned over sugar spreads too.

Emerging Markets Q3 Recap: Sentiment Remains Strong
Mark Mobius – Franklin Templeton Investments
Templeton Emerging Markets Group has a wide investment universe to cover—tens of thousands of companies in markets on nearly every continent! While we are bottom-up investors, we also take into account big-picture context. Here, I outline what’s happened in the emerging-markets universe in the third quarter of the year, including some key events, milestones and data points going back a bit further to offer some perspective. Overall, emerging markets saw a strong quarter despite a few global market uncertainties.

****SD: This article reminded I should read up on Mobius strips, which I never could quite wrap my head around.

Earnings Week of 10/24 – 10/28
CBOE Options Hub
This week is by far the busiest of earnings season with over 100 companies with Weeklys available for trading reporting results. As always the data below is based on the last three years of earnings results unless the ticker is in italics. The columns show the biggest rally, biggest drop, average move, and what the stock did last quarter in reaction to earnings. Finally, double check the earnings dates as not all were confirmed.


Money.Net wins FIA innovator competition
FIA announced that Money.Net is the winner of the 2016 FIA Expo Innovator of the Year award. The winner was announced during the second day of the Futures and Options Expo, which drew more than 5,100 registrants this year.


The cult of the expert – and how it collapsed
Sebastian Mallaby – The Guardian
Led by a class of omnipotent central bankers, experts have gained extraordinary political power. Will a populist backlash shatter their technocratic dream?

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