Observations & Insight

JLN Options To Have Guest Editor: The Schwartz Will Be With Us
As much as I’m sure you all love the JLN team’s snark and irreverence, sometimes we shake things up. As such, next week we will have a guest editor: Trade Alert’s Henry Schwartz. Schwartz will provide his insight and commentary for JLN Options.

Enjoy the different spin next week!


Jim Kharouf Named New CEO of John J. Lothian & Company, Inc.; John Lothian Moves to Executive Chairman; Kharouf Gets Equity Stake In Firm
James Kharouf has been named CEO of John J. Lothian & Company, Inc., replacing company founder John Lothian. Lothian moves to the role of executive chairman of the financial markets- focused media company.

Kharouf, 50, has served as editor-in-chief of John Lothian News since 2007 and president of JLN since 2010. He will assume the role of CEO on January 9, 2017. A Milwaukee native, Kharouf is a graduate of Marquette University with a degree in journalism and has been a journalist and editor for more than 25 years in the US and Europe. He served as an editor at Futures Magazine and as U.S. correspondent for Futures & Options Week. He has also contributed to magazines and newspapers in the equities and derivatives space since 1996, with a stint in public relations.

“Jim is ready for this next step in his career,” said John Lothian. “I have seen firsthand his tremendous professional and personal growth since we first collaborated in 2006. He is one of the most talented journalists I know, and has the stuff to be a great CEO.”

For the rest of the story, go here

Lead Stories

The Dispersion Trade
Jared Dillian – Mauldin Economics
There is a mathematical relationship between the price of an index and the constituent stocks that comprise the index. That seems pretty straightforward. It is also arbitrageable—if there is a price discrepancy between futures on the index and the underlying stocks, you can buy one and sell the other and make an arbitrage profit. This is freshman year capital markets stuff. What a lot of people don’t know is that there is a mathematical relationship between index options and options on the constituent stocks that comprise the index.

****SD: From Dillian – “At Lehman Brothers, we had one person dedicated to the dispersion trade and nothing else. She sat on the corner of the floor and talked to no one. Rumor was that she made more money than all of us put together.” Sometimes the loudest talkers have the least to say.

Kolanovic Sees Higher Risk Potential In 2017, Volatility Not Properly Priced
While JPMorgan’s Marko Kolanovic is positive on US stocks in 2017, market risks will increase and volatility is being underpriced by as much as three points. Chief among those risks will be the strong US dollar, he writes in an 82-page “2017 Equity Derivatives Outlook.”

A Trader’s Guide to Donuts, Wheat and Algorithms …
Rob Shapiro, Bloomberg LP – TABB Forum
Despite heralded, differentiating performance attributes, benchmark algorithms are widely perceived as commoditized. But clearly they don’t all behave identically from a micro-market structure and execution performance perspective. Rather, the vast majority of traders cannot easily measure benchmark performance differentials, leaving a huge hole in the industry’s best execution processes.
Must a donut always be round?

****SD: A four-sided donut?! Blasphemous.

CFTC faces tough questions as trial of Chicago firm, founder ends
Nate Raymond – Reuters
The U.S. Commodity and Exchange Commission faced tough questions from a federal judge on Wednesday over whether the agency could support its claims that a Chicago trading firm and its founder had manipulated the price of a futures contract.

****SD: Far reaching implications whichever way this turns out… Another story on the case under our ‘regulation’ section.

Low VIX Readings Say More About the Past than the Future
Ben Eisen and Chris Dieterich – WSJ
The current super-low readings on the CBOE Volatility Index tend to be taken by many as an ominous sign about the future. Instead, they may say more about the past.

Lower for longer, ECB scales back asset buys
Balazs Koranyi and Francesco Canepa – Reuters
The European Central Bank trimmed back its asset buys in a surprise move on Thursday but promised protracted stimulus to aid a still fragile recovery, and dismissed any talk of tapering the program away.

****SD: Super Mario Draghi! (The link is a music segment from the Tonight Show – that’s the only hint I’ll give.)

Mexico collects $2.65 billion from 2016 oil hedges
Anthony Harrup – MarketWatch
The Mexican government collected $2.65 billion from oil-price hedges taken out to protect the 2016 budget from a drop in prices, the Finance Ministry said Wednesday.

****SD: More money for the wall/fence/surveillance/maybe nothing.

S&P 500 Rockets Higher During One-Minute Futures Volume Frenzy
Lu Wang and Joseph Ciolli – Bloomberg
Almost 50,000 E-mini contracts changed hands around 1:21 p.m.; That minute saw five out of the day’s seven biggest trades
The mid-afternoon surge in U.S. stocks came as futures on the S&P 500 Index notched their highest single-minute volume of the day, with almost five times as many contracts changing hands than any other point on Wednesday.

****SD: That’s one frisky algo. (And a lot of notional. Like $3.5 billion worth.)

Exchanges and Clearing

Singapore Exchange hit by second disruption this year; Derivatives trading delay is latest in series of technical faults on SGX
Jeevan Vasagar and Peter Wells – FT
The Singapore Exchange was hit by its second disruption this year with the start of trading in some derivatives contracts delayed by over two hours on Thursday morning.

****SD: Reuters on the outage here.

U.K.’s May Finds U.S. Ally in Brexit Tussle Over London Clearing
John Detrixhe and Silla Brush – Bloomberg
Prime Minister Theresa May has found a surprising ally as Britain and the European Union battle over London’s vital clearing industry — the U.S.

Nasdaq Announces Additional ISE Market Data Specification Changes
Nasdaq announces that ISE Spread feed-specific documentation is now available, in addition to updates to all other ISE market data specifications.

US markets lead the pack for November trading
Julie Aelbrecht – Futures & Options World
Trump’s shock US presidential win at the start of November boosted trading levels
US clearing house the Options Clearing Corporation and the Chicago Mercantile Exchange were the fastest growing markets in November, after Trump’s shock US election win shook up the markets. In November, the Options Clearing Corporation (OCC) said its cleared futures volume was up 109% in November to 10 million lots. The OCC’s stock loan program also reported strong volume numbers, up 35% in November and year-to-date activity up 38% from 2015

SGX reports market statistics for November 2016
Total Derivatives volume was 16.6 million, up 43% month-on-month and up 22% year-on-year.

LME announces departure of Stuart Sloan as chief operating officer
The London Metal Exchange on Wednesday announced the departure of its chief operating officer (COO) and head of strategy Stuart Sloan, without giving any details.

OCC Honored with 2016 Clearing House of the Year Award
OCC, the world’s largest equity derivatives clearing organization, announced today it has won the 2016 Clearing House of the Year – The Americas from FOW Magazine. Presentation of the award took place on December 7 at the FOW International Award gala dinner in London, honoring achievements that have supported the advancement of the global derivatives industry.

****SD: All of the winners of FOW awards can be found in the FOW release about the gala under our ‘events’ section.

Regulation & Enforcement

DRW Judge Casts Doubt on CFTC Case Defense Calls ‘Absurd’
Christian Berthelsen – Bloomberg
The federal judge presiding over a complex derivatives market manipulation trial cast doubt on both sides as lawyers for U.S. market regulators and trading firm DRW Holdings Inc. presented their closing arguments Wednesday.

ICE told to speed up investigations on U.S. futures exchange
Intercontinental Exchange Inc (ICE.N) generally takes too long to complete investigations into questionable trading practices on its U.S. futures exchange as required by the rules, the regulator said. Overall, ICE Futures U.S. has an adequate trade practice surveillance program, the U.S. Commodity Futures Trading Commission said in a report dated Dec. 2. The regulator also recommended ICE do a better job documenting its reviews.

****SD: Slow as a glacier

Hong Kong’s Securities And Futures Commission Issues Second-Quarter Report
The Securities and Futures Commission (SFC) today published its Quarterly Report summarising key developments from July to September 2016. Highlights of the quarter include the August joint announcement by the SFC and the China Securities Regulatory Commission of the in-principle approval for Shenzhen-Hong Kong Stock Connect, and the launch of a consultation on enhancements to expand the scope of the position limit regime for futures and options contracts.


Tullett Prebon Information And Quaternion Risk Management Partner To Enhance Transparency And Standardisation In Risk Modelling – Partnership Fuels Columbia University Research To Improve Understanding Of Systemic Risk
Press Release
Tullett Prebon Information (TPI), the leading provider of independent real-time price information from the global OTC financial and commodity markets, and Quaternion Risk Management, a leading risk analytics firm, have partnered to launch an innovative open source risk project in collaboration with Columbia University.

Euler Investments Selects OptionsCity for Market-Making Software and API Services
OptionsCity Software, a global provider of electronic trading solutions for professional futures and options traders, today announced that Euler Investments, a London-based hedge fund, has selected OptionsCity Metro to facilitate their market-making activities as well as CityTrader and City API for futures and options trading. Traders at Euler Investments will leverage Metro in the energy and commodity markets.

Banks Listen in on Phone Calls to Discover the Best Traders
Joe Easton – Bloomberg
It’s not what you say, but how you say it. Especially if you want to get hired as a trader. London-based Amplify Trading Ltd., which provides training services to banks and asset managers including HSBC Holdings Plc and Invesco Ltd., is introducing voice analysis technology aimed at identifying behavior associated with a successful career as a trader.

Fidessa’s F&O Platform Wins FOW’s Trading System Of The Year
Press Release
Fidessa group plc (LSE: FDSA) today announced that its futures & options trading platform has been named Sell-side Trading System of the Year at the FOW International Awards. This is the fifth consecutive win for Fidessa in this category and follows a win in the same category, for the fourth year running, at FOW’s Awards for Asia, announced in September.


Give This Cheap SPDR S&P 500 ETF Trust (SPY) Trade a Chance
Tim Biggam – InvestorPlace
As we reflect on the passing of the late, great John Lennon exactly 36 years ago today, one of my favorite Lennon songs is “Give Peace A Chance.” With the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) ripping to new all-time highs yesterday and the CBOE Volatility Index just off the yearly (and all time) lows, I think the combination of expensive stocks and cheap options sets up for a high-probability trade in the SPY.

Careful at Christmas: Trading Holiday Markets and Understanding the Risk
T.J. Neil – The Ticker Tape
It’s late December, and you’ve taken the last two weeks of the year off. The kids are visiting friends, your spouse is out doing some shopping, and you’re home all alone on a weekday. As an active retail trader, you decide to turn on your computer and take a look at the markets. With no work obligations, it seems like the perfect time to start making some trades … but is it?

Assessing Vega Risk
Trader Planet
An overlooked part of options trading is that many traders do not identify all their risk factors. One of the most overlooked risk factor is VEGA. VEGA is an option’s sensitivity to changes in implied volatility. When entering an options trade, one must consider two things: one, what is my risk exposure to vega and two, does this seem like a reasonable risk to take?

Trader bets Trump all talk on drug pricing, buys Pfizer on the dip
Health-care stocks sat out the Trump rally Wednesday, but one technician says a rebound could be on the horizon for one of the biggest names in the sector: Pfizer.


International Awards – winners announced
Futures & Options World
The FOW International Awards were announced at tonight’s gala dinner in London

ICAP’s 24th Charity Day Raises GBP8.2 Million
Press Release
ICAP plc (IAP.L), a leading markets operator and provider of post trade risk mitigation and information services, announces today that it has raised GBP8.2 million on its 24th annual global Charity Day, held yesterday. This is equivalent to approximately 4% of ICAP’s pre-tax trading profit reported for the year ended 31st March 2016.

****SD: ICAP better keep doing this event after the Tullett deal is finalized – I saw an article that cast a shadow over it continuing… After all, how else will Prince Harry keep busy?


Only five non-OPEC producers so far attending talks to widen output cut
Alex Lawler and Rania El Gamal – Reuters
Only five of 14 non-OPEC oil producers have agreed so far to meet the group on Saturday for talks aimed at widening a deal to reduce output, casting doubt on whether OPEC will secure the full cuts it is seeking, two OPEC sources said.

****SD: Red herring or not? The question remains, Will The OPEC Deal Really Matter For The Global Market?

Exchange Traded Concepts Announces Share Split for REX VolMAXX Short VIX Weekly Futures Strategy
Exchange Traded Concepts, LLC today announced that the Board of Trustees of Exchange Traded Concepts Trust has authorized share splits for the REX VolMAXX Short VIX Weekly Futures Strategy ETF (“VMIN”).

Brazil’s Anbima says hedging crucial to lure foreign capital
The issue of designing effective instruments that protect long-term foreign investors from bouts of currency volatility in Brazil is crucial to helping lure capital for infrastructure in the years ahead, a financial industry group said on Wednesday.

KCG Gives Read on Tick Pilot
John D’Antona – MarketsMedia
And the preliminary verdict is in – the nascent Tick Pilot program has indeed affected the equity market structure – but in only a few ways. In an open call conference call to the membership of the Security Traders Association last week, Phil Mackintosh, Head of Trading Strategy and Analysis at KCG Holdings, said that the SEC’s Tick Pilot program, which has been in full effect for all three test groups only a few weeks has produced some interesting results in its infancy.

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