Observations & Insight

A Basel netting issue: Pushing for less burdensome capital requirements in the options market
Spencer Doar – JLN
The unintended consequences of financial regulation have been seeping into the markets since the first rule was made in the wake of the financial crisis. One prime example is the leverage ratio, which determines the required capital of general clearing members. The actual calculation of the capital requirement within the Basel III leverage ratio framework is a particular sticking point for the OCC. Right now, the Current Exposure Method (CEM) is used in the calculation, whereas the OCC and a wide swath of industry participants believe that the Standardised Approach for Counterparty Credit Risk (SA-CCR) would better encapsulate the nature of listed options markets. From the OCC’s perspective, maintaining CEM as the methodology in the calculation will lead to the weakening of liquidity in the options market.
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Cathy Lyall, Minnamurra Consulting – 30 Years of Change
MarketsWikiEducation.com

Cathy Lyall’s first day in the markets was 1987’s Black Monday. She had planned on going into foreign affairs but snagged a job as a futures broker the Thursday before the crash from her boyfriend, a cash bond broker. She also signed her first mortgage in London the Friday before Lehman Brothers collapsed. Life events when synced with world events yield perspective.

In the period between her first day on the job and her first mortgage, Lyall, currently director of Minnamurra Consulting, noticed a shift in the industry’s mentality.

“The ethics and ethos had changed in the markets — it was flipped completely on its head,” Lyall said. “It was me first, company second, and I’d like to say the client was third, but I think the client was out of the equation altogether. They were the patsies that people were trying to make money from. That meant our markets were broken.”

The good thing about mindset and industry culture is that it can change and Lyall believes that the “my word is my bond” mentality will return to markets — the next generation of market participants will play a key role in swinging the pendulum the other direction.

Watch the video »

Lead Stories

Dollar Is New Fear Index as Easing Renders VIX Useless, BIS Says
Anchalee Worrachate – Bloomberg
Rise in dollar liabilities makes its strength hurt risk-taking; ‘There may be no winners from a stronger dollar’: BIS’s Shin
The world’s most-traded currency is becoming a fear gauge. That’s the opinion of Hyun Song Shin, head of research at the Bank for International Settlements. A stronger dollar can depress demand for credit while reflecting reduced investor appetite for the riskiest assets, Shin wrote in a report released Tuesday by the BIS.
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Nasdaq’s new CEO faces challenge as industry goes supersize
Tim Cave – Financial News
Nasdaq chief executive Bob Greifeld was quick to realise the exchange model was going global and diversifying more than a decade ago. His successor Adena Friedman has to decide whether to keep up with rivals who have gone further, faster. Greifeld made a number of attempts to establish Nasdaq’s global credentials by trying to buy the London Stock Exchange in 2006 and eventually settled with buying Nordic group OMX in 2008. But the momentum in recent years has been with rivals whose mix of big deals and strength in fast-growing derivatives, data or Asian markets have led to the creation of an elite group of global players – leaving Nasdaq just hanging onto the bottom of the top five global exchange groups by market capitalisation.
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****SD: For the news and not analysis, check out Reuters’ Nasdaq names Friedman CEO; Greifeld to be chairman

Traders Salivate as Volatility Returns
Juliet Chung and Rob Copeland – WSJ
Donald Trump upended U.S. politics and global markets. And that is exactly why his presidency has Wall Street traders excited. After Tuesday’s election, once-sluggish bank stocks surged, tech stocks including Amazon.com Inc. and Google parent Alphabet Inc. fell. Seemingly invincible bonds sold off, and the Japanese yen slumped against the dollar. The markets have suddenly become a trader’s dream. That is true for small-fry day traders to hedge funds willing to wager billions of dollars. Market volatility and increased trading volume can allow traders to exploit potential price inefficiencies with the hope of producing market-beating gains.
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****SD: “Excuse me, server? … Yes, what goes well with a large serving of volatility? .. Okay, I’ll have a flagon of ale and a large side of Pepto.”

SEC’s White Says She Will Step Aside When Obama Leaves Office
Benjamin Bain and Matt Robinson – Bloomberg
Mary Jo White has stepped to the front of the line of financial regulators moving aside for Donald Trump’s administration. White, a political independent appointed by President Barack Obama, said Monday that she will step down as Securities and Exchange Commission chair in January. Her nearly four-year tenure has been highlighted by high-profile enforcement cases and plagued by internal battles that stalled controversial policies.
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Real Options in Business Valuation
Dr. Michael McDonald – The National Law Review
Business valuation is a complex area that underpins a critical part of modern finance. Equity markets, venture capital markets, and debt markets all rely on accurate valuation metrics to help with efficient allocation of capital. Effective valuation tools are also important in business disputes, where lawyers help firms to sort out complex issues related to everything from merger deals to antitrust cases.
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****SD: A little bit heavy and outside of the realm of trading, but applying options modeling to other fields is a trend worth following.

A Quick Look at Market Risk Through the End of 2016
Russell Rhoads – CBOE Options Hub
As the recent election drew near I would periodically post a chart showing the implied volatility for ATM SPX options over the many expirations we have available for trading. Just for the heck of it I checked in on SPX implied volatility for every expiration available until the end of 2016. The shape was interesting with a couple of bumps that occur around known events which may impact the equity market. I decided to get out a calendar and see what other potentially market moving events are coming up and where they fall on the chart below. The line tells an interesting story.
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Physical Commodity Traders Should Come Back Home
Andrew Hecht – Seeking Alpha
In 2015, I had written several articles for Seeking Alpha about the flight of the physical commodity business from the shores of the United States. In those pieces I explained why I believe the commodities business is a strategic imperative to the nation with the largest economy in the world and the regulation was short-sighted and misguided.
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5 Questions with Dr. Brett Steenbarger, Trading Psychologist
Brian Mehta – Trade Talk, Trading Technologies
Brett N. Steenbarger, Ph.D. is Clinical Associate Professor of Psychiatry and Behavioral Sciences at SUNY Upstate Medical University in Syracuse, NY, where he specializes in the teaching and practice of brief approaches to counseling and psychotherapy. Brett’s main work is with traders and portfolio managers in the financial markets at hedge funds, proprietary trading firms and other money management organizations.
jlne.ws/2fRGLpS

The Big Challenges Ahead for the Binary Options and Forex Industry
Finance Magnates
It’s not breaking news anymore that the binary options industry is under fire. The question on many people’s minds is who is to blame for the negative stigma that has developed and what has caused the decline of this fledgling industry? The other major question on many peoples’ minds is will this trend taint the already well establish FX industry?
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U.S. Election

Post-Election Update 2016
Curtis Beaulieu, George Felcyn, Gene Godley, Edward Krenik, Frank Maisano, Dee Martin, Paul Nathanson, Scott Segal, Salo Zelermyer and Josh Zive, Bracewell LLP – JD Supra
The 2016 election results have significant implications for companies across a wide range of industry sectors. From environmental policy to financial services to tax reform, President-elect Trump has committed to sweeping action on a variety of fronts, and will have a Republican-controlled House and Senate to work with on priority issues. Nevertheless, the GOP-led Senate is not filibuster-proof, and many of the finer points of Trump’s agenda remain unclear. Accordingly, it is important for interested stakeholders to begin thinking through how their own priorities will track with the next President and Congress.
/goo.gl/mCShZo

****SD: As you might be able to guess by the crowd populating this piece’s byline, there are a lot of areas of expertise covered: energy, the environment, taxes, appropriations and the budget, trade, consumer protection and financial services. A one stop shop.

Trump Staff Shake-Up Slows Transition to Near Halt
Julie Hirschfeld Davis – NY Times
President-elect Donald J. Trump’s transition operation plunged into disarray on Tuesday with the abrupt resignation of Mike Rogers, who had handled national security matters, the second shake-up in less than a week on a team that has not yet begun to execute the daunting task of taking over the government.
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****SD: This election process already is the biggest reality show on earth, except it has no network, no broadcast time (unless all the time is “a time”) and no production notes on storyline progression (well, there’s probably some of the latter but nobody reads them). When will there be a hot tub showdown?

U.S. derivatives regulator sees smooth transition at agency following election
Reuters
The chair of the U.S. derivatives regulator said on Monday he hopes to accomplish a few more things as he enters the last few months heading the Commodity Futures Trading Commision, adding he is committed to ensuring a smooth transition at the agency.
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****SD: The Titanic also envisioned smooth sailing. Some of the smoothest ever actually.

Exchanges and Clearing

ESMA Defines Common Supervisory Approach For CCPs’ Service Extensions And Change Of Risk Models
Mondovisione
The European Securities and Markets Authority (ESMA) has issued today an opinion defining a common supervisory approach for supervisors dealing with central counterparties (CCPs) wishing to extend their existing authorisation or change their risk models under the European Market Infrastructure Regulation (EMIR).
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CME latest company to weigh up Dublin move
Belfast Telegraph
Managers at the Chicago-based derivatives exchange are understood to be weighing stronger ties to the Republic to ensure its London clearing
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From Hire to Retire: OCC’s Focus on Developing and Retaining the Best Talent
Tracy Raben – OCC
As a Systemically Important Financial Market Utility (SIFMU), OCC is focused on hiring, developing and retaining the best talent. Our mission is to promote stability and market integrity through effective and efficient clearance, settlement and risk management services while providing thought leadership and education to market participants and the public about the prudent use of products we clear. We must be doing something right, as we were named 2016 Clearinghouse of the Year by Global Investor/ISF Magazine.
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“Huge opportunity” for prop firms in Dubai – panel
Luke Jeffs – Futures & Options World
FOW’s Trading GCC was told there is a huge opportunity to set up in Dubai
There is a “huge opportunity” for international proprietary trading firms to set up a local trading hub and tap the opportunities presented by developments in that market, a local exchange expert has said. Speaking at FOW’s Trading GCC event, held on Tuesday in Dubai, Jamie Lear, a director at the Dubai Mercantile Exchange, said it was not just lower tax rates that should attract international firms.
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Moves

Virtu parts ways with Dublin-based Bjurgert
Luke Jeffs – Futures & Options World
Bjurgert joined Virtu in Dublin at the end of 2011 after stints with Merrill and JP
Virtu Financial, one of the world’s top electronic market-makers, has parted ways with a derivatives expert from its European headquarters in Dublin. Virtu Financial, the market-making firm that floated last year, parted ways this month with Bo Bjurgert, a former Merrill Lynch and JP Morgan trader who joined Virtu’s Dublin-based business development team five years ago.
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Regulation & Enforcement

Britain’s financial regulator approves Tullett-ICAP deal
Reuters via Yahoo
Britain’s financial regulator approved interdealer broker Tullett Prebon’s (TLPR.L) proposed acquisition of ICAP Plc’s (IAP.L) hybrid voice broking business, removing a key regulatory hurdle in the path to create the world’s largest voice broker.
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SEC weighs cyber risks to proposed ‘flash crash’ database
Timothy Weatherhead – The Hill
The SEC is weighing cybersecurity concerns as it decides whether to approve plans for a new program intended to address flash crashes in the market. Regulators will meet on Tuesday to decide on the program, known as the consolidated audit trail (CAT). The program would create the largest database of securities transaction information in the world when completed. The Securities and Exchange Commission data system is being built to help regulators understand market actions following the 2010 flash crash, an incident in which stock markets plummeted and rebounded in the span of roughly 30 minutes.
/goo.gl/V6N3uS

Exclusive: Audit of U.S. stress test ready, may aid Dodd Frank overhaul fight
Patrick Rucker – Reuters
A independent study of the financial costs and benefits of Wall Street ‘stress tests’ could be released as soon as Tuesday and may strengthen calls to reform U.S. banking rules, said sources familiar with the report. The Federal Reserve conducts a review each year of how the largest U.S. banks could fare during a financial crisis and the Government Accountability Office has been studying that work for two years.
/goo.gl/3ZoV5h

SEC Chair Mary Jo White Announces Departure Plans
Mondovisione
SEC Chair Mary Jo White, after nearly four years as the agency’s head, today announced that she intends to leave at the end of the Obama Administration. Under Chair White’s leadership, the Commission strengthened protections for investors and the markets through transformative rulemakings that addressed major issues highlighted by the financial crisis. The Commission also instituted a new approach to enforcement that has resulted in greater accountability and record actions through, among other things, the use of admissions of wrongdoing and enhanced data analytics and technology.
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Regulators Warn Investors of Binary Options Risks
FINRA
Trading binary options can be an extremely risky proposition. Unlike other types of options contracts, binary options are all-or-nothing propositions. When a binary option expires, it either makes a pre-specified amount of money, or nothing at all, in which case the investor losses his or her entire investment. Trading binary options is made even riskier by fraudulent schemes, many of which originate outside the United States.
/goo.gl/3zAa8O

Technology

The Next Generation of Hedge Fund Stars: Data-Crunching Computers
Alexandra Stevenson – NY Times
Every five minutes a satellite captures images of China’s biggest cities from space. Thousands of miles away in California, a computer looks at the shadows of the buildings in the images and draws a conclusion: China’s real estate boom is slowing. Traders at BlackRock, the money management giant, then use the data to help choose whether to buy or sell the stocks of Chinese developers. “The machine is able to deal with some of the very complex decisions,” said Jeff Shen, co-chief investment officer at Scientific Active Equity, BlackRock’s quantitative trading, or quant, arm in San Francisco.
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****SD: Aren’t they already the stars?

Strategy

George Soros Opens Stake in Largest China-Focused ETF
Maria Armental – WSJ
George Soros, the billionaire investor who has repeatedly warned of a looming financial crisis with debt-laden China at the center of the storm, disclosed Monday he had invested in the largest China-focused exchange-traded fund and opened a big position in an emerging markets ETF.
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****SD: The relevant part: “In addition to more than 2.4 million shares in the iShares MSCI Emerging Markets ETF and 633,059 shares in the iShares China Large-Cap, the regulatory filing revealed Soros Fund Management LLC had 675,000 “put” options against the S&P 500 and held 32,000 shares in an ETF that tracks the index, compared with put options on roughly four million shares and 30,900 shares in the ETF at the end of the previous quarter.” Also see Barron’s George Soros: There’s More In That 13F Than Emerging Markets

Options Volume Soars Amid Financial Sector Rally
Josh Selway – Schaeffer’s Research
Bank stocks have been thriving in the aftermath of Donald Trump’s election win last week. For example, the Financial Select Sector SPDR ETF (XLF) has added 10.7% since Tuesday’s close, while sector heavyweights Bank of America Corp, Goldman Sachs Group Inc, and JPMorgan Chase & Co. have posted similar gains. Not only that, but all three stocks have seen heavy options trading. Let’s take a closer look at what’s been happening with BAC, GS, and JPM in the days since the election.
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Rally on! Why now is not the time to buy protection: Strategist
Annie Pei – CNBC
While the market seems to have more or less priced in the result of last Tuesday’s election, investors may still want to wait and see before buying portfolio protection. The so-called “fear index,” the VIX, plunged more than 24 percent in the days following the election while the Dow Jones industrial average has rallied to yet another all-time high. Lower volatility implies that options are cheaper, and for investors who predict that the Trump rally could come to an end and a market crash might be on the way, buying protection at this time could seem like a good idea. But Susquehanna’s head of derivatives strategy, Stacey Gilbert, believes that looking to the options market for protection at this time is premature.
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The Canadian Model to Getting Very, Very Fully Funded
Chief Investment Officer
HOOPP went LDI in 2003, light years ahead of its peers. But CIO Jim Keohane says he’s not finished—even after the funded status reached 122%.
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****SD: Included only because it is indicative of the push for/by pensions to get into the options markets. Check out the OCC’s piece from September, Pension Funds Can Benefit from Exchange-listed Options

Really Bad Trades and Lessons You Can Learn
Brian Lund – The Ticker Tape
In his 1905 book The Life of Reason, George Santayana, a Spanish philosopher, wrote the famous phrase, “Those who cannot remember the past are condemned to repeat it.” Although Santayana was not a trader, his words should be taken to heart by anyone who attempts to extract profits from the markets.
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Events

GFLC Day One: Election Fallout & Financial Regulation
OpenMarkets, CME Group
The ninth Global Financial Leadership Conference enjoyed the distinction as one of the first live venues for anyone to get an in-depth analysis of the 2016 Presidential election from some of the top political minds in the United States. Just six days after Donald Trump shocked the world with his upset win, former House Speaker John Boehner, former Barack Obama adviser David Axelrod and former George W. Bush counselor Karen Hughes discussed how Trump won, and how Americans can have renewed faith in Washington. That was followed by a 2017 regulatory outlook from CFTC Chairman Timothy Massad. Here it is, your day one wrapup in photos.
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Miscellaneous

CME Group Announces Sir Tim Berners-Lee as the 2016 Melamed-Arditti Innovation Award Recipient
CME Group
CME Group’s Center for Innovation today announced that Sir Tim Berners-Lee, inventor of the World Wide Web and Founding Director, World Wide Web Foundation, is the 12th recipient of the CME Group Melamed-Arditti Innovation Award. CME Group will present the award at the ninth annual Global Financial Leadership Conference in Naples, Fla., on Tuesday, Nov. 15.
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****SD: World Wide Web? Never heard of it.

DTCC: Tax And Regulatory Differences, Operational Complexities Remain Challenges For RMB Internationalisation
Mondovisione
The Depository Trust & Clearing Corporation (DTCC), the premier post-trade market infrastructure provider for the global financial services industry, today released new research examining opportunities and challenges facing international financial services firms as the internationalisation of China’s currency, the renminbi (RMB), proceeds.
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****SD: I don’t like that it has two tickers.

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