Observations & Insight

What Just Happened?
By Jim Kharouf, JLN

It was after midnight and the realization that Donald Trump is going to be president of the United States stunned, saddened and angered me. This is what our great country has descended to – a nation of angry white people who voted more than the brown and black people.

It’s quite simple really – more people loved Trump’s hate and BS than believed Hillary Clinton’s boring establishment BS. And so, here we are, on the precipice of all that is right with democracy and wrong with America.

We’ll rationalize it by saying we are bigger than this president – we are better than this man, a misogynist, a racist and by all accounts, a jerk. But we’d be wrong. The American people have voted for this and they will get it.

It’s anyone’s guess now what impact this will have on the country, as no formal plan was ever made clear during the campaign. It is possible that we will see a new phase of de-regulation across many sectors of the economy. Whether that means yet another overhaul of financial regulation is a good question. Will we see the Dodd-Frank Act undone in the way Trump has promised to dismantle Obamacare? Will Trump, who received little or no support from Wall Street, seek the populist pitchforks and tear the structure down? That might make both Trump and Main Street happy.

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The Black Swan – the new symbol of the United States of America
By John J. Lothian

Yah baby, Yah! Dodd-Frank, gone. Clearing mandate, gone. Regulations, gone. Low interest rates, no problem. Volcker Rule, gone. Volatility, you bet. Bullish on the exchange sector, you bet.

The American voters just unleashed the greatest gift on the world of trading we could have ever asked for. We will now have volatility at all times of the day and night. Binary contracts just became a big thing.

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Lead Stories

Hedges Hold as Global Markets Need Six Hours to Process Panic
Joseph Ciolli and Aleksandra Gjorgievska – Bloomberg
Guess what? You missed the dip. Global equity markets were in full rebound mode Wednesday morning, rapidly retracing losses that overnight turned violent enough to trigger trading curbs on the Chicago Mercantile Exchange. The Dow Jones Industrial Average climbed and an index of investor fear that became the focus of would-be hedgers went into free fall early Wednesday.

****SD: Also see Record Hedging Proves Timely as Election Selloff Hits Stocks

Financial Models Go Haywire as ‘Tail-Risk Trump’ Lives Up to His Name
Luke Kawa – Bloomberg
Trump has been called the ultimate “tail-risk candidate,” so it’s perhaps unsurprising that his electoral success has been greeted with outsized market reactions. Stocks, bonds, and currencies were rattled by the vote, registering market moves that are supposed to be incredibly rare according to the normal distribution of probabilities that still form a bedrock of the financial models employed by large trading desks on Wall Street.

Wall Street rallies in volatile post-U.S. election trading
Chuck Mikolajczak – Reuters
U.S. stocks rallied on Wednesday, in a dramatic rebound from overnight losses fueled by the stunning victory of Republican Donald Trump as investors snapped up stocks in sectors that appeared poised to benefit from the policies of a Trump presidency.

****SD: Crazy turnaround. And how big a role did Icahn’s $1 billion play last night in helping to stop the S&P bleeding? Were we just due for some upside after the nine down days? Just knee-jerk? What’s going on? Hard day to try to make sense of things.

VIX Is Not for the Faint of Heart
Bruce Kamich – TheStreet
George Soros, full-time trader, generous philanthropist, political activist, author when it suits him and part-time philosopher, once said that, “short-term volatility is greatest at turning points and diminishes as a trend becomes established.”

****SD: VIX down below 16 as of this writing. Also see Volatility-tracking products can catch out the unwary

Top VIX Crushes in History
Vix and More
Yesterday’s sharp downward move in the VIX gave me a reason to tweet that the volatility crush as seen in the SPX and VIX was among the top 25 in history. Upward pressure on the VIX toward the end of the session dropped the VIX down to the 30th largest VIX decline in history, but along the way the Twitterati raised a number of questions about volatility crushes and the VIX as a measurement tool of broad market volatility crushes.

New approach predicts price trends in the stock options market
Science Daily
A new research paper from the University of Luxembourg outlines a novel method to identify how options traders exploit mutual fund non-fundamental price pressure on aggregate stock prices. Decisions of retail investors in the stock market are often influenced by short-term perceptions, which sometimes leads to a form of herding behaviour. If the general mood towards a certain asset or class of assets is positive, investment funds receive massive orders and money inflows.

Wizards of Today’s Markets: Jack Schwager, Part 2
TradeTalk Blog
We recently ran our third “Wizards of Today’s Markets” Q&A, rounding off our trio of Chicago trading legends with TransMarket Group’s Ray Cahnman. To close out the series, we thought it would be fitting to talk with the originator of the “Market Wizards” moniker himself, Jack Schwager.

U.S. Election

About Last Night
Russell Rhoads – CBOE Options Hub
So I spent the evening and early part of this morning watching different networks while watching the financial markets at the same time. The chart below is a 5-minute chart showing the S&P 500 and VIX futures trading during the non-US hours trading session. Then after 3 hours of sleep I taught my class at Loyola, spending half of that talking my students down from their disappointment at the election results. There were a couple of things that stand out on the chart from last night. First the picture and then I’ll summarize below.

Trump win casts doubt on Fed’s plans to hike interest rates
Reuters via CNBC
Donald Trump’s victory in the U.S. presidential race throws into question the core assumption in global financial markets that the Federal Reserve will raise interest rates soon and follow with further gradual hikes over coming years.

****SD: Just about any article could be formatted as “Trump win casts doubt on (insert subject here)”

Victorious Donald Trump Is the Devil Wall Street Doesn’t Know
Jesse Hamilton, Elizabeth Dexheimer – Bloomberg
Donald Trump, the financial sector hardly knows ye. During the campaign, a group of bankers from around the country — plane tickets in hand — were looking forward to meeting the candidate in the flesh at Trump Tower in midtown Manhattan. They were going to get a chance to hear from his own mouth what he’d like to do with their industry. But at the last minute, Trump canceled and decided to spend his time elsewhere, so they never got the chance.

US Election: Triumphant Trump faces big economic challenges
Stephen Pope – TradingFloor
The real estate tycoon Donald Trump has emerged victorious from a torturously long US election campaign and will become 45th president of the United States of America.

Trump Victory Hits Some Emerging Markets Harder Than Others
As investors try to adjust to the changes that follow Donald Trump’s victory in the U.S. presidential election, let’s take a quick look at the emerging markets that are likely to suffer most if he implements the protectionist policies he promoted during his campaign. One area that has been overlooked recently is Central, Eastern and Southeastern Europe. Since today is the 27th anniversary of the fall of the Berlin Wall, which marked the region breaking free from communism, let’s start with it.

Analysis: Donald Trump’s Win Hands Brokers One of the Best Days in 2016
Finance Magnates
The election of Donald Trump as US president is likely to cause the best day ever in terms of trading volumes for a number of brokerages. While the competition for the higher trading volumes ever will be tough with Brexit earlier this year and the Swiss National Bank debacle in January 2015, the day of this U.S. election is a solid contender.

****SD: Also see CLS Reports Extreme Trading Volumes on USD FX Pairs Due to Elections

How will the ECB shift after Trump?
Claire Jones – Financial Times
Having emerged from the immediate aftermath of the Brexit vote virtually unscathed, will the eurozone’s economy be similarly untouched by the fallout of the US presidential election?

Mexico peso plunges to life low as Trump homes in on U.S. presidency
Michael O’Boyle and Noe Torres – Reuters
Mexico’s peso plunged to its lowest-ever levels on Tuesday night as U.S. Republican Donald Trump led in the key battleground state of Florida and had an edge in a clutch of other states, increasing his chances of winning the U.S. presidency.


CBOE says in SEC filing that Bats had another potential suitor
Lynne Marek – Crain’s Chicago Business
Bats Global Markets may have another option if its $3.2 billion merger agreement with CBOE Holdings doesn’t close in the first half of next year as expected. Bats had another unidentified company potentially interested in a transaction before the deal with Chicago-based options exchange CBOE was announced, according to a CBOE filing yesterday with the Securities and Exchange Commission detailing the run-up to the merger agreement. Bats CEO Chris Concannon planned to meet Sept. 28 with the chairman of the other company, identified only as “Company A,” according to the filing.

Deutsche Boerse expects deep EU concerns over London Stock Exchange deal
Deutsche Boerse expects EU antitrust regulators to set out details of their concerns over its merger with London Stock Exchange next month, two people familiar with the matter said on Tuesday, a move indicating regulators want hefty concessions in return for clearing the deal.

CME S&P 500 Wednesday Weekly Options reaches new volume record
CME Group Inc (NASDAQ:CME) just announced a new record breaker today with Wednesday Weekly S&P 500 Options achieving a new daily record.

Euronext Publishes third Quarter 2016 Results
Decrease in revenue: -15.2%, to EUR112.8 million (Q3 2015: EUR133.0 million, which was the second best quarter ever)

Moscow Exchange Announces 3Q 2016 Results
Moscow Exchange (MOEX) today announces its financial results under International Financial Reporting Standards (IFRS) for the third quarter of 2016. Increases in fee and commission income from the Money Market, Fixed Income Market and Depository & Settlement Services partially offset lower interest income and allowed the company to maintain its best-in-class EBITDA margin.

Regulation & Enforcement

Crunch Time for Options Market Structure Reform
Rob Daly – Traders
Time is short for the US options industry to address its nuanced market-structure with the US Securities and Exchange Commission, according to industry participants. Although more SROs operate equities and options exchanges, their market structures are not interchangeable, according to Gregg Berman, director of research, market integrity, monitoring and surveillance at Citadel Securities and who keynoted SIFMA’s Listed Options Symposium in lower Manhattan last week.

SEC Mines Data to Spot Insider Trading
George Leopold – Datanami
Using an internal analytics platform along with commercial data mining tools, federal securities investigators are using billions of rows of trading data collected over the last decade to spot insider-trading schemes.

The Battlegrounds of Binary Options Part 2
Yael Warman – Finance Magnates
Continuing on from the first article of our three part series, where we discussed why the regulators have been drawn into action on the binary options industry, we take a look at the different moves made by the individual EU country regulators. Shedding light on how various European countries have chosen to walk that fine line between tightening or loosening their hold on binary options brokerages.

CME Group bans two traders for prearranging transactions
CME Group Inc said on Tuesday it permanently barred from its markets two traders who prearranged trades to transfer equity between accounts two years ago.

FIA files letters to ESMA on Position Limit proposals under MiFID II
At the end of September 2016, FIA filed jointly with ISDA, GFMA, EFET and WMBA two letters to ESMA, asking for clarifications regarding the scope of the position limits regime under Art. 57 of MiFID II. We argue that position limits should not apply to non-commodity contracts referred to in Annex I Section C.10 of MiFID II (for example, inflation swaps) or to securitised commodity derivatives.

FIA files response to FCA Consultation Paper on MiFID II implementation
On 28 October, FIA filed its response to FCA Consultation Paper 16/19 on MiFID II implementation in the UK.

Breaking: French Parliament Approves Binary Options, FX and CFD Advertisement Ban
Victor Golovtchenko – Finance Magnates
The French Parliament has just voted to ratify the ‘Sapin 2’ bill that is aiming to hand certain powers to the French Ministry of Finance in order to limit the advertisement of risky products. The bill won’t take effect until it is published in the country’s national law paper.


Bloomberg messaging service suffers outage
Robin Wigglesworth and Eric Platt – Financial Times
Bloomberg’s instant messaging function, a vital cog in the global financial industry and one of the data company’s biggest selling points, suffered a brief but severe global outage on Tuesday, fraying nerves ahead of the US presidential election. The disruption lasted for about an hour, and the service was glitchy for about another hour until the company declared it fully restored by 11am in New York.

Cinnober expands investment in real-time clearing for banks; Establishes operations in separate company
The Board of Cinnober has decided to further develop its business area for sales of real-time clearing technology and services to large international banks, so-called client clearing. To focus fully on this venture, Cinnober will transfer the rights to this technology to a subsidiary, which will further commercialize the offering.

Trading Stocks during the US Election, the Curious Case of Votecastr
Finance Magnates
In the trading markets, technology is often seen as this double edged sword. On one hand it has connected buyers and seller from around the globe in astonishing speeds that pretty much trade any asset (virtual or real) at any time.

Metamako Slashes MetaMux Latency To Offer High-Speed Market Data Filtering
Rosemary Barnes – Finance Magnates
Metamako, a provider of latency devices and solutions for the trading industry and exchanges, has announced a major improvement to the latency of MetaMux 48, which is down from 82 nanoseconds to just 69 nanoseconds for round-trip exchange connectivity.


The Trump Fear Trade
Steven M. Sears – Barron’s
Sell puts if you want to make the stock market great again. It’s the one trade that immediately lets you monetize the fear many investors will feel following Donald Trump’s election as president. The put trade simply says that any weakness in the stock market – and despite today’s rally, there should be plenty – will likely be a temporary phenomenon that will make many good stocks attractively priced. Put options give buyers the right to sell stocks at a certain price and time. Selling puts, however, positions investors to buy stocks at a lower price. “This is the American Brexit,” says Michael Schwartz, Oppenheimer’s chief options strategist. “Buy the weakness. Sell puts.”

Hedging Interest Rates
In our last blog we discussed the different models that can be used when interest rates are low or negative and how the models can be calibrated to market data. When standard transactions such as caps, floors, and swaptions are being considered, the model being used does not have an appreciable effect on the price. This sounds counterintuitive, but is a direct result of the way models are used by practitioners. The model is nothing more than a sophisticated interpolation tool.

How Commodities Might Do Under Clinton, Trump
Jodie Gunzberg – OpenMarkets
In October, the S&P GSCI Total Return (TR) lost 1.5 percent but the Dow Jones Commodity Index (DJCI) TR gained 0.1%. The performance disparity was mainly due to the weighting difference in energy since crude oil in the indices slid near 10 percent from its mid-month high, on doubts over OPEC’s ability to agree on production cuts and the report from the American Petroleum Institute (API) showing U.S. crude stocks rose by 9.3 million barrels in the last week.


Options Strategies to Generate Income in Your Portfolio
We previously shared an article by Steven Sears, who writes The Striking Price column for Barron’s. It was the first of a two-part series to help the novice investor get a clear-and-concise, straight forward description on the basics of options trading. The first part of his series was on the basics of buying options. The second part of his series was on the basics of selling options in order to generate income in your portfolio. It is a very well written piece and is definitely worth reading for someone brand new to equity options.


Hemp is getting hotter, with help and harm from marijuana
Rachel Koning Beals – MarketWatch
Betsy Ross stitched the first American flag using hemp and actor Woody Harrelson was once threatened with jail time for growing the crop. Today, retailers from Whole Foods Market Inc. to Wal-Mart Stores Inc. sell bags of shelled organic hemp seed for snacking, BMW stuffs some of its car seats with hemp, a hemp derivatives exchange has launched and an advocacy group, GrowHempColorado, wants to tap cryptocurrency for hemp transactions.

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