Observations & Insight

September Options Exchange Marketshare via OCC
MWE Europe 2016

Lead Stories

High-Speed Traders Fear Regulator Spilling Their Biggest Secrets
Annie Massa and Benjamin Bain – Bloomberg
Some of the biggest electronic traders are complaining that a new test in the U.S. stock market will compromise their top-secret strategies, one of their most valuable assets. Citadel Securities and KCG Holdings Inc. are among a chorus of brokers questioning elements of a U.S. Securities and Exchange Commission experiment, which began Monday, designed to whip up more trading in small companies. Their complaint is that the test will force firms to publicly expose detailed trading data with only the thinnest veil of anonymity, allowing competitors to reverse engineer how their prized trading algorithms work.

****SD: My magic beans!?! My precious magic beans spilled everywhere….

October set to shake up US markets after sleepy summer
Jessica Dye – Financial Times
The unusual calm that washed over US equities during the dog days of summer is set to shatter, as investors brace for greater bursts of volatility expected in the next few weeks ahead of the US presidential election on November 8. “US equities recently posted their least volatile 30-day period in more than two decades,” wrote Richard Turnill, global chief investment strategist at BlackRock Investment Institute. “This calm is unlikely to last.” The CBOE Vix index, which tracks the expected fluctuations in US stocks over the next 30 days, reached its lowest point this year during August.

Traders need to stop looking for a ‘magic’ catalyst to move this market
Lawrence G. McMillan – MarketWatch
Stocks have tried to find a catalyst to spur them in one direction or the other, but they have been unable to do so. In early September, it was the fear of a Fed rate rise that caused stocks to gap down for a couple of days. Then when the Fed kept rates unchanged, the following rally seemed strong for a couple of days as well. But in reality, the S&P 500 Index SPX, -0.46% didn’t go much of anywhere. Late in the month, there was a scare that Deutsche Bank DB, +1.31% is in trouble, and that caused some heavy selling last week, but it is unlikely to have much follow-through either.

Pound Drops to Lowest Since 1985 as Angst Builds Over Brexit
Charlotte Ryan – Bloomberg
The pound tumbled to its lowest level in three decades amid mounting concern the U.K. is heading for a so-called hard Brexit that would restrict access to the European Union’s single market. Sterling exceeded its lows versus the dollar set in the wake of the June 23 referendum and touched the weakest in 3 1/2 years against the euro. The slide extended as Prime Minister Theresa May was said to take the view that financial services would get no special favors in EU exit talks. The pound has fallen against all 16 of its major peers since the premier’s weekend announcement that she’ll trigger the formal process for quitting by March.

****SD: With Chinese markets closed yesterday and Rosh Hashanah, sterling assumed the role of that catalyst mentioned in the above story.

There’s a little bit of Deutsche in every bank
Financial News
The first is the favourite of every corporate boss with a crumbling share price: It was manipulated down by speculators. Deutsche chief executive John Cryan is trying out this argument. “Trust is the foundation of banking,” he wrote in a memo to staff. “Some forces in the markets are currently trying to damage this trust.” The claim has provoked scorn from politicians and investors. Across the sector, though, there is a genuine puzzle: If banks are so much better capitalised now than they were before the global financial crisis of 2008-2009, why do their shares suggest they are riskier?

****SD: Doesn’t seem to matter which corner of the market, everybody is talking about Deutsche and bank health, again. So, welcome more Deutsche content to options. Speaking of, see Options market is betting on further declines for Deutsche Bank shares from CNBC, Deutsche Bank’s derivatives exposure threatens market, finds JPM analyst from The Trade and Deutsche Bank Market Ripples May Not Be Over from The Ticker Tape.

Hurricane Matthew Threatens Petroleum Terminals in Bahamas
Sheela Tobben – Bloomberg
Hurricane Matthew is threatening to shut in about 33 million barrels of oil storage in the Bahamas and disrupt Caribbean shipping this week before heading northwest toward the U.S. East Coast.

****SD: And yachts. The hurricane threatens yachts.

Nothing Matters but October
Steve Claussen – OptionsHouse
Welcome to October! In Chicago anyway, it seemed we dove from 80 degree summer evenings to fall temperatures overnight! October the month that is infamous for the crash of 1929 (that I read about) and again in 1987 (that I lived and traded in the OEX option pit on the CBOE) is actually a month that more often historically has staged market recoveries, albeit from negative September results. However this year September wasn’t a major downer at all in the S&P 500 Index. Led by energy names rallying last week, due to an OPEC agreement for the first announced cutbacks in production since 2008, the major market averages were able to post a small gain for the week and settled only about 22 points below its all-time closing high!

Wizards of Today’s Markets: Ray Cahnman, Part 2
Rick Lane – Trade Talk, Trading Technologies
Rick: Would you say that—we’ve all made bad trades and probably learned more from those than from the good trades—but would you say that [your narrow escape with the back month mortgage spreads] is the story that underscores your approach to the rest of your career?


CBOE Holdings Reports September 2016 Trading Volume
CBOE Holdings, Inc. (NASDAQ: CBOE) reported today that September average daily volume (ADV) for options contracts traded on Chicago Board Options Exchange (CBOE) and C2 Options Exchange (C2), and futures contracts traded on CBOE Futures Exchange (CFE) was 5.1 million contracts, an increase of 25 percent from August 2016 and 3 percent from September 2015.

****SD: Other good news for CBOE from Barron’s, Wells Fargo Ups CBOE To Buy On Bats Deal

CME Group Reached Average Daily Volume of 15 Million Contracts per Day in September 2016, up 6 Percent from September 2015
CME Group
ME Group, the world’s leading and most diverse derivatives marketplace, today announced that September 2016 average daily volume (ADV) reached 15 million contracts per day, up 6 percent from September 2015. CME Group September 2016 options volume averaged 2.9 million contracts per day, up 9 percent versus September 2015, with electronic options averaging 1.7 million contracts per day, up 22 percent over the same period last year. Third-quarter 2016 volume averaged 14.3 million contracts per day, flat compared with a strong third-quarter 2015. CME Group year-to-date 2016 ADV through September averaged 15.4 million contracts per day, up 8 percent.

The importance of business continuity in times of operational risk
John Fennell, OCC Executive Vice President and Chief Risk Officer – OCC Blog
As the chief risk officer for OCC, I can tell you that business continuity is high on our operational risk list. It is important that we do this right in our role as a foundation for secure markets. In 2003, a lot of financial services companies had their primary sites in Manhattan and their back-up sites in New Jersey. We learned a lesson from the 2003 blackout that the industry had to be more dispersed geographically and that we had to be able to function remotely. In 2011, when an ice storm hit Dallas during the week of the Super Bowl, and at the same time Chicago had a snow blizzard that resulted in people and cars stranded on Lake Shore Drive, OCC had 85 percent of its team operating remotely in both locations providing uninterrupted service for market participants.

MIAX Options Joins IPC’s Rapidly Growing Equity Derivatives Marketplace
Press Release
IPC, a leading global provider of secure, compliant communications and networking solutions for the financial markets community, today announced that it continues to grow its equity derivatives marketplace with the addition of the MIAX Options Exchange (MIAX Options) to the IPC Financial Markets Network. MIAX Options is a fully automated electronic options exchange for the trading of OCC issued standardised options on equities and ETFs.

MIAX Options Reports September 2016 Trading Activity; Remains #1 in Time at NBBO for Both All Option Classes and Penny Pilot Option Classes for August 2016
Press Release
MIAX Options Exchange today announced that over 22.9 million contracts were executed on MIAX Options in September 2016, equating to an average daily volume (ADV) of over 1 million contracts. The September volume represents a 1.6% increase from the 22.5+ million contracts executed in August 2016 and a 14.1% increase from the 20.1+ million contracts executed in September 2015.

MCX applies for clearing corporation
Business Standard News
The Multi Commodity Exchange of India Ltd (MCX) has informed the BSE that its wholly owned subsidiary MCX Clearing Corporation Ltd (MCX CCL) has applied to the Securities and Exchange Board of India (Sebi) seeking recognition as a clearing corporation to enable MCX to transfer the functions of clearing and settlement of trades to a separate clearing corporation viz. MCX CCL.

****SD: From the Economic Times — For institutional investors a clearing corporation is one of the absolute essentials: Mrugank Paranjape, MD & CEO, MCX

FY17-end a realistic timeline to launch options trading: MCX
MCX is absolutely prepared for the new commodity options trading, says MD and CEO Mrugank Paranjape. With an aim to deepen the commodity derivatives markets and enhance liquidity, markets regulator Securities and Exchange Board of India (SEBI) allowed options trading on commodity bourses recently. So far, only future trading was permitted on commodity bourses.

OCC enjoys sec lending summer growth
Securities Lending Times
The Options Clearing Corporation’s (OCC) securities lending volume grew by 29 percent in new loans in September, compared to the same time last year.

Intercontinental Exchange Completes Acquisition of S&P Global’s Standard and Poor’s Securities Evaluations and Credit Market Analysis
Intercontinental Exchange
Intercontinental Exchange (NYSE: ICE), a leading operator of global exchanges and clearing houses and provider of data and listings services, announced it has today completed its all-cash acquisition of S&P Global’s (NYSE: SPGI) Standard & Poor’s Securities Evaluations (SPSE), a leading provider of fixed income evaluated pricing, and Credit Market Analysis (CMA), a leading provider of independent data for the over-the-counter (OTC) markets, including credit derivatives and bonds. The transaction was announced in March.

Trading statistics September 2016
Eurex Group
Investment behaviour of the buy side shapes the product offering of exchanges; Eurex’ MSCI segment reaches 1 million contracts of open interest

Moscow increases clearing default fund by a half
Julie Aelbrecht – Futures & Options World
The so-called ‘skin in the game’ debate has been a hot topic in recent years
The Moscow Exchange has increased the default fund of its central counterparty NCC Clearing Bank to RUB 9.5 billion (GBP119 million) up from RUB 6.5 billion. According to the Moscow Exchange (Moex), the increase would “add an extra layer of security for participants in on-exchange trading”. This dedicated capital, also known as ‘skin in the game,’ is the part of the central counterparty’s funds that can be used to cover losses in the event of a default of one of its members.

EEX Trading Results For September 2016
Press Release
In September 2016, the monthly volume on EEX’s power derivatives market amounted to 373.3 TWh, increasing the volume traded in September 2015 (225.8 TWh) by 65%.

Regulation & Enforcement

Wall Street Watching as U.S. High Court Tackles Insider Trading
Greg Stohr and Patricia Hurtado – Bloomberg
Wall Street figures accused of insider trading are keeping a close eye on a U.S. Supreme Court appeal by a Chicago grocery wholesaler trying to overturn his conviction for buying stock based on information leaked by a relative. The justices will consider their first insider-trading case since 1997 on Wednesday when they hear Bassam Yacoub Salman’s case. It tests whether someone can be sent to prison for making trades when the insider who provided the tip wasn’t looking to make any money.

****SD: Mark Cuban supports Salman, for whatever that ends up being worth.

Under Surveillance: Getting to Grips With the New Market Abuse Regulation
Mike O’Hara, The Realization Group – TABB Forum
How prepared are financial firms for reporting requirements under new Market Abuse Regulation (MAR)? Many firms that previously did not need to worry about market abuse – at least from a regulatory compliance perspective – now must put in place systems that will enable them to report to their local watchdogs any suspicious activity in near real time. Regulators expect companies to be ready, and they’re likely to take a dim view of any firms that aren’t up to the task or are found to be dragging their feet.

SEC: Investment Adviser Charged With Cherry-Picking And Misleading Clients
The Securities and Exchange Commission today announced fraud charges against an investment adviser accused of “cherry-picking” profitable trades for his own account rather than a client’s accounts, and misleading seniors and other clients about the fees he charged and the risks in investments he recommended. The SEC Enforcement Division alleges that Laurence I. Balter and his Kihei, Hawaii-based firm Oracle Investment Research purchased equities and options in an omnibus account and waited to allocate the trades until after they were executed and Balter knew whether they were profitable. Balter allegedly allocated profitable trades to his own accounts and unprofitable trades to his client accounts.


Regulation drives innovation in technology
Chris Thompson, product director at Abide Financial – Futures & Options World
Having recently made the move from ‘Fintech’ to ‘Regtech’ there is a lot that feels familiar. I cannot help but draw parallels between the two genres and wonder whether any lessons can be taken from the past. Most would tell you that Fintech emerged from the financial crisis in 2008, driven by consumer demand for lending and a rise of disruptive innovative technology. In capital markets though, the beginnings of Fintech can be traced back to the large scale electronification of the exchanges in the late 1990s. This created the opportunity for technologists and Independent Software Vendors (ISV) to satisfy the needs of a then relatively analogue and resistant trading community

****SD: Ahh, regtech, the new buzzy niche.

The CFO Imperative: Leveraging the Cloud for Business Innovation and Growth
Wharton School of Business, University of Pennsylvania
Cloud technology offers Internet-based IT resources to firms without the need for major, upfront capital outlays. By tapping services as they need them on a pay-as-you-go basis, businesses can stay flexible and efficient. Such a strategy is useful when companies have bursts of IT intensity in their operations, especially while launching new products or services or coping with volatility in business environments. Many firms also find the cloud a useful launch pad for embracing data analytics tools and the Internet of Things.

****SD: I’ll give this story a pass for using both “leveraging” and “innovation” in the title since Dell collaborated and likely was the source of the jargon.

Corvil Deploys Machine-time Analytics Platform
Finance Magnates
Corvil, a specialist in real-time data analytics and regulatory solutions for the financial services industry, implemented a new class of data analytics, pushing its ongoing agenda to shore up transparency, surveillance, and compliance across financial markets.


European banks: the big contrarian trade with few takers
Richard Blackden – Financial Times
“Banks are under siege,” Vítor Constâncio, the vice-president of the European Central Bank, warned an audience at a Spanish university in early July. If that stridency is unusual in a central banker, the comments were outdone last week by the chief executive of Credit Suisse. Tidjane Thiam told a conference that European banks are “not really investable as a sector”. The two sets of remarks might appear more puzzling given they bookended the best quarterly performance for shares of European banks since the start of 2015. In the third quarter, the Stoxx Banks Index climbed 11.2 per cent, leaving the wider market trailing.

Ag Sentiment Moderates in September, Continues to Favor Livestock
Jim Mintert, David Widmar, Michael Langemeier – Purdue University Ag Economy Barometer
The Purdue University/CME Group Ag Economy Barometer indicated that farmer sentiment improved modestly during September as fall harvest got under way across most of the U.S. Based on a monthly survey of 400 agricultural producers, the Ag Economy Barometer was at 101 in September (Figure 1). While this was moderately above the August value of 95, the barometer’s current reading remains well below its peak of 112 in July.

Watch Out – Money Managers Are Super Long Gold And Natural Gas
Seeking Alpha
This is the 27th in a series of weekly updates that outlines how traders are positioned, and how that positioning has recently changed. I break down the updates by asset class, so let’s get started.

How to Hedge the Presidential Election Buying Put Options
Jacob Mintz – Cabot
Most traders don’t believe a Trump or Clinton victory matters to the market. What does matter is uncertainty. A good example was the George W. Bush vs. Al Gore election in 2000. It was a calamity for the markets because the election was too close to call for months. So I don’t anticipate significant volatility if Clinton or Trump runs away with the election. But if the race really tightens up, there is certainly the potential for short-term volatility—because the market hates uncertainty!

Why You Should Not Short The S&P 500
Seeking Alpha
As the ongoing bull market is the second-longest in history, an increasing number of investors has become nervous about an imminent bear market. The fear has become worse due to the declining earnings per share of the S&P (NYSEARCA:SPY) in the last four quarters. Thus some investors currently consider shorting S&P in order to profit from a potential decline. In this article, I will summarize why investors should not attempt to short the S&P. First of all, most investors are well aware that economic cycles typically last 5-7 years. Therefore, as the ongoing bull market is 7.5 years old, these investors believe that the top should be just around the corner. However, this notion is correct only for cyclical bull markets, not secular.


CBOE and RCM Alternatives Event on VIX Futures Trading
CBOE Options Hub
The CBOE Options Institute is teaming up with RCM Alternatives on October 13th from 4:30 to 8:00 for a discussion and expert panel on VIX Futures and Options trading. The even will be held at CBOE with a reception following in the Member’s Lounge that overlooks the trading floor.

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