Observations & Insight

Bits & Pieces
By John J. Lothian

We have added Johan Toll of Nasdaq to our March 1 Stockholm MarketsWiki Education World of Opportunity event. He will speak about blockchain.

Unfortunately, Patrick Thornton-Smith of Duco had a conflict come up and will not be able to present. We hope to get PTS in the fall in London.

John Damgard has agreed to speak at our July 21 event in Chicago. We are beginning work on lining up speakers for this summer’s series. Chicago is scheduled for July 17, 19 and 21. New York is set for July 11 and 12. We are still looking for a venue for July 12. Any help is welcome.

If you have not checked out our new MarketsWikiEducation.com site, please do. Patrick Lothian did an amazing job of developing this new site. Also, please like MarketsWiki Education on Facebook and follow us at @MarketsWikiEdu on Twitter.

Walt Lukken is in Chicago today for the FIA Washington update. I am sure there will be some questions he will not be able to answer: unknowable unknowables.

We are gearing up for the FIA International Conference in Boca Raton, Florida in mid-March. We will again be conducting our Exchange CEO series, as well as hearing from other leaders. My daughter Katherine will be working for us as an intern during her spring break. If you don’t see her with a microphone in her hand, you can probably catch her at the pool.

Jim Kharouf has accepted an invitation from the World Federation of Exchanges to participate in their IOMA conference in Frankfurt in April.

Lastly, any help you can give us to get the word out for our March 1 Stockholm event would be appreciated. We have a great lineup of speakers and want this to be the first of several years in which we bring the program to Sweden.

Lead Stories

Investors Look Past Headlines as Bull Market Roars Ahead
Landon Thomas Jr. – NY Times
Markets hate uncertainty. It is one of the oldest saws in finance. Yet even as a series of political scandals flare up in President Trump’s nascent administration, raising questions about his ability to pursue an investor-friendly agenda of tax cuts, deregulation and fiscal spending, the stock market just roars ahead.

****SD: The thing about old saws is sometimes they rust up and stop cutting well.

Wall Street’s Trading Revival Risks Relapse as Volatility Ebbs
Andrea Wong and Alexandria Arnold – Bloomberg
So much for the “durable” volatility in financial markets that Wall Street CEOs cited for helping to revive almost every investment bank’s earnings last quarter. Low volatility has crept through markets once again following a bout of gyrations that spread across bonds and equities in the last two months of 2016 and the first weeks of this year.

****SD: I knew it was only a matter of time before volatility got the “we’re in the eye of the storm” treatment from a strategist! Nick Colas of Convergex had some context in his morning briefing – the long run VIX average is 19.6 and the five year average is 15.6. Since the election the VIX closing average has been 12.2.

Why the VIX Has Been Acting So Weird
Mark Sebastian – TheStreet
If you are wondering whether the VIX is acting screwy today, the answer is yes. Settlement in VIX futures was way outside normal range as the print was over 12, and VIX settled below 11 yesterday. Part of the reason may be that a large volatility fund blew up over the last week or so. Catalyst Funds Hedged Futures Strategy, which went from virtually nothing in assets under management to over $4 billion over the last few years, has taken it on the chin over the last week and has seen a massive drawdown on positions.

****SD: I get the impression that while the VIX is usually Nelson Muntz — reliably punching people and saying “Ha-ha” — recently it’s turned into Ralph Wiggum — look and roll your eyes while expecting something crazy on the horizon.

Beware of overpriced options
Jared Dillian, Mauldin Economics via Business Insider
I am old enough that I was trading in the markets before decimalization. If an option was trading for a quarter, we called it a “quack.” If it was trading for a sixteenth, we called it a “teeny” or a “stink.” Beware the teeny puts. If you were a market maker on the floor, you generally didn’t want to be short any teeny puts right before earnings. Just spend the money and buy them back. No reason to be short unbounded downside risk for just a couple hundred bucks.

US oil traders riveted by mystery bidding
Gregory Meyer and David Sheppard – Financial Times
A mystery is confounding the US oil market: when inventories rise, prices rise, too. That is not the way it is supposed to work. At 518.1m barrels, stocks of crude sitting in commercial tanks are the highest in records dating to the early 1980s. In theory, the excess supply should weigh on markets. But this year a loose pattern has emerged after the US government releases weekly oil data: surprisingly large increases in crude stocks have prompted spurts of buying.

****SD: To those slackers who never opened their Econ 101 books, don’t worry. You didn’t miss anything on the dynamics of supply and demand.

The VIX and S&P 500 Are Moving in Tandem Like It’s 1995
Cecile Vannucci – Bloomberg
For the ninth time this year, the CBOE Volatility Index and S&P 500 Index moved in unison on Wednesday, with the options-price proxy surging 11 percent as the stock gauge climbed for a seventh straight day.

****SD: 1995 was also the last year of “Batman The Animated Series” … Sad!

Buy Side to Brokers: ‘Show Me Some Love’
John D’Antona Jr. – Traders News
The best way for a broker to prove their value to a buy-side trader is to simply pick up the phone and reach out. In other words, show the buy-side some love. Now. At an interactive panel session at the Security Traders Association of Florida’s annual conference this past weekend, a bevy of buy-side traders told their sales trader counterparts, both on the panel and in the audience, that they want meaningful, productive relationships with their brokers.

Exchanges and Clearing

Hong Kong stock exchange to launch renminbi currency options on March 20
The Hong Kong Exchanges and Clearing Limited (HKEX) said on Thursday that it will launch its renminbi currency options on March 20. The USD/CNH options will be the first currency options traded at the HKEX, it said in a statement on its website.

TRAFiX Offering Access to Bats Options BAM Auction
Bats Global Markets and TRAFiX, a fintech company and innovator in next-generation Order and Execution Management Systems, today announced TRAFiX will offer access to the Bats Auction Mechanism (BAM), launched earlier this year on the exchange group’s EDGX Options Exchange.

MIAX Options Named Best Overall Exchange at Fund Technology and WSL Awards 2017
PR Newswire via Yahoo
MIAX Options Exchange announced today that it was named “Best Overall Exchange” at the Fund Technology and WSL Awards 2017. Previously known as the WSL (Wall Street Letter) Institutional Trading Awards, the Fund Technology and WSL Awards 2017 recognize and reward providers catering to asset managers and institutional traders that have demonstrated exceptional customer service and innovative product development over the past 12 months. In 2015 and 2016 MIAX Options was named “Best Infrastructure/Technology Initiative by an Exchange/ATS” by the Wall Street Letter.

LME failed to report suspicious trade orders to FCA for three months – sources
Pratima Desai – Reuters
Following the introduction of new market abuse regulation last year, the London Metal Exchange did not submit any suspicious transaction order reports (STORs) for three months, setting off alarm bells at the UK regulator, metal industry sources said.

****SD: Lack of suspicion equals cause for suspicion. Nice.

CME Group Announces Copper Futures Open Interest Record, Surpassing 300,000 Contracts Milestone
PR Newswire
CME Group, the world’s leading and most diverse derivatives marketplace, today announced Copper futures open interest surpassed 300,000 contracts for the first time on Monday, February 13, 2017. Copper ended the trading session with a total of 300,996 contracts open interest, surpassing the previous record of 297,830 set on February 1, 2017.

****SD: From CNBC – Is copper still king? Here’s why the current cheap valuation may be a mirage


Convergex prepares for MiFID II with latest hire
Hayley McDowell – The Trade
Convergex has hired industry veteran, Robin Strong, to expand the firm’s European commission management, research payment and outsourcing services to the buy-side ahead of MiFID II.

Regulation & Enforcement

New Reforms Could Make Banks More Vulnerable
Erik Thedeen – Bloomberg
The review of global banking regulation that began in the aftermath of the financial crisis is nearing completion. The Basel Committee on Banking Supervision has not been able to reach a final agreement despite the urgent need. Nobody disagrees on the goal or the main instrument: to strengthen financial stability through higher and more robust capital requirements. But achieving the objective of stability depends in part on getting the composition of capital requirements right. Unfortunately, current proposals fall short.

Bets on Fortress placed before bid news yield 400% profit
Miles Johnson, Stephen Foley and Joe Rennison – Financial Times
A trader or traders in the options market made an estimated profit of 400 per cent betting on a big move in Fortress Investment Group shares on Tuesday, just hours before the private equity firm announced a $3.3bn takeover offer from SoftBank.

****SD: Bloomberg on Fortress bets here.

FBI says it’s investigating binary options fraud worldwide, invites victims to come forward
Simona Weinglass – The Times of Israel
The Federal Bureau of Investigation is actively and concertedly investigating binary options fraud, and will pursue justice anywhere on earth, an investigator from the agency’s Complex Financial Crimes Unit said.

A little too late: Belgium’s FSMA addresses clients of Banc de Binary
Maria Nikolova – FinanceFeeds
Whereas the fight against binary options fraud gathers speed in some jurisdictions, forcing illegally operating entities to cut and run, elsewhere the clumsiness and reluctance of certain regulatory bodies is apparent.

After years of success, Banc De Binary finally shuts its doors
Forex News Now
Anyone who has ever been interested in trading binary options must have run into Banc De Binary. Since it was founded in 2009, it grew to become one of the largest binary options brokers in the world. Now, it’s shutting down for good.


Capital Markets are Primed for Cloud Data Delivery
John D’Antona Jr. – Traders News
Traders are embracing cloud-based data delivery. Though the market data industry has operated fundamentally in the same manner for over a generation, the advent of cloud-based service delivery is bringing change for the options available to the capital markets community. TABB Group’s latest report, “Stairway to the Market Data Cloud: As a Service Model Comes to Market Data,” reviews progress in security, operations and API suites that now enable next generation delivery of cloud based market data services.


Block Trade Analysis – Large Bullish 1 x 4 VIX Option Trade
Russell Rhoads – CBOE Options Hub
I’m on the road today playing an academic, but regardless of how far I am from CBOE I still am fortunate that I’m constantly keep in the loop about big trades. I got a heads up this morning that a VIX Mar 15 – 22 1 x 4 Call spread traded in the VIX pit a few minutes after the open. My assumption was the trader bought the 15’s and sold the 22’s (I was wrong) mainly because all the big trades seem to be based on a low volatility outlook.

Block Trade Analysis – Large RUT Bear Call Spread
Russell Rhoads – CBOE Options Hub
As the Russell 2000 (RUT) continues to move into uncharted territory at least one trader believes 1500 is not achievable. At least not through standard March (3/17) expiration. Early today when RUT was around 1393 (much lower than today’s close) a pretty big trade came into the RUT post.

When Are We Going To Get Some Volatility?
Brandon Dempster – Seeking Alpha
The decline in volatility post-crisis is being marked as one of the greatest short opportunities of all-time, in retrospect. There are plenty of large risks on the table, but the market just seems to be ignoring these factors and focusing on potential positives. Will we ever see volatility elevate to a new, higher baseline rather than see a continual roll-off?

George Soros and other fund managers fell in love with financials
William Watts – MarketWatch
George Soros wasn’t the only big investor to show some love to surging financial stocks in the fourth quarter, regulatory filings showed. Soros Fund Management held a new stake of 62,100 shares in Goldman Sachs Group Inc. as of Dec.31, as well as call options, which give the holder the right but not the obligation to buy the underlying security at a set price, on 139,000 Goldman shares, according to the fund’s Tuesday 13-F filing with the Securities and Exchange Commission. Soros also took a new stake of 179,000 shares in Bank of America Corp., while dumping call options on 1.3725 million shares.

As Dollar Stumbles, Yen Offers Best Option for Bulls, AMP Says
Netty Idayu Ismail – Bloomberg
Nader Naeimi added to his bullish wagers on the dollar against the yen this month, predicting a 10 percent gain to 125 as the Bank of Japan maintains monetary stimulus. He’s less optimistic the greenback will strengthen against other currencies.


Newspapers aim to ride ‘Trump Bump’ to reach readers, advertisers
Jessica Toonkel – Reuters
The Trump administration’s combative view of traditional news media as the “opposition party” and “fake news” is turning out to be the best hope in 2017 for newspapers struggling to attract more digital readers and advertisers.

U.S. lawmakers push for answers on Trump team’s Russia ties
Steve Holland and Patricia Zengerle – Reuters
A crisis over the relationship between President Donald Trump’s aides and Russia deepened on Wednesday as a growing number of Trump’s fellow Republicans demanded expanded congressional inquiries into the matter.

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