Observations & Insight

East meets West – Chinese brokers continue international expansion
Alex Godingen, Head of Business Development, APAC, Fidessa

The world watched last year as Chinese markets plunged. Speculation ran rife as the West argued whether this was a correction, an evolution or the beginning of the end.

Meanwhile, in China, securities and futures firms remained largely unruffled. State-owned, and backed by over US$3 trillion in foreign exchange reserves, these institutions have been looking outward for a long time. The domestic market, large as it is, is not big enough for the number of brokers (over 100 securities and over 200 futures) saturating it. The government has started a domestic M&A process, but overseas expansion is needed as well to create a market – and firms – that can stand toe-to-toe with their foreign counterparts.

The market is also pushing them abroad. China’s outbound foreign direct investment (ODI) continues to grow – from US$12 billion in 2005 to more than US$118 billion in 2015 – as it consolidates its position as the world’s second largest economy (GDP US$11 trillion in 2015). Chinese retail investors, who make up a stunning 80% of the market, are hungry for overseas investments to help manage their risk. They want big, global firms to help them manage their wealth around the world, but that are based in China.

This retail focus poses problems.

Read the rest of Godingen’s commentary at JohnLothianNews.com

Lead Stories

China’s Passion for Stock Trading Lives On in Options Market
Kana Nishizawa – Bloomberg
As trading activity in China’s stock market wanes, one part is booming. The number of options changing hands on the China 50 Exchange-Traded Fund swelled to a record last month, data compiled by Bloomberg show. Turnover on Shanghai’s equity exchange went the other way, sinking to levels last seen regularly in 2014. For Old Mutual Plc, the options trading shows that investors aren’t convinced by the 13 percent rebound in Chinese shares from their one-year low.

****SD: The Bloomberg Gadfly article below, China Needs Options, provides more color on the options situation in China (and both are somewhat corollaries to Alex Godingen’s piece above).

Hedge-fund event stirs up options trading in select names
Saqib Iqbal Ahmed – Reuters
Hedge fund managers trading ideas at the Sohn Investment Conference on Wednesday spurred a flurry of activity in the options market in select stocks, as traders jockeyed to take advantage of the potentially profitable tips mentioned at the annual assemblage. Options on a number of stocks saw a bump in trading volume on Wednesday as fund managers touted their long and short investment picks.

****SD: Last year’s picks were a mixed bag. Check out Bloomberg’s How The Hedge Fund Picks From Last Year’s Sohn Conference Are Performing for some specifics. Must be nice for Muddy Waters Research’s Carson Block to say he’s shorting Bank of the Ozarks and then the stock dives. Kind of a shorter’s version of forward guidance. His statements even prompted a response from the bank. Ozarks did rally by yesterday’s close to recover some of its losses but is down another 2+ percent today as of this writing. (If the outlook was short term, the whole strategy could have been the announcement of the short…)

Two new products attempt to slay the white whale of the ETF market
Alex Rosenberg – CNBC
If you think volatility is about to rise, what should you buy? One veteran of exchange-traded products hopes he has come up with a new answer to that question. For years, an exchange-traded product that tracks the popular CBOE Volatility Index has been, in some ways, the white whale of the ETF world. That is, while there is clearly investor demand for a product that can be used to hedge against or speculate on future rises in volatility, no such thing exists — nor most likely could it.

****SD: These new REX products are great from an educational standpoint as they prompt a discussion about how the VIX works and the inherent problems in current products that track it.

China Needs Options
Christopher Langner – Bloomberg
Investors in China are discovering that a great way to take a position in a market without fully committing is by simply buying options. If only there were more of those, maybe authorities wouldn’t have to intervene so much. Sure, there may be a few more equity crashes along the way, but ultimately, the use of derivatives could transform Shanghai and Shenzhen into true investment destinations.

VIX Can Be Deceiving as Steep Curve Shows Uncertainty: Analysis
Don’t let the low U.S. equity volatility fool you. The increasingly steep term structure of Chicago Board Options Exchange Volatility Index, or VIX, futures shows uncertainty remains high amid weak global growth and rising concerns about effectiveness of central bank policies, Bloomberg strategist Tanvir Sandhu writes. The VIX futures curve’s typical contango, where the term structure is upward sloping, means roll-down costs will erode any returns from outright long positions or even cause losses.

May-June Issue of OCC News
This edition includes recognition of our industry’s success regarding the final fiduciary rule that was announced by the U.S. Department of Labor, a Q&A with Richard Wallace, our head of compliance, on the importance we place on this key part of our business, a conversation on how we manage third-party risk, and updates on our work in Europe and Washington, D.C. on behalf of the listed options industry. Mary Savoie of OIC, and Molly McGregor of ISE also talk about next week’s Options Industry Conference in California.

Volatility Update: Late-April Showers on Wall Street
Frederic Ruffy – The Ticker Tape
Market volatility picked up in the final two days of April, but it was an otherwise quiet month on Wall Street. The S&P 500 finished nearly unchanged for the month, and the average daily moves in the index were roughly 10 points, which is well below the average daily moves of almost 18 points seen during the first three months of the year. Now, as the equities market enters what some see as a seasonally weak period, some market watchers are likely wondering whether the subdued market action throughout most of April has set the table for a more substantial correction in the months ahead.


CBOE Holdings, Inc. Earnings Boosted By SPX and VIX Trades
The Motley Fool
CBOE Holdings (NASDAQ:CBOE) reported first-quarter results on April 29. The holding company for the Chicago Board Options Exchange benefited from greater usage of its high-margin proprietary products.

LSE’s Long Cold Summer
Chris Hughes – Bloomberg
InterContinental Exchange is subjecting shareholders in the London Stock Exchange to a long, cold summer. The U.S. group has said it is not making a takeover bid for its U.K. peer — dashing the hopes of LSE shareholders for a better deal than the merger agreed with German rival Deutsche Boerse.

LSE denies ICE’s claims over merger talks
The Trade
The London Stock Exchange Group (LSE) has denied claims from Intercontinental Exchange (ICE) Jeffrey Sprecher that it refused to hold proposed merger talks. In a statement from the LSE, the third released regarding the merger, it denied Sprecher’s claim that ICE approached the LSE over a possible proposal.

ICE sees commodities wipe out equities losses
Futures & Options World
ICE’s commodity derivatives were up while equity derivatives had a slow April
The Intercontinental Exchange has reported a strong trading month in April as increased activity in commodities more than wiped out losses in its equities segment. The Atlanta-based exchange said on Thursday derivatives trading on ICE was up 11.8% in April to a total of 8,015,000 contracts. Commodity derivatives at the Intercontinental Exchange (ICE) was up, with a 23% rise in energy products to 2,611,000 contracts up from 2.368,000 in April 2015, mostly driven by an uptick in Brent crude, natural gas and gasoil futures.

Regulation & Enforcement

US firms agree SEC form for ATS transparency lacks clarity
The Trade
A TABB Group study into the Securities and Exchange Commission’s (SEC) proposed rules on alternative trading systems (ATS) transparency reveals US firms agree it lacks clarity and consistency.

Bring on interest rate options, RBI
Economic Times
A Reserve Bank of India-appointed expert committee headed by Prof P G Apte has chalked out a sensible, forward-looking framework for the introduction of interest rate options in the country. Various interest rate derivative products, such as interest rate swaps, forward rate agreements and interest rate futures, both exchange traded and available over the counter, have indeed been permitted since 1999, so that banks and other entities can manage interest rate risks.

Britain’s FCA to part ways with Mifid head Stewart
Futures & Options World
The Financial Conduct Authority (FCA) is set to part ways with the head of its Mifid II and MAR implementation programme just two months ahead of the implementation of the European Market Abuse Regulation (MAR).


Exclusive: Big data breaches found at major email services – expert
Hundreds of millions of hacked user names and passwords for email accounts and other websites are being traded in Russia’s criminal underworld, a security expert told Reuters. The discovery of 272.3 million stolen accounts included a majority of users of Mail.ru (MAILRq.L), Russia’s most popular email service, and smaller fractions of Google (GOOGL.O), Yahoo (YHOO.O) and Microsoft (MSFT.O) email users, said Alex Holden, founder and chief information security officer of Hold Security.


Option Gamma: identifying levels of pain
Stefan Wintner – Automated Trader
The increasing popularity of shorter expiry S&P 500 options has the potential to significantly impact the underlying market. Analyzing the hedging pressure of market makers can help to identify critical points.

Rolling Along: Knowing When to Adjust an Option Trade
The Ticker Tape
Adjustments can be an integral part of any option trade, but knowing when to adjust can be tricky. Still, if you know what to look for, the market can send you a signal that the time for an option adjustment might be at hand. This doesn’t mean it’s guaranteed to be the absolute best time to adjust, but the options market can help you identify when the adjustment window is starting to close.

Earnings Next Week – 5/9 – 5/13
CBOE Options Hub
The earnings calendar continues to offer several opportunities to trade around announcements next week. As always the data below is based on the last three years of earnings results, unless the data is in italics. In those cases less than three years worth of history is available. The columns show the biggest rally, biggest drop, average move, and what the stock did last quarter in reaction to earnings.

On Bull-Market Brink, Citi Sees Commodity Gains as Goldman Jeers
Flows into global commodity ETFs reach $18.5 billion this year
`Doesn’t really make sense’ to be bearish, Citi’s Wilson says
Commodity bulls, it might finally be time to exhale. There’s a growing chorus of voices and a surge of investor money signaling the worst of the commodity slump is over. Leading the pack is Citigroup Inc., the bank that was ahead of the game back in 2012 when analysts declared the end of the super cycle of rising demand and prices. Now, the bank expects a weaker dollar and China’s stabilizing economy mean most markets have reached their bottoms.

Managing risk on a 1,300 head US dairy farm – ‘It’s just another tool in the tool box’
Risk management is just another tool in any dairy farmers tool box, according to US dairy farmer Joe Thome. Thome spoke about the risk management steps undertaken on his 1,300 dairy farm in Wisconsin at the Joint IFA and FCStone conference on dairy volatility in Laois on Wednesday. The US-based dairy farmer said that risk management is a business decision that can help dairy farmers, but if farmers are not familiar with it could have a negative impact on their business.

Long-Term Investors Need to Think Short-Term
Nadex Binary Options
Investors often aren’t concerned with short-term fluctuations or daily price action. But when it comes time to buy and sell those stocks, smart investors turn into traders, looking to enter and exit at the best price.

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