Observations & Insight

Let Me Count the Ways: Nasdaq Looks at All the Possibilities for Options, and Beyond, in ISE Acquisition
Jim Kharouf – JLN

With double the number of US equity options exchanges, Nasdaq has some work to do in the coming months.

Nasdaq closed the deal today for $1.1 billion with Deutsche Boerse, giving the exchange three options markets: International Securities Exchange, ISE Gemini and ISE Mercury, to go along with Nasdaq Options Markets (NOM), Nasdaq OMX BX and Nasdaq OMX PHLX.

Tom Wittman, executive vice president of Nasdaq and global head of equities at Nasdaq, told John Lothian News that the plan is to integrate and migrate the three exchanges onto the Nasdaq platform. That essentially means the technology team at Nasdaq will have to rebuild the ISE exchanges to provide the same functionality and rules that exist today.

Wittman isn’t fazed by the task, however. His team did it when Nasdaq bought PHLX and completed the project in 12 months. He thinks it may be able to finish this project in less time.

Nasdaq is also taking a good long look at PrecISE, the front-end trading software it acquired in the deal. That software, which allows customers to trade into the ISE exchanges, is considered extremely flexible. It may also be used to trade on all six options exchanges, as well as on other asset classes such as equities and futures. In other words, the front-end could provide a strong trading platform for other Nasdaq properties.

“Maybe there is a way for customers, say a bank that wants to execute a complex order, to execute on PHLX, ISE Gemini or NOM, because it operates this certain way,” Wittman said. “So, I see it being able to expand the use there. And I don’t see any reason not to leverage that front-end, easily for equities and why not treasuries if there is a need or want from our customer base?”

The deal also provides a tremendous boost in market share to Nasdaq, giving the exchange 41.6 percent of equity options volumes, as calculated from the OCC volume figures from May. Wittman said the deal “gives us optionality.” Pun intended or not, a fleet of six exchanges, each with different order structures, matching algorithms and pricing models, does give the Nasdaq quite a grip on the options market.

Going forward, Wittman believes there is still more growth ahead for the options business as more retail stock traders, not to mention institutional players, migrate into derivatives.

“A lot of it is just an education process,” he said. “If you look at the firms that do wealth management, they get their clients into equities but never hedge with an options strategy. Those firms are starting to become more educated and will use them more in the coming years.”


Also of note, Kevin Murphy, managing director at Citi, announced that he is leaving the firm after 33 years.  He said he is now working on a major motion picture and finishing his first novel. 

Lead Stories

Brexit – What now for the cleared derivatives markets?
This memorandum focuses on the key areas in which a Brexit is likely to impact the cleared derivatives markets. It is based on the assumption that following the referendum vote (which is technically advisory), the United Kingdom (U.K.) Government will press on with the process of negotiating its withdrawal from the European Union (EU) (as opposed to using the outcome of the referendum vote to seek to re-negotiate more preferential terms or, for example, doing nothing). Thus, the scope of this memorandum is limited solely to the U.K.’s options when considering its on-going relationship with the EU as part of a withdrawal from EU membership. It should be regarded as general guidance only and should not be relied upon as definitive advice.

****SD: Lots of potential outcomes explained.

Here’s Why Volatility Has Been One of the Most Volatile Assets
Ben Eisen – WSJ
Wall Street’s favorite gauge of fear has had a wild ride in recent sessions. The CBOE Volatility Index, or VIX, surged 49% on Friday, its fifth biggest rise ever. Then on Tuesday it fell 21%, its ninth biggest drop on record. A measure of the volatility of VIX, known as VVIX, on Friday jumped to its highest level of the year.

****SD: In other post-Brexit news, the ocean is wet.

A Little Perspective on Yesterday’s Record High SKEW
Russell Rhoads – CBOE Options Hub
We have data for the CBOE SKEW Index (SKEW) going back to the first trading day in 1990. Yesterday, SKEW finished the day at the highest level over this period closing at 153.66. The chart below shows the annual high low and average by year going back to 1990. That highest green dot is yesterday’s close.

****SD: Post about the record high: CBOE SKEW Index Rose to 153.66 on June 28, Its All-Time High

Paris, Frankfurt Already Jockeying for City’s Brexit Spoils
John Detrixhe, Birgit Jennen and Helene Fouquet – Bloomberg
The British seat at the European Union summit had been empty for less than 24 hours before leaders from France and Germany were haggling over one of the U.K. economy’s crown jewels: the business that facilitates trading in euro-denominated derivatives.

****SD: See Doug’s comment in the below story.

Not so fast, François: EU clearing land grab is complex
In the days since the UK electorate’s emotive decision on European Union membership, financial commentators have been speculating about the fate of euro-denominated clearing in the City of London. Will the major UK central counterparties (CCPs) such as LCH have to move all euro clearing into the eurozone?

***DA: This suggestion is, in a word, preposterous. U.S. CCPs like CME Group clear in sterling, euro, yen and other pairs, and have done so for quite a while. Ditto for jurisdictions across the planet. We do not want to go there.

Hedge funds make killing on Brexit volatility
Futures & Options World
Two trading days after Brexit return main CTA index to positive territory
Hedge funds profited from the immediate post-Brexit volatility, according to research from French bank Societe Generale that suggests as many as 90% of Commodity Trading Advisor strategies did well trading after the shock decision. Societe Generale’s CTA Indices confirm positive performance for CTA managers in the two full days of trading after the Brexit referendum result was announced.

Volatility Update: VIX Jumps After Brexit
The Ticker Tape
The CBOE Volatility Index (VIX) reached four-month highs late last week. As stocks across the globe faced a day of heavy selling pressure, currencies gyrated, and bond yields fell, the market’s “fear gauge” did as it typically does during times of market turmoil: it moved higher.


How Far Ahead Is NASDAQ Compared To Its Peers In Equity Options Trading?
NASDAQ is one of the biggest players in terms of equity options trading in the U.S. At 3.7 million trades per day, its trade volume is 2.5 times the volume of CBOE and 1.3 times the volume of NYSE. Moreover, its wide market presence allows it to charge a premium price per contract compared to its competitors so its revenue is not directly comparable to the other players in the market. Below we take a look at how NASDAQ’s equity options trading stacks up against other market participants.

Deutsche Boerse Completes Sale of ISE to Nasdaq
Finance Magnates
Germany-based exchange and clearing house operator, Deutsche Boerse AG, today announced that it has completed the sale of International Securities Exchange Holdings Inc. (ISE) to Nasdaq today, as it finished its divestiture of ISE for $1.1 billion.

Euronext Rolls Out PSI 20 Options, Extending Portuguese Offering to Europe
Finance Magnates
Euronext has expanded its PSI 20 Index (PSX) with the launch of a new options offering, which will be made available immediately for both institutional and retail investors, according to a Euronext statement.

MIAX Options – Reg SCI / SIFMA BCP Test Plan
Press Release
As previously announced in a MIAX Alert published on June 20, 2016, the MIAX Options Exchange will participate in the SIFMA 2016 industry-wide business continuity test on Saturday, October 15, 2016 from 9:00 AM to 1:00 PM EST. All members that are required to participate in accordance with Regulation Systems Compliance and Integrity (Regulation SCI) have been notified.

SGX reports FY2016 results on 27 July 2016
Press Release
Singapore Exchange (SGX) is reporting full-year results for Financial Year 2016 (FY2016) after the market closes on 27 July 2016.

Regulation & Enforcement

U.S. lawmakers seek more money, authority for derivatives regulator
The Commodity Futures Trading Commission would have stronger policing powers over the derivatives market, along with a boosted budget, under legislation introduced in the U.S. Congress on Wednesday.

U.S. judge dismisses SIFMA case over market data fees
A U.S. judge dismissed a long-simmering legal battle over the cost of market data that is used by brokerages and high-speed trading firms, in a victory for the New York Stock Exchange and Nasdaq. The Securities Industry and Financial Markets Association (SIFMA) had challenged whether fees charged by the two exchanges to traders, including a fee increase in 2010, for proprietary equity market data were justified due to an alleged lack of competition.

CFTC Oversight Division Concludes Evaluation of CBOE Futures’ Transparency
Finance Magnates
The US Commodity Futures Trading Commission’s (CFTC) has issued the results of a rule enforcement review of the CBOE Futures Exchange, LLC, which had been subject of a previous evaluation of its trade practice surveillance program, per a recent CFTC manifest.


Can Option Volume Indicate the Intentions Behind Trades?
The Ticker Tape
Market watchers sometimes look to trading volumes in stocks and options as possible indications of market sentiment. For instance, relatively high volume accompanying a rise in a stock might indicate a bullish move with strong conviction. Conversely, relatively low volume accompanying a rise in a stock might be seen as bearish or lacking conviction.

VIX Volatility Index: Reversal May Hint At A Market Bottom
See It Market
Generally speaking, market shocks such as last week’s Bexit vote can provide a great buying opportunity when fear takes a sudden and sharp rise. A high VIX can also be a fantastic time to start opening option positions that involve net selling such as iron condors and covered calls.


CBOE RMC Europe Keynote Address Speaker Announced
CBOE Options Hub
Independence Day is just around the corner which means I’m starting to look forward to my Fall travel schedule. Two of the things I get to do (I say this as I consider it a great perk of my job) is attend CBOE’s Risk Management conferences in Europe and Asia. The European version is scheduled for September 26 – 28 when we return to the Powerscourt Hotel in County Wicklow outside of Dublin Ireland. Today I learned that the keynote speaker will be Jim VandeHei who was a co-founder of Politico.

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