Observations & Insight
Dan Day-Robinson, Chairman, Swiss Futures and Options Association – Embracing Change
“…While some may see them as the crazy ones, we see genius. Because the people who are crazy enough to think they can change the world, are the ones who do. – Rob Siltanen, the creative genius behind Apple’s “Think Different” campaign”
Dan Day-Robinson will be the first to tell you he has a flair for the dramatic. As a former market maker, investment banker and now head of a trade association, he has hundreds of stories, and he knows how to tell them. He takes us on a rollicking tour through his years in the financial world, including his most recent charge as head of the Swiss Futures and Options Association. He lays out the history of the SFOA, a group that was once much more prominent than it is today, and explains his vision for its future.
Will you see him as one of the crazy ones, or will you see genius?
2016’s Options Volumes Off to a Strong Start. But Will the Trading Last?
Callie Bost – TABB Forum
Last year showed that volatility is no simple panacea for depressed options trading. And while the first few weeks of volatility in 2016 have provided a boost for options volumes, there’s no guarantee the burst will last, as the root of the issue is deeper than the market’s daily moves.
One of Wall Street’s favorite market adages is: “So goes January, so goes the year.” Let’s hope that rings true for the US listed options market.
While daily trading has whipped around stock traders, the turbulence has been a reprieve for options desks. The S&P 500 Index has dropped 9% in the first 12 trading days of 2016. In that period, options volume has averaged more than 21 million contracts daily, 30% higher than the 16.4 million contracts traded per day in 2015.
Where’s the fear? Hedging action subdued in stock sell-off
Saqib Iqbal Ahmed – Reuters
The U.S. stock market is in the middle of its worst three-week stretch in more than four years, but the kind of fear that normally accompanies such drops has not been evident.
The usual ways investors cope with rising anxiety – by buying volatility futures, using lots of bearish put options to protect against losses, or a sharp move into the bond market – have not materialized as they did last summer and autumn, even as the stock market hits 15-month lows.
Oil options show not everyone buys ‘lower for longer’
Amanda Cooper – Reuters
The seemingly relentless slide in the oil price has savaged global financial markets and raised the spectre of widespread recession, but the derivatives market is showing traders are not necessarily buying into the “lower for longer” scenario.
Volatility, a gauge of options prices, has rocketed to its highest since the depths of the financial crisis in late 2008 as traders have scrambled to snap up protection against an even more aggressive sell-off.
Twitter Volume a Guide to Stock Options Pricing
David Bauman – UConn Today
While the stock market may seem anything but predictable, a study by University of Connecticut researchers that mined and analyzed Twitter data has helped them develop a stock option forecasting model that tripled investors’ profits when applied to simulation portfolios.
The study, “Twitter volume spikes and stock options pricing,” published recently in the journal Computer Communications, reveals how spikes in the number of tweets about a company can be used to design a profitable stock options trading strategy.
“Our study is the first that analyzes the relationship between Twitter volume spikes and stock options pricing,” says Bing Wang, associate professor of computer science and engineering, one of three authors on the paper. Co-authors were Wei Wei of FinStats.com, a big data analysis company, and Yuexin Mao, a UConn Ph.D. student in computer science and engineering advised by Wang.
****SD: The full study is available for purchase here
VIX Sends a Scary Signal: Market Rout Far From Over
Steven M. Sears – Barron’s
The options market says the stock market’s decline is not over. Trading patterns, and measures of investor sentiment, are still relatively muted even as equities plummet. The Dow Jones Industrial Average had fallen 551 points by midday; more recently the SPDR S&P 500 exchange-traded fund (ticker: SPY) was off 2.75%.
HKEX STRATEGIC PLAN 2016-2018
Hong Kong is entering a new phase as a leading international financial centre. The scale and depth of the world’s interaction with Mainland China’s markets and investors are being transformed by two-way capital flow opening, domestic reforms and Renminbi (RMB) globalisation. While Mainland corporates begin to formulate their internationalisation blueprints, a large number of Mainland investors are starting to meaningfully enter the global financial markets for the first time, seeking investment opportunities and wealth diversification. At the same time, the Mainland markets themselves are changing, especially in commodities where an increasing need for the market to ‘physicalise’ and internationalise has become apparent.
****SD: The above is a link to the full PDF — for a blurb click here. The main takeaway as pertains to this newsletter is that in the next three years, HKEx plans on offering options and futures on indexes for domestic Chinese stocks.
ICE Futures U.S. Achieves Daily Volume Records in Cocoa Futures and Options
Intercontinental Exchange (NYSE:ICE), a leading operator of global exchanges, clearing houses and data services, today announced that ICE Futures U.S. achieved daily volume records in cocoa futures and cocoa options with 87,195 contracts and 29,211 contracts traded respectively on January 20, 2016.
NFX hits four million lots, eyes integration
Futures & Options World
Energy platform set to closer align to Nasdaq’s existing Commodities business
Nasdaq said its new energy exchange has traded four million contracts since launch six months ago and the group now plans to integrate NFX with its wider commodities business.
MGEX Open Interest Climbs to 10th-Best Ever
MGEX, a Designated Contract Market (DCM) and Derivatives Clearing Organization (DCO), reports its second-consecutive open interest record day following Tuesday’s activity, now seeing the number climb to 10th-best all-time at 80,748.
Regulation & Enforcement
Exchanges Clash With Regulators Over Market-Manipulation Case; Chicago trading firm DRW pushes back
Bradley Hope – WSJ
In a rare confrontation, the two biggest futures exchanges are clashing with the industry regulator over its pursuit of a Chicago trading firm for market manipulation.
Last week, CME Group Inc. in Chicago and Intercontinental Exchange Inc. in Atlanta, together with representatives of the futures trading industry, jointly filed a friend-of-the-court brief opposing the Commodity Futures Trading Commission’s definition of “manipulation” being used in a 2013 case against DRW Investments LLC and its founder, Don Wilson Jr.
****SD: The other rarity is CME and ICE joining forces on something.
The People vs the Machine
Eugene Land – Futures & Options World
Increasingly stringent global financial services compliance regulations, such as Dodd-Frank, Basel III and Mifid II, require investment firms to record all calls that conclude deals with clients. This means that voice recorder assurance can no longer be ignored and that today’s voice infrastructure teams face a daily challenge of ensuring that relevant conversations on trading floors and in contact centres are continuously recorded.
Senate committee chairman asks CFTC to explain major accounting error
Lisa Lambert and Suzanne Barlyn – Reuters
Senate Agriculture Committee Chairman Pat Roberts has asked for a full explanation from the U.S. Commodity Futures Trading Commission for an accounting error that led auditor KPMG to withdraw nearly a decade of financial opinions about the agency’s accounts.
OptionsCity Announces CityTrader Platform is Now Available with DAW Trading
OptionsCity Software, a global provider of futures and options trading and analytics solutions, today announced that its cloud-based futures and options trading platform, CityTrader, is now available to DAW Trading clients. With CityTrader, DAW Trading clients will find robust futures and options trading functionality, with the ability to request live quotes from the exchange and build custom spreads.
Rival sees ICE, LME amid European plans
Luke Jeffs – Futures & Options World
The firm said it enabled its US clients to start trading Eurex on Wednesday
The chief executive of a US prop trading tech start-up that span-off Ronin Capital said he is looking at the Intercontinental Exchange and the London Metal Exchange in Europe after going live on Eurex, its first European market.
Robert D’Arco, the chief executive of Rival Systems and former director of technology at Ronin Capital, said US has been the main focus for the Chicago-based start-up since launch in September last year but the firm is also set to realise its European plans this year.
Fintech: Search for a super-algo
Robin Wigglesworth – Financial Times
Investment groups race to create a thinking, trading computer. But will AI machines become the Warren Buffetts of the future?
Nearly three decades ago, Warren Buffett penned an annual letter to his adoring investors mocking an insidious new trend beginning to make its mark in the money management industry: the computer.
Incorporating The Volatility Risk Premium Into Portfolios
Wei Ge – Parametric via Seeking Alpha
This is the third paper in a series that Parametric has published on the VRP. The first paper discusses the sources of the volatility risk premium, explaining that the VRP may come from three distinct sources: behavioral biases, economic factors, and structural constraints faced by investors (Ge ). The second paper compares the three most common ways to monetize the VRP, all of which utilize financial derivatives: option strategies, variance swaps, and VIX Index futures (Ge ). It concludes that investors may seek to harvest the volatility risk premium with either a dedicated capital allocation or an overlay strategy and suggests that using equity index options may be the best approach for investors to monetize the VRP, closely followed by utilizing VIX Index futures.
Looking for a New Chart Bottom? Early 2016 May Be Too Early to Tell
Frederic Ruffy – TD Ameritrade: The Ticker Tape
The S&P 500 (SPX) blew through August 2015 lows last week, testing its chart near 1850, or the lowest level since October 2014. Recall that late August—defined by China-induced jitters—proved to be an important turning point for the SPX; it rallied nearly 12% in the two months that followed. Yet, while some market watchers are once again talking about market bottoms, others see important differences between the recent lows and the ones in summer 2015.
Volatility Explodes as the SPDR S&P 500 ETF Trust (SPY) Skims Lows
Alex Eppstein – Schaeffer’s Research
Bad news for SPDR S&P 500 ETF Trust (SPY) bulls — the broad-market exchange-traded fund (ETF) is down 1.7% at $184.78. Worse yet, the SPY has taken out a crucial technical level en route to a new annual low of $181.02. Not surprisingly, this has the ETF’s options pits running in overdrive.
Shout Out: Sheldon Natenberg, finance author and educator
Karie Angell Luc – Chicago Tribune
Retired options trader and educator Sheldon Natenberg is author of “Option Volatility & Pricing:Advanced Trading Strategies and Techniques,” described by Amazon as “one of the most widely read books among active option traders in the world.”
The Glenview resident’s career included stints at the Chicago Board Options Exchange and the Chicago Trading Company. He retired in August and will be recognized March 14 by EQDerivatives Magazine for outstanding industry contributions.
VIX Backwardation Streak Updates
Russell Rhoads – CBOE Options Hub
Despite a late day recovery for the equity markets, all three measures of backwardation remained in place as of yesterday (1/20).