Observations & Insight

Tayloe Draughon, Neurensic – Futures Industry AI and Machine Learning

“As you seek worlds of opportunity, look for areas in which there are problems, because if somebody is having problems, there are going to be opportunities.”

Recent advancements in technology have led to a monstrous spike in trades and trade messaging. Meanwhile, new regulations are requiring banks, brokers, dealers and futures commission merchants to not only store all of this new data, but also to conduct surveillance for trade infractions such as spoofing, layering or “banging the close.”

One particular challenge is that these new regulations require proof of intent, that is whether a trader or trade algorithm intentionally broke a rule. How does one sift through the billions of daily messages flowing through the pipes, flag anything suspicious, and prove intent at the same time?

According to Neurensic’s Tayloe Draughon, the answer is artificial intelligence, machine learning and pattern recognition. In other words, fight tech with tech. His message to the next generation? We have problems, and our problems become your opportunities.

Watch the video »


Notes from the first day of the STA 83rd Regulatory Conference
John J. Lothian
STA 2016 started off with a moment of silence for former STA chairmen and others who had passed away in the last year and then a bang with the singing of the national anthems of Canada and the USA performed by Jennifer Litwin, Greenwich Associates. She can belt them out worthy of a professional hockey game.

Lead Stories

7 Signs Fear is Back
Andrea Kramer – Schaeffer’s Research
After snoozing higher for weeks, the S&P 500 Index (SPX) was recently rattled out of its quietest slumber in years — just as this indicator predicted — culminating in its worst week since February. The volatility hasn’t stopped, either, as stocks bob and weave amid macro uncertainty and dramatic fluctuations in oil prices. Against this backdrop, it seems fear has returned from its post-“Brexit” hiatus to grip Wall Street again. Here are seven signs that skepticism is ramping up once more — and why stocks may not have hit a top just yet.

***DA: Let’s see…there’s wildly fluctuating prices, and, uh, six more.

Hedge funds alter strategies in China as regulatory crackdown bites
Samuel Shen and Michelle Price – Reuters
Hedge funds are ditching their ambitions of pioneering Western-style high-speed trading strategies in China’s fledgling equity derivatives market and are styling themselves as traditional asset managers to weather an intensifying regulatory crackdown. These aspiring ‘Flash Boys’ have been hamstrung by short-selling restrictions introduced in the wake of last year’s stock market crash which has made it difficult and politically risky to execute their sophisticated trading strategies.

Pound as Brexit Safety Valve Can’t Save Economy on its Own
Lukanyo Mnyanda – Bloomberg
The pound can only go so far in propping up the U.K. economy as Brexit looms. While sterling’s 11 percent drop since the June 23 referendum boosts exports, which will help narrow the country’s record current-account deficit, its broader effects will be limited, particularly given the unknowns of the European Union exit talks. That’s the view of BlueBay Asset Management LLP and Millennium Global Investments Ltd., which between them oversee $75 billion.

***DA: Which is different how, exactly? Because the EU economy is humming along so nicely?

BOE Sees Chance of Another Cut This Year as Rate Held at 0.25%
Scott Hamilton – Bloomberg
Bank of England policy makers indicated there’s still a chance of another rate cut this year as they assess the potential longer-term fallout from Britain’s decision to leave the European Union.

KCG Completes Acquisition of Neonet
KCG Holdings, Inc. (NYSE: KCG) (“KCG”) today announced that it has completed the acquisition of Neonet Securities AB (“Neonet”), an independent agency broker and execution specialist based in Stockholm, Sweden. The Neonet business, which will operate as a subsidiary of KCG and be renamed KCG Neonet, will continue to be based in Stockholm and led by CEO Tim Wildenberg.

***SD: KCG’s volume from August can be found here. If you recall from the beginning of the year, KCG announced it would exit retail options market making, but still trades options on behalf of non-retail entities.

Fed minutes don’t always help predictability: ECB research paper
The U.S. Federal Reserve’s meeting minutes provide some assurances about future policy but do not necessarily improve the Fed’s predictability, a study published by the European Central Bank showed on Wednesday.

****SD: I’m glad someone did the research, but the result is what I expect.

Greenspan Worries That ‘Crazies’ Will Undermine the U.S. System
Rich Miller – Bloomberg
Former Federal Reserve Chairman Alan Greenspan voiced concern that the U.S. economic and political system could be undermined by what he called “crazies.” “It is the worst economic and political environment that I’ve ever been remotely related to,” Greenspan, 90, told a conference in Washington Tuesday evening sponsored by Stanford University and the University of Chicago.

****SD: He’s been on this earth 90 years and can’t think of any other terrible economic and political environment on this level that he’s been “remotely related to?” I mean, he lived through the Great Depression and World War II. Were those the “good ol’ days?”

Volatility is Coming Back!
Todd Rich – OptionsHouse
For most of this past summer (and for sure the entire month of August), the investing topic-of-the-day was how eerily quiet the markets had become. Well, the weeks of complacency and a slow melt up on low volatility and low volume have come to an end. Volatility. It’s back!


CBOE To Launch Options On FTSE Emerging Index
Chicago Board Options Exchange (CBOE) today announced that it plans to launch options on the FTSE Emerging Index on September 26, 2016. The FTSE Emerging Index is a market-capitalization weighted index representing the performance of large and mid-cap companies from advanced and secondary emerging markets.

MIAX Hit by Duplicate Data Packet Issue
Max Bowie – WatersTechnology
On the morning of Monday, Sept. 12, the MIAX Options Exchange notified clients that it experienced instances of duplicate data packets on its “A” market data feed, affecting users of its 10 Gigabit per second non-ULL (Ultra Low Latency) network.

NYSE Announces Further Enhancements to Exclusive IR Market Data Platform, NYSE Connect
The New York Stock Exchange (NYSE), part of Intercontinental Exchange (NYSE:ICE), today announced further enhancements to NYSE Connect, a comprehensive market data platform and mobile application designed exclusively for NYSE-listed companies.

The Sydney Stock Exchange has teamed up with Sydney blockchain startup Bit Trade Labs to drive a project to reduce settlement times from four days to none.
Asha McLean – ZDNet
The Sydney Stock Exchange (SSX) is embarking on a project that will result in the instant settlement of trades on its exchange, using blockchain technology, the underlying system that facilitates transactions such as bitcoin trading.

Regulation & Enforcement

SEC Chair Concedes Reining in Flash Boys Is Harder Than Expected
Alexis Leondis – Bloomberg
Preventing flash traders from wreaking havoc is easier said than done. It’s been more than two years since U.S. Securities and Exchange Commission Chair Mary Jo White said her agency wanted to rein in aggressive, high-frequency trading that could have a destabilizing impact on markets. She said Wednesday that crafting a rule is proving difficult, and that the agency’s next step would be publishing its work on the issue and seeking public comment. That means it could be years before a rule is in place, and the job will probably fall to White’s successor.

****SD: Also see Reuters’ Automated trading could work against investors: SEC chief

Indonesia c.bank allows banks to sell FX call spread options
Indonesia’s central bank on Thursday issued a regulation allowing banks to sell call spread option contracts of foreign exchange transaction for hedging purposes.

New Laws Haven’t Made Big Banks Safer, Paper by Lawrence Summers Says
Kate Davidson – WSJ
Big Wall Street banks are no safer today than they were before the 2008 financial crisis, despite a raft of new rules aimed at safeguarding the system, according to a new paper co-authored by former Treasury Secretary Lawrence Summers.

Isda pledges to tackle derivatives standards
Luke Jeffs – FOW
Trade body issued a paper on Thursday criticising the lack of industry standards
Trade body the International Swaps and Derivatives Association has pledged to work with regulators and its members to standardise tasks that are common across the industry following the publication of a paper that criticises the lack of standards in the derivatives market. The Association said in a statement on Thursday: “Isda will draw up a development plan for the creation of common domain models and will work with regulators and the industry to identify and prioritise use cases.”

FIA submits letter to CFTC on improving Chief Compliance Officer annual report requirements
FIA, along with the International Swaps and Derivatives Association (ISDA) and the Securities Industry and Financial Markets Association (SIFMA) submitted a letter to the CFTC on the process for filing the Chief Compliance Officer (CCO) Annual Report for Futures Commission Merchants, Swap Dealers and Major Swap Participants.


The Voice: Green Key Technologies Is Turning Your Brokerage Voice Into Valuable Data
Jim Kharouf – JLN
In today’s financial markets, the conversation is most often about electronic trading, high frequency trading, complex orders via algorithms and so forth. Yet, for the $492 trillion global OTC derivatives markets, firms still conduct business over the phone, person-to-person, a practice which is now availing itself to new technology in compelling ways.

Calculating the financial risks of renewable energy
MIT News
For investors, deciding whether to invest money into renewable-energy projects can be difficult. The issue is volatility: Wind-powered energy production, for instance, changes annually — and even weekly or daily — which creates uncertainty and investment risks. With limited options to accurately quantify that volatility, today’s investors tend to act conservatively.


When Volatility Spikes, Opportunities Abound
Steven M. Sears – Barron’s
If you hated the VIX at 12, you should love it after Friday’s 40% jump. An elevated CBOE Volatility Index breathes life back into the options market and allows investors who regularly sell puts and calls to get paid for the risk. When the VIX is low, options premiums are generally low. When it is high — and it was recently around 17, its highest level since late June — opportunities multiply.

Opinion: Here’s why the market’s ‘fear gauge’ can be a strong signal to buy
Jeff Reeves – MarketWatch
It seems the only thing investors talk about these days is volatility. The “V-word” has been front and center in headlines for about a week now. Yes, the CBOE Volatility Index, or “VIX” VIX, spiked more than 40% in just a few days. And yes, Bloomberg reported that Barclays Bank PLC iPath S&P 500 VIX Short-Term Futures ETN VXX, actually recorded more trading volume on Tuesday than any of the major corporations in the S&P 500 SPX, trading a record 110 million shares.

BAML: Watch For “Fragility Event,” Hedge Properly
Mark Melin – ValueWalk
Hedge risk? As stock market volatility is trading at odd, if not absurd lows, Bank of America Merrill Lynch’s Global Asset Allocation team doesn’t think much of the VIX as a leading indicator and advises to hedge inexpensively. In fact, they think the opposite of low volatility is about to disrupt the dead calm.

Virtual trading can’t prepare you for the real world
Tinesh Bhasin – Business Standard
Many new stock investors burn their fingers when the market cycle turns. Their usual story: They start trading when the markets are heading towards the peak, initial success boosts their confidence, and they end up piling losses when a big correction happens. Some cautious amateurs wisely resort to virtual stock trading platforms to learn the tricks and test themselves before taking the plunge.

****SD: Paper trading can prepare for parts of the real trading world. Just be sure you are trading in extremely liquid securities (aka practice with SPY, AAPL, etc.) otherwise you will be misled by your fills. Of course, chances are that the psychology behind putting ‘fake’ money on the line will always skew your risk tolerance.


When Did Charts Become Popular?
Dan Kopf – Priceonomics
Modern newspapers are overflowing with charts. The New York Times, Washington Post and Wall Street Journal dedicate immense resources to making graphics for both their print and online editions. But it was not always so.

****SD: I love that this blog is loaded with archival charts — really proves the point about graphical visuals in journalism.

Stuck on Ship, One Gloomy Hanjin Crew Waits to Learn Its Fate
Saurabh Chaturvedi – WSJ
For almost three weeks, two dozen men have been whiling away the hours off the coast of Singapore on a rusty old cargo ship loaded with frozen meat and other goods. They had been headed from South Korea to the Persian Gulf. Now they’re stuck, not allowed to dock or to leave.

****SD: This Hanjin fallout is a fascinating shipwreck. Which ports will get business from Busan? Singapore? Who will sop up Hanjin’s business with so many headwinds in the shipping industry? What about all those rotting mangoes and other goods drifting around at sea? Will my Black Friday shopping be altered? When will these poor guys get off their darn boat?

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