Observations & Insight
John Fennell, OCC – Clearing – Providing Confidence to Financial Markets
“In the past, settlement – the movement of securities and cash – is what you would associate with clearing. That changed as a result of the financial crisis. When you have banks like Bear Stearns and Lehman Brothers defaulting, confidence becomes the bigger issue.”
Historically, clearing has not exactly been part of the “glamorous” side of trading. In fact, it has been looked at as a utility, like electricity and plumbing. But that all changed during the financial crisis. Clearing is not just about moving contracts through the pipes; it is also about the guaranteeing performance of those contracts.
OCC’s John Fennell says that, these days, clearing is where it’s at – an area of the market where one can innovate while managing those tail risks (or, “Lehman Moments”). It is also an area of the market that is enjoying solid growth. For newcomers looking for career opportunities, it doesn’t get any more glamorous than that.
Traders Are Pulling Money From VIX Funds Like Never Before
Camila Russo – Bloomberg
While stocks are having a chaotic start to the year, investors are withdrawing money from securities that profit from higher volatility at the same time as short sellers are piling into bets that tranquility will return.
Traders yanked $850 million from two of the most popular exchange-traded products tracking moves in the Chicago Board Options Exchange Volatility Index in January. That’s even as the gauge of investor anxiousness known as the VIX is set for its biggest monthly surge since August. In one note, bearish bets briefly climbed to more than 100 percent of shares outstanding.
Hedge funds betting against China eye ‘Soros moment’
Patrick Graham – The Globe and Mail
A handful of mainly U.S.-based macro hedge funds have led bets against China’s yuan since late last year and the coming weeks should tell how right they are in predicting a devaluation of between 20 and 50 per cent.
Since at least last September, Texas-based Corriente Partners, which made hundreds of millions of dollars foreseeing Europe’s debt crisis, has been accumulating tailored “low delta” options – essentially bets with long odds – that provide for an up to 50-per-cent fall in the yuan.
****SD: Also, see China mouthpiece warns Soros against shorting renminbi from the Financial Times
Lower oil prices are exaggerating the appearance of volatility
John Kemp – Reuters
Headline 1: “On Thursday and Friday last week, the price of Brent crude surged more than 15 percent higher in one of the largest two-day moves on record.”
Headline 2: “On Thursday and Friday last week, the price of Brent crude rose by $4.30 per barrel, which was a large but not uncommon two-day increase that occurs a few times most years.”
The first version describes an extremely rare event that needs special explanation while the second describes something much more like the everyday rise and fall in prices.
Headline writers obviously prefer the first formulation because it is more exciting, but both headlines describe exactly the same movement in oil prices that occurred on Jan. 21 and Jan. 22.
Why the Fed Is the Root of Much Market Turmoil
Greg Ip – WSJ
Not long ago, this week’s Federal Reserve meeting looked like a nonevent. Having begun to raise rates from near zero in December, the central bank was expected to stand pat in January while signaling more increases later on.
Now, after a bone-jarring start to 2016, many investors hope the Fed is having second thoughts about hiking rates three or four more times this year. That raises the stakes around what the central bank says in the statement it will release Wednesday afternoon.
The ‘Fed put’ to be tested
James Saft – Reuters
The idea that the Federal Reserve stands as a kind of unpaid insurance agent to investors faces a stern test this week.
With the Fed signaling four rate hikes this year but the market betting there will only be one, the U.S. central bank faces two-way pressure when it announces policy after its meeting ends on Wednesday: to show that it is aware that things have changed, perhaps for the worse, in the opening weeks of the year, while keeping its options open and its power respected.
US airlines rethink hedges as oil plunges
The lowest fuel prices for more than a decade are proving to be a double-edged sword for US airlines.
While carriers saved hundreds of millions of dollars from oil prices halving since June, they forfeited a large chunk of that gain because of the fuel hedges they bought as protection against oil rising.
What Is an Exchange?
Tyler Gellasch – TABB Forum
Exchanges’ roles in our market structure have devolved so much so in recent years that when the SEC put together its Equity Market Structure Advisory Committee last year, it didn’t even bother to include the NYSE and Nasdaq. In an effort to restore their market share and role in the markets, exchanges have been looking to aggressively expand and diversify – into brokers’ turf and order routing services.
The Fastest Growing Derivatives Market In EMEA And The Americas: Borsa Istanbul VIOP
Borsa Istanbul Derivatives Market VIOP, the region`s leading and most diverse derivatives marketplace, announces that full-year 2015 total trading volume reach a record of 90.3 million contracts, up 52 percent from 2014. As part of that increase, total options volume grew by 10 times to a record 2.6 million contracts, whereas total futures volume up 48 percent reaching a record 87.6 million contracts. Additionally, daily average number of open interest reached 875,134 contracts, up 83 percent. Trading levels were exponentially up across most products and VIOP continues to be the dominant pool of trading in the region.
Eurex delays Asia launch again to late 2017
Alice Attwood – Futures & Options World
Deutsche Boerse has again pushed back the launch of its new Asian exchange and clearing house, this time to the end of next year, as the German group awaits regulatory approval from the Monetary Authority of Singapore for the exchange.
The group is now aiming to launch Eurex Asia and Eurex Clearing Asia in Singapore in the second-half of 2017, a spokesperson told FOW before declining to comment further.
Hotspot Announces New Service To Allow Customers To Build Private LIquidity Pools
Hotspot, a leading institutional foreign exchange (FX) market owned and operated by BATS Global Markets (BATS), today announces the launch of Hotspot Link, a new service designed to allow clients to design unique, relationship-based, liquidity pools to meet their specific trading needs.
Intercontinental Exchange Announces Senior Management Promotions
Intercontinental Exchange, Inc., a leading operator of global exchanges, clearing houses and data services, announced the following leadership appointments effective Monday, February 1, 2016, each of which will report directly to ICE Chairman and CEO Jeffrey C. Sprecher.
Ben Jackson, President and COO of ICE Futures U.S., has been named ICE’s Chief Commercial Officer. In this newly created role, Jackson will be responsible for leading the integration planning and execution of ICE’s acquisitions and joint ventures. Jackson joined ICE in 2011 from SunGard where he led the company’s energy and commodities business.
Regulation & Enforcement
European Commission’s Handling Of Financial Crisis Was “Generally Weak”, Say EU Auditors
The European Commission was not prepared for the first requests for financial assistance during the 2008financial crisis because warning signs had passed unnoticed, according to a new report from the EuropeanCourt of Auditors. The auditors found that the Commission did succeed in managing assistance programmes which brought about reform, despite its lack of experience, and they point to a number of positive outcomes. But they also identify several areas of concern relating to the Commission’s “generally weak” handling of the crisis: countries treated differently, limited quality control, weak monitoring of implementation andshortcomings in documentation.
Former BoE governor Bailey gets top FCA job
Alice Attwood – Futures & Options World
Speculation about the new CEO has been rife since Wheatley stepped down
Deputy governor of the Bank of England Andrew Bailey is to be the new chief executive of British regulator the Financial Conduct Authority
The New TT Autospreader: Changing the Rules
Amidst the rapidly unfolding story happening in and around Trading Technologies, Autospreader, a tool invented by TT over a decade ago for executing the industry’s defining trading algorithm, has been quietly going through a major overhaul.
Regardless of the products being traded or the strategy being executed, the execution speed is critical to the successful execution of synthetic spreads. With this in mind, we took all of our accumulated knowledge and expertise and rebuilt Autospreader from scratch, leveraging best-in-class colocation facilities; a streamlined, consolidated, modular code base; cutting-edge networking technologies and real-time performance monitoring. The result is a synthetic spreading engine that is twice as fast as anything we’ve ever released—with the flexibility to execute in ways never possible before.
FXCM integrates CFD pricing into FlexTrade’s technology
FXCM, the online provider of foreign exchange trading and related services, and FlexTrade Systems, a provider of execution management and order management systems for equities, foreign exchange, options, futures and fixed income, have announced the integration of FXCM’s CFD pricing into FlexTrade’s technology. FXCM through FXCM Pro focuses heavily on its wholesale business, which services brokers, funds, and emerging market banks. The offering includes products such as indices, energies, treasuries and precious metals.
Apple options busy as traders pick sides ahead of results
Saqib Iqbal Ahmed – Reuters
Activity in Apple Inc options were busy on Tuesday ahead of the iPhone maker’s quarterly results, split between investors expecting the stock to recoup recent losses and those looking for protection against a further drop.
****SD: Apple’s earnings call is at 4 p.m. Central time. Also, see Investors Looking for Cover from Falling Apple Stock from the WSJ
Some Sector ETFs See Options get Pricey
Tom Lydon – ETF Trends
Perhaps it is a result of increased market volatility to start the new year, but some sector exchange traded funds have recently seen options on those ETFs get pricey and some traditionally defensive sector ETFs are home to some of the most expensive options contracts.
What It’ll Take to See the Next Wave of VIX Panic
Adam Warner – Schaeffer’s Research
I’ve long thought that the mega hype around all things Fed is wildly overblown. I mean, we heard about a future hike off of ZIRP for what seemed like forever. It happened and we moved on.
But, of course, we didn’t really move on. World markets have gone nuts since then. Currencies moving around, commodities tanking, junk spreads popping, Patriots losing, etc.
VIX Short-Term Futures ETPs: Do They Live Up To Expectations?
On Seeking Alpha’s StockTalks, it is not uncommon to read a comment that expresses the following general sentiment. “The VIX is down 20% today, but the VelocityShares Daily Inverse VIX Short-Term ETN (NASDAQ:XIV) is only up 10%. It has a lot of catching up to do!” Or, “it is a broken ETN!”
The most common response points out that these ETPs do not track the spot VIX, but are instead designed to track short-term VIX futures. A comment by one reader went on to assert that the ETPs follow their tracking index “perfectly.”
Anyone who has done their due diligence knows that the five short-term volatility ETPs discussed in this article are not intended to track the spot VIX. But do these ETPs truly follow their tracking indexes perfectly?
How to keep from losing your head
Neil Staines – TradingFloor.com
Last week, financial markets witnessed events which some may refer to as capitulative (the most prominent of which were seen in oil and equity markets). While it is not clear whether participants had their metaphorical heads cut off, the moves are particularly worthy of reflection and consideration. Were the resultant bounces temporary, position adjustments, or the start of a change of trend?