Observations & Insight

US Options Volume Falls Below 2015’s Totals as Volume Languishes in August
TABB Forum Options LiquidityMatrix
Another month of muted stock market volatility suppressed volumes in the US listed options market, which experienced its slowest two months in four years. Options volume in August totaled 322.7 million contracts, 4.5% higher than July’s volume but 24% lower than the year-ago August. In July and August 2016, traders swapped 631.6 million total contracts, the lowest two-month total since August 2012.

Lead Stories

Adios Algiers, oil options hint output deal may lie further ahead
Amanda Cooper – Reuters
The oil options market indicates traders are not betting big on OPEC and rival Russia clinching a meaningful deal this month to control output, although investors have turned more optimistic.
The oil price is heading for its first weekly rise in nearly a month after Saudi Arabia and Russia said on Monday they would work closely to monitor fundamentals and to recommend measures to ensure market stability, including a potential production freeze.

Dividend Backlash Intensifies in Options Market as S&P 500 Slips
Joseph Ciolli – Bloomberg
More evidence the world is kicking its dividend addiction has surfaced in the options market.
Relative to the biggest S&P 500 Index tracker, investors are paying close to the most in four years to protect against losses in the $16 billion iShares Select Dividend ETF, according data compiled by Bloomberg. The ETF, which has climbed 16 percent in 2016, fell in August for its first monthly drop since January, losing 1 percent. The S&P 500 slipped 0.3 percent to 2,180.43 at 1:27 p.m. in New York on Thursday.

****SD: More on the topic from Barron’s — Worries About Dividend Bubble Trickle Into ETF Options Prices

Of mice and markets: A surge in speculation is making commodity markets more volatile
The Economist
A game of cat and mouse appears to be taking place in the oil market. The felines are big producers who want prices to go higher, the rodents speculators betting that they will fall. Twice this year, in the first quarter and the third, hedge funds and others have taken out record short positions on futures of West Texas Intermediate (WTI), an American crude-oil benchmark, only to be mauled by (so far empty) talk among members of the OPEC oil cartel and Russia of a production freeze. The resulting scramble by funds to unwind their short positions has fanned a rally in spot oil prices (see left-hand chart).

****SD: Spoiler alert — Lennie dies at the end.

Biggest Oil Traders See Another Year of Pain as Glut Endures
Javier Blas – Bloomberg
The largest oil traders are anticipating little relief to what has become the worst market slump in a generation. All but one of 15 senior oil traders and executives interviewed this week at the annual Asia-Pacific Petroleum Conference in Singapore expect crude to remain between $40 and $60 a barrel over the next 12 months. Brent crude has traded in that range for the past five months.

****SD: Reuters has the down-low on the newly discovered Caspian oil fields here. The operator of the fields estimates they will produce 500k bpd by the end of 2017. (Though, as we know, initial estimates are usually high expectations that come down as more of the fields are explored.)

JP Morgan’s Top Quant: Even A Tiny Bit Of Volatility Could Unleash $100B Cascade of Selling
Chris Dieterich – Barron’s
By any measure, this has been a somnolent summer for U.S. stocks. Ever since the panic induced by Brexit, in June, major indexes have inched higher without staging swings of any magnitude. The CBOE Market Volatility Index, or the VIX , is barely over 12. The last move of greater than 1% for the SPDR S&P 500 (SPY) was on July 8, for pete’s stake.

****SD: “Somnolent summer?” Very nice. So many days of range bound action and subdued volumes means it’s time to use the thesaurus to find new ways to describe the market.

Here’s Why It’s So Tricky to Understand ‘Economic Anxiety’
Sid Verma – Bloomberg
There’s an endless debate among political pundits about whether “economic anxiety” is a major driver of Donald Trump’s support or whether that’s merely a cover for other factors, such as race and anti-immigration sentiment. One problem with the discussion: economic anxiety is a nebulous concept that’s difficult to identify.

***JB: Reality and perception unfortunately do not go together as much as we might like or think.

Volatility Update: Volumes Slump as Volatility Drops
Frederic Ruffy – The Ticker Tape
After several weeks of relatively quiet trading, many measures of market volatility were back at low levels in the early days of September. Indeed, the S&P 500 navigated a rather narrow range in August and added a mere 0.4% for the month. Average daily moves were quite small and trading volumes slumped. The situation stands in stark contrast to a very volatile month in August 2015.

****SD: JJ Kinahan’s take on the current market here

ECB hints at stimulus but keeps markets guessing
Balazs Koranyi and Francesco Canepa – Reuters
The European Central Bank held interest rates at record lows and kept the door open to more stimulus on Thursday but gave few hints about its next move, disappointing markets that had priced in a decisively dovish tone.

Are Investors Sitting Ducks Taking on Risk and Shunning Hedges?
John Kicklighter – DailyFX
Volatility measures like the VIX offer tradable instruments but more commonly measure hedging costs and exposure. With so many markets’ volatility measures at exceptionally low levels, it seems traders are shunning safety. While the near-term ‘fear’ measures are low, the cost of protection beyond one month is actually rising.


Brexit will cost London its lead in euro contracts, Bean warns
Patrick Hosking – The Times
London is certain to lose its dominance in the clearing of euro-denominated financial contracts, according to a former deputy governor of the Bank of England. Sir Charles Bean, who left the Bank in 2014, told the House of Lords’ financial affairs committee that Britain’s withdrawal from the EU would end that activity in London.

CBOE Vest Launches CBOE Vest S&P 500 Buffer Protect Strategy Fund (BUIGX)
CBOE Press Release
CBOE Vest Financial, an investment manager focused on target outcome investment strategies, on August 25 launched the CBOE Vest S&P 500 Buffer Protect Strategy Fund (BUIGX), the first mutual fund designed to provide investors with index-based buffer protection.

Intercontinental Exchange Integrates SFTI and 7ticks Networks to Expand ICE Data Services’ Global Connectivity Business
Press Release
Intercontinental Exchange (NYSE:ICE), a leading operator of global exchanges and clearing houses and provider of data and listings services, has integrated its Secure Financial Transaction Infrastructure (SFTI) and 7ticks network and hosting businesses into a combined best-of-breed offering called Connectivity, a financial transaction network and foundation infrastructure for ICE Data Services businesses. A key part of the Connectivity portfolio is the roll-out of SFTI Wireless, provided by Anova Technologies, which offers the fastest connectivity for market data and order flow between ICE’s Mahwah Data Center and the co-location facilities in Carteret and Secaucus, New Jersey.

Nasdaq to Observe a Moment of Silence on Friday, September 9, 2016
On Friday, September 9, 2016, Nasdaq’s U.S. markets will observe a moment of silence at 9:20 a.m., Eastern Time (ET), in remembrance of the events of September 11, 2001, and to honor the victims and their families.


Greg Wood joins FIA as SVP of Global Industry Operations and Technology
Walt Lukken, president and CEO of FIA, announced that Greg Wood has been hired as the Senior Vice President of Global Industry Operations & Technology. Wood will help lead the strategic direction of FIA by developing and maintaining key strategic relationships with various constituencies in the industry; identifying and managing member and industry operational, execution and market structure issues; and guiding the development of FIA’s operational and technical solutions.

Regulation & Enforcement

Futures may be exempted from reporting
Luke Jeffs – FOW
Futures were included in European trade reporting rules that took effect in 2014
Europe may be about to exempt exchange-traded derivatives from trade reporting rules less than three years after these products were included in new European rules, a move that angered European futures experts. Speaking at the FOW Regulation 2016 event in London, two senior futures experts said they are becoming increasing confident the controversial decision by the European Commission to include futures in the February 2014 European Market Infrastructure Regulation (Emir) will be reversed.

U.S. commodities, derivatives regulator adopts new cybersecurity rules
U.S. commodities and derivatives firms, including exchanges and clearinghouses, would have to frequently test their information technology for vulnerabilities under final rules approved Thursday by the Commodity Futures Trading Commission (CFTC).

Curbs on algo trade detrimental to market liquidity: FIA
A global trade organisation for derivatives, has asked regulator Sebi to reconsider proposed curbs on superfast algorithmic trading, saying such measures could be detrimental to market liquidity and increase costs for investors.

Argentina: The Central Bank Relaxes Foreign Exchange Restrictions On Derivatives
Pablo J Gayol – Mondaq
On August 8, 2016, the Argentine Central Bank introduced substantial changes to the foreign exchange regulations by issuing Communiqué A 6037 (“Communiqué 6037”). Communiqué 6037 collected and systematized much of the changes introduced in recent months and also amended the regulations in certain areas. In connection with derivatives, it changed the paradigm from a general rule in which residents could not enter into derivative transactions with foreign counterparties unless they could benefit from an exemption to a general rule in which they do not need such authorization.


Wolverine Execution Services expands trader access to CBOE PULSe Trader Workstation
Wolverine Execution Services (WEX) announced today that it has established direct connectivity between the Chicago Board Options Exchange (CBOE) PULSe Trader Workstation (PULSe) and the WEX Trading Platform (WTP). WEX clients will now have the ability to electronically send orders and receive executions that have been routed to the CBOE PULSe Trader Workstation through WTP.

Time to Take a Fresh Look at HFT
Jock Percy, Perseus – Finance Magnates
Amid the colorful theatrics and rhetoric of the US presidential elections, the controversy around high-frequency trading (HFT) was once again brought into the political, and public, arena. The debate has significantly intensified following the 2014 publication of Michael Lewis’ “Flash Boys”, prompting a number of regulatory reviews and even an FBI investigation into the supposedly predatory practices of HFT. Further, Hillary Clinton’s proposed tax on cancelled orders serves to highlight just how much concern remains around the impact, whether real or perceived, of HFT on our markets.


Pension Funds Can Benefit from Exchange-listed Options
Frank Tirado – OCC
The realities of current global economic conditions, characterized by ultra-low to negative interest rates and slow growing economies, plus a widening liability gap, are putting pressure on pension funds to meet their obligations. In fact, in a recent article in the Financial Times “Pensions: Low yields, high stress”, it was noted that the amount of U.S. assets held by pension funds have grown 105 percent since 1999 while the cost of their liabilities to pensioners has almost quadrupled, up 278 percent over the same time period.

Taking Advantage of Mispriced Utility Stocks
Steven M. Sears – Barron’s
Do you plan on paying your power bill? Do you think utility companies are conservative businesses with long-term staying power and reliable dividends? If you answered yes, you needn’t give in to the panic over utility stocks that has overtaken the market. Instead, consider a “half and half” trading strategy to create a position in the deeply unpopular Utilities Select Sector SPDR exchange-traded fund (ticker: XLU).

3 Trading Lessons from Blair Hull
There are traders, and then there are super traders. Blair Hull unquestionably fits the latter category. He’s widely recognized as a heavyweight in our industry, and Forbes even called him, “One of the most successful traders of the last 40 years.” Blair’s 40-year trading career has been anything but uneventful, and at times, borderline unconventional.

Edge In Selling Options Part 2: The Put-Write
Seeking Alpha
Selling puts is normally characterized as dangerous; however, from 1986-2015, the strategy had the best risk-reward profile out of multiple strategies tested, measured by standard deviation divided by total return. Modern managers leverage the put-write to benefit in multiple market scenarios: bullish, flat and even moderately bearish price moves. Short puts have risk down to zero, but the put-write strategy actually had one of the lowest max drawdowns during the period tested.

Finding Trading Mentors: Do You Need One, and Where to Look?
Brian Lund – The Ticker Tape
If you’re new to the stock market and want to learn how to trade, or even if you’re a seasoned trader who’s simply stuck in a rut, finding a trading mentor can be the answer. In the seminal investing book Market Wizards, legendary trader Paul Tudor Jones recounts how he learned his craft by standing next to famed cotton speculator Eli Tullis and watching him trade. Traditionally, that’s the kind of personal relationship we envision when it comes to a trading mentor, but today, thanks to technology, a mentorship can take many different forms.

What could possibly go wrong? Volatility is low, buy gold and bonds, Says Source Research
Rupert Hargreaves – ValueWalk
What could possibly go wrong? That’s the title of a recent research report from Source Research the multi-asset research outfit, founded by ex SocGen analysts. It seems the analysts at source are playing to investors’ fears. After a low volatility summer, there’s plenty of speculation going around that volatility could return with a bang during autumn and winter months. Indeed, there are a number of risk events coming up over the next few months that could spark a sudden sell-off if the outcome is not what the market expects. Chief among these risks is the US presidential election in November and before that, in September there’s the Fed’s rate decision.


Making the Most of Industry Conferences
Pete Cherecwich, Northern Trust – TABB Forum
Industry conferences sometimes seem designed to try one’s patience. Early morning flights through crowded security lines. Anonymous hotels in distant suburbs. Dull panels, broken up only by rubbery chicken and wilted salads for lunch. In a time of ever-advancing digital communication, the whole enterprise may seem slightly outmoded. But I’ve found conferences to be some of the most productive and enjoyable parts of my job. The connections, the information, and the chance to learn from industry colleagues – nothing beats a well-organized conference for getting all three in just a couple of days.

CBOE Holdings To Present At Barclays Global Financial Services Conference On September 14
CBOE Holdings, Inc. (NASDAQ: CBOE) announced today that Edward T. Tilly, Chief Executive Officer, will present at the Barclays Global Financial Services Conference in New York on Wednesday, September, 14 at 7:30 a.m. (Eastern Time). The presentation, to be broadcast live over the internet, can be accessed at www.cboe.com in the Investor Relations section, under Events and Presentations. The archived webcast will be available for 30 days after the event, and is expected to be available within an hour of the presentation.


New hedging product one step away from launch
Grace Amianti – Jakarta Post
Bank Indonesia (BI) is slated to issue an upcoming regulation that will allow big banks to offer clients a structured product for hedging transactions. The central bank already submitted the draft of the regulation on a new hedging product — dubbed “call spread foreign exchange (FX) option” — to the Law and Human Rights Ministry, which is expected to approve the rule within a week, a senior official says.

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