Observations & Insight

How Now and What’s Next for Retail Forex?
As the self-proclaimed regulatory expert at John Lothian & Co., with my first three years here spent building our regulatory database MarketsReformWiki, I am generally the go-to person on stories involving rule changes. But when I was asked about the June 1 letter from Phillip Capital CEO Lynette Lim informing customers that the firm would be no longer be offering retail forex, due to a recent ruling by the Securities and Exchange Commission, the conversation went something like this:

John: “So, what is this SEC ruling all about, and is there a story here?”

Doug: “Uhh…uuh…I don’t know.”

So, how did I miss this? Simple – there was no press release and it was not a rule change per se but rather a notice posted on a Friday afternoon, saying that a previous ruling, which allowed certain registrants to offer retail forex, but with a sunset provision of July 31, 2016, would not be renewed. The sun will officially set.

First, a little historical context. In 2010, the CFTC approved its final rules regarding off-exchange retail foreign exchange transactions. Although the rulemaking pre-dated the Dodd-Frank Act, once the Act was signed in July 2010, the commission’s forex rules, along with the forex rules of other regulatory authorities, became a part of Dodd-Frank.

Read the rest of the column at JohnLothianNews.com HERE


Options Exchange Marketshare for May 2016 (from the OCC via email)
MWE Chicago 2016

Lead Stories

An Advocate for the Listed U.S. Equities Options Industry
Craig Donohue – OCC
As the world’s largest equity derivatives clearing organization and the foundation for secure markets, we at OCC believe strongly in our purpose of ensuring confidence in the financial markets and the broader economy. An important part of our values is serving market participants and the greater public interest in our role as an advocate for the listed U. S. equities options industry. The legislative, regulatory and policy initiatives impacting OCC, our clearing members and their customers reflect the global and interconnected nature of these markets. These external factors can sometimes disrupt the balance that we as independent risk managers strive to maintain. For this reason, we take seriously our role in educating policy makers about our markets and to advocate for legislation and regulation that maintains the efficiency and competitiveness of our markets.

OCC Cleared Contract Volume up Four Percent in May
Press Release
OCC, the world’s largest equity derivatives clearing organization, announced that cleared contract volume in May reached 319,533,636 contracts, a four percent increase from the May 2015 volume of 308,639,215 contracts. OCC’s year-to-date average daily cleared contract volume is also up four percent from 2015 with 16,734,689 contracts.

****SD: Also, OCC enjoys bumper increase in new loans

Monster Option Grants Reward Executives With $598 Million Payout
Monster Beverage Corp.’s two top executives, Rodney Sacks and Hilton Schlosberg, saw gains of $598 million last year from exercising options, a windfall that shows how unpredictable compensating bosses with stock can be. They received the options a decade ago, when the soft-drink maker had a market value of less than $2 billion and was registered as Hansen Natural Corp. In its 2006 proxy statement, the company said if shares appreciated 10 percent annually, each award could be worth $28.7 million by 2015. Those figures were provided to meet Securities and Exchange Commission rules, the company said at the time, and “do not represent our estimates or projections.”

****SD: The last time I had a Monster energy drink it felt like my heart was going to explode — apparently that feeling equates to a $30.86 billion market cap. On Jan. 1 2011, MNST stock was trading at $28. Now, it’s up around $151. And FYI, the two Monster execs beat out Tony James of Blackstone ($250 million), John Martin of Gilead ($232 million) and Reed Hastings of Netflix ($178 million) for top take-home packages of 2015.

Options Show Euro Support Likely to Survive ECB Meeting: Analysis
Currency option gauges suggest the lower band of euro-dollar’s recent elevated range at 1.1058-1.1616 may remain intact after the European Central Bank rate decision and President Mario Draghi’s press conference later today, Bloomberg strategist Vassilis Karamanis writes.

Volatility Update: Five Indicators to Watch Right Now
The Ticker Tape
The “summer doldrums” refers to a sometimes seasonally slow period on Wall Street when the weather outside warms and volumes slow as traders leave for vacation. However, trading already sank into a bit of a lull in May 2016 and, therefore, it’s impossible to predict whether market volatility will move higher or lower going forward. It’s already at the lower end of the 2016 range. Fortunately, there are more than a few indicators that can give us a better sense of whether market participants are positioning for a bit more volatility through the summer and fall. Here are five.

Why Volatility Is Likely to Remain High
Market Realist
While volatility has been on the rise since last August, much of the past five years has been characterized by unusually low volatility. Today the VIX Index is around 15, roughly 25 percent below the long-term average. Looking at the futures curve for the index, investors expect volatility to rise back to around 20 by the fall. Even this may understate the potential rise in volatility. Volatility normally moves in tandem with credit markets. While financial market conditions have become easier, evidenced by tighter spreads, they are still considerably tighter than was the case two years ago. This suggests that volatility should rise back into the low to mid-20s.


Trading Statistics May 2016 Eurex Exchange: ADV 5.9 Million Contracts
Press Release
In May 2016, the international derivatives markets of Eurex, part of Deutsche Börse Group, recorded an average daily volume of 8.0 million contracts (May 2015: 10.1 million). Of those, 5.9 million were Eurex Exchange contracts (May 2015: 7.7 million), and 2.1 million contracts (May 2015: 2.4 million) were traded at the New York based International Securities Exchange (ISE). The volume traded on the spot and derivatives power markets of the European Energy Exchange (EEX) amounted to 287.8 terawatt hours (TWh). Eurex Repo recorded in all markets in May 2016 an average outstanding volume of 142.6 billion euros.

ISE Holdings Reports Business Activity for May 2016
Press Release
ISE’s options exchanges combined to represent 15.5% of equity options market share, excluding dividend trades. ISE’s options exchanges reported a combined ADV of 2.1 million contracts. Dividend trades made up 0.5% of industry volume in May 2016.

CBOE Holdings Reports May 2016 Trading Volume
Press Release
CBOE Holdings, Inc. (NASDAQ: CBOE) reported today that May average daily volume (ADV) for options contracts traded on Chicago Board Options Exchange (CBOE) and C2 Options Exchange (C2), and futures contracts traded on CBOE Futures Exchange (CFE) was 4.3 million contracts, an increase of 2 percent from April 2016 and relatively unchanged from May 2015.

CME sees metals, crude trading boost May volumes
Futures & Options World
The Merc’s positive results beat earlier results reported OCC, CBOE and Eurex
The Chicago Mercantile Exchange Group has reported strong results for May 2016, with a 6% rise in average daily volumes, deviating from results released by other major exchanges. US commodities giant the Chicago Mercantile Exchange (CME) reported a daily average volume of 14.9 million contracts per day, up 6 % from May 2015. Options volume for the month averaged 2.8 million contracts per day, up a tenth on May 2015.

****SD: CME press release here

Exchange May volumes highlight Q2 trading slump
Futures & Options World
Europe’s largest derivatives exchange and two of the main US options markets have reported mixed trading volumes for May, confirming anecdotal reports of a dramatic slowdown in trading during the second quarter. Deutsche Boerse’s derivatives exchanges Eurex and ISE traded an average of 8.0 million contracts per day on average, down a fifth on May 2015. Eurex reported an average daily volume of 5.9 million contracts in May 2016 compared with 7.7 million in the same month last year.

MIAX Options Exchange: Professional Interest And Priority Customer Order Counting Methodology
Press Release
Pursuant to an industry – wide initiative to harmonize the methodology for counting of orders in listed options for designation as “Professional Interest” order or order for the account of a “Priority Customer,” the Exchange has filed and received approval for SR-MIAX-2016-11.

Regulation & Enforcement

The Wall Street Golden Boy Who Allegedly Fleeced His Friends and Family
Vanity Fair
Groomed at Groton, Princeton, and Harvard Law, financial expert Andrew Caspersen had the trust of everyone around him. So why, as prosecutors allege, would he start a fraudulent investment that targeted his Wall Street buddies and even his own mother? William D. Cohan delves into the case and the two tragedies—the death of Caspersen’s fiancé on 9/11 and his father’s suicide—that could provide an answer.

****SD: Story broke some time ago, but it takes a while for Vanity Fair to give it the deep look treatment.

Karen the Supertrader’s Winning Strategy Relied on Fraud, SEC Alleges
It wasn’t innovative strategy behind Karen the SuperTrader’s consistent returns after all, the U.S. Securities and Exchange Commission says, but a much more tried-and-true technique: fraud. Karen Bruton, the Nashville-based hedge fund manager behind the Web moniker and her Hope Advisors, which oversees more than $175 million for clients, improperly used options trades to defer losses into future periods, resulting in juicy incentive fees from clients when none should have been paid, the agency said in a complaint in federal court in Atlanta this week.

****SD: It’s a bird, it’s a plane, it’s… Superfraud?

Groups Sue Obama Administration Over ‘Best Interest’ Rule for Retirement Advice
A coalition of national financial and business trade groups filed a lawsuit Thursday to try to strike down an Obama administration rule aimed at shaking up the way Americans receive retirement savings advice. The plaintiffs include the U.S. Chamber of Commerce, and associations representing the country’s biggest financial institutions, including the Financial Services Roundtable, and the Securities Industry and Financial Markets Association. They filed their suit in a federal court in Dallas.

****SD: Bloomberg’s take here


Trading algorithms bring benefits but fears of accidents grow
Financial Times
When Bruce Bittles first started trading in the 1960s, the US stock market was a largely human affair. Exchange floors were the chaotic maelstrom of shouts, frantic phone calls and finger waving, later made famous by 1980s films such as Wall Street and Trading Places. But now the machines have taken over. Nasdaq became the world’s first electronic stock market when it opened its doors in 1971, but since then, the trading world has been revolutionised several times over. The old bourses and trading pits now are largely shuttered. Virtually all stock trades are done electronically in data centres.

****SD: Thinking about “Trading Places” always makes me want some orange juice.

Nasdaq Announces New Connectivity to Third Party Services in Carteret
With market data feeds continuing to require more bandwidth and Nasdaq expanding services, markets and asset classes available in the Carteret, NJ data center, we are introducing a new connection offering – Third Party Connections. This new offering will provide a robust and resilient network environment that satisfies requests from third party service providers and regulators for separation of this message and data traffic from Nasdaq proprietary services.


Spreads a ‘first trading tool’ with limited risk
Gary Delany – TradingFloor.com
When investors or hedgers first look at options, they – rightly – look at them in the simplest way. They look at buying and selling calls or puts, the four basic strategies. But options offer more permutations than is the case when you simply buy or sell an underlying security.

This Cheap Bet on Oil Pays Off Big if Prices Rise
Someone is betting that oil prices are going higher. Prices may not stay higher for long, but at least one firm, perhaps a bank’s proprietary trading desk, is wagering that oil prices will keep rising through at least June 10. The bullish oil trade coincides with oil prices recently trading around $50, a price level not seen in 10 months, and Thursday’s meeting of the Organization of the Petroleum Exporting Countries.

The 6-Figure Bet on SPY Record Highs
Schaeffer’s Research
Bearish options traders have been targeting the SPDR S&P 500 ETF (SPY) over the past couple weeks. For instance, data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) shows that the exchange-traded fund’s (ETF) 10-day put/call volume ratio sits at 1.96, putting it in the 84th percentile of its annual range. Said simply, put buying has been more popular than normal lately on SPY. However, one trader today is betting on record highs for the SPY in the near term.

Investors May Look to Managed Futures in Unsettled Markets
Managed futures funds offer investors opportunities to generate positive returns even in down markets while also reducing volatility, but advisors say individual investors should be wary of the complex investments.

When Volatility Products Fail
Seeking Alpha
With two significant stock market corrections in the last year we can now look back and see whether the Powershares S&P 500 Downside Hedge Portfolio (NYSEARCA:PHDG) or the Barclay S&P Veqtor ETN (NYSEARCA:VQT) were able to deliver value. For the purpose of this article value is found in the ability to appreciate significantly from exposure to VIX futures during the period of stock market declines helping to offset overall portfolio declines.

Goldman Says Hedge Funds Wedded to Top Picks Like Never Before
Hedge funds, who’ve seen their reputations take a beating in recent months, have not suffered a corresponding hit to their confidence, at least as far as stock-picking goes. So says research from Goldman Sachs Group Inc., which found that a stock-selection metric known as concentration climbed at the end of the first quarter to the highest level on record. The term refers to the percentage of hedge fund holdings accounted for by their 10 biggest positions, currently at 68 percent.

****SD: Included more as a bad strategy story.

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