Observations & Insight

The Non-Linear Path: Malay Bits & Pieces
Doug Ashburn in Kuala Lumpur, JLN

The Grand Hyatt Kuala Lumpur, the chosen venue for this year’s IOMA, the WFE‘s clearing and derivatives conference, is a lovely hotel in a vibrant city. The lobby, which sits atop the 40-story building and looks out upon the iconic Petronas Twin Towers, is visually appealing but logistically challenging. In order to get to one’s room, one must ride to the top floor, change elevators, and ride down. Getting to the conference floor requires a two-story escalator ride after the up-down process.

This non-linear path, however, offers a fitting metaphor for the state of global derivatives rules.

In yesterday’s newsletter, I included a summary of what has become THE issue of this year’s IOMA – the supplemental leverage ratio (yes; even bigger than blockchain). The view was nearly unanimous in the room that the damage being done to central counterparty clearing is potentially disastrous to global markets. However, because of the state of politics in the U.S. and Europe, combined with the self-centeredness (or self-preservation?) of regulators, means the direct path is not an option.

Like the exhibit hall at the KL Hyatt, I know where it is and I can see it, but I must jump through hoops to get there.

What is needed are more politicians like Kay Swinburne, Minister of the European Parliament, who has been tireless in her efforts to educate her colleagues on the importance of sensible regulation. Swinburne, who was kind enough to give me 15 minutes of her time after two long days at the conference, says that progress is being made, but the clock is ticking and impediments remain.

To her credit, she will be spending her summer monitoring the first clearing obligation, coming in June, just in time for Brexit. She is also working on “fixes” to the ESMA Level 1 text, which includes tweaks to the treatment of repos, package transactions (much like the tweaks we have made in the CFTC) and certain participants that were unintentionally swept into rules on direct market access.

She is also working to educate the public on the financial consequences of Brexit, namely that Britain would need to go through its own rulemaking process and apply for equivalence with EU rules. Considering it took four long years for the U.S. to gain equivalence, what would happen to London as a financial center, especially amid the expected rise in protectionism and other barriers that would likely be built along the English Channel? She says facts are few and far between, and not hitting the daily papers.

The non-linear path, indeed.

After two days of fretting about the past and present, the final panel, “The World is Not Enough – 2017 and Beyond,” took a refreshingly optimistic look at the future. The inimitable Sandy Frucher took a page out of Bart Chilton‘s book when prefacing a discussion of the shift of the global economic center to the east and to the young, by quoting from Bob Dylan’s “The Times They Are a-Changin’.” In the final assessment, yes, we often take the non-linear path, but we eventually get where we need to be.


2016 Exchange CEO Series: CurveGlobal’s Michael Davie Looking For New Twist On Interest Rates

New exchanges are looking to disrupt the status quo or add value to the marketplace. And CurveGlobal, a joint venture between the London Stock Exchange Group, CBOE and several global banks, is planning to do both when it launches later this year.

While much is being made of the LSEG’s potential merger with Deutsche Boerse, Curve Chairman Michael Davie told JLN at the FIA Boca conference that the venture is focused on continuing its work to pull the exchange and its customer base together.

Watch the video »

Lead Stories

Asia volatility traders in liquidity hunt
Jennifer Hughes – Financial Times
When markets plunged in January, led by China, one index in Asia was hit more than most — a move that sent shudders through the region’s growing band of volatility traders, as the world braced for a re-run of the turmoil that overtook the market the previous September. The index that volatility traders were watching most closely was the Hang Seng China Enterprises Index (HSCEI), made up of Hong Kong-listed mainland companies. In 2015, when China’s markets were soaring, it had become the reference point of choice for so-called “autocallable securities” in Korea, a popular and risky retail product.

****SD: Popular is right when it comes to autocallable securities. I’m reminded of this Financial Times article from February, which has details on autocallables. From that article: “Last year Korean investors bought record amounts of so-called ‘autocallables,'” and, “Autocallables contain features that have blown up previous products, from ‘target redemption forwards’ — once dubbed kill-you-later-accumulators — to ‘knock-in-knock-out,’ or Kiko, deals.”

Low Vix signals robust appetite for equities and oil
Financial Times
There are two ways to look at the low cost of market protection. It’s either a good thing that shows investors risk appetite is robust, and which allows portfolio positions to be held because they can be cheaply hedged. Or it is a bad thing because it suggests the market is too sanguine and thus vulnerable to a negative shock. Naturally, those with a tendency toward bullishness will favour the former; the bearish will veer towards the latter. So, with that in mind, traders can make their mind up about the following. The CBOE Vix index, a measure of the cost of S&P 500 implied option volatility, closed on Monday at 13.09, its lowest finish to a session since August 17.

No ECB shock to the euro this week
If options market pricing before this week’s European Central Bank decision on interest rates is to be believed, policymakers have soothed much of the nervousness that has accompanied many of their meetings over the past year. One-week implied volatility – a gauge of how sharp currency moves are expected to be over the next seven days – is typically used by hedge funds and other speculative investors to bet on large swings around formally scheduled events.

Vesel, LLC and Trade Alert, LLC Join Forces to Provide Specialized Buy Side Listed Options Messaging
Vesel, LLC (Vesel), and Trade Alert, LLC (Trade Alert), the two main sources for options transparency on Wall Street, have announced a partnership whereby buy side customers are individually alerted to specific sell side options trades indicating broker involved and other pertinent trade information. The customizable platform allows buy side clientele to earmark specific stocks to monitor and thereby receive alerts. The combination of FinTech resources demonstrates Vesel’s and Trade Alert’s commitment to the ever-increasing importance of delivering customized options information to a sophisticated and growing client base.

Checking in on Overnight VIX Action
CBOE Options Hub
Last Friday CBOE began disseminating spot VIX quotes during what we lovingly call the Extended Hours Session (ETH). The first quote for VIX on April 15th occurred at 2:15 am Chicago time. I was elsewhere Friday but I did check the data periodically and everything seemed to be running smoothly. I’m back at work today so I decided to take a look at how VIX did relative to the S&P 500 futures market from 2:15 am to 8:15 am Chicago time, looking at the price every 5 minutes. At 8:15 am the SPX option market closes for 15 minutes before resuming trading at 8:30 am so there’s also a break in VIX quotes.

US regulator sees liquidity risk for buy-side
Futures & Options World
The FSOC has released an update on financial risk from asset managements The Financial Stability Oversight Council released on Monday an update to its review of potential risks to US financial stability posed by asset management products and activities. The council’s views on financial stability risks focused on liquidity and redemption, leverage, operational functions, securities lending and resolvability, and transition planning.


Euronext Said to Plot Ways to Block Deal Creating European Titan
Stock exchange operator Euronext NV is evaluating how to create roadblocks to a merger between its London- and Frankfurt-based competitors because of concern the deal would marginalize its own role in European trading, according to people familiar with the matter.

****SD: The game is afoot.

Euronext taps former BNP banker Modica as CFO
Futures & Options World
Modica’s appointment marks the latest management change at the exchange. Euronext has hired a new chief financial officer from BNP Paribas, marking the latest management changes under the exchange group’s new chief executive Stephane Boujnah.

Hong Kong bourse set to re-introduce closing auction on July 25 – sources
Hong Kong Exchanges & Clearing (HKEx) has scheduled the re-introduction of a closing auction for July 25, three individuals briefed by the exchange told Reuters, in a long-awaited development that will bring the bourse in line with its international peers. The HKEx proposed re-introducing a closing auction, a common mechanism used to reduce volatility at the end of a trading session, in January 2015, but did not give guidance on when it would be implemented.

Regulation & Enforcement

CFTC Keeps Source Code on the Menu
TABB Forum
With the comment period for Regulation AT now officially over, market participants can begin to reflect on best practices to prepare for enforcement of the rules as the CFTC mulls over the responses. While the focus on automated trading source code remains the loftiest item on the agenda, it may not provide regulators with all of the information they need.

****SD: I wouldn’t recommend ordering it though.

Death of Controversial NYSE Rule Improved Trading, Broker Says
The New York Stock Exchange’s decision to phase out a rule blamed for spurring volatility during Aug. 24’s wild session has led to more orderly trading, according to an analyst at Investment Technology Group Inc. ITG examined NYSE’s performance at getting stocks trading during two recent periods of high market volatility: August and January. It found that delays to the start of trading in January were much shorter than they were on Aug. 24.

CFTC Announces Additional Names to Its List of Foreign Entities that Illegally Solicit U.S. Residents in Forex and Binary Options
As part of the U.S. Commodity Futures Trading Commission’s (CFTC) ongoing efforts to help protect Americans from fraud, today the agency announced the addition of 23 new names to the RED List. Started in September 2015, the RED List — standing for “Registration Deficient” — contains the names of unregistered foreign entities that the CFTC has reason to believe are soliciting and accepting funds from U.S. residents at a retail level for, among other things, trading in foreign currency (forex) or binary options, and who are required to register with the CFTC but, in fact, are not registered (see CFTC Press Release 7224-15, September 9, 2015).

Ancoa hires four to prepare for MAR implementation
Futures & Options World
Market surveillance tech firm has added new tech to help props spot abuse Surveillance tech firm Ancoa has hired another four derivatives experts in a bid to prepare for the impending European Market Abuse Regulation (MAR). The firm has hired Dr Kostas Giannoutakis, Chris Lawrence, Tim Rudlin and Jesse Whaley in London.


Finance leaders call for collaboration on fintech development
Financial Times
A group of global finance leaders is calling on regulators, start-ups and industry incumbents to embark on landmark collaborations that they say will reduce the chances of the financial technology boom imploding. The group, convened by the organisers of the World Economic Forum at Davos, argues in a position paper published on Tuesday that there is an “urgent need” to do more to ensure the rapid growth of fintech does not become a risk to “systemic stability”.

The Pitfalls of Data Feeds for Exchange Prices
Finance Magnates
If the trading platform is the heart of your brokerage business, the data feed is its veins. The quality of the source of the quote stream affects the entire trading process and subsequently the broker’s revenue. Poor data feeds may provoke platform abusers to perform their arbitrage strategies, which may lead a broker to substantial losses. The importance of the qualitative data feed shouldn’t be underestimated. That’s why in this post I want to draw your attention to the problems that you may face with feeds.

Nadex releases update to Android application
North American Derivatives Exchange, Inc. (Nadex), part of IG Group Holdings plc (LON:IGG), has just released an update to its mobile application for Android gadgets, with the enhancements including easier work with documents and improved search.


Should You Listen To The ‘Sell In May’ Adage?
The Ticker Tape
Soon investors may start hearing the old “Sell In May and Go Away” market adage. Wall Street is littered with these axioms and seasonal tendencies. Should you listen? Or, is this just more “noise” in an already noisy trading world?

When is a Long Shot a Good Shot?
Ari Pine – Trade Talk
I recently was interviewed for a podcast by Chat With Traders. I spoke about expected value and the importance of process over outcome. It’s one thing to discuss in general terms the idea of positive expected value and the idea to focus on process rather than outcome. It’s another to actually see it in action. I’d like to go through a trade we recently had on. This will make the concept concrete. The idea of expected value is relatively straightforward: one must combine the probability of a financial event occurring and its outcome. For example, consider an investment where there’s a 25% chance of losing $10 and a 75% chance of making $10. Multiply the outcomes by the probabilities to get the expected value. In this case, 0.25 x -$10 + 0.75 x $10 = $5. That’s easy enough.

How one trader plans to make millions on Facebook
With Facebook earnings around the corner, one big trader has an intriguing strategy for playing the tech giant. In one of Monday’s biggest options transactions, a trader appears to have sold 17,000 Facebook 100-strike puts expiring on April 29 for $1 each (in round numbers).

Use The Yen To Trade The Stock Market With Binary Options
It’s hard to know the price a unique asset. It’s much easier to find the price of an object when we know the price of something similar to it. This simple statement forms the basis of an entire industry known as statistical arbitrage. The implication for all traders is that we must look to other related assets to provide clues to the future trajectory of prices. Thus if we are trying to trade the US stock market, we should look for other assets which are correlated with equities. One relationship which has stood the test of time has been the correlation between the USD/JPY and the S&P 500. The two prices have been locked in a dance for over two years. The correlation from 1/1/2014 to now has been 74.4%.

More Concerns With VIX Related Equity Hedges
Yesterday was a strange day indeed. VIX dropped 2% but VXX dropped 6.3%. I took a look at all days since 2014 when VIX was lower on the day. This underperformance of 4.3% was the second worst underperformance. The only time that VXX did worse relative to VIX on a down VIX day was October 19th 2015. That was after a rapid rise in the S&P 500 to roughly 2,030 was just before the S&P rallied to 2,110 in the following 2 weeks. History may not repeat itself, but it is worth noting.


CBOE to Host 5th Annual CBOE RMC Europe September 26 – 28, in County Wicklow, Ireland
Press Release
Chicago Board Options Exchange (CBOE) will host the 5th annual CBOE Risk Management Conference (RMC) Europe, from September 26 through September 28, 2016, at the Powerscourt Hotel in County Wicklow, Ireland.

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