Observations & Insight

Walt Lukken, FIA – The New Normal and the Five Tips


“We’re in a very exciting industry. Fundamentally, the demand for risk management in our financial markets to service the real economy is not going to disappear. It may change on the margins and people are going to leave the business, but it is going to be here and innovating for a long time to come.”

Sometimes a MarketsWiki Education presentation is of the “buy one, get one free” variety. Walt Lukken, president and CEO of the Futures Industry Association, delivered just that – two interesting and thoughtful presentations – to a crowd of summer interns at the MarketsWiki Education World of Opportunity Chicago 2016.

In the first half, Lukken offers an introduction to the futures industry from the perspective of its representative trade organization. He looks at the state of regulation and politics in the U.S. and abroad and says, despite the many headwinds, the outlook for the derivatives industry is quite positive indeed.

He then offers up five important suggestions for improving one’s career path – ideas that hold true whether one is a freshly hired intern, an occupant of a corner office in the C-suite, or anywhere in between.

Watch the video »

Lead Stories

Asia’s retail investor affinity with leveraged products
Jennifer Hughes – Financial Times
If you would like to understand Asia’s affinity with derivatives, especially among its army of “mom-and-pop traders”, google “CBBC.” Top of the search rankings, even above CBeebies, the BBC children’s TV channel beloved of parents, comes the Hong Kong CBBC platforms of the likes of Credit Suisse and HSBC. Derivatives including Hong Kong’s callable bull-bear contracts highlight the gulf between east and west in terms of market behaviour and thinking. The best example of this is leveraged exchange traded funds, which are seeking space alongside the city’s booming CBBC market.

****SD: And millennials love the VelocityShares 3x Long Crude Oil ETN. Different strokes for different folks. See the “ETF proliferation” story in miscellaneous for more on the effects of ETFs on trading — it’s not a rosy picture.

OCC Weighs In On Leverage Ratio and Impact on Listed Options Industry
John Fennell – OCC
One place where OCC works to help the options industry is in the area of international regulatory standards. We recently signed on to a letter along with 30 other exchanges and trading firms regarding the leverage ratio framework as proposed by the Basel Committee on Banking Supervision (BCBS). OCC and its co-signees continue to believe that unless the Standardized Approach for Counterparty Credit Risk (SA-CCR) method is adopted within the leverage ratio, market makers, who serve to provide deep liquidity to the listed options market, will be significantly diminished.

If you think this market is confusing, wait until you see what the ‘smart money’ is doing
David Rosenberg – Financial Post
Okay, this really is one weird market. I am looking at the hedge fund proxy market positioning from the latest Commitments of Traders report from the Commodity Futures Trading Commission, and the results are startling. I’m quite sure I have not seen such levels of confidence on one hand, and cognitive dissonance on the other, before in my entire professional life (and that spans 30 years). First, there is a very large net speculative long position on the Chicago Board of Trade (CBOT) with respect to the 10-year U.S. Treasury note — a 96,007 futures and option contract net long position to be exact.

Virtu Never Loses (Well, Almost Never) in Quest to Upend Markets
Matthew Leising – Bloomberg
A computerized voice rang out on Virtu Financial’s New York trading floor one Friday morning in late May: “Something’s wrong.” This was the Watcher, an automated program the electronic market-making company created to alert risk managers when any of the millions of orders it places on a given day go awry. In this case, Virtu had entered into a $1?million currency contract but then decided to cancel the order. While it took only 700?microseconds to get confirmation that the trade was on, the cancellation hadn’t been acknowledged by the exchange within 5?seconds, triggering the Watcher’s Stephen Hawking-like voice.

****SD: Never say almost never.

Volatility Update: Could VIX Be Getting Set for a Repeat of 2015?
Frederic Ruffy – The Ticker Tape
Stock markets are reeling. Trading volumes are surging, and it’s a record-setting day for trading activity on the Chicago Board Options Exchange (CBOE). There is a palpable sense of investor panic in the air. Fear is back and volatility has hit extremes. It’s August 24, 2015.

Futures Market Update – Markets and Volatility
Sarah Linane – OptionsHouse
As the summer comes to an end, we look forward to volatility returning to the market place. Historically, the summer months are a low volume trade; however, the good old saying of “sell in May and go away” has not worked this year. The equity index markets are at all-time highs and have seen about a 6.5 % overall increase since the beginning of May. Aside from the June 24th Brexit Vote causing unexpected volatility and a significant drop in the market, equity products remained quiet. However, this lack of volatility and small daily ranges, does not always carry over in all futures asset classes.

Retail Broker-Dealers: Throughput, Please
Terry Flanagan – MarketsMedia
Retail trades are smaller than institutional trades, but there are many more self-directed investors than there are trading and investment firms. And while people in pajamas on their kitchen-table laptops aren’t always in the market, when they are, trades can come in torrents. So retail broker-dealers need infrastructure that can handle the volume spikes that might come at the open or close of a trading day, or around corporate earnings announcements, macroeconomic news, or geopolitical events.

Volatility Drives Us Mad and Steals Our Future
The Reformed Broker
Five years ago this week, one of the wildest times in the market I’ve seen in my entire career on The Street. The daily swings, driven by headlines and comments from European bankers and politicians, were breathtaking.

Economists See Election-Induced Uncertainty Harming U.S. Economy
Josh Zumbrun – WSJ
For the first time in this election cycle, most economists surveyed by The Wall Street Journal believe uncertainty from the coming election is crimping economic activity. While every election spurs some economic uncertainty, more than 80% of respondents to the Journal’s latest survey of economists rate the current cycle as presenting an unusual muddle. A majority—57%—said the economy has suffered, at least somewhat, as a result.

****SD: Crystal ball says that in four years we will be subject to more election uncertainty.


CME Group Discloses July 2016 Options Review
Aziz Abdel-Wader – Finance Magnates
Chicago-based CME Group (NASDAQ: CME), one of the world’s paramount exchange operators, has published its July Options Review which showed a mixed performance across the group’s overall business, according to a CME statement.

Exchange Groups Work Together To Strengthen U.S. Equity Markets
Press Release
The three major exchange groups, Bats Global Markets (Bats), Nasdaq and the New York Stock Exchange (NYSE), (collectively, ‘the exchanges’) have worked together to harmonize key functions of the U.S. equity markets to increase resiliency during times of extreme volatility.

Deutsche Börse Group, LSE Merger Sees 75% of Shares Tendered
Finance Magnates
Deutsche Börse AG and the London Stock Exchange Group (LSEG) have taken one step closer to a landmark merger, following the tender of 75% of Deutsche Börse shares under the offer of HLDCO123 PLC, according to a Deutsche Börse filing.

EEX Group Revenue: Significant Growth During First Half Of 2016
Press Release
During the first half of 2016, the EEX Group continued its growth course, significantly increasing both its sales and result in comparison to the first half of 2015.

MIAX Options Options – New Complex Order Rules Pending SEC
Press Release
MIAX filed SR_MIAX_2016_26 to adopt new rules to govern the trading of Complex Orders on MIAX.

Regulation & Enforcement

Brexit volatility fuels FX mis-selling claims
Farah Khalique – Euromoney Magazine
Brexit-related currency volatility is fuelling a rise in foreign-exchange product mis-selling enquiries from businesses that have been burnt on ‘fiendishly complicated’ currency trades. Independent derivatives consultant Vedanta Hedging is working on eight new enquiries since the referendum, including one from a clothes importer that is facing million-dollar margin calls from its brokers. Abhishek Sachdev, founder of Vedanta Hedging, says: “We are definitely seeing more enquiries for mis-sold currency options since Brexit, and as ever, this is just as focused towards the brokers as it is the banks.

****SD: Bigger the event, bigger the confusion.

India’s steps to regulate algorithmic trade may hurt liquidity, traders say
Nikkei Asian Review
India’s capital markets regulator recently proposed measures to tighten regulations on algorithmic trading to ensure equal and fair access to all market participants, but traders are concerned the steps may pose a threat to prevalent liquidity available on the exchanges. A chunk of algorithmic trading today consists of high frequency trading (HFT), which leverages high-speed financial data and sophisticated technology for quicker access to stock prices and to place a large number of orders at speeds faster than ordinary investors. The practice, which includes placing servers as close to the exchanges as possible – called colocation, has been widely criticized the world over for giving such traders an unfair advantage.

Lawyer, Adviser Charged With Insider Trading
Nicole Hong – WSJ
A former partner at law firm Hunton & Williams LLP and his investment adviser were criminally charged with participating in an insider-trading scheme ahead of a Pfizer Inc. acquisition. Prosecutors said Robert Schulman, an intellectual-property lawyer at Hunton & Williams in Richmond, Va., tipped off his investment adviser, Tibor Klein, in 2010 about a pending merger between Pfizer and King Pharmaceuticals Inc. Mr. Klein, 43 years old, was president of the investment-advisory firm Klein Financial Services.

MiFID 2: FCA gathers steam
In line with the UK financial services regulators’ appeals to UK businesses to keep calm and carry on, FCA is pressing ahead with its planning for implementation of the revised Markets in Financial Instruments Directive (MiFID 2) and Regulation (MiFIR) package, due to be implemented and to apply from 3 January 2018.

Belgium bans forex and binary options trading
SMN Weekly
In a communiqué on its website, the Belgium Financial Services and Markets Authority (FSMA) announced that its Regulation on distribution of ‘over-the-counter’ (OTC) derivatives has been approved. As a result, distribution of Forex, CFDs, and Binary options among Belgian retail clients is banned from 18 August 2016.


CME tech to be cornerstone in hybrid offering: Tullett
Alice Attwood – Futures & Options World
The broker last week agreed a long-term licence for CME’s hybrid trading tech
The managing director for electronic broking at Tullett Prebon has said that the recently-agreed license extension with CME Group for its hybrid trading technology will see the exchange’s tech become the cornerstone system for the firm. “It is already widely used within Tullett Prebon and supports our hybrid model in all major asset classes. This licence acquisition gives us the flexibility and agility to deliver new functionality which will ultimately result in the technology being capable of supporting even more products… We expect this to be a cornerstone hybrid technology for the firm,” David Perkins, MD for electronic broking at Tullett Prebon told FOW on Wednesday.

****SD: Tullett also parted ways with their head of listed derivatives, Martyn Harrison.

New paper by Deutsche Börse and Celent: Future of Fintech in capital markets
Eurex Group
The paper “Future of Fintech in capital markets” covers the areas core market infrastructure, post-trade digitization, artificial intelligence and analytics as well as investment technology digitization and alternative funding platforms. It also shows how Fintech offers new business opportunities for financial market infrastructure firms and how Deutsche Börse can raise its competencies to an even higher level.


The stock market ‘bubble boys’ are wrong about this market—commentary
Ron Insana – CNBC
The “bubble boys” are back in droves. From global investor Marc Faber, who said on CNBC Tuesday that U.S. stocks could fall some 50 percent from current levels, to Republican presidential nominee Donald Trump, who recently claimed stocks are in a bubble and that he wouldn’t invest in the market, the gloom and doomers are flashing warnings signals!

****SD: Keep saying it for long enough and you’ll be right.

How Admiral Beat Maury at His Own Game
Fari Hamzei – CBOE Options Hub
Maury felt pretty smug about taking the Admiral’s FB trade, however, he was not prepared for BIDU. The Admiral had his mojo working as he went stalking an uber Maury trade, and it ended up a doozie!

****SD: I will again remind readers that this is not, unfortunately, about beating Maury Povich at his own game (which, presumably, is deciphering paternity).

Time To Buy FX Volatility
Danske Markets – Investing.com
Implied FX volatility has fallen sharply over the summer. According to our FX volatility valuation model, the low level of volatility has created buying opportunities.


Dead Ringer
Leo Murphy – Trading Technologies
As the manager of TT CampusConnect™, Trading Technologies’ university outreach program, I spend a lot of time on college campuses and have the opportunity to reap the benefits of those visits. On a recent visit to one of our partner schools, the University of California Santa Cruz (UCSC), I noticed a poster advertising the Grateful Dead Archive, a collection available for public viewing in UCSC’s McHenry Library. What? This is right up my alley. As a big fan of all things “jam” (the Dead, Dave Matthews, Phish, et al.), I had to check this out.


Volatility Spreads: Trading High and Low Vol
In this fast-moving, one-hour seminar, the Options Industry Council will analyze both high and low volatility strategies. This session will focus on risk, potential payoff and breakeven points. Straddles, strangles, diagonals and credit spreads are a few of the exciting strategies that we’ll cover in this quick, 60-minute session.

****SD: Next Tuesday (the 16th) from 3:30 – 4:30 p.m. CT.


Anyoption Signs Rugby Star JP Pietersen as Brand Ambassador
Rosemary Barnes – Finance Magnates
Binary options brokerage anyoption announced today that it has signed South African rugby star JP Pietersen of Leicester Tigers as the company’s new Brand Ambassador, in a deal estimated to be worth around $50,000, according to sports marketing agency, Sports Media Gaming.

Odd Odds: Vegas Now Takes Olympics Bets, Including Serbian Water Polo
Zusha Elinson – WSJ
Alf Musketa has been preparing for the Olympics for four years. And now he is ready—to bet on them. Mr. Musketa, 54, a Vegas-area resident who makes a living wagering on sports, has made himself an expert in the Olympics of the obscure, studying up on the rising stars of javelin-throwing, hurdling and shot put. He has watched countless contests, scoured track-and-field blogs and filled more than a dozen three-ring binders with handwritten notes on athletes.

****SD: From the story: “The majority of sports books here haven’t put much effort into researching the more obscure sports, which Mr. Musketa hopes to exploit like a hedge-fund manager looking for undervalued assets.”

The More the Scarier? ETF Proliferation Bad For Trading Health, Study Finds
Chris Dieterich – Barron’s
Expense ratios – what investors explicitly pay fund managers to oversee their stocks and bonds – have generally fallen across the board in the realm of exchange-traded funds. And investors have by and large flocked-to ETFs with the lowest expense ratios, with increased competition among big asset managers resulting in tit-for-tat fee cuts on many large ETFs. Morningstar research finds that investors are paying less for fund management mostly because they’re voting with their dollars.

****SD: “What’s the problem?” “Our product is too alluring.”

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