Observations & Insight

Editor’s Note
Due to the Thanksgiving holiday we will not be publishing JLN Options tomorrow or Friday. We will resume publication on Monday, November 30th. May your Thanksgiving be filled with peace, joy, family, and football. And by football, we mean American football, since it is a truly American holiday.

For our international readers, have a nice day, and sorry about the interruption in our publishing schedule. Happy eating!


By John Lothian, Doug Ashburn, and Jim Kharouf – JLN

It would be safe to say that in the months prior to yesterday’s CFTC proposed rule on automated trading, that those who spoke to the agency were convinced that the rule would be more flexible than the one that was rolled out.

The rule, now dubbed Regulation AT, addresses everything from what kinds of risk controls should be in place when creating an automated trading system to post trade reporting requirements so the CFTC knows that you know what you’re doing when running an algo program. All that seems to make sense in the wake of two so-called flash crashes and other algo misadventures.

But what is troubling are a couple of key components in the rule – registration and intellectual property. Registration with the CFTC applies to proprietary trades as well as clearing member futures commission merchants (FCMs) as well as anyone registered as an FCM, floor broker, swap dealer, major swap participant, commodity pool operator, commodity trading advisor or introducing broker engaged in algorithmic trading. (For definitions of participants and summary of the rule, visit the rule’s page in MarketsReformWiki). I’m not sure, but that’s pretty much everyone, even Doug Ashburn, who used to be a floor broker and John Lothian, a recovering electronic broker. Oddly, hedge funds have NOT been included.

Just what does the CFTC plan to do with all of these names? And just what will the CFTC do with the algo you’ve hired a staff of Ph.Ds to create? That is a question raised by CFTC commissioner Chris Giancarlo, who is likely the best person at the CFTC to ask this question, given his experience in the trading space. Just how and when should the CFTC look at one’s intellectual property? And if they do, who will keep it safe?

There was once a CFTC employee named Susan Wagner who left the commission and patented the idea of electronic trading. She sued the exchanges for infringing on her patent, including Howard Lutnick of then eSpeed, who then bought the patent from her and took control of the suits against the other exchanges.

There are many questions to be carefully considered here. But we all will have an opportunity to chime in. As soon as the rule hits the Federal Register – and we will keep you posted as to when that will happen – a 90 day public comment period will commence. Speak now, or … you know the rest.

Lead Stories

Bill Ackman Found a Cheap Way to Buy More Valeant Stock
Matt Levine – Bloomberg
“The biggest regret I have with Valeant is that we’re not in a position to buy more,” said Bill Ackman on a conference call earlier this month, but he solved that problem just a couple weeks later. In October, when Valeant’s stock first plunged on rumors about its specialty pharmacy business, Ackman had bought about 2.1 million shares for his Pershing Square funds, for a total of about $232 million.

U.S. Airlines Are Betting Oil Prices Won’t Rally Any Time Soon
Robert Tuttle – Bloomberg
Two of the world’s biggest airlines are betting that oil prices won’t rally any time soon, growing more cautious after losing hundreds of millions of dollars on hedges.
United Continental Holdings Inc. and Delta Air Lines Inc. have reduced fuel hedging as oil plunged close to a six-year low. They’ve become more like American Airlines Group Inc., the biggest global carrier, which closed its last hedging position in 2014.

Mexico to Receive $6.4 Billion from 2015 Oil Hedges
Laurence Iliff – WSJ
Mexico’s program of annual oil hedges to partially protect the federal budget from sudden shocks in world oil prices will pay off handily this year, with Finance Minister Luis Videgaray on Tuesday estimating the December payout at $6.4 billion.
“The hedges we acquired last year to protect a price of $74.60 per barrel, which without a doubt is a higher price than what we saw during the year, will be paid in early December,” Mr. Videgaray told reporters. “Our estimate is that they will be for an amount of $6.4 billion, or about 104 billion pesos.”

China allows first foreign institutions into interbank FX market
The first batch of foreign central banks, sovereign wealth funds and international financial institutions have been registered to enter China’s interbank foreign exchange market, the country’s central bank said on Wednesday. This registration comes ahead of a highly-anticipated announcement by the International Monetary Fund on Monday that China’s yuan may join its foreign exchange basket.

With glory days gone, London traders face life in ‘real world’
Jamie McGeever – Reuters
Once dubbed “masters of the universe”, it seemed the party would never end for a profession often associated with a champagne lifestyle of fast cars and faster living.
But those days are over for London’s financial market traders. Perceived by the public to have lived in a bubble for much of the past 30 years, thousands are now being forced into the “real world” as banks slash costs and shrink trading operations.

Trader Doubles as Pro at Magic: The Gathering Tournaments
Frederick Dreier – WSJ
Packing for a competitive event requires meticulous attention. When Jamie Park travels for his competitions, he always carries at least one Black Lotus, and a Deathrite Shaman or two.
Mr. Parke, 34, is an elite-level player of Magic: The Gathering, the strategy-driven card game that revolves around dragons, sorcerers and other fantasy creatures. Magic players attack each other with numbered cards—Black Lotus and Deathrite Shaman are two of the most popular—and the first player to eliminate his foe’s 20 life points wins.

****SD: I put this WSJ piece between the two “out of work traders” stories for a reason.

Life after the pits: how ‘dinosaur’ traders are reinventing themselves
Tom Groenfeldt – eFinancialCareers
To survive in the trading pit, all you needed was an ability to think fast under pressure, shout loudly and do rapid mental arithmetic. But in a world where successful traders are under 30, robots are taking over and anyone who survives needs to be able to code, there’s a generation of traders from the Chicago Board of Trade who have been left on the scrapheap.

Monetary Policy Divergence: Trading Volatility
Davide Kotlar – The Market Mogul
A few weeks ago, we had strong data coming from the US, indicating an increase in probability (which is now at 70%, calculated from interest rate futures on FED Funds Rates) that the FED will hike interest rates in the next December’s meeting. Non-Farm Payrolls, which are released the first Friday of every month, were better than expected (271k vs. 180k) and the unemployment rate fell to 5%, near the full employment rate of the Federal Reserve that is 4.9%. On the other side of the ocean, ECB President Mario Draghi stated the willingness of the committee to add further stimulus to the economy as concerns about inflation still persist. The are three strategies that the ECB could use: cutting the deposit rate of 10 basis points to -0.30, increasing the size of the QE or extending the duration of the program which is now supposed to end in September 2016.


Trade Volumes Down For CME Across Key Asset Classes In October
Leading exchange operator CME Group has witnessed strong average daily trading volumes through the first three quarters of the year across various asset classes, including commodities, energy, foreign exchange and equity contracts. As a result, its transactions and clearing fee revenues grew by 10% y-o-y to $2.5 billion for the nine month period ended September. The company recently reported its trade metrics for October 2015, with total volumes declining significantly, primarily due to a tough year-on-year comparison over October last year, when trade volumes surged to record levels. Below we take a look at CME’s October performance across key asset classes.

IEX ramps up war of words, ideas, in challenge to U.S. exchanges
John McCrank – Reuters
Would-be exchange operator IEX Group ratcheted up its war of words with the New York Stock Exchange and Nasdaq, both of which have argued against IEX’s exchange application, saying they were trying to block competition to protect their business interests.
IEX, the private trading venue featured in author Michael Lewis’s book “Flash Boys: A Wall Street Revolt,” applied in September with the U.S. Securities and Exchange Commission to become a registered stock exchange called the Investors’ Exchange.

SGX wants to add value to its company disclosures
Yasmine Yahya – Straits Times
The Singapore Exchange (SGX) is studying ways to encourage institutional investors to be more engaged, and to move towards cutting down the number of company disclosures while giving them greater value.
SGX chief regulatory officer Tan Boon Gin said the push towards “low volume/high value” disclosures was part of moves to strengthen the regulatory regime here.

Hungary central bank takes control of Budapest bourse
Philip Stafford and Andrew Byrne – Financial Times
Hungary’s central bank is to take control of the country’s main stock exchange after buying the shareholdings of the bourse’s two big Austrian shareholders in a $45m (GBP29m) deal.

Regulation & Enforcement

High-Speed Traders Face New CFTC Scrutiny; CFTC votes to propose registration, risk controls for automated-trading firms
Andrew Ackerman – WSJ
The Commodity Futures Trading Commission took its first concrete step toward boosting oversight of rapid-fire traders, advancing plans to increase controls of computerized trading after a series of market glitches.

***DA: For a complete summary of the rule, and related documents, plus links to related topics, visit the rule’s page in MarketsReformWiki

The train on platform MiFID 2 is delayed by one year
Steve Grob – Fidessa
Not surprising to see that it now looks odds-on that we’ll get a full one year delay on the implementation of MiFID 2. This will embarrass the politicians who don’t want to be seen as going soft on those “wreckless” bankers, but I assume Jo Public will have forgotten all about this by the time they’re up for re-election in 2019. It’s worth bearing in mind, however, that the original aim of MiFID 1 back in 2007 was simple – make it easier to trade equities across European borders. Post financial crisis and the whole process became highly politicised and was skewed towards extracting retribution from the industry and ensuring that systemic risk was removed from the system. This ignored the simple fact that risk in capital markets can never be erased, it can only ever be moved to another part of the system. Naturally the regulators will worry that a delay might mean all their hard work gets unpicked, but perhaps a delay now is better than charging ahead with something that even ESMA says it would struggle to prepare for in time.

Ex-Goldman employee accused by U.S. regulator of insider trading
Nate Raymond – Yahoo
A former Goldman Sachs Group Inc employee was accused by U.S. securities regulators on Tuesday of repeatedly engaging in insider trading based on information about deals involving the bank’s clients.


Indicator of the Week: Is Black Friday Really That Important?
Rocky White – Schaeffer’s Research
The biggest day of the year for retailers comes at the end of this week. The unofficial start to holiday shopping starts the day after Thanksgiving, Black Friday (some stores open on Thanksgiving). Investors and commentators will eyeing this day, keying on sales and the length of lines to get a sense of consumer strength and the economy in general. In this article, I’ll take a look at how stocks have behaved around Black Friday — and if Black Friday, or the market’s reaction to Black Friday, can give us a sense of how stocks will do moving forward.

Looking for Action? Choose Between Sadness or Madness
Timothy Collins – TheStreet
If you are expecting big moves today, I suggest you look elsewhere. Sure, there will be a few names jumping around, but those are company-specific catalysts. If you are looking for action, then you might find yourself having to dip into the sadness we call Hewlett Packard (HPQ) or the madness we call KaloBios Pharmaceuticals (KBIO). I’m more interested in watching a little early morning action, then starting to decorate for Christmas. Don’t judge me!

Logic Has Nothing to Do With This Market
James Deporre – TheStreet
It was just one Russian pilot who was killed, but it was a good excuse for some market pressure. Of course, the fact that it was an obvious reason for selling is precisely why it didn’t happen. The dip buyers showed up immediately and when they didn’t crack, even after taking out the opening lows, there was no choice but to buy.

Options Strategy: Navigating Oil’s Volatile Trade (VIDEO)
Kevin Kelly, chief investment officer at Recon Capital Partners, discusses his options strategy and his trade of the day. He speaks to Bloomberg’s Julie Hyman on “Bloomberg Markets.”


The Danger of Reading into ‘Large’ Trades
Adam Warner – Schaeffer’s Research
The motives behind big trades are seldom clear, especially on mega-caps like Exxon Mobil Corporation (XOM)

HFT Masterclass – How to Tell Your Synthetics from Your Strangles
Lokesh Madan – Finance Magnates
There are four general categories into which all spreads fall: vertical spreads, time spreads, straddles and strangles, and synthetics.

Discussion of Volatility of Volatility at RMC in Hong Kong on Dec. 1
Matt Moran – CBOE Options Hub
On December 1st in Hong Kong at the First Annual CBOE Risk Management Conference (RMC) Asia, two expert speakers – William Chan, Equity Derivatives Strategist, Bank of America Merrill Lynch, and Michael Fagan, Chairman, Levitas Capital – will discuss the topic of Volatility of Volatility, and (1) Historical observations and interpretations for “vol-of-vol” surfaces, (2) Trading and hedging applications, depending on client objectives, and (3) A case study approach. Below is some analysis I did to prepare for the presentations.

Before Giving Thanks, This Is What Bulls Want
Kristen Scholer – WSJ
Tuesday we wrote about how stocks are expected to rise through the end of the year. By how much? That could depend on where the market closes Wednesday.
Over the last 65 years, the S&P 500 has averaged a gain of 2% from Thanksgiving to the end of the year, according to Jeffrey Hirsch, editor of Stock Trader’s Almanac. The index has been higher about 70% of the time, rising in 46 of those 65 periods. Performance for the large-cap S&P index deteriorates though when it ends the Wednesday before Thanksgiving down for the year.

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