Observations & Insight

FinTech Exchange Chicago: Future Is Now For Some FinTech and Right Around The Corner For Other Technology
Spencer Doar, JohnLothianNews.com

FinTech Exchange 2016 Chicago was no wistful exercise in futurology last month. It was firmly set in the do-or-die present of technological solutions and opportunities.

Chicago may not be thought of as a fintech hub among key global financial centers such as New York or London, but the homegrown talent was out in force along with a slew of imported presenters on the forefront of finding and pioneering new technology opportunities.

The themes were well known — big data analytics, blockchain, machine learning and the necessity of reimagining the assumptions around how a business runs. And of course, the event’s overarching message of “Run, don’t walk, to the cloud” was loud and clear.

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Lead Stories

BoE wants global stress-testing of derivatives clearers
Clearing houses for financial derivatives should be stress tested on a global basis to prevent them becoming “too big to fail”, the sector’s regulator in Britain said on Wednesday. Regulators are requiring swathes of the world’s $493 trillion market for credit default, commodities and interest rate swaps to pass through a clearing house or central counterparty (CCP) to ensure completion of trades and greater transparency.

Citadel moves on Automated Trading Desk
Nicole Bullock and Joe Rennison – Financial Times
Citadel is in talks to buy Automated Trading Desk, an electronic market-maker owned by Citigroup, as the Chicago-based hedge fund seeks to expand its already sizeable market-making operations, according to a person familiar with the deal. No sale price or valuation was given for ATD, which the bank acquired for $680m in 2007. On its website, the company calls itself “the true pioneer in automated trading” with operations dating back to 1988. Citi has said in public documents that the group added a network of broker dealer customers to its existing base of institutional, broker dealer and retail customers.

****SD: News about the FBI investigation into Citadel and KCG’s market making operations can be found in our regulation section.

Most UK-listed firms hedging against Brexit-driven hit for pound – survey
Four-fifths of Britain’s major companies have hedged against the risk that a vote to leave the European Union would knock more than 10 percent off the value of sterling, a poll of almost 800 of the top 1,000 showed on Wednesday.

****SD: Why is June 23 such an important date? Tim Burton’s “Batman” hit theaters on that day in 1989.

Here’s why the VIX has been on the retreat lately
Most storms invade quiet skies, but not every calm spell directly leads to a storm. This is true in markets as in weather, which makes it tricky to interpret the subdued behavior of stocks so far this spring. Volatility has ebbed dramatically over the past two months — both the actual day-to-day movement of the market and the expected jumpiness over the next month that’s priced into index options, as measured by the CBOE’s S&P 500 Volatility Index (VIX).

Conoco CEO looks at hedging options but says market limited
ConocoPhillips (COP.N) has looked at using derivatives to lock in oil prices in a volatile market, including so-called floors to guard against any new price drops, but Chief Executive Ryan Lance said on Tuesday the company is too big to hedge all of its output.

Crop Prices Rally as Report Points to Easing of Glut
Jesse Newman – WSJ
U.S. crop prices surged Tuesday, extending an unexpected run in agricultural prices that has drawn in big investors like hedge funds. The gains promise much needed relief for a farm economy battered by the slump in prices for major row crops over the past three years. At the same time, they could mean higher prices for consumers going into the summer. “This is fantastic news for the agricultural sector,” Terry Reilly, an analyst at brokerage Futures International LLC in Chicago, noting that some U.S. farmers who earlier this year were anticipating losses on their soybean crop may now make money instead. “Planting soybeans is profitable now,” he said.

****SD: Here is a link to the PDF of yesterday’s WASDE report.

Broadridge Adds Derivatives Clearing to its Global Post Trade Management Solution
Press Release
Broadridge Financial Solutions, Inc. (NYSE: BR) today announced that it has broadened its Global Post Trade Management (GPTM) solution, adding exchange-traded derivatives functionality through the acquisition of Dojima LLC.

As Hedge Funds Reel, One Hong Kong Firm Is Thriving
Bei Hu – Bloomberg
In a hedge fund industry plagued by lackluster performance and the biggest outflows since 2009, Benjamin Fuchs stands out. From his office next door to hawkers of pigs’ feet and live chickens in Hong Kong, the founder of BFAM Partners has steered his $1.8 billion Asia fund to nine straight months of positive returns and boosted assets under management by $650 million since July 1. While hedge fund titans from Daniel Loeb to Steven A. Cohen lament crowded bets and a lack of talent, Fuchs has thrived with a contrarian approach that often puts him on the right side of his peers’ losing trades.


Bats’ ‘Client Suspension Rule’ Approved
Markets Media
Bats Global Markets is now going to be able to police its own marketplace faster and with less supervision as it deems fit. Sounds too good to be true? Manipulative traders had better watch out.

PHLX crosses river, but stays in Philadelphia
Nasdaq’s futures and options trading market and information technology unit, based in the building its predecessor Philadelphia Stock Exchange bought at 1900 Market St. in 2008, plans to relocate to the 49-story FMC headquarters tower at 2900 Walnut St. The Nasdaq offices will move from the former Philadelphia Stock Exchange building at 1900 Market St. “The commonwealth of Pennsylvania and city of Philadelphia have provided a tremendous opportunity for Nasdaq to create state-of-the-art options trading technology, as well as a new vibrant office environment in the new FMC Tower,” said Tom Wittman, executive vice president and global head of equities, Nasdaq.

NYSE, NYSE Arca And NYSE MKT Short Interest Reports
Press Release
NYSE today reported short interest as of the close of business on the settlement date of April 29 2016

Nasdaq Announces End-Of-Month Open Short Interest Positions In Nasdaq Stocks As Of Settlement Date April 29, 2016
Press Release
At the end of the settlement date of April 29, 2016, short interest in 2,313 Nasdaq Global Market securities totaled 7,785,833,668 shares compared with 8,009,519,261 shares in 2,305 Global Market issues reported for the prior settlement date of April 15, 2016. The end-of-April short interest represents 4.83 days average daily Nasdaq Global Market share volume for the reporting period, compared with 5.12 days for the prior reporting period.

Why CME, ICE Pricing Data Are About to Boost Bitcoin
The Cointelegraph
Mainstream exchange embrace of Bitcoin could lead to less volatility and further acceptance and new opportunities. In what can be seen as a mainstream financial world’s embrace of Bitcoin, the Chicago Mercantile Exchange (CME Group) and Intercontinental Exchange Inc. (ICE) are all set to publish data on prices of Bitcoin. CME Group is likely to start publishing this data in the fourth quarter of 2016 while ICE, the owner of the New York Stock Exchange (NYSE) is considering if it should include data from various exchanges for a daily settlement price which it has been publishing since May of 2015.

Deutsche Boerse CEO touts LSE merger, saying ‘size is everything’
Deutsche Boerse’s (DB1Gn.DE) planned $30 billion merger with LSE Group (LSE.L) is on track for completion late this year or in early 2017, the German exchange operator’s Chief Executive Carsten Kengeter said on Wednesday.

LSE to offer weekly FTSE 100 options contracts
A ‘first-of-its-kind’ weekly options contract based on the FTSE 100 Index will launch on 31 May. According to an London Stock Exchange statement on the product launch, its introduction will complement the London Stock Exchange Derivatives Market (LSEDM) existing product offering on the FTSE 100 Index and is a first of its kind for the UK-listed derivatives market.

****SD: This news came out earlier this week — this is just a reminder.

Hong Kong Exchange Net Income Falls 9 Percent to HK$1.43 Billion
Hong Kong Exchanges & Clearing Ltd., Asia’s biggest exchange operator, said first-quarter earnings fell nine percent on lower trading turnover and higher costs.

****SD: Press release here

Regulation & Enforcement

HFT investigation: Big Surprise As Citadel, KCG Are Targeted
The big news in the Citadel, KCG Holdings HFT investigation, first reported by Reuters today, is that such an investigation is even taking place. There has been a slow change in financial services and, like an oven temperature being expertly turned up, few people have noticed. From 2012 onward investigators have been slowly turning up the pressure much like one might change the long / short ratio in a hedge fund using macro-economic indicators. The FBI investigation into Citadel LLC on high frequency trading issues benchmarks another example of an investigative move that those close to the situation thought improbable. Ken Griffin, founder of Citadel and avid art collector, runs one of the larger and more secretive alternative investment firms in the world. Griffin is a man associated near the top of perhaps a rarefied group of social and political elite in Chicago that can exert significant influence. That influence is more than regionally felt, as Citadel was active at the Securities and Exchange Commission during the IEX Exchange battle. The IEX Exchange battle is another interesting turning point as a more independent regulatory and investigative structure emerges. It is from this perspective that one might best understand the reported FBI investigation into electronic market makers Citadel and KCG Holdings.

****SD: Here is a WSJ take on the investigation and here is the Reuters exclusive we ran yesterday.

MiFID II: not only the launch date has changed
Last week, European regulators confirmed their anticipated move to put the implementation date of the Markets in Financial Instruments Directive
(MiFID II) back by one year to January 2018. Although the spotlight has been on this delay – and what it means for the financial services industry – in the midst of this there has been an additional amendment to the MiFID II text which is of great significance; the removal of non-financial corporates from MiFID II obligations.

Russian gang suspected of scam in ICE market
Financial Times
Intercontinental Exchange’s London futures market has been used as a front for Russian organised crime, according to police who have made two arrests for suspected money-laundering. The City of London Police revealed that they had arrested two men — one a Russian broker — over suspected money-laundering as part of a global alleged scam spanning Switzerland, the Caribbean and Russia. The police did not name the broker, but people familiar with the situation said it was Dzimitry Niadzvetski, who worked at a London unit of Archer Daniels Midland, the US agricultural trader and producer.

****SD: I will always include a futures story if it involves the Russian mob. Reuters take here


A Walk Through the Maze
Meredith Kelley Zidek – CBOE Options Hub
Let’s detail a story of the last two weeks, in which I stumbled through a maze in search of the reward at the other end. I’ve made some wrong turns and backtracked a few times, but I think I smell the cheese ever stronger, ever closer to me, right around the next corner. On April 28th I started with nothing but an idea, so I set it in motion as such: With SVXY trading at $56.63 the moment I spied it, I sold ten SVXY 56 strike puts for the May 6th (six trading days away) expiration for $1.70 premium received on each. All costs or amounts received take into account commission, so if you notice my figures not adding up by eight or fifteen dollars, rest assured I had to pay someone to move all this around for me. The amount received for this transaction was $1,685.22.

Skewed thinking
We’ve all seen Ebay online auctions and witnessed tricks of buyers to capture the best price for any product. They do not await a true balancing auction price where all bidders have reached their maximum given values. Instead, a cheeky bid arrives in the last few seconds of the online auction, that is fast enough to ”win” the product sale and timed to prevent a counter bid. So Ebay is not really a perfect efficient pricing model then. It’s more like a skewed buyers’ market. Option traders would know this Ebay effect as negative skew. When events change prices it is to the upside only.

Should Correlations Drive Your Investment Decisions?
Fox Business
Do stock market correlations matter? Statisticians use correlations (or cross-correlation) to measure the relationship between asset classes or investments. The general idea is to better understand the similarity or dissimilarity in how investments perform against each other and to build a portfolio of investments that can benefit. The CBOE S&P 500 Implied Correlation Index (ChicagoOptions:^KCJ) also known as the “ICI” is one such statistical measure that uses options to estimate the average correlation among the largest 50 stocks inside the S&P 500 Index. The ICI recently hit 52-week lows indicating ultra low correlations between individual stocks and sectors.

How Long Calls Can Help Small Accounts Trade Big
The Ticker Tape
Some retail investors have a simple investment strategy: Buy stock in a good company with attractive earnings, growth, or dividend yield potential. These investors might hold stocks in an account and hope they produce positive returns. Some investors might avoid stocks with high prices that can eat up large percentages of a portfolio. They limit their exposure in one stock in order to spread the risk out—the old eggs-in-several-baskets approach. In short, options on stocks don’t enter their universe as an alternative to simply buying a security. Let’s see if we can, through education and discussion, change that thinking.

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