Observations & Insight

FCM Outlook 2016: Brokers Finding New Fields Of Green
JLN Staff
Futures Commission Merchants have not had an easy time of it in the years since the 2008 Financial Crisis and the subsequent regulatory and interest rate avalanche. For many firms, it’s been a perfect storm of financial crisis, low to no interest rates and volatility, and an ongoing crush of new rules and regulations from U.S. and European regulators. For some firms, the combination has been stifling, while others have shut down or sold out to other, stronger players. In January, the number of FCMs stood at around 60, down from 139 in 2008, according to data from the National Futures Association, one barometer of just how hard it is to make it in the harsh environment.

Below are the parts of our FCM series:
Singularity: G. H. Financials’ Mark Ibbotson on FCM Efficiency
We Can Rebuild It: SocGen Prime Services Group Reengineered And Growing
Full house: OptionsHouse Set To Grow Futures Business
Bite Sized: TD Ameritrade’s FCM Looks for Bigger Slice of Retail Pie
Shipbuilding: RJ O’Brien Building Business in Tough Times


Lead Stories

Brexit Worry Radiates Around World as Poll Puts Traders on Edge
Adam Haigh and Anuchit Nguyen – Bloomberg
Brexit is back, and investors from Australia to Thailand are ducking for cover.
The pound tumbled and currency volatility surged on Monday after two polls showed more Britons favor a vote to leave the European Union at a June 23 referendum than those who want to stay. That prompted a money manager 10,500 miles away in Sydney to buy stock-market protection, while a brokerage in Bangkok is advising clients to trim equities and hold extra cash.

OPEC Unity Keeps Oil Near $50, Sends Speculators to Sidelines
OPEC meetings aren’t what they used to be. Far from sending the oil market into gyrations, the run-up to last week’s OPEC meeting kept crude pinned near $50 a barrel and sent hedge funds to the sidelines. QUICKTAKE Oil Prices Speculators cut their total long and short positions on West Texas Intermediate crude to the lowest since January 2015 and one measure of market volatility fell to a 10-month low before the Organization of Petroleum Exporting Countries’ June 2 summit.

Saudi central bank bans use of options against riyal: executive
Saudi Arabia’s central bank has told banks it is banning the use of options and other derivatives to speculate against the riyal, in a new effort to reduce pressure on its currency peg, a senior executive at a Saudi bank told Reuters on Sunday.

Don’t know where U.S. stocks are headed? The options market has a deal for you
One year after the U.S. stock market topped out, indexes are again near their highs and that makes options traders nervous, so much so that bullish bets on U.S. equities now are bargain priced, even though the underlying stocks are not. While market volatility is low, general economic weakness and the possibility of Britain’s exit from the European Union could hurt stocks. That makes an options strategy known as ‘stock replacement’ attractive for investors who worry about the downside but want a piece of the upside.

The Risky Business of Liquidity
Chief Investment Officer
The more risk investors perceive in equity markets, the more illiquid global markets tend to become, according to new research. While uncertainty has long been considered a factor in illiquidity in US equities, Massey University PhD candidate Rui Ma and finance professors Hamish Anderson and Ben Marshall took the theory one step further. They argued that investors’ risk perceptions are an important determinant of overall international stock market liquidity.

How VXX Performed In 2008 And 2011
Seeking Alpha
2008 data on VXX is available through backtesting. A look at the actual performance during 2011. What ultimately causes these types of events in volatility.


Metal brokers in talks for new London market, Abbott to lead review
Fast Markets
A significant number of base metals brokers are believed to be in talks with Martin Abbott, former CEO of the LME, to review the possibility of launching an alternative trading platform to the London Metal Exchange (LME), well-informed sources said. To date, the project has received the backing of several members – some of which are high-profile LME Category One members – with several others in the pipeline.

IEX Plucks Strategy Officer From Electronic Trading Firm KCG
Annie Massa – Bloomberg
IEX Group Inc., which is seeking to convert its dark pool into an official U.S. stock exchange, has hired a chief strategy officer from brokerage KCG Holdings Inc.
At KCG, Eric Stockland most recently advised investors on how to carry out trades electronically. Before that, he was an equities trader at Getco, a KCG predecessor that helped pioneer high-frequency trading — the technique IEX aims to blunt.

CBOE Named ‘Exchange of the Year’ At Global Capital Americas Derivatives Awards 2016
CBOE Options Hub
Chicago Board Options Exchange (CBOE) announced today that it was named “Exchange of the Year” Thursday night at GlobalCapital’s Americas Derivatives Awards 2016 ceremony in New York City.

Regulation & Enforcement

A financial transaction tax would worsen the state’s fiscal crisis
Terry Duffy – Crain’s Chicago Business
As the bewitching hour neared for the General Assembly to resolve its almost 12-month state budget impasse, an issue that actually goes back decades, lawmakers felt pressure to resolve the stalemate that threatens many aspects of our state’s economy. This unfortunate standoff is endangering the funding for our schools, health care, infrastructure and a slew of other state-provided services. It is leaving a stack of unpaid bills and a number of worried citizens, this life-long Illinois resident included.


Market data: Justifying the cost
Traders News
Market participants have grown increasingly frustrated at rising exchange-led data costs, as they struggle to keep up with a welter of new regulations on data usage. Many believe that exchanges – which are amongst the biggest vendors of trading data – have been indulging in monopolistic practices, ramping up data fees as well as introducing complex and strict new data licensing measures.

WEBB Traders Selects Itiviti Analyst MAR To Address Urgent Compliance Requirements
Press Release
Itiviti, a world-leading technology provider for the capital markets industry, today announced that WEBB Traders, a fast growing global proprietary trading firm based in Amsterdam, has selected Itiviti Analyst MAR, a solution targeting Market Abuse Regulation (MAR) compliance for all asset classes, with easy, non-intrusive implementation.

Euromoney Tradedata upgrades Xymbology service for MiFID II
Euromoney Tradedata today announced an upgrade to its Xymbology service for MiFID II symbology in advance of the critical, mandatory transaction reporting deadline of 3rd January 2018.


How to Exploit the Options Market’s Fear Premium
Every time the stock market starts dancing around record levels, someone in the options market invariably urges investors to consider stock replacement strategies. The sales pitch goes something like this: Rather than risking all of your profits in a winning position, pocket those profits, and reduce your market risk, by selling the stock and replacing it with a call option. A classic replacement trade entails buying a call that expires in a year or more, though some look to shorter expirations so they can try to time market moves.

Volatility Futures as an alternative to equity and puts
Colin Bennett – Eurex
In part 2 of our 3 part series on volatility, Volatility Futures are examined in depth both as an alternative to equity and as an alternative to puts. The key characteristics of trading volatility in practice are demonstrated, and the differences between Volatility Futures and Variance Swaps analyzed.

Earnings: Week – 6/6 – 6/10
CBOE Options Hub
It is a very quiet week for earnings enthusiasts as only three companies with short dated options will be reporting earnings. As always the data below is based on the last three years of earnings results. The columns show the biggest rally, biggest drop, average move, and what the stock did last quarter in reaction to earnings.

Weekend Review – Russell 2000 Index and Volatility – 5/31 – 6/3
CBOE Options Hub
The Russell 2000 – How about that??? I hear Mel Allen’s voice as I type that. Small caps went on a relative tear last week with the Russell 2000 (RUT) rising 1.19% last week while the large cap focused Russell 1000 was up 0.10%. This places RUT up 2.49% for 2016, within striking distance of the Russell 1000 which is up 2.73% year to date. More impressive is the relative performance since the lows in February. RUT has rebounded 22.1% off this year’s closing low and RUI is up 15.6% over the same time period.

Weekend Review – VIX Futures and Options – 6/5/2016
VIX Views
The S&P 500 was slightly higher last week and so was VIX, but we put an asterisk next to that number based on the three-day holiday weekend. The futures tell more of the story and as you can see below as with the exception of the February 2017 contract all the futures moved lower.

Weekend Review – Volatility Indexes and ETPs – 6/5/2016
VIX Views
The whole curve shifted a bit higher last week. We have to attribute the rise to the three-day weekend effect. At least in the case of VXST and VIX. Typically, VXV and VXMT are not impacted as much as the shorter dated volatility indexes. I might attribute the rise of longer dated volatility to the expected date for the next rate hike being pushed down the road.

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