JLN Options: This Bubble’s Got Legs; Race into commodities risks stalling; Addressing Risk in Agriculture

Sep 9, 2016

Observations & Insight

Bits & Pieces
Spencer Doar – JLN

Looks like today will be the day we break the calm. This will be the first time that SPY moves more than one percent since July 8.

A few other notes about the recent range bound action and the coming month (presuming today continues on it’s current path):

–For more than 40 days the Dow traded in its tightest range in 100 years. It’s possible this was in fact the longest period of quiet ever for stocks.
–We’re in September, which historically stinks = averages a one percent fall.
–As for today’s drop, looks like it’ll be the biggest since June 28.
–According to some strategists (see yesterday’s JP Morgan’s Top Quant: Even A Tiny Bit Of Volatility Could Unleash $100B Cascade of Selling for an example), today’s fall could be the catalyst for a big selloff. “Put simply, a share-price drop of only 1 percent or 2 percent would, in his estimation, badly rattle the market by upending current low-price options hedges used by Wall Street professionals. He adds that historically, September is the worst-performing month of the year, with an average decline of 1 percent.” – CBS’ story on JP’s quant outlook

Here’s TD’s JJ Kinahan for more on how the day looks.

A little “did you know” about ETF options liquidity for weekend pondering: The iShares MSCI Brazil Capped ETF (EWZ) has the seventh most liquid options (more than VXX and GDX).

Those ETFs ranking above it on the other hand were not surprising. The six ETFs ranking higher from first to sixth: SPY (duh), EEM (emerging markets not surprising), IWM (playing the Russell 2000 also not surprising), GLD (zero eyebrows raised), QQQ (again, duh) and USO (for the third time, duh). In these examples, liquidity was measured by open interest.

Lastly, a reminder that next Thursday marks the eight year “anniversary” of Lehman Brothers’ collapse.


JJ Kinahan, TD Ameritrade – Seeing Opportunity Everywhere in the Market

“I don’t care what job you have, I don’t care where you are at, you basically hate 25 percent of what you do. Twenty-five percent of your job you’d probably do for free. It’s fun, it’s great, it’s why you get up in the morning. So, now you have a challenge — the 50 percent in the middle. The 50 percent in the middle, your opportunity is to say, ‘You know what? I’m going to make this fun somehow.'”

Since starting at CBOE as a trader when he was 21, JJ Kinahan has made his career fun. And if people know you can have a few laughs while getting your work done and making money, they will want to work with you.

In his talk, Kinahan is quick to point out that this industry is characterized by one degree of separation. As a career progresses, that becomes even more true. While you may not know somebody directly, chances are you know of them, what they do and their disposition. If you develop a solid reputation early on in your career, it will follow you due to this connectivity. (The opposite is true as well.)

To this day, Kinahan does business with people he first met in his early 20s. So, you may think you are going unnoticed, but rest assured, the industry radar is active and the results are filed away by peers in the financial markets.

Watch the video »

Lead Stories

This Bubble’s Got Legs
Christopher Langner – Bloomberg Gadfly
The whole world is moving together and signs of a massive bubble that spans asset classes are becoming clearer. Yet, given the driver is cash printed by central banks, indications it could pop are scant. A Credit Suisse gauge known as the cross-market contagion indicator — which tracks price relationships in equities, credit, currencies and commodities — shows different markets are influencing each other more than at any time since at least 2008.

****SD: Well, if it’s a Willy Wonka bubble, at least we’ll get a three course meal out of it. RIP Gene. More from Bloomberg — New Kind of Correlation Spotted in Factors Obsessing Wall Street

Race into commodities risks stalling
Eric Onstad – Reuters
Flows into commodity investments have hit their highest levels since the global financial crisis as negative interest rates boost the appeal of real assets, but they risk reversing as rallies falter in metals and oil.

Addressing Risk in Agriculture
Dareb Bakst, Josh Sewell and Brian Wright – Heritage
Agricultural producers, similar to other businesses, face significant risk. The United States Department of Agriculture’s (USDA) Economic Research Service identifies five different types of farming risk: human and personal risk (such as human health), institutional risk (regarding governmental action), financial risk (such as access to capital), price or market risk, and production risk (such as weather and pests). Of these, policymakers usually focus on the last two types.

****SD: Comprehensive (extremely so) overview of issues facing US agriculture.

Come Hear Uncle John Bollinger’s Band
Michael P. Regan – Bloomberg Gadfly
Greg Bender of Bloomberg Tradebook recently said to watch out for a spike in mentions of Bollinger Bands in the financial press, and he’s a nice guy so let’s do our part to prove him right and talk about them. First, you may ask, what are Bollinger Bands and why do I have to pretend to be an expert on them right now? The concept was created by John Bollinger in the 1980s to help quantify how wild or calm trends in individual securities or the entire market are and to try to identify turning points.

Exclusive: Iranian oil output stagnates for third month amid OPEC bargaining
Alex Lawler and Rania El Gamal – Reuters
Iran’s steep oil output growth has stalled in the past three months, new data showed, suggesting Tehran might be struggling to fulfill its plans to raise production to new highs while demanding to be excluded from any OPEC deals on supply curbs.

Closure of AccuShares Spot CBOE VIX Fund (VXUP and VXDN) and AccuShares S&P GSCI Crude Oil Excess Return Fund (OILU and OILD)
Press Release
AccuShares Investment Management (“AIM”), sponsor to the AccuShares Spot CBOE VIX Fund and the AccuShares S&P GSCI Crude Oil Excess Return Fund (each, a “Fund” and together, the “Funds”), declares the final Net Asset Value for each Fund as of the close of the NASDAQ trading session today, September 8, 2016.


NYSE to implement new volatility procedures Monday
The New York Stock Exchange will implement changes Monday to its opening procedures as it seeks to speed up trading and make it more efficient even on volatile days. The new procedures would eliminate “Rule 48,” which allows market makers to delay opening a stock when markets are volatile.

August Options Reviewhttp://goo.gl/VZhoQ0
Offering more flexibility (strike, duration, exercise style) and precision, options on futures allow market participants to better customize their risk management strategies to their specific needs.

****SD: More from Finance Magnates


ICAP Appoints Seth Johnson as CEO of EBS BrokerTec
Finance Magnates
ICAP plc, a markets operator and provider of post trade risk mitigation and information services, has today announced that Seth Johnson, currently Head of Strategy at ICAP’s Global Broking division, has been appointed CEO of EBS BrokerTec.

Regulation & Enforcement

Directors of collapsed options broker BBY to take the stand
Andrew White – The Australian
Glenn and Ken Rosewall, Arun Maharaj and David Perkins have mostly tried to avoid the spotlight since the collapse of Australia’s biggest options broker BBY more than a year ago. But sometime in the next two weeks they will finally get a chance to put on the public record a version of what happened in the first stockbroker collapse in three decades. The foursome of directors and executives at BBY will be among 10 witnesses taking the stand in much anticipated liquidators hearing into the collapse of BBY as Stephen Vaughan and Ian Hall of KPMG attempt to establish a case to recover an estimated shortfall of $23 million.

Margin Rules: Lessons Learned
ISDA – derivatiViews
It’ll probably come as no surprise that one of the major preoccupations for ISDA and many of its members over the past week has been the implementation of non-cleared margin requirements. On September 1, 20 or so of the largest derivatives users began exchanging initial and variation margin on their non-cleared trades under rules that took effect in the US, Japan and Canada. Barring some teething problems, the rollout went relatively smoothly given the scale of the change and the time given to the industry prepare for it. However, we won’t be stopping here – we know there is plenty more work to be done.

Federal Reserve asks Congress to limit Wall Street merchant banking
Patrick Rucker and Olivia Oran – Reuters
The Federal Reserve Board recommended that Congress pare back Wall Street’s ability to own physical commodities and engage in other aspects of merchant banking because of possible risks to the financial system, according to a report issued on Thursday. U.S. lawmakers should repeal permission granted in 1999 for Goldman Sachs Group Inc (GS.N) and Morgan Stanley (MS.N) to conduct activities like storing and transporting physical commodities that other banks cannot do, the Fed said jointly with two other regulators.

Sebi strengthens comexes’ risk management
Business Standard
The Securities and Exchange Board of India (Sebi) has taken several recent decisions, which indicate it is preparing commodity exchanges (comexes) for the next stage of reforms. It has tightened norms for the agricultural segment and loosened circuit limits for non-agri commodities, while doubling the margins for all commodities. And, allowed exchanges to reduce transaction charges and improve liquidity. Also, it has decided to allow introduction of options trading and index futures, besides allowing new market participants – banks, mutual funds and foreign hedgers, which trade with India.

Nadex Warns Against US-Based Binary Options Broker Daily Options
Rosemary Barnes – Finance Magnates
Nadex (North American Derivatives Exchange) has issued a warning about Daily Options, an online brokerage operating at www.dailyoptions.org. The warning from Nadex comes after the exchange learned that Daily Options, which offers to log into binary trading platforms selected by its clients and successfully manage and trade on their behalf, has been encouraging Nadex members to provide their username and password to trading supervisor Franklin Cove, in order for Daily Options to trade the Nadex account on the member’s behalf.


OptionsCity Featured in “17 Companies That Are Transforming Industries (and Hiring Now!)”
Groundbreaking. It’s an adjective that everyone wants, yet very few can actually lay claim to. That is, unless you’re one of these 17 companies that are totally transforming their respective industries. From shaking up age-old methods to innovating brand new technologies, these companies are the very definition of disrupters—making things bigger and better and constantly challenging the status quo. Best of all, you can be part of one of them: They’re all hiring right now.


Listening For The Market’s Bell
Harley Bassman – Financial Advisor Magazine
The old Wall Street expression is “They don’t ring a bell at the top.” This snarky adage is usually employed by those saddened financial managers who ride a successful investment to a peak and then watch in horror as it reverses course to a level below their cost basis. They lay the blame at the feet of the amorphous market that failed to signal it was time to exit the ride.

Embracing the elephant in the room
Hope William-Smith – Money Management
Last year before taking office, Prime Minister Malcolm Turnbull suggested in a speech that learning to work effectively with the changes underway in the Asia-Pacific would be a challenge for regional economies worldwide. Questions of sovereign instability and currency risk have historically plagued investor sentiment toward Asia, but industry experts believe now is the time for Australians to embrace the elephant in the room and allocate capital to attractive markets.

****SD: Note: do not embrace an actual elephant.


CME Group Chief Financial Officer to Present at UBS Best of Americas Conference 2016
Press Release
CME Group announced today that John Pietrowicz, Chief Financial Officer, will present at the UBS Best of Americas Conference 2016, in London, on Thursday, September 15, 2016, at 9:30 a.m. (London Time).

Intercontinental Exchange CFO Scott Hill to Present at Barclays Global Financial Services Conference on September 13
Press Release
Intercontinental Exchange (NYSE: ICE), a leading operator of global exchanges and clearing houses and provider of data and listings services, announced today that Scott A. Hill, Chief Finance Officer will speak at the Barclays Global Financial Services Conference. The fireside chat will take place on Tuesday, September 13 at 10:30am ET.


From steaks to furniture, Hanjin Shipping collapse to raise freight costs
Karl Plume – Reuters
The collapse of Hanjin Shipping (117930.KS) will boost the cost to U.S. businesses and consumers of a wide range of imported goods, from furniture and clothing to fresh fruit and frozen meat, according to federal agencies, shippers and retailers. With Hanjin’s future in doubt, carriers have announced they will hike container freight rates by as much as 50 percent beginning next month as retailers scramble to secure shipping ahead of the peak year-end holiday season, industry sources said.

*****SD: Nooooo, not my furniture and steaks!

Chinese Billionaire Linked to Giant Aluminum Stockpile in Mexican Desert
Scott Patterson, John W. Miller and Chuin-Wei Yap – WSJ
Two years ago, a California aluminum executive commissioned a pilot to fly over the Mexican town of San José Iturbide, at the foot of the Sierra Gorda mountains, and snap aerial photos of a remote desert factory. He made a startling discovery. Nearly one million metric tons of aluminum sat neatly stacked behind a fortress of barbed-wire fences. The stockpile, worth some $2 billion and representing roughly 6% of the world’s total inventory—enough to churn out 2.2 million Ford F-150s or 77 billion beer cans—quickly became an obsession for the U.S. aluminum industry. Now it is a new source of tension in U.S.-Chinese trade relations. U.S. executives contend that the mysterious cache was part of a brazen scheme by one of China’s richest men to game the global trade system.

****SD: 77 million beer cans? Somebody had some fun with numbers at the WSJ.

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