Observations & Insight

CBOE Hits Home Run In Bats Acquisition
By JLN Staff

“This is a great fit culturally,” said CBOE CEO Ed Tilly, who is trying to pull off the biggest deal of his career, with the $3.2 billion acquisition of Bats Global Markets.

Tilly and his team was also looking for a deal that would create cost synergies for the firm, and of course, growth. The combined offering will push CBOE well beyond its equity options and niche futures business. On the options side, Bats offers a maker-taker options exchange with price-time allocations. Bats also extends CBOE into the stock, FX and trade reporting services in Europe. Ultimately, CBOE gets dramatically more diversified, but will still keep its trading floor open. The deal is expected to close in the first half of 2017.

Perhaps the most compelling reason for CBOE is technology. CBOE says it will migrate its systems to Bats’ platform. CBOE, which has been rolling out a multi-year technology upgrade, said it plans to fully migrate into a single Bats-technology platform by 2020. Though CBOE says they will continue as planned until the deal closes, the exchange is eager to migrate to what Tilly calls a “proven, high-speed, low cost platform” at Bats. He says the CBOE Futures Exchange will migrate first, and the options markets will follow as soon as all of the order types and other functionality is bolted onto Bats’ architecture.

Now CBOE gets new technology, new asset classes to offer on a platform that is considered superior to its own. With estimated annual revenues of more than $1 billion, CBOE will be considered a formidable competitor to the likes of ICE and Nasdaq, not to mention extend its European reach.

The management team would be considered strong by anyone’s measure as well, with Tilly remaining CEO, Chris Concannon as president and chief operating officer, Alan Dean as chief financial officer and Chris Isaacson as chief information officer. Ed Provost, who currently serves as CBOE’s president and COO, will be retiring.

For Tilly, this is the deal that will propel the CBOE forward for years to come. He called it, “A great fit, one that’s consistent with what we’ve been looking for.”

Lead Stories

CBOE Agrees to Buy Market Operator Bats for $3.2 Billion
John Detrixhe and Annie Massa – Bloomberg
CBOE Holdings Inc., which invented the options market in 1973 with the Chicago Board Options Exchange, agreed to acquire Bats Global Markets Inc. for about $3.2 billion to expand into stocks, ETFs and currencies trading.

****SD: Pick your provider for more on this acquisition — NY Times here, WSJ here, Fortune here, Forbes here, Barron’s here, Reuters here and Crain’s Chicago Business here.

Brutal Upheavals Mount as S&P 500 Bull Market Nears 8th Year
Lu Wang – Bloomberg
It wasn’t hard to sense the unease that gripped traders this summer as U.S. stocks meandered through their calmest period ever. As it turns out, they were right to be on edge. Markets were finally shocked out of their torpor when $600 billion was erased from the value of shares on Sept. 9. The eruption was notable not only for its force, but also as a painful reminder that such episodes are becoming much more frequent. In the last two years there have been five similarly extreme shifts in volatility — as many as occurred in the prior two decades, according to data complied by Deutsche Bank AG and Bloomberg.

Barclays, UBS and BAML star in return of the giant exchange tie-up
Fareed Sahloul – Financial News
The three banks were on September 26 among the firms named as advisers on a $3.2 billion agreed takeover of Bats Global Markets by the Chicago options giant CBOE. Barclays and UBS are advising Bats, with BAML working with the US advisory boutique Broadhaven Capital Partners for CBOE on the tie-up, as well as providing the financing. The two exchanges said they had entered into a “definitive agreement” over a $3.2 billion cash-and-stock deal.

****SD: More on the Broadhaven Capital angle from Business Insider

There’s big volatility ahead for this sector: Goldman Sachs
Rebecca Ungarino – CNBC
The market in autumn tends to see an uptick in volatility — and Goldman Sachs forecasts the health-care sector could see a particularly rocky upcoming month.
The investment bank’s options research team, in a note published last week, said it is focused particularly on option buying strategies to “capitalize on the seasonal pick up in health care [volatility] during this election year.”

Volatility Update: VIX back in the grind
Georgio Stoev – TradingFloor.com
The Federal Reserve’s decision to leave rates unchanged sparked a two-day rally in equities as one would expect. Supporters of the efficient market theory could argue that all known information is already priced into equities, but where does this leave us? Before we provide some insight on the options market for the week ahead, let’s see how different assets performed last week…

Hedge funds rotate from U.S. heating oil to gasoline
John Kemp – Reuters
Hedge funds have become increasingly bullish about the outlook for gasoline prices even as they have become more cautious the prospects for heating oil this winter. Hedge funds and other money managers have raised their net long position in U.S. gasoline blendstock futures and options by almost 27 million barrels since the end of July

Oil Speculators Abandon Hope of OPEC Reaching Supply Accord
Mark Shenk – Bloomberg
il investors turned bearish at the fastest pace in more than a year as they lost confidence that OPEC will reach a deal with other producers to limit supply at a gathering this week in Algiers. Money managers increased bets on falling prices by half as the Organization of Petroleum Exporting Countries kept pumping at a record rate before the meeting. Prices rose as high as $47.62 a barrel this month as OPEC officials conducted meetings from Vienna to Paris to Moscow in attempts to reach consensus. Oil tumbled on Sept. 23 after Saudi Arabia was said to dismiss prospects for an output agreement.

*****SD: For more on oil, Reuters has Oil up 4 percent as OPEC meets, volatility hits post-Doha high and the Financial Times has Bets on higher oil price take biggest cut since 2014.


CBOE Holdings Agrees to Acquire Bats Global Markets to Strengthen CBOE Holdings’ Global Position in Innovative Tradable Products and Services, and Achieve Meaningful Cost and Operational Efficiencies
CBOE Holdings, Inc. and Bats Global Markets, Inc. today announced that they have entered into a definitive agreement, which has been approved by the Board of Directors of each company by unanimous votes of the members of the boards present, under which CBOE Holdings has agreed to acquire Bats in a cash and stock transaction valued at approximately $32.50 per Bats share, or a total of approximately $3.2 billion, consisting of 31% cash and 69% CBOE Holdings stock, based on CBOE Holdings’ closing stock price of $70.30 per share on September 23, 2016.

***DA: Also see today’s presentation slides, from CBOE Investor Relations.

LSE and banks set to launch new derivatives exchange
Philip Stafford – Financial Times
London’s newest derivatives trading venue is set to debut on Monday with its performance closely watched as Brussels examines whether to sanction Europe’s largest exchange.
CurveGlobal, backed by seven major investment banks and the London Stock Exchange Group, will initially compete in interest rate futures markets that are dominated by Deutsche Börse and the US Intercontinental Exchange.

Regulation & Enforcement

Exchanges defeat appeal of U.S. high-frequency trading lawsuits
Jonathan Stempel – Reuters
A federal appeals court on Friday rejected an investor’s attempt to revive lawsuits accusing major U.S. exchanges of selling early access to market data to high-frequency traders, the subject of Michael Lewis’ 2014 best-seller “Flash Boys.” The 2nd U.S. Circuit Court of Appeals in Manhattan agreed with the New York Stock Exchange, The Nasdaq Stock Market, BATS Exchange, the Chicago Board Options Exchange and others that it is for the U.S. Securities and Exchange Commission rather than courts to regulate how market data is disseminated.

Commodity firms face Mifid uncertainty
Luke Jeffs – FOW
Commodities firms were exempted from trading rules under Mifid I when they took effect in late 2007 but they have been told that under Mifid II only firms that engage in commodities trading as an “ancillary” activity to their main business are eligible for an exemption to the requirement of becoming a Mifid II investment firm.

Rogue trader’s fine to Societe Generale cut by 99.98%
Alanna Petroff and Pierre-Eliott Buet – CNN
Jerome Kerviel just caught a break. He’s the infamous rogue trader who racked up one of the biggest losses in history at the bank Societe Generale (SCGLY) in 2008, and he just saw his 4.9 billion euro fine (billion with a ‘B’) slashed to a mere 1 million euros.

****SD: Kerviel built up huge positions in various European index futures, not options, but this is noteworthy for the industry as a whole. If you want a rundown on how Kerviel built up a $73 billion position, check out this comprehensive rundown.


Banks Face Costly, Complex Technology Upgrades
Terlis Demos – WSJ
Even as banks build new technology in response to threats from fintech upstarts, some of their existing systems are struggling to keep up with new regulations. The Commodity Futures Trading Commission in the past several months has fined Deutsche Bank AG , J.P. Morgan Chase & Co. and Barclays PLC over failure to report of derivatives trades in a timely and accurate way. The problem: technology issues in the banks’ back-office systems for accurately or rapidly reporting trades of swaps, which are bets on the direction of interest rates, commodities and other assets.


A Power Tool for Traders
Chris Dieterich – Barron’s
This is a story about how your columnist learned to stop worrying and love the bomb. The bomb, in this case, is a product that can blow up your portfolio, yet has managed to yield several years of market peace. We’re talking about exchange-traded products designed to bet against, or short, the market’s so-called fear gauge. That gauge, the VIX, measures the price investors are willing to pay for “insurance” in the form of options. Buyers of these products that short the VIX could lose most of their money should markets be consumed by a financial-crisis-magnitude crash. It has taken years for me to warm to this strategy and make no mistake: The risks are high.

VIX In October In Election Years
Peter Tchir – Forbes
Finally some potential good news for those traders and investors who are buying VIX related ETPs.VIX has risen in October during the last six presidential elections.

Hedge funds prefer hard wheat to soft, coffee to cocoa, cattle to hogs…
Hedge funds favoured hard wheat over soft, coffee over cocoa, and cattle over hogs as they raised their bullish bets on agricultural commodities for a second successive week – for the first time in three months. Managed money, a proxy for speculators, lifted by a little ov 30,000 contracts its net long position in futures and options in the main 13 US-traded agricultural commodities in the week to last Tuesday, according to data from the Commodity Futures Trading Commission (CFTC) regulator.

Traders Opt for Crowded Volatility Hedge
Ellen Chang – TheStreet
The amount of interest generated by traders in the iPath S&P 500 VIX Short Term Futures (VXX) is thought-provoking because of the two types of investors who were drawn to them. The buyers were either people using it to insure their portfolio against a large market loss since the VXX would increase a lot or those taking the other side of the insured’s trade, said Jim Haile, a vice president of product management at E-Trade, a New York-based brokerage company.


Majority of UK CEOs considering moving operations abroad post-Brexit: survey
Three-quarters of British company bosses are considering moving operations abroad following the vote to leave the European Union, according to a survey published on Monday. The KPMG survey of 100 UK chief executives, from companies with revenues between 100 million pounds and 1 billion pounds ($130 million-$1.30 billion), found 86 percent were confident about their company’s growth prospects and 69 percent were confident about the British economy’s growth prospects over the next three years. However, 76 percent said they were considering moving either their headquarters or their operations outside Britain because of the June 23 “Brexit” vote.

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