Observations & Insight

Bits & Pieces: It’s Prime Time!
Spencer Doar – JLN

We’re not normally price oriented but there is some notable action out there set to make for a heckuva week.

First, after 15 months of bouncing around, the S&P 500 finally eclipsed it’s 2132.8 ceiling. Second quarter earnings season kicked off this week and expectations are that this will mark the fifth straight quarter of declines. The chances of an interest rate hike have been kicked all the way out to next summer, signaling the Fed doesn’t think the economy is strong enough to go it alone in the midst of global turmoil. So, yeah, that S&P record makes total sense… Action in SPY yesterday was slightly in favor of the bulls — 0.85 put call ratio (PCR) per the OCC.

Today is also Amazon Prime day — the company’s personal Black Friday-esque dealathon. That means that yesterday the “A” in FANG popped to a record high and, more importantly, that you can purchase Fenway Park dirt from Derek Jeter’s final game in Boston for a mere $19.99! (Not kidding.) Investors love this event and have given Amazon the bullish treatment — yesterday’s PCR was .56.

The end of the week is the behemoth for earnings as JPMorgan Chase (Thu), Citigroup (Fri), U.S. Bancorp (Fri), Wells Fargo (Fri) and PNC (Fri) report. Which reminds me, when will that Silicon Valley born Long-Term Stock Exchange get off the ground?

Friday also sees a ton of big picture data releases — U.S. retail, CPI and industrial production all come out.

Unfortunately, the real newsgrabber this week is not that important for options, as Nintendo is traded OTC here in the States, so there isn’t an obvious options play to capture the value added by that mobile-game-that-shall-not-be-named.

Last, but far from least, we kick off our MarketsWiki Education World of Opportunity series in Chicago today! There is still time to sign up for our events in other cities.

Lead Stories

CBOE to List SPX Monday-Expiring Weeklys Options
Press Release
The Chicago Board Options Exchange (CBOE) today announced that it plans to list S&P 500 Index (SPX) Monday-expiring WeeklysSM options, beginning August 15, 2016, pending regulatory approval. With the expected introduction of SPX “Monday Weeklys,” CBOE will now offer SPX options with Monday, Wednesday and Friday weekly expirations. CBOE’s new SPX Monday Weeklys options will generally have the same characteristics as CBOE’s Wednesday- and Friday-expiring SPX Weeklys options, with the exception of their listing and expiration dates. The initial expirations for the new Monday Weeklys are planned for August 22, 2016 and August 29, 2016. Going forward, new expirations for the Monday Weeklys will typically be listed on Fridays and CBOE expects that Monday Weeklys with at least two expirations will be available at all times.
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****SD: Little bit more on the offering from the CBOE’s Options Hub here

OCC: Evolving from Processing Trades to Managing Risk for Listed Options Industry
Global Investor
Executive chairman Craig Donohue speaks to Andrew Neil about the importance of working with regulators and implementing technology.
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Clearing industry criticises leverage ratio
Securities Lending Times
The Basel leverage ratio fundamentally threatens the business model of clearing members and will endanger the stability of the global financial markets, according to a joint industry comment letter.
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****SD: The letter in its entirety can be found in our regulation section.

U.K. Stocks Prove Calmer as Risk-Adjusted Return Tops Europe
Roxana Zega – Bloomberg
British stocks have famously drubbed the rest of Europe since Brexit, but anyone capitalizing on the rebound must have endured swings that made holding on impossible, right? Wrong. In addition to beating other European markets on absolute terms, the 5.4 percent gain in the benchmark FTSE 100 Index since Britons voted on June 23 to leave the European Union is also the best when price swings are taken into account, data compiled by Bloomberg show. A gauge of volatility expectations in London-listed equities headed for its lowest level since April, signaling optimism the gains will continue.
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****SD: And Brazilian equities involved in corruption probes are outperforming their “good guy” peers. Weird.

Wizards Of Today’s Markets: Blair Hull, Part 1
Rick Lane – TradeTalk
Last month, we released the first installment of our Trade Talk series titled, “Wizards of Today’s Markets.” In it, we heard from Don Wilson, founder and CEO of DRW, regarding a variety of topics, including cryptocurrencies, regulation and market structure. In our second installment, we feature legendary trader and businessman Blair Hull. Mr. Hull, who stopped by the Tech Tap to speak with me, has had a tremendous career which includes founding Hull Trading Company in 1985—and then, in 1999, selling it to Goldman Sachs.
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****SD: Shout out to our 16th floor neighbor!

Psssst. The U.S. Treasury Market Flies at Midnight
Tracy Alloway – Bloomberg
Treasury traders are increasingly operating under cover of darkness. Global risks such as China’s slowdown or the U.K.’s historic referendum to leave the European Union have turned Treasury traders into night owls, according to fresh research from JPMorgan Chase & Co. At the same time, they say, a decline in the ease of trading in the market for U.S. government debt is encouraging investors to use derivative contracts to place their overnight bets, rather than exchanging the underlying securities.
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****SD: No one seems to know the definitive origin of “x flies at midnight.” Espionage? Zoological reference? Payday drunkenness back in the day?

Celebrate what? The trillions spent by central banks has been a dud, says Bank of America
Sue Chang – MarketWatch
Toasts all around? U.S. stocks charged into record territory on Monday after Friday’s jobs report helped restore confidence in the U.S. economic recovery. But not so fast. The solid data mask a worrisome reality — despite the trillions collectively spent by central banks to breathe life into their economies since the 2008 financial crisis, authorities have been largely shooting blanks, according to Bank of America Merrill Lynch.
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Exchanges

CME builds on record volumes
Global Investor Magazine
CEO Phupinder Gill from Global Investor/ISF’s Exchange of the Year speaks to Andrew Neil about innovation and creating organic growth
As exchange rivals push on with consolidation plans, CME Group appears to be sticking to its own organic growth strategy and enjoying success. The first three months of 2016 saw the US derivatives exchange post record first-quarter financial performance. “It was an exceptional start to the year,” explains Phupinder Gill, chief executive officer, CME Group. “We saw record quarterly average daily volume, which was up 13% compared with an already strong first-quarter last year.”
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Tattletales Wanted: To Nab Market Spoofers, Exchange Seeks Help
Bloomberg
Bats adds community watch to advance promise to police markets
Exchange has adopted rules to crack down on spoofing faster
Bats Global Markets Inc., one of the three big operators of U.S. stock exchanges, wants brokers to start snitching on their peers when they suspect market manipulation. Through a new initiative it likens to a neighborhood watch, Bats will encourage brokers to report suspicious price quoting and trading in its U.S. equities and options markets. The company handles about one-fifth of stock trading in America.
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****SD: Bats press release here

BRIEF-Nasdaq says June U.S. equity options volume of 81 mln contracts versus 71 mln contracts
Reuters
June U.S. Equity options volume of 81 million contracts versus 71 million contracts
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BOX Price Improvement for June
BOX Options
In the month of June price improved contracts on BOX Options Exchange (“BOX”) averaged 263,419 per day.
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Deutsche Börse Lowers Threshold for London Stock Exchange Merger
Chad Bray – NY Times
The London Stock Exchange Group and the Deutsche Börse said on Monday that they would lower the acceptance threshold required from shareholders in the German exchange operator for their merger to proceed. The exchanges also said they would extend by two weeks the period for investors in the German exchange to accept the offer to exchange their Deutsche Börse stock for shares in a new holding company for the combined entity. The offer period will now expire on July 26. It was originally set to expire on Tuesday.
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****SD: In case you missed it.

Regulation & Enforcement

Consultation on Revisions to the Basel III leverage ratio framework
OCC
On July 6, 2016, OCC, along with 30 other exchanges, clearing organizations, and market participants, sent a letter to the Basel Committee on Banking Supervision regarding the Consultative Document on Revisions to the Basel III Leverage Ratio Framework. The letter states that unless the Standardized Approach for Counterparty Credit Risk (SA-CCR) method is allowed as a replacement for the Current Exposure Method (CEM) in the leverage calculation for exchange-traded derivative exposures, the application of the leverage ratio will result in vastly increased capital requirements for general clearing members offering clearing services to market makers and liquidity providers. The letter says this action will fundamentally threaten their business models and impact the liquidity and stability of global financial markets, and would be contrary to the G20 commitments on central clearing.
goo.gl/I1YIad

Time for a CFTC User’s Fee?
Eugene Grygo – FTF News
Would it really be such a bad idea for the CFTC to charge a user’s fee? That issue may wind up being a spinoff from a bill put forth late last month by the Wall Street lightning rod U.S. Senator Elizabeth Warren (D-Mass.) with the support of Mark Warner (D-Va.), and Congressman Elijah Cummings (D-Md.). They say the proposed legislation would essentially be Derivatives Reform II: The Sequel to Dodd-Frank. They are arguing that the CFTC is too weak and that the Republicans have undermined the original reforms. (Please check out my story here.)
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S. Korea’s FSC mulls lowering base deposits for futures and options to stimulate market
Choi Jae-won – Pulse
The base cash deposit for investment in Korean futures and options will be lowered to 15 million won ($13,000) from current 30 million won as a part of deregulations measures to bolster trade in Korean futures and options. The new actions will likely be announced by the Financial Services Commission (FSC) as early as next month.
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Technology

OptionMetrics Expands Technology, Development and Operations Team in Response to Record Revenue Growth
Press Release
OptionMetrics, a leading provider of quality historical option price data, tools and analytics, today announced the addition of veteran systems engineers, software engineers and quality assurance specialists, bolstering the size and capabilities of its global technology, development and operations team. The new hires are a direct response to three consecutive record quarters of overall revenue growth (Q4 2015, Q1 2016 and Q2 2016), and new sales growth of 40% over the comparable quarters in 2014 and 2015.
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FlexTrade — Celebrating 20 Years of Leading the Way in FinTech
Ivy Schmerken – Traders News
Vijay Kedia has been CEO of FlexTrade Systems since 1996. Over the past two decades, FlexTrade has evolved from a startup to a major FinTech organization providing multi-asset EMSs and OMSs, TCA, advanced analytics and algorithmic trading technology solutions to leading institutions around the world. While FlexTrade started with equities, the company has steadily expanded its coverage across foreign exchange, options, futures, ETFs and fixed-income. With nearly 420 employees, FlexTrade serves clients in more than 20 countries, and operates offices in 18 cities in 10 countries.
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When is big data too big? Making data-based models comprehensible
Mary Ann Liebert – EurekAlert!
Data-driven mathematical modeling is having an enormous impact on the ability to organize and describe very large data sets, and make inferences and predictions about populations and situations based on sampling data. However, as these models become increasingly complex, the ability of users to understand and apply them represents a growing challenge.
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Strategy

Portfolio Margin vs. Regulation T Margin
Peter Klink – The Ticker Tape
How can an individual trader get risk-based margins like a market maker without owning (or leasing) a seat or trading on the exchange floor? Portfolio margin. Portfolio margin is a new, risk-based margin available for qualified accounts. Portfolio margin computes real-time margin for stock and option positions based on their risk rather than the fixed percentages and strategy rules associated with Regulation T margin.
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Hedging Portfolio Risk: Reducing Anxiety And Exposure At Stock Market Highs
Fred Oltarsh – Forbes
If you are sitting on stocks for retirement that you have accumulated outside of your 401k or IRA, then you may feel particularly vulnerable to a stock market correction. Depending on your adversity to risk, there are ways to lessen the impact of a correction. Options trading provide numerous strategies that can be used to lessen the effects of an adverse move in the market. The main question is your risk tolerance and would you be willing to put more money to work at lower levels?
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BXM Index – Leading Benchmark for Capturing the Volatility Risk Premium – Blog #7 on 30-Year Price History
Matt Moran – CBOE Options Hub
On April 29, 2016, Morningstar added a new Option Writing category to its U.S Retail Category system, and the Category Index is the CBOE S&P 500 BuyWrite Index (BXM). In the May 7, 2016, Striking Price column in Barron’s, Steve Sears wrote — “… THE OPTIONS INDUSTRY has taken a major step onto Main Street. Morningstar, which millions of individuals rely upon to evaluate mutual funds, has created a category for options-trading funds. The significance of this can’t be overstated. It indicates options have become part of the mainstream investment landscape, like growth mutual funds and index funds. … Morningstar’s “options writing” category is limited to mutual funds that use options as a central and consistent part of their strategy. The funds sell puts, or calls against long stock, and may also use spreads and collars.”
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Can We Finally Focus on Earnings?
Steve Claussen – OptionsHouse
With the market sentiment being dominated by global macro themes the past two weeks it is with pleasure that traders can finally focus on some stock specific catalysts this week! Earnings season “unofficially” kicks off with Alcoa’s report after the market close tonight. Alcoa (AA $10.00) would be almost an irrelevant stock for most traders since the company was removed from the Dow Jones Industrial Average back in 2013, except its corporate announcement schedule has always been the leadoff to each earnings season.
jlne.ws/29MgURa

Build A Structured Product Yourself
Seeking Alpha
Many of you may have heard about so-called structured products, which are usually sold by banks to clients with a decent amount of capital (sometimes, to sophisticated/accredited investors only). The idea behind a structured product is simple: it provides a nice expected return with a small (sometimes, zero) risk. This asymmetric risk-return profile is achieved using the mix of stock options and bonds (or like low-risk instruments):
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