Observations & Insight
Let’s Pause a Moment: Keith Ross Talks Dark Pool Rules and IEX
The addition of high speeds and multiple execution venues has altered the equity market structure in recent years. Now, the SEC is weighing in with newly proposed rules on dark pools. Meanwhile, IEX, which rose to fame with Michael Lewis’ “Flash Boys”, is trying to move from dark pool to full-fledged exchange. Keith Ross of PDQ ATS says transparency is a good thing, and a market pause has its benefits in alternate venues, but as an exchange, could create chaos.
Watch the video »
China Burns Hedge Funds as $562 Million Yuan Bet Turns Worthless
The battle over the fate of China’s currency is starting to get bloody for the bears. Seven months after a shock devaluation spurred hedge funds and other speculators to wager on further declines, the yuan’s unexpected resilience has turned many of those bets into losers. At least $562 million of options that pay out if the currency drops below 6.6 per dollar — its weakest point since the devaluation — have expired worthless since August. Another $807 million will lapse within three months. While those figures provide just a glimpse into the potential losses for pessimistic speculators, what’s clear is that the Chinese government has proven a stronger adversary than many traders anticipated.
****SD: Trying to nail down the yuan is harder than translating Nietzsche.
Opinion: An Acquisitive Nasdaq
Rob Daly – Markets Media
Wall Street’s boilerplate of “past performance is not guarantee future results” might be true for financial performance, but under the leadership of CEO Bob Greifeld, Nasdaq has compiled quite a track record when it comes to integrating exchange acquisitions. In late 2007, the then Nasdaq Stock Market announced the acquisition of the Boston and Philadelphia stock exchanges for $61 million and $652 million respectively.
There’s Only One Buyer Keeping S&P 500’s Bull Market Alive
Lu Wang – Bloomberg
Demand for U.S. shares among companies and individuals is diverging at a rate that may be without precedent, another sign of how crucial buybacks are in propping up the bull market as it enters its eighth year. Standard & Poor’s 500 Index constituents are poised to repurchase as much as $165 billion of stock this quarter, approaching a record reached in 2007. The buying contrasts with rampant selling by clients of mutual and exchange-traded funds, who after pulling $40 billion since January are on pace for one of the biggest quarterly withdrawals ever.
****SD: Article goes on to point out companies aren’t as present during earnings season, which corresponds to the last dip(s) in the S&P.
KCG Holdings Sees February Trading Volumes Tick Lower
KCG Holdings, Inc. (NYSE: KCG) has reported its monthly trading volumes for February 2016, which took a step back, ultimately paring a portion of last month’s gains, according to a KCG statement. During February 2016, KCG saw an average daily US equities market making of $31.2 billion traded, or -13.8% MoM from $36.2 billion in January 2016. The latest volume was also represents a move lower over a yearly timeframe, as volumes incurred a fall of -4.3% YoY from $32.6 billion in February 2015.
****SD: KCG stock is down about a dollar since JPMorgan fired them as their NYSE market maker in early January.
Volatility Is Here To Stay Throughout 2016: Societe Generale
Central banks have been very accommodating, but they weren’t able to reverse the global economy’s slowing growth in the first quarter. With fears of a recession resuming, financial conditions have tightened, Societe Generale writes, leading to a “a broad-based rise in market volatility. Analyst Patrick Legland and his team write that this is “clearly a risk to monitor,” but warn that with China’s slowing growth and low oil prices unlikely to abate in the near future, volatility is probably here to stay for throughout the year.
****SD: Shake a magic 8-ball these days and somehow it always says, “All signs point to more volatility.”
Hedge funds step up bets on commodity market revival
After deserting commodities markets during last year’s slide, some hedge funds are starting to move back in, betting a recent pick-up in energy prices could signal a turning point. A handful of managers are weighing up new specialist hedge funds, industry data shows, while some funds are stepping up exposure to energy markets and oil in particular.
Shale Patch Pain Sees Speculators Boost Bets on Oil Price Rise
Hedge funds are the most bullish on oil in almost a year as the U.S. shale boom unravels and demand for gasoline strengthens. Signs that producers won’t be able to sustain a supply glut are intensifying, with the International Energy Agency calling a bottom for the price rout. U.S. output is near a 15-month low as companies from Anadarko Petroleum Corp. to Chesapeake Energy Corp. cut jobs and park rigs to conserve cash, while several missed debt payments. Meantime, U.S. gasoline consumption rose to the highest on record for this time of the year.
****SD: Of similar interest, Reuters’ Turning to frack tech, stricken U.S. oil drillers test new limits
Here’s What’s at Stake for London’s Trading Share in a `Brexit’
Silla Brush and John Detrixhe – Bloomberg
A British exit from the European Union may not be an immediate shock to London’s standing as a global financial hub. The City, after all, just got a vote of confidence from Europe’s biggest exchange operators, who are considering a 20 billion pound ($28 billion) tie-up that would place its holding company in London. Deutsche Boerse AG and London Stock Exchange Group Plc have said the merger makes sense whether or not Britain votes for an EU “Brexit.” Stuart Gulliver, chief executive officer of HSBC Holdings Plc, said a June 23 vote by Britain to leave the EU would affect a “very small percentage” of the bank’s U.K. employees and wouldn’t force the bank to move its headquarters from London.
Deutsche Boerse could hike offer for London Stock Exchange this week
Tim Wallace – The Telegraph
German exchange Deutsche Boerse could increase its offer to buy London Stock Exchange this week, potentially hiking its bid for the British institution as soon as today. The rising price of shares in the LSE Group combined with interest from rival US exchange group Intercontinental Exchange (ICE) is set to push Deutsche Boerse to dig deeper in its efforts to acquire the LSE, which the market currently values at just over GBP10bn.
CME Group Announces Record FX Futures and Options Volume
CHICAGO, March 11, 2016 /PRNewswire/ — CME Group, the world’s leading and most diverse derivatives marketplace, today announced it reached a trading volume record for total FX futures and options yesterday, March 10, of 2,517,334 contracts, surpassing the previous record of 2,371,202 by 6 percent set on May 6, 2010. FX futures also set a new record of 2,350,478 surpassing the previous record of 2,208,417 on May 6, 2010.
Open Interest for Options on MSCI Emerging Markets Index (MXEF) Grows to 9,855 Contracts
Matt Moran – CBOE Options Hub
Open interest for options on the MSCI Emerging Markets Index (MXEF) grew from 98 contracts in mid-January to 9,855 contracts yesterday. Over the past year several institutional investors have expressed to me their interest in the potential for a liquid MXEF options contract, particularly because the MXEF options contract is cash-settled and has a notional size that is about 24 times larger than options on the EEM ETF.
TAIFEX Received SEC Class Relief For Index, Equity And ETF Options
The Taiwan Futures Exchange (TAIFEX) has successfully obtained class no-action relief (“Class Relief”) status for its index options, equity options and ETF options from the United States Securities and Exchange Commission (SEC). TAIFEX and its members can now market its flagship TAIEX Options (TXO) and its newly listed ETF options to eligible broker-dealers and eligible institutions in the United States through U.S.-registered broker-dealers, in compliance with SEC regulations.
****SD: Also see Taiwan Futures Exchange Eyes Higher Volumes after SEC Relief
The London Stock Exchange is for sale: Who will get it?
Stock exchanges do not come up for sale very often; one as large and prestigious as the London Stock Exchange even less often, so there is a lot of interest around this. Deutsche Borse’s attempt to merge with the LSE is reaching a critical stage. Deutsche Borse has until March 22 to make a formal offer. It’s gotten more complicated because Intercontinental Exchange, which owns the NYSE, has also indicated they are interested in the LSE. The CME is also a potential bidder.
BSE to stop liquidity enhancement incentive programme in equity derivatives
Leading stock exchange BSE will discontinue the liquidity enhancement incentive programme in four segments, including equity derivatives from next month. Besides, the exchange will stop such incentive programme in single stock futures, Sensex futures and Sensex options contracts. The liquidity enhancement incentive programmes (LEIPS) — wherein both market makers and general participants get incentives in the form of cash payment for trading in these contracts — will be discontinued with effect from April 1.
BSE Introduces New Measures To Prevent Trade Reversals In Equity Derivatives
Indian stock exchange, BSE, has announced the introduction of a new measure designed to automatically cancel reversal trades executed on its Equity Derivatives segment with effect from today.
Bats Streamlines Disaster Protocol With Successful Test
Bats Global Markets (Bats), an operator of exchanges and financial markets services, has undergone a streamlined doomsday emergency protocol, executing its operations across its US markets from its Kansas City-area disaster recovery (DR) site per its ongoing Business Continuity Planning (BCP) process, according to a Bats statement. Bats has made a habit of preparing itself for disaster-related conditions in a region that is routinely vulnerable to inclement weather, i.e. tornados, etc. As a result, twice annually, Bats rolls out its BCP process by severing the link with the group’s global headquarters from all outside network access for the day, in essence replicating what could happen in a disaster situation.
Regulation & Enforcement
Why the Gridlock Slowing New Rules for Wall Street Won’t Go Away
Elizabeth Dexheimer – Bloomberg
The long wait by Wall Street’s top regulator for a full slate of commissioners may soon end. That doesn’t mean the partisan fights over rules and corporate punishments that have stalled action at the U.S. Securities and Exchange Commission will stop. Democrat Lisa Fairfax, a George Washington University law professor, and Republican Hester Peirce, a senior research fellow at George Mason University, will testify before lawmakers Tuesday, almost five months after President Barack Obama nominated them to join the SEC. While Fairfax’s Senate confirmation would be a win for liberal groups that have vilified banks, Peirce has been a consistent critic of the massive regulatory expansion that’s occurred since the financial crisis.
CFTC Commissioner Withdraws Controversial Report on Position Limits
Gabriel Rubin – Wall Street Journal
WASHINGTON—A top U.S. commodities regulator withdrew a report and nonbinding recommendations that called for the Commodity Futures Trading Commission to abandon a long-delayed rule aimed at curbing bets on commodities, including oil, gold and sugar.
World Federation Of Exchanges Calls For Vigilance And Coordination As Industry Backs Global Cyber Standards
The World Federation of Exchanges (WFE) is the global trade association that represents more than 200 market infrastructure providers including exchanges and CCPs. Each year over $26 trillion in trading is processed by the infrastructure operated by WFE members. Cyber security is a matter of enormous importance to WFE’s members, and is vital to the continuing stability of the financial system.
CFTC Commitments Of Traders Reports Update
The current reports for the week of March 8, 2016 are now available.
Ex-Porsche Executives Ask for Acquittals in Manipulation Case
Lawyers for former Porsche SE Chief Executive Officer Wendelin Wiedeking and ex-Chief Financial Officer Holger Haerter said prosecutors “invented” a story to back up charges that the men misled the markets before a failed bid to take over Volkswagen AG in 2008.
Tradency Develops AI Investment Algo Tool – RoboX
Long established copy trading platforms provider Tradency is now ready to deploy a whole new type of retail investing solution. Finance Magnates recently met with the ?founder and CEO of Tradency, Lior Nabat, at the firm’s offices where we got to learn from him about the development process and motivation for the new offering called RoboX.
The robots are coming – but we still need human touch in the workplace
Katie Allen – The Guardian
What a time to be a human: barely a day goes by without a new warning that the machines will steal our jobs. More news is due on this robot uprising this week when George Osborne is expected to announce a trial of driverless lorries in his budget. The World Economic Forum says more than 7 million jobs are at risk from advances in technology in the world’s largest economies over the next five years. The Bank of England’s chief economist, Andy Haldane, is gloomier still and warns up to 15m jobs in Britain are at risk of being lost to an age of robots. Clearly it’s not a time for complacency. We are already in an age of automatic checkouts. RBS has just unveiled “Luvo”, an advanced artificial intelligence (AI) that it is trying out to field customer service queries. Elsewhere in financial services, robot advisers are emerging to help people invest.
****JB: A supercomputer just beat a Go champion last week. It was thought that level of AI would not be possible for ten years but here we are already.
Trader makes a huge bet on energy rebound
Despite the seemingly never-ending saga of low oil, one trader placed a big bet this week that one area of the energy market could soon make a major comeback. Looking at the JPMorgan Alerian MLP ETN, the AMJ, that trader purchased 50,000 of the January 2017 30/40 call spreads for 80 cents each. Since each call option accounts for 100 shares, this is a $4 million bet that the AMJ will rise as high as $40 in less than 12 months. That’s a near 90 percent move from where the ETN was trading on Thursday, around $21.
Playing Volatile Oil Prices
Vix and More
Today I penned my eighteenth guest column for Barron’s, filling in for Steve Sears and the venerable The Striking Price options column. Looking back, I was surprised to see that this is the eighth year I have been contributing to Barron’s and while I have generally tilted in the direction of volatility topics during this period, I always like to keep my thoughts topical, but with an unusual twist or two. In Playing Volatile Oil Prices: The ins and outs of the backspread trade, I tackled the recent huge moves in crude oil prices, touched upon some of the fundamental and technical influences on the price of crude and used the current environment of chaos following a huge short squeeze as a backdrop to talk about the opportunities associated with a call backspread.
Crude Oil & Equities Correlation: What’s It Mean for Your Strategy?
The Ticker Tape
Some equities market investors might never have intended to follow crude oil and may not know the Permian Basin from the Bakken Formation. But with stocks currently closely linked to crude oil prices, investors need to understand how this correlation can affect trading and gain insight about what factors can and have moved the oil market. The correlation between oil and S&P 500 futures recently reached a higher-than-normal 84%, said JJ Kinahan, chief market strategist at TD Ameritrade. But that was actually down from the extreme high of 92% seen in late January and early February. Historically, Kinahan said, the correlation has been 55%.
The Fed caused 93% of the entire stock market’s move since 2008: Analysis
Lawrence Lewitenn – Yahoo Finance
The bull market just celebrated its seventh anniversary. But the gains in recent years – as well as its recent sputter – may be explained by just one thing: monetary policy. The factors behind that and previous bubbles can be illuminated using simple visual analysis of a chart. The S&P 500 (^GSPC) doubled in value from November 2008 to October 2014, coinciding with the Federal Reserve Bank’s “quantitative easing” asset purchasing program. After three rounds of “QE,” where the Fed poured billions of dollars into the bond market monthly, the Fed’s balance sheet went from $2.1 trillion to $4.5 trillion.
****SD: Other S&P news: Morgan Stanley cuts S&P 500 target as recession fears rise
It’s Too Early To Short Stocks
The Market Oracle
Here are the cons to shorting the stock market: The Fed and the PPT have a printing press. They have access to unlimited amounts of money, and they are extremely motivated in keeping the stock market propped up. Most of the world is experiencing negative interest rates. Money is flowing out of those bond markets and it has to land on something.The combined contracts in the COT index funds are net positive 29 billion. The biggest, smartest, and best capitalized traders in the world are bullish, and not just mildly bullish, they are heavily bullish. What do they
know that Joe Sixpack retail trader armed with his stockscharts subscription doesn’t?
Oil Price Rise Could Be Its Own Undoing
Nicole Friedman and Ira Iosebashvili – WSJ
The slide in oil prices has paused after crude fell more than 70% from its 2014 peak. Now the question is whether the recent rise itself could spark another downward spiral. U.S. oil prices are up more than 45% from a 13-year low in February, boosted by talks among Saudi Arabia, Russia and other major producers about capping their output. A temporary reduction in global crude supply following outages in Nigeria and Iraq also helped buoy the market.
***SD: Ahh, the market’s own ouroboros.
Trading with Elliott Waves Doesn’t Have to Be Complicated – Video
The Market Oracle
Jeffrey Kennedy, a recognized expert in Elliott wave analysis and forecasting, explains why the Wave Principle is such a reliable and powerful way to forecast the financial markets. Jeffrey stresses that if you understand — and practice — the basics of the Wave Principle, you’ll be surprised how much it can impact your analysis and trading results.
A Modified Volatility Pair Trading Strategy
Last month I wrote Volatility Pair Trading Based on Contango. I basically took Nathan Buehler’s idea of trading volatility ETNs based on contango, but added a beta-matched hedge to remove the effect of market movement on performance. When contango is high, we expect XIV to outperform a beta-matched SPY fund. A 3x leveraged ETF like UPRO is a good choice considering XIV has a beta of around 3.5. To avoid short selling, we buy XIV and SPXU rather than buy XIV and short UPRO. During backwardation, we expect XIV to underperform a beta-matched SPY fund. Rather than buy UPRO and short XIV, we buy UPRO and VXX.
CBOE Weekly VIX Indexes Report
CBOE Options Hub
The Curious Effect of ECB’s Stimulus Package on the EUVIX Index On Thursday, ECB President Mario Draghi announced a cut in interest rates and purchases of corporate bonds. In the same breath, Mr. Draghi said he hoped there would be no further cuts. The Euro promptly dropped to $1.08, then rebounded to $1.12 by the close.
Weekend Review – VIX Options and Futures – 3/7 – 3/11
CBOE Options Hub
VIX dropped just over 2% which isn’t that much considering we got a 1% rise in the stock market. The curve remains in a fairly common state of contango. Standard March futures settle Wednesday on the open and the spread of over a point also makes me wonder if volatility traders are buying into higher stock prices.
Weekend Review – Volatility Indexes and ETPs – 3/13/2016
Russell Rhoads – VIX Views
Three out of the four S&P 500 based volatility indexes dropped last week with the longer term focused VXMT rising slightly. I went on a data fishing expedition with respect to weeks where VXMT and the S&P 500 rose, but couldn’t find a definitive patters. I even looked at the predictive power going out as far as six months and got nada. I did find out that both the S&P 500 and VXMT have risen in sync 52 times since 2008, which is interesting and a bit surprising, but doesn’t lead to anything else.
Weekend Review – Russell 2000 Options and Volatility – 3/7 – 3/11
CBOE Options Hub
After stumbling a bit last week both the Russell 1000 (RUI) and Russell 2000 (RUT) moved higher with RUI up by about 1% and RUT rising 0.5%. this is the first week in a while where RUT under performed RUI and the small cap benchmark is now lagging the large cap Russell 1000 by 3% for 2016.
Fed on deck: Your complete preview of the week’s big economic events
The Federal Reserve is up next. Last week saw the European Central Bank steal the show with the ECB cutting interest rates, increasing the size of its quantitative easing program, and affirming that it will do whatever it takes to encourage an economic recovery in Europe.
Derivatives Association to Hold Institutional Blockchain Event in London
The latest institutional player to grapple with the effects of blockchain technology on the financial system is the International Commodities and Derivatives Association (ICDA), a long established representative group for global brokers, investment fund managers, commodities trading firms, market information providers, exchanges and clearing houses. The Geneva-headquartered organization, which until recently was known as the Swiss Futures and Options Association (SFOA), has announced that it will hold an event called the ICDA Blockchain Conference in the City of London at April 2016.