Observations & Insight

Boca’s Last Bits
As the final day of the FIA Boca Conference came to an end, several themes have emerged from the event.

The first is the lawyers have taken over the exchange leader panels. Gone are the days when CEOs could banter about new possibilities, replaced by boilerplate disclaimers read word for word on stage. Among the exchanges not talking are Deutsche Boerse, London Stock Exchange, Nasdaq, BATS and ISE. In a word – boring.

But there is significant movement in technology solutions. As one attendee put it, the downpour of rain, which is regulation, is mostly coming to an end. Now firms are trying to deal with the flood water around them with new business models and new technologies.

The technologies emerging in the space are largely designed to meet regulatory, compliance and risk management needs. Alex Lamb‘s company Technancial recently signed a deal with Broadridge Financial Solutions to provide its real-time margin technology to its post-trade operations. The idea here is to give margin information quickly so firms can better manage cost at the trading level, rather than as a traditional post-trade item.

Cinnober, which recently was signed to build out a brand new clearing house for the Japan Exchange Group to bring that boerse realtime clearing, is also working on European trade reporting. The service, called BOAT, will partner with the London Stock Exchange Group to offer OTC trade reporting to firms that are required to comply with MIFID II on the gamut of OTC derivatives transactions.

Meanwhile, Chicago-based startup Neurensic which debuted at the FIA Expo last November is getting traction on its surveillance technology. It says it has signed several deals including a yet-unnamed global bank, to provide an artificial intelligence-based solution that identifies risky behavior and regulatory and compliance problems before violations occur. It is the kind of technology that is blending Silicon Valley-esque wonder with practical industry needs.

Oh yeah, and everyone is doing something in blockchain – everyone. From ICAP to Overstock.com to exchanges, blockchain is being studied, tested and pitched.

ICAP has completed testing on a distributed ledger technology that applies to post trade operations. It will be a private blockchain that uses “smart contracts” which, according to ICAP, will reduce the need for reconciliation.

And New York-based itBit is currently testing a blockchain solution for the gold market, which allows for the trading and settlement of physical gold.

Today’s industry solutions are less about cool new technology bells and whistles and more about cost savings for firms. And with the regulatory picture much clearer now, those tech solutions are finding a more receptive audience.


2016 Exchange CEO Series: CME’s Gill Looking For Customer Efficiencies

CME Group has been focused on global growth, just like every other major exchange. But to get there, the exchange leader believes it has to work with customers to streamline costs so it can expand.

In part one of our two-part interview at the FIA Boca Conference, CME CEO Phupinder Gill said that the exchange is working on new ways to address capital efficiencies through products such as cleared swaptions, but also new clearing services that will help institutions reduce collateral.

CME is also continuing to work on market disruptors such as blockchain technology, which may change the way in which clearing services are delivered.



Lead Stories

Clearing up the differences in equity option markets
Gary Delany – TradingFloor
The US listed equity option market can be seen as a single unit, despite being composed of 14 exchanges. A single clearing house, OCC, clears all the trades. Each of the exchanges compete for order flow, using product, fee and technology innovation to attract business. Most of the options traded are multiply listed and are thus tradable at all exchanges, with the exception of proprietary products like CBOE’s SPXSM index options. Positions for multiply listed US equity options can be established on one exchange and closed out at another, with the position at OCC reflecting both legs of the trade. The US Securities and Exchange Commission mandated that all exchange traded US equity options should use OCC as the clearing house.

****SD: Despite growth, Europe drastically lags the US in options volume. European annual options volumes are roughly a quarter of US volumes.

The Market’s Dreaded ‘Quadruple Witching’ Is More Like 3 Witches and a Little Lady
Several options and futures contracts are set to expire Friday in a quarterly occurrence known as “quadruple witching.” But does the name overhype the event? Quadruple witching takes place when four types of derivatives — index options, index futures, single-stock options and single-stock futures — all expire on the same day. The event tends to boost trading volumes as investors re-adjust expiring positions. As we’ve detailed before, volatility doesn’t always follow. Several market traders point out, however, that the scary-sounding quadruple witching is a misnomer because single-stock futures are so thinly traded.

****SD: From a current professor/former trader quoted in the story: “I’ve never met a soul who has traded a single-stock future. I never understood what [single-stock futures] really offered that you couldn’t replicate with stock index futures or options.”

CBOE VIX’s Drop Below India Fear Gauge Signals Rally to Extend
The rebound in Indian equities may get support from indications of easing volatility elsewhere around the globe. The Chicago Board of Options Exchange Volatility Index, a U.S. measure of investor anxiety known as the VIX, has stayed below its Indian counterpart for five weeks, the longest such run since November, data compiled by Bloomberg show. The gap indicates India’s market may be due for further declines in volatility.

Hedge fund closures return to crisis highs
More hedge funds closed their doors in 2015 than at any time since the financial crisis, according to new research, as turbulent markets dragged down the industry’s performance. Last year was the worst year for liquidations since 2009, with 979 funds closing, up from 864 in 2014, according to data from Hedge Fund Research. The fourth quarter of 2015 also saw the fewest new hedge funds starting up since 2009, with just 183 openings compared with 269 in the third quarter.

Hedge fund giant Citadel is having a brutal year
Business Insider
Citadel, the $25 billion Chicago-headquartered hedge fund led by Ken Griffin, fell 8% through March 11, Bloomberg News reports citing sources familiar with the matter.

****SD: Given the above CNBC story, seems like you’re either down or you’re out.


Global bourses merger: Dwarfed Asian peers watch and tread water
Nikkei Asian Review
Consolidation among the world’s leading security exchanges in Europe and the U.S. is set to leave Asian exchanges behind in terms of size, but the wave of cross-border acquisitions is still some distance from these shores, analysts say.

Don’t Say Europe’s Biggest Exchange Takeover Is Too Big to Fail
Deutsche Boerse AG and London Stock Exchange Group Plc want to create a European trading champion. They just don’t want regulators to think it’s too big to fail. The companies took pains in their announcement on Wednesday to emphasize that the combined firm, holding some $170 billion in collateral from their customers, would help reduce risk in the multi-trillion dollar derivatives market. They also stressed the union wouldn’t hurt competition or potentially destabilize the wider financial system.

****SD: “They also stressed the union wouldn’t hurt competition.” Uhhh… If ever a quizzical eyebrow raise were merited, this is the moment.

Save our Stock Exchange: Fightback begins to stop Germans buying the City’s crown jewel
The Daily Mail
Frankfurt will also have the upper hand with a 54.4 per cent stake, although the parent company will be based in London. Business groups, including the slavishly pro-Brussels CBI, last night gave their blessing to the marriage. But there was a growing backlash from MPs and business figures, who warned it could damage the City of London, with jobs and business eventually moving to Frankfurt. John Longworth, who was ousted as director general of the British Chambers of Commerce after daring to publicly back Brexit, led the criticism. He questioned why Ministers have refused to intervene given the London Stock Exchange’s crucial importance to the UK economy.

****SD: Leave it to the Daily Mail to keep things neutral.

CBOE Preps Vest Downside Protected Indexes
Waters Technology
The Chicago Board Options Exchange is planning to create new indexes based on strategies generated by options-based investment advisor Vest Financial Group, after acquiring a majority stake in the firm in January.

This amazing graphic shows just how the US stock market has gotten so complex
Matt Turner – Business Insider
Stock trading used to be pretty simple. A handful of exchanges, led by the New York Stock Exchange and Nasdaq, dominated share trading. A buyer would place an order with a broker, who would then execute the trade on the exchange floor.

****SD: Not quite sure where the “12 options exchanges” line in the story comes from (I suppose he’s qualifying some parent companies differently), but who doesn’t like fun visualizations?

Regulation & Enforcement

MiFID II Ushers in New Reality for Regulatory Reporting
Only 10 percent of firms are ‘very ready’ for MiFID II, while 57% plan to invest in technology to support the regulation’s complex requirements. Despite the announced delay to MiFID II implementation, firms need to fundamentally change the way they approach trade and transaction reporting. Here are four solution requirements for the new reporting landscape.

****SD: What’s regulatory reporting like when wearing the Oculus Rift?

EU Banks Set to Win Easier Curbs on Bond, Derivative Trading
European Union banks and asset managers are set to win looser rules on buying and selling bonds and derivatives, after the bloc’s executive branch called for a rewrite of restrictions on securities.

Wendelin Wiedeking and Holger Härter acquitted of market manipulation
Financial Times
Two former top executives at Porsche have been acquitted of market manipulation charges related to the failed takeover of Volkswagen during the depths of the financial crisis in late 2008. Stuttgart district court acquitted Wendelin Wiedeking and Holger Härter — Porsche’s former chief executive and chief financial officer — of all charges. Prosecutors were seeking prison terms for both men and a fine of more than EUR800m for Porsche.


Post-trade partners consider their futures and options
Securities Lending Times
Broadridge Financial Solutions and The Technancial Company (TTC) are teaming up to provide a joint post-trade offering for futures and options. The alliance will see the combination of Broadridge’s global post-trade processing solution with the strengths of TTC’s real time JANUS Margin Engine.

Xignite to Showcase Financial Data Streaming and Alerts Api Solutions at Findevr New York
Bobs Guide
Xignite, Inc., the leading provider of market data cloud solutions for financial services has been selected to present at FinDEVr New York 2016, a technology-focused conference for fintech developers, engineers and CTOs. Xignite will showcase CloudStreaming and CloudAlerts, two new APIs that allow fintech developers to stream real-time market data to digital financial applications, and add notification alerts for real-time market events and conditions, such as price movements or volume breakouts.


When Should You Buy Volatility?
Seeking Alpha
Have you heard that reading academic financial material can help you improve your results in the financial markets, but been unable to understand exactly “what” the literature was actually saying. This definitely used to be an issue for me. Now that’s it’s not, I’d like to bring some of the often cryptic language of finance academics into simpler explanations that you can easily understand to further your investment goals. First, I’ll be starting off with What Makes the VIX Tick? This paper analyzes high-frequency (minute) data for the VIX index to discern what actually causes the VIX to move and how these causes move it.

Pair Trading Oil With The VIX Would Have Made Bank This Month
Traders who have betted on upside in oil and downside in volatility in S&P 500 index would have profited from their strategy this month. According to Morgan Stanley, crude oil rose 53 percent over the past 24 trading days, while the VIX slipped 45 percent over past five weeks, the largest 5-week decline in history.

****SD: Yeah, and if I bet on Yale to upset Baylor I would have made bank too. Woulda coulda shoulda.

Options Insight: Is an S&P 500 Pullback Ahead? (VIDEO)
Delta Derivatives’ Tim Biggam discusses the recent performance of stocks and his options play for the SPDR S&P 500 ETF Trust. He speaks with Bloomberg’s Ramy Inocencio on “Bloomberg Markets.”

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