Observations & Insight

MarketsWiki Education Update
Doug Ashburn, JLN

After five successful (and packed!) sessions last month – three in Chicago and two in New York, we have turned our attention toward the October European tour. Plans are moving along, but we still have room for a couple of speakers in London, and a few in Paris and Frankfurt. We are still negotiating venue opportunities, so nothing yet to report there. However, it is not too soon to start talking it up, so please help us.

The 2016 European tour begins in Paris for a one-day event October 25. On October 27, the series visits the financial center of Frankfurt, Germany. The following week, MarketsWiki Education returns to London for its third year there. Speaker and venue information will be passed along as we finalize them. For a brief retrospective on the series and past events, along with a sample of some of our favorite videos, have a look at a recent column I wrote (Knowledge Is Power: A MarketsWiki Education Journey, July 8, 2016).

Last week we began releasing the video presentations from Chicago. We are almost through with Session 1. Tomorrow we release a fintech overview by Rob D’Arco, CEO of Rival Systems. Next week we start on Session 2.

In case you missed the first few, here they are:
Lisa Dunsky, OCC – Hit By A Brick: How Setbacks Shape Your Career
Kate Maehr, Greater Chicago Food Depository – Volunteerism: Good for the community and good for you!
Christian Domin, GlenStar Properties – Value Investing: Office Space and Associated Risks

This year’s events have been consistently solid, entertaining and sage. Please pass these along to anyone you know who is interested in learning more about our industry. There is something in there for all participants, both young and seasoned. Also, be sure to follow our YouTube channel. The future of the industry depends upon attracting and maintaining fresh talent.

Lead Stories

If a Clearinghouse Collapses, Then What?
Jakob Wilhelmus, Milken Institute – TABB Forum
Clearinghouses are intended to reduce counterparty risk by acting as the middlemen for derivatives contracts. But it could be argued that the Dodd-Frank Act has removed concern about a single default rippling through the market by creating central hubs that are, in the familiar phrase, too big to fail. To ignore the possibility, however, that a clearinghouse might fail should not be an option. Regulators need to specify what will happen in the wake of a clearinghouse failure if they want to maintain them as private institutions.

***DA: Considering the 500-year flood comes every 10 years or so, we should probably look into the stability of the levees.

Back to a low vol FX world?
David Keohane – Financial Times
This is from HSBC’s FX team, they of most fervent RORO use, who basically think that if Brexit, the Turkish coup attempt and the BoJ’s not pulling the trigger as expected didn’t rattle the markets properly then something must be up. To demonstrate this, they take us back to 2014 when things were in proper (and the fear was indefinite) low vol mode. As they say, this didn’t last: “Chart 1 shows that the majority of G10 currency pairs had negative Volatility Scores at this time. In other words, not only was realised volatility very low at that time, the outlook being priced into the options market was that realised volatility would continue to be lower than usual.”

***DA: Sterling is still whipping around.

Pound Slides as BOE Cuts Rate for 1st Time Since 2009, Boosts QE
Anchalee Worrachate, Marianna Duarte De Aragao and John Ainger- Bloomberg
MPC members vote 9-0 to lower the official bank rate; Asset-purchase target increases by 60 billion pounds
The pound fell the most in more than four weeks after the Bank of England cut interest rates for the first time since March 2009, part of a suite of stimulus measures to help boost the economy after the U.K.’s vote to leave the European Union in June.

****SD: See more from Bloomberg View, Bank of England Delivers. What’s Next?

This Quiet Market Has Traders on Edge
Liz McCormick, Joseph Ciolli and Rebecca Spalding – Bloomberg
Stock, bond, currency volatility gauges have all tumbled; Oil plunge, Fed surprise, weak earnings could rouse investors
It’s quiet out there. Maybe too quiet. Even as U.S. stocks and bonds hit one high after another, and skeptics from Donald Trump on down warn trouble is coming, a preternatural sense of calm seems to have descended over financial markets.

How OCC Manages Third-Party Risk
Kirstin Wells – OCC
As a Systemically Important Financial Market Utility (SIFMU) and the foundation for secure markets, OCC is one of the few market utilities that considers third-party risk in a broad context. It is common to think of vendor risk when thinking of third-party risk, however, OCC considers its third-party risk in five pillars. These are: clearing members, settlement banks and liquidity providers, exchanges, other financial market utilities and critical vendors.

Greenspan Put Gone Wild as Critics See Markets Hamstringing Fed
Rich Miller – Bloomberg
Citigroup’s Buiter says Fed is ‘captive’ of financial markets; Fed disagrees, saying it’s focused on Main St. and the economy
It’s the Greenspan put gone wild. Or so the Federal Reserve’s critics would have it. No longer is the Fed just waiting for financial markets to be hit by a bout of turbulence and then lowering interest rates in response — as former Chairman Alan Greenspan did. Instead, the critics contend, it’s become so sensitive to the risk of sharp market moves in the future that it’s pulling its policy punches now by repeatedly holding off on raising rates.

***DA: One thing about premium sellers – they can collect on every expiry until the one that costs two decades worth.


Bats Doubles Down on Options and FX
Rob Daly – MarketsMedia
Bats Global Markets expects to spend the remainder of 2016 focused on its U.S. options and global foreign-exchange operations, according to CEO Chris Concannon. “We remain on track to deliver auctions capabilities to our EDGX options exchange by the end of this year,” he said during Bats’ second-quarter earnings call today. “Similarly, we remain on schedule to launch FX forwards on our Hotspot platform by year end and delivering on a promise we made when we purchased the platform on 2013.” Concannon estimated that 30% of the U.S. options market’s volume takes place within auctions.

****SD: Also see US options surge drives Bats growth from The Trade

CBOE converting trading floors in Chicago into tech work space
Lynne Marek – Crain’s Chicago Business
Chicago Board Options Exchange is finally letting go of a bit of its trading floor past. The exchange operator for the first time this month is converting a quarter of its former trading floor space into a work area for employees, said Ed Provost, chief operating officer of parent company CBOE Holdings. The company will be playing catch-up with nearby futures exchange operator CME Group, which stopped trading on about a third of its trading floor last summer and is now trying to sublease it. Trading has been shifting to ever-faster electronic lines and computer screens for nearly two decades, leaving formerly boisterous, open-outcry pits quiet. While a few persist, only a third of CBOE’s volume takes place on the trading floor at its South Loop headquarters today. Now it’s remaking some of the space in 21st-century fashion for 50 to 70 technology workers.

Exchange Operator Bats’s Earnings Top Views
Anne Steele – WSJ
Bats Global Markets Inc. ‘s adjusted earnings and revenue easily beat expectations in the most recent quarter—its second as a publicly traded company—helped by increased market volume at the exchange operator. Bats went public in April, surging in its market debut after shares priced at the high end of expectations. As of Wednesday’s close at $25.60, the stock is up 35% from its IPO price of $19. The exchange operator has touted itself more as a technology firm than a financial company, according to investors and analysts who attended the company’s roadshow ahead of the offering.

****SD: Bats press release here

CBOE VIX Futures Contracts Reach All-Time High
Shiv Mehta – Investopedia
On Monday, Chicago Board Options Exchange (CBOE) reported the trading volumes for the month of July which showed that CBOE VIX futures contracts reached record levels in the month of July. The report highlighted open interests in CBOE VIX futures at CBOE Futures exchange (CFE) reached 525,144 contracts on July 20, which is significantly above the previous highest level of 501,835 contracts registered on July 7.

SGX Updates On Its Bid For The Baltic Exchange
Press Release
Singapore Exchange (SGX) announces that it has agreed with The Baltic Exchange Limited (Baltic Exchange) to proceed with the solicitation of support from shareholders of the Baltic Exchange (Baltic Shareholders) to acquire their issued ordinary share capital of the Baltic Exchange (Baltic Shares) for GBP160.41 in cash per Baltic Share. This represents a total consideration of GBP77.6 million.

HKEX Monthly Market Highlights
Press Release

****SD: From the release: “The average daily turnover of equity index options for the first seven months of 2016 was 120,733 contacts, an increase of 32 per cent when compared with the 91,592 contacts for the same period last year.”

TMX Group Announces Business Integration Initiative
Press Release
TMX Group Limited today announced a business integration initiative that is designed to advance the company’s evolution as a client-driven solutions provider to the Canadian and global capital markets. The objective of the initiative is to align, simplify and integrate relevant systems and operations to both lower the cost base and make TMX more nimble and adaptive.

LSE chief plays down Brexit merger threats
Luke Jeffs – Futures & Options World
LSE chief Rolet insisted the terms of the merger deal are not subject to change
The chief executive of the London Stock Exchange has played down potential threats to its proposed merger with Deutsche Boerse as the British exchange reported solid financial results for the first half of 2016. Xavier Rolet sought on Thursday to play down recent German opposition to the plan to locate the merged entity’s headquarters in London and French disquiet with the prospect of Euro-denominated clearing taking place outside of the Eurozone.

****SD: LSE is also holding firm on an HQ based in London

CME Group Declares Dividend
Press Release
CME Group Inc., the world’s leading and most diverse derivatives marketplace, today declared a third-quarter dividend of $0.60 per share, payable September 26, 2016, to shareholders of record as of September 9, 2016.


A Golden Opportunity to Invest in Goldman Sachs
Steven M. Sears – Barron’s
If the world were to end, two things are fairly certain. Cockroaches would still roam the earth, and Goldman Sachs would find a way to profit from the event. The premier Wall Street bank stock may now be hampered by low interest rates and an often-difficult global trading environment, but opportunities exist for long-term investors, especially those looking for a world without end.

Why Interest Rates Affect Option Prices
Matt Hibbard – Daily Reckoning
On Tuesday, once again we saw the RBA wave the white flag on the economy, as it lowered the official cash rate by another 0.25%. Of course, the latest move had as much to do with the exchange rate as it did with trying to boost the economy.

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