Observations & Insight

It’s a MAD MiFID II world now, and US firms should prepare
By Erik Donelson, special contribution to John Lothian News

Note: Erik has been working as a regulatory intern at John Lothian News since April 2015. On the last day of his internship, he attended an FIA event in Chicago – “What Every Market Participant Should Know about MiFID II.” Below are his thoughts and observations from the event.

MiFID II enforcement is coming, and it’s going to affect all market participants, including those in the United States. As ESMA and the European Commission finalize the technical standards ahead of January 2017, when the directive and accompanying regulations come into force, it is becoming clear that markets in Europe will be radically altered.

On July 30, the FIA hosted a panel in Chicago of “victims,” as they labeled themselves, of MiFID II rules. Chief among the regulations is a definition of high frequency trading and the regulation of algorithms. According to the panel, the commission seems to prefer a system based on the median daily lifetime of cancelled/modified orders. Under this regime, any entity that falls above the median threshold would be classified as HFT.

Additionally, any firm with direct electronic access will be deemed a MiFID regulated firm, and this definition will include those trading for their own account. Clearing firms and others that provide direct access to their clients will be subject to an entire slate of new risk controls.

Given the short turn-around time between the finalization of the technical standards and implementation of the rules, firms will be scrambling to implement necessary compliance systems. ESMA “Q&A” documents will give guidance on its implementation. However, given the complexity and scope of these new regulations, industry members will need to move quickly to meet these new regulatory demands.

The panel also discussed whether U.S. rules would be deemed equivalent under the directive.

Read the rest of the commentary at JohnLothianNews.com

Lead Stories

CME Spared Open-Outcry Options Traders, But for How Long?
Brian Louis – Bloomberg
Is CME Group Inc. starting to lose its rationale for letting options traders stick around the pits, yelling and waving their hands to buy and sell the contracts?

Options market sees oil price fall despite OPEC confidence
Amanda Cooper – Reuters
OPEC policymakers seem confident in a sustained recovery of oil prices from this year’s lows as demand improves, but the derivatives market is geared for an alternative scenario: a fall below $50 a barrel by the end of the year.

Offshore Iron Ore Derivatives Volumes Hit Key Milestone
Sandy Williams – Steel Market Update
Singapore Exchange (SGX) and the CME Group together cleared over 118 million tonnes of iron ore swaps, options and futures by the 29th of July. SGX had cleared over 105 million tonnes, making it the highest trading volume month on record for the Asia-based bourse. This record volume was recorded in a month which saw significant price volatility for this key steelmaking raw material (see recent notes on the topic here).

Floor Monkeys And Decentralization Of Risk
Jared Dillian – ValueWalk
As most of you know, I used to be a clerk on the floor of the old P. Coast options exchange in San Francisco. What a place. I could tell stories about that floor for weeks. The craziest things you ever heard.
But let’s keep it professional. The funny thing about a trading floor like the PCX (or the NYMEX, or the CME) is that you have winners and losers. You have big winners and big losers. You have people who blow themselves up. You have people who blow themselves up so spectacularly, they take a chunk out of their clearing firm.

Turmoil in Shanghai
Business Standard Editorials
China’s financial markets continue to experience turmoil despite multiple attempts to induce stability. The fear is that weakness in equity markets may cause negative feedback loops that lead to defaults and bankruptcies in an indebted, slowing economy. China’s slowdown has already hurt global commodity prices. Base metals and gold are at multi-year lows. If China’s property and equity bubbles burst, the negative impact may cause further deceleration. Lower growth would make it harder for companies and local governments to service debt. True, stock market capitalisation is not too high, at 110 per cent of China’s gross domestic product or GDP (including Hong Kong listings). The Shanghai Composite Index is up 74 per cent in the last 12 months. But the index has fallen 13 per cent in July, and it is down 29 per cent from all-time highs in mid-June. On Monday, the indices fell by over eight per cent, in the largest single-day decline since 2007. Trading is suspended in 125 listed companies. There has been massive selling of gold and base metals on commodity exchanges.

Short Bets on S&P Hit Highest Level Since 2012
Dan Strumpf – WSJ
More investors are going short.
Short interest on stocks in the S&P 500 recently hit its highest level in more than two-and-a-half years, according to data provider Markit. The measure, which tracks the percentage of shares on loan for negative bets, shot to 2.5% in early July, its highest level since December 2012. It has since pulled back to 2.4% as of July 22.


CBOE to List VIX ‘Weeklys’ Options Beginning October 8
Press Release – CBOE
The Chicago Board Options Exchange (CBOE) today announced that it plans to list options with weekly expirations on the CBOE Volatility Index (VIX Index) beginning Thursday, October 8, 2015.

CBOE Holdings Reports Better-Than-Expected Results
Lisa Beilfuss – WSJ
CBOE Holdings Inc. said its profit rose in the latest quarter, as a more favorable mix of trading volume lifted transaction fee revenue.

CBOE Holdings Reports Results for Second-Quarter 2015
Press Release – CBOE
CBOE Holdings, Inc. today reported net income allocated to common stockholders of $44.6 million, or $0.54 per diluted share, for the second quarter of 2015, compared with $42.6 million, or $0.50 per diluted share, in the second quarter of 2014. Operating revenue for the quarter was $148.7 million, up 3 percent compared with $143.9 million in the second quarter of 2014.

If Greek trades in U.S. are any guide, Athens bourse may have rocky re-start
Sudip Kar-Gupta – Reuters
U.S.-listed equity instruments tied to Greece have fallen around 20 percent since the Athens stock market was closed in late June, heralding a potentially rough start when it finally re-opens.

Regulation & Enforcement

Exclusive: China watchdog extends pursuit of short sellers to HK, Singapore – sources
Michelle Price and Pete Sweeney – Reuters
China is pressing foreign and Chinese-owned brokerages in Hong Kong and Singapore to hand over stock trading records, sources said, extending its pursuit of “malicious” short sellers of Chinese stocks to overseas jurisdictions.
China’s main share markets, both among the world’s five biggest, have slumped around 30 percent since mid-June and authorities have been flailing in efforts to prevent a further sell-off that could spill over into the wider economy.

China targets high-frequency traders in ‘spoofing’ probe
Gabriel Wildau – Financial Times
China’s securities regulator is targeting high-frequency traders in its latest attack on price manipulation, amid stock market turbulence that has sparked concerns over the stability of the broader financial system.

Regulations Must Evolve With Markets
FIA Principal Traders Group
Last week, CFTC Chairman Tim Massad said that the agency is preparing to release a rule on automated trading by the end of the year.
“Algorithmic trading has dramatically increased in our markets, and that changes the way we regulate, changes the way we do surveillance,” he explained to reporters.
The members of FIA PTG agree that automated trading is a transformative force in our markets, and we have long recognized that automated trading requires a different approach to risk management.

Business Conduct Guidelines and FAQ
Press Release – Nasdaq
The NASDAQ Stock Market, NASDAQ BX and NASDAQ PSX have issued guidelines to provide additional clarification as to the types of trading behavior that are prohibited, such as layering and spoofing.


TD Ameritrade Creates Trading Tool based on Trader’s Market Perception
John D’Antona – Traders Magazine
Traders who execute orders in options are getting a tool that works based of their perception of the market – where it is and where it could be going.
The new software, dubbed “Trade Finder,” is billed by the mega-buyside investor as taking clients on the journey from ideation to order entry by answering four simple questions. The new system is available on TD’s Trade Architect system, its Web-based trading application.


Overtrading and the Danger of Pro Rata
Ginger Szala – AllAboutAlpha
The 2015 New Year surprise happened fast: the Swiss National Bank announced on Jan. 15 that the Swiss Franc would no longer be capped by the Euro and it jumped 41% in minutes. This black swan event happened just before a U.S. holiday when traders were already winding down for a three-day weekend. Those left trading included a combination of retail players, banks and some prop firms. And the market went into a frenzy.
The losses were still being calculated into the next week and beyond. Several retail forex firms – from London to New Zealand – went bust. Alpari was an early victim. FXCM was on life support until it received a $300 million rescue from Leucadia National Corp., owner of Jefferies Group. Deutsche Bank, Citicorp, and Barclays each suffered losses in the $150 million zone. Clearing firms took hits — Interactive Brokers’ CEO Tom Peterffy admitted the following day they lost $120 million. Early hits in the hedge fund community included Everest, which closed seven of its eight funds. Its one remaining fund, with less than $500 million, represents less than 20% of the assets they had months before, according to Reuters. BlueCrest Capital Management, a multi-billion dollar hedge fund based in London, reportedly shut the trading book of one senior currency traders. Retail losses were widespread and hefty. The maximum leverage permitted for retail cash forex trades in the United States is 50:1. Unfortunately for Europe, the higher leverage permitted there exacerbated losses.

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