Observations & Insight

Scooped: What The Nikkei Deal Means For The Derivatives Industry
Jim Kharouf – John Lothian News

Nikkei got the scoop of the year. It purchased the Financial Times at the 11th hour from FT parent Pearson for GBP844 million ($1.3 billion).

The big surprise was that Hong Kong Exchange and Clearing’s Charles Li, CEO and former journalist, didn’t buy it, a seeming bargain compared to the LME price tag of GBP1.39 billion.

The media world will care much more about this deal than the rest of the globe. The journalist handwringing over Rupert Murdoch’s buyout of the Wall Street Journal in 2007 for $5 billion amounted to nothing substantive. The FT will likely maintain its focus as well. Let’s hope so for this industry, because it is essentially the only mainstream newspaper (if that’s even an accurate term these days), which covers the derivatives industry with any regularity.

Sad to say, but the flagship Chicago papers have no one covering the cornerstone industry of the city any longer, and haven’t for many years. The New York Times covers the industry when it pertains to regulatory matters and enforcement scandals. That leaves few other outlets to cover the news in this space and the FT has done a commendable job of it.

The journalism space for years now has been like confetti tossed up in the air. Few seem to have figured out how to transition from paper to the digital world and make a profit. The Wall Street Journal and FT have transitioned well, but many news outlets have fallen off or just closed shop. That should be of interest to this industry because that means you have fewer outlets who can amplify your voice and story to readers.

John Lothian News has taken a sizeable role in this regard and strange as it sounds, we feel saddened when another industry news outlet closes because that means fewer journalists are focused on our industry. Blogs are making up for some of it, yes. Gary DeWaal‘s “Bridging The Week” is one great example, along with Craig Pirrong‘s “Streetwise Professor” just to name a couple. But quality blogs that hit key issues with a voice that carries are few and far between. That is concerning for this industry, which is critical to the global economy, but somehow does not garner the in-depth coverage that is needed to educate and inform the broader market. Without that understanding, it often becomes the punching bag for all that is wrong with financial markets.

We will do our level best to raise our profile via this newsletter and through our own educational efforts such as the intern speaker series. The rest of us should think about how to continue to make this industry relevant to the broader public, and let us hope Nikkei shares that view.

Lead Stories

Credit option skew flips on ‘relentless’ vol selling
Dan Alderson – GlobalCapital
Relentless selling of at-the-money options has “overwhelmed European credit volatilities”, said BNP Paribas strategists this week. This reversal, they said, has driven volatilities back to the bottom of last year’s range.
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Hedging in oil ETF options wanes as crude slides below $50/bbl
Saqib Iqbal Ahmed – Reuters
With oil prices below $50 a barrel again for the first time in three months, action in the options market suggests traders think the declines may be waning.
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Canary in the Coalmine
Matthias Paul Kuhlmey – WealthManagement.com
It is a common understanding that a “canary in the coalmine” acts as a metaphor for impending danger. Quite understandably, investors are always on the lookout for this proverbial little bird to guide decision-making, either by avoiding losses or taking advantage of opportunities presented by increased volatility. Yet, these days, we have to wonder if the proper collective focus guiding the process of avoiding danger is being applied. With an obsession to dissect day-to-day moves in equity markets, especially led by the mainstream media, most investors have failed to notice (or at least consider) that volatility in most asset classes (vs. equities) has increased sharply over the last year—potentially foreshadowing more significant issues to come, and also that we may rest with a false sense of security regarding our investments.
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Brent Falls Below $55 a Barrel With U.S. Crude in Bear Market
Mark Shenk – Bloomberg
Brent crude dropped below $55 a barrel for the first time in more than three months while U.S. prices traded in a bear market amid a global supply glut.
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Fear, Greed, and Bad Breadth
Adam Warner – Schaeffer’s Research
The only thing we have to fear is fear itself — or an utterly range-bound market. We’ve pretty much established the SPDR S&P 500 ETF (SPY) is never moving above 213 or below 205 ever again. Yet, the Fear is still there.
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OPEC Shorts Are Driving Down the Price of Oil
Dr. Kent Moors – Oil & Energy Investor
The conflict between OPEC and U.S. shale/tight oil producers has entered a new phase. And the result has been an accelerated decline in oil prices.
Last November (on Thanksgiving no less), Saudi Arabia led an OPEC decision to hold production stable, followed by a later significant increase in volume. For the first time, the cartel had opted to protect market share rather than price.
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Volatility index offers share investors false sense of calm
Philip Baker – Australian Financial Review
One of the features of the past few years has been the lack of volatility in the sharemarket. Even now the Chicago Board Options Exchange’s VIX Index – otherwise known as the “fear index” – is still close to its record low for the calendar year reached just a week ago. According to some traders, that’s good news for the sharemarket.
The theory goes that the world did not fall apart as the market had thought – despite the ructions in Greece, Iran, the Chinese sharemarket and some mixed news from the US reporting season.
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Counterparty concerns slow family office derivatives use
Viren Vaghela – Risk.net
HNWs got burnt in the Lehman crisis and are still cautious over exposures Asia family offices are turning to derivatives products in greater numbers as a solution to the current low interest rate environment in the region but legacy concerns over counterparty exposure following the Lehman Brothers insolvency in 2008 are slowing take-up.
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Exchanges

Deutsche Boerse, CME final bidders for FX platform 360T -sources
Arno Schuetze, Andreas Kroener, and Patrick Graham – Reuters
Commodities and currency exchange operator CME Group is competing against Germany’s Deutsche Boerse in a final round of bidding for German-based foreign exchange trading platform 360T, three industry sources told Reuters on Friday.
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Launch of Trading in VIX Weeklys Futures – More Expirations to Provide More Responsiveness
Matt Moran – CBOE Options Hub
On the July 23 trading day, CBOE Futures Exchange, LLC launched the first-ever trading of futures with weekly expirations on the CBOE Volatility Index. The new VIX Weeklys futures offer more expirations that have the potential to provide more precision and responsiveness for investors. On July 23 the estimated trading volume was more than 200 contracts for the new VIX Weeklys futures (with expirations on August 5 and August 12), and approximately 216,000 contracts for the VIX futures with the standard expirations.
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How Leo Melamed Took The CME From Open Outcry To Electronic Trading
Tom Groenfeldt – Forbes
Leo Melamed was the driving force for technology at the CME, said Michael Gorham, Professor of Finance and Director of the Center for Financial Innovation at Illinois Institute of Technology Stuart School of Business.
“He is really brilliant. He had this vision of the future, but he also knew it was member owned organization and he couldn’t piss off the members. So you would see him making statements about how true liquidity could only come from the floor. Yeah, and we have this other thing…”
Melamed’s success with technology led the CME to take over the CBOT, which was the bigger operation, Gorham added.
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R.J. O’Brien Limited Becomes Member of London Metal Exchange
PRNewswire
Chicago-based R.J. O’Brien & Associates (RJO), the oldest and largest independent futures brokerage and clearing firm in the United States, today announced that its London-based affiliate R.J. O’Brien Limited (RJO Limited) was just approved as a clearing member of the London Metal Exchange (LME).
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New Measure of Investor ‘Fear’ as CBOE Introduces Weekly VIX Products
Saumya Vaishampayan – WSJ
CBOE Holdings Inc. is introducing another way for investors to bet on its “fear gauge.”
The firm is narrowing the timeframe of certain futures and options in an effort to make the derivatives more closely track its volatility gauge. There’s often a gap between the CBOE Volatility Index, a widely cited gauge of stock market swings, and its options and futures, which are instruments investors can use to make bets on the VIX.
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Nasdaq Launches ‘NFX’ to Trade Energy Derivatives
Press Release – Nasdaq
Nasdaq announced that its US-based Nasdaq Futures, Inc. (NFX) will officially launch today. The platform will initially offer futures and options on oil, natural gas and US power benchmarks, with a fee holiday for the first nine months of trading. All products will be cleared through The Options Clearing Corporation (OCC).
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Nasdaq Expects to Be First Exchange Using Bitcoin Technology
John Detrixhe and Ryan Hoerger – Bloomberg
Nasdaq OMX Group Inc. expects to become the first major exchange operator to use the technology behind bitcoin when a project in its private-companies business goes live in the fourth quarter.
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Regulation & Enforcement

CFTC plans more scrutiny over algorithmic trading
Argus Media
The Commodity Futures Trading Commission (CFTC) later this year plans to propose new rules to boost oversight over algorithmic traders that have claimed a growing share of energy futures. About 80pc of the trading volume in natural gas contracts now involves algorithmic traders on at least one side of the transaction, CFTC chairman Timothy Massad said today. Those traders use computer models to buy and sell hundreds of times per second to capitalize on minute price movements.
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DTCC backs extension of LEIs to more asset classes
Cian Burke – Futures & Options World
The Depository Trust & Clearing Corporation (DTCC) has welcomed moves by regulators to extend the global legal entity identifiers (LEI) regime beyond derivatives markets to cover all asset classes. Bill Hodash, managing director of business development at DTCC, told FOW many of the authorities participating in the Financial Stability Board’s Regulatory Oversight Committee (ROC) oversee trading across many asset classes.
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Technology

High frequency trading beneficial for Malaysian and other markets
Daniel Khoo – The Star Online
High frequency trading (HFT) is increasingly playing a larger role in stock exchanges worldwide, but is not a threat to longer-term investors, said Nasdaq OMX Group Inc vice-chairman Sandy Frucher.
“Some people have faster technology, while others may have a slower technology. But the long-term investor does not have to worry about this, and if nothing else, it will move the market up,” Frucher told StarBiz on the sidelines of the Global Sustainability and Impact Investing Forum.
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OpenMama relaunches
Press Release – Finextra
OpenMama, the project developed to allow financial services firms to move more freely between market data technology and content vendors, today announces its re-launch boasting a new advisory group, increased vendor coverage and, for the first time, the ability to bridge data to and from Thomson Reuters Enterprise Platform (TREP) using a completely open source stack.
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Education

Making Sense of These 3 Schaeffer’s Indicators
Josh Selway – Schaeffer’s Research
At Schaeffer’s, we use numerous indicators in our writing to describe stock and trader behavior. While at first some of these things may seem confusing, in reality, they’re quite simple to understand — and can provide valuable insight for options traders. Below, we’ll look at a few terms we regularly use in our coverage at SchaeffersResearch.com to clear up any confusion you might have.
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The Beginner’s Guide To Volatility: VXX – iPath S&P 500 VIX Short-Term Futures ETN
Nathan Buehler – Seeking Alpha
Volatility trading continues to grow in popularity among retail and institutional investors. Most of my readers understand volatility. However, I have been told by some new readers that my analyses are too complicated for beginners. This is an article, for the library, as a reference for beginners.
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