Observations & Insight

Shuffling at the OCC

A lot of rearranging going on at the OCC today. Craig Donohue staying on for three more years gets the headline, but there is much more to the announcement.

-Scot Warren promoted to Chief Administrative Officer from the role of Executive Vice President, Business Development
-John Fennell promoted to Executive Vice President and Chief Risk Officer
-Dale Michaels replaced Fennell as Executive Vice President, Financial Risk Management
-Adi Agrawal now Senior Vice President and Chief Audit Executive, formerly the First Vice President, Internal Audit
-Chip Dempsey joins OCC in newly created role of Senior Vice President and Chief Commercial Officer
-David Prosperi has more responsibilities now as First Vice President, Communications.
-Julie Bauer joins OCC as Senior Vice President, Government Relations, replacing Joe Corcoran.
-Corcoran transitions to OCC’s Legal Department.

The press release with more on the individuals’ backgrounds can be found here.


JJ Kinahan, TD Ameritrade – Seeing Opportunity Everywhere in the Market

“I don’t care what job you have, I don’t care where you are at, you basically hate 25 percent of what you do. Twenty-five percent of your job you’d probably do for free. It’s fun, it’s great, it’s why you get up in the morning. So, now you have a challenge — the 50 percent in the middle. The 50 percent in the middle, your opportunity is to say, ‘You know what? I’m going to make this fun somehow.'”
Watch the video »

Lead Stories

Deutsche Bank: An 8-10% Selloff ‘Looms’ As Volatility Returns to U.S. Stocks
Luke Kawa and Sid Verma – Bloomberg
Volatility awoke from its summer slumber last week, with the Chicago Board Options Exchange’s VIX index spiking on Friday to close above 20 for the first time since the sessions following the Brexit vote. The index, sometimes known as Wall Street’s fear gauge, might have further to go.

****SD: Goldman has this to say — Goldman: We’ve Reached ‘Maximum’ Bullishness and That’s Bad News for U.S. Stocks

Did SPY Options Help Trigger Friday’s Sell-Off?
Todd Salamone – Schaeffer’s Research
Standard September options expiration week is upon us. This year’s expiration is setting up similarly to last year, with the Federal Open Market Committee (FOMC) scheduled to meet soon and the SPDR S&P 500 ETF Trust (SPY – 213.28) sitting just above a major put strike — with more than 190,000 contracts in open interest at the September 210 put — just as it was last year.

****SD: From Seeking Alpha — Investors Rushed Into Put Options On Friday, What Does This Mean Going Forward?

Market turbulence raises questions over trading strategies
Robin Wigglesworth – Financial Times
The summer tranquility is ending with a bang, as markets convulse with the most severe bout of turmoil since the UK’s Brexit vote. Some analysts say an old bogeyman might have exacerbated the turmoil. The primary trigger for the sell-off over the last two days was disappointment with the European Central Bank not extending its bond-buying programme, and mounting concerns the US Federal Reserve could defy investor expectations and raise interest rates later this month. Yet some analysts say the severe reaction might have been worsened by forced selling by vehicles such as commodity trading advisers (CTAs), risk parity funds and other computer-driven strategies that respond automatically and dynamically to market turbulence.

****SD: Bloomberg Gadfly has more on this subject — Dear Algos: Thanks for the Tantrum. Love, Mom and Pop

Market Volatility Does Live
Bob Lang – CBOE Options Hub
With respect to the old Christmas folklore story, ‘Yes Virginia, there is Volatility’. The massive move this past Friday was not telegraphed, but then the first big move down hardly ever is. Nobody rings a bell at the top, nor at the bottom. Navigating the markets without the proper instruments becomes a very dicey proposition, and certainly with the right tools there is no guarantee of success, certainly with the timing.

****SD: More from TradingFloor.com — VIX explodes, catches some traders unaware. WSJ has Volatility Spike Brings Abrupt End to Markets’ Summer Vacation. OptionsHouse’s Steve Claussen writes The Bulls’ Confidence is tested – Vol explodes higher!. Lastly, The Economist has Markets: The age of stagfusion

Low-cost ETF challengers eat into derivatives market
Joe Rennison – Financial Times
If financial markets were a school playground, exchange traded funds are the popular group that everyone wants to be friends with. By comparison, some derivatives are the wallflowers.

Vol is low, not cheap
David Keohane – Financial Times
We’ve talked about how quiet the market is already. Complacency is becoming an ever more common hit in our inboxes, and we assume not just because of herding instinct. It’s also because, as we already quoted Citi: “Current vols are a strong outlier, not just compared to 2016, but against the average for all Augusts since 2000 (see charts 2, 3 below). That should give any trader pause.”

Global Sell-Off: Technicians Weigh In
The Reformed Broker
It’s kind of silly that we’re even calling what went on Friday and over the weekend a “sell-off”, but that’s just indicative of how spoiled we’ve gotten by the absence of normal volatility this summer. But summer is gone, like the headphone jack, and September is getting underway in a manner quite true to its volatile reputation. So anyway, what’s do we make of this sell-off, shallow though it’s been so far?

****SD: TD’s JJ Kinahan with more on what the week holds.

Federal Reserve risks markets shock with September move
Eric Platt – The Financial Times
Janet Yellen will deliver the biggest shock to markets since taking over as chair of the Federal Reserve should the central bank raise interest rates this month, according to a survey of Wall Street economists that shows more than 85 per cent expect it to hold fire. The scepticism among economists may concern the Fed’s top officials, who have spent the past month trying to persuade financial markets that an increase at their meeting on September 21 is a possibility given that the US unemployment rate is below 5 per cent and the global fallout from the Brexit vote has been muted.

No End for Wheat Rout With Stockpiles Ballooning to Record
Megan Durisin – Bloomberg
Hedge funds are betting that the rout that took wheat prices to the lowest in a decade is far from over. World inventories of the grain are forecast to expand for a fourth straight year, U.S. government data show. The supply cushion underscores why money managers have their biggest-ever bet on price declines.

BigTrends.com Weekly Market Outlook – Key Levels To Watch Here
CBOE Options Hub
Things were going fine last week… until Friday, when it all came completely unraveled. Friday’s 2.45% stumble in the S&P 500 (SPX) (SPY) was not only the biggest single-day loss since June when the United Kingdom voted to leave the European Union, it carried the market to its lowest close since early-July. Some key support levels were snapped too.


HKEX Chief Executive Charles Li – Latest Charles Li Direct: Addressing Mainland Investors’ Questions About How Hong Kong’s Market Works
Charles Li
With the announcement of Shenzhen Connect, we’ve begun to see a substantial increase in the Southbound trading of Hong Kong shares by Mainland investors, particularly after Mainland insurance companies got the green light to access the Connect programme. With growing interest in the Hong Kong market, we have also begun to notice that Mainland investment commentaries have become increasingly focused on one particular area of the Hong Kong markets: the easy access to refinancing through instruments like deeply discounted rights issues and share consolidations, which happen occasionally. Citing individual cases where some Mainland retail investors felt “trapped” in some of these transactions, the commentators cried foul and asked why Hong Kong regulators don’t “weed out” such practices all together.

MIAX Options Exchange – MIAX Options – Update: Market Data (ToM, AIS And MOR) Issue For 10 Gig Non-ULL, A Feed Only. No Issues With B Feed
Pres Release
Please be advised the MIAX Options Exchange is currently experiencing duplicate packet issues on the A feed impacting Market Data (ToM, AIS and MOR) affecting users on the 10 Gig non-ULL network. No data is being lost. Firms experiencing issues should listen to B Feed only for the remainder of the trading day.

MIAX Options Exchange – MIAX Options – Market Data (ToM, AIS And MOR) Experiencing Duplicate Packet Issues On The A Feed Affecting Some Users
Press Release
Please be advised the MIAX Options Exchange is currently experiencing duplicate packet issues on the A feed impacting Market Data (ToM, AIS and MOR) affecting users on the 10 Gig non-ULL network. No data is being lost.

HKEX: Special Intra-Day Margin Call In Respect Of The Day Following The Chinese MidAutumn
Press Release
The Traded Options Market will be closed for business on 16 September 2016. In order to assure that safeguards are in place against potential market risk that may arise during the aforesaid period when some of the major markets are open, the Clearing House has decided to make a special intra-day margin call in respect of all open positions on Thursday, 15 September 2016.


E-Trade Names New C.E.O. in Management Shake-Up
Liz Moyer – New York Times
E-Trade Financial, the online retail broker, has shuffled its top management and created a new role for a former executive who is returning to the firm and being tasked with bolstering growth in its main business. The changes, announced on Monday morning, mean the departure of the company’s chief executive, Paul T. Idzik, who had been in the post since January 2013.

Regulation & Enforcement

Ban On Forex In Belgium: A Mistake Or A Start Of A New Era?
Forex News Now
Belgium cracked the whip, issuing a blanket ban on trading in all leveraged financial products in the country. The move was a rare case of the Belgium’s Financial Services and Markets Authority (FSMA) leading the region in financial market regulation. FSMA has earned a distinction in Europe as a follower financial regulator.

LEI usage must go further
Allan D Grody – FOW
The chart below follows the nine month period, month-by-month, of reports of total issued LEIs, newly created LEIs and lapsed LEIs (failure to renew LEIs on first or subsequent annual anniversary of LEI registration). In this nine month reporting period, the month of August is the third month in a row of a net gain in LEIs issued vs LEIs lapsed since GLEIF started reporting in January, 2016. At the August 2016 end of reporting period, 459,136 LEIs had been “Issued”, of which 69.5% or 319,451 had been “Validated” vs. July month end’s 313,378.


The flaws in social trading
Yael Warman, Leverate – LeapRate
Instead of having to put in the long yards of studying the financial markets, keeping a constant watch on CNBC financial experts, read the finance section from head to toe and attend every class on BabyPips (though why would you want to miss them?), traders can take a swifter and easier route to success by Social Trading. Social trading enables traders to collaborate with other investors by sharing mutually beneficial trading information, along with tips and tricks that help people trade more successfully. The format of social trading follows that every group has its “leader” who publishes live trades, allowing “followers” to copy. This creates an opportunity for novice traders to quickly learn and replicate the moves of experienced operators, allowing their profit curve to develop much faster in comparison with other trading formats.

SPY has weekly expirations on Wednesday as well as Friday.
As the number of expiring cycles has increased over the years expanding from monthly expiration only to quarterly and weekly expirations, we want to express the importance of verifying the expiration date when trading options with multiple expiring cycles within a single symbol.


Weekend Review – VIX Options and Futures – 9/11/2016
Russell Rhoads – VIX Views
The streak of SPX doldrums came to an end on Friday with the orderly drop of over 50 points for which resulted in VIX rising to 17.50. Everything worth noting happened on Friday which may have added to the angst that resulted in the S&P 500 closing near the daily lows and VIX closing near the daily highs.

Weekend Review – Volatility Indexes and ETPs – 9/11/2016
VIX Views
VXST more than doubled as a function of the index being depressed in front of the three-day weekend and then in reaction to Friday’s SPX sell off. As would be expected, the rest of the VXST-VIX-VXV-VXMT curve moved higher as well, but outside of VXST relative to VIX we are still in a state of contango.

Weekend Review – Russell 2000 Options and Volatility – 9/5 – 9/9
CBOE Options Hub
Stocks across the board had a tough week (or Friday) with both the Russell 2000 (RUT) and Russell 1000 (RUI) losing value. Friday was especially tough on RUT with the small cap benchmark losing 3.3% while RUI was down 2.5%. For the week RUT lost 2.8% while RUI was down 2.5% for the first ‘win’ by the large cap index in a few weeks. For the year RUT is still in the lead, up 7.34% while RUI is now up 4.24% for 2016.

Emerging & European Equity Performance since Brexit
Richard Rosenthal – CBOE Options Hub
Investor interest has been growing in the European and Emerging equity markets as evidenced by significant rallies in some of the major indexes, particularly the FTSE 100 and FTSE China 50.


Mortgages, Taxes and Unicorn Swaps
Matt Levine – Bloomberg
This is not especially timely — I’m 120 years late to it, actually — but here’s a paper from last month about an 1896 manual for London options traders that is too delightful not to mention here. The gist of it is that 19th-century options traders understood put-call parity and used pricing methods that pretty closely approximate the modern Black-Scholes results, at least for relatively easy options.

****SD: The above paragraph is actually the fifth portion of his column. Scroll down for this old options story.

Clinton Health Another Land Mine for Suddenly Vulnerable Markets
Oliver Renick and Joseph Ciolli – Bloomberg
Investors nursing wounds after the worst selloff in three months for equity and debt markets got another stress to ponder after concerns over Hillary Clinton’s health flared anew.

Strategist: If Trump Wins, ‘The U.S. Economy Would Take Off in a Big Way’
Luke Kawa, Karen Yeung and Emma Dai – Bloomberg
Financial markets are starting to “wake up” to the possibility of a Donald Trump presidency in the wake of Hillary Clinton’s recent health concerns and tightening polls, according to Bank of America Merrill Lynch Head of Global Rates and Currencies Research David Woo. He says investors are still underestimating the real estate mogul’s chances of ascending to the highest office in the land, and what a seismic change this could be for markets and the world’s largest economy.

World Agricultural Supply and Demand Estimates

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