Observations & Insight

Reg AT Stirs Concerns Ahead of CFTC TAC Meeting
Sarah Rudolph – JLN
The CFTC’s Technology Advisory Committee (TAC) was scheduled to meet on Tuesday to discuss three issues important to the trading industry: 1) the Regulation Automated Trading (Reg AT); 2) swap data standardization and harmonization; and 3) the potential of blockchain and distributed ledger technology to the derivatives market.


CBOE RMC, Feb. 29-Mar 2, 2016, Bonita Springs, FL
Now in its 32st year in the U.S., the annual CBOE Risk Management Conference (RMC) is the premiere financial industry conference designed for institutional users of equity derivatives and volatility products. Hosted by the Chicago Board Options Exchange (CBOE), RMC is an educational forum dedicated to exploring the latest products, trading strategies and tactics used to manage risk exposure and enhance yields. RMC brings together top traders, strategists and researchers, enabling participants to learn the state-of-the-art in investment risk management from true experts in the field. Learn more HERE and register for the event HERE

***DA: I see flights on American, nonstop Chicago to Fort Myers for $107 round trip. Or, if you are feeling spunky, you can fly Spirit for $84 round trip. Get thee to Bonita Springs!

Lead Stories

Deutsche Bank – The Market Is Pricing In a Rare Stretch of Carnage in Equities
Luke Kawa – Bloomberg
Oil is moving in tandem with U.S. equities—and while this may be a case of the tail wagging the dog, there’s no telling how long this connection will endure, or how severe the downside could be for both asset classes.
According to Deutsche Bank, options markets are ascribing too high a probability to what would be a statistically uncommon sell-off in stocks. Based on the magnitude of the retreat in the S&P 500-stock index over the past month, the likelihood of a further decline of epic proportions has been diminished.

Market Data Deathmatch Impacting Investors Despite Efficiency of U.S. Equity Market, Says TABB Group Research
Press Release
It is widely accepted that electronic trading has made the U.S. equity market significantly more efficient, helping reduce spreads, commissions, and market-maker revenues, while returning dollars into the hands of investors. At the same time that trading volumes and profits at market participants have declined, exchange revenues at the three largest U.S. equity exchange groups have risen nearly 16 percent, and the revenues for exchange data, access and technology are up 62 percent from the beginning of 2010 to the third quarter of 2015.

****SD: TABB Group link here. As if Larry Tabb wanted more proof, under the Exchanges section, see “LME to introduce data usage fees in April.”

How Fearful Were Investors in August? Not as Much as Thought
Saumya Vaishampayan – WSJ
It’s been a common refrain in recent weeks: Even as stocks tumbled, analysts and traders argued sentiment wasn’t as panicked as it was during the late-summer turmoil.
For justification, some market participants pointed to the CBOE Volatility Index, or VIX, often referred to as the stock market’s “fear gauge.” But that might not be a fair comparison.
Sure, the VIX’s highest closing level of 2016 was 27.59 on Jan. 20. That’s well below the close of 40.74 it notched on Aug. 24, back when fears about Chinese growth had helped knock stocks sharply lower. But on Aug. 24, the day the Dow Jones Industrial Average dropped by more than 1,000 points in the first minutes of trading, the VIX didn’t calculate for nearly a half hour.

CalPERS renews participation in OCC repurchase facility
Rick Baert – Pensions & Investments
CalPERS this month renewed its agreement to participate in a fully committed repurchase facility with derivatives clearinghouse Options Clearing Corp. and securities lending agent eSecLending.

****SD: Here is the story about the initial agreement from back in March. TL;DR — credit facilities from banks are becoming more expensive due to capital requirements, so the OCC looked elsewhere.

Bill Ackman’s Pershing Square Annual Investor Letter
Guru Focus
2015 is a year we will not forget. There was no financial crisis except perhaps in the energy, commodity, and currency markets.1 There were no major new wars except for the rise of ISIS and growing global terrorism. The global economy has shown signs of weakness, most notably in China, but U.S. core growth appears sound. The substantial majority of our portfolio companies made continued business progress despite currency headwinds and a weakening global economic environment. Yet, the Pershing Square funds suffered their greatest peak-to-trough decline and worst annual performance ever. What happened?

****SD: More on his Valeant move. For more Ackman, see “Bill Ackman Finds Shorting Yuan, Riyal More Vexing Than Valuable” under Strategy

Finance hub is flourishing as Belfast puts troubles in past
Philip Stafford – Financial Times
Northern Ireland is throwing off its violent recent past to become a thriving node in the complex network that is the modern international financial market.
The province of just 1.9m people can point to homegrown software companies that have achieved success providing ancillary services such as data analytics and management, including Belfast’s Wombat Technologies and Newry-based First Derivatives.
It has also produced Phelim Boyle, an economist whose work on the Monte Carlo method in options pricing helped bring about the explosion in derivatives trading in the 1980s.


Computerized Trading Firm to Take Over Barclays’s N.Y.S.E. Seats
Nathaniel Popper – NY Times
The high-frequency trading takeover of the New York Stock Exchange is now essentially complete.
Global Trading Systems, a computerized trading firm based in New York, said on Tuesday that it was taking over the seats on the floor of the New York Stock Exchange that have been run by the British bank Barclays.

LME to introduce data usage fees in April
Alice Attwood – Futures & Options World
British exchange is moving to a new purpose-built office on Finsbury Square
The London Metal Exchange is to introduce in April new charges on data usage, the latest step in commercialisation at the HKEx-owned group.
The British metals exchange will on April 4 2016 introduce a new market data usage policy that requires firms to obtain a licence if they use LME data for valuations, pricing or reference purposes.

Lars Hansen and Randall Kroszner Appointed to CME Group’s Competitive Markets Advisory Council
Press Release
CME Group, the world’s leading and most diverse derivatives marketplace, today announced the appointment of two new members to its Competitive Markets Advisory Council (CMAC). These new members are Lars Hansen, David Rockefeller Distinguished Service Professor of Economics at the University of Chicago and 2013 recipient of the Nobel Prize in Economics; and Randall Kroszner, former member of the Board of Governors of the U.S. Federal Reserve system and Norman R. Bobins Professor of Economics at the University of Chicago Booth School of Business.

TSX and S&P Dow Jones Indices Sign Multi-Year Agreement
TMX Group (TMX) and S&P Dow Jones Indices (S&P DJI) today announced a renewal of the multi-year Index Operation and License Agreement (Agreement) between TSX Inc. and S&P DJI, further extending their long-standing and successful partnership. The Agreement will ensure that market participants will continue to have access to a comprehensive suite of investable indices for the Canadian equity markets, as well as North American and global markets. Executives and other representatives from TMX and S&P DJI will later today hold a market close ceremony to celebrate the Agreement.

****SD: The rights to list options and futures on the indices at the Montreal Exchange is part of the agreement.

Nasdaq signs Nigerian exchange for Smarts tech
Futures & Options World
African exchange will use the platform to power its compliance programme
US exchange group Nasdaq has signed up its latest exchange client, the Nigerian Stock Exchange (NSE), for its market surveillance technology system, Smarts.
The African exchange will use the Smarts platform to power its compliance programme as it works to expand its market across asset classes. The system includes tools needed in market surveillance to monitor manipulation, such as spoofing and layering.

ThinkLiquidity Partners With CME to Bolster Transaction Reporting Capabilities
Jeff Patterson – Finance Magnates
ThinkLiquidity, a risk management technology group specializing in real-time analytics and consulting services, has become a registered service provider with CME Group, helping extend transaction reporting capabilities to brokers in Australia, according to a ThinkLiquidity statement.

Douglas Diamond to receive CME Group-MSRI Prize in Innovative Quantitative Applications
Press Release
CME Group, the world’s leading and most diverse derivatives marketplace, and the Mathematical Sciences Research Institute (MSRI) announced Douglas Diamond, Professor of Finance at the University of Chicago, as the 2015 recipient of the CME Group-MSRI Prize in Innovative Quantitative Applications. A ceremony honoring Diamond will take place at CME Group Headquarters on Monday, Feb. 1, at 10:00 a.m. CT and will feature a dynamic discussion on the topic of non-bank runs and financial crises.

Regulation & Enforcement

Experts question whistle-blower regime
Alice Attwood – Futures & Options World
The Commodity Futures Trading Commission has launched a website to make it easier to report suspected manipulation
US regulator the Commodity Futures Trading Commission last week sought to encourage whistle-blowers to flag-up potential violations by launching a website to simplify the process but market experts have questioned if the move will drive any significant industry change.

Breaking: Banc De Binary Settles With CySEC to Pay EUR350,000
Finance Magnates
Bank De Binary has settled with the Cyprus Securities and Exchange Commission (CySEC) to pay EUR350,000 for possible violations. According to the official announcement by the regulator, the binary options brokerage might have violated a couple of points in the Cyprus Investment Firms law.

****SD: Another day, another binary broker violation…

AMF sounds alarm on binary options
Press Release
Promises of easy money by trading in binary options via websites: The Autorité des marchés financiers (the “AMF”) is sounding the alarm and urging Québec consumers to stay clear of such scams.
“No business is currently authorized to market or offer binary options in Québec. Over the past few months, we have seen a spike in reports and calls to our Information Centre about binary options offered on-line,” said AMF President and CEO Louis Morisset. “We are especially concerned that consumers who have been enticed by promises of attractive payouts, not only here in Québec, but elsewhere around the world as well, will never see their money and have exposed themselves to a high risk of identity theft and fraud,” he concluded.

****SD: Another day, another warning about binary options…


A Big Trader Just Joined Criticism of Key Stock Market Service
Annie Massa – Bloomberg
To one of the U.S. stock market’s biggest traders, the decades-old central system that broadcasts prices to investors is sluggish and should be replaced.
That conclusion, from a KCG Holdings Inc. report released Monday, echoes calls from other traders to overhaul the way information is collected and distributed in the market. The object of KCG’s scorn is the consolidated data feed known as the SIP, which collects and redistributes prices from 12 stock exchanges and dozens of alternative venues. The most sophisticated traders shun it, instead basing trading decisions on faster sources bought directly from exchanges.

Is Fragmentation a Figment of the Market’s Imagination?
Traders News
Has technology really helped the U.S. equities market? Has the development of over 50 or so trading venues benefited investors and market structure or has it hurt?
Market consultancy Greenwich Associates in its latest report examined the effects of technology and electronic innovation on the current market structure. And according to Greenwich, warnings that market fragmentation is undermining the efficiency and even the stability of U.S. equity markets are more myth than reality—but they are also important.

Istanbul eyes November Nasdaq futures tech launch
Alice Attwood – Futures & Options World
Exchange went live with Nasdaq’s trading tech for its spot market in December
Borsa Istanbul has targeted November to implement Nasdaq’s technology and trading system for its derivatives market, after the group with successfully went live with the tech for its spot market in December.
The exchange group is now working toward implementation of Nasdaq’s complete technology and trading system for the growing derivatives markets.


Bets on Negative U.S. Rates by End-2017 Jump Above 10% Chance
Matthew Boesler and Liz McCormick – Bloomberg
Federal Reserve officials are expecting to raise interest rates this year and next. Options markets show some investors are taking out protection in case rates instead go negative.
The implied probability of U.S. interest rates sinking below zero next year has risen above 10 percent, data compiled by Bloomberg show. The move has been driven by a surge in purchases of contracts that pay out if rates are cut below zero by the end of 2017 and may be linked to investors finding a cheaper way to hedge the opposite bet — that rates will actually rise as the Federal Reserve expects.

Bill Ackman Finds Shorting Yuan, Riyal More Vexing Than Valuable
Rachel Evans – Bloomberg
Bill Ackman is finding out the hard way the lengths policy makers are willing to go to defend their currencies.
Bets against China’s yuan and the Saudi Arabian riyal, made by the billionaire founder of activist hedge fund Pershing Square Capital Management, have largely failed as hedges against the effects of slumping Chinese stocks and declining oil prices due to intervention by the nations’ central banks, Ackman wrote in his annual letter to investors released Tuesday. Pershing, which has almost $15 billion of assets under management, lost 20.5 percent in its publicly traded fund last year.

A Bullish Options Bet on a Big Energy ETF
Tom Lydon – ETF Trends
The Energy Select Sector SPDR (NYSEArca: XLE), the largest equity-based energy exchange traded fund, has had its shares of struggles in 2016 after being the worst of the nine sector SPDRs in each of the previous two years. However, there are signs some traders are betting XLE’s near-term outlook could be improving.

XIV Or ZIV? New Perspectives Following 6 Months Of Elevated Market Volatility – VelocityShares Daily Inverse VIX Short-Term ETN (NASDAQ:XIV)
Seeking Alpha
A few articles published on Seeking Alpha have focused on comparing two volatility ETNs: VelocityShares Daily Inverse VIX Short-Term ETN (NASDAQ:XIV), and VelocityShares Daily Inverse VIX Medium-Term ETN (NASDAQ:ZIV). Because the most recent of these appeared in July 2015, all of them predated the past six months of elevated market volatility.
This article focuses on the historical performances of XIV and ZIV since inception, and assesses their suitability for trading and/or investing in light of additional wisdom gained over the past six months.

Facebook earnings and the ‘iron condor’ strategy
Georgio Stoev – TradingFloor
Facebook is expected to report its quarterly earnings after the New York bell tonight.
Analysts are expecting a big quarter from the Menlo Park-based social media giant, and traders are expecting a big move.
The February, at-the-money straddle (ATM call and ATM put), prices in a move of $7.50 (either up or down). We, therefore, see these rich in premium options as a good trading opportunity. While some investors could sell a short strangle (short call and short put) they could also get in trouble if the underlying moves outside the established range and one of the short options becomes in-the-money.


How VIX Responds to Volatile Oil Prices
Adam Warner – Schaeffer’s Research
We know at least for the moment that oil and stock prices are intertwined. That won’t last forever, of course. Mark Hulbert shows a much different relationship if you look back past the last decade. And hey, I’m old enough to remember when lower oil prices were considered a good thing.

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