Observations & Insight

Sweet 16: The Tops For 2016 – Exchanges
Exchange leaders will be dealing with big changes at their respective companies in 2016, from launching new competing markets and dealing with new regulation to integrating new data acquisitions to expanding across different time zones. In JLN’s Sweet 16, we spoke with Michael Davie, Terry Duffy, Jeff Sprecher and Rama Pillai about the top exchange priorities for 2016.
Watch the video »

Lead Stories

Draghi’s Less-Than-Super Currency Backlash Kills Consensus Trade
Anchalee Worrachate and Anooja Debnath – Bloomberg
In the end, not even Mario Draghi could do enough to meet the lofty expectations of the currency market. The European Central Bank president, nicknamed “Super Mario” for his record of decisive policy actions, failed to live up to that reputation with the extra monetary stimulus he unveiled on Thursday. He paid the price with the euro surging the most since 2009 against the dollar. Options traders cut bearish bets on the shared currency by the most since August. Deutsche Bank AG, the world’s second-biggest foreign-exchange trader, and Barclays Plc recommended closing positions that would profit from a weaker euro, while Goldman Sachs Group Inc. said it was reviewing its forecasts.

****SD: Just once I want Draghi to start a presser with, “It’s a me, Mario!”

Credit options bear brunt of ECB downer as volatility spikes
Dan Alderson – GlobalCapital
Credit options were the worst hit of volatility strategies on Thursday, said traders, after the European Central Bank unveiled provisions that many in the market found underwhelming.

Speed-Trading Pioneer Daniel Tierney Resigns From KCG Board
Annie Massa – Bloomberg
One of the founders of high-speed trading pioneer Getco, Daniel Tierney, has resigned from the board of KCG Holdings Inc., the company created when Getco saved a struggling brokerage.
KCG announced Tierney’s departure and the appointment of two new board members, Debra Chrapaty and Alex Rampell, in a release on Friday. The changes take effect immediately, the company said.

Options on Futures: Use Cases in Efficient Risk Management
Andy Nybo and Bob von Halle – TABB Group
The recent market volatility is playing havoc with the investment strategies of portfolio managers around the world who are still trying to make sense of shifts in international economies, changes in market sentiment, and spiking volatility across nearly all asset classes. The challenges of managing risk exposure never abate, but recent market conditions are testing the wherewithal of all but the most placid investment strategists.
One area of continued investor interest has been in the options on futures (OOF) markets, where volumes have continued to grow amid the increased market volatility, and rising investor interest in using more complex strategies. These strategies run the gamut from simple hedging to premium harvesting and increasingly, multi-legged trades across expirations designed to mitigate risk between production cycles and time horizons.


CME, ICE, Eurex see November volumes rise
Luke Jeffs – Futures & Options World
The world’s top exchanges saw volumes up on speculation over interest rates
European and US exchange giants CME Group, the Intercontinental Exchange (ICE) and Eurex reported volumes up in November on the back of a surge in interest rate trading as markets geared up for rate hikes in the US and Europe.

CME rules out FX options clearing for now
Futures & Options World
CME Group has ruled itself out of offering over-the-counter foreign exchange options clearing for the foreseeable future, granting a competitive advantage to rival LCH.Clearnet as the London-based central counterparty (CCP) prepares to clear the first physically settled FX products next year.
“As a major player in the OTC interest rate swaps clearing space, we are in regular dialogue with our clients to understand their needs. Currently, we are seeing low appetite for OTC FX options clearing and have no near-term plans to launch this product,” said Will Patrick, executive director for FX products at CME Group.

Polish exchange chief exec Pawel Tamborski quits
Luke Jeffs – Futures & Options World
TamborskiThe chief executive and chairman of the Warsaw Stock Exchange Pawel Tamborski said he is to step down from that role at the end of the year, less than 18 months after the took the top job at the Polish group.
Tamborski said in a statement on Thursday he will step down as chair and chief executive of the exchange group on December 31 and hinted at his reason by saying “I have never been a politician”.

Regulation & Enforcement

Tricky Twins Spoofed Trading Computers
Matt Levine – Bloomberg
I have in the past praised the Securities and Exchange Commission’s enforcement actions for their fine sense of humor and dramatic tension, but occasionally one feels that they stretch the bounds of plausibility. Take today’s enforcement action against Behruz Afshar, Shahryar Afshar and Richard Kenny. I can believe that a pair of lovable rogues teamed up with “their friend and former broker” to run some option-trading scams. But it goes a bit far that the lovable rogues are also twin brothers. And it is completely over the top that the centerpiece of their alleged scam consisted more or less of the twins pretending to be each other. Come on! That is the plot of a teen comedy, not a securities enforcement action.

Foreigners drawn in as fear and loathing grip China’s finance industry
Engen Tham and Michelle Price – Reuters
A widening regulatory probe into some of China’s biggest brokerages has set nerves jangling in a financial industry still recovering from a summer of turmoil, with fear of becoming entangled in investigations spreading among foreign investors.
People working at domestic securities firms report an ugly mood after news in the past week of increased scrutiny of the sector by authorities. A nervous inertia is slowing new business as staff are encouraged to report their bosses or colleagues for corruption.

CME Defeats Suit Alleging It Favored High-Frequency Traders
Janan Hanna – Bloomberg
CME Group Inc., owner of the world’s largest futures market, defeated a lawsuit by some users who alleged the company sold access to order information to high-frequency traders ahead of other market participants.


China’s stock markets to introduce circuit breaker from January 1 to stem future routs
Xie Yu and Jing Yang – South China Morning Post
Mainland China’s stock markets will install a circuit breaker from January 1 to prevent a repetition of the market rout which wiped out trillions of dollars from June this year.
Analysts said it was better to have a market-based mechanism rather than arbitrary government intervention, although the move might affect market liquidity, together with a daily cap that allows only 10 per cent upward or downward movement for individual stocks, and a so-called T+1 rule that prevents investors from buying and selling shares on the same day.

Why Tech-Savvy Banks Are Gung Ho About ‘Container’ Software
Penny Crosman – American Banker
Container software, a technology that only a year ago was still considered edgy and risky, is getting a warm reception from financial institutions, with good reason.
At a conference this week in New York devoted to containers, bankers and others raved about the technology. Goldman Sachs, Bank of America, the International Securities Exchange and others are increasingly using containers in-house and Goldman recently made a breakthrough by taking a few applications into production within containers in the public cloud.

****SD: ISE has a data center running solely on CoreOS, the new Linux OS that works well with containers. For more on ISE’s use of containers for options trading, see this story.

FPGAs Grow Beyond Low-Latency Roots
The field programmable gate array (FPGA), a favorite tool of high-frequency and latency-arbitrage traders, is growing up.
Over the past few years, improved performance and increased ease of programming FPGAs are moving the once niche technology into new roles in financial firms’ data centers.


How to Trade a Mean-Reverting SPY
Adam Warner – Schaeffer’s Research
I talk about CBOE Volatility Index (VIX) mean reversion all the time, but there’s an even greater mean reversion force going on these days: SPDR S&P 500 ETF (SPY) mean reversion.
With one month to go, the best description we can give 2015 is “One Big Churn.” If you don’t like the prices one day, have no fear; you’ll see a price you like better soon. As SPY failed yet another pop above 210, I took a look at how often we’ve visited some SPY “fulls” this year. I define that by if the “full” (say 207) was in that day’s SPY range. If SPY has a range of 207.10-207.90, that day “saw” just a 207 full; if the range was 207.10 – 209.90, it saw 207, 208 and 209 fulls, et al.

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