Observations & Insight

Boca Bits & Pieces – Tuesday
If there are two trends that continue to re-emerge each FIA conference, they are that regulation is STILL the number one challenge for the industry, and technology solutions continue to address many of those challenges in, um, bits and pieces.

Yesterday’s roundtable discussion from the FIA revealed as much in its recent survey of 800 members, who have collectively called for finality on the rulemaking – now in year number eight, depending on how you count it. Along with the regulatory fatigue, the FIA and member firms continue to worry about capital requirements and the ripple effect of those.

John Lothian News once again is putting together its annual exchange CEO video series with the top execs. In a sneak peak, Phupinder Gill, CEO of the CME Group, told JLN that one of the main focuses of CME now is to work with customers to find all kinds of capital efficiencies in clearing and new products. The London Stock Exchange Group is also working on those issues with its LCH.Clearnet, portfolio margining and netting. Our videos will be posted shortly.

Meanwhile, technology firm Duco announced yesterday it is working with the CME to address the confounding issue of fee structures for customers. Many firms are struggling with static data – basic counterparty names and reference data, and when firms are running a global business and have a mix of legacy systems, it can be very complicated, said Duco’s CEO, Christian Nentwich. Duco hopes to expand the offering to other exchanges as well as to trade repositories.

Its offering will include the CME as well as its CBOT, NYMEX and COMEX divisions, each of which has a very different fee structure. The service will help non technologists within firms manage the data, although data fees, alas, do not appear to be coming down. Such is the life of a publicly traded exchange and the drive to keep shareholders happy.

Onto other pieces.

Oddly, people actually still trade futures and options and firms are fully focused on it. Trading Technologies, for one, is now a year into its new trading solution called TT, the replacement for its legacy system X_Trader. And as TT’s CEO Rick Lane writes in a blog post today, TT has reduced latency on its so-called Autospreader by 70 percent over its legacy system down to 60 microseconds, showing that speed, indeed, still matters. This is on an internet-based platform, a baffling concept for many in the industry. This is only part of the story.

Another trend that has lingered in recent years is the shrinking pool of FCMs serving the derivatives markets. So it was refreshing to hear that online broker OptionsHouse is bucking the trend by opening a non-clearing FCM, scheduled for the 2nd quarter of this year. Their (not-so) secret? Focusing on retail, a segment that has seemingly gotten lost in the shuffle, even though it represents the fastest growing area of the market. According to Dan Ryba, vice president of the firm’s futures division, says, to meet the needs of the modern retail customer, an FCM needs to lead with user-friendly tools, mobile apps, and a focus on education.

The FIA Boca Tennis Tournament drew almost 50 participants this year, a great turnout for a great cause. Trading Technologies sponsored the event and matched each $50 donation, for Futures For Kids. Clive Furness of Contango said he played more tennis yesterday than he had in his entire life. All for the kids. On Friday, FFK gets another boost from the Boca golf outing. Again, all for the kids.

We want to thank the FIA for putting the name tags for the press on bright orange paper; call it hunting orange. It makes it so much easier to walk up to someone to talk to when you are wearing a color that says “CAUTION!!!!!!”

Jorge Alegría, formerly the chief executive officer of the Mexican Derivatives Exchange (MexDer) has joined CME Group and is working on a project covering Latin America. We learned this when we showed up at a CME Group cocktail party and he was present.

As we hit the “send” button on today’s newsletter, our friends at CBOE continue the trend of releasing news and offering brief presentations on strategic initiatives over breakfast. At this year’s breakfast, the exchange announced the listing of options on the FTSE 100 and FTSE China 50 indexes beginning March 29. See the press release below.

Additionally, we heard brief presentation by industry legend Richard Sandor and his newest innovation, the American Financial Exchange, the fledgling marketplace serving small and mid-sized banks, with which CBOE has teamed. AFX plans to launch its interest rate benchmark, Ameribor, later this year. In just over a year, the exchange has now signed on 12 member banks and have done $600 million in transactions. For more on AFX, see our recent interview with Sandor

Also featured at the CBOE breakfast was a presentation by Vest Financial, in which CBOE recently made a major investment. Vest, which advises on options-based investment, can be integrated within CBOE’s platform. As with the exchange’s previous investment in TradeLegs, the agreement punctuates CBOE’s commitment to helping navigate the often-complex world of options trading. But whereas Tradelegs is aimed at institutional investors, Vest caters to the retail marketplace.

Another example of technology addressing a need in the marketplace.

Lead Stories

Equity options market fears higher costs
Philip Stafford and Nicole Bullock – Financial Times
Users of the US equity options market fear they face higher costs as the latest industry consolidation involving Nasdaq is not seen alleviating a fragmented landscape of trading venues. The New York-based group stole a march on rivals last week with a $1.1bn deal to buy the International Securities Exchange from Deutsche Börse. By taking control, Nasdaq will decisively leapfrog the Chicago Board Options Exchange to become the biggest operator in a field of 14 exchanges, with a 40 per cent market share. “Somebody is the new big dog. They have a big market share and CBOE is now the only one not aligned with a cash market,” says David Weiss, senior analyst at Aite Group, a financial markets consultancy.
goo.gl/lbL4p7

****SD: In the story Manoj Narang, founder of new US hedge fund Mana Partners, says: “It becomes the worst of all worlds — you get the fragmentation but without the competition. One manifestation is pricing power — exchanges are starting to charge significant amounts for data. It means you have to buy the data feeds from all the exchanges.”

London Stock Exchange, Deutsche Boerse Agree on Merger
John Detrixhe – Bloomberg
Deutsche Boerse AG agreed to acquire London Stock Exchange Group Plc, a deal that may kick off a bidding war as rival Intercontinental Exchange Inc. contemplates a counter offer. LSE-Deutsche Boerse would be the world’s biggest exchange operator by revenue and second-largest by market value, sandwiched between CME Group Inc. and ICE. Chicago-based CME is also assessing whether to make a bid, according to people familiar with the matter. A combination of LSE and ICE would create a new global leader, with a market value about $10 billion greater than CME’s.
bloom.bg/1pom4Fa

****SD: If there is a spoiler for deal, can it come in a form ready-made for the movies? (Something that would make the whole “note under the hotel door” look minor in comparison.)

Exchange merger set to raise temperatures in Florida
Philip Stafford – Financial Times
The redrawing of the global exchange landscape and its potential fallout is set to dominate the agenda as the global derivatives industry gathers in Florida this week. The announcement of London Stock Exchange Group’s merger with Deutsche Börse — the market’s biggest deal in many years — is likely to add further spice to its biggest annual gathering, the Futures Industry Association conference. The event has long had a history as a hotbed of dealmaking as senior exchange executives mingle with each other and their main users such as hedge funds, asset managers and high-frequency traders, as well as bankers and lawyers.
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****SD: You can bask in Massad’s remarks at the conference here

OptionsHouse Forms Futures Brokerage
Press Release
OptionsHouse, a value leader in the online brokerage industry, announced today that it has formed a non-clearing futures commission merchant (FCM). OptionsHouse will launch the FCM in Q2 of 2016, subject to regulatory approval. Futures trading is currently available at OptionsHouse, but by establishing its own FCM, the company will be able to further enhance the futures trading experience for its customers. Not only will the time and effort required to open a futures account be significantly reduced, additional cash management and trading strategies will be available. Customers will be able to trade electronically and access licensed OptionsHouse professionals at a full-service desk, 24 hours a day, six days a week.
/goo.gl/Hbvwmx

OCC CalPERS Partnership: It’s better to have and not need
Securities Lending Times via OCC
OCC remains innovative in the face of external pressures, says John Fennell
What was the aim of the CalPERs partnership?
We developed the committed liquidity facility with US pension fund CalPERS to increase our overall resources from $2 billion to $3 billion, while diversifying our pool of committed lenders to be less bank-focused. The partnership made Options Clearing Corporation (OCC) the first central counterparty (CCP) to establish a committed liquidity facility with a non-bank, all for the purpose of mitigating concentration risk. We already have a lot of bank risk and the way regulations are evolving and being implemented has put a lot of pressure on the costs of these kinds of facilities and more importantly the long term suppl
goo.gl/LYcG6i

FIA Elects New Board Members At Annual Meeting
Press Release
FIA announced the election of directors to its board at its annual meeting in Boca Raton, Fla. Seven directors were elected at this meeting for one and two-year terms.
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Exchanges

CBOE to List Options on FTSE 100, FTSE China 50 Indexes
Press Release
The Chicago Board Options Exchange (CBOE) today announced that it plans to list options on the FTSE 100 and FTSE China 50 indexes beginning March 29, 2016. The announcement was made by CBOE Holdings CEO Edward Tilly at a press briefing at the 41st annual Futures Industry Association Conference currently taking place in Boca Raton, Florida.
goo.gl/CO1HTm

****SD: Another installation in the race to gain whatever exposure to China one can.

CME Group sells data center outside Chicago, to lease back space
Reuters
CME Group Inc has agreed to sell the Chicago-area data center that houses its electronic trading platform as part of a drive to cut costs. CyrusOne, a Texas-based company that owns more than 30 data centers worldwide, will purchase the building in Aurora, Ill., for $130 million, according to a statement issued on Tuesday. As part of the deal, Chicago-based CME will sign a 15-year lease for space in the 428,000 square foot building. The company’s electronic trading platform, known as CME Globex, will continue to be operated from the center, according to the statement.
reut.rs/1polUh3

****SD: That’s roughly $300 a square foot. To think some people pay $5,000 a square foot for luxury condos in New York without the ability to expand co-location services.

Market questions details of DB-LSE deal
Futures & Options World – Let’s Talk Derivatives
The news on Wednesday that the proposed merger between Deutsche Boerse and the London Stock Exchange Group has been agreed, while not a shock to the market, has reignited questions over competition, as well as the effect that the creation of a new behemoth would have on the market. Professor John Colley from Warwick Business School said: “The savings seem rather meagre in a merger which appears to be designed to avoid upsetting staff, directors and, indeed, competition authorities.” The London Stock Exchange and Deutsche Boerse, the two largest European exchange groups earlier Wednesday confirmed that they have formally agreed terms to merge, less than a month after the firms said that they were in talks.
goo.gl/rQF5tm

****SD: Just be sure they are the right questions. Because, as Pynchon wrote, “If they can get you asking the wrong questions, they don’t have to worry about answers.”

Nasdaq Futures Welcomes Straits Financial
Nasdaq
Nasdaq announced today that Straits Financial is now an approved Futures Commission Merchants (FCM) for trading on Nasdaq’s U.S.-based designated contract market (DCM), which offers futures and options on key energy benchmarks, including oil, natural gas and U.S. power.
goo.gl/6gdN0p

TOM MTF: Markit Liquidity Report On Dutch Equity Options For The Month Of February 2016
Press Release
As part of the regular series of liquidity reports on the Dutch options market, Markit has released the February 2016 edition. The introduction of MiFIDII obliges banks and brokers to take all “sufficient” steps in order to achieve the best possible result when executing option transactions for customers. In doing so, the bank or broker needs to decide on which exchanges it makes available to its customers and publish annually the top five list of exchanges on which orders have been executed.
goo.gl/W3tXWs

BSE’s F&O volume dries up, daily turnover tanks 77% in FY16; NSE sees 13% rise
Economic Times
The average daily turnover on BSE’s derivatives segment has plunged nearly 80 per cent this financial year on a year-on-year.basis after four years of consistent spike. That has happened at a time when peer NSE has managed to clock a decent 13 per cent growth YoY in its F&O segment’s average daily turnover during the same period.
goo.gl/BSKmgg

****SD: That’s an M1 Abrams size tank.

GMEX Partners With FPT To Launch Vietnam’s First Derivatives Market And Clearing House – Delivering Innovation In Exchange Traded Derivative Contracts To Be Traded On Hanoi Stock Exchange And Centrally Cleared By Vietnam Securities Depository
Press Release
GMEX Group has entered into a joint venture agreement with FPT Information System (FPT) based in Hanoi. The partnership has been awarded the mandate to provide technology, global business and local operational expertise to launch the first Derivatives market and fully integrated clearing house in Vietnam. The Ministry of Finance (MOF) has entrusted the HNX and the Vietnam Securities Depository (VSD) to operate the derivative market’s transaction activities.
goo.gl/ZxuAvf

CBOE Receives Two Honors at EQDerivatives Global Equity and Volatility Derivatives Awards 2016
Press Release
The Chicago Board Options Exchange (CBOE) announced it received two honors at the EQDerivatives Global Equity & Volatility Derivatives Awards last night in New York City — “U.S. Exchange of the Year” and “Listed Product Launch of the Year” for CBOE Volatility Index (VIX Index) Weeklys futures and options.
goo.gl/eUYV68

Regulation & Enforcement

N.Y.S.E. Names Former Regulator as Chief Regulatory Officer
Liz Moyer – NY Times
The New York Stock Exchange has completed an overhaul of its regulatory functions, naming Anthony J. Albanese, the former acting New York state financial industry regulator, as its chief regulatory officer. Mr. Albanese stepped down as acting superintendent for the New York Department of Financial Services at the end of last year after six months on the job, and after four years as chief of staff to former superintendent Benjamin Lawsky. Before that he was a partner specializing in securities litigation at the law firm Weil Gotshal & Manges.
nyti.ms/1poaz0F

SEC Aims to Complete ‘Flash Crash’ Fix in Coming Months
Andrew Ackerman – WSJ
A giant data project at the center of the regulatory response to the 2010 “flash crash” will finally begin operating next year, a top U.S. regulator said Tuesday. The Securities and Exchange Commission has put renewed efforts into completing the Consolidated Audit Trail this year, getting it ready to begin providing regulators with data in 2017, according to the SEC’s Stephen Luparello, who leads the agency division tasked with overseeing the project. CAT is a massive computer system originally conceived as a way to enable regulators to monitor stock and options orders in real time and zero in on manipulators quickly. After the flash crash—which occurred on May 6, 2010, and saw some big stocks lose nearly all their value before markets rebounded—CAT was seen as a crucial step in protecting the markets from future swings.
on.wsj.com/1podEhd

CFTC Charges Two Binary Options Firms with Fraud, Illegal Off-Exchange Activity, and Operating in an Unregistered Capacity
Press Release
The U.S. Commodity Futures Trading Commission (CFTC) today announced that a federal district court has unsealed a civil Complaint that the CFTC filed with the Northern District of Illinois on February 2, 2016, against two foreign web-based binary options firms, Vault Options, Ltd. (Vault) and Global Trader 365 (GT 365), both Israeli web-based companies. The CFTC’s Complaint alleges that the two firms unlawfully solicited and accepted more than $1 million from at least 50 U.S. customers to trade off-exchange binary options contracts, defrauded those customers, and operated as unregistered Futures Commission Merchants (FCMs).
1.usa.gov/1RMdS8M

SpotOption Exchange and BDSwiss Get Administrative Fines as CySEC Gets Tough
Finance Magnates
The Cypriot regulator issued two small fines to SpotOption Exchange and BDSwiss in December in what seems to be an ongoing effort by the regulator to get its house in order. After a lot of criticism, the Cypriot regulator has ramped up its control mechanisms and started taking action against a number of companies in the industry.
goo.gl/l6TrQU

****SD: How is a EUR 5000 fine “getting tough”?

Technology

A Look Back on TT’s First Year
Rick Lane – Trading Technologies
Two years ago at the annual FIA Boca conference, we announced our plans to rebuild our flagship X_TRADER platform. Our goal was to make the tools that our customers had depended on for 20 years even faster, more flexible and more accessible than ever before. Then last year in Boca, we announced the commercial availability of the new platform, which we simply call TT. Now as our industry leadership gathers once again this week in Boca, I’m excited to report we’ve reached several key milestones with regard to performance, functionality, market connectivity and distribution in the platform’s first year.
/goo.gl/UFN1zN

BAE Profiles ‘World’s Most Dangerous Cybercriminals’
FTF News
BAE Systems, the London-based, multinational security company, recently released profiles of “six prominent types of cybercriminals” and detailed how they could hurt companies around the globe, officials say.
goo.gl/xmekQ8

****SD: Also included is some on Markit’s new FX affirmation service and the CME/Duco team up.

Strategy

Options hedging in focus as FOMC meeting looms
Reuters
Investors have regained their appetite for hedging in the U.S. options market, with signs of an uptick in protective trades headed into the results of Wednesday’s Federal Reserve meeting.
The availability of relatively cheap protection and the looming uncertainty linked to the outcome of the Fed’s two-day policy meeting may have boosted trading activity in VIX call options, analysts said.
reut.rs/1pofZZu

****SD: But will protection be cheap in June?

Options Bears Bet Valeant’s Worst-Ever Drop Can Go Lower: Chart
Bloomberg
Valeant Pharmaceuticals International Inc. plunged as much as 46 percent on Tuesday, putting the stock on track for its worst day ever. And yet options traders are betting on still deeper declines. At 11:15 a.m. New York time, almost 130,000 bearish options on Valeant stock had already traded — the highest put volume in 2016 and more than quadruple the average. Some traders also dived into bullish options, sending volume on Valeant calls to almost 300 percent its 2016 mean.
bloom.bg/1LqHxrs

****SD: How many funds has Valeant put major dents in?

Know Your Time Frame
Bob Lang – CBOE Options Hub
Forecasting is fun, but it leads to many errors in the process. We hear them all time, someone trying to be a hero but often failing miserably in their predictions. I read a quote last week by Howard Simons of the ‘Iron Law’ of forecasting (for economists): Give ’em a number or give ’em a date, but don’t ever give ’em both. Indeed, trying to forecast is quite difficult, one can go back and forth from hero to goat several times. Keep laying out a forecast and eventually you’ll be right, but it certainly depends on your time frame.
goo.gl/m1uBrb

Simulated Backtests May Not Be Realistic For Volatility ETNs
Seeking Alpha
The volatility ETNs VelocityShares Daily Inverse VIX Short-Term ETN (NASDAQ:XIV) and iPath S&P 500 VIX ST Futures ETN (NYSEARCA:VXX) have attracted much interest. Since these products provide the greatest value when used in conjunction with trading strategies that seek to avoid large drawdowns, numerous strategies have been developed. However, both ETNs were brought into existence after the most recent major crisis in 2009. That means they’ve only been through part of the full volatility cycle that runs through boom, bust, and recovery. It’s therefore desirable to backtest these trading strategies against longer time periods to include a diversity of conditions.
goo.gl/N1NoJr

Physical iron ore price volatility stokes paper trade – Metals
Platts News
Ten-day historical volatility for iron ore futures is approaching 100% after averaging just 29% last year, brokerage Freight Investor Services said Wednesday.
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