Observations & Insight

The Model Is Changing
Jim Kharouf – JLN

E*Trade announced it is buying OptionsHouse for $725 million today. This comes in the wake of OptionsHouse buying tradeMonster in 2014. Everyone has a price.

What we are seeing is greater consolidation in the retail options brokerage space. TD Ameritrade acquired Thinkorswim for $606 million in 2009, which launched that firm into the retail options space. Today, 45 percent of trades flowing through TD Ameritrade are in derivatives. (See our JLN story on TD Ameritrade Bite Sized: TD Ameritrade’s FCM Looks for Bigger Slice of Retail Pie.) E*Trade, no doubt, has seen this.

One subtle component of the E*Trade-OptionsHouse deal is the futures business, which OptionsHouse launched in May. While still small, it also provides E*Trade with a healthy options brokerage business and a potential boost to its futures business to compete with TD Ameritrade and Charles Schwab, which bumped its futures and options business with the acquisition of OptionsXpress for $1 billion in 2011.

What is clear today that wasn’t so in years past is that retail customers want and now get multi-asset class service from one broker. The stand-alone firm model may be under threat certainly in the equity options space, and perhaps it is now washing up on the futures market shores as well.

Lead Stories

ETrade to buy OptionsHouse from General Atlantic
Lynne Marek – Crain’s Chicago Business
E-Trade Financial has agreed to buy Chicago-based OptionsHouse for $725 million from a private-equity company that bought and merged two online options brokers in 2014. New York-based E-Trade said it’s acquiring OptionsHouse parent Aperture New Holdings and expects the cash deal to close in the fourth quarter, pending regulatory approvals. OptionsHouse and TradeMonster were the last independent online retail options brokers in Chicago when Greenwich, Conn.-based General Atlantic bought control and combined the operations in 2014. It didn’t disclose how much it paid for the privately held companies at that time. The latest acquisition will help E-Trade better compete with rivals that bought other Chicago online options platforms years ago.

****SD: Our recent OptionsHouse FCM piece can be found here.

Trading volumes soar as S&P breaks record
Philip Stafford – Financial Times
The record high for the S&P 500 index has fuelled strong demand in US equities and derivatives trading in the first half of the year. Data released on Monday by the World Federation of Exchanges, a trade association for more than 200 market structure operators, revealed that the number of share trades in the first half of the year to June 30 in the Americas rose 23 per cent to 3.7bn.

****SD: Volumes of stock index options rose 25 percent (to 302m contracts) in the first half of 2016.

Technical indicators suggest this bull run continues to have the green light
Lawrence G. McMillan – MarketWatch
Stocks continue to plow ahead to new all-time highs on the S&P 500 Index SPX, -0.45% This has created some overbought conditions, but as of this time, there are no sell signals in place. In fact, another longer-term bullish indicator has arisen (more about that later). The SPX has support at the old breakout level of 2120-2135, so any correction should hold at that level. If it doesn’t, then sell signals would begin to appear, and we’ll have to alter our outlook.

Weekly Market Outlook – Where We Stand As Fed Approaches & Earnings Seasons Is Underway
Price Headley – CBOE Options Hub
Despite starting last week out overbought and near all-time highs, the bulls decided by the end of the week they were still buying more. Friday’s close of 2175.03 was not only 0.6% higher than the prior week’s close, it was a record high close for the S&P 500 (SPX) (SPY). No, it’s not a giant gain, but it’s an impressive one all things considered – however there are plenty of opportunities for profit-taking right now. The $64,000 question: Can the current rally last? As John Keynes said it, the market can remain irrational longer than you can remain solvent. In other words, it can go further and faster than one might think — and often, the trend is your friend.

US election could see 25% pull out of stock market
The Trade
A quarter of investors in the US have said they would consider pulling out of the US stock market altogether, following the presidential election.
UBS’ ‘investor watch’ – a quarterly report on issues affecting the stock markets – found via a survey it conducted that investors in the US have “serious concerns” over the outcome of the upcoming election.

****JB: Not surprising, I guess, when the two (main) candidates running are each the most disliked person their party has ever put forward (even by people in their own party).

Has Wall Street Been Tamed?
Edward Robinson – Bloomberg
Chris Hentemann has two pieces of art on the walls of his corner office in midtown Manhattan. One is an oversize photograph of the cockpit of his twin-engine Beechcraft Baron. The other is an Andy Warhol print of Muhammad Ali with his fists cocked. For Hentemann, a rail-thin money manager who has spent 25 years in finance, the two pictures capture the duality of Wall Street. It’s an industry where you need to manage risk with precision and discipline, but it’s also one driven by audacity, ego and the killer instinct. Or at least it used to be.

****JB: Just remember tame does not equal domesticated.

Yellen Still Waiting for Overwhelming Evidence to Warrant Hike
Craig Torres – Bloomberg
Fed’s July meeting will set stage for possible September move
Economic data beat expectations but have less influence on Fed
For Federal Reserve officials, getting better never seems to rise to good enough. Since the policy-setting Federal Open Market Committee last gathered six weeks ago, economic reports have shown one example of U.S. resilience after another following a slow first quarter. When the monetary policy panel meets on Tuesday and Wednesday, a majority of investors expect them to do what they have done at every meeting this year: nothing.

****JB: Seems like we’ve been waiting a long time.

The Option Queen Newsletter
J.A. Schwarz – The Option Queen
Technical analysis is amazing. Two weeks ago we drew a horizontal line projecting where we believe the S&P 500 would go basis its past behavior….today’s chart shows that the line was hit twice last week and, for the moment, is a resistance point. A point of concern is the failing volume in this four-day rally. This is typical of this market which has been the poster child for a wishy washy market. Perhaps the Fed’s tinkering with the business cycle has resulted in this sort of muted reaction where we get neither boom nor bust economies. Speaking about muted reactions this entire seven-year economic expansion has been, at best, muted.

Yuan Flunks Fed Haven Test as IMF Prepares It for Reserve Basket
Elena Popina – Bloomberg
Just two months before it is to be included in the International Monetary Fund’s influential basket of global reserve currencies, a new report distributed by the Federal Reserve is casting doubt on the ability of China’s yuan to achieve haven status for investors.

Volatility Collapsing in India as Highest Asian Yields Draw Cash
Nupur Acharya and Kartik Goyal – Bloomberg
Indian bonds are offering two rarities for investors in global markets still reeling from the U.K.’s decision to quit the European Union: high yields and a stable currency.
Expectations for rupee swings have dropped at the fastest pace in Asia since Britain’s June 23 vote amid the biggest inflows into Indian notes since October. Foreigners are returning to rupee debt after a two-month hiatus as strong monsoon rains help ease concern about inflation, boosting the allure of securities that offer the highest 10-year sovereign yield among major Asian markets.

Introducing our Recent Partnership with the Options Insider Radio Network
Press Release – OptionsHouse
At OptionsHouse, we are committed to educating our customers and those looking to learn more about trading. As such, we’re happy to announce a recent partnership with the Options Insider Radio Network. OptionsHouse’s own Chief Investment Strategist, Steve Claussen, and Todd Rich, President of OptionMONSTER Media, will alternate appearing on The Option Block program every Monday at 4 pm EST.


Markit Liquidity Report On Dutch Equity Options For The Month Of June 2016
Press Release
As part of the regular series of liquidity reports on the Dutch options market, Markit has released the June 2016 edition.

NYSE Successfully Petitions for a Simplified Listing Process for Actively Managed Exchange Traded Funds (ETFs)
Press Release – Intercontinental Exchange
The New York Stock Exchange (NYSE), part of Intercontinental Exchange (NYSE:ICE), today announced receipt of Securities and Exchange Commission (SEC) approval to streamline the listing process for certain actively managed ETFs.
Since 2000, NYSE has worked collaboratively with the industry and the SEC to simplify the listing process for issuers. Effective immediately, many actively managed funds will be able to list new ETF products without a separate filing with the SEC under SEC Rule 19b-4,1 a process that can create uncertainty for the issuer. This change will align the launch process for index-based and actively managed ETFs.

Regulation & Enforcement

Isda issues clearing letter before Hong Kong mandate
Julie Aelbrecht – Futures & Options World
Hong Kong’s mandatory clearing regime will come into effect in September
Trade body the International Swaps and Derivatives Association has issued a classification letter ahead of mandatory clearing taking effect in Hong Kong before the end of the year. Isda published on Monday a new classification letter that will enable counterparties to notify each other of their status for clearing requirements under the Hong Kong mandatory clearing regime.

Bats Comments on SEC’s Approval of Generic Listings Filing
Press Release – Bats
Bats Global Markets, Inc. (Bats: BATS) today issued the following statement in response to the SEC’s approval of its filing to adopt generic listing standards for actively managed exchange-traded funds.
“This is a pivotal moment for the ETF industry as the introduction of these standards will help issuers of all sizes bring innovative funds to the market in weeks instead of months, and with more certainty of approval,” said Bats CEO Chris Concannon. “In turn, investors will gain access to a much broader range of low-cost, high-performance investment products.

CFTC Staff Suggest Measures by Clearinghouses to Enhance Recovery and Wind-Down Plans
Gary DeWaal – Lexology
Staff of the Commodity Futures Trading Commission’s Division of Clearing and Risk issued guidance to derivatives clearing organizations regarding their obligation to maintain “viable plans” for their recovery and orderly wind-down, following a major adverse financial event, or any risk that threatens their ongoing existence.

Hedge funds’ bond dispute heads to the High Court
Marion Dakers – The Telegraph
A group of hedge funds and investors are suing an Indian manufacturer in the London courts for forcing them to convert their bond holdings into shares after a “suspicious” spike in the stock price.


Short on Cash to Buy Stocks? Consider Substituting a Long Call Option
The Ticker Tape
Nothing’s better than the feeling of riding a stock market rally. And nothing’s worse than having to watch it from the sidelines because of limited funds.
Stocks can be expensive, no doubt, but that doesn’t necessarily mean you can’t participate in rallies. It’s possible that call options can provide a lower-cost substitute so you can join in. That’s the good news, but as you might imagine there’s a bit more to it than just committing less capital than you would to a similar size stock position. While stocks can and do sometimes fall to a value of zero, it’s very unusual, but with options it’s a common occurrence.

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