Observations & Insight

MarketsWiki Education Chicago 2015
MarketsWiki Summer Intern Series, Chicago 2015 – Day Two
Sarah Rudolph – John Lothian News

Technology was the focus on the second day of our MarketsWiki Intern Education Series at IIT.

Joseph Niciforo, managing member, HC Technologies, kicked off the program talking about how, as “time frames in trading have compressed to sub microseconds and we approach the speed of light, perhaps there may be room for a different type of trader.”

Niciforo started out in the industry under the tutelage of Paul Tudor Jones, who taught him to be disciplined and trade slowly, building his account. After one trade went spectacularly wrong and he lost a large sum of money, he learned never to violate his risk management plan again.

Now, at Tudor, he said, “We are seeking to find new macro traders. Returns of macro funds aren’t what they used to be, so people are getting out of the space.”

Read the rest of the Day 2 summary, including speakers Ed Haravon, Mark Haraburda, John Avery, Rick Tomsic and Kapil Rathi, on JohnLothianNews.com.

Lead Stories

Europe Moves to Cut Risk in $505 Trillion Derivatives Market
Will Hadfield – Bloomberg
Banks and investors in the European Union will have to send trades of some interest-rate swaps to a third party under new rules intended to make financial markets safer.
The banks and major investors that hold the derivatives will have to use a third party called a clearinghouse to process their trades, the European Commission, the EU’s executive arm, said in a statement on Thursday.

The S&P 500 is weaker than it looks
J.C. Parets – Business Insider
The S&P500 is arguably the most watched and talked about index in the world. In addition to being an index, it also a very liquid and tradeable security in the case of both the Exchange Traded Fund, Futures contract and extremely liquid options contracts across strikes and expirations.
For us who look at the entire world and all asset classes, not just stocks, the S&P500 is simply one index, in just one country, in just one asset class on earth. There are a lot more countries, a lot more asset classes (outside of stocks) and a lot more out there that is actually trending. The S&P500 is and has been in a sideways trend all year. Let’s break it down.

Wall Street’s Profit Boost From Asia Derivatives Boom May Stall
Regina Tan – Bloomberg
Earnings at investment banks including Goldman Sachs Group Inc. and Citigroup Inc. received a boost in the first half as access to China helped increase derivatives sales and trading income from the region. Gains may moderate as the stock rally subsides.
Financial statements and post-earnings commentary from Credit Suisse Group AG, UBS Group AG, Societe Generale SA and Deutsche Bank AG also highlighted derivatives and structured products’ impact with the German bank saying in its 2015 interim report that revenues in equity derivatives in the second quarter were “significantly higher than the prior year quarter driven by strong performance in Asia.”

Beware ‘Wild West’ of FX options
Farah Khalique – Euromoney Magazine
Brokers and even the likes of Western Union are finding success in selling complex foreign-exchange options to small to medium-sized enterprises (SMEs) as banks retreat from servicing their smaller customers, but industry figures warn of a new ‘Wild West’ and the need for robust compliance standards.

FX Volatility in 2015: How Do Currencies Compare to Other Assets?
John Kicklighter – DailyFX
Volatility is a frequently misunderstood concept even by seasoned financial market professionals. While investors are reasonably wary of rapidly moving assets because of the increased level of risk they represent, they frequently overlook volatility’s benefits for generating trading opportunities. To the uninitiated, trading currencies seems to intuitively trigger fears of erratic price swings. A deeper look at how volatility levels compare across various asset classes reveals FX to be a sensible component for both long- and short-term portfolios.
Benchmarking to June of 2014 – an extraordinary activity lull since 2007 – it can be seen that volatility levels across different asset classes have shown some extraordinary differences. The broader financial system started to churn broadly towards the end of 2014.However, not all assets would maintain this heightened level of action. For example, currency market volatility has held its buoyancy better than most.This has stemmed from the impact of divergent monetary policies as well as discrete events like the renewed Greece crisis.

Yuan Volatility Falls as PBOC Seen Keeping Stability Into 2016
A measure of expected swings in the yuan fell for a third day on bets China will maintain exchange-rate stability into 2016 after the IMF signaled a delay to giving the currency reserve status.

Commodities beat equities as markets see mixed July
Luke Jeffs – Futures & Options World
The world’s top exchanges saw mixed trading fortunes last month as commodities outperformed financial products by volume and the large Asian markets reported strong growth on their markets.

Oil’s $4.4 Trillion Hole
Liam Denning – WSJ
It rankles when you lose $20. But hey, at least it isn’t $4.4 trillion.
That is roughly how much revenue the world’s oil producers will forego over the next three years, based on the current outlook for prices and demand, relative to what was expected just a year ago. With Brent crude having tumbled back below $50 a barrel, the industry has entered a vicious, and spreading, bout of deflation.

Fun With Numbers: Stagnation, Stat-Skewing, and Baseball Bias
Adam Warner – Schaeffer’s Research
I’m kind of not here this week; many thanks for keeping everything kind of where I left it. By the way, I’m shocked (shocked!) that we’ve spent a few days churning to nowhere.
If anyone ever asks you “Where’s the market going to be ‘X’ days from now?”, a safe answer is “Right about where you see it now … Oh, and the iPath S&P 500 VIX Short-Term Futures ETN (VXX) will make new all-time lows.”
Here are a couple of random thoughts until we meet again next week.


Asian exchanges outshine Western peers in July
Luke Jeffs – Futures & Options World
The Singapore Exchange has reported a bumper July for trading volumes driven by growth in its equity index and commodities segments, underlining a strong month for the Asian exchanges.

TMX Considers ‘Alternatives’ for Its Slumping Box Options Unit
Eric Lam – Bloomberg
Toronto Stock Exchange owner TMX Group Ltd. is considering what to do next with Box, its slumping U.S. options exchange.
“Like every other asset around our portfolio, if we don’t think we can make it a growing, profitable business then we’ll have to look at alternatives,” TMX Chief Executive Officer Lou Eccleston said Thursday while discussing the Toronto-based company’s second-quarter results. “We’re watching it very closely.”

Toronto Stock Exchange operator TMX misses estimates
Alastair Sharp and Anannya Pramanick – Reuters
TMX Group Ltd, the operator of the Toronto Stock Exchange, reported a lower-than-expected quarterly profit, hurt by a drop in revenue at its issuer services and cash markets trading businesses.
TMX, which has a dominant grip on market activity in Canada, has suffered along with its many resource-based issuers on the sharp decline in commodity prices. It also faces competition from the new Aequitas Neo exchange, although the new entrant’s inroads have so far been minimal.

Singapore Exchange to launch iron ore lump swap, futures
Manolo Serapio Jr. – Reuters
The Singapore Exchange said on Thursday it will launch iron ore lump premium swap and futures contracts on Aug. 31, hoping to provide more hedging tools for market participants managing risks amid volatile prices of the raw material.
SGX already offers iron ore swaps and futures based on 62-percent grade fines, or granular iron ore that must be treated before being fed into blast furnaces.

Regulation & Enforcement

Swap Dealers Eye Relief in SEC Policy Curbing Bank Penalty Scope
David Michaels – Bloomberg
The U.S. Securities and Exchange Commission proposed a way for banks to shield their derivatives businesses from disruption triggered by enforcement actions, reprising a long-running fight over how severely the agency should punish Wall Street firms accused of wrongdoing.

As China Probes Stock Algos, Speed Traders Bet on Commodities
Eduard Gismatullin – Bloomberg
China’s probe of algorithmic trading in the stock market has done nothing to dissuade high-frequency traders from using the nation’s burgeoning commodities exchanges.
Virtu Financial Inc., one of the world’s biggest high-speed firms, said on Wednesday it has started buying and selling commodities listed in mainland China. Optiver, which entered the nation’s commodities markets two years ago, said Tuesday it’s growing its business in Greater China. KCG Holdings Inc. said in June it sees opportunities in the region.


Convergex Brings New Adjustable Capital Commitment Crossing Algorithm
John D’Antona – Traders Magazine
Buyside traders who execute options trades can now do it electronically – and tap capital from another party to help manage their exposure.
The new options algorithm, from Convergex, is dubbed Capital Commitment Crossing, and allows liquidity providers the choice of a “Minimum” or “Maximum” touch rate when trying to source blocks for its clients.
According to Convergex, the algorithm gives liquidity providers a new level of control over how they manage their own exposure as they facilitate block trades on behalf of their options customers.


How Commodities Slump is Undermining Earnings – At A Glance
Matthew Curtin – WSJ
Falling metal and mineral prices have played havoc with mining groups’ latest earnings. Iron ore, copper and aluminum producer Rio Tinto was the latest to report sharply lower profit, boding ill for coal, base-metals and metals-trading giant Glencore and Rio’s main Australian iron-ore rival BHP Billiton. They are slated to report second-quarter and fiscal-year earnings, respectively, later this month. Here’s how the commodities slump is exacting its toll.

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