Observations & Insight

Rob D’Arco, Rival Systems – Technology: the Center of the (Financial) World

“It’s an exciting time for technology in the trading industry. Never before has technology been so instrumental across all aspects of the financial markets.”

When Rob D’Arco was tasked with the design of an options trading platform 15 years ago, he was admittedly nervous. Though his management consulting and technology background had prepared him for the assignment from a competency standpoint, he knew nothing about trading environments and trader mentality, aside from a few horror stories about working with traders and trading groups.

In the end, he was pleasantly surprised by how easy it was to work with the traders, who took the time to patiently work with him on the design and building of the platform. The lesson? The traders had a vested interest in getting the right technology into their hands as quickly as possible, which aligned perfectly with his interest in learning about the markets.

The core of the system they built is now a key component of his firm, Rival Systems, which supplies technology and technology solutions to market participants. He says success in the fintech world comes from a repeating cycle of innovation, incubation and monetization. Technology, for all its benefits, “is worthless if it does not help the company make money,” says D’Arco.

Sounds like he understands the trader mentality quite well.

Watch the video »

Lead Stories

Fear in markets can mean profit, but know risks
Stan Choe, AP via The Salt Lake Tribune
For some investments, the sound of crashing stock prices and panic in the market is actually the sweetest melody. These investments tie themselves to the VIX index, a measure that traders call the stock market’s “fear gauge,” and they’ve been in higher demand as markets have become bumpier. Investors poured more than $2 billion into volatility funds during the first half of the year, triple the amount they did 12 months earlier, according to Morningstar. But before joining the tide, it’s important to know that these kinds of funds aren’t for everyone, and they’re certainly not leave-it-alone, long-term holdings.

****SD: Two billion dollars of inflows to VIX derivatives is enough to get the Associated Press to notice. For good or ill, the suite of products tied to the VIX continues its charge into the mainstream.

Will the Rio Olympics Bring Gold Medal Stock Performance?
Bryce Sutton – WealthManagement.com
All eyes are on Rio de Janeiro as the 2016 Summer Olympics prepare to take the international stage Friday. Athletes will flock to Rio to compete at the world’s most recognized and celebrated sporting event for the pride of their countries and highly coveted gold medals. Every two years, the games not only bring in Olympians and spectators—whether they be at the games or watching on television at home—but they also generate more than $1 billion in revenue through sponsorship deals. Brands and businesses are eager to benefit from the global exposure of the games, using the event as a platform to engage with markets in more than 200 countries.

****SD: CBOE noted there has been heavy put action in the iShares MSCI Brazil ETF. But I’m more concerned with actual event performance given the plethora of negative headlines surrounding the run-up to the Games.

Deutsche Börse-LSE merger faces Dutch opposition
Financial Times
The Netherlands has joined Belgium and Portugal in warning European antitrust authorities that the planned merger between Deutsche Börse and London Stock Exchange Group could damage the country’s economy and market stability.

Companies Routinely Steer Analysts to Deliver Earnings Surprises
Thomas Gryta, Serena Ng and Theo Francis – WSJ
In April, AT&T Inc. shares rose after it reported quarterly revenue that narrowly topped the average estimate from analysts. The surprise wasn’t as surprising as it looked. Before AT&T’s announcement, investor-relations employees at the telecommunications giant encouraged analysts to look back at comments made by finance chief John Stephens in early March, say analysts who spoke with the company. He had implied some customers were waiting longer to upgrade their mobile phones, an important revenue source.

****SD: Frequently, I find that issues/debates surrounding the market boil down to people and institutions using “bend but not break” methods, and then eventually arguing about what “break” even means.

Bruised Pound Shows Signs of Resilience in Face of BOE Stimulus
Anchalee Worrachate and John Ainger – Bloomberg
Analysts forecast sterling resurgence starting in 2017; Weaker pound is good for U.K. outlook: Eurizon’s Jen
Mark Carney’s stimulus package dealt the pound more of a glancing blow than a knockout punch.

****SD: This might be true, but, as the second Muhammad Ali vs. Sonny Liston fight taught us, even a glancing blow can be a “knockout” punch.

Yuan Volatility Drops to Nine-Month Low on PBOC Stability Bets
Sentiment improving as central bank defends key level: OCBC; Signs of calm compare with devaluation turmoil a year ago
A gauge of swings in the yuan fell to the lowest level since November amid receding bearish bets and speculation China’s central bank is helping keep the exchange rate stable.

Does an Overvalued Stock Market Mean a Crash Is Coming?
24/7 Wall St.
There is one issue that has come up for quite some time, now that the bull market is seven years old and since the Dow Jones Industrial Average (DJIA) and the S&P 500 recently hit all-time highs. Is the stock market really overvalued? The simple answer is yes. A more rational answer is that the market valuations of 2016 are higher for a whole host of reasons, compared to past bull markets. Note that valuations actually went far higher in the past. Perhaps the real question is whether the market and all the other indicators might imply a market crash or a serious correction is coming up?

****SD: If drivers spent as much time thinking about and evaluating chances of crashes as market analysts and reporters do, we wouldn’t have as many carbon problems.


CME Group Announces New Steps to Enhance Live Cattle Futures Markets
CME Group
CME Group, the world’s leading and most diverse derivatives marketplace, today announced it will take a number of actions designed to enhance Live Cattle futures markets. These new measures are based on continued collaboration with and feedback from the cattle industry as well as the results from an independent study conducted by Informa Economics.

Shanghai Stock Exchange relaxes restrictions on option trading
The Shanghai Stock Exchange (SSE) said on Friday it would relax some restrictions on option trading, as regulators move to unwind some measures imposed during a stock market rout last year.

Currency derivatives OI turnover at BSE crosses $2 bn
Business Standard News
Currency derivatives open interest turnover at BSE on Friday crossed $2 billion (about Rs 13,400 crore) mark.

TMX Group Consolidated Trading Statistics
Press Release
TMX Group Limited today announced July 2016 trading statistics for its marketplaces – Toronto Stock Exchange, TSX Venture Exchange, TSX Alpha Exchange (Alpha), Montréal Exchange (MX) and NGX.

FTSE Mondo Visione Exchanges Index Outperforms MSCI World Index In July
July saw positive performance across the majority of FTSE Mondo Visione Exchange constituents as markets rebounded after the Brexit turmoil.

Regulation & Enforcement

U.S. Derivatives Regulator Again Delays Curbs on Overseas Trades
Benjamin Bain and Silla Brush – Bloomberg
CFTC reprieve means some trades exempt from rules until 2017; Agency and Wall Street have battled over regulations
Wall Street banks got a one-year reprieve from rules that would subject derivatives trades held overseas to tough U.S. oversight.

****SD: Delayed is the new on time.

SEBI may tighten algo trading rules
Abhirup Roy and Rafael Nam – Reuters
India’s capital market regulator said on Friday it was considering tightening rules for algorithmic trading, citing concerns about fair access to markets. The Securities and Exchange Board of India (SEBI) said it was looking at various potential limits on so-called algo traders, including imposing “random speed bumps,” which would randomly delay execution of some orders.


Speed Bump Wars Ahead?
Terry Flanagan – MarketsMedia
If you can’t beat ’em, join ’em. That’s the approach NYSE Group and Nasdaq may take with IEX Group, which plans to go live as an exchange later this month. IEX differentiates with a 350-microsecond ‘speed bump’, which is meant to negate the advantage of the highest-speed electronic traders and provide long-term investors and other market participants with a cleaner trading experience.


Maury Meets Mark
Fari Hamzei – CBOE Options Hub
In the lively chat rooms of Hamzei Analytics, Maury tales are abound. Saying Maury (a fictitious character) is frugal, is an understatement. His motto is “What’s for free, is for me”. At the very least, he hates wholesale prices and want to buy below cost, thus negotiates for the best bargain.

****SD: Unfortunately, this is not an interview with Maury Povich about his options strategies.


How Does Portfolio Margin Work?
Peter Klink – The Ticker Tape
In my last article on portfolio margin, I provided some background and history on this new type of margin and explained some of the differences between portfolio margin and Reg T margin. In this article, I’m going to explain how portfolio margin works and what using portfolio margin might mean to an individual trader. With portfolio margin, stock and option positions are tested by hypothetically moving the price of the underlying between +/- 15%. At TD Ameritrade, large-cap, broad-based indices are tested with +10%/-12%.


Sign of the Ease? Central Bank Rate Cuts Since Lehman: 666 – Focus on Funds
After the Reserve Bank of Australia and Bank of England this week, global central banks have cut rates a total of 666 times since the collapse of investment bank Lehman Brothers in 2008, according to Micheal Hartnett, chief investment strategist at Bank of America Merrill Lynch. Synchronized easy-money policies have helped boost equity prices and tamp down yields to record lows.

****SD: Nothing to do with options, but what the devil wants, the devil gets.

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