Observations & Insight

Boca Bits & Pieces
JLN Staff

Happy St. Patrick’s Day, or as it is called during the FIA Boca conference, Happy Pat Kenny CQG Green Shirt Day. Pat Kenny, the most interesting man in the world who is not being sent to Mars, has a tradition of giving out green logoed shirts to key industry CEO’s during the FIA Florida conference. The tradition dates back to Kenny’s days with PATS.

It is often said that St. Patrick’s Day is amateur day for drinking. If the conference has been any indication, many amateurs have been getting some pretty good practice. Thank you to SGX for holding a nice “reception” last night. The Tiger beer is still clouding my head this morning.

Carl Gilmore continues to add gravitas to Integritas Financial Consulting, as he has announced today that Chris Hehmeyer of HTG Capital Partners has signed on as chairman of his advisory board. Hehmeyer just stepped down as chairman of the National Futures Association board, so he has a lot more time on his hands.

Is the Exchange Leaders Panel Still the Exchange Leaders Panel?

As the big exchanges continue to diversify holdings and spread revenues well beyond the traditional, Walt Lukken‘s question at yesterday’s exchange leader seemed rather appropriate. Driving the point home, Andreas Preuss of Deutsche Boerse said the company is moving into less than 50% revenue generated by trading and clearing, and the industry is fast embracing fundamentally disruptive technology improvements. In the near future, he said, tech companies will rule, and the way the business looks today “may soon be a fond memory.” The industry should look to what other companies outside the financial markets have done in the forefront of technology, and must also focus on making the cycle from invention to production shorter.

Jeff Sprecher, however, said that exchanges are still the ecosystem and they evolve their technology to accommodate their exchange customers. “The exchange is the touchpoint that drives these other value services,” he said. And the exchange companies are providing a one stop shop for customers.

Phupinder Gill of CME Group said exchanges’ core mission has transformed now that they have a financial obligation to shareholders. But he said that offerings such as data are complementary to the core exchange business.

Now on to other bits and pieces from Boca Wednesday.

Continuing a major theme from yesterday’s newsletter, options are a driving driving growth in exchange volume, and the industry is taking note. In a blog post yesterday, Trading Technologies announced it is ready to roll out options functionality on its new platform. CME Group‘s Derek Sammann says options on futures are the fastest growing product at the CME Group these days. While overall volume at the exchange is up 17% year on year, options trading is up 27%. The trend has been going on for the last 5 years or so but has accelerated in the past two or three years.

In addition, electronic trading of options has jumped, with 45% of options trading electronically.

Interestingly, while historically commodity lows have tended to push volumes in options lower, the reverse trend is now taking place – even though commodities across the board are at historic lows, traders are flocking to options, because while typically hedgers would be more concerned with hedging upside risk rather than downside risk in commodities, they are now more concerned with hedging the downside, Sammann said.

Lead Stories

Global Volatility Summit sees hedge funds debate the price of fear
Australian Financial Review
The world’s most sophisticated hedge funds gathered in New York on Wednesday to pay homage to a force of profit and destruction – volatility. The Global Volatility Summit, set up seven years ago by hedge fund Capstone and held behind closed doors, attracted investors, fund managers and analysts who study and invest in the unseen dimensions of financial markets. The gathering of self-described “volatists” was filled with intense discussion about option pricing and terms such as skews, thetas and left tails that describe the undercurrent of the market’s behaviour.

****SD: “Fear is the mind-killer.” -Frank Herbert (And for those esoteric cinephiles out there, they are not debating about the 1956 film-noir “The Price of Fear.”)

How Will NASDAQ’s Equity Option Volumes Be Affected By The ISE Acquisition?
NASDAQ currently serves as the platform for almost 25% of total equity option trades in the U.S. On the other hand, the International Securities Exchange (ISE) – which NASDAQ recently agreed to acquire for $1.1 billion – controls just over 16% of the equity options market. With the ISE-NASDAQ deal underway, NASDAQ is expected to control the biggest slice of the equity options market, at a little over 40%.

Options market flips to bet on stronger euro into April
Market expectations for euro exchange rates over the next month turned positive on Thursday for the first time since the start of February, another sign of weakening faith in the strong dollar trade that has dominated the past two years.

****SD: So Draghi will be unhappy? It’s becoming slightly unclear to me how Super Mario prioritizes foreign exchange rates these days.

U.S. crude options volatility sinks as prices bounce off Feb lows
Options-related volatility in U.S. crude oil has sunk to its lowest since January, with investors returning to the sidelines after scrambling to protect their positions as futures prices rallied off 12-year lows hit last month. Implied volatility in U.S. crude’s West Texas Intermediate (WTI) market have fallen below 45 percent, down from a seven-year high above 78 percent in February, when WTI was trading at around $35 to $26.

Odds on, odds off: London gold market seemingly confused on best route forward
With Cheltenham races this week, everyone is in betting mood. It would appear that the cards could be stacked in IntercontinentalExchange’s favor, as the operator has come up as an outside favourite to possibly succeed the London Bullion Market Association ‘request for proposal’ to reform the London gold market. Why? Because the other two rumored exchanges involved in the process — the London Metal Exchange and CME Group — have already been touted, maybe? “The market is currently built on hearsay, and rumors,” said one source close to the situation. And guessing. Oh, and lack of interest.

S&P: Every Volatility Measure We Track Has Dropped
On Wednesday, stocks rallied after a dovish tone from the Federal Reserve, and thus, “the storm that welcomed us into 2016 ended,” according to Tim Edwards, Senior Director, Index Investment Strategy at S&P Dow Jones Indices. Yesterday the S&P 500 was less than 1% from being in the black for 2016, for the first time since the markets opened this year. Elsewhere, the CBOE Volatility Index (VIX) hit its lowest level of 2016 and closed just below 15, Edwards writes. (Readings 20 and above are usually associated with bear markets.)


ICE’s Sprecher Contemplates Next Move as LSE Bidding Looms
Your move, Jeff Sprecher. The chief executive officer of Intercontinental Exchange Inc. has to decide whether to bid for London Stock Exchange Group Plc now that Deutsche Boerse AG and LSE have announced an all-share deal that they’ve described as a merger of equals. ICE, the owner of the New York Stock Exchange, confirmed on March 1 it’s considering a bid. It has started lining up financing, people familiar with the matter said last week.

****SD: Care to recall the details of Sprecher at Boca ’07? FOW has a fun trip down Memory Ln.

Euronext looks to snap up assets from any Deutsche Boerse-LSE fallout
European stock exchange operator Euronext NV (ENX.PA) is considering acquisitions to help it stay competitive after Deutsche Boerse AG (DB1Gn.DE) and London Stock Exchange Group Plc (LSE.L) agreed to merge in a $30 billion deal, according to people familiar with the matter. With a market value of about 2.6 billion euros Euronext, which runs stock exchanges in Paris, Amsterdam, Brussels, London and Lisbon, will be reduced to minnow status among European bourses if the LSE-Deutsche Boerse deal goes ahead.

****SD: Pulses elevated on the sidelines too.

P&M: Vietnam eyes Q4 launch for derivatives exchange
IFR Asia
The Hanoi Stock Exchange and Vietnam Securities Depository are preparing to launch Vietnam’s first derivatives market and integrated clearinghouse in partnership with GMEX Group and FPT Information Systems.

Regulation & Enforcement

Regulator Pledges to Keep Secrets for High-Frequency Traders
The U.S. regulator for derivatives said it will look after high-frequency traders’ code once planned new rules oblige them to share their algorithms with the authorities. High-speed firms Hudson River Trading LLC and CTC Trading Group LLC both filed public letters earlier this week criticizing the regulations because they give the government easier access to their code. The Commodity Futures Trading Commission wants the ability to examine algorithms to help it determine who to blame when markets crash.

****SD: “Just trust us” seems like dubious policy.

FIA comments on CFTC’s proposed rule on automated trading
Automated Trader
Boca Raton, Florida – “Automated trading has revolutionized markets, enhancing efficiency and contributing to liquidity,” said Walt Lukken, president and CEO of FIA. “To be effective, regulation of automated trading must be implemented in a manner that protects market integrity while allowing for continued evolution of trading practices and technology. We appreciate the CFTC’s goal of modernizing regulations and enhancing transparency, but we have concerns with the proposed rule as written, particularly with regard to the scope of their application.”

US and EU Push For Common Approach with latest CFTC Framework
Finance Magnates
More steps towards cross-border regulatory harmony have been taken as the United States (US) Commodity Futures Trading Commission (CFTC) today approved a substituted compliance framework for certain counterparties that are also regulated in Europe, thus simultaneously providing relief for the applicable firms from specific CFTC regulations.

CFTC chair outlines key focus areas for 2016
Cyber security and automatic trading are high on the US regulator’s agenda for 2016
The chair of the CFTC has outlined five key focus areas for the US regulator, including further progress in a common approach for transatlantic central clearing counterparties (CCPs) after the European Commission this week granted equivalence for US CCPs.


TT sees three large clients set to migrate
Vendor is looking at new functionality to expand the coverage of its trading system Trading Technologies has said that three of its largest clients have become the first to pledge to move to its next generation platform from its older system a year after the new technology was made available. The vendor unveiled a year ago its next generation solution TT and has been working on that system since then to encourage clients to migrate to the newer system.

****SD: They are BNP Paribas, Citigroup and RJ O’Brien

G. H. Financials And Object Trading Bring The World To ASX 24
Press Release
Object Trading and G. H. Financials announced readily-available direct market access to the ASX 24. G. H. Financials, a leader in order-routing, clearing and settlement services to the world’s derivatives markets, has become a conformed broker on the managed DMA (Direct Market Access) service platform of Object Trading, a provider of a global, multi-asset trading infrastructure. Market participants can now easily trade on the ASX 24, with minimal onboarding times, as G. H. Financials’ execution, clearing, and risk management infrastructure and related setup processes are in place and already active on the Object Trading platform.

Adjustment of FIH Mobile Structured Products, Futures and Options
Hong Kong Exchanges and Clearing Limited (HKEX) has announced the arrangements for the adjustment to FIH Mobile Ltd (FIH Mobile) structured products, futures and options to account for FIH Mobile’s distribution of a special dividend.


Volatility Update: Sizing Up Volatility Spikes (and SPYIX)?
The Ticker Tape
By most measures, volatility is a lot lower than it was a month ago. That’s not too surprising given the four-week, 8.5% advance in the S&P 500 during that time. Not only is volatility easing, but also, overall trading volumes across the options exchanges seem to be slowing from the frantic pace seen in early 2016. Meanwhile, one exchange seeks to offer investors a new market gauge ahead of the next volatility spike.

Expecting A Bounce In Volatility
Andrew Thrasher
The S&P 500 has rallied over 10% since the February low, push the index up to its 50-week Moving Average. Meanwhile the Volatility Index ($VIX) has declined approx. 47%, sending the ‘fear index’ to its lowest level so far this year.

A Strategy That Has Successfully Hedged Equity Exposure
Randy Swan is president and CEO of Swan Global Investments and its portfolio manager. Randy developed the Defined Risk Strategy in 1997 to help protect clients from large losses. Before founding Swan Global Investments, Randy was a CPA and senior manager for KPMG’s Financial Services Group, primarily working with insurance companies and risk managers. His experience at KPMG helped him design the DRS, as he was able to see firsthand how insurance companies manage risk. The DRS seeks to use options strategically and tactically to structure particular risk/reward parameters in portfolio management.

Earnings Week of 3/21 – 3/25
CBOE Options Hub
It’s a very quiet week next week on the earnings front with the highlight being NKE. The numbers below represent three years of history. After the ticker the columns show the biggest gain, biggest drop, average move (non-directional) and stock price reaction last quarter.

Call Options Stay Hot On Troubled Valeant Pharmaceuticals (VRX)
Schaeffer’s Research
After dropping more than half of their value on Tuesday — and dealing a huge blow to Bill Ackman’s Pershing Square — shares of Valeant Pharmaceuticals Intl Inc (NYSE:VRX) are down another 10.7% at $29.95 today, on news that the company’s creditors are demanding new terms as VRX risks defaulting on its debt payments. But with the stock fresh off a new five-year low of $29.88, options traders seem to be working up an increased appetite for calls.

****SD: Generally, intraday moves, trends and the like on one stock can quickly get in the weeds, but this Valeant saga, like any train wreck, is mesmerizing. And then there’s the VRX options plays of Ackman for context. Here’s something to keep in mind: “Pershing also owns Valeant call options on 9.12 million shares. Its loss on Valeant doesn’t include declines it may have had on options.”


Global Retail Investors Survey: Stock Prices and U.S. Election In Focus
Finance Magnates
Tokyo-based global financial broker, Monex, has just released its latest Global Retail Investor survey. Data reveals that the forecast for stock markets among retail investors was much worse than in the previous survey, declining in all three regions surveyed – Japan, the U.S. and China (Hong Kong) – for the first time since December 2011. Global stock price declines since the beginning of the year are believed to have caused this deterioration in the sentiment of retail investors.


VIX Network Session at FIA Boca
VIX Views
Yesterday afternoon at the 41st Annual International Futures Industry Conference in Boca Raton, CBOE and S&P Dow Jones Indices teamed up for a session highlighting the growing use of VIX around the world. Reid Steadman from S&P Dow Jones Indices offered a brief welcome address where he noted the various markets where participants have access to a consistent measure of implied volatility. He underscored that a wide variety of equity markets including India, Australia, and Hong Kong have access to a volatility index using the VIX methodology.

March 22 Panel at CBOE on Accessing the Volatility Risk Premium with Cash-Secured Put Writing
Matt Moran – VIX Views
Presentations and a panel discussion on the topic of – Accessing the Volatility Risk Premium with Cash-Secured Put Writing – will occur on Tuesday March 22, 2016 from 5:00 PM to 6:45 PM at Chicago Board Options Exchange (CBOE), 400 So. La Salle St., (enter on Van Buren Street), Chicago, 60605.

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