Observations and Insight
Canada prepares for derivatives transparency overhaul
Marisol Collazo, CEO of the DTCC Data Repository – John Lothian News Exclusive
Following the September 2009 commitment by G20 leaders to improve the integrity of the markets, reporting of derivatives trades to trade repositories has become critical to regulatory efforts to monitor and detect the build-up of risk in the financial system.
To date, a number of jurisdictions around the world have developed rules and regulations requiring mandatory reporting of derivatives to trade repositories. Derivatives trades are being reported to trade repositories in the United States (since 2012), Japan, Hong Kong, Singapore and Australia (since 2013), the European Union (since 2014), and will soon be followed by Canada which is the latest jurisdiction to transpose G20 requirements on derivatives trade reporting into law.
Read the rest of the commentary on JohnLothianNews.com => http://jlne.ws/1BwN84k
ISE Submits Filing for New Options Exchange Called ISE Mercury
Sam Mamudi – Bloomberg
International Securities Exchange Holdings Inc. applied to create its third U.S. options exchange, to be called ISE Mercury.
ISE, a unit of Deutsche Boerse AG that already operates two options venues in the U.S., said the new venue’s structure, fees and products will be made public at a later date. Should ISE Mercury open, it would be the nation’s 13th options market.
***JB: If this goes through we will have ISE Mercury and ISE Gemini exchanges so who wants to bet the next options exchange will be called Apollo? (Press release is below under “Exchanges”.)
Market Meltdown Curbs Approved by American Options Exchanges
Sam Mamudi – Bloomberg
U.S. equity options exchanges agreed to a set of rules in an effort to avoid market mishaps.
The measures include steps designed to stop quotes and trades from taking place at extreme prices and to prevent too many trades in a short period of time, according to a statement today from venue operators including NYSE Group Inc., Nasdaq OMX Group (NDAQ) Inc., CBOE Holdings Inc. (CBOE) and International Securities Exchange Holdings Inc. The exchanges agreed that they should have kill switches that wall off a broker if it’s bombarding markets with mistaken trades.
***JB: See OCC press release below under “Regulations and Enforcement”.
Volatility Revival Is No Reason to Panic for Oppenheimer
Joseph Ciolli and Oliver Renick – Bloomberg
The calm that had blanketed U.S. stocks for the past 12 months is lifting and that’s a good thing, according to John Stoltzfus of Oppenheimer & Co.
Tension in Hong Kong and concern about the Federal Reserve’s plans for interest rates pushed stocks lower today, sending the Dow Jones Industrial Average down as much as 178 points. The 30-stock gauge rebounded to avoid its fifth straight session of alternating gains and losses of more than 100 points, a stretch that last occurred in 2008.
Volatility Update: Divergence Between Index, Fear Gauge
JJ Kinahan – Forbes
A chock-full slate of economic data could keep the S&P 500 (SPX) and the CBOE Volatility Index (VIX) on the wild ride that has dominated trading over the last several sessions.
Although the earnings reporting calendar is light this week, the market could be looking to the next deluge of quarterly reports just around the corner. Alcoa (AA) unofficially jump-starts the season on October 8 and many stock traders are increasingly aware of currency fluctuations and their potential impact on earnings.
Financials’ Volatility Fails To Materialise
The last couple of years have seen stocks with large ratios of implied to realised volatility, which have a strong track record of outperformance, fail to deliver strong performance. A look at the phenomenon points to financials which are still viewed with caution by the options market despite having low realised volatility over the last couple of years.
***DA: Maybe it is because financials, more so than other sectors, is tying its future performance to central bank intervention and stimulus, which is currently in a state of flux.
Alibaba options active in U.S. trading debut
Saqib Iqbal Ahmed – Reuters
Chinese e-commerce heavyweight Alibaba Group Holding Ltd’s options contracts were active in their first day of trading on U.S. exchanges on Monday, with bullish and bearish bets about even in the early going.
Options volume for Alibaba was 45,000 contracts, with 24,000 calls and 21,000 puts traded so far, according to data from options analytics firm Trade Alert.
Alibaba Eludes Traders’ Grip With Half of Facebook Swings
Joseph Ciolli and Namitha Jagadeesh – BloombergBusinessweek
Alibaba Group Holding Ltd.’s (BABA:US) smooth sailing since its initial public offering has been a bust for traders hoping to capitalize on volatility.
The average move in Alibaba’s stock over the week following its debut is 2.9 percent, half that of Facebook Inc. (FB:US) in the period after the social networking site went public in May 2012. Brokerages are charging rates to borrow shares, the first step in a short sale, that are about average for the U.S. market, a sign demand for bearish bets hasn’t surged.
Warning Alarm Or Healthy Pullback? – Weekly Market Outlook 9.29.14
Price Headley – CBOE Options Hub
The BigTrends TrendScore is a daily reading on the bullish/ bearish level of various market assets – it uses the S&P 500 Index (SPX) (SPY) as a proxy for the broad market. The SPY Trend-Score fell out of the bullish range for the first time since early/mid August on last Thursday, but did close back into bullish territory on Friday.
To some degree, the overbought market was due for a dip, and the floor was finally cracked with Thursday’s big selloff. Despite Friday’s bounce, some technical damage was done to the charts.
Why All the Questions About Dividend Arbitrage? – The Short Answer
Some bank executives and regulators are asking new questions about an established and often controversial trading strategy known as “dividend arbitrage.” Variations on the trades share a goal: exploiting different countries’ disparate tax rates in order to minimize taxes on stock-dividend payments, boosting trading profits as a result.
Hedge Funds Are Richer Than Ever
Kevin Short – HuffingtonPost
Things are looking pretty good for the superrich.
The largest Americas-based hedge funds are controlling more money than ever before, according to a new analysis by Absolute Return, a hedge fund news site.
***DA: Part of the phenomenon lies with the fact that managed accounts have gone mainstream with the advent of alternative funds. Whether such investments are prudent for the individual investor is a question for another day.
ISE Holdings Files for Third Exchange License to launch ISE Mercury
Press Release (International Securities Exchange)
International Securities Exchange Holdings, Inc. (ISE Holdings) announced that it has filed a Form 1 application for its third options exchange, ISE Mercury, with the Securities and Exchange Commission (SEC). ISE Mercury has a targeted launch in the first half of 2015.
“ISE Mercury will use our proven technology platform to service a segment of the options market not currently active on ISE or ISE Gemini,” said Boris Ilyevsky, Managing Director of ISE’s options exchanges. “Our goal is to reach broadly across market segments and to deliver innovative trading functionality, superior customer service, and competitive fees to different constituencies in the industry through our three exchanges. ISE Mercury will build upon the success of ISE and ISE Gemini and will expand our customer base and extend our value proposition.”
Details regarding ISE Mercury’s market structure, fee schedule and products traded will be publicized at a later date.
***DA: Next will be ISE Apollo, followed by, I believe, ISE Space Shuttle.
***JB: I’m holding out for ISE Phoenix (for any Star Trek nerds out there…for the rest go watch Star Trek:First Contact).
CME Group and CFFEX Sign Market Data Agreement
Press Release (CME Group)
CME Group, the world’s leading and most diverse derivatives marketplace, and China Financial Futures Exchange Inc. (CFFEX), the sole financial derivatives exchange in mainland China, announced today that they have signed an agreement on market data provision. Under this agreement, CME Group will license and distribute CFFEX market data outside of mainland China, to customers of CME Group’s recognized market data distribution platform.
ICE Europe Takes Over Liffe Commodities After 18 Years
Morgane Lapeyre – BloombergBusinessweek
Intercontinental Exchange Inc. (ICE:US) eliminated the Liffe name and incorporated cocoa, robusta coffee, white sugar and feed wheat futures and options into ICE Futures Europe, owner of the Brent crude contract.
ICE, based in Atlanta, has the dominant position in the softs markets, also owning ICE Futures U.S. in New York where arabica coffee, cocoa and raw sugar trade. ICE Futures Europe now has the biggest share of the cocoa market with 259,410 futures outstanding today compared with 209,687 contracts on ICE Futures U.S., according to data compiled by Bloomberg. ICE’s Brent oil futures have 1.4 million contracts outstanding.
CHX chief looks to tech to revive shrunken Chicago Stock Exchange
Lynne Marek – Crain’s Chicago Business
If John Kerin has his way, one of Chicago’s oldest companies will be one of the city’s newest tech darlings.
Mr. Kerin is the new CEO of CHX Holdings Inc., privately held parent of the 132-year-old Chicago Stock Exchange. When he started at the exchange in 1988, it had 1,000 employees and handled about 10 percent of trading volume in stocks in the U.S. Today its headcount is down to 80, while its market share has shrunk to just half of 1 percent.
LME Boosts Fees 34% in First Increase Since 2012 Takeover
Agnieszka Troszkiewicz – Bloomberg
The London Metal Exchange, the world’s biggest metals bourse, raised fees it charges members and users for the first time since it was acquired by Hong Kong Exchanges & Clearing Ltd. for $2.2 billion.
***SR: The changes take effect Jan. 1. When HKEx bought the LME in 2012 it promised not to increase fees until 2015. Quite an increase!
Regulations and Enforcement
OCC and The U.S. Options Exchanges Announce New Risk Control Standards to Strengthen Industry Protections
Press Release (OCC)
OCC and the U.S. options exchanges announced today the adoption of risk control standards that include price reasonability checks, drill-through protections, activity-based protections and kill-switch protections, pending regulatory approval.
Earlier this year, OCC and the options exchanges agreed on a principles-based set of exchange risk control standards designed to reduce the risk of errors or unintended activity that could cause or contribute to a financial loss to market participants and OCC. OCC has adopted the risk control standards and approved an implementation plan. The standards will be implemented through an OCC rule that will apply a principles-based approach to options transactions.
HFT’s Death by a Thousand Cuts
Dr. John Bates – Wall Street & Technology
It took a while for regulators to catch up with high-frequency traders. Unfortunately for the HFT players, the regulators found their footing in September.
September has been a painful month for the high-frequency trading industry, as a series of seemingly small stories (and one big one) could be signaling the beginning of the end for the so-called “Flash Boys.”
Banks to Adopt Crisis-Clause Derivatives by Next Month
Ben Moshinsky – BloombergBusinessweek
About 14 global banks will adopt new derivatives contracts by the end of October aimed at halting cascades of defaults in the financial system during a crisis, the Financial Stability Board said.
The International Swaps and Derivatives Association Inc., an industry group, is preparing amendments to its standard framework of documents that would allow regulators from any jurisdiction to temporarily halt claims on defaulting banks, the FSB said in a statement on its website. It didn’t identify the banks that had signed up for the new contracts.
Senate Democrats Urge CFTC Review of LME Aluminum Trading
Silla Brush – BloombergBusinessweek
The U.S. Commodity Futures Trading Commission should probe the London Metal Exchange to ensure aluminum trading and warehousing are free of manipulation, three Democratic senators said in a letter.
The regulator must investigate whether LME rules sufficiently protect against conflicts of interest between firms’ trading and warehouse operations, Senators Sherrod Brown of Ohio, Elizabeth Warren of Massachusetts and Tammy Baldwin of Wisconsin said in the letter dated yesterday. The review should come before the agency grants full registration to the LME as a foreign trading exchange.
OptionsCity Announces Support for CME Market Data Platform 3.0 Upgrade
Press Release (OptionsCity)
OptionsCity Software, a global provider of electronic trading solutions for professional futures and options traders, today announced that the firm has completed certification with CME Group’s Market Data Platform (MDP) 3.0.
The MDP 3.0 is a low latency solution designed to improve customers’ ability to process and act on real-time market data. The certification ensures that OptionsCity customers will continue to remain competitive through lower latency direct access and a reduction in the gap between market data and order fills.
Why It’s Just a Matter of Time Until VXX Tanks Again
Adam Warner – Schaeffer’s Investment Research
We haven’t commented much about the iPath S&P 500 VIX Short-Term Futures ETN (VXX) lately. I’ve unfortunately subscribed to the school of blog-thought that says “If you can’t find something snarky to say about something, don’t say it.” And I have nothing snarky to say about VXX.
Montréal Exchange brings options trading to university campuses across Canada
Mike Fox – LeapRate
Montréal Exchange Inc. (MX), Canada’s derivatives exchange, today marked the launch of trading in its Options Trading Simulation contest. A key part of MX’s derivatives education initiatives, the Options Trading Simulation contest offers undergraduate university students the opportunity to gain virtual experience in the Canadian options market. Using the TMX Trading Simulator, student teams create their own options portfolios and deploy various mandated trading strategies over the course of the eight week session.