Observations & Insight

Lanre Sarumi, RiskBone – Your Heart vs. Your Talents: Success Mindset for the Financial Industry
MarketsWikiEducation.com

“It turned out that what I was good at became what I was doing.”

Lanre Sarumi entered the financial markets for one reason alone – he wanted to be a trader – yet he struggled to find a bank or trading group willing to hire him as one. He eventually took a job as a systems developer at Citadel Investment Group, where he led teams that designed risk solutions for the back and middle office. Though was great at building risk solutions, his heart was in trading, so every time there was an opportunity to move into a trading position, he would take it.

Unfortunately, trading was not Sarumi’s strong suit. Though he had some successes, he also had a number of setbacks. On more than one occasion, his manager would call him into the office and say, “I know you want to be a trader, but what we really need is for you to take a look at our risk management software.”

Eventually, Sarumi got the message. He now runs his own risk management and quantitative analytics firm. The message? While there is nothing wrong with following your heart, sometimes your best opportunities in life lie with your greatest proficiencies.

Watch the video »

Lead Stories

This Is How Leverage in the Financial System Lives On
Tracy Alloway – Bloomberg
Rumors of leverage’s death have been greatly exaggerated. In the aftermath of the 2008 financial crisis an abundance of leverage — borrowed money used to amplify returns — was blamed for exacerbating losses on subprime mortgages and contaminating the banking system with catastrophic results. Since then a host of new rules have been enacted to reduce financial leverage, including penalizing certain derivatives positions, such as the credit default swaps (CDS) villainized in the crisis, as well as outright curbing the amount of borrowing allowed at big banks.
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****SD: Hey, look who gave swaptions a share of the limelight! Lots to unpack in this one. Among a few other themes, the piece provides insight into the ongoing dialogue about derivatives of derivatives and the increasing effect they have on the underlying. Check out these numbers: “Analysts at Citigroup Inc. estimated that about $24 billion of CDS index options traded in 2005, rising to $1.4 trillion in 2014 — a more than a 5,000 percent jump in activity in just under a decade.”

Jackson LOL: The Fed has yet to take monetary reform seriously
The Economist
Larry Summers is right; this year’s Fed symposium in Jackson Hole was triply disappointing. In the weeks before the gathering, members of the Federal Open Market Committee (FOMC) publicly discussed their worries that the current monetary framework might leave the Fed unable to deal adequately with future slowdowns. They got our hopes up: enough that we published a leader giving the Fed some suggestions for new approaches. But as Mr Summers says, the Fed let us all down. In their public remarks, at least, the FOMC members present expressed little concern about problems with the Fed’s toolkit or weaknesses with the current 2% inflation target. Worse, Janet Yellen and Stanley Fischer, the chairman and vice-chairman respectively, used the occasion to tell markets to revise up their expectations of near-term rate hikes.
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****SD: I think Jackson LOL is good, but find that those applying the insult “Jack-holes” to the swarms that descend on Wyoming more amusing. Bill Gross opined on the Fed today. CNBC has the take: Bill Gross – The Fed has mastered market manipulation

Hard to detect seismic politics in weather-worn markets
Mike Dolan – Reuters
You may reasonably wonder just what sort of political upheaval it takes to upset financial markets these days. Despite a series of potentially seismic shifts in the political landscape over the past two years, world asset prices appeared to suffer less and less lasting damage. And a similar scenario is playing out again this year around Brexit and the possibility of a Donald Trump White House. A Greek exit from the euro that could have unraveled the single currency, a Scottish exit from the United Kingdom, a maxi devaluation of China’s yuan were just some of the bogey issues feared fleetingly over the past two years. And yet global equity and debt markets, to the extent they were hit at all, bounced back smartly to ever higher highs as measures of volatility ebbed.
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****SD: Related: Marketwatch has Here’s why we should celebrate this dull market; Barron’s has Is a Quiet Market a Dangerous Market? and Should We Be Worried About The Low Vol?; Blackrock put out Once again, it’s too quiet out there. I think the picture is painted with that assortment of stories.

Bullishness among traders has hit a disturbing 3-year high
Sam Ro – Yahoo Finance
There’s been an eery calm in the financial markets. The S&P 500 (^GSPC) hasn’t seen an up or down move of greater than 1% in 36 trading sessions. Wall Street strategists warn that markets aren’t pricing in the slew of uncertainties that lie just beyond the horizon. Catalysts for volatility include the US presidential election, the next Fed rate hike, the evolving Brexit narrative in Europe, etc.
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****SD: “‘The net speculative position on the CME as far as SPX contracts are concerned have ballooned nearly 70% since mid-July to 38,083 net longs, a bullish bet we have not seen since June 2013, and this is one vivid sign of just how complacent the masses are,’ Rosenberg wrote on Wednesday.”

U.S. Farm Incomes to Hit Lowest Level Since 2009
Morningstar
U.S. farm incomes will hit their lowest point this year since 2009, a U.S. Department of Agriculture forecast showed on Tuesday, deepening pain in the Farm Belt amid a multiyear downdraft in commodity prices.
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****SD: Here’s a rundown of the bearish action in soybeans, corn and wheat from Agrimoney.

Dollar Set for First Monthly Gain Since May on Divergence Bets
Rebecca Spalding and Anooja Debnath – Bloomberg
Chances of Fed rate increase next month climbs to 36 percent; Greenback gains versus yen as Kuroda stands ready to ease
The dollar headed for its first monthly advance against the yen since May on mounting speculation U.S. monetary policy will further diverge from that of the Bank of Japan.
In the options market, the premium on contracts to buy the yen in a month, compared with those to sell, has disappeared for the first time since November after BOJ Governor Haruhiko Kuroda reiterated on Aug. 27 his readiness to ease further.
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The Truth Emerges: EIA Admits It “Overestimated” Crude, Gasoline Demand In The First Half By 16%
Zero Hedge
One of the recurring peculiarities of oil complex data as reported by the EIA was how, during a time of an unprecedented crude glut by OPEC and pronounced economic weakness in the US, was overall US demand of various petrochemical products as strong as the DOE reported on a weekly basis. To be sure, the alleged increase in demand was one of the major catalysts that prompted rising oil prices together with relentless jawboning by OPEC members about a “production freeze” that would never materialize, in turn spurring not one but two record short squeeze across the commodity complex. We now know the answer.
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****SD: EIA release referenced here. Another good story about oil from Bloomberg about other less than accurate statistics— Mystery of Oil Held on Chinese Islands Puzzles Crude Markets

Exchanges

Weekly Bund Options allows investors to react more effectively in any market event
Opalesque
The introduction of the Eurex’s Bund Options with weekly expiration allows investors to react more effectively to any unexpected market events, said Paris-based Nicolas von Kageneck, a Paris-based executive of Eurex Exchange. Von Kageneck made the statement during the latest Opalesque 2016 France Roundtable. Von Kageneck said, “We regularly introduce a number of new products which are linked to our existing products. If you look for example at our Bund Options, we have recently launched weekly expiries. With such high gamma options, you can react more effectively to any unexpected market events. The same holds with the launch of a Mini-DAX future, where Eurex offers an instrument also suited for trading retailers and is expected to become a viable alternative to CFDs.”
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JPX Published The JPX Report 2016
Press Release
We are glad to inform you of the publication of the JPX Report 2016. Prepared as part of our efforts toward integrated reporting, the report offers stakeholders and the general public a deeper insight into our corporate philosophy, social raison d’être, and our initiatives toward sustainable corporate development.
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Chicago Stock Exchange Targets Rapid-Fire Traders With Speed Bump, Echoing IEX
Dave Michaels – WSJ
Another stock exchange wants to slow down trading, saying some rapid-fire firms have found a way to exploit slower orders, scaring investors away from its market. The Chicago Stock Exchange has proposed to implement a speed bump, mimicking an earlier move by IEX Group Inc., the upstart stock exchange made famous by Michael Lewis in the book “Flash Boys.” In June, IEX won approval to impose a speed bump of 350 microseconds, or millionths of a second, a delay that it said is just long enough to protect investors from predatory high-speed trading that can front-run the orders of slower investors.
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Moves

CME Europe welcomes new FX head Cave
Alice Attwood – FOW
Alexander Cave was formerly an FX trader at Citigroup in London
CME Europe’s new head of foreign exchange, Alexander Cave, has started in the role this week, with the appointment the latest in a series of senior management changes at the Merc’s European exchange. Cave, who started at CME Europe on Wednesday, was most recently a consultant at IntroAfrica Services Ltd which specialises on market entry and operating services. Prior to this he was a foreign exchange trader at Citigroup in London for seven years. A spokesperson confirmed that Cave had begun in the new role on Wednesday.
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Operations head Spires departs Tower Trading
Alice Attwood – FOW
The company appointed Jonathan Taylor as CEO in June this year
Tower Trading Group has parted ways with its head of operations and director of client services, Adrian Spires, after nine years with the firm. Part of the management team at Tower, Spires joined the proprietary trading firm in 2007 as risk manager, and was in 2009 appointed head of operations. Before Tower, Spires was a trader at SGF & Credit Lyonnais for five years. Spires confirmed to FOW that he has left the TTG for a new business venture.
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Ex-Soc Gen broker to run futures execution at GH Financials
Joe Parsons – The Trade
GH Financials has appointed a former senior Societe Generale derivatives broker to head its London-based listed derivatives sales and execution desk. Steven Wilkins joined the brokerage and clearing firm in July, following his departure from the French bank in May. Wilkins replaces John Ramsay, head of brokering, who left GH Financials in July, according to the FCA register and his Linkedin profile.
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Regulation & Enforcement

G20 Urged to Remove Restrictions on Reporting of Some Derivatives
Finance Magnates
The Financial Stability Board (FSB), a global banking regulator has urged G20 leaders to take charge in financial regulatory mechanisms and singled out derivatives transactions reporting as a sector where more regulatory action is necessary. With the upcoming meeting of global leaders set for for next week in China, a set of new financial regulations is being suggested for discussion.
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SEC Whistleblower Program Surpasses $100 Million In Awards
Press Release
The Securities and Exchange Commission’s awards to whistleblowers have surpassed the $100 million mark with the program’s second-largest award of more than $22 million announced earlier today. The whistleblower program was established by Congress to incentivize whistleblowers with specific, timely and credible information about federal securities law violations to report to the SEC. To date, enforcement actions resulting from whistleblower tips have resulted in orders for more than $500 million in financial remedies, much of which has been returned to harmed investors.
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****SD: If you work for a super-duper huge institution, looking for fraudulent/criminal behavior could be a nice retirement plan.

Banks in U.K. Eyeing EU Market May Find Equivalence Cold Comfort
John Glover – Bloomberg
For bankers in the U.K., a lot of money and a lot of jobs hang on the terms of their continued access to the European Union’s single market after Brexit. Yet those terms — such as “passporting” and “equivalence” — aren’t exactly household names.
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Analysis: The Revival of Unregulated Binary Options Brokers
Victor Golovtchenko – Finance Magnates
Regulation versus the free market – an eternal fight between cat and mouse with no clear winner and many unexpected twists and turns. One way or another, this is a brief description of pretty much any industry since the birth of laws and regulations centuries ago.
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FIA submits amicus brief in FCStone/Sentinel litigation involving the protection of customer funds
Press Release
FIA filed an amicus brief in the FCStone/Sentinel litigation involving the protection of customer funds that may have been moved out of futures segregated accounts. FIA’s brief focuses on protections afforded to customer segregated funds in bankruptcy situations.
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Real costs of high-frequency trading
LiveMint
We all love speed. We want 4G speeds for our phones, faster processors for our computers and BMWs for the road. So, why should it be different when it comes to our trading? Does it matter that some traders can trade a few hundred times before others can even blink? Does it matter that exchanges cater to the needs of these high-speed traders and make a quick buck themselves? These are some of the questions that the Securities and Exchange Board of India (Sebi) has been pondering over, well, for several years now. And as its recent request to the public (for comments on its proposed solutions) shows, it hasn’t made much headway in answering them. Here is an attempt to set the issues in context before evaluating the specific solutions that Sebi is proposing.
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Technology

Dropbox hack leads to dumping of 68m user passwords on the internet
Samuel Gibbs – The Guardian
Popular cloud storage firm Dropbox has been hacked, with over 68m users’ email addresses and passwords dumped on to the internet. The attack took place during 2012. At the time Dropbox reported a collection of user’s email addresses had been stolen. It did not report that passwords had been stolen as well.
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****SD: Obviously not options related, but Dropbox is widely used, so heads up. I got an email regarding the hack, which also served as a reminder that I do indeed have a Dropbox account and hadn’t altered my password in six years. Change your passwords people!

Strategy

U.S. Presidential Election Cycle & Stock Market Performance
Dan Rosenberg – The Ticker Tape
Next January 20, a new U.S. president will take the oath of office. Are there implications for the stock market? The presidential election cycle theory claims that the market follows a pattern linked to the president’s year in office. The theory contends that the first year of a new president’s term is the weakest for U.S. stocks, with improvement coming over the following years. That would seem to signal odds for a challenging market in 2017, with stronger performance from 2018 through 2020.
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Nyrstar in zinc hedge
Mining Journal
Nyrstar, Europe’s biggest smelter of zinc, has said it has entered into short-term strategic hedging arrangements, using put and call collar structures, to mitigate potential downside risks with respect to the zinc price.
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****SD: Real random inclusion, but why not take a look behind the curtains of industrial metal hedging from time to time? If anything, now you know that Nyrstar is Europe’s biggest smelter of zinc, just in case that ever comes up on Jeopardy.

Investor Confidence Is Tumbling, Says State Street
Shuli Ren – Barron’s
Boston-based asset manager State Street says institutional investors’ risk appetite tumbled in August. State Street’s Global Investor Confidence Index decreased to 89.7, down 8.3 points from July’s reading of 98. This index is a measure of actual buying and selling patterns of institutional investors, and a reading of 100 is neutral – the level at which investors are neither increasing nor decreasing their long-term allocations to risky assets.
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Miscellaneous

FTSE set for third straight month of gains
Kit Rees – Reuters
UK shares steadied on Wednesday as weakness in mining shares outweighed gains by banks, though the FTSE 100 remained on track to post its third monthly gain in a row.
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****SD: Bre-what?

Economists Discuss the Predictions That Divide Them
Nelson D. Schwartz – NY Times
What’s ahead for the American economy? That question is dividing experts, given that the economy has advanced at a slow pace since last winter even as the job market has recorded impressive gains.
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Flash Crashes, ETFs & An Arbitrage Trader’s Dream
Roger Aitken – Forbes
Flash crashes and rogue traders – there’ve been a few. Most trading folk will recall the May 6 ‘flash crash’ in 2010 – also known as ‘The Crash of 2:45’ or simply the 2010 Flash Crash. Yet has anything been learned since then or even last August’s ETF flash crash in the US? Perhaps, but there is always room for improvement even if there is no silver bullet or sacred cow on hand.
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