Observations and Insight

Steve Grob, Director, Group Strategy, Fidessa – The Finance Industry: The Case for the Defense

“The truth is that you can’t actually uncouple finance from the real economy…[finance] is the heart of the real economy.”

Steve Grob, director of group strategy of Fidessa, does a bit of role-playing as a “defense attorney” for the financial industry. Grob discusses the importance of the financial industry and its relationship with the global economy, as well as how regulatory matters will affect the future of finance. He brings up the concept of “belief systems” that society has learned to accept as true without thinking about the entire process. For example, when we flick a light switch on, we immediately expect a light to turn on, and we’re not always thinking about the process of how the light is created. The same thought process applies in the financial industry, in the sense that if regulators condone a topic such as HFT, then the general public agrees and sees it in a negative light.

Watch the video »

Lead Stories

LSE wins regulatory approval for US options
Luke Jeffs – FOW
The London Stock Exchange Group has made a breakthrough with its evolving derivatives strategy by winning US regulatory approval to offer equity options in the US.
The British exchange said on Thursday it has been granted no-action relief status by US options regulator the Securities and Exchange Commission to offer US persons options based on the LSE’s UK stocks, International Order Book, depositary receipts and indexes.
Nicolas Bertrand, head of equity and derivatives markets at London Stock Exchange Group, said: “Our class no-action relief status is another significant step towards broadening our distribution network and enhancing liquidity on our derivatives market.
***DA: Globalization 3.0.

OptionsCity Software Acquires Optionshop
Press Release – OptionsCity
OptionsCity Software, a global provider of electronic trading solutions for professional futures and options traders, today announced the acquisition of futures trading technology provider Optionshop. The acquisition adds new technology capabilities to OptionsCity’s increasingly diverse product-set while extending its reach into new customer markets. Terms of the deal were unannounced.
***DA: Well, yeah; an optionshop belongs in an options city.

Correlation Gauge for S&P 500 Falls at Fastest Rate Ever
Callie Bost – Bloomberg
With October’s tempest behind them, investors are speculating stocks will break out of lockstep moves and start reacting to individual influences such as earnings and takeovers.
The Chicago Board Options Exchange’s S&P 500 Implied Correlation Index has dropped a record 30 percent in November. The gauge, which uses options to measure expectations about whether Standard & Poor’s 500 Index stocks will move in unison, touched the lowest level since the index was created in January 2012 on Nov. 18.
***DA: Dissention in the ranks of index components?

Average Wall Street pay to rise 4% this year
Justin Baer – MarketWatch
Wall Street pay will rise slightly this year, though the increase will be offset at some banks by huge legal settlements agreed to this year, an industry recruiter said in a new study to be released later this month.
“This is the year those legal costs come home to roost,” said Michael Karp, a managing partner with Options Group, which is publishing the study.


BATS Global Markets to Lay Off 56 Employees
Bradley Hope And Scott Patterson – WSJ
BATS Global Markets Inc., one of the country’s largest stock exchange operators, is planning to lay off 56 employees early next year, according to a filing with the state of New Jersey.

Shame Gauge Gets Derivatives as Futures Start on JPX-400
Tom Redmond and Toshiro Hasegawa – Bloomberg
Japan’s push to make its companies more profitable is about to spread to the derivatives market.
The bourse operator will list futures on the JPX Nikkei Index 400 (JPNK400) from Nov. 25, a move analysts say will draw investors as disparate as the Bank of Japan, short-sellers, pension funds and day traders to the underlying measure. The shame gauge, as it’s known, started trading in January and has attracted about $4 billion so far in Japan, including money from the nation’s $1.1 trillion public retirement-savings manager.

Regulation and Enforcement

U.S. SEC enacts rules to protect exchanges, dark pools from glitches
Sarah N. Lynch – Reuters
U.S. regulators adopted a new rule Wednesday that requires stock exchanges and some larger trading platforms to take steps to protect against market disruptions such as technology glitches or natural disasters.
***DA: I’m sure we are completely safe now.

CFTC commissioner calls for foreign SEF regime
The Trade
A top regulator at the US derivatives watchdog has called for the establishment of a foreign regime for the execution and clearing of off-exchange derivatives to mitigate the global market from fragmenting.
Mark Wetjen, a commissioner at the Commodity Futures Trading Commission (CFTC), became the latest high-profile regulator to criticise his agency’s swap trading rules which have resulted in foreign investors shying away from using US electronic venues known as swap execution facilities (SEFs).


A Smart Idea
Doug Ashburn – JLN
We admit it – over the years we have leveled our share of criticism toward the CFTC, its commissioners, some of the things they say and certain rules they have published.
Lately, though, we have had mostly good things to say. The new chairman, Tim Massad, has struck a more conciliatory note with market participants in the U.S. and, perhaps more importantly, abroad. In recent days, new commissioners Chris Giancarlo and Sharon Bowen have each stressed the need to balance the mandates of Dodd-Frank with the realities of the marketplace and the fear of unintended consequences. Without going so far as to call it a “kinder, gentler commission,” especially if one is an institution on the receiving end of a recent fine, we can at least agree that the CFTC has become more pragmatic and responsive in 2014.
Since we are giving credit where credit is due, let us bring your attention to the CFTC’s SmartCheck, a new site that gives investors and would-be market participants a one-stop portal for background checks, the latest news and enforcement actions, and other helpful information.
Read the rest of the commentary!  It’s over on the JLN Blog at:


Are Options Underpricing the Probability of More Upside?
Adam Warner – Schaeffer’s Investment Research
Yesterday, we noted that the humans rarely “predict” that volatility will go lower. And that “prediction” makes some sense given that the markets themselves rarely predict lower volatility.
I used CBOE Volatility Index (VIX) premiums to realized volatility and VIX futures premium to VIX itself as examples. But there are more ways to gauge expectations out there.

Options Education

Multi-asset options 1
Kay Van-Petersen – TradingFloor.com
So what exactly is volatility and why is it so important when discussing options and options strategies?
Put very simply, the two biggest drivers of options prices are the underlying asset, followed by volatility. Yes interest rates, yield and time play a factor but nowhere near as big as volatility. Picture an empty room, with a red ball flying across the room. The speed and direction change of the ball denotes volatility. If the ball sails across the room in a lazy one-directional pathway, volatility is low. If it shoots across the room at great speed and in a variety of changing pathways, volatility is high.


Options Alliance Annual Conference Dec 8
Join us on December 8 for a deep dive into the exploding world of financial startups. Meet and mingle with your fellow entrepreneurs as you learn how to market, grow and fund a wide range of financial startups. The program begins at 1 pm at the Arditti Center for Risk Management at DePaul University’s Chicago Loop campus. The three panels cover the marketing, growth in AUM and funding of startup firms. A networking cocktail reception follows.
***Panelist firms include OIC, CME Group, Tradelegs, RCM Asset Management and more.

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