Observations & Insight

Peter Nabicht, 12Sided Technology – The Implied Job Descriptions in Finance

“Markets are an ultra-complex socio-technical system. That is a thing; Google it. There are three examples regularly given of such systems – huge cities, the space shuttle program, and financial markets. That’s how complex and interconnected we are.”

Have you ever lost a million dollars in 4 ½ seconds? Neither have we. Peter Nabicht, however, once wrote an algorithmic trading program that did exactly that, when one of his teammates misplaced a decimal on a minor tweak to the algo. Though the blame could have easily gone to Nabicht and/or one his colleagues, none of them was fired over the incident. Why? For one, though the tuition was steep, each received a valuable education from the incident. Plus, each team member accepted responsibility for the actions, meaning none tried to say “It’s not my job.”

Nabicht says that in ultra-complex socio-technical systems, as in most not-so-complex systems, the phrase “not my job” should not be part of the lexicon. He says a well functioning marketplace benefits all of us, thus we should share in the responsibility of ensuring well functioning capital markets.

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Lead Stories

Summer’s over: Markets brace for the fall
Sam Ro – Yahoo Finance
August was unusually quiet in the US markets and economy, which could be the set-up for a volatile few months ahead. Labor Day marks the unofficial end of summer for the US. Kids return to school after their summer vacations, and the US Senate and House of Representatives head back to Washington after their lengthy summer recess. On Wall Street, traders and rainmakers close their summer homes in the Hamptons and head back to work.

****JB: Being in Congress is better than being a kid. They go into recess again at the end of September. Heck, they gave themselves more than eight months off this year. Not bad for a $174,000/year job (so a bit more than $195/hour this year while in session and not including benefits).

Goldman: The Biggest Reason Low Yields Can’t Boost Stocks Much Higher
Markets have been in an unsustainable “Goldilocks” mode, according to Goldman Sachs Group Inc., in which expectations of rising economic growth combined with sinking bond yields have laid the foundation for a rally in stocks. But this environment can’t hold much longer as acceleration in growth will fail to materialize or come at a cost, accompanied by a rise in government bond yields.

****SD: Meanwhile, Morgan Stanley says Four Reasons Why The S&P 500 Will Rally to 2,300

With Nowhere to Go, This $64 Billion Asset Manager Bets on VIX
Jonas Cho Walsgard – Bloomberg
With massive stimulus inflating stocks and bonds, the tactical allocation team at Norway’s largest bank has opened a bet on volatility for the first time. The unit at DNB ASA is hedging its mixed funds by keeping duration short and buying volatility index contracts for the first time, according to Torkild Varran, chief executive officer of DNB Asset Management, who oversees about 530 billion kroner ($64 billion).

****SD: There’s always somewhere to go (not that those would be better options).

VIX Option Activity Signals Possible Volatility Spike
Elizabeth Harrow – Schaeffer’s Research
This week, we present to you one of those interesting data discoveries that occasionally crops up in the course of our routine study of various technical and sentiment indicators. In the process of composing his weekly report to our research team, Schaeffer’s Quantitative Analyst Chris Prybal noted an apparent correlation between CBOE Volatility Index (VIX) futures put option volume and the action in the S&P 500 Index (SPX). Namely, per the chart immediately below, it would seem that when VIX’s 20-day cumulative put volume falls below 400,000 contracts, the S&P tends to experience some weakness.

Worry + Price Action = New Market Highs
Bob Lang – CBOE Options Hub
The most hated rally of all time. That is what I’ve been hearing of late, and no wonder so many are frustrated by missing out on the upside when the ‘wall of worry’ is up. When doubt creeps in so does courage or boldness, as the market moves without the majority of the crowd. Yet, it seems every bull rally is hated due to this same reason. When the wall of worry is showing, ‘high price’ warnings come out almost daily then markets will defy the consensus.

Does a Return to Liquidity Mean a Return to Volatility?
We have passed through the US-based Labor Day holiday – a seasonal drought in broader market liquidity. This go around, the slump in participation exacerbates a deepening, structural drain in market activity born of monetary policy and the complacency that follows it. The question traders and investors should ask is whether the reliable seasonal tides can marshal in a deeper current change for the global financial markets that resolves stubborn moral hazard and desperation for return.

Speculators start betting on yen’s decline
Keidai Sanda – Nikkei Asian Review
Uncertainties over Japanese and U.S. monetary policies are raising doubts that the yen’s rally will continue, with many speculators pouring cash into exchange-traded funds that bet against Japan’s currency. The ProShares UltraShort Yen ETF is considered an indicator of the sentiment among hedge funds and other short-term speculators. The fund’s assets under management recently rose to $260 million, returning to the amount seen in December when the yen traded for around 120 to the dollar.

The Option Queen Newsletter
J.A. Schwarz – Market Analytics
Hurricane Hermine is ripping up the east coast of the United States, leaving power outages in its wake. We look forward to a much needed break from Hillary and “The Donald.” For the first time in what seems an eternity, both candidates will hopefully take a back seat. This election season has been one of the dirtiest, nastiest, and valueless seen in modern history. We must remind our readership that no matter who wins, and unfortunately one of these two will win, what they promise will have about as much chance of happening as palm trees growing in the dark cold permafrost of Barrow Alaska next year.

BigTrends.com Weekly Market Outlook – Two Month Range Continues
Moby Waller – CBOE Options Hub
Despite a couple of scares, stocks ended last week intact, and even up just a bit thanks to Friday’s gain. On the other hand, last week’s action still left the S&P 500 (SPX) (SPY) along with the other indices overvalued and overbought. Whether or not that matters remains to be seen, though it’s interesting that the bears had more than ample opportunity to push the market over the cliff — but they just never did it.

Equities Risks Rising as Earnings Growth Stagnates (VIDEO)
CME Group
CME Group Chief Economist Blu Putnam discusses on Futures Institute rising risks in the equities market fueled by lackluster earnings growth.


Exchanges Are National: Time to Drop the Deutsche Boerse – LSE Merger
Thomas Krantz via Tabb Forum
A listed exchange is a public company and a national treasure, a dual identity to be embraced. Can the Deutsche Boerse – London Stock Exchange deal succeed in the corporate sense and also in the fulfilment of exchanges’ obligations to the public good? History has demonstrated that building cross-border securities exchanges is not only hard, but it has the propensity to fail.

Intercontinental Exchange Reports ICE & NYSE August 2016 Statistics
Press Release
Intercontinental Exchange, Inc. (NYSE:ICE), a leading operator of global exchanges and clearing houses and provider of data and listings services, today reported August 2016 trading volume and related revenue statistics, which can be viewed on the company’s investor relations website at http://ir.theice.com/ir-resources/supplemental-information in the Monthly Statistics Tracking spreadsheet.

****SD: Finance Magnates — ICE’s August Metrics Strike Yearly Lows, FX Falls to Lowest Level Since 2014

BRIEF-Intercontinental Exchange Inc – Aug total futures & options contract volume 4.1 million versus 4.3 million
Aug total futures & options contract volume 4.1 million versus 4.3 million
Aug total U.S. Equity options 2.3 million contracts versus 3.6 million contracts

Exchange giants report sharp drops in August
Julie Aelbrecht – Futures & Options World
US exchange giant CME reported a 15% drop in average daily volume traded
Some of the world’s top futures markets have reported double digit drops in their monthly volumes for August, reinforcing similar results on Friday and signalling weak trading last month. Derivatives giant the Chicago Mercantile Exchange (CME) reported its daily average volume dropped 15% in August to 13.8 million contracts per day. In line with results reported late last week, the CME’s commodity volumes fared better than equity- and currency-based contracts.

Euronext, HKEX latest to report August losses
Futures & Options World – Let’s Talk Derivatives
Most major derivatives hubs reported sharp drops in trading for last month
Euronext said its derivatives trading fell 9% and Hong Kong Exchanges and Clearing saw volumes down 13% last month, marking the latest exchanges to report a weak August for trading. European exchange Euronext reported on Tuesday a 9% drop in trading on its derivatives markets to 8.5 million lots in August. The average daily volume on the equity index contracts was down 38% on August last year to 158,599 contracts and the average daily volume on individual equity derivatives for the month decreased 44.7% to 164,776 contracts.

Five Questions With Magnus Haglind, COO And Deputy Head Of Nasdaq Global Commodities
TradeTalk – Trading Technologies
I first met Magnus Haglind when he was living in Chicago and serving as CEO of Nasdaq Futures (NFX), the U.S. energy market launched by Nasdaq in 2015. Nasdaq had announced Trading Technologies’ status as a preferred NFX vendor, and our teams were starting to work together to connect traders to the new exchange using our software. While the collaboration between TT and Nasdaq has deepened, Magnus’ role has evolved. A native of Sweden, Magnus recently took a new position that has him overseeing Nasdaq’s global commodities business.

Euronext Announces Volumes for August 2016
Euronext, the leading pan-European exchange in the Eurozone, today announced trading volumes for August 2016.

****SD: Finance Magnates — Euronext’s August Volumes Retreat to Lowest Levels of Year

SGX sets up Securities Market Industry Working Group
Singapore Exchange (SGX), in consultation with the Monetary Authority of Singapore (MAS), has formed a Securities Industry Working Group (IWG), to assess and make recommendations on SGX and industry participants’ processes to improve the Singapore securities market’s operational resilience.

SGX joins United Nations Sustainable Stock Exchanges initiative
Singapore Exchange Ltd (SGX) is pleased to announce that it has joined the United Nations (UN) Sustainable Stock Exchanges (SSE) initiative as a Partner Exchange. The SSE initiative, opened by UN Secretary-General Ban Ki-Moon in 2009, serves as a platform for exploring how exchanges, together with stakeholders, can enhance corporate transparency on Environmental, Social and Corporate (ESG) governance issues and stimulate sustainable investment.

Throwing a Curveball
Joe Parsons – The Trade
You won’t be seeing any slog sweeps or wild swings from Andrew Ross, the chief executive of the London Stock Exchange Group’s (LSEG) ambitious interest rate derivatives platform.
His style is a lot simpler: to knock singles about and put the bad ball away for four. It is this cricketing style which Ross is applying to CurveGlobal.

****SD: FOW — LSE schedules two tests ahead of Curve launch

MOEX Expands Liquidity Support Program with Options on Brent Crude Futures
Rosemary Barnes – Finance Magnates
Russia’s main trading venue, Moscow Exchange, has announced that it is making changes to the liquidity support programme for its Derivatives Market from 1 September 2016 by adding options on Brent crude futures.

BME Clearing sees derivative slump in August
Spanish stock exchange BME Clearing’s derivative market saw an 11 percent drop off in volumes for August, compared to the same time in 2015.

Regulation & Enforcement

MiFID II Q&A on Trading Venues Being Prepared
The European Securities and Markets Authority is working on guidance on secondary markets under MiFID II, the regulations covering financial markets in the region from 2018, which includes clarifying the differences between new types of trading venues and the operation of the double volume cap.

SpotOption Organizing Binary Options Lobby to Fight Global Crackdown
Avi Mizrahi – Finance Magnates
Finance Magnates has learned that binary options platform developer, SpotOption, is organizing a lobby group for the controversial industry as it finds itself under attack by regulators in different markets. SpotOption has been working on this matter for months now and today it will hold a forming meeting with other regulated binary options firms in Nicosia, Cyprus.


Are Financial Services Ready for the Cloud?
OpenMarkets – CME Group
With its ability to reduce costs and increase time-to-market, the cloud would seem all things to all people. Provisioning new infrastructure, which traditionally has been a months-long process, is now reduced to just a few minutes. “This transformation is being described by many as the fourth industrial revolution,” Scott Mullins, Head of Worldwide Financial Services Business Development, Amazon Web Services told Tech Talk 5.0 in London recently. “The world doesn’t work the same way anymore, which means that legacy methods for procuring and deploying technology don’t either.”

Keeping up with high-frequency traders; Experiments with timestamping are yet to provide enough accuracy
Philip Stafford – Financial Times
Market regulators charged with overseeing orderly trading are fighting a losing battle when it comes to keeping up with super fast technology.

MiFID II & Trade Reconstruction: Plugging the gap in voice communications
Paul Christensen, CEO at Green Key Technologies
The successor to the EU’s Markets in Financial Instruments Directive, MiFID II, will soon introduce a raft of new obligations to financial institutions. Among these are the record-keeping of communications, voice recording calls and the ability to reconstruct trades and client interactions.

FlexTrade Adds TradeGuide to its FlexTRADER EMS Platform
Finance Magnates
FlexTrade Systems, a global provider of multi-asset execution management system (EMS) technology, today introduced ‘TradeGuide’, a new way of visualising and presenting trade data in the company’s FlexTRADER multi-asset execution management system (EMS).

Colt Spearheads Transformation with Three Key Senior Hires
Finance Magnates
Colt Technology Services confirmed today that it is undergoing a significant transformation, refocusing on delivering fibre-based, high-bandwidth solutions, coupled with significant investments in the next 12 months to deliver a best in class network and customer experience.


If VIX Closes Above This Level, It’s Time to Buy Put Options
Todd Salamone – Schaeffer’s Research
After reviewing my description of the previous week’s SPDR S&P 500 ETF Trust (SPY – 218.37) price action — which encompassed comments from central bankers late in the week in Jackson Hole, Wyoming — I couldn’t help but note the striking similarities with respect to last week’s action. In fact, substitute “August employment report” for “Yellen’s comments” in the excerpt above, and you pretty much have a description of last week’s action in terms of the pivot points during the week.

How to Take Profits, But Stay in the Game
Steven Sears – Barron’s
These are tricky times in the stock and options markets. Upside calls are inexpensive on many stocks, but it’s not clear how much upside is left with so many stocks and indexes near record highs. Many downside puts are expensive, but probably not expensive enough to sell short—especially ahead of this fall’s heavy calendar of major market events that could roust stocks from their low-volatility trance.

Volatility Update: The deafening silence of the VIX
US equities continued their grind, so relevant in the month of August, but closed the week with a modest rally. On Friday, the US unemployment numbers came in mixed – the US economy added some 151,000 jobs while the unemployment rate steadied at 4.9%. The release saw little increase in hourly wages, which is something the Federal Reserve is watching closely and now investors believe that the central bank is not likely to increase interest rates in September.

As Nyrstar hedges forward, should zinc bulls be worried?
Andy Home – Reuters
Zinc continues to glow red hot amid the general gloom pervading the industrial metals sector. On the London Metal Exchange (LME) three-month metal closed last week valued at $2,364 per tonne, up 50 percent on the start of the year and the highest it’s been since May last year.

Hedge funds slash bullish gold price bets again
Large scale gold futures and options speculators or “managed money” investors such as hedge funds were wrong-footed by the negative employment and wage numbers and had been positioning themselves for further declines in the gold price ahead of the Dept of Labor data.


Weekend Review – VIX Options and Futures 9/4/2016
VIX Views
VIX finished the week just under 12. We can attribute this to a combination of the equity market being pleased by Friday’s August Non-Farm Payroll report along with the three-day weekend effect. Note the September futures, which settle on the 21st moved lower, but held up a bit relative to spot VIX. This is common regardless of the directional move out of the index, but is accentuated whenever we have a long weekend.

Weekend Review – Volatility Indexes and ETPs 9/4/2016
VIX Views
The VXST – VIX – VXV – VXMT curve does what it normally does on a pre three-day weekend week and got steeper. It’s been a while since I ran the numbers but I’m fairly certain VXST almost always drops before a holiday weekend and then rebounds when we all return to work refreshed and ready to trade.

Weekend Review – Russell 2000 Options and Volatility – 8/29 – 9/2
CBOE Options Hub
I went to the horse track for the first time in about a decade just before writing this blog. In one race, a horse (not mine of course) steadily pulled away into the finish of a race. That’s sort of what is happening with the Russell 2000 (RUT) performance relative to the large cap focused Russell 1000 (RUI). RUT gained almost twice as much at RUI last week (1.19% versus 0.62%). This places RUT up 10.21% for 2016 and RUI up only 6.81%.


Weak crop prices lead to sharp decline in producer sentiment
CME Group
After months of increases in producer sentiment toward the U.S. agricultural economy, the August reading of the Purdue/CME Group Ag Economy Barometer showed that declining commodity prices are weighing on the minds of producers.

Banc De Binary Signs One Year Sponsorship Deal with Southampton FC
Finance Magnates
Banc De Binary, one of the biggest binary options brokerages in the industry, has signed a sponsorship deal with Southampton Football Club. The partnership is aiming to bring fans of the team and traders closer together, with the broker gaining access to distribute marketing content to over 2 million social media fans across Twitter and Facebook.

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