Observations & Insight

A Complicated Relationship
By John J. Lothian
Patrick Young is headed back to the Bürgenstock Conference of the Swiss Futures & Options Association for the first time in several years to host a rerun of the “Crossfire” panel he once popularized. He is bringing his well-known wit and blistering charm to this once legendary international forum of industry leaders.

Burgenstock has not aged so well in the years since Crossfire was a thing. It lost its beautiful venue atop a mountain overlooking Lake Lucerne and has bounced around Switzerland to alternative locations that lacked the unique qualities of the Bürgenstock site.

The new CEO of the SFOA, Daniel Day-Robinson, is trying to bring new life to the conference. He wants to go back to basics, where Bürgenstock started, focused on new products and new markets. With a nod to the past, and an eye on the future, Robinson brought the exiled Mr. Young back to help put a spark into the conference.

The question for some who know Mr. Young is whether he will add a spark, or burn down all of that around him. From his perch as publisher of Exchange Invest, a somewhat familiarly styled daily newsletter about exchanges, Mr. Young has insulted and/or torched some notable exchange leaders, including former NYSE Group CEO Duncan Niederauer. He has been on a scorched-earth campaign against Nasdaq’s futures efforts in London and notably piggish towards NLX CEO Charlotte Crosswell. Nasdaq must have thick skin, as it was announced yesterday that it was sponsoring Exchange Invest.

Read the rest of the commentary on John Lothian News

Lead Stories

Mood Darkens in Tokyo as Traders Boost Bearish Stock Bets
Yuji Nakamura and Toshiro Hasegawa – Bloomberg
If Japan’s options market is any guide, investors see little respite from the stock slump that’s gripping Tokyo.

Payrolls will not bring end to the stress of recent volatility
Jamie Chisholm – Financial Times
So, you’re a US trader, frazzled by the recent weeks’ extreme volatility.
Perhaps you were caught the wrong side of the oil market’s enormous gyrations. Maybe you went short in anticipation of further equity falls, only to be trampled as Wall Street violently cut its losses.
Fancy a less stressful end to the week? Good luck.
The US non-farm payrolls report due for release on Friday could seal the deal on whether the Federal Reserve this year increases official borrowing costs for the first time since the financial crisis.

Majority of U.S. shale firms pass up second-quarter chance to hedge $60 crude
Catherine Ngai – Reuters
With the benefit of hindsight, last quarter may have been the best chance for cash-strapped U.S. shale oil producers to ensure they would get at least $60 a barrel for the next year or two. Barely a third did so.
According to a Reuters analysis of hedging disclosures by the 30 largest such firms, more than half of them did not expand their hedges during the three months ended June or had no hedges at all, exposing them to a plunge that wiped more than $20 off the price of oil in the following months.

From Here on Out El Nino’s Weather Impact Is Only Going to Grow
Brian K Sullivan – Bloomberg
How the weather plays out in the next six months will have a lot to say about the California drought, snow in the Northeast and even the price of natural gas.
A strong El Nino in the equatorial Pacific will make itself noticed in weather patterns across the globe. Tuesday’s update from the Australian Bureau of Meteorology said it’s the strongest El Nino since 1997-98, which was the biggest in records going back to 1950

Low interest rates, labour reform key to minimising China-driven risk
John Kehoe – Australian Financial Review
The International Monetary Fund has warned policymakers that a slowdown in global economic activity and rising volatility in emerging markets, particularly China, have amplified downside risks for the world economy.
In the midst of some of the wildest swings in financial markets since the 2008 global recession, the IMF conceded world economic growth had unexpectedly slowed to a “moderate” pace in the first half of the year and said that world trade contracted in the June quarter.

With China quiet, U.S. market must prove it can heal itself
Michael Santoli – Yahoo Finance
To test a diagnosis, it helps to remove the suspected infectious agent. Something like this is now happening in the markets.
This is the first of five straight days when Chinese and U.S. stock markets will not be open on the same day. China closed Thursday and Friday for its annual military parade and commemoration of World War II’s end. Then here we head into the three-day Labor Day weekend.
So for two sessions, American stocks won’t be exposed to the Chinese market that so many consider toxic, and we’ll see if the inconclusive bounce and choppy positioning can tell us anything about whether this has been a brief market gut check or a long-lasting syndrome that threatens the bull market itself.

No concern yet regarding financial institutions from market turmoil: Jack Lew
Jason Lange – Reuters
U.S. Treasury Secretary Jack Lew said financial market turmoil has yet to cause enough stress in financial institutions to warrant concern, CNBC reported on Thursday.

The Market Hasn’t Even Begun to Panic
Paul Vigna – WSJ
The market is down (though not today) and bulls seem to be scrambling. Markets seem to be zipping around like a pinball. Investors seem to be seized by panic selling one minute, and panic buying the next. Volume is up, volatility is up. Sentiment seems to be teetering on the edge.
“Seems to be” is the key there, however.

China should welcome its short sellers
John Gapper – Financial Times
Li Yifei, head of Man Group in China, is said to have gone on holiday after being summoned by officials investigating the plunge in the stock market. As regulators, executives and journalists face allegations of manipulation and “rumour-mongering”, China wants others to take a break too.
The hedge fund executive’s experience is part of China’s awkward efforts to block the selling of shares and censor information. Four executives at the investment bank Citic Securities are reported to have confessed to insider trading, and Wang Xiaolu, a reporter for the business magazine Caijing, has been paraded on television to apologise for an unwelcome story that he wrote in July.

Will This Volatility Pop Outlast the Financial Crisis?
Adam Warner – Schaeffer’s Research
Out of 500 stocks in the S&P 500 Index (SPX), nearly all of them were down. It was yet another 90/90 down day. And of course the overall damage continued to accumulate even though we have yet to retest the lows (so far).

A Pyrrhic Victory for Active Stock Pickers
Joshua M Brown – The Reformed Broker
Bouts of volatility tend to be favorable for active stock-picking funds, as it is usually the lowest quality stocks that get smashed open like a row of decorative gourds on Halloween night. Professional managers tend to have less exposure to junky stocks because they’ve all gone to the same business schools and have been educated with the same text books. And none of them have been taught to load up on low-quality companies, for obvious reasons.

World’s top oil trader Vitol sees price stuck at $40-$60 to 2016
Oil prices will remain at $40 to $60 a barrel into 2016 as rising crude supplies overwhelm demand, according to the world’s largest independent oil trader.


Intercontinental Exchange Reports ICE & NYSE Monthly Statistics for August 2015; Energy Daily Volume up 21%, Ags up 37%, Cash Equities up 62% over Prior August
Press Release – ICE
Intercontinental Exchange (NYSE: ICE), the leading global network of exchanges and clearing houses, today reported August exchange traded volume.
ICE’s August 2015 futures and options average daily volume (ADV) increased 11% compared to August 2014.

Euronext Announces Trading Volumes for August 2015, Rebounding from July
Andy Traveller – Finance Magnates
Euronext, the largest exchange in the Eurozone, today announced trading volumes for the month ending August 31, 2015. The results show a turnaround for the exchange from July’s underwhelming performance, with a number of records having been set.

HKEx volumes up year-on-year but down on July
Cian Burke – Futures & Options World
The Hong Kong Exchange (HKEx) reported another bumper month in August, with volumes up nearly a half on the prior year, mirroring the performance of its Asian and western rivals.
HKEx reported volumes up 44%, compared to August last year, to 17 million contracts, but volumes fell 11% on July.

Vienna Stock Exchange Monthly Statistics August 2015
Press Release – Mondovisione
Vienna Stock Exchange Monthly Statistics August (PDF Link)

EEX chief firmly focused on global growth
Alice Attwood – Futures & Options World
The European Energy Exchange (EEX) remains firmly focused on growing its operations across both geographies and asset classes, buoyed by success in Europe and its development of new contracts, said its chief executive on Thursday.
Speaking at a panel discussion on London, CEO Peter Reitz reaffirmed the exchange’s commitment to its core market, as well as plans to target other markets and geographies.

SGX to hike its clearing default contribution
Luke Jeffs – Futures & Options World
The Singapore Exchange has taken the unusual step of raising its contribution to its own default fund by S$50 million (GBP23 million), keeping the group’s “skin in the game” above 25% of its bail-out fund.

Montréal Exchange (MX) Introduces New Futures and Options on Sector Indices
Press Release – Via email
MX, Canada’s derivatives exchange, is pleased to announce the listing of futures and options on the S&P/TSX Composite Index Banks (Industry Group) and the S&P/TSX Capped Utilities Index as of July 31, 2015. These new products provide participants with tools to effectively generate returns by economic sector.
MX also confirms the elimination of position limits on the S&P/TSX 60 Index Standard Futures (SXF) and the S&P/TSX 60 Index Mini Futures (SXM) contracts, effective August 14, 2015. This initiative is intended to create new trading opportunities and to broaden the SXF and SXM markets to include new participants.
On a year-to-date basis through August 2015, volumes in SXF, MX’s flagship index future, were up 14% compared to the same period last year and up 30% during the 6 a.m. to 9:15 a.m. early trading session.

Ex-NYMEX Execs Richard Schaeffer and David Greenberg join Amercanex
Jeff Patterson – Finance Magnates
Amercanex (American Cannabis Exchange) has brought in a pair of ex-NYMEX executives to strengthen its operations, according to an Amercanex statement. Richard Schaeffer, the former NYMEX Chairman, and David Greenberg, the ex-NYMEX Board Member, have collectively joined the Amercanex team. Mr. Schaeffer comes to Amercanex with nearly three decades of experience in the financial services industry, having held a number of senior level roles over his career.

Regulation & Enforcement

Don’t Use These Lame Acronyms If You Don’t Want to Get Nabbed by the Feds
Keri Geiger Sam Mamudi – Bloomberg
Criminals always slip up. They leave behind fingerprints. Hair. A cigarette butt.
A telltale acronym.
TYOP (tell you on phone), TOL (talk offline) and LDL (let’s discuss live) are red flags for prosecutors combing through the e-mail transcripts of Wall Street traders suspected of illegal activity. No need for a crime lab. A simple search — Control-F on the computer keyboard — has become one of investigators’ favorite weapons to uncover possible lawbreaking, according to defense attorneys and current and former prosecutors who agreed to speak on condition of anonymity.

Market calls for US and Europe to end derivatives dispute
Philip Stafford – Financial Times
Two high-profile markets advisers have called on the US and Europe to end their long-running dispute over harmonising derivatives rules, arguing rapid resolution is needed to prevent global derivatives markets from fragmenting.
The US Committee on Capital Markets Regulation and London-based Financial Markets Law Committee on Wednesday said both sides needed to recognise each other’s rules as equivalent, arguing their differences do not amount to a systemic risk to markets.

China tightens trading rules on forex, stock markets
China has announced tougher rules on trading stock index futures and foreign exchange derivatives as it seeks to steady jittery markets whose weakness has raised concern over the health of the world’s second-largest economy.
Facing slowing economic growth and sharp currency and share losses, Beijing has prioritised near-term stability over longer term market liberalisation.

Attaining Compliance with Algorithmic Differentiation
Russell Goyder – Futures & Options World
Emerging regulatory reform and fierce competition are key factors making it harder for derivatives dealers to get ahead. As a result, many are looking at alternative methodologies that can help them gain an edge in a complex marketplace, while simultaneously easing compliance-related challenges.

How Is Binary Options Regulation Changing in the UK?
Finance Magnates
As a relatively new investment vehicle, binary options have suffered from a poor reputation in the past. Partly owing to the actions of a small minority of brokers, but also due to these options being classed as gambling in some jurisdictions.


BNY Mellon pricing snafu highlights bank’s fragmented technology
Tim McLaughlin and Svea Herbst-Bayliss – Reuters
BNY Mellon Corp’s recent high-profile computer glitch has highlighted how reliant the bank is on a patchwork of in-house and third-party technology platforms despite a pledge by Chief Executive Gerald Hassell to simplify things.
The U.S. bank roiled about 5 percent of the U.S. fund industry last month when one of the accounting systems it relies on to generate prices for mutual funds and exchange-traded funds collapsed. The problems lasted a week and affected about $404 billion in assets.

Speed Bumps Hit a … Speed Bump
Adam Sussman – TABB Forum
When IEX introduced its speed bump (aka “the coil,” or “the shoebox”), its purpose was to make it harder for high-frequency traders (HFT) to take advantage of calculating the NBBO faster than everyone else. In other words, if an HFT firm knows that a trading venue uses the SIP to calculate the midpoint, it can opportunistically route to that venue when it has a high probability of unwinding the position based on its faster view of the market. Coupled with IEX’s “shoebox” is a superfast ability to calculate the NBBO. That’s why the eventual admission that the legacy DirectEdge exchanges used the SIP, while its then-president claimed to use direct feeds, was a turning point for the industry.


High Vix of Vix = Good For Stocks
Chris Dieterich – Barron’s
Ok, so the CBOE Volatility Index (VIX) is the market’s fear gauge.
It’s an options-based measure of expectations for price swings in the SPDR S&P 500 (SPY) over the next 30 days. It tends to spike when markets fall, as they have recently. It’s at about 25 right now, about it’s long-term average of about 20, but topped 50 in the middle of last month when markets went haywire.
But many derivatives-following types also monitor the CBOE VVIX Index.


Flash Crash 2015: Did You Miss It?
Bob Lang – CBOE Options Hub
When markets opened on Monday, August 24, a slew of sell orders were already lined up, causing many computer systems to go haywire. Many brokers were locked out, and with market makers and specialists unwilling to take action, we saw enormous bid/ask spreads, stops being hit at very low levels, and frozen markets. This all occurred at the opening bell, and it was quickly fixed when some traders saw opportunity and dove right in on the buy side.
This was flash crash 2015, and it happened so quickly that nobody seemed to be concerned. In fact, no one expressed shock that it happened, which I find really surprising.


Get Ready For Rocktoberfest Chicago
Eurex’s Matt Scharpf would like those in Chicago to come to the ALTSO warm up event on Thursday September 10 at Subterranean in Wicker Park. There will be a $20 charge for the event and multiple bands. You can find out more details here.

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