Observations & Insight

OCC Announces Total Cleared Contract Volume Up Four Percent in January
Press Release
OCC, the world’s largest equity derivatives clearing organization, announced today total cleared contract volume for the month of January was up four percent from January 2015 with 371,870,087 contracts, marking the third highest January on record. Average daily volume at OCC was up nine percent from January 2015 with 19,572,110 contracts. OCC’s stock loan program reported strong volume numbers in January with year-to-date activity up 29 percent.
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****SD: Updated market share statistics can be found under the “Exchanges” section. The top two Januarys for volume ahead of January 2016 are January 2014 with 395,595,620 contracts cleared and January 2011 with 381,558,077 contracts cleared. A new year almost always entails an uptick in trading. Historical monthly volume data from the OCC goes back to 2008; seven of the eight Januarys in that period had more volume than the previous December. The only exception is December 2014 vs. January 2015 where there was a (mere) 2.3 million contract decrease in volume.

Lead Stories

The SEC’s Derivatives Proposal
John Rekenthaler – Morningstar
In December, the SEC released a document that addressed the derivatives usage of mutual funds (and exchange-traded funds). The commission has been busy over the past year, having submitted two proposals earlier in 2015, one on portfolio reporting and the other on investment On the merits of this newest proposal, I will not yet write definitively. For one thing, Morningstar’s Policy Committee has yet to issue its official response. By default, this article might appear to represent Morningstar’s views–and, per the disclaimer that follows this column–that is not necessarily so. For another, the proposal is long and its subject matter complex. Thus, I tread carefully.
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Why there will be so much volatility this reporting season
Philip Baker – Australian FInancial Review
The practice of continuous disclosure should mean that any profit reporting season is nothing more than a good chance for companies to relay their outlook to investors. But it rarely pans out that way. Interest rates aside, it is company profits and earnings that are the real driver of share price moves, and the coming reporting season might give investors some further insights into why shares have had such a horror start to the year.
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****SD: On this note, see the “There is a damaging ‘culture of quarterly earnings hysteria'” story under “Education.”

U.S. vulnerable to global slowdown, volatility: Fed’s Fischer
Jonathan Spicer – Reuters
The U.S. economy could suffer, with inflation remaining too low, if recent volatility in financial markets persists and signals a slowdown in the global economy, the Federal Reserve’s second-in-command said on Monday.
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****SD: Here is video of Fischer talking about volatility from Bloomberg. Also, see More central bank rate cuts coming before any hike from Reuters.

Volatility Indexes Show Oil and Stocks Link Diminishing: Chart
Inyoung Hwang – Bloomberg
One place where stocks and oil prices are showing a significant divergence is in volatility. The relationship between two gauges that track present and expected swings in the assets is widening as crude prices become ever more
volatile and stay relatively muted in stocks. The difference between the Chicago Board Options Exchange Crude Oil Volatility Index versus a similar measure for equities reached the highest level in seven years Monday.
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Options show investors bet on more Swiss franc weakness
Anirban Nag – Reuters
Investors in the derivatives market are anticipating the Swiss franc will weaken further against the euro, as expectations grow that the Swiss National Bank will do more to drive down its value in the coming months.
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The market expects more volatility for some time to come
Lawrence Lewitinn – Yahoo Finance
Get ready for a bit more volatility in the markets.
The CBOE Volatility Index (^VIX) has been trading above 20 for most of the new year. Until the huge spike this past August to as high as 53.29, the VIX spent the better part of three years below 20. On Monday, the VIX closed at 19.98.
Sometimes referred to the as the “Fear Index,” the VIX often moves in the opposite direction of the market in the short term, though it is technically a measure of the expected volatility in the S&P 500 (^GSPC) for the month ahead.
This may be the start of a new normal, according to Russell Rhoads, education director at the Chicago Board Options Exchange’s Options Institute.
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Count on ocean shipping rate volatility, Drewry warns
JOC
In an increasingly uncertain container shipping market, price volatility is one of the few entirely predictable things left, was Drewry’s wry assessment of the wildly fluctuating freight rates on East-West trades. The London-based analyst said in its Container Insight Weekly that weekly spot rates in the East-West container trades continued their well-worn pattern in the first weeks of 2016: a sudden spike at the start of the month induced by some headline-grabbing general rate increase — often in the region of $1,000 per twenty-foot-equivalent units, and sometimes higher — from carriers, followed by the inevitable backslide as the month progressed.
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****SD: In related news, Baltic index slips to fresh low as demand concerns persist

Exchanges

January 2016 Total Options Marketshare:
AMEX- 7.89%
BATS- 9.75%
BOX- 2.72%
CBOE- 24.91%
C2- 1.92%
EDGX- 0.33%
GEM- 2.57%
ISE- 13.01%
MIAX- 5.64%
NOBO- 0.74%
NSDQ- 6.49%
NYSE Arca- 10.31%
OMX PHLX- 13.73%

January 2015 Total Options Marketshare:
AMEX- 7.45%
BATS- 8.78%
BOX- 2.81%
CBOE- 27.04%
C2- 2.02%
EDGX- N/A
GEM- 1.91%
ISE- 10.40%
MIAX- 4.38%
NOBO- 0.62%
NSDQ- 9.46%
NYSE Arca- 9.48%
OMX PHLX- 15.65%

January 2016 Equity Options Marketshare:
AMEX- 8.81%
BATS- 10.90%
BOX- 3.04%
CBOE- 16.30%
C2- 2.05%
EDGX- 0.37%
GEM- 2.86%
ISE- 14.48%
MIAX- 6.30%
NOBO- 0.82%
NSDQ- 7.25%
NYSE Arca- 11.51%
OMX PHLX- 15.31%

January 2015 Equity Options Marketshare:
AMEX- 8.04%
BATS- 9.67%
BOX- 3.09%
CBOE- 20.01%
C2- 2.21%
EDGX- N/A
GEM- 2.11%
ISE- 11.44%
MIAX- 4.83%
NOBO- 0.68%
NSDQ- 10.41%
NYSE Arca- 10.30%
OMX PHLX- 17.21%

CBOE Holdings Reports January 2016 Trading Volume
Press Release
CBOE Holdings, Inc. (NASDAQ: CBOE) reported today that total trading volume in January for options contracts on Chicago Board Options Exchange (CBOE) and C2 Options Exchange (C2) and futures contracts on CBOE Futures Exchange (CFE) was 103.0 million contracts, with an average daily volume (ADV) of 5.4 million contracts, increases of 14 percent and 32 percent, respectively, from December 2015.
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CBOE Futures Exchange Reports Gain In January 2016 Trading Volume
Press Release
-VIX Futures ADV Up 19% from January 2015
-Record Volume Set During Extended Trading Hours
-5.2 Million VIX Futures Contracts Traded
-VIX Posts Monthly ADV of 271,994 Contracts
CBOE Futures Exchange, LLC (CFE) today reported that January average daily volume (ADV) was up 19 percent from January 2015 and 32 percent higher than in December 2015. Exchangewide total volume also rose in January, up 13 percent compared with January 2015 and up 14 percent from December 2015.
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CME Group Hit Record Average Daily Volume of 18.2 Million Contracts per Day in January 2016, up 16 Percent from January 2015
Press Release
Average daily options volume reached a record 4.3 million contracts, electronic options also hit a record 2 million contracts per day traded
Energy average daily volume was a record 2.6 million contracts, which included a record for WTI crude oil average daily volume of 1.4 million contracts
Electronic trading reached a record 15.4 million contracts per day.
Open interest was 107.9 million contracts, up 18 percent from December 2015 the highest ever monthly increase
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****SD: I suspect the record for contracts traded electronically per day will be broken time and time again in coming years — kind of the opposite of Joe DiMaggio’s hitting streak.

ISE Reports Business Activity for January 2016
Press Release
ISE and ISE Gemini combined to represent 17.4% of equity options market share, excluding dividend trades. ISE and ISE Gemini reported a combined ADV of 3.0 million contracts. Dividend trades made up 0.1% of industry volume in January 2016.
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December 2015 US and International Volume and Open Interest Reports
FIA
Link to full spreadsheet
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Eurex: Trading statistics January 2016; Eurex Exchange: ADV 7.2 million contracts/ ISE: ADV 3.0 million contracts
Eurex
Eurex: In January 2016, the international derivatives markets of Eurex, part of Deutsche Börse Group, recorded an average daily volume of 10.2 million contracts (January 2015: 8.8 million). Of those, 7.2 million were Eurex Exchange contracts (January 2015: 6.6 million), and 3.0 million contracts (January 2015: 2.2 million) were traded at the New York based International Securities Exchange (ISE). The volume traded on the spot and derivatives power markets of the European Energy Exchange (EEX) amounted to 332.4 terawatt
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CHX Proposes End to Escalating Market Data Fees – and Information Asymmetry
TABB Forum
The Chicago Stock Exchange wants to set the record straight about increasing market data revenues. Any increase in aggregate exchange market data revenue must be attributed to revenue derived from private data feeds, not revenue from the SIP, which actually has declined significantly; any increase in exchange market data revenue is squarely the result of revenue derived from private data feeds, according to CHX, which offers two proposals to end escalating market data fees – and achieve information and speed parity.
The Chicago Stock Exchange (“CHX”) welcomes vigorous dialogue on market structure issues and respectfully submits this response to Larry Tabb’s recent article of January 22, 2016 regarding exchange profitability and market data revenue (see: “Stock Exchanges are Eating Your Returns,” Bloomberg View).
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LSE’s CurveGlobal names 10-person board
Tim Cave – Financial News
CurveGlobal, the new European futures exchange being set up by the London Stock Exchange and a group of banks, has appointed a raft of senior market figures to its board as its launch looms.
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CME picks former FX research head as digital lead
Anna Irrera – Financial News
CME Group, the US futures giant that is one of the financial institutions at the forefront of work assessing the potential of blockchain technology, has handed its former global head of foreign exchange and metals research a new brief leading its digital efforts.
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Volatility Concerns in Cattle Markets Tackled by CME Group
AgWeb
Steps are being taken by CME Group to address volatility in the cattle markets, although producers will still have to deal with a bearish marketplace. In January, representatives from the National Cattlemen’s Beef Association (NCBA) sent a letter to Terry Duffy, executive chairman and president for the CME Group, asking for changes that might fix high-frequency trading for the cattle futures market. Duffy took it upon himself to answer the call to action by meeting with cattle producers at the Cattle Industry Convention in San Diego on Friday. “The elephant in the room is volatility,” Duffy told cattlemen during NCBA’s Cattle Marketing and International Trade Committee meeting.
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Regulation & Enforcement

U.S. derivatives chief urges EC to move fast on clearinghouse rules
Reuters
The main U.S. derivatives regulator on Monday urged the European Commission to quickly finish its work on “equivalence,” which would allow European companies to use U.S. clearinghouses for swaps when new EU bank rules come online later this year.
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Stay Compliant With Regs on the Rise
Nasdaq
RBC advisor Reva Shakkottai sees the strong winds of compliance sweeping over an increasingly regulated advisory landscape.
Regulators have become more concerned with how firms disclose conflicts of interest and manage risk, she says. “In 2016, we’ll see some of the biggest changes to come around in years,” she predicts, echoing industry sentiment. For months, advisors and their managers have been following the Department of Labor’s efforts to establish a fiduciary rule.
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Transaction tax, shorter trading hours bog Indian market, says government committee
Economic Times
Slashing the securities transaction tax (STT) and stamp duty on equity derivatives and extending trading time for currency futures are among the key recommendations given by an expert committee to the finance ministry ahead of the 2016 budget.
The Standing Council on International Competitiveness of the Indian Financial Sector, comprising of the National Stock Exchange Vice Chairman Ravi Narain and professor at Indira Gandhi Institute of Development Research Susan Thomas, have said that stamp duty should not be applicable to cash settled products such as index derivatives as there is no delivery of the underlying taking place.
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Technology

Itiviti AB established to deliver powerful trading and connectivity offering built for the future
Press Release
The management of Itiviti AB today introduced a newly named company and brand, marking the completion of the previously announced unification of Orc Group, a global market leader in electronic trading technology for listed derivatives and CameronTec Group, the global standard in financial messaging infrastructure and connectivity. Itiviti holds market leading positions in several areas from the outset, and the combination significantly expands the customer proposition for banks, brokers and trading firms.
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Optimus Futures Now Supports OptionsCity’s CityTrader, Offering Clients Unparalleled Access to Options on Futures
Press Release – OptionsCity
OptionsCity Software, a global provider of futures and options trading and analytics solutions, today announced that Optimus Futures now supports CityTrader, OptionsCity’s cloud-based trading platform. CityTrader provides active traders robust tools and functionality to trade both futures and options on futures.
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This man wants to upend the world of high-frequency trading
Anora Mahmudova – MarketWatch
When developers at a top U.S. stock exchange needed help debugging a program that puts time stamps on quotes and trades in July, they could have hired a high-profile consulting firm. Instead, they called a customer who runs a company out of a small office in a Chicago suburb who had weeks earlier called the exchange’s dealings with high-frequency trading firms “completely illegal” on Twitter. The customer, Eric Scott Hunsader, and a colleague did the work in a few days — for free. Hunsader occupies an unusual position in the investing world. Founder of a software company called Nanex, he is a market data expert whose tools for spotting patterns and solving puzzles are indispensable to traders. But he’s also a vocal critic of market structures he believes punish investors, and he frequently assails high-frequency traders, exchanges and government regulators.
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Strategy

Using a Portfolio Put to hedge macro market risk
Steve Claussen – OptionsHouse
The overall market has had a miserable start this first month of 2016. The S&P 500 index has sold off 10% before attempting to bounce yet remains down about 7%. There is a ton of nervousness and trepidation among investors as the VIX (CBOE Volatility Index) has spiked higher indicating higher premiums for option protection. Making the purchase of puts on individual stocks prohibitively expensive.
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How To Beat The Market: One Surprisingly Simple Trade
Zero Hedge
Back in 2012 and then again in 2013, after repeatedly observing just how broken markets have become as a result of central bank intervention, a topic that back then was still taboo and is now wholeheartedly accepted even by the Davos billionaires (whose mood the WSJ summarized as “irritated, bordering on affronted, with what they say has been central-bank intervention that has gone on too long”) we presented what may have been the “best alpha opportunity around” and how to outperform the “market” in a world in which not only fundamentals no longer matter, but in which hedge fund herding has led to relentless losses for the active investor community for 7 years in a row as a result of the omnipresence of central banks who have made hedging pointless: just do the opposite of what everyone is doing, and go long the most shorted stocks.
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****SD: ZeroHedge: never unwilling to say, “I told you so.”

Fund Offers Strategic Protection in Wild Markets
Gregg Greenberg – TheStreet
Investors are only a month into a brand new year, yet already many are worn out from the market’s mayhem. Those feeling particularly whipsawed by the step-up in volatility should consider the Exceed Defined Shield Index Fund (SHIEX), said Joseph Halpern, CEO of Exceed Investments.
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Education

Weekly Outlook: Big Week for U.S. Economy
OpenMarkets
Today marks the start of a new month and a big week for the U.S. economy. There are several Federal Reserve speeches throughout the week capped off by the January jobs report on Friday. In addition to Friday’s jobs report, there’s much anticipation around Fed Chair Janet Yellen’s testimony Feb. 10-11 on Capitol Hill. Many are saying that the first two weeks in February will either leave the possibility of a March hike on the table or fully extinguish the possibility.
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LARRY FINK: There is a damaging ‘culture of quarterly earnings hysteria’
Matt Turner – Business Insider
Larry Fink, the chief executive at BlackRock, the world’s biggest investor with $4.6 trillion under management, just sent a letter to chief executives at S&P 500 companies and large European corporations.
The letter asks CEOs to better articulate their plans for the future, and focuses on short-termism both in corporate America and politics.
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As Markets Swing, Momentum Can Be Deceiving
Russ Koesterich – Financial Advisor Magazine
Stocks experienced several violent reversals last week before finishing strong. Stocks continue to find support in an old friend: central bank accommodation, most recently from the Bank of Japan.
Despite this most recent spike to the proverbial central bank “punch bowl,” we are likely to see continued abrupt swings in financial markets.
This is particularly true in those areas that seem crowded, i.e., are particularly expensive.
Thus, in the prevailing environment of heightened volatility, momentum remains an unpredictable theme.
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