Observations & Insight

In case you missed it:

Let Me Count the Ways: Nasdaq Looks at All the Possibilities for Options, and Beyond, in ISE Acquisition
Jim Kharouf – JLN
With double the number of US equity options exchanges, Nasdaq has some work to do in the coming months. Nasdaq closed the deal today for $1.1 billion with Deutsche Boerse, giving the exchange three options markets: International Securities Exchange, ISE Gemini and ISE Mercury, to go along with Nasdaq Options Markets (NOM), Nasdaq OMX BX and Nasdaq OMX PHLX. Tom Wittman, executive vice president of Nasdaq and global head of equities at Nasdaq, told John Lothian News that the plan is to integrate and migrate the three exchanges onto the Nasdaq platform. That essentially means the technology team at Nasdaq will have to rebuild the ISE exchanges to provide the same functionality and rules that exist today.

Lead Stories

OCC Cleared Contract Volume Up 11 Percent in June
OCC Press Release
Second Highest June for Options Volume and Highest Month Ever for Futures Volume
Securities Lending CCP Activity Up 39 Percent in June and 45 Percent Year-to-Date
OCC, the world’s largest equity derivatives clearing organization, announced today that cleared contract volume in June reached 378,908,938 contracts, an 11 percent increase from the June 2015 volume of 340,826,276 contracts, marking the second highest June for OCC cleared options contracts. OCC’s year-to-date average daily cleared contract volume is up five percent from 2015 with 16,820,655 contracts.

LSE and Deutsche Boerse May Go Dutch to Win Over Regulators
John Detrixhe and Aaron Kirchfeld – Bloomberg
Firms may need to explore options to get nod from regulators
Brexit has made clearing, headquarters, politics more complex
London Stock Exchange Group Plc shareholders approved Deutsche Boerse AG’s acquisition of the 300-year-old exchange Monday in a near-unanimous vote. That was the easy part.

****SD: Statement By Deutsche Börse AG On London Stock Exchange Group Shareholders’ Vote

Alert: European Commission deems US DCMs to be equivalent
The European Commission has published its decision to grant equivalence to those designated contract markets (DCMs) in the U.S. that operate under the regulatory oversight of the CFTC, in accordance with the European Markets Infrastructure Regulation (EMIR). The Commission Implementing Decision (EU) 2016/1073 was published in the Official Journal (OJ) of the EU on 1 July and will come into force on 22 July 2016.

****SD: They are: Cantor Futures Exchange, L.P.; CBOE Futures Exchange, LLC; Chicago Board of Trade (Board of Trade of the City of Chicago, Inc.); Chicago Mercantile Exchange, Inc.; Commodity Exchange, Inc.; ELX Futures, L.P.; Eris Exchange, LLC; ICE Futures U.S., Inc.; Minneapolis Grain Exchange, Inc.; Nasdaq Futures, Inc.; New York Mercantile Exchange, Inc.; Nodal Exchange, LLC; North American Derivatives Exchange, Inc.; OneChicago LLC and TrueEX LLC.

Gaps and Volatility: Will it Be a ‘V’ or a ‘W’?
Moby Waller – CBOE Options Hub
Since the middle of June we have seen some remarkable market action. What started out with a rather shallow dip morphed into a near-catastrophic drop following the Brexit decision toward the end of the month, leaving many to wonder if they should have followed the ‘sell in May and go Away’ advice from the prior month. Volatility started to kick up mid-month as the Brexit vote came closer, in fact European markets reacted far more negatively leading up to the vote with the VSTOXX term structure showing panic-stricken investors were lining up.

VIX, the market’s fear gauge, plunges in historic one-week move
Alex Rosenberg – CNBC
The market’s primary measure of fear has cratered, representing a dramatic turnabout in investors’ emotional state. The CBOE Volatility index plunged 42 percent in the prior trading week, in the biggest one-week drop in the history of the index going back to 1990. The move came as markets staged a stunning comeback following the U.K. vote to leave the European Union.

****SD: Also see Forbes’ The VIX Is Dead! Long Live The VIX!

Regulation Matters: Listed Option Markets Need a Voice
Joanna Fields – TABB Forum
Historically, to protect option market makers, regulations governing options market structure were crafted to be quite distinct and unique from the US stock markets. But the combined effect of all the recent changes and proposals on the horizon in today’s option markets have been substantial for all market participants, impacting the available liquidity.

Battle lines drawn over London’s role in euro clearing
Philip Stafford and Roger Blitz – Financial Times
As the dust from Brexit settles, the battle over one of the City of London’s prestigious businesses is already escalating. François Hollande, president of France, is the loudest voice calling for euro-denominated clearing to be conducted outside London. Shaping the future of the City’s current dominance as a trading hub in eurozone markets during the post-Brexit era will be the debate and outcome of what are likely to be years of negotiation between the EU and UK. A key question is whether the City can retain access to the single market and remain the dominant financial centre for euro-denominated markets.

Strong Risk-Adjusted Returns for PUT Index – Blog #1 on 30-Year Price History
Matt Moran – CBOE Options Hub
[This is the first in a series of nine blogs to be published in early July at the CBOE Options Hub on nine CBOE benchmark indexes which have price histories that begin on June 30, 1986, three decades ago.] The CBOE S&P 500 PutWrite Index (PUT) – is an award-winning benchmark index for a strategy that has grown in popularity over the past decade; arguably is the world’s best-known and leading gauge of the cash-secured put-writing strategy; has facilitated increased use of cash-secured put option selling by mutual funds and pension funds in recent years; measures the performance of a hypothetical portfolio that sells one-month S&P 500 Index (SPX) put options against collateralized cash reserves held in a money market account.

****SD: Bog #2 in the series, Less Left-Tail Risk for BFLY Index, here and Blog #3 in the series, Managing Downside Exposure with PPUT Index, here

OCC Named Clearinghouse of the Year by Global Investor/ISF
Press Release
OCC, the world’s largest equity derivatives clearing organization said today it was named Clearinghouse of the Year by Global Investor/ISF Magazine. The award was presented to OCC on June 30th in London as part of the publication’s celebration of its 30th anniversary.


LSE and Deutsche Börse say proposed merger can withstand Brexit
Sean Farrell – The Guardian
The London Stock Exchange and Deutsche Börse said the terms of their merger would withstand Britain’s vote to leave the EU, after LSE shareholders voted almost unanimously in favour of the deal.

****SD: From Finance Magnates Only Merkel and Schaeuble Can Torpedo LSE and Deutsche Börse Merger and from FOW D. Boerse hints at London HQ concession

CME to count on French grain firms in EU wheat battle with Euronext
CME Group faces a tough task getting Europe’s grain trade to adopt U.S.-style wheat futures, but backing from big French grain handlers gives it a chance of challenging Euronext in a market some traders say has room for only one exchange. CME, the owner of the Chicago Board of Trade (CBOT) whose prices are a global benchmark for grain, will launch trading in European Union wheat futures and options on Sept. 12 as it seeks to tap into the world’s biggest wheat growing zone.

****SD: One broker in the story: “You can’t see two contracts running in parallel. One of them will have to be killed.” Follow up story titled: “Who Will Win the Raging Wheat War and When?”

CME Group Achieved Average Daily Volume of 16.4 Million Contracts per Day in June 2016, up 13 Percent from June 2015, and 15.1 Million Contracts per Day in Second-Quarter 2016, up 13 Percent from Second-Quarter 2015
Press Release
CME Group, the world’s leading and most diverse derivatives marketplace, today announced that June 2016 average daily volume (ADV) reached 16.4 million contracts per day, up 13 percent from June 2015. CME Group June 2016 options volume averaged 3.4 million contracts per day, up 17 percent versus June 2015, with electronic options averaging 1.9 million contracts per day, up 25 percent over the same period last year. Second-quarter 2016 volume averaged 15.1 million contracts per day, up 13 percent from second-quarter 2015. Total open interest at the end of second-quarter 2016 was 106 million contracts, up 16 percent from year-end 2015. During the quarter, CME Group reached record open interest of 116.3 million contracts on June 9, 2016.

****SD: Eurodollar options up 25 percent YoY to 1.1m contracts daily. E-mini S&P 500 options average daily volume up 29 percent to 635k. Average daily volume in WTI options up 40 percent YoY. (Really, just a good month across the board activity-wise.)

CBOE Holdings Reports June 2016 Trading Volume
Press Release
CBOE Holdings, Inc. (NASDAQ: CBOE) reported today that June average daily volume (ADV) for options contracts traded on Chicago Board Options Exchange (CBOE) and C2 Options Exchange (C2), and futures contracts traded on CBOE Futures Exchange (CFE) was 5.2 million contracts, an increase of 22 percent from May 2016 and 15 percent from June 2015. Total options and futures volume was 114.0 million contracts, an increase of 27 percent from the previous month and 15 percent from a year ago.

****SD: Index options average daily volume up 26 percent to 2m. VIX futures second best month all time.

LME boosts reporting thresholds for options
Alice Attwood – Futures & Options World
Exchange’s move to greater transparency comes after member consultation
The London Metal Exchange is set to next month raise the thresholds for delayed publication of large options trades in a bid to boost transparency and reduce risk for liquidity providers, six months after implementing the measures across options trading on the exchange. The exchange will on August 15 increase the thresholds for the delayed publication of larger options orders on the LME – apart from Tin – following a consultation with members, in a move that will see immediate reporting take place for options trades up to new, higher levels, and push more liquidity onto the order book.

ASX Group Monthly Activity Report – June 2016
The value of ASX-listed stocks, as measured by the All Ordinaries Index, fell 2.5% in June 2016. Declines were also observed in other major markets, including Japan down 9.6%, Germany down 5.7% and Hong Kong down 0.1%. The UK was up 4.4%, Singapore up 1.8% and the US up 0.1%. Volatility measures for the Australian equity market rose above long-term averages during June. Volatility (as measured by the average daily movement in the All Ordinaries Index) was 0.8% in June, up on the previous month (0.6%). Expected future volatility (as measured by the S&P/ASX 200 VIX) rose in June to an average of 19.4 (compared to 17.6 in May).

****SD: Exchange traded options down 8 percent YoY (8.7m vs. 9.5m contracts); could have been larger decrease but the segment was buoyed by a 60 percent increase in index options YoY (up to 1.4m from 924k contracts). Options on futures volume for June = 181k contracts, up 54 percent YoY. Average daily futures options volume = 8,241.

DGCX Reports Multiple Records in H1 Volumes
Finance Magnates
UAE’s leading derivatives bourse, the Dubai Gold and Commodities Exchange (DGCX), ?has recorded an all-time high of more ?than 9.5 million contracts in the first half of 2016 as heightened market volatility ?after the Brexit vote boosted trading on the exchange, according to a DGCX statement. ?

****SD: Rupee contracts the big winner on the options front.

Moscow Exchange Volumes Tick Higher in June as Brexit Volatility Spreads
Finance Magnates
Moscow Exchange has marked an increased turnover in the month of June when compared to last month and to the same month last year. The top Russian trading venue has marked an increase in trading volumes totaling $1.10 trillion (RUB 70.2 trillion). The number is higher by 20.8 per cent when compared to the month of May and by 20.3 per cent when compared to June 2015.

****SD: 42 percent YoY growth for derivatives at MOEX. Of 154m total derivatives contracts traded, 5.9m were options contracts.

Bats Global Markets, Inc. To Hold Second Quarter 2016
Press Release
Bats Global Markets, Inc., a leading global operator of exchanges and services for financial markets, will hold its second quarter 2016 earnings conference call on Thursday, August 4, at 8:00 a.m. ET. An earnings press release will be issued prior to the earnings conference call.

Regulation & Enforcement

UK’s strict compliance will help in Brexit deal – LME
Alice Attwood – Futures & Options World
LME’s regulation head said Mifid II delay did not cause upgrade work to slow
The UK’s tough stance on regulation will be an important pawn in the country’s negotiations over its exit from the European Union, according to the London Metal Exchange’s head of regulation. “Regulatory adherence to rules such as Mifid II and MAR will be key to discussions as the UK negotiates its exit from the EU. Being able to demonstrate a robust regulatory framework will stand us in good stead from a business perspective when it comes to agreeing equivalence,” said Kirstina Combe, head of regulation at LME.

US Democrats to support transaction tax on HFT
The Trade
US Democrats have backed a proposed trading tax on US exchanges to curb high frequency trading (HFT), according to the party’s draft platform.

Shanghai Stock Exchange says to learn from 2015 market downturns
The Shanghai Stock Exchange said on Tuesday it would work to learn from wild downturns in the stock market last year and would adopt a strict and comprehensive regulatory philosophy and build strong supervision of the capital market.

EU toughens up market manipulation rules
The Trade
The EU has released a revamped framework to address market manipulation in Europe’s financial markets.

Irving Pollack, First SEC Enforcement Director, Dies
Lauded for his integrity and passion for securities law
Helped create centralized enforcement from earlier ‘fiefdoms’
Irving Pollack, who established the U.S. Securities and Exchange Commission’s enforcement division as its founding director in 1972, has died. He was 98.

ABN, ING increase provisions for derivatives sold without proper warnings
Dutch banks ABN Amro and ING said on Tuesday they would increase provisions they have taken to settle complaints from small and medium customers who purchased interest rate hedges between 2011 and 2014.

Australia, Canada warn about 11 binary options firms, most of them Israeli
The Times of Israel
The Israeli government’s failure to take action against snowballing fraud in the binary options industry has led to further embarrassing repercussions: the governments of Australia and Canada have issued warnings about 11 firms, most or all of which operate from Israel.


Costly data battle heats up between traders and equity exchanges
Financial Times
Information has become one of the biggest battlegrounds of the US finance industry, pitting banks, brokerages and trading firms against the exchanges that control the flow of financial market data. Banks are desperate to lower their costs after the financial crisis, while exchanges need to find ways to boost revenues given a sharp decline in commissions and trading volumes over the last decade. “There’s a great deal of angst about this,” says Eric Noll, chief executive of Convergex, a brokerage. “It’s manageable now, but the trend is disturbing. It’s moved from a back-of-the-head issue to the forefront.”

What Traders Are Telling Me About TT
Patrick Rooney – Trading Technologies
The TT platform has been available for more than a year now, and in that time, we have been very conscious of seeking input from users. Through a series of webinars and training presentations, I have been fortunate to get first-hand feedback. Three of the topics that traders keep coming back to are accessibility, speed and flexibility. Let’s take a deeper look at each characteristic.

CUSIP Global Services Adds Single Stock Futures to Options Service
Press Release
CUSIP Global Services (CGS) today announced the expansion of its CUSIP Options service to include single stock futures. The expansion was made possible through an extension of the CGS partnership with Euromoney TRADEDATA, a financial information provider specializing in futures and options products. Under the partnership, CGS will assign CUSIP IDs to all single stock futures traded on the OneChicago exchange.


Commodities Second Quarter Overview And Outlook For Q3 2016
Andrew Hecht – Seeking Alpha
The raw material markets had a great second quarter in 2016. The overall commodity sector consisting of 29 of the primary commodities that trade on the U.S. and U.K. exchanges rallied by 10.75% for the three months that ended on June 30 and is 12.67% higher over the first half of this year. The overall winner for the quarter was natural gas, posting a gain of over 49%. Two commodities not included in the composite, iron ore and lumber, moved up 12.7% and down 2.19%, respectively. If I add these commodities and the Baltic Dry Index, which gained 59.42% into my calculations, the sector rose by 12.94% in Q2 and 15.25% so far in 2016.

Now what – More Fireworks ahead?
Steve Claussen – optionshouse
Brexit fears drove global averages down frighteningly quickly, but stocks reversed just as suddenly to put in the best weekly (+3.2%) performance this year.

After the Biggest Weekly VIX Drop Ever, What Now?
Todd Salamone – Schaeffer’s Research
The stock market reminds me of the batter that just hangs around, fouling off pitch after pitch. Whether it’s slowing earnings growth, an economic report that misses its mark, Fed uncertainty, or political uncertainty both here and overseas, the fact of the matter is that major U.S. equity benchmarks are trading near all-time highs. But they have gone over a year without making a new high. Pitch after pitch is a strike; the pitcher has yet to record an out, but the batter has not yet reached base safely.

BigTrends.com Weekly Market Outlook – Will The Post-Brexit Rally Continue?
CBOE Options Hub
Despite the horrific start on Monday, the bulls were decidedly in charge over the course of the last four days of last week, setting up a weekly gain of 5.1% for the S&P 500 (SPX) (SPY). The index is almost back to where it was before the Brexit vote shocked the world… for better or worse.

Earnings Week of 7/5/2016 – 7/8/2016
CBOE Options Hub
This is the last of the lull weeks with only two companies reporting earnings that have short dated options available for trading. As always the data below is based on the last three years of earnings results. The columns show the biggest rally, biggest drop, average move, and what the stock did last quarter in reaction to earnings.


Ag Economy Barometer Moves Higher; Weather on Producers’ Minds
Purdue University Center for Commercial Agriculture
The Ag Economy Barometer turned higher in June with the index settling at 104. The June agricultural sentiment reading was higher than during the six-month base period, which averaged 100 between October 2015 and March 2016, and was also stronger than May’s reading of 97 (Figure 1). June marked the third month in a row that the Ag Economy Barometer was markedly stronger than the nine-month low of 85 set in March 2016. However, the sentiment index during June was still lower than the post-harvest high of 116 set in October 2015.

Weekend Review – VIX Futures and Options – 7/3/2016
Russell Rhoads – VIX Views
The curve below is what happens when you have the biggest week over week drop for VIX on record. The 42% loss in VIX shattered the previous largest drop of 36.53% which occurred in the last week of 2012. Not so coincidentally both were weeks before a three-day weekend.

Weekend Review – Volatility Indexes and ETPs – 7/3/2016
Russell Rhoads – VIX Views
In hindsight volatility definitely overshot to the upside in response to Brexit and the price action on Monday where VIX and the S&P 500 both moved lower together was a sign of things to come last week. The 42.66% drop in VIX was the biggest week over week drop on record (going back to 1990). The whole VXST – VIX – VXV – VXMT underwent a shift from one extreme to the other last week.

****SD: Also, Rhoads’ recap of Russell options and volatility here

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