Observations & Insight

Balancing Act
Doug Ashburn – JLN

Back in 2009, in the aftermath of the financial crisis, the G-20’s finance ministers met in Pittsburgh to agree on a set of principles to guide new regulations on clearing, execution and capital standards. These principles eventually led to Dodd-Frank, EMIR, Basel III and the rest of the regulations still being implemented and fought over. While a consensus was reached in Pittsburgh, trying to balance global interests with local regulations, and trying to balance safety and liquidity, has proven to be much more difficult to achieve than initially hoped.

Today and tomorrow, all of the U.S. financial regulators, and a host of participants, bank heads, academics and market structure experts are gathering at the Federal Reserve Bank of New York in what could well become the “Pittsburgh Moment” for fixed income market structure.

Over the next two days, these deep thinkers will look at the recent Joint Staff Report on last October’s Treasury flash crash, the role of market makers and high frequency trading in the current market structure, and what steps can and should be taken to improve market structure. Let us hope that, whatever principles are agreed to from this week’s conference, the regulators lead with the need for striking the right balance, and let the regulations flow from there.

Click here to see the conference announcement and here to see the agenda

One area of concern, which was specifically addressed in the Joint Staff Report, is whether the high rate of trade cancellations and self-matching in the futures markets during the Treasury flash crash will receive the blame for the heightened volatility. If so, will self-match prevention become mandatory at the exchange level, or will we see a shift toward a tool at the ISV level, such as TT’s new Position Transfer mechanism, which prevents self-trades from reaching the exchange level by essentially creating a “synthetic fill” that matches the buy and sell orders and sends them directly to the back office? (For more on this issue, take a look at a recent post on TT’s Trade Talk blog.)

Last night, before jumping on a plane to join the party at the New York Fed, CFTC Chairman Tim Massad delivered an address at the World Federation of Exchanges Annual Meeting in Doha, Qatar. Massad discussed self-match prevention and a host of other areas where technological innovation has solved a problem, but, in the process, opened up new challenges. These new challenges will be addressed with, you guessed it, technological innovation.

Read the text of Massad’s speech, then stayed tuned to hear more on the market technology issue from our own Jim Kharouf, who is moderating a panel today at the WFE meeting titled “Exchanges and Technology: Balancing Innovation and Disruption.” They will touch on today’s market structure challenges, but also address the next generation of innovation and disruption, such as cybersecurity and blockchain.

Balancing innovation and disruption – that is the real trick, isn’t it?

Lead Stories

Options Traders Betting on a Boom in European Bank Earnings
Sofia Horta E Costa and David De Jong – Bloomberg
As U.S. bank earnings wind down just as Europe’s kick off, a contrast has emerged in the options market.
While investors bought up protection before earnings day at Morgan Stanley and Goldman Sachs Group Inc., costs to hedge volatility in European banks touched a three-year low versus the broader market. And the spread in Europe will remain low — a sign that the industry is poised to bounce back from its worst quarter in more than three years, says Citigroup Inc.’s Alexander Altmann.

***DA: Thank you, Mario Draghi.

IMC Teams With Convergex to Attract Retail Options Orders
Brian Louis – Bloomberg
Global trading firm IMC Financial Markets and Wall Street broker Convergex Group LLC agreed to join forces in a venture to boost their businesses by expanding into handling options orders for U.S. retail investors.

How to Cope With Market Volatility
John Waggoner – Morningstar
If you start to whimper just a little bit before you read the market news, it’s probably because stocks are more volatile now than they have been since 2011, when oil prices soared, U.S. debt got downgraded.
Volatility, of course, is really a euphemism for “scary down days, often in succession”. No one complains about a market with wild and crazy gains. But heightened volatility can not only wrack your nerves, it can make you do silly things with your money.

***DA: I can say for certain that there are people who complain about wild and crazy gains. Most people call us “permabears” but I think of myself as a “perma-realist.”

Why Currency Markets Are Experiencing Flash Crashes
Dan Weil – Institutional Investor
The stock and bond markets have received plenty of attention for flash crashes that have occurred over the past five years, but they aren’t alone.
Several flash crashes have hit the currency markets too, most notably in March, when the U.S. Dollar index dropped 3 percent in just under four minutes and then gained most of that back in three minutes. Whereas 3 percent may not represent a huge move for a stock, it is for a currency and even more so for a currency index.

Gold options traders seek further gains
Ole Hansen – Trading Floor
Gold has stabilised above $1,170 following the spike higher during the past couple of weeks. The recent rally has also triggered a pick-up in options activity with traders increasingly using options to express a bullish sentiment. As a result we have seen the cost of call options rising above puts for only the second period this year.


CME Group to raise transaction fees in January
The CME Group Inc plans to raise transaction fees on a host of products starting Jan. 1, 2016, pending regulatory approval, the exchange said on Monday.
Fees for members to trade agricultural options on CME’s electronic Globex platform will rise to 36 cents, from the current level of 25 cents, to match fees on agricultural futures.

Clearing head leaves CME Clearing Europe
Alice Attwood – Futures & Options World
Adam Husted has left his London-based role as executive director, head of clearing and business development at CME Clearing Europe.
According to an internal memo seen by FOW, Husted left the CME Group company September 9.

Are exchange checks the answer to systemic risk?
Guy Warren – Futures & Options World
How can exchange system monitoring help protect the markets, and the reputational, regulatory and revenue drivers for exchanges and trading venues?
Do you remember the famous Honda advert a few years ago, known as ‘The Cog’? One small initial movement, through a fascinating series of complicated mechanisms, can result in a much larger result – like moving a car. But they can be incredibly fragile. Move one piece of the puzzle ever so slightly out of position and the machine breaks down. The lesson is that in a complex system, even a small event can contribute to catastrophe.
In the intricate financial services world – and for exchanges and trading venues especially – tackling such systemic risk has been one of the biggest priorities in recent years and it’s essential that venues monitor their technology for potential problems.

NYSE Readies for Another Hurricane Sandy With Electronic Trading
Traders News
The New York Stock Exchange, the last U.S. stock market with a physical trading floor, wants approval to trade some equities electronically at the start of the day.

Regulation & Enforcement

Why US regulators target spoofing
Michael Mackenzie and Philip Stafford – Financial Times
Dubious trading practices are once more back in the spotlight after the main US derivatives regulator this week accused a Chicago-based proprietary trading firm 3Red Trading and its co-founder of “spoofing” markets from commodities to stock index futures.

The Man Accused of Spoofing Some of the World’s Biggest Futures Exchanges
Matthew Leising – Bloomberg
Before he gained notoriety, Igor Oystacher was known as 990.
That was the identification code assigned to the firm where he worked in 2004, when the head trader at Chicago-based Kingstree Trading LLC noticed something he’d never seen before in the Standard & Poor’s 500 futures market. He watched again and again as 990 ran over everyone in what he called an unprecedented display of market manipulation. The head trader alerted an executive at the firm to the practice, according to both men, who asked not to be identified by name for fear of reprisal.

European benchmark rules may hurt innovation – CFTC
Cian Burke – Futures & Options World
Timothy Massad, chair of the Commodity Futures Trading Commission (CFTC), warned on Tuesday the proposed European benchmark regulations could damage benchmark administration
Speaking at the World Federation of Exchanges annual meeting in Qatar, Massad, told delegates the approach being taken by European regulators to benchmark integrity risked imposing additional costs and requirements on non-EU countries, making it difficult to introduce new benchmarks.

Game changer: Confronting the new SEC whistleblower paradigm (part 3)
Jon Daniels, Maura Sullivan Flaherty and Nicholas M. Berg – Inside Counsel
The first two articles in this series discussed three Securities and Exchange Commission (“SEC” or the “Commission”) whistleblower award trends: (1) the Commission’s protection of whistleblowers; (2) awards to compliance personnel for reporting to the SEC; and (3) the SEC’s focus on overly-restrictive confidentiality agreements. This article highlights several important takeaways from these developments and provides practical advice for companies operating in this new whistleblower regime.

PwC Warns on MiFID II Transaction Reporting
PwC has warned that regulators will first enforce transaction reporting rules under the incoming MiFID II rules despite the problems in collecting data under existing regulations.


OptionsCity to Power Global Exchanges
OptionsCity Software, a global provider of futures and options trading and analytics solutions, today announced OptionsCity Exchange Solutions, a suite of products and services designed to help global exchanges expand their technology and drive visibility and liquidity.

Orc boosts data offering to tackle Mifid II readiness
Cian Burke – Futures & Options World
Orc Group, the Swedish trading systems vendor, has partnered with OneMarketData to offer the data provider’s flagship OneTick data management product through its Trading Bricks and Execution Bricks platforms.
The Swedish vendor said on Monday it was offering the data management solution to help clients meet surveillance and transparency requirements under Mifid II, which is to come into force on January 3, 2017.


Simplifying Complexity: Trading Complex Order Books in Options (Part 2)
Ivy Schmerken – MarketsMedia
Traders seeking an edge in multi-leg options trades are relying on technology to navigate a complex market structure.
One major challenge is that there is no linkage with regards to complex order books spread across seven US options exchange. Hence, it’s very important to scan all the exchanges to see what’s out there. In addition, the complex orders just sit in the complex order book and there is no connection to the listed quotes in the regular order book. “That was a problem, because there could be a spread that looks like it could execute but it doesn’t,” says Henry Schwartz, CEO of Trade-Alert.


New OIC Study Shows Increased Knowledge of Listed Options by Investors
Press Release
The Options Industry Council (OIC), the educational cooperative run by OCC, the world’s largest equity derivatives clearing organization, and the U.S. options industry, today released the results of a new study conducted by Harris Poll that shows that industry efforts to educate investors about the use of listed options are generating positive results.

****SD: Very good, young grasshoppers.


Opportunities with Eurex Fixed Interest Options, Wednesday, October 28, 12pm EST
OptionsCity (via email)
OptionsCity’s Metro NOW is a high performance, web-deployed options trading platform. Metro NOW is built for speed, and it ensures clients fast and reliable access to exchanges and products.
Recently, Eurex Exchange has established electronic quotation in fixed income options and offers permanent and advanced Market-Making programs. Streaming quotes are provided by over a dozen highly specialized Market-Making firms who service demand for direct execution from institutional end-users.
In this webinar, we are going to talk about Eurex fixed income options and OptionsCity Metro NOW ‘s accessibility to Eurex products. Traders can leverage Metro NOW to trade or make markets on the Eurex fixed income options products. You can submit your questions before or after the webinar. This is a great chance to discuss Eurex fixed income options with experts from OptionsCity and Eurex.
Topics Include:
– Options on euro fixed income futures
– Volume and liquidity development
– Product nuances and applications

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