Observations & Insight
Depending on where you sit in the financial markets, the FIA’s IDX conference last week could be considered more of the same or a continuation of a new direction for the derivatives space. Those in the change camp will point to the obvious – Deutsche Boerse-London Stock Exchange Group deal, continued emergence of block chain and continued divergent strategies from the exchanges themselves. There are a few more subtle changes welling up in the sector – the continued rumblings and concerns by vendors and end users over the cost of fees from exchanges and regulators. There’s even an early-stage startup exchange in the works in London, aimed squarely at challenging the London Metal Exchange, led by none other than the former CEO Martin Abbott, our sources say.
There is rarely a pivotal moment in the evolution of markets and this year’s IDX won’t be one of them. But what it did show is how the cost of doing business – from capital requirements to data, execution and clearing fees – is moving firms toward cheaper and perhaps better ways of doing things. Take the blockchain panel – the very last panel session of the day and usually the time slot for the remaining 20 attendees. This year the rough attendance estimate was about 200 to 250 people – all riveted by the prospect that this technology may indeed be a game changer for the industry and a cost disruptor. And it may be led by an exchange to boot – the Australian Securities Exchange, which could have a beta version of its blockchain clearing technology in the coming months.
Whether ASX or others can implement a system that makes clearing and settlement better, cheaper and faster is to be seen. But there is no doubt that cost is the innovation driver in today’s market.
OTC derivatives market rethinks its resistance to the future
Philip Stafford – Financial Times
Battered by falling trading revenues, big global banks are taking a harder look at reforming their once booming backyard of privately negotiated deals with clients.
Tougher financial reform has significantly increased the cost of transacting in the private over-the-counter derivative markets for banks and investors such as hedge funds and asset managers.
Sorry to inject a little politics into the markets
Jeff Greenblatt – Futures Magazine
Two gigantic weeks are coming up. Up to bat first is Washington and Fed Chair Janet Yellen. The Fed knows it’s an absolute absurdity to raise rates in an economy that just created 38,000 jobs. But do you want to tell me they have their collective heads in the sand about an economy barely staying above water at 0.8% GDP? They know the ship is sinking and don’t want to be left holding the bag when it eventually goes over the cliff. I don’t know how the market will like the idea of raising rates in an environment like this.
With U.S. stocks near record highs, some investors prep for volatility
David Randall and Saqib Iqbal Ahmed – Reuters
As U.S. stocks close in on new record highs, some investors are betting on a return of the wild ride that marked the first two months of the year.
Their reasoning: the bounce-back in commodity prices that fueled much of the 13.3-percent rally in the Standard & Poor’s 500 index since its February lows is leveling off.
Market’s fear gauge hits highest level in 3 months
Sue Chang and Mark Decambre – MarketWatch
Wall Street’s so-called fear index is starting to tick higher.
The CBOE Market Volatility Index VIX, +14.27% or VIX, on Monday climbed above the 19-level for the first time since March 10 on rising uncertainty in global markets.
Volatility Kicking Up Again – Seen This Movie Before
Bob Lang – CBOE Options Hub
Friday’s risk off day was certainly one we have not seen in a few weeks. Bulls have had the advantage of late, and any spike in volatility was sold down. Take a look at the VIX chart and you’ll see the last two spikes prior to Friday (to 16 and then 17) were pulled down sharply by the end of the day. Yet, some fear seemed to seep in as we headed to the weekend. Was it warranted? I’m not so sure, but as we’ve seen when volatility has spiked previously, it may be time to be contrarian and look for the markets to reverse higher.
Brexit jitters drive sterling volatility to record high, pound choppy
Anirban Nag – Reuters
Sterling steadied after hitting an eight-week low on Monday, although jitters days before Britons vote on whether to leave the EU or not drove the cost of hedging against huge swings in the exchange rate to record highs.
Betting markets have lowered the chances of the country remaining in the European Union after some recent polls showed the “Leave” camp ahead, creating anxiety amongst investors.
#Brexit Update from Social Market Analytics
Russell Rhoads – CBOE Options Hub
Over the weekend I noticed the headlines regarding Brexit. It appears the polls are starting to point to a shift in sentiment with respect to Britain exiting the EU. Those leaning toward leaving seem to slightly outnumber those who consider staying in the EU a good idea. To see how the situation looks from a social media standpoint I asked the guys at Social Market Analytics for a quick update.
Rate-Hike Probability Plummets
Vito J. Racanelli – Barron’s
On June 2, the day before much-weaker-than-expected jobs data were released, federal-funds futures put the probability of a June or July interest-rate hike at 20.6% and 60%, respectively. Both were lower than the broad market was expecting, and the futures market eventually proved accurate.
The Option Queen Newsletter
This week’s FOMC meeting will likely yield little to no market anxiety and another ho-hum result. We simply do not believe that the FOMC will do anything but regurgitate the same old data dependent statement on Wednesday. That said, that is the exact right thing to do before Brexit. As for July, well, that would be a good time for an interest rate increase. After all, the market will blame any retreat on the summer seasonal doldrums. The other possible month for an increase would be December. We continue to believe that the FOMC will avoid making a decision anywhere near this year’s Presidential election.
Eric Ries’s Long-Term Stock Exchange (LTSE) is a serious plan for creating a totally new US stock exchange
Kevin J. Delaney – Quartz
A startup backed by prominent Silicon Valley names is moving toward creating a new US stock exchange, one with additional rules for companies and investors designed to reward long-term shareholding and business strategies to generate long-term results.
Trading platform IEX seeks SEC guidance on proprietary trading rule
Herbert Lash – Reuters
IEX Group, the alternative trading system seeking to become a U.S. stock exchange, on Friday asked regulatory authorities for guidance on a rule regarding proprietary trading, a request IEX said will not delay a deadline next week for its exchange application.
Bats Europe to Launch New Index Series
Bats Europe, the region’s largest stock exchange operator, today announced the launch of a UK-focused benchmark index series.
Bats will launch 18 different indices covering large to small cap securities and 12 industry sectors. The indices were developed in consultation with investors and index users, to offer a robust and trustworthy alternative to incumbent providers.
Nadex Resumes Trading in Bitcoin Binary Options Contracts
Avi Mizrahi – Finance Magnates
American binary options traders looking for exposure to the great volatility of cryptocurrencies can again trade with one of the only two legal venues in the U.S for binary options. The North American Derivatives Exchange (Nadex) has announced that it made the decision to resume the listing of its Bitcoin contracts starting today.
Regulation & Enforcement
Goldman Accused of Giving Libya Officials Gifts to Win Influence
Jeremy Hodges – Bloomberg
Goldman Sachs Group Inc. used Moroccan vacations and hired prostitutes to woo unsophisticated officials at the Libyan Investment Authority, influencing executives to make risky trades that led to a $1.2 billion loss, lawyers for the $60 billion fund said at the start of widely anticipated trial in London.
TRADING THE WEEK: FOMC Outlook, ‘Quad Witch’ Ahead
John D’Antona – MarketsMedia
The U.S. equity markets are going to be fairly quiet heading into the new week ahead of the eagerly anticipated Federal Open Market Committee meeting which will help provide guidance to the financial markets. Also, Friday traders must contend with so-called quadruple witching, which could generate some end of week volatility.
How Macro Events Could Trigger a ‘Melt-Up’ For the SPY
Todd Salamone – Schaeffer’s Investment Reseacrh
This week brings the standard expiration of June options, and with it, macro events that the investment community is watching closely. The first event is the Federal Open Market Committee (FOMC) meeting, at which time we will get a decision on interest rates and updated economic projections from Fed officials. After a disappointing May employment report earlier this month and Fed Chair Janet Yellen indicating “sizable” uncertainties, Fed funds futures traders are placing only a 4% probability of a rate hike.
Market Outlook – Market Looks Vulnerable Here
Moby Waller – CBOE Options Hub
The market was on pace to a decent gain last week…. until Friday. With that day’s stumble, an intraweek gain of 1.0% turned into a 0.14% loss for the five-day span. Worse, the shape and location of last week’s intraweek reversal hints that the tide may have finally turned bearish.
Of course, in this market, such hints don’t necessarily mean a lot.
Russell 2000 Index: Re-Pricing Risk
Rick Rosenthal – CBOE Options Hub
The bellwether benchmark for U.S. small-caps, the Russell 2000 Index tracks the performance of U.S. companies that derive most of their revenues domestically.
Since the middle of May, as the Russell 2000 Index moved to its year’s high (1190.17) on June 8th. In comparison to the S&P 500 the Russell 2000 slightly outperformed on a year-to-date basis (+2.33% vs. 2.27%) as of today. Please note the Russell 2000 Index ticker is (RTY) in the Bloomberg chart below.