Observations & Insight

Giving Chicago some fintech love
Spencer Doar, JLN

It is hard to like generic house muzak and the umpteenth use of certain buzzwords, but yesterday’s second iteration of Chicago’s FinTech Exchange was objectively a good show(ing). The reviews of Barchart’s signature cocktail served after the presentations — the Barchart Bull came in a copper Moscow Mule mug — were solid, too. The event was packed elbow-to-elbow. There was much mention of how Chicago gets overlooked in the fintech space and the turnout was testimony to why the Windy City shouldn’t be.

The following are the options-related packets of info worth a mention.

When someone orders market data from the CME Group, it takes about three weeks for you to get a large hard drive with the requested data. That’s ridiculous, and Julie Menacho, executive director of market technology business development, was quick to acknowledge that. The CME will be updating that process sometime in May or June — stay tuned.

Around the time CME updates its historical data delivery, the exchange will also roll out its partner services website. The site will allow firms to search for service providers (just one example) depending on their needs. Imagine, well, a clearinghouse for parties interested in meeting, developing and working with their counterparts. Dare I say that the opportunity would allow firms to leverage their existing infrastructure and technologies in new ways? (Sorry, had to drop at least one buzzword).

CBOE Livevol will also be changing the manner in which they distribute data. CBOE Livevol CEO Catherine Clay wants industry participants to get a more Amazon-like experience when shopping for data: more custom tailoring to the shopper and more filters. Their new website, to be launched Tuesday, will allow for a la carte delivery of custom analytics. Maybe folks will finally start having a pleasant data ordering experience.

Tim McDermott, CEO of Nadex, had one thought on binary options and his exchange that I had not considered before. What if Nadex’s purpose (and thus binary options in general) doubled as that of an educational institution? Think of the longstanding industry commentary about the changing of the guard; a new generation of traders are coming into their own without some of the traditional career educational opportunities. (They aren’t running, clerking or any of the traditional roles associated with the exchange floor.) So, how do they get the hands-on experience that can’t come from book learning? What if they got the gist of a particular segment of the market by trading binary options, and then moved to, say, trading futures in that market after getting the hang of it? That was McDermott’s proposition.

One problem with that idea is that most binary options accounts lose money. By some estimates, the number could be as high as 85 percent. Granted, Nadex is a CFTC-regulated exchange swimming in a shady sea, but I’m not sure the industry would be happy with that conversion rate. For now, a better recommendation would be to stick to the practice account alternatives available at most retail brokerages.

Last, consider this random bit of troubling trivia from evident.io: the average time for a firm to detect a data breach is 275 days. Stay safe out there and have a good weekend.

Lead Stories

Record VIX Bets Keep Surging Amid Wall Street Mixed Signals
Joseph Ciolli and Inyoung Hwang – Bloomberg
Open interest on VIX call options highest since September 2014
Long-VIX securities have absorbed $3.2 billion over nine weeks
One thing’s certain about the market for equity volatility — it’s jumping. Why that’s happening is a source of debate on Wall Street. Going long market turbulence has surged in popularity in the last nine weeks, with investors sending an unprecedented $3.2 billion into securities that reap gains from wider price swings. That pushed shares outstanding on exchange-traded notes tied to the Chicago Board Options Exchange Volatility Index to a record and has wagers on volatility near the highest level since 2014.

As market braces for Mexico hedging, U.S. oil options volatility surges
A marked rise in U.S. oil options volatility for contracts expiring in 2017 has sparked speculation among traders that the market is preparing for Mexico’s annual hedging program, worth billions of dollars and one of the largest by a nation across commodities markets. The state-run producer typically buys put options for a portion of its annual output that give it the right to sell crude at a certain price – helping to protect revenue for national oil company Pemex as well as the country’s oil-reliant economy – as the nearly two-year rout in crude prices punishes major producers.

Is Long ‘VIX’ A Crowded Trade?
First I am reluctant to call these “VIX” based products as the ETF’s and ETN’s are not tied to spot VIX as we know it and see it reported every day. The vast majority of “VIX” linked, exchange traded product are tied to an index that is linked to the performance of the first two VIX futures contracts. Having said that, which I think is extremely important, it is worth looking at the fund flow data I was able to pull together using Bloomberg.

Who Are The Big Soybean And Grain Buyers?
Inside Futures
Over the past month, if you wanted fundamental reasons for the grain markets moving higher, there have been countless reports about rains in Argentina and hot weather in Brazil. There has also been a common theme that the exporting corn and soybeans will increase soon. Reporters have had an easy time writing about the rally. All they needed to do was to change wording around to make a report from the previous day or week a little different to appear fresh. But how many times can the same story be used about weather, or hope there might be considerably more exports? Finally a few more analysts are reporting on fund trading and their effect on the markets. When soybean open interest has been making historic daily highs and funds day after day are reported to be buying 25,000 to 30,000 futures contracts, it is essential to report it. With derivative trading, plus futures trades along with Over the Counter trading, funds have been loading up on the long side of soybeans and soy products with an unknown amount of longs. And it isn’t just agricultural commodities. Look at the rally in U.S. stock Indexes.

KCG’s (KCG) CEO Daniel Coleman on Q1 2016 Results – Earnings Call Transcript
Seeking Alpha


Eurex Exchange’s Equity Index Derivatives newsletter – Q1/2016
In Q1/2016, liquidity and open interest in our broad- and narrow-based products remained at high levels, confirming continued investor demand for listed and centrally cleared products. This newsletter gives you the latest information about Eurex’s Equity Index, Dividend and Volatility Derivatives. You will find important data and facts on volumes, open interest and more.

****SD: Newsletters in newsletters. Let the rabbit hole continue.

Stellar Trading Systems Establishes Connectivity with CBOE Futures Exchange
Press Release
CBOE Futures Exchange, LLC (CFE) today announced that Stellar Trading Systems, a multi-asset trading software and services specialist, has established connectivity with CFE as an approved independent software vendor (ISV). The new link will provide traders using Stellar Trading Systems’ platform the ability to directly interface with CFE and gain access to the exchange’s suite of products, including futures on the CBOE Volatility Index (VIX Index).

CME Group eyes 15% stake in MCX
Shrimi Choudhary – Business Standard
CME Group, one of the world’s largest derivatives exchanges, is planning to take 15 per cent stake in India’s only listed commodity bourse — Multi Commodity Exchange (MCX). The move follows the government’s decision to increase foreign holding in Indian commodity exchanges to 15 per cent, from five per cent earlier. Currently, a single investor cannot own more than 15 per cent in a commodity exchange. “CME had placed a non-binding bid in 2014 when Financial Technologies (India) Ltd or FTIL had to sell 26 per cent stake in MCX,” said a source.

Quick View: Bats follows exchange playbook with data push
Philip Stafford – Financial Times
Bats Global Markets has banished memories of its ill-fated IPO four years ago. Now investors have to weigh up what the investment case is. Early share price moves have put Bats on a forward price/earnings ratio of about 18 times, according to Bloomberg data. Compared with other listed US exchanges, it is on a chunkier valuation than Nasdaq (17 times) but marginally lower than CBOE (18x), Intercontinental Exchange (19x) and CME Group (24x).

****SD: If real estate is “location, location, location,” exchanges are “data, data, data” (or at least striving to reach that point).

NLX puts three seniors on redundancy risk
Global exchange group Nasdaq has put three key senior employees of its European rates exchange NLX at risk of redundancy, less than a week after the firm said CEO Charlotte Crosswell will step down next month.

Bats Global Markets Reports Strong March Market Share Acquires ETF.com; Announces the SPYIX Volatility Index
Bats Global Markets, Inc. (BATS: BATS) today reported March data and highlights, which include the acquisition of ETF.com and the launch of the SPYIX volatility index.

****SD: Bats’ options market share was 10.3% in March.

Regulation & Enforcement

SEC extends test period to curb U.S. market volatility
The U.S. Securities and Exchange Commission on Thursday extended by one year a pilot program designed to curb excessive volatility in domestic securities markets. The so-called National Market System Plan to Address Extraordinary Market Volatility, commonly known as limit up-limit down, was adopted in 2012 in the wake of the “Flash Crash” two years earlier. It provides for trading halts when stocks rise or fall specified percentages above or below recent trading ranges.

****SD: The SEC release here

Singapore Raids Brokers; Exchange Reports Irregularities
Wes Goodman, Chanyaporn Chanjaroen and Andrea Tan – Bloomberg
Singapore authorities raided a number of brokerages in a probe of possible breaches of the securities law, while the stock exchange reported several cases related to alleged insider trading and market manipulation as the city sought to protect its reputation as a financial center.

Protect source code to protect innovation in markets
In our last piece on the CFTC’s proposed rules on automated trading, we explained why the Commission should focus only on risk controls in its first rulemaking on this topic. However, while we strongly urge the CFTC to set aside the policies and procedures section for now, we’re also enumerating the problems that would arise should they choose to move forward with it, particularly with their proposal for unprecedented access to algorithmic source code.

****SD: The rule, as written, allows “regulators to access source code at any time without a subpoena or any formal process of law.” Wouldn’t it be weird if you came home from walking the dog and saw some stranger looking under the hood of your car? “Oh, hi, just checking it out.”

Spoofing Cases From Oystacher’s Past Prove Intent, CFTC Says
Matthew Leising – Bloomberg
Fines levied against 3Red Trading LLC’s Igor Oystacher by the world’s largest futures exchanges prove he intended to rig markets, according to U.S. regulators seeking to use those penalties as evidence in their own lawsuit against the trader.

****SD: Your weekly dose of Snuggs action.

Trade Options: Recent End-User Developments
On March 16, 2016, the Commodity Futures Trading Commission (“CFTC”) approved a final rule (“Final Rule”) eliminating certain reporting and recordkeeping requirements for “trade option” counterparties that are neither “swap dealers” nor “major swap participants” (“Non-SD/MSPs”). The Final Rule is briefly summarized below.


Duco bolsters team with three senior fintech hires
Alice Attwood – FOW
Financial technology firm Duco has hired a trio of fintech experts in senior roles to support the firm’s expansion plans as it continues to focus on signing up exchange clients. Duco has hired Angela Scott from Oracle, Phil Jeffery from Cisco and Keith Churchill from Iomart. The trio has joined the company’s operations in London. Scott joined Duco this month as head of client services. Before this she was at Oracle for nearly 17 years, latterly as a director in the firm’s customer success and renewals strategic account team.

****SD: Duco’s moves come on the heels of their deal with the CME.

Options Names Former TIBCO Executive As New Chief Financial Officer
Press Release
Options, the leading managed service and IT infrastructure provider to the global capital markets industry, has today announced Jon Lambert as the firm’s new Chief Financial Officer (CFO). Lambert, who previously served as CFO for both TIBCO and Wombat Financial Software, brings with him over 25 years of corporate finance and operational experience within the infrastructure technology and financial services sector.


The Goldman strategy that’s returned 105% in days
Traders who have pursued a strikingly simple strategy this earnings season have cashed in big time. Goldman Sachs’ options research team has long advocated buying calls on stocks set to report earnings. Simply put, the average stock rises on earnings, taking the price of the relevant calls (which are options that grant their owner the right to buy a stock for a given price within a certain time frame) higher along with it.

****SD: The Barron’s story below is related to this one.

Rack Up Quick Gains by Trading Ahead of Earnings
The options market is in a weird zone, unlike most anything that has occurred in the past 20 years. Implied volatility, which is the essence of options prices, is so subdued at the onset of earnings season that it is creating opportunities for anyone interested in buying short-term calls on stocks just before earnings are released. This approach has already produced some triple-digit gains, even as some investors position for the stock market to crash.

Managing volatility: A trader’s conundrum
Volatility is on the rise in the foreign exchange market and remains a classic trader’s conundrum. It’s well documented that when combined with liquidity, volatility creates opportunities across FX, but in periods of excess volatility, for example following China’s move to transform its exchange rate regime, there is a need to manage risk through the use of sophisticated tools or by using hedging instruments such as options. Investors navigating the rough financial seas this year, including wild swings in financial conditions and risk appetite, the risk of a further devaluation of the Chinese currency, unpredictable reactions to central bank meetings, and concerns that the US recovery is faltering, will reach for FX options as a tool for hedging risks and leveraging market views

Which ETFs can protect in market volatility?
Fund Strategy
Volatile markets are always a challenge. “Don’t sell in haste” is an easy message when markets are calm, but sadly plans do not always survive contact with a market correction. The Investment Association reports more than GBP1bn was pulled from funds in January, and the promise of lowering volatility might be enough to tempt investors back into this market. I have looked at ETF options for investors craving safety in their portfolio.

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