Observations & Insight

2016 Exchange CEO Series: Hong Kong’s Charles Li Looks To Keep Building Bridges To China

As Hong Kong Exchange & Clearing looks at extending its services as a bridge to mainland China, HKEx CEO Charles Li said that it’s now embarking on a new three-year plan to bring China’s market to the rest of the world.

HKEx posted record earnings in 2015 and has a current market cap of about US$28 billion, posted the first full fiscal year with the London Metal Exchange under its umbrella and launched the Hong Kong-Shanghai Stock Connect, which links the two equity and, potentially, derivatives markets. The exchange ranked 17th among global derivatives markets, with annual volumes up 12.4 percent to 359 million contracts in 2015, according to the FIA Annual Volume Survey.
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Lead Stories

Regulators take softer line on bank capital for derivatives
Banks that trade large numbers of derivatives may benefit from proposals by regulators unveiled on Wednesday that take a softer line on broad capital rules designed to bolster the finance industry’s defences against market shocks. Banks have been campaigning for some time to change this measure of capital to total assets, known as the leverage ratio, which becomes binding from January 2018.

Fear Gap Grows Between U.S. and European Markets
Saumya Vaishampayan – WSJ
The gap has widened between stock market “fear gauges” in Europe and the U.S. The difference between gauges of volatility tied to the Euro STOXX 50, which contains 50 stocks from eurozone countries, and the S&P 500 is around levels that were common during last summer’s Greek debt crisis.

Currency Traders Brace for Wild Ride as Volatility Curves Invert
Rachel Evans – Bloomberg
The $5.3 trillion-a-day foreign-exchange market is getting turned on its head. For the first time since 2010, traders of all five of the world’s most-transacted currency pairs are more wary of price swings in the next three months than over the next year. Typically, longer-term measures of volatility are higher to account for future uncertainty.

Oil Market Volatility Reaches Near-Record Highs
Seeking Alpha
It has been a long time since oil markets operated on the basis of the fundamentals of supply and demand. But now, investors are starting to have to refocus on these issues, and volatility is reaching near-record levels, as the chart shows. During Q1, weekly volatility in Brent was above the levels seen after the 9/11 tragedy – only the periods of the first Gulf War and the subprime crash were higher in the past 25 years. Yet there has been no invasion of a major oil-producing country, or financial crisis.

Doubling Down on Bad VIX Bets Means Paying Most Since ’13: Chart
Oliver Renick – Bloomberg
Betting that the stock market will get more volatile has been one of the worst trades amid a 13 percent rebound in U.S. stocks. It was also one of the most popular, with a record $2 billion added in the last six weeks to exchange-traded products that benefit from a rise in the Chicago Board Options Exchange Volatility Index, the gauge known as the VIX.

How Unintended Consequences Can Affect the Stock Market
In the early autumn of 1987, the U.S. stock market slumped. The Dow Jones Industrial Average had doubled over the previous two years, reaching its all-time high of 2,722 in August. The euphoria quickly subsided. By mid-October, profit-taking had knocked 20% off the Dow’s peak value, and the financial media’s tone had turned ominous. As with January of this year, October 1987 was one of those times when the market felt as if it was teetering, on the edge.

****SD: Pretty much summed up as, “we need to keep an eye on derivatives.”

Catalysts for change: part three – volatility
As the complacency trap that has been built up in March looks to have caught the markets out, I am jumping ahead in my three-part analysis of catalysts to cover part three: volatility.


US exchange operator Bats plans IPO for next week
Financial Times
Bats Global Markets, the US exchange operator, is planning to list next week, according to a presentation that is being shown on its roadshow. The Kansas City-based company, the second-largest US equity exchange and rival to the New York Stock Exchange and Nasdaq, will look to erase memories of a botched listing four years ago with a new push. Several shareholders including Bank of America Merrill Lynch, KCG, Instinet and Citigroup, will sell down 11.3m shares at between $17-$19 a share. April 15 is the likely listing date, according to a person familiar with the process, reports Philip Stafford.

****SD: Bloomberg’s take here

ICE latest exchange to see mixed volumes in March
Julie Aelbrecht – Futures & Options World
The Intercontinental Exchange has become the latest exchange to report mixed trading volume results for March, with interest rates up a tenth and equity derivatives down heavily. The Intercontinental Exchange (ICE) said its futures daily volume was up 5% year-on-year, interest rate volumes were up a tenth and equity derivative volumes were down 16%, as a 12% growth in equity indices was wiped out by a 52% drop in single stock derivatives.

Rule change raises stakes in LSE-Deutsche Boerse merger
Marion Dakers – The Telegraph
A tweak to new market rules has raised the stakes in the London Stock Exchange’s bid to merge with its German rival Deutsche Boerse. Analysts said the decision by the European Securities and Markets Authority to bring forward rules on open access puts further pressure on Deutsche Boerse to seal a deal. Under the long-awaited rules, known as Mifid 2, market operators must allow access to trading and clearing to anyone above a certain size, rather than force clients to buy bundles of services or keep certain markets as a monopoly.

LSE CEO Xavier Rolet Denies Deutsche Börse Deal Would Increase Financial Risks
David Wighton – WSJ
The chief executive of London Stock Exchange Group PLC hit back at critics of its proposed $30 billion merger with Deutsche Börse AG , denying that a combined group would pose greater risk to the global financial system. Xavier Rolet said there would be no heightened risk caused by bringing together the two groups’ clearing houses which process derivatives trades. “The risk will be no greater than it is today because they will be kept completely separate. In terms of risk management, the margins and the regulatory framework, the companies are going to stay the way they are,” he told The Wall Street Journal.

March Madness: The Trading Volumes of March 2016
Traders News
The first quarter of 2016 began with waves of volatility and the trading volumes of the major exchanges and marketplaces tell the tale. Traders presents the trading volume figures for the month of March 2016.

****SD: March Madness for trading was not as cool as March Madness for Jay Wright. If you haven’t seen his reaction to leading Villanova to a national title, do yourself a favor and watch this Vine. Cool as a cucumber.

NZX to offer milk price futures, options to reduce volatility
The National Business Review
NZX, the financial markets operator, is developing a new market offering New Zealand dairy farmers a way to lessen the risk of volatile milk prices. The Wellington-based company [NZX] plans to start a futures and options market for milk on its trading platform, allowing farmers, processors and others linked to the local dairy industry a way to fix the future price of milk to reduce uncertainty. The milk contracts will add to the NZX’s existing futures contracts for whole milk powder, skim milk powder, anhydrous milk fat and butter, and its whole milk powder options.

****SD: I have a fatal dairy allergy — reading about milk options makes my skin kind of itchy.

SGX reports market statistics for March 2016
Press Release
SGX reports market statistics for March 2016

****SD: “Total Derivatives volume was 17.1 million, up 23% month on month and up 15% year on year.”

Borsa Istanbul: A New Market Maker For BIST30 Index Options
Press Release
Effective from April 1, 2016, Garanti Investment became a market maker in BIST30 Index Options.

Regulation & Enforcement

Wall Street Is Edging Toward Win on Derivatives Capital Rule
Silla Brush – Bloomberg
Wall Street is making progress in its effort to soften a crisis-era capital requirement that banks argue places onerous expenses on trading. The Basel Committee on Banking Supervision on Wednesday proposed a new method for banks to assess their exposure to derivatives, which could wind up lowering the amount of capital lenders need to meet restrictions on leverage. The committee, which includes the Federal Reserve and European Central Bank, also took steps toward alleviating banks’ concerns that they’re taking a capital hit on the billions of dollars in collateral they receive from customers for handling derivatives.

Regulation AT: If you think it does not apply to you, think again
Dana Comolli, DMAXX – TheBooks Blog
Algorithmic trading typically conjures up thoughts of Michael Lewis’ “Flash Boys” and high frequency traders. The objections to these market participants have come from many areas and they have been blamed for bouts of volatility that make little sense. The response from regulators has been expected, but certainly not in the scattershot form of Regulation AT (CFTC proposed regulation RIN 3038-AD52, Regulation Automated Trading). The CFTC states as its purpose “to address the risks of algorithmic trading through a series of pre-trade risk controls and other measures that AT Persons, clearing member FCMs and DCMs must implement.” Any new regulatory proposal raises hackles, but this one, with its all-inclusiveness as well as potential risks, has caused outright howling.

ESMA backs competition and choice in derivatives clearing
Automated Trader
The European Securities and Markets Authority said it sees no need to temporarily exclude exchange-traded derivatives (ETDs) from non-discriminatory access to central counterparties and trading venues, which will be introduced by MiFID II and MiFIR. MiFIR requires ESMA to assess whether ETDs should be exempted for a period of 30 months from the non-discriminatory access provisions.

‘Mad Punter’ Used FT, Daily Mail Tipsters to Beat Stock Markets
One of the traders on trial in the U.K.’s biggest ever insider trading probe said he relied on journalists at the Financial Times and Daily Mail newspapers for tips on what they would be publishing the following day to beat the stock market. Iraj Parvizi, 50, who is known in gambling circles as “the Mad Punter” due to his willingness to wager on anything, told the jury that his most successful strategy involved calling his sources at the British papers and trying to figure out what they were working on.

****SD: They call him “the Mad Punter” because he wagers on anything, but the real crazy part to me is “he bought and sold millions of pounds of shares daily but never kept any records because he relied on those he traded with to keep notes.”

Alternative Trading Systems with Form ATS on File with the SEC as of April 1 2016 (April 5, 2016)

******JL: If you want to know why Reg NMS is a disaster, look at this list of ATS from the SEC. Then count the number of major market making firms. We went from lots of market makers and few exchanges to lots of exchange/ATS platforms and very few market makers. It is the worst in the options markets. In the options markets because of the auctions and directed order flow deals, there are just a handful of market making firms interacting with almost all of the customer order flow. That would be backwards. Time to roll back Reg NMS and bring competition into the real marketplace. Directed order flow deals are like having your brother-in-law standing next to you in the trading pit. That was never good for competition.


FinTech Regulation: Race to the Top
The Trade News
The Financial Conduct Authority (FCA) has teamed up with Australian regulators in a ‘world-first’ agreement to support FinTech businesses. The agreement means innovative FinTech companies in Australia and the UK will benefit from further support from regulators when entering the market in both countries. Regulators across the globe have been very supportive of FinTech companies, but some argue none more so than the UK’s FCA.


Will This Earnings Season Crush The Market?
Seeking Alpha
Since the end of 2011, the SPDR S&P 500 Trust ETF (NYSEARCA:SPY) has risen by 63%. Take a quick guess: How much have S&P 500 earnings grown since 2011? Trick question. Between 2011 and 2015, S&P earnings have in fact fallen slightly. Using actual GAAP earnings rather than adjusted figures, the market’s PE ratio has expanded from 14.5 at the end of 2011 to 24 today as earnings have declined marginally while the index soared. The market’s historical earnings yield has fallen from 6.9% to just over 4% now.

****SD: It’s easier to exceed expectations when the bar has been lowered.

Indicator of the Week: What Happens After a Big Quarterly Comeback?
Schaeffer’s Research
The S&P 500 Index (SPX) moved higher over the last few days of the first quarter to eke out a gain, after being down by over 10% earlier in the quarter. The only other time the index was down by double digits in a quarter and then ended positive was the fourth quarter of 1933, over 80 years ago. Will stocks ride this momentum going forward, leading to gains — or is the rally exhausted? This week I’ll look back at other times the index made huge runs to end a quarter, and see what tends to happen going forward.

Trades to watch in a sluggish market
Though stocks slid Tuesday, “Fast Money” traders still found opportunity in a sluggish market. The three major U.S. averages dipped more than 0.75 percent each, and the Dow Jones industrial average suffered its first triple-digit loss in almost a month. Trader Karen Finerman said she expected weakness due to the “remarkable” comeback stocks mounted from after a brutal start to the year.

****SD: I include this, not because of the “buy volatility protection” recommendation (duh), but for the quick-hit disclosures of Finerman’s, Adami’s, Seymour’s and Najarian’s positions at the bottom.

Trading Lessons: The Mountain Top Is Lonely
Bob Lang – CBOE Options Hub
This story is part III of my trading lessons series. I’ve been to the top of what is called ‘trading nirvana’, a place where I thought I would have plenty of company. Back in my early trading days, I thought there was nothing bad that could touch me. As you recall from a previous article where I turned a small sum of 7K into a nice amount over half a million in just a few years. This was ‘it’ for me, and while it was far from a fortune I could live on the rest of my days, I certainly believed it was a great start. Perhaps I was lucky and found a winning lottery ticket and cashed it in. We could certainly say ‘right place at the right time’, a success if we measure the size of our profit/loss. But how do we handle this success? Are we just stubborn, greedy and full of hubris? Do we freeze up and panic at the sign of trouble, or just ignore any warnings – believing we can repel any dangers as if we were made of teflon.

A Portfolio Of Puts
Seeking Alpha
Recently, I wrote an article Covered Put Writing: Not What You Think. In it, I described some basic characteristics of covered put writing, laying out some “maxims” for the single covered put position and “corollaries” for the systematic rolling covered put writing strategy (SRCPWS). The focus of that article necessarily was covered put writing on a single underlying (e.g., a single stock or stock index). But what about a portfolio of covered put positions? After all, investors may desire to sell put options on a portfolio of underlyings where a put option on that portfolio is simply not available. What, then, are the characteristics of a portfolio of covered put options? (Note: Some readers do not approve of my using the term “covered put” for the strategies described. I understand your concerns, so please feel free to mentally substitute “collateralized put” whenever you see “covered put”).


FOW Derivatives Asia, 12-13 April, Hong Kong
FOW returns to Hong Kong on 12-13 April for the next instalment of Asia’s largest derivatives conference. Join over 600 delegates to hear the latest thinking on the Chinese and Asian derivatives markets. Topics this year include realising Asia’s ambitions to becoming a commodity powerhouse, next steps for the Connect initiative and the outlook for the internationalisation of China. The event is free to attend for banks, brokers, props and the buyside. For more information and to register, click below.

***If you will be attending the conference and would like to schedule some time to meet with Doug Ashburn, who will be there moderating a panel on blockchain, send him an email


TRADING UP: New Role for JPM’s Pomraning; NYSE’s Crutchfield Moving On
Deutsche Bank, the German bank that has been under scrutiny lately as it struggles to return to profitability, is reportedly set to hire approximately 100 people globally, including traders, salespeople and technologists. The move follows a culling of its trading business which culminated in the departure of one of its most prominent executives, Jose Marques, the New York-based global head of electronic equity execution who left in December 2014. His role was filled by London-based Andrew Morgan and Robert Casebourne who became co- heads of electronic trading. Andre Crawford-Brunt remains the firm’s global head of equity trading.

BNY Mellon taps Deutsche’s Murray as COO
Futures & Options World
BNY Mellon has hired ex-Deutsche Bank’s head of listed derivatives and clearing Piers Murray as chief operating officer of the custodian’s market unit, marking the second high-profile move from Deutsche to BNY in the past eight months. The US bank said Murray will assume his New York-based position in June and report to Michelle Neal, president of BNY Mellon Markets, who joined from Deutsche in August last year.

3 Mistakes Execs Make with Stock Grants and Options
Stock-based compensation is an excellent tool in building personal wealth. In particular, executives in public companies often enjoy being compensated based on their company’s stock price. Having worked with public corporation executives over the past three decades, I have had the opportunity to see incredible levels of wealth be built. Unfortunately, I have also seen an amazing amount of money get left on the table.

Hello Markets Announces Hello Football Index Kick Off
Finance Magnates
Binary options platform provider, Hello Markets has announced the launch of a new offering, Hello Football, which is aimed at benefiting football clubs, scouts, agents, investment funds, pundits, press and football players. The Hello Football Index is a set of price discovery algorithms designed to measure the value of a football player in real time. It uses big data to create a real-time price valuation feed based on each aspect of information in connection with a player.

****SD: Wut?

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