Observations & Insight

Rumi Morales, CME Ventures – Investing in the Future of Fintech


“Sometimes the best innovations are those that tap into a basic need. Facebook improved communication. Uber helps you move. Airbnb gives you shelter. And when you think of financial technologies, and the importance of finance and banking, it is to make and protect money.”

Since the dawn of the Industrial Age, technology has facilitated change. This change has continued through the Digital Age, except that these days it tends to come much more quickly.

CME Ventures is a subsidiary of the exchange group that makes strategic investments in fintech startups. Its director, Rumi Morales, looks at the history of fintech, and offers a glimpse of what tomorrow may bring. While no one can be certain, the trends point to more digitization, artificial intelligence and cybersecurity – three areas that are at the same time exciting and scary.

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Chicago 2016 Video Releases to Date
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Kate Maehr, Greater Chicago Food Depository – Volunteerism: Good for the community and good for you!
Christian Domin, GlenStar Properties – Value Investing: Office Space and Associated Risks
Rob D’Arco, Rival Systems – Technology: the Center of the (Financial) World
Jeff Levoff, Partner, DRW – Make a Market: Proprietary Trading in the Modern Era
Walt Lukken, FIA – The New Normal and the Five Tips

Lead Stories

Traders Plead With Regulator to Overhaul U.S. Options Auctions
Brian Louis – Bloomberg
Traders are urging U.S. regulators to fix a part of the options market that some blame for contributing to the last five years of stagnant trading. Auctions, which mainly match orders from individual investors, may have reduced competition during normal trading. The relative attractiveness of auctions could be reducing liquidity in the options market as market makers cut their efforts elsewhere during continuous trading.

****SD: An underlying thread = fee/incentive fallout.

The too-big-to-fail problem is getting even bigger
Jonathan Garber – Business Insider
The too big to fail problem on Wall Street may now be even bigger. The Dodd-Frank Act was implemented in the aftermath of the financial crisis to make sure that a bank failure didn’t risk bringing down the entire system. According to Craig Donohue, the executive chairman of The Options Clearing Corporation and former CEO of the Chicago Mercantile Exchange, it may have made things worse.

Volatility ETPs Hot Amid Continued Turbulence
Volatility-based investing has dramatically risen in popularity over the last decade as investors have become increasingly sophisticated, diversifying from a simple portfolio of stocks and bonds. In fact, there have been days when trading volume in CBOE VIX derivatives exceeds that of the SPDR S&P 500 ETF (SPY). But there are issues investors must consider, noted an August TABB Group report titled “Volatility ETPs: When Traders Cash in on Turbulence.” Investors who don’t recognize how to maximize the benefits and avoid the pitfalls might experience disappointment.

Traders Brace for More Turmoil in World’s Worst Stock Market
Roxana Zega – Bloomberg
Future of Italy Prime Minister Renzi hangs on referendum; Price of options hedging against swings at highest since 2013
While most western-European markets have recovered from the Brexit shock, Italy still has a long way to go. With a looming referendum and an ongoing banking crisis, traders are paying up to hedge against more stock turbulence.

****SD: The last sentence: “It’s a mess, and it’s difficult to see the way out.” – Thomas Haerter, chief investment officer at Zurich-based consultancy firm Wellershoff & Partners Ltd.

Soros Looking For A Fall Circa 2008
Financial Advisor Magazine
Yes, it’s true that at the end of the second quarter George Soros was sitting on a huge equity-options position that would profit if the market goes down. It’s an intriguing position, though let’s not get too carried away describing it. For one thing, it wasn’t the portfolio’s “biggest holding” in the second quarter, just as it wasn’t its “biggest holding” in 2013, despite what news reports said. The reason for the confusion is the way equity derivatives are reported in 13F filings required by the Securities and Exchange Commission.

****SD: Real solid breakdown of the Soros put options story.

Mexico says it has nearly completed 2017 oil hedge
Gabriela Lopez – Reuters
Mexico has nearly completed its oil hedging program for 2017, the country’s finance minister said on Tuesday, adding that what is considered to be the world’s biggest sovereign oil derivatives trade began in mid-June. Luis Videgaray gave no details on how much crude Mexico was hedging, how much it spent or the average price it paid.


CBOE Futures Exchange Receives Registered Market Operator Approval in Singapore
Press Release
CBOE Futures Exchange, LLC (CFE) today announced it recently received approval from the Monetary Authority of Singapore (MAS) to be a Registered Market Operator (RMO) in Singapore. With this designation, CFE may now allow professional investors, accredited investors and expert investors, as defined under Singaporean law, to become CFE Trading Privilege Holders (TPHs) and access CFE’s market directly. A growing number of market participants from outside the U.S. are trading CBOE Volatility Index (VIX) futures, which trade on CFE nearly 24 hours, five days a week. In addition to offering VIX futures in non-U.S. trading hours, direct access to CFE’s market in Singapore enables CFE to further expand its customer outreach in Asia and is expected to provide even more investors with greater efficiency to trade and hedge with CFE’s products.

****SD: You may recall that CBOE’s global footprint grew in July when it opened a London office.

Intercontinental Exchange Announces Expected Closing for Acquisition of S&P Global’s Securities Evaluations and Credit Market Analysis
Press Release
Intercontinental Exchange (NYSE: ICE), a leading operator of global exchanges and clearing houses and provider of data, announced that following U.S. Department of Justice clearance, the company will close its acquisition of S&P Global’s (NYSE: SPGI) Securities Evaluations (SPSE) and Credit Market Analysis (CMA), two assets within the S&P Global Market Intelligence division.

****SD: From The Trade — ICE bolsters data business with latest acquisition

The lowdown: Shenzhen-Hong Kong Stock Connect
Paolo Danese and Rev Hui – GlobalCapital
After years of rumours and months of speculation, Chinese and Hong Kong authorities announced on Tuesday that theShenzhen-Hong Kong Stock Connect had been finally been approved – almost two years since the launch of Shanghai Connect. Here is GlobalRMB’s lowdown on what you need to know about the announcement.

****SD: One point of note in this article — more asset classes are in the pipeline, including some equity options.

DB/LSEG merger – Final acceptance ratio: 89.04 per cent of all Deutsche Borse shares Automated Trader
Following analysis of all shares tendered for exchange, Deutsche Börse has determined a final acceptance ratio for the Exchange Offer of HLDCO123 PLC of 89.04 per cent. On 1 June 2016, HoldCo published its voluntary public takeover offer in the form of an exchange offer to the shareholders of Deutsche Börse for acquiring all registered no-par-value shares in Deutsche Börse AG. The additional acceptance period ended on 12 August 2016, 24:00 CEST.

NZX Half Year 2016 Results Announcement
Press Release
NZX’s financial results for the six months to 30 June 2016 demonstrate the strong performance of its markets business and growth in its funds services business, reflecting the strategic investments it has made. Total NZX revenues for the half year of $37.9 million were up 10.3% on the previous corresponding period.

Regulation & Enforcement

Discussion Draft of Modernization of Derivatives Tax Act
The National Law Review
On May 18, 2016, Senate Finance Committee Ranking Member, Senator Ron Wyden, released a financial product tax reform discussion draft that, if adopted, would significantly alter the current tax rules with respect to financial products (derivatives), as well as the tax treatment of certain non-derivative positions that are offset by derivatives. The discussion draft is referred to as the Modernization of Derivatives Tax Act, or MODA.


Tullett’s voice is still in tune
Dan Alderson – GlobalCapital
Far from seeing Tullett Prebon’s voice-hybrid push as a last stand of the dinosaurs against robot supremacy, those firms going all-in on electronic trading would do well to re-examine their own longevity. Tullett has rattled off a succession of initiatives to grow its hybrid voice brokerage presence, at a time when many of its rivals are exiting voice to go fully electronic. Tullett has teamed up with GMEX Group on a trading platform for FX options, obtained a long term licence to use CME Group’s hybrid voice/electronic technology, and bought Creditex’s hybrid voice broking business for credit derivatives from Intercontinental Exchange. All of this comes on top of its plans to buy ICAP’s global hybrid voice broking and information business later this year, in a deal worth around GBP1.1bn.

****SD: I think of it like record formats — sure, vinyl isn’t what it used to be after CDs and MP3s, but there is still interest and demand for the product. There’s no hard and fast rule that dictates innovation must fully supplant a preceding technology or practice.


Gold ETF Speculators Brace For Speed Bumps
Gold has been on fire in 2016. While the commodity rallied at the start of the year as stock markets sold off, it more recently enjoyed its “safe-haven” status in the wake of the “Brexit”-fueled broad-market plunge in late June. Additionally, the Federal Reserve’s hesitancy to raise interest rates has helped boost the malleable metal to levels not seen since 2014. Gold’s impressive run is mirrored in the price action of the SPDR Gold Trust ETF. Year-to-date, the exchange-traded fund (ETF) is up 27%, and hit a two-year high in early July. However, with technical resistance looming just overhead, one notable hedge fund slashing its stake in GLD, and rumblings of a potential September rate hike resurfacing, this uptrend could be on the verge of stalling out in the near term — a fear shareholders appear to be bracing for via options-related insurance.

****SD: Is the gold train slowing down? Speaking of gold trains, the search is underway for the rumored Nazi gold train in Poland. That Reuters story is filed under “lifestyle” — presumably the lifestyle in question is that of treasure hunter.

Protective Puts for Hedges and Locking In Profits
The Ticker Tape
Few things are as beautiful as learning new ideas. Some traders would add especially when it’s a stock that gets temporary protection thanks to a put option, creating the “protective put.” Of all the benefits that a protective put strategy can provide, perhaps the biggest one is that it lets you sleep better at night, knowing that your stock position is protected from a major, or even catastrophic, loss.

Indicator of the Week: Does a Low VIX Mean It’s Time to Buy Options?
Rocky White – Schaeffer’s Research
Last week I wrote about how the CBOE Volatility Index (VIX) was at extremely low levels. The VIX measures implied volatilities, or option prices on S&P 500 Index (SPX) options. It’s telling us that option prices are extremely low on the broad-market index, or that traders are not expecting a lot of volatility going forward. Consequently, it takes a small move in the underlying index to get relatively big returns on options right now. So, is now the time to purchase options? This week, I’ll take a look at how index options have performed over the past several years depending on how expensive (or cheap) option prices are.

****SD: According to this analysis, the answer is no.

Cheaper Exposure To VIX?
Seeking Alpha
Present VIX levels are very low relative to historic levels. Outright long VIX futures positions can suffer significant decay. Weekly VIX futures spread trades may offer alternative exposure to volatility with lower decay.

FCM Rankings – Q2 2016
Tod Skarecky – Clarus Financial Technology
It’s time to update our analysis of FCMs. The data from our last report showed a few things: The number of FCM’s reaching a 14-year low; Any growth in pledged collateral being in “Cleared Swaps”; A concentration of margins within the top firms, including 96% of swaps being cleared by the top 10 firms.

****SD: Some options info in here.

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