JLN Options: Tullett Prebon teams with GMEX for hybrid FX platform; Hedge Funds All In on VIX Plunge as S&P 500 Pushes Toward Record; Oil Bear Market Attracts Record Bets on Further Price Slide

Aug 9, 2016

Observations & Insight

Yes, Precious
Doug Ashburn, JLN

Sometimes the best ideas are worth waiting 139 years for.

This morning the World Gold Council and the London Metal Exchange, together with a consortium of banks, announced a planned launch of LMEprecious, a new platform for spot, daily and monthly futures, options and calendar spread contracts for gold and silver, with platinum and palladium planned for down the road.

This will mark the second attempt at a gold futures contract at the 139-year-old LME. The previous one, London Gold Futures Market, launched in 1982 and never really caught on. It was shuttered three years later. In an early-morning interview with LME CEO Garry Jones, I had but one question, “Why now?”

“It’s a lot more than futures,” said Jones. “For the first time we will be offering spot trading, and tom-next trading, and a date structure out to T+25, and then a monthly futures contract from then onwards. So for the first time, banks and others will trade spot, tom-next, short-dated business through a central counterparty.”

Why now? The answer is multifaceted, but a lot of it has to do with the LME’s evolution over the past few years, since its acquisition by HKEx in 2012. The top priorities were to stabilize the base metals business, move to self-clearing with the 2014 launch of LME Clear, update its technology, and then move into product development. Last year the LME launched new ferrous metals contracts – steel scrap and steel rebar – and has now set its sights on the precious markets.

But really, it was the World Gold Council that provided the impetus. Last year, the WGC put out a request for proposal to a number of exchanges, including ICE and CME Group, to look at a London-based gold market. In the end, LME was chosen as the preferred partner.

“It’s an adjunct to what we are doing already, so it’s not a new build completely,” says Jones. “We are already the leading metals exchange. We are using all the things we already have.”

Plus, demand for gold is growing globally in a zero interest rate environment. There is a regulatory angle as well. As new collateral requirements come on line, and precious metals gain in importance as a value storage and transfer mechanism, it is critical to have a robust market at the front end of the term structure. Plus, as regulators continue to push for central clearing of derivatives, a market such as this may well-positioned.

The consortium of banks, including Goldman Sachs, ICBC Standard Bank, Morgan Stanley, Natixis, OSTC and Societe Generale, have an economic interest in the venture, though no terms were disclosed. “We start with a coalition of the willing,” said Jones, “and then we aim for a critical mass.” The market is open to others, though, and the partners do not get any special deal on execution or clearing costs. But their economic interest does incentivize liquidity provision from day one.

Jones does not view this venture as a replacement to the existing gold market, but rather a necessary adjunct. And given the recent successes at the exchange, I would not bet against it.


Jeff Levoff, Partner, DRW – Make a Market: Proprietary Trading in the Modern Era


“This is not a get-rich-quick scheme. It’s hard work to try to find positive expected value. That’s what we do every day.”

Conceptually, proprietary trading is easy. One must follow two simple steps – finding positive expected value and managing the risk of positions taken. The devil, as always, is in the details.

When Jeff Levoff, partner at DRW, began in the business, positive expected value was an easier proposition. A simple Black-Scholes based software suite would spit out theoretical values, and market makers like Levoff would actively bid below theoretical value, offer above it and – voila! – positive expected value. As markets have grown more complex and as participants have grown more sophisticated, today’s proprietary trader must think and act outside the box to find opportunity.

In this MarketsWiki Education presentation, Levoff demonstrates DRW’s philosophy using quotes from famous people and applying them to the financial markets. Be sure to watch until the end because, as the saying goes, it ain’t over till it’s over.

Watch the video »

Lead Stories

Tullett Prebon teams with GMEX for hybrid FX platform
The Trade
Tullett Prebon has expanded its hybrid brokering capabilities by teaming up with GMEX for a new voice and electronic trading platform for FX options. The announcement comes one week after the interdealer broker acquired CME Group’s hybrid trading technology.

****SD: Press release here

Hedge Funds All In on VIX Plunge as S&P 500 Pushes Toward Record
Joseph Ciolli – Bloomberg
Professional speculators are making record bets in volatility markets that U.S. stocks will keep rallying. Hedge funds and other big traders tracked by the Commodity Futures Trading Commission have pushed net short positions on CBOE Volatility Index futures to 115,000 contracts, the most since 2013, data compiled by Bloomberg show. Shorting volatility is effectively a bet equity prices will rise since the VIX and stocks move in opposite directions 80 percent of the time.

****SD: Short the lows? Are we going to need an addendum to “buy low, sell high”?

Oil Bear Market Attracts Record Bets on Further Price Slide
Mark Shenk – Bloomberg
U.S. crude supply rose, imports surged to highest since 2012; Astenbeck’s Hall sees oil poised for ‘violent reversal’ higher
Hedge funds have gone all-in on lower oil prices, counting on seasonal weakness to play out again this year. Money managers increased wagers on declining crude prices to a record as futures dropped to the lowest in more than three months. U.S. crude inventories climbed for a second week as imports arrived at the fastest pace since 2012. The supply gain comes on the cusp of seasonal refinery maintenance that will curb crude demand. Futures have declined in each of the past five Septembers.

VIX 1 year low and what it means for stocks; Why this complacent market may not be that bad
Evelyn Cheng – CNBC
The market’s closely watched “fear index” is at a one-year low, but it may not be heralding the kind of market sell-off it has in the past. When the CBOE’s Volatility Index, or VIX, fell to a low of 11 last summer in a signal of complacency, the market was jolted by China’s sudden currency devaluation. That sent the S&P 500 spiraling lower, in a more than 12 percent correction.

****SD: Also see Low VIX…Low Volume. The Bull Market Disconnect Widens from Investing.com and the Financial Times’ The US ‘fear gauge’ provokes fretting.

Wave of Reverse Splits Coming For VIX ETFs
Chris Dieterich – Barron’s
Recently placid stock market volatility means that three of the market’s most popular CBOE Volatility Index (VIX) exchange-traded products are scheduled for reverse share splits this week. Prices for the $1.7 billion iPath S&P 500 VIX Short-Term Futures exchange-traded notes (VXX) and $52 million iPath S&P 500 VIX Mid-Term Futures ETN (VXZ) reflect see 1-for-4 share splits when the market opens on Tuesday, according the Barclays. The splits mean that holders will get one share in exchange every four that they own, but at higher prices.

****SD: All these splits while the Olympic gymnastics finals are happening.

The Data-Driven Demise of the Flash Boys Myth
Bill Harts – TABB Forum
Recently, Reuters reported on a study by two professors at the University of California, Berkeley, that, for the first time, presented data to test if the central claim of “Flash Boys” and its protagonists, IEX, was true. Namely: Do high-frequency trading strategies use information from fast data feeds to front-run investors who use slower data feeds? The answer is no. Or, as one of the study’s authors put it more succinctly in the Reuters article: “That’s not happening.”

BlackRock: Volatility Will Spike as November Election Approaches
The current U.S. presidential election season is unusual, with unpopular candidates, vast policy differences and equity market volatility at historically low levels. This week’s chart shows that we could see market volatility moving higher as the Nov. 8 Election Day approaches.


Gold Back to Futures on London Metal Exchange After 30 Years
Eddie Van Der Walt – Bloomberg
Gold, silver futures in ’17; platinum, palladium coming later; Partners include Goldman Sachs, ICBC, Morgan Stanley, SocGen
Three decades after London’s exchange-traded gold contract flopped, it’s coming back. The London Metal Exchange, along with the World Gold Council and a group of banks and trading firms, are starting a new venture called LMEprecious, which will introduce centrally-cleared gold and silver contracts in the first half of next year, and later add platinum and palladium, according to a joint statement.

****SD: When an institution or individual returns to futures (in one way or another), it takes much willpower to avoid “Back to the Future” references.

Nasdaq gets MAS nod for commodities
Alice Attwood – Futures & Options World
The firm plans to offer freight, iron ore contracts for Singapore-based clients
Exchange giant Nasdaq’s commodities business has won approval from the Monetary Authority of Singapore (MAS) as a market operator in that jurisdiction, a regulatory nod that will see the firm able to offer new contracts to local clients. Nasdaq Commodities’ Nasdaq Oslo derivatives exchange has received approval from MAS as a recognised market operator (RMO) in Singapore, allowing the firm to offer trading access to Singapore firms.

SGX derivative volumes drop 40% year-on-year
Julie Aelbrecht – Futures & Options World
Major exchanges have reported mixed results for July
The Singapore Exchange (SGX) has Monday reported a significant drop in its trading volumes for July, including a 40% drop in derivatives volumes compared to July 2015. Total derivatives volume at the exchange stood at 12.9 million in July, down 40% compared to last year. Results for the exchange’s financial derivatives segment were poor across the board, with an exception in the foreign exchange contracts, which were up 24% year on year, to 436,900 contracts. The biggest losses were recorded in equity index futures.

Following The Success Of The TA-25 Index Weekly Options Tel Aviv Stock Exchange Will Soon Launch US Dollar Weekly Derivatives
Press Release
The board of directors of the Tel Aviv Stock Exchange (TASE) decided in its meeting on Thursday (August 4, 2016) to launch US Dollar weekly options. Weekly TA-25 Index options were introduced by TASE in 2013 and their trading volumes are constantly on the rise. The average daily volume of such options was approx. 12,000 in 2013 and currently exceeds 50,000.

Regulation & Enforcement

CFTC Announces Enhancements To Protect Customer Funds – Commission Grants Exemption To Facilitate Customer Accounts For Clearinghouses At Federal Reserve Banks
Press Release
The U.S. Commodity Futures Trading Commission (CFTC) today announced three separate measures that are designed to enhance the protection of customer funds. The CFTC approved an order to exempt Federal Reserve Banks that maintain customer accounts for derivatives clearing organizations (DCOs) from liability under the Commodity Exchange Act (CEA). In addition, the CFTC’s Divisions of Clearing and Risk (DCR) and Swap Dealer and Intermediary Oversight (DSIO) issued separate interpretative and no-action letters regarding the use of money market funds (MMFs) by DCOs and futures commission merchants (FCMs).

FCA replaces Mifid head with Esma expert
Alice Attwood – Futures & Options World
The Financial Conduct Authority has hired an expert in financial innovation from the European Securities and Markets Authority to replace the head of its Mifid II and MAR implementation programme, after Gavin Stewart left that role at the beginning of July. Jennifer Long has joined the FCA as the accountable executive for the regulator’s Mifid II and Market Abuse Regulation programme. She reports to Marc Teasdale, director of market oversight within the FCA’s enforcement and market oversight division.

CySEC Chair: 24option Ban in France Due to Two Sentences Advertising Text
Finance Magnates
The Chairwoman of the Cyprus Securities and Exchange Commission (CySEC), Demetra Kalogerou has shared with Cypriot newspaper Cyprus Mail that the ban of 24option in France has been over a marketing message that is two sentences long. The Autorité des Marchés Financiers (AMF) has classified the advertising practices of the binary options brokerage as sufficient ground to ban the firm from operating on the French market.


Bearish Bets on Valeant Stack Up
Akane Otani – WSJ
Options traders are betting Valeant Pharmaceuticals International Inc. shares are due for even more pain. The drugmaker is expected to report earnings before the market opens on Tuesday. The report will be a key one: Canada-based Valeant, once one of the world’s most-valuable pharmaceutical companies, has cut its 2016 earnings forecast twice since December. Its shares have tumbled 78% so far this year.

The unexpected lesson investors can learn from NBA great Dennis Rodman
Julia La Roche – Yahoo Finance
Texas-based volatility hedge fund manager Christopher Cole of Artemis Capital Management made an astute basketball analogy for when it comes to investing. “If you really want to understand portfolio optimization in a world of negative interest rates, forget [Harry] Markowitz… you need to study the mercurial Dennis Rodman, former professional basketball player,” Cole wrote in a note to clients this spring that’s being recirculated among Wall Street inboxes.

****SD: Very little regarding Dennis Rodman is “expected.”

Absolute Return Via Equity Index Options
Ticker Magazine
Although many mutual funds use options, few products, including both retail and institutional, harness index options as their primary source of returns. Stephen Bond-Nelson, portfolio manager of the AllianzGI Structured Return Fund, highlights the team’s absolute return strategy, built around the index option market and designed to generate consistent returns regardless of market dynamics.

Mathematical Breakdown Of Leverage Decay And Compounding
Seeking Alpha
Leveraged funds create an illusion that is initially abstract and enticing to investors but mathematically eliminates holding as a long-term objective. In simplified analysis, I will review the long-term consequences of holding a leveraged fund and analyze exactly how much decay can be expected and the minimum return required. Regardless of growth in the underlying asset, long-term investments in leveraged funds will depreciate an investor’s funds to zero if held indefinitely.


More than Meets the Eye: Reading Put/Call Options Ratios
The Ticker Tape
The put/call ratio (p/c ratio) is probably one of the most recognizable option statistics among traders and investors, even by those who don’t regularly trade options. Yet, what this number is often thought to represent may not be accurate, and there’s some potentially insightful data that it misses altogether.

A Global Derivatives Expert Shines the Light on Systematic Risk
David Galland – Equities.com
“A bank, especially an investment bank, is a fiendishly complicated institution. It is essentially a huge seething pot of current and future cash flows, the nature and risk of which change as the markets and the economy change.” In order to better understand the tangled mass of derivatives overhanging the global banking system, we need to begin by defining some basic terms.

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