Observations & Insight

Expo Bits & Pieces, Day 1
JLN Staff

Yesterday was the first full day of 31st Annual FIA Expo Chicago, and from our vantage point, the conference is shaping up to be among the best ever. Sure, it helps that we are experiencing unusually balmy temperatures for November. One exchange executive said to me yesterday, “it feels more like an FIA Boca than an Expo.”

One of the highlights of the day was the showing of MarketVoice’s video on the closing of the trading floors. Quite a nostalgic trip for many of us in the room.

But after a quick look back, the crowd took to looking forward, to the real story of Expo 2015 – innovation. Innovation is everywhere at the Chicago Hilton – in every panel, throughout the exhibit hall, and especially in the Innovators Pavilion, in what used to be the less-traveled Red Room. You would be well served to spend some time there.

Innovation made its way into the video project we have undertaken this week at Booth 314, where, in partnership with Cinnober Financial Technology, we conduct short interviews with industry participants on the important topics facing the financial markets, in what we are calling “Sweet 16: The Tops For 2016.” What technology, regulation, exchange or macroeconomic issue or trend will be most important to our industry next year? We will take the 16 best ideas and thoughts and package them in a John Lothian News video series.

Interestingly, very few of yesterday’s participants stuck to one topic – a true testament to how interwoven these topics are to the industry, and this fact is punctuated by today’s innovation.

The ever-popular Exchange Leaders panel looked at the challenges of the lack of liquidity and the concern that the fragmentation common in the equity markets could infect the derivatives markets. Market making programs help provide liquidity, but there, too, the equity model is problematic, as market makers are finding ways to put on “risk free” trades, ICE CEO Jeff Sprecher said. Eurex CEO Andreas Preuss agreed that transparency is needed around exchanges’ market making programs and said Eurex’s program details are all publicly available. He said that individual deals with market makers should be abolished and that “stupid stipends won’t help the industry overall and have never proven a good way to create sustainable open interest in these programs.”

Paul Pantano, partner at Cadwalader, Wickersham & Taft LLP, chucked a few wry barbs at regulators during the sparsely attended end of day “Commodities: Will Hedging Survive” panel, — sparsely attended, we’d assume, because beer had already appeared in the Exhibit Hall.

“The good news is the longer the [position limit] rules take, the better they’ll be.”

“In the U.S., deadlines only apply to market participants, not to regulators.”

And if anybody was wondering, Pantano revealed he likes Oreos during a discussion of the ongoing anti-manipulation case against Kraft Foods.

During the same commodities panel, Matthew Chamberlain, head of business development at the LME, had a few colorful analogies from across the pond, the best of which was “the snake in the tunnel,” a reference to the need for flexibility in new rules and regs (and not, as was suggested, a less family-friendly meaning).

And one of the most important items of the week, is the return of CME Group’s Kim Taylor who has quietly returned to work, looking healthy again and giving us that signature laugh. Welcome back Kim.

Lead Stories

Valeant Pharmaceuticals Intl Inc Answers the Short-Seller Casting Call
Adam Warner – Schaeffer’s Investment Research
We’ve all seen the short-seller movie before. The plot is always the same: Short Seller makes claims about his public target. Media picks up the story. Shares tank. Target company defends itself by attacking the short seller without addressing much about the claims themselves. Media takes the bait and starts questioning the short seller.

Reality Check – VIX, SPX, and Non-Farm Payrolls
Russell Rhoads – CBOE Options Hub
The first Friday of the month means different things to different people. For instance, at the Rhoads household that’s taco night! However, in the world that is the financial markets the first Friday of the month is (typically) the day that the market digests the Non-Farm Payrolls number. This is often the first number to give us insight into the economy from the previous month. For example this coming Friday’s Non-Farm Payroll report discusses changes in employment during October.

A sign oil prices could be headed even lower
Lawrence Lewitinn – Yahoo Finance
Crude oil prices have been hovering in the $40-range for months, but could be headed even lower.
A leading indicator of sentiment in the oil markets – the CBOE Crude Oil Volatility Index (^OVX, referred to as the “Oil VIX”) – closed at 41.54 on Wednesday. Though down from the mid 50s in July, it has been above 30 for much of the year. Last year, when crude prices were around $100 per barrel, the Oil VIX rarely poked above the 20 level.

What Do We Get Wrong About the VIX? [Video]
Watch the video – Yahoo Finance
NYU’s Volatility Institute Director Robert Engle discusses market volatility. He speaks on “Bloomberg Surveillance.”

Broad asset class rally drives positive performance for hedge funds in October
Dovish language from the European Central Bank and language from the US Federal Open Market Committee, interpreted as positive on growth while remaining data dependent, drove markets higher last month, according to the latest Hedge Fund update from GAM.

Ride out volatility
FT Adviser
US: With rising rates, stock market will remain volatile, so keep calm, stay patient and stay invested

Buy The Dip Just Took a Bit Longer as S&P 500 Recovers From Rout
Who stands to win with the Standard & Poor’s 500 Index posting its biggest monthly advance since 2011? How about investors who started pumping money into the market as U.S. stocks bottomed in August and haven’t stopped since.

S&P 500 has climbed a long way very fast
James Mackintosh – Financial Times
Before it was so rudely interrupted by Janet Yellen, Fed chair, on Wednesday, the rebound in US stocks of the past six weeks had been the biggest since the recovery from the country’s near-default in 2011. It is also the fifth-biggest over such a short period in the past decade.


Join our Talented Family
We’ve made quite the impact in the young life of our company. From the original 13 employees who built a stock market from the ground up in 2005, we’ve grown to become the second-largest U.S. stock exchange and largest pan-European stock exchange. Learn about our epic rise.

BATS Chi-X Europe Sets New Pan-European Market Share Record
Press Release
BATS Chi-X Europe (BATS) today reported October data and highlights, including a new record pan-European market share of 26.0%. The previous record market share, of 25.9%, had been set in November 2011.

LSE in talks with Broderick to head Curve
Luke Jeffs – Futures & Options World
The London Stock Exchange Group is in advanced talks with swaps expert Sandy Broderick about becoming chief executive of its new futures exchange CurveGlobal.
Broderick, currently the chairman of interest rate venue GMEX, is said by sources to be holding this week late-stage talks with the British exchange and its various backers about becoming the chief executive of the futures exchange set to launch in the second quarter of next year.

World Federation of Exchanges calls for uniform ESG disclosure from listed companies
Barry B. Burr – Pensions & Investments
The World Federation of Exchanges called on exchanges Wednesday to embrace a set of 34 environmental, social and governance factors into their disclosure guidance for companies listed in their markets to provide a uniform corporate reporting framework for investors.

Regulation & Enforcement

Sanctions, Spoofers, Bits and Gold
Matt Levine – Bloomberg
One important lesson from the last few years of bank scandals is: Don’t put it in writing. A lot of people got that wrong. Fine. But the really surprising thing is the number of people who came so close to getting it right, but for one small mistake. They knew not to put it in writing, and they told their colleagues not to put it in writing. Their mistake — it is a subtle one — is that they told their colleagues not to put it in writing in writing.

***JB: I can imagine the email must have been something like this, “Ok guys, we’re totally going to do something illegal so whatever you do don’t write any of it down or the Feds will get us!”

Mifid II phase-in on the cards, says MEP Kay Swinburne
Tim Cave – Financial News
One of the European politicians responsible for approving the revised Markets in Financial Instruments Directive has said the new trading rulebook will likely be phased in to help firms comply with the mammoth legislation.


MetaTrader 5 Launched Live on SAFEX by South African Broker 28E Capital
One of the leading South African brokers 28E Capital has officially launched MetaTrader 5 in the South Africa Futures Exchange (SAFEX). This has been made possible through the active participation of the official MetaQuotes’ South African Agent Derivative System Technologies.


Overextended S&P 500 places put options in play
Serge Berger – TradingFloor
The month of October brought about one heck of a rally for stocks and saw the benchmark S&P 500 rip higher to the tune of 10%, which has so far continued into the first few trading sessions of November.
The near-term overbought readings through a technical lens are now, however, reaching historical proportions. This coupled with the low implied volatility of options makes purchasing some put options either for speculation or as protection a solid choice at the current juncture.

Whole Foods’ options activity signal 10 pct post-earnings move
Angela Moon and Saqib Iqbal Ahmed – Reuters
Whole Foods Market Inc shares are expected to swing about 10 percent following its fourth-quarter earnings report on Wednesday, options activity indicates, signaling more volatility for a stock that has lost half its value since the start of the year.

S&P 500 may be ‘overbought’, but think before you sell
Wallace Witkowski – MarketWatch
With the recent rally in the S&P 500 index, one indicator is showing the index is “overbought,” but before you start hitting the sell button, consider that historically overbought conditions don’t necessarily indicate an imminent selloff.

Trading: It’s About Leverage and Volatility. Stocks and Commodities Offer an Interesting Comparison
Fred Oltarsh – Inside Futures
It is often thought that commodities are the most volatile markets. Look at the movie Trading Places, the 1980’s classic which portrayed the volatility of the Orange Juice market. In reality, though, as seen in the chart below, there are numerous stocks which are as volatile, or more volatile than most commodities. Volatility can be a joy, but also a curse. Getting caught on the wrong side of a move, or a gap opening, can be quite painful. Another consideration when trading is leverage. Commodities have a significant advantage in bang for the buck. Margins on commodities rarely exceed 10-15%, while the margin on stock is typically 50%.

Gold ETF pivots around Fed expectations
Jamie Chisholm – Financial Times
If US jobs data cement expectations for a December rate rise by the Federal Reserve, then keep an eye on gold.
The chart below shows how SPDR Gold Shares (GLD), an exchange traded fund that tracks the precious metal, has been following CBOT two-year US government


Sentiment Polls, Fund Flows and Short Interest Are Great Guideposts
Bob Lang – CBOE Options Hub
Sentiment polls and surveys are a quick and easy way to see where money is being placed, or at least ‘talked about’. They are often good as contrarian indicators, but when they trend it is not safe to bet against the tide. Polls are quite arbitrary and fickle, notice how politicians use them to leverage their position based on what the people are saying. Markets change direction swiftly and with force, hence sentiment polls often shift on a dime.


From Our Man At The 31st Annual FIA Futures & Options Expo
Press Release
The Futures Industry Association made innovation the theme for this week’s annual conference in Chicago and for the first time had an innovation pavilion with early stage technology companies offering solutions that could help the industry.
Andreas Preuss, CEO of Eurex, cautioned the industry against getting too caught up in the innovation wave sweeping financial technology.
Speaking on a panel of exchange leaders, he said that innovation requires space to work without inhibition, it requires creative chaos. As soon as creative chaos is curtailed, the innovation capability begins to decrease.

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