Observations & Insight

Bits & Pieces
By John J. Lothian
On Monday the Trading Tech 300 program will come to the Chicago Board of Trade Building as Glenstar Properties puts on three merit badge classes for Boy Scouts from around the Chicagoland area.

The classes sold out quickly once listed on the Pathway to Adventure Council website (http://www.pathwaytoadventure.org). Several boys from my troop are signed up as they wanted to take a merit badge class in the building that was Wayne Towers in Batman Begins. It was also in The Dark Knight as itself. That is just too cool.

Glenstar is offering merit badge classes in Engineering, Electricity and Search and Rescue. One of the ideas behind the Trading Tech 300 program is to put the teaching of the merit badge materials in the context of a business where those skills are being used every day. Glenstar really stepped up for this program with these offerings.

Two other current offerings for Trading Tech 300 are the CBOE offering First Aid and Finger Printing and the National Futures Association also offering Fingerprinting.

These are early days in Trading Tech 300 program, but I could not be happier with the response from firms and scouts to the program. Advantage Futures kicked off the program in July with the Chess and Public Speaking merit badges and the feedback was great.

It is not a coincidence that I am focused on helping young people get exposed to and learn about our industry and the companies in it. Whether it is Trading Tech 300, the Summer Intern Education Program or this newsletter and our social media outreach, I am trying to reach, inform, inspire and educate a new generation of industry professionals, traders, and other market players and participants.

Before I leave this industry, I want to leave it better than I found it. And it was unbelievably great when I started. I believe our best days are ahead of us, but it will take the next generation to get us there. Part of that next generation might just be a bunch of eager Boy Scouts wanting to learn and advance in ranks. Thank you to all who are participating in Trading Tech 300 and making this investment in our future.

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Speaking Engagement: ISE’s Gary Katz Speaks Out Against IRA Options Rule
Sarah Rudolph – John Lothian News
Gary Katz, president and CEO of the International Securities Exchange, testified before a U.S. Department of Labor hearing Thursday in the hope of persuading the agency to modify a proposed rule change that could take away investors’ ability to use listed options in their IRA accounts.
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Lead Stories

WWII Technology Used For HFT, Small English Town Discovers
Mark Melin – ValueWalk
Dunkirk is a small village laced with typical English charm that is just now waking up to the technical revolution in high speed trading. Located 57 miles east of London close to the English Channel, in-between Faversham and Canterbury parish in southeast England, it is an odd place for stock trading to emerge as a contentious issue, but that is the case.
A rather obtuse 360 foot metal tower that stands out amidst the picturesque scenery, used as a radar tower during World War II to warn against approaching German aircraft. After being abandoned its fenced security surrounding a steep hill with ominous old signs warning trespassers that the 26 acre facility is protected under the Official Secrets Act is the perfect location for another secretive venture: high frequency trading.
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****SD: Happy somebody else picked up on this story. The Daily Mail article referenced was titled “How shadowy high-tech traders are using this WW2 radio mast to cream billions off our pensions.” Talk about skewed…

Bullish Signal Emerges In Emerging-Market ETF Options
Saumya Vaishampayan – WSJ
The options market is signaling that beaten-up emerging market stocks are due for a bounce.
The iShares MSCI Emerging Markets Exchange-Traded Fund (EEM) has tumbled 10% this quarter so far, and on Wednesday hit a fresh nearly four-year low.
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****SD: With the first Bears preseason game in the books and the NBA schedule released — Bulls opener is October 27 versus the Cavaliers — I have to say that all the bullish/bearish articles take my brain in a different direction than usual. (It’s safe to say that Chicago is bullish on the Bulls and bearish on the Bears.)

Is the Dow Headed for Its Most Volatile Year Since the Recession?
Karee Venema – Schaeffer’s Research
It’s been 18 sessions since the Dow Jones Industrial Average (DJIA) tracked an intraday range of fewer than 100 points, or since July 20, to be exact. The trend continued yesterday, with the blue-chip barometer exploring a range of 140.4 points. However, this volatile price action is just more of the same for the DJIA — with intraday swings of 200 points or more running above average this year.
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Behind the $5.5 million bet against Apple
Alex Rosenberg – CNBC
Apple shares have come under serious pressure in the past month. And one big trader appear to be betting on more downside for the tech giant.
In a big Thursday options trade, one trader appeared to bet $5.5 million that Apple is going even lower.
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Gross’s Fund Rises After Tweaking ‘Shorts of a Lifetime’
Miles Weiss – Bloomberg
Bill Gross finally figured out a way to execute what he called his “shorts of a lifetime.”
Gross accurately predicted earlier this year that German government debt and Chinese stocks were poised for a slump, but didn’t directly wager against these markets. Instead he sold insurance on German bunds, which depressed returns at his Janus Global Unconstrained Bond Fund in late April and May when the bonds fell faster and further than Gross had anticipated.
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Volatility, High-Frequency Hacking Algos, and That Brady Sketch
Adam Warner – Schaeffer’s Research
Another week, another scare, another churn, another time for some random short topics as I ready for a second career as courtroom sketch artist
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Hedge Funds Bloodied by China Rout in Worst Month Since 2011
Bei Hu – Bloomberg
What China giveth, China taketh away.
After riding a market boom to return almost six times the global industry average in the first five months of this year, Greater China-focused hedge funds crashed to earth with the stock rout in July, their worst month since September 2011. Funds run by Pine River Capital Management, EJF Capital LLC, Top Ace Asset Management, Zeal Asset Management and Springs Capital (Hong Kong) were among those that lost money.
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Currency-Hedged ETFs Soften Blow of Dollar’s Rise
Leslie Josephs and James Ramage – WSJ
Investors are pouring billions of dollars into a fashionable corner of one of the fastest-growing areas on Wall Street: exchange-traded funds that aim to protect investors against
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Regulation & Enforcement

Wetjen to step down as CFTC Commissioner
Cian Burke – Futures & Options World
Mark Wetjen, the longest serving member of the Commodity Futures Trading Commission (CFTC), on Friday announced his resignation from the role, effective August 28 2015.
Wetjen, who joined the regulator in October 2011, has played a key role implementing the Dodd Frank Act, and served as acting Chairman between January 2014 and June 2014, following the resignation of Gary Gensler.
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Technology

A New Fast Lane for Traders Spurs Plan to Thwart Exploiters
John Detrixhe and Sam Mamudi – Bloomberg
ICAP Plc is introducing a speed bump on its EBS currency market that prevents some customers from leveraging a new, faster fiber-optic cable connecting New York and London from taking advantage of other clients.
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Euronext adds derivatives data to mobile app, preps real time pro app
WatersTechnology
European exchange group Euronext is planning to release a premium version of its mobile application for Apple iOS devices with real-time data to cater to active traders, after adding delayed market data from its options and futures markets to its free-of-charge version of the application this week.
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Leonteq Taps Asia in Push to Boost Derivatives Factory Users
Jan-Henrik Foerster and Jan Schwalbe – Bloomberg
Leonteq AG, the second-best performer in Switzerland’s SPI Index since its 2012 listing, is seeking to triple the number of users for its derivatives software after signing up the company’s first Asian client last year.
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Strategy

The Investors’ Dilemma – Do Not Blindly Buy The Dips Anymore
Markos Kaminis – Seeking Alpha
The stock market reversed course Wednesday, turning an opening decline into a green day for the SPDR S&P 500 Trust ETF. But I’m warning investors that we need to treat this market differently than how we have grown accustomed to. Times have changed, and a very sensitive stock market should continue to exhibit volatility into this fall. In fact, I’m anticipating a market correction sometime over the next couple months. If I’m right, then that means we have to stop blindly buying the dips.
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Swedroe: Virtues Of A Long/Short Strategy
Larry Swedroe – ETF.com
Much of the academic research on commodities has focused on the impact of including an allocation to long-only commodity strategies in a portfolio. Joelle Miffre and Adrian Fernandez-Perez add to the literature with a paper on the performance and volatility of long-only and long-short commodity portfolios, as well as their conditional correlation with equities (represented by the S&P 500 Index) as well as bonds (represented by the Barclays Capital U.S. Aggregate Bond Index).
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Education

How two great investors handle losses
Joshua Brown – Business Insider
It’s been a tough month for investors. As of yesterday, roughly half of the stocks in the S&P 500 have fallen into bear markets, with declines greater than 20%. International stock markets have fallen dramatically, with the losses accelerating on the heels of the latest Asian currency “event”.
We’ve seen stuff like this before. There is a worthwhile lesson in considering how a pair of history’s greatest investors have dealt with this kind of thing in the past.
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