Observations & Insight

April Marketshare via OCC
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Lead Stories

Low Volatility and the Risks of Crowded Trades
Dean Curnutt, Macro Risk Advisors – Bloomberg
Amid an improbable level of calm in markets, it’s worth remembering what Victor Haghani, a partner at Long-Term Capital Management, said in early 1999 about the fund’s implosion, especially given that quiet markets are compelling trading strategies that capitalize on low levels of volatility.

****SD: Gotta say, LTCM references always get me to read more.

Market Recon: The Fear Gauge Is So Tiny, It’s Adorable
Stephen Guilfoyle – TheStreet
Isn’t it just adorable? Cute little fella. The incredible, shrinking CBOE Volatility Index, also known in some circles as the fear gauge, kissed levels below 10 during yesterday’s session. This, for those of you keeping score at home, was the lowest level for the “VIX” since February 2007. French elections? No fear. U.S. budget deal? No fear. Geopolitical risk? Not buying it. Domestic policy uncertainty? Been there, done that, learning to live with it.

****SD: Last night’s Convergex market note from Nick Colas mentioned that the VIX has only closed below 10 nine times since 1990 — each case did not bode well for 12 month returns. Yesterday, it dipped into the 9 handle but ended up closing above 10. Also see the FT’s Slumbering volatility the market surprise for 2017

China H-share volatility at all-time low
David Goldman – Asia Times
The risk of China’s H-shares as measured by the cost of options on the large-cap China ETF has plunged to a record low. Implied volatility on “China VIX” options (traded as VXFXI on the CBOE) stands at just 15%, the lowest since options began trading in 2011. The spread between China ETF volatility and VIX has also narrowed to the lowest on record.

****SD: Now this seems nuts. (Keep in mind that H-shares are listed on HKEX and denominated in HK$. FTSE Russell has a recent blog to keep the various Chinese share classes straight – China’s share class mosaic)

Great Data – The Antidote to Speed and Volatility Stress
Barry Star – Traders News
Automated traders are in an elite club. Every day, they walk a high-stakes tightrope between the potential for big gains and big losses. Whether you’re a market maker, volatility trader, or systematic trader, every day is like a poker tournament held at microsecond speeds. That’s why speed commands so much attention in the machine trading world. Speed is sexy, speed sizzles. In shops that have more of it, their machine-driven trading can move them into or out of positions faster than their competitors. That helps win more often than not, and equally important, helps them avoid getting picked off.

****SD: “I got a fever, and the only prescription is more data!”

The market is baiting copycats of the mystery trader called ’50 Cent’
Joe Ciolli – Business Insider
For a limited time, you can wager on a stock market selloff for a low, low price. The lowest price since 2014, in fact. The trade in question is the purchase of contracts wagering that the CBOE Volatility Index will reach 14 over a 13-day period — in this instance, ahead of May 14 expiration.

****SD: Following this 50 Cent character is far less entertaining than the saga of the nonexistent Nazi gold train in Poland last year…

Volatility Spike Does Not Come Which Leaves MKM Analyst Confused
Mark Melin – ValueWalk
Volatility has been acting “odd,” a research note from MKM Partners observed. Back on March 6, when the research provider made the projection that volatility spike was likely to rise again in the intermediate term, they did so based on historical pattern analysis rather than a fundamental market call. Volatility did jump, but even that relative spike was abnormal.

Trump Threatens Shutdown This Fall After Democrats Win Deal
Jennifer Epstein and Toluse Olorunnipa – Bloomberg
President Donald Trump threatened Tuesday to force a government shutdown later this year after congressional Democrats and Republicans struck a budget deal that largely neglected his priorities.

Exchanges and Clearing

OCC Cleared Contract Volume Down Six Percent in April
OCC, the world’s largest equity derivatives clearing organization, announced today that cleared contract volume in April was 320,547,848 contracts, down six percent from April 2016 monthly volume of 339,522,257 contracts. Average daily volume at OCC is down one percent in 2017 with 17,027,383 contracts. OCC’s stock loan program reported strong volume numbers with April activity up seven percent and year-to-date activity up 17 percent.

CME Group Reached Average Daily Volume of 16.3 Million Contracts in April 2017, up 18 Percent from April 2016
CME Group
CME Group, the world’s leading and most diverse derivatives marketplace, today announced that April 2017 average daily volume (ADV) reached 16.3 million contracts, up 18 percent from April 2016. CME Group April 2017 options volume averaged 4 million contracts per day, up 52 percent versus April 2016, with electronic options averaging 2.4 million contracts per day, up 53 percent over the same period last year. Open interest at the end of April was 121 million contracts, up 10 percent from the end of April 2016.

A Pool Table in Philadelphia Shows Nasdaq’s Thirst for Talent
Brian Louis – Bloomberg
Nasdaq Inc. has traded places in Philadelphia, moving to a new skyscraper with a view and a pool table from an older office as it tries to lure recruits in part from local universities to double its staff in the city.

LORD COPPER: LME’s Chamberlain can steer exchange on middle course
Metal Bulletin
It doesn’t really seem that long ago since the position that has now morphed into CEO of the London Metal Exchange was not much more than a bureaucratic role – it was almost secretarial in ensuring the smooth operation of the instructions given down by the board, at that time made up exclusively of member representatives.

Nasdaq To Cover the ISE exchanges (Nasdaq ISE, Nasdaq GEMX, Nasdaq MRX) Market Data Services Under The Nasdaq Global Data Agreement
Effective immediately, Nasdaq will cover ISE, GEMX, and MRX market data products under the terms and conditions of the Nasdaq Global Data Agreement (GDA).

London Metal Exchange Locates LMEselect Platform at Interxion’s Data Center
Finance Magnates
The London Metal Exchange (LME), the world’s largest market for metals futures and options contracts, has expanded its newly upgraded trading platform LMEselect’s execution and connectivity services to Interxion’s London data center.

Eurex appoints Romanos Daniel as Chief Innovation Officer
Eurex Group
On May 1, Romanos Daniel took on the role as Chief Innovation Officer at Europe’s largest derivatives exchange, which is part of Deutsche Börse Group. As a Member of the Executive Board, he will strengthen Eurex’ innovation focus. „We are excited to have Romanos join our leadership team at a time of uncertainty and constant change in our industry”, says Thomas Book, Eurex CEO and Head of Derivatives Markets Trading at Deutsche Börse Group. “Romanos will add invaluable market expertise in derivatives trading and risk management”.

Short Selling Makes Quiet Start in Middle East After Saudi Debut
Saudi Arabia, the Middle East’s largest share market, became the first in the region to introduce short selling last month. Investors have yet to test the waters.

****SD: If nobody is even willing to short, that doesn’t bode well for for options adoption when trading in that asset comes to Tadawul in a few years.

“We work on delivering attractive and efficient solutions:” Interview with Eurex Clearing AG CEO, Eric Muller
Eurex Group
Following last week’s WFE IOMA conference, Eric Müller shares his viewpoints on the clearing and derivatives landscape.

Regulation & Enforcement

U.S. regulators to delve into ‘too big to fail’ designation
Lisa Lambert – Reuters
The heads of the U.S. financial regulators will meet next week to dive into the sensitive process of labeling companies “systemically important,” better known as “too big to fail.” The Financial Stability Oversight Council will discuss President Donald Trump’s April memorandum instructing the FSOC chair, U.S. Treasury Secretary Steven Mnuchin, to examine how the council makes the designations, according to a notice from the U.S. Treasury on Monday.

Will Trump ‘Do a Big Number’ on the Big Banks?
Andrew Ross Sorkin – NY Times
For a brief moment, Wall Street stopped on Monday, as if time was suspended in an alternative reality. President Trump, for the first time as resident of the White House, said aloud that he was considering breaking up the nation’s biggest banks. Of course, he had said it on the campaign trail, but this seemed different.

FIA steps up opposition to CFTC’s Reg AT
Julie Aelbrecht – FOW
Industry body the Futures Industry Association has stepped up its opposition to the US regulator’s plans to regulate automated trading, calling the proposal “too prescriptive”. The Futures Industry Association (FIA) has written a letter to the Commodity Futures Trading Commission (CFTC) to oppose the commission’s plans for Regulation Automated Trading, a controversial proposal from the US futures regulator. “Proposed Regulation AT is too prescriptive and is neither necessary nor appropriate to address the risks of automated trading,” said Walt Lukken, president and chief executive officer of the FIA.

****SD: Press release from FIA on the issue here.


Equinix completes $3.6 billion deal to buy 29 data centers from Verizon
Ron Miller – TechCrunch
Equinix, an international data center company based in Redwood City, California, announced today that it has completed the purchase of 29 data centers from Verizon for $3.6 billion. The deal was announced in December.


Why Is Volatility So Low And What Should We Do Now?
Vineer Bhansali – Forbes
Last week, the VIX closed at one of its lowest levels in recent history. Why? And what can we do about it? In my view, there are a number of interrelated reasons why option prices and option implied volatility are so low, and they might suggest some ideas for portfolio construction.

****SD: I love the line “and what can we do about it?” Can you imagine if people started calling their local legislators? “Representative Davis? … Yeah, so vol has been real low for a while and people are struggling for benchmark beating returns …. As in volatility … Well, in derivatives markets for— …. Like futures and options on equities, commodities and indices … Well, you know, the CME and CBOE in Chicago trade … Okay, never mind.” (Danny Davis is my House rep, as I live in the 7th District – although, due to awesome gerrymandering Tetris, it’s the 5th District two blocks to my north, one block to my east and six blocks to my south, and the 4th District three blocks to my west. Seriously.)

Amazon vs. Alphabet: Who has the edge in the race to $1,000 per share?
Rebecca Ungarino – CNBC
As Amazon and Google parent Alphabet propel the Nasdaq 100 to new all-time highs this week— and notch record levels of their own — investors may wonder which $900+ technology stock will break the $1,000 milestone first. “Choosing between Amazon and Google is kind of like picking your favorite child. It’s just something we wouldn’t recommend doing,” Jonathan Krinsky, chief market technician at MKM Partners, said Monday on CNBC’s “Power Lunch.”


Option Guide For Dummies: Delta, Gama, Theta, Rho, And Vega
There you are in a conversation with a professional trader about their strategy and suddenly the “inside baseball” terms start rolling off their tongue – Delta Hedging, Short Gamma, Theta Burn, and Vega Risk. You smile and nod without perhaps knowing exactly what these terms mean, and just like that, what started as a good meeting now has you distracted. Let’s face it – while these terms are very common in the options trading space – the average investor or allocator may be saying “it’s all Greek to me” (we couldn’t help ourselves).

****SD: Every week, somebody invariably puts out a guide to options Greeks — this one from RCM Alternatives is actually pretty good with more real life context (in this case the rise of managed futures funds) instead of just Merriam-like definitions.


April barometer shows slight uptick in producer sentiment
CME Group
Producer sentiment toward the agricultural economy inched up six points in April, according to the Purdue University/CME Group Ag Economy Barometer. The barometer increased from 124 in March to 130 in April. The higher reading comes on the heels of two months of declines following January 2017’s all-time high of 153.

Odd Lots: One of the World’s Top Chess Players Talks Chess, Computers and Options Trading
Joe Weisenthal and Tracy Alloway – Bloomberg (Podcast)
On this week’s episode of the Odd Lots podcast, we talk to Hikaru Nakamura, one of the best chess players in the world. Currently rated in the top seven, Nakamura achieved grandmaster status at a younger age than Bobby Fischer. In addition to chess, Nakamura actively trades options, and on this episode he talks about the similarities and differences between the two pursuits. We also discussed poker, what it takes to be a pro chess player, and how computers and artificial intelligence are changing everything.

****SD: Bloomberg had an interview with Nakamura on Bloomberg TV a bit ago that was rather cursory. This podcast covers more, though I’d recommend it for the chess insight rather than the options stuff.

Cauliflower Is the New Kale
Claire Suddath – Bloomberg
For the past four years, chef Jason Weiner has offered a Meatless Monday menu at his restaurant, Almond, in New York. The idea, he says, is to urge omnivores to accept vegetables as a main course. To do this, he relies frequently on a versatile veggie almost everyone likes: cauliflower.

****SD: “Almost everyone” likes cauliflower?! What about the ~2 billion kids on our giant spinning space rock?

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