Observations & Insight

Bits & Pieces

Last call.

Our MarketsWiki Education series in London will be held on Monday. Do you know any interns, students, or young professionals who would benefit from hearing about our industry from the likes of Scott O’Malia, Guy Simpkin, Steve Woodyatt, Steve Grob, Rob Russell, Andrew Gibbins, Cathy Lyall and more?

It’s not too late to send them our way. Register http://bit.ly/1XxdC46. Hosted at the University of Chicago Booth School of Business, 25 Basinghall St, London EC2V 5HA, there are three 90 minute sessions: from 10:00 to 11:30, 13:00 to 14:30 and 15:00 to 16:30. Attend one or all three, with the final session followed by drinks.

Help us, help inform our next generation of professionals and leaders in this space. CME Group, our Global Premier Sponsor, has made this event possible and free to attendees.

Today’s newsletter features the second video in our three-part series about the ongoing impacts of market regulation. While at FIA Expo 2016, JLN interviewed a number of participants in today’s markets like exchange leaders and technologists. If you want to gain some insight regarding how they approach the shifting regulatory landscape, the video is well worth a look. If you missed part one yesterday, you can check that video out here. Tune in to part one to hear the CME Group‘s Phupinder Gill, Hazem Dawani of OptionsCity, Trading Technology‘s Drew Shields and Dave Snowdon of Metamako. Scroll down for part two.


Impact: Navigating Regulation and What Comes Next, Part 2

At FIA Expo 2016, JLN spoke with a variety of participants in today’s markets about the ongoing effects of regulation and what those mean for the future of their businesses.

In Part 2 of our three-part series, Gary DeWaal, special counsel with Katten Muchin Rosenman LLP; Matthew Chamberlain, head of business development for LME; John Avery, director of client and industry engagement, Derivatives Utility at FIS; and Rob D’Arco, CEO of Rival Systems, share their take on topics like the challenges facing swaps dealers, the pace of regulation and the rising cost of compliance.

Watch the video »

Lead Stories

Market change doesn’t have to be violent to hurt
Roger Blitz, Dan McCrum and Robin Wigglesworth – Financial Times
As Halloween arrives, it seems the only scare investors have to worry about is opening their curtains to see a malevolent clown on the lawn. Financial markets are remarkably calm, with almost every measure of fear and turbulence flatlining once again. Part of the reason is the dwindling chance a President Donald Trump will be addressing the world from the White House Rose Garden after November’s election. Each poll indicating victory for Hillary Clinton is a signal of political continuity that has eased concerns of a disruptive election in the world’s most powerful country.

U.S. Said to Probe Tullett, BGC, TFS-ICAP Over FX Options
Liam Vaughan, Matthew Leising and Matt Robinson – Bloomberg
CFTC asking whether interdealer brokers made fake bids; Some individuals said to cooperate; firms do internal probes
U.S. authorities are investigating whether middlemen in the $5 trillion-a-day foreign exchange market posted fake bids, rigged auctions and gave confidential information to others who then profited from it, according to people familiar with the situation. The investigation, by the U.S. Commodity Futures Trading Commission and New York’s Attorney General, is focused on the currency options desks at several interdealer brokers, staking out new territory after U.S. officials prosecuted banks for colluding to manipulate foreign-exchange rates.

Buy Side Looks to Fill Market-Making Vacuum
Shanny Basar – Traders News
Nearly half of hedge funds said they would evaluate being market makers in certain securities as banks pull back from some markets, according to a new survey from State Street. In a report “Let’s Talk Liquidity: Opportunities in a New Market Environment”, State Street surveyed institutional investors on whether market liquidity has deteriorated. Banks have shrunk their balance sheets in response to the increase in capital requirement from regulations such as Basel III, Dodd-Frank and Solvency II and pulled back from some activities. The study had 300 global respondents which included 150 asset owners and 150 asset managers, including 50 hedge funds.

ExxonMobil eyes setting up large-scale trading division
David Sheppard and Neil Hume – Financial Times
Rivals’ profits are buttressed in downturn by buying and selling third-party oil
ExxonMobil is investigating building a full-scale trading division for the first time in its history, as the world’s largest listed energy company searches for new ways to boost profits during the oil price slump. The move would be a huge departure for a company that has deliberately shunned trading other producers’ oil, and instead focused on exploration for crude, production and refining.

LME must tackle rivals, scepticism in race for London’s gold market
Ewa Manthey – The Bullion Desk
The London Metal Exchange (LME) must overcome a general sense of scepticism and an increasingly crowded marketplace when it rolls out its new precious metals contracts next year. Working with the World Gold Council (WGC) and with support from five banks and one proprietary trading house, the LME will launch London spot, futures and options contracts for gold and silver in the first half of 2017. Platinum and palladium contracts will follow later. But the market is largely sceptical about the new LME/WGC precious metals venture for now. “I just don’t have a lot of confidence that the LME can influence the precious metals market,” one market participant said.

No Signs Of Profit Taking In VIX ETFs
Peter Tchir – Forbes
The VIX index has increased every day this week. As I wrote about this weekend in Doubling Down On VIX, we saw inflows into UVXY, TVIX and VXX in spite of VIX falling. This week, with VIX rising, we have actually seen the shares outstanding increase.

Oil: Tell-Tale Signs in U.S. Inventories
Erik Norland – CME Group
For those hoping for a sustained rebound in oil prices, U.S. inventories might present a mixed picture. First the bad news: crude oil inventories are still near record high levels and are continuing to rise on a year-on-year basis. Gasoline and ultra-low sulfur diesel (ULSD) inventories are also increasing year on year but to a lesser extent. Inventories of all three remain near seasonally-adjusted record highs.


CBOE Holdings Reports Solid Third-Quarter Results
CBOE Holdings, Inc. (NASDAQ: CBOE) today reported net income allocated to common stockholders of $40.3 million, or $0.50 per diluted share, for the third quarter of 2016, compared with $67.2 million, or $0.81 per diluted share, in the third quarter of 2015. Last year’s third quarter financial results represent an all-time high for the company, while this year’s results include $8.6 million of acquisition-related expenses. Adjusted net income allocated to common stockholders was $47.2 million, or $0.58 per share, compared with $63.0 million, or $0.76 per share, for the third quarter of 2015. Operating revenue for the quarter was $156.2 million, down 16 percent compared with $187.0 million in the third quarter of 2015.

****SD: Also see MarketWatch’s CBOE revenue slides 16% on declining trade volume and the WSJ’s CBOE Holdings Posts 16% Revenue Decline on Sliding Trade Volume

CBOE eyes ETF market after Bats merger
Luke Jeffs – Futures & Options World
US options market believes the Bats deal will strengthen its hand in the ETF market
US options market CBOE said its planned merger with exchange rival Bats Global Markets will position the combined entity as a full service trading and listing entity in the growing exchange-traded products market. CBOE said on Friday Bats’ equity trading capabilities combined with its own equity volatility index business will enable the merged firm to provide the full-range of index, trading and data services required for exchange-traded product providers and users.

Deutsche Boerse sells shares in Bats amid flat quarterly earnings
Hayley McDowell – The Trade
Deutsche Boerse has sold approximately a third of its shares in Bats Global Markets for $86 million, as the Group reports a relatively flat third quarter. The earnings report explained that following the sale, “the company expects a positive impact on the earnings after tax of around EUR23 million in the fourth quarter 2016.” The shares were sold on 26 October this year, to “optimise its portfolio of shareholdings.”

CBOE hires Purohit to boost London office
Luke Jeffs – Futures & Options World
US options exchange is keen to drive more European business to its Chicago markets
CBOE Holdings has hired an experienced futures and options sales trader in London to boost the US options exchange’s European sales effort out of its new London office. CBOE hired last month Hemal Purohit, a futures sales trader with almost 20 years’ experience, to work with Matt McFarland, the head of CBOE London who officially opened the Chicago group’s first European office last month.

Bitcoin Futures and options Exchange ‘Deribit’ Announces Zero-fee Trading
Deribit, the only full-featured Bitcoin futures and options platform has announced the removal of all trading fees for the remainder of 2016. “We want to introduce our platform to anyone interested in Bitcoin futures and options trading,” Said Marius Jansen, CMO of Deribit. He added, “So we decided to offer free trading until the end of the year.”

****SD: Free remains my favorite price.


Tripathi swaps UniCredit for Capula
Mikael Latreille – FX Week
Manu Tripathi, a former head of emerging market (EM) foreign exchange options trader at UniCredit, has joined hedge fund Capula Investment Management. Based in London, Tripathi had worked at UniCredit since January 2015. He joined the Italian bank from VTB Capital (2013 – 14), where he headed the FX derivatives desk and was responsible for managing risk, introducing new products and expanding the…

Regulation & Enforcement

Recent Insurer Victories In Indexed Annuity Class Actions – Insurance
In Abbit v. ING USA Annuity and Life Ins. Co., on August 30, a federal court in California granted summary judgment for the insurer on five claims the court had recently certified for classwide resolution. Three claims—for breach of contract and violations of California’s Unfair Competition Law (UCL), and Financial Elder Abuse statute—rested on allegations that ING set “the prices of … undisclosed derivative structure so low that the true values of the contracts were below” the minimum guaranteed contract values (MGCV) required under the Insurance Code. The other two claims, both for violation of California’s securities laws, were predicated on allegations that indexed annuities were securities under state law because “ING’s internal execution of the ‘derivatives’ and ‘options’ transfers market risks from ING to” annuity owners.

Who Begets Liquidity?
John D’Antona Jr. – Traders News
The Securities and Exchange Commission is taking new and bold steps to ensure liquidity in the $68 trillion asset management industry with the passage of new rules regarding disclosure and holdings. Of importance to the asset management and trading industry is how the new SEC rules affect their ability to manage liquidity, the impact on investable assets, decisions on when to buy and sell, as well as on holding smaller cap stocks. The SEC has mandated that funds assess, manage, and periodically review their liquidity risk, based on specified factors. Liquidity risk would be defined as the risk that a fund could not meet requests to redeem shares issued by the fund without significant dilution of remaining investors’ interests in the fund.


Wall Street’s Frantic Push to Hire Coders
Hugh Son – Bloomberg
For almost five years, Gregory Furlong worked 50-hour weeks as a shipping clerk at a Best Buy two miles from his childhood home in Wilmington, Delaware. It was a kind of employment purgatory for a computer obsessive who tinkers with motherboards in his free time. So last year, Furlong, 30, enrolled in a three-month coding boot camp that uses HackerRank, a web platform that trains and grades people on writing computer code. After earning a top ranking for Java developers globally, Furlong was hired by JPMorgan Chase & Co. in December for its two-year technology training program.

The Impact of Fintech on the Buy Side
Sam Chadwick, Thomson Reuters – TABB Forum
Enormous investments in fintech in four key areas has put significant pressure on traditional financial services players. But to a large extent, the buy-side industry has seen little action so far.

Krzana is the search engine of the future
Peter Lee – Euromoney Magazine
Krzana aims to give users an edge over rival investors by sucking the rare, important signals that will move markets out of the vast and noisy din of financial news media. Can you remember where you were on the morning of April 9, 2015? If you work for or own shares in Oil & Gas UK, you probably do. That was the day the company announced the discovery under Horse Hill near Gatwick Airport of the largest onshore recoverable oil reserves in the UK for 30 years.

Regulatory Sandboxes: The Road to Fintech Redemption?
Finance Magnates
A race is under way. Spurred by the initiatives of the UK’s Financial Conduct Authority, countries are embarking on missions to establish themselves as the preeminent jurisdiction for all things fintech. The source of their motivation isn’t difficult to identify. Financial institutions, traditional bellwethers of economic growth, have faced headwinds spanning from tepid markets to greater regulatory oversight. Revenue streams have been affected, hiring reduced and wages frozen.


The Volatility Indicator Signals Not A Dull Moment Towards Election Day
Ron Honig – Seeking Alpha
In a previous article on the topic of volatility, I introduced the Z(30) moving average, which is the ratio between the previous 30-day standard deviation of the S&P 500 (represented by SPY) to the average price of SPY during these 30 trading days. The Z(30) indicator essentially measures the S&P 500 volatility based on historical data, unlike indicators like the VIX which is based on future options.

Block Trade Analysis – HSY Earnings Trade
Russell Rhoads – CBOE Options Hub
In honor of National Chocolate Day, The Hershey Company (HSY) released what must be considered a sweet earnings report for investors. As I write this the stock is at 100.50 up 4.99 or just over 5% on the day. I decided in honor of the ‘holiday’ and HSY’s great results that I would go looking for a trade that correctly anticipated today’s rise in shares.


General Electric Pursues Deal With Baker Hughes
Dana Mattioli, Kate Linebaugh, Joann S. Lublin and David Benoit – WSJ
General Electric Co. is in talks to merge its oil-and-gas business with Baker Hughes Inc., according to people familiar with the matter, a transaction that would dramatically reshape the industrial giant.

Twitter Couldn’t Hold Onto Vine’s Audience—or the Stars It Created
Ellen Huet and Polly Mosendz – Bloomberg
Jerome Jarre hasn’t posted on Vine in more than a year. The 26-year-old goofy Frenchman once ruled the six-second looping video platform, where he drew in millions of viewers with clips of him walking up to unsuspecting strangers and saying, “I love you.” But by 2014, he was already doing similar videos on Snapchat, where teens were beginning to spend hours sending each other selfies.

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