Observations & Insight

Did you know?
Jim Kharouf and Spencer Doar – JLN

Moscow, OneChicago, MexDer, Fear Gauge and Trump Street with an Irish twist. No, they are not connected.

One of the interesting things about updating annual volume figures on our MarketsWiki site is the snapshot of how a particular exchange has been doing over a number of years. The FIA Annual Volume Survey shows a couple of unusual suspects in the top 5 in 2016 with the National Stock Exchange of India coming in second and the Moscow Exchange at number four in terms of derivatives volumes.

At the IOMA: World Federation of Exchanges conference last week in Frankfurt, I sat down with Sergei Mayorov, director of group strategy at the Moscow Exchange to see what was driving derivatives volumes. Last year, the exchange posted 1.95 billion contracts, up 17.5 percent from 1.69 billion in 2015. He said volatility in the Russian ruble, not to mention volatility in general, helped. The exchange, despite geopolitical challenges, still derives about 45 percent of its volume from outside Russia. The challenge now, he said, is to generate more trading from within the country. Less than one percent of Russians have a stock or futures account.

  • Did you know that MexDer, the Mexican Derivatives Exchange ranked fifth among global derivatives exchanges in 2006 with 274.5 million contracts traded? Ten years later, the exchange’s derivatives volumes slumped to 12.9 million in 2016, ranking the exchange 40th, according to the FIA Annual Volume Survey.
  • OneChicago LLC is quietly but steadily growing its volume. After all the hype cooled off for single stock futures following its launch in 2001, OneChicago posted volume of 12.3 million contracts last year, up a modest 5.8 percent from a year earlier. In 2010, its annual volume was just 4.9 million contracts. Some yeoman’s work by David Downey and Tom McCabe.
  • Did you know that Russia Row and Trump Street in London are connected? We mean they are actually on the same street, which intersects with King Street, which intersects with Cheapside. You can’t make this up folks. (Thanks to Marc Millington-Buck from the Moscow Exchange.)
  • From CBOE‘s 44th Anniversary blog post: “In 1998 Steve Sears first referred to the VIX as “The Fear Index” in Barron’s.” And…
  • Professor Robert E. Whaley, one of the key contributors to the creation of the VIX and 2015 Joe Sullivan Award winner, travels to Ireland at least two times a year and built a fully functioning Irish-styled pub in his basement.

Lead Stories

The market’s risky bet on stability
Christian Pfrang and Robin Wigglesworth – Financial Times
The relief with which markets greeted the victory of centrist Emmanuel Macron in the first round of France’s election this week has only sharpened the appeal of a trade whose popularity is also raising fears of turbulence should it unravel. Selling insurance against the risk of sharp price movements across markets has been an easy and profitable trade in recent years, helping portfolios generate additional returns during the era of ultra-low bond yields and significant underperformance by many hedge funds and other active investors.

****SD: The implied vs realized volatility play, funds harvesting extra returns via options (covered call popularity, etc.), the whole “picking up pennies in front of a steamroller” thing — that’s the gist of this wide-ranging article.

Bets on a stock market rally using options just hit record levels
Evelyn Cheng – CNBC
Traders are buying so many S&P 500 call options right now that the ratio of those contracts to put options hit an all-time high Wednesday, according to Credit Suisse.

****SD: I don’t get the Trump tax plan reaction because what are the real chances it gets implemented?

Euro Is Suddenly Everyone’s Favorite After First Round of French Election
Stefania Spezzati and Anooja Debnath – Bloomberg
What a difference a week can make. Perceived as the riskiest currency on the planet until Sunday’s French election, the euro is suddenly everyone’s favorite.

Trading and cost cutting jump-start Nomura’s wholesale profits
Tim Burke – Financial News
A strong start to 2017 in sales and trading, as well as lowered costs after a restructuring, have had a dramatic impact on the bottom line in Nomura’s wholesale banking business. The Japanese bank published results today for the three months to March 31 – its fiscal fourth quarter – as well as its full-year numbers for 2016/2017.

****SD: The major cost-cutting comes from the following: “Last year Nomura announced a new strategic plan that included closing its equity derivatives, delta one trading, equity financing, and equity futures and options businesses in Europe, the Middle East and Africa, streamlining Emea spread product sales and research, and shutting its domestic Emea equity underwriting business.” In other Nomura news, Nomura Eyes Munich, Frankfurt as Post-Brexit Options for EU Base

Chicago fintech, the rising star in innovation
Mark Tebbe – Chicago Business Journal
Since its founding, Chicago has been the home to startup and modest financial institutions which have grown into global corporations. With names such as the Chicago Board Options Exchange, Chicago Mercantile Exchange, Citadel, Discover, DRW Trading, JPMorgan Chase, Morningstar and Northern Trust, these financial titans lead this industry as some of the most respected firms in the world.

Shale revolution casts shadow over longer-dated US oil futures; Rising US shale oil production is squeezing demand for three and four-year oil futures contracts
Gregory Meyer – FT
While the US is breaking population records, states such as Illinois and West Virginia have lost people in recent years.

****SD: More oil news from the WSJ – Oil Shortage Feared by 2020 as Discoveries Fall to Record Low

Exchanges and Clearing

CME Group Inc. Reports Strong First-Quarter 2017 Financial Results
CME Group
CME Group Inc. today reported revenue of $929 million and operating income of $601 million for the first quarter of 2017. Net income was $400 million and diluted earnings per share were $1.18. On an adjusted basis, net income was a record $416 million and diluted earnings per share were a record $1.22. Financial results presented on an adjusted basis for the first quarters of 2017 and 2016 exclude certain items, which are detailed in the reconciliation of non-GAAP results.1

****SD: Lots o’ records set.

Nasdaq warns of potential revenue impact following Virtu-KCG tie up
Hayley McDowell – The Trade
Nasdaq has said its data and connectivity services businesses could be negatively impacted following the merger between Virtu Financial and KCG.

CEO CHAT: Apex Clearing’s Capuzzi Says T+2 is Good Start, But T+1 Better
John D’Antona Jr. – Traders News
Recently, the Securities and Exchange Commission (SEC) voted to reduce the clearing duration for securities trades from trade date plus 3 days (T+3) to T+2. While Wall Street cheered what it viewed as a long overdue reduction, one chief executive said an even shorter clearance cycle would better serve the markets.

Spencer rails against EU’s Brexit plan to take back euro-clearing
Lucy McNulty – Financial News
Financial services world-wide would be worse off if European Union leaders are successful in their efforts to repatriate the clearing of euro-denominated derivatives, the founder and chief executive electronic trading firm NEX Group has warned. Michael Spencer told an audience of academics and business professionals at the Prosperity UK conference in London that an effort to shift London’s euro-denominated clearing business back to the European Union would penalise the Europeans and leave London, Europe and “the whole financial structure worse off”.

****SD: Any confusion about what NEX Group can be cleared up by reading Jim Kharouf’s piece NEX Stop, The Future Of Markets

Regulation & Enforcement

‘Fist bumps’ at hedge funds over Trump’s tax plan
Svea Herbst-Bayliss and Jennifer Ablan – Reuters
U.S. hedge fund managers began warming to President Donald Trump soon after his surprise election ignited a powerful stock market rally. Now, his dramatic tax cut plans give them even more reasons to cheer.

****SD: Yeah, brah! Cowabunga, hang loose, or something….

Sebi to issue unified licence to stock brokers for commodity derivatives, equity trading
Sebi’s unified licence will allow a stock broker dealing in securities markets to trade in commodity derivatives without setting up a separate entity, and vice-versa

Special Report: CFTC Reviews Default Management Recommendations
At an April 25 meeting of the CFTC’s Market Risk Advisory Committee, CFTC staff and industry representatives discussed ways to enhance the process used by clearinghouses for managing the default of a clearing member. The discussion centered on a set of recommendations that were developed last year by a subgroup of the advisory committee under the leadership of Susan O’Flynn of Morgan Stanley.


QuantConnect Announces Open-Source Support for Futures and Options
Business Wire
QuantConnect, an open-source, cloud-based algorithmic trading platform, today announced the launch of futures and options support on the platform, enabling users to backtest, research and live trade the new asset classes. QuantConnect users can design strategies that use multiple asset classes for increased diversification and alpha generation. QuantConnect now supports five asset classes: equities, cash foreign exchange, futures and options from opening tick to daily resolution.

Five Ways to Prevent MIFID II Technology Decisions from Going Wrong
Traders News
On 22 March 2017, Vela hosted an executive roundtable in London on the cross asset challenges of MiFID II. In the first of three event reports, we look at how the participants, who came from across the market, emphasised the need to automate more than ever before, and for greater collaboration between buy-side, sell-side, and technology vendors.


Amazon stock options traders defy historical volatility
Tomi Kilgore – MarketWatch
Wall Street’s oddsmakers appear to be tempting fate, as the market for Amazon.com Inc. stock options is predicting once again a much smaller investor reaction to the e-commerce giant’s quarterly report than history would suggest.

Swim Lessons: Synthetics, A Useful Accessory for Your Options Wardrobe
Scott Connor – The Ticker Tape
As any fashion professional would tell you, though your collection of outfits provides the base of your wardrobe, the accessories—those extra little add-ons—can make the difference. If we were to draw a parallel to the options market, the base would consist of your typical options strategies—single-leg options, verticals, straddles, strangles, and such—that make up the core of our daily Swim Lessons shows.

A Low VIX Signals More Stock-Market Gains
Michael Kahn – Barron’s
If history is a reliable guide, the sudden and sharp decline in the CBOE Volatility Index—or VIX—suggests a few more weeks of stock-market strength. The VIX, which is calculated from options prices, is also called the “fear index” for its propensity to spike higher when the market runs into trouble. When investors feel the need to hedge, its value goes up. And when investors feel more confident, the going price of hedging options falls, and so does the VIX.

A popular stock market bear case is flawed
Joe Ciolli – Business Insider
As stock bears tell it, overconfidence can be the death knell of a market rally. While that logic has historically held merit, there are some holes in one of their favorite pieces of supporting data. In recent months, they’ve cited the diminishing number of shares being shorted in the SPDR S&P 500 ETF (SPY), which tracks the benchmark index. After all, it’s at the lowest since May 2007, a period that directly preceded a bear market that saw the S&P 500 drop 55%, according to data compiled by financial analytics firm S3 Partners.


Options Lab webinar: How is the Options market structured? (VIDEO)
Georgio Stoev – TradingFloor.com
Gary Delany, director of European marketing and education for the Options Industry Council, joins Saxo Bank’s product manager for Futures and Listed Options Georgio Stoev to give the lowdown on US and European options markets.


2017 CBOE Risk Management Conference Europe
CBOE Holdings, Inc. (BATS: CBOE | NASDAQ: CBOE) will host the 6th annual CBOE Risk Management Conference (RMC) Europe, from September 11 through September 13, 2017, at The Grove Hotel in Hertfordshire, UK.


ADM names new global trade desk chief as part of wider shakeup – memo
Hugh Bronstein – Reuters
Archer Daniels Midland Co has replaced the leader of its global trading desk, according to an internal memo seen by Reuters on Wednesday, as the company sheds traders around the world while grappling with huge grain supplies that have weakened margins. Gary McGuigan, most recently managing director of global trade at ADM will succeed Gary Towne as president of the global trade desk, according to the memo. The move is in keeping with a time frame set when Towne, who is retiring from the company, took the job last year, it said.

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