Observations & Insight

Bits & Pieces
JLN Staff

The CME reported third quarter earnings this morning and a couple of items were worth noting. CME is making progress in its ongoing efforts to attract Asian customers. CME CEO Phupinder Gill told analysts that the region has been a strong contributor to CME’s metals and energy product groups. Volume in its natural gas options out of Asia rose 104 percent, and in metals, volumes from the region were up 44 percent.

The other item worth mentioning is that the daily options volumes on CME’s Globex platform hit an all-time high in the third quarter, and is above that in the fourth quarter. It plays nicely with our recent story on options on futures and worth a look if you haven’t seen it, A Tangled Web: Exploring The Explosive U.S. Growth Of Options On Futures


Impact: Navigating Regulation and What Comes Next, Part 1

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 1 of our three-part series, Phupinder Gill, CEO of CME Group; Drew Shields, CTO of Trading Technologies; Dave Snowdon, co-founder, director and CTO of Metamako; and Hazem Dawani, president and CEO of OptionsCity, provide their thoughts on subjects ranging from issues with MiFID II clock synchronization to the shifting clearing landscape.

Watch the video »

Lead Stories

Nobel Laureate Merton Says Buffett’s Financial WMDs Help Society
Tom Redmond and Shigeki Nozawa – Bloomberg
When Paul Volcker said the last financial innovation that improved society was the automated teller machine, Robert C. Merton took offense. Now the Nobel Prize-winning professor is hitting back, pointing to markets for options and interest-rate swaps that are humming along as fast as ever. He says Warren Buffett’s remark that derivatives are “financial weapons of mass destruction” was taken out of context by those who want to banish them, when a better solution is to make them safer without sacrificing their advantages.

****SD: But what does Bob Dylan have to say?

How air pollution on Wall Street might actually be bringing down the stock market
Chris Mooney – Washington Post
Every week, it seems, we learn more about the consequences of air pollution — and in particular of the smallest airborne particles, known to scientists by the name PM2.5, which are capable of traveling deep into the lungs and entering the bloodstream, and from there, causing havoc.

****SD: I smell a niche ETF coming. Or maybe that’s just exhaust.

Commodity traders must go digital or face extinction: report
Julia Payne – Reuters
As commodity margins flat-line, the number of traders will shrink as existing trading firms consolidate and digital rivals emerge, U.S. consultancy Oliver Wyman said in its annual commodity trading report. With the exception of oil and natural gas boosted by volatility last year, growth across commodities is plateauing with combined margins stuck at around $44 billion per year in 2014 and 2015, the report said.

****SD: What? Oil traders were totally on the frontier of digital innovation before Yahoo Messenger shut down. I still find that amusing.

Traders expect to see $53 billion in earnings moves from two tech giants
Alex Rosenberg – CNBC
Tech giants Alphabet and Amazon are set to report earnings after Thursday’s bell, and traders expect to see some big-money moves on the events. Options on Alphabet are implying that the stock will move $42 between now and the end of the week — a move of a bit more than 5 percent for the stock. Meanwhile, Amazon options are implying that the stock will move about $53 by Friday — a roughly 6.5 percent move.

****SD: That’s a lot of meatballs.

Volatility Update: Will Election Day Bring Conviction to VIX?
Frederic Ruffy – The Ticker Tape
If there’s one thing recently lacking on Wall Street, it seems to be conviction. The S&P 500 has spent the first few weeks of October chopping around somewhat aimlessly and without any significant trends one way or the other. Some market watchers partially blame the pending elections for the lack of trading vigor. That is, with Election Day less than two weeks away, the uncertainty is serving as an overhang for the equities market. If so, can we expect a major change in volatility once the elections have passed? Let’s look at what happened in previous years and try to find out.

****SD: Also see TradingFloor.com’s US Election: The ‘ugly period’ is drawing nearer

3 Charts Suggesting Pre-Election Fear Is On the Rise
Alex Eppstein – Schaeffer’s Research
Last week, we highlighted three signs of mounting fear in the stock market ahead of the U.S. presidential election. Well, since we ran that article, hints of building pre-election jitters haven’t slowed down, based on trading trends on the CBOE Volatility Index (VIX) and S&P 500 Index (SPX).

****SD: More charts from Bloomberg’s These Are the Charts That Scare Wall Street

OPEC May Need Help to End the Global Glut of Oil
Grant Smith – Bloomberg
Even if OPEC defies a skeptical market by implementing output cuts in full, it still won’t drain the ocean of surplus oil already pumped from the ground.

Volatility Has Currency Traders Abandoning Stop-Loss Orders
Some currency investors, worried that events such as the pound’s recent collapse could become more common, are abandoning an automated trading mechanism that was supposed to protect them from losses after big market swings. The trading mechanism, known as a stop-loss order, is meant to sell an investor’s position as soon as a currency hits a preset level against another currency. Banks and electronic trading platforms often struggle to execute the orders at exactly the level an investor requested, resulting in trades below the indicated price even when markets are relatively calm.

****SD: A story tangentially related to options.

Euro’s Pessimistic Outlook Fades After It Scrapes Bottom: Chart
Todd White – Bloomberg
Euro traders are losing their gloominess. After the single currency fell to within 1.3 percent of its 2016 low this week, they’re concluding the tumble is mostly over. The premium in options markets for one-month puts over calls shrunk to its smallest level since August on Wednesday, according to risk-reversals data compiled by Bloomberg.

VolX launches “Big Data” risk solution with 1600 risk indices
The VolX Group (VolX), architects of RealVol Instruments and Indices, has launched 1,600 risk indices. This new offering allows market participants access to the data they need to manage asset-specific and systemic risk in the marketplace.


CME plans first bitcoin product for November
Luke Jeffs – Futures & Options World
The Merc said it will launch its first two bitcoin reference rates on November 13
CME Group is set to become the first large derivatives exchange to launch a product that tracks the value of crypto-currency bitcoin after outlining on Thursday its plan to list two bitcoin products in the middle of next month. The US exchange giant said in a circular seen by FOW it will launch on Monday November 14 two bitcoin-rates designed to offer clients reliable benchmarks for the digital currency.

****SD: If you’re curious about bitcoin’s recent action, check out Finance Magnates’ Bitcoin Price Completes 9% Jump in a Week as it Reaches $680. The rise is primarily being attributed to Chinese traders.

CME Group Inc. Reports Strong Third-Quarter 2016 Financial Results
CME Group
CME Group Inc. (NASDAQ: CME) today reported revenue of $842 million and operating income of $525 million for the third quarter of 2016. Net income was $473 million and diluted earnings per share were $1.39. On an adjusted basis, net income was $357 million and diluted earnings per share were $1.05. Financial results presented on an adjusted basis for the third quarter of 2016 and 2015 exclude certain items, which are detailed in the reconciliation of non-GAAP results.1

****SD: See the WSJ’s CME Group Posts Flat Quarterly Trading Volume as well.

CBOE Holdings Declares Fourth-Quarter 2016 Dividend
CBOE Holdings, Inc. (NASDAQ: CBOE) announced today that its Board of Directors has declared a quarterly cash dividend of $0.25 per share of common stock for the fourth quarter of 2016. The fourth-quarter dividend is payable on December 16, 2016, to common stockholders of record as of December 2, 2016.

MIAX Options – Introducing MIAX Member Firm Portal: Monday, October 31, 2016
The MIAX Options Exchange is pleased to announce the introduction of the Member Firm Portal (MFP), generally available beginning Monday, October 31, 2016. The MFP is an internet-facing portal application which will provide self-service functions to member firms. Available day-one will be the ability to correct same-side clearing details and perform trade queries. Requests for price or size changes and trade adjustments or busts will continue to be submitted to MIAX Regulatory and performed by Trading Operations for processing. Additional features will be added to the MFP over time and announced via trader alert as they become available.

Nasdaq profit hit by deal costs, but tops expectations
John McCrank and Richa Naidu – Reuters
Transatlantic exchange operator Nasdaq Inc said on Wednesday its quarterly profit fell on acquisition costs following a string of deals, but the results still topped expectations, helped by higher data and technology revenues.


Russell Investments names new global head of trading
Andrew Pearce – Financial News
Russell Investments has relocated one of its top executives in Europe to the US to run its global trading business. Russell said in an October 26 statement that Rob Bishop has relocated from London to Seattle to replace Jim Imhof as managing director and global head of trading. Imhof is retiring from the $244 billion fund manager.

Regulation & Enforcement

DRW makes last-ditch attempt to avoid market manipulation trial; Don Wilson trading company argues its case rather than settling with CFTC
Gregory Meyer – Financial Times
A leading derivatives trader accused of market manipulation by a US regulator is making a last-ditch bid to avoid a trial. DRW, the Chicago-based proprietary trading company, and its boss Don Wilson have filed a motion asking a newly appointed judge to dismiss the case before it goes before a jury on December 1.

Wall Street Braces for New Democratic Muscle in the Senate
Yuka Hayashi – WSJ
Hillary Clinton’s lead in presidential-election polls has Wall Street increasingly focused on the battle for control of Congress—and bracing for a less friendly environment if Democrats retake the Senate and give new clout to the party’s left wing. “It’s not Hillary Clinton we are worried about. It’s the influence that the liberals have on her,” said Richard Hunt, president and chief executive of the Consumer Bankers Association trade group. He cited Democrats on the Senate Banking Committee, particularly Elizabeth Warren of Massachusetts, who has regularly put the financial industry on the defensive, most recently during hearings over Wells Fargo & Co.’s scandal.

Europe to detail final Mifid rules in early November
Futures & Options World – Let’s Talk Derivatives
European regulator has started work on some level III texts under the Mifid II
The European Commission is set to publish the last two sets of Mifid II technical standards in the first half of November, offering commodities trading firms some certainty about their obligations under the vast European directive. The final two regulatory technical standards under Mifid II — RTS 20 and 21 — are to be released by the European Commission in the first half of November, according to sources familiar with the matter.

Top EU lawmaker calls for clarity on Mifid II research rules
Mark Cobley and Tim Cave – Financial News
Markus Ferber, one of the European Parliament’s most influential voices on financial services reform, has called on EU authorities to “quickly” address fund managers’ concerns over research payments under Mifid II. Mifid II, the result of the ongoing overhaul of the EU’s flagship markets regulation which will come into force on 3 January 2018, bans fund managers from paying banks for research directly out of clients’ funds, as this is seen as an inducement to trade with that bank.

U.S. Agency Takes Big Step Toward Regulating Fintech Companies
Jesse Hamilton and Elizabeth Dexheimer – Bloomberg
OCC to set up innovation office to examine new technologies; Regulator to have staff in Washington, New York, San Francisco
Without saying how it might oversee financial-technology firms in the future, a key U.S. regulator is setting up an office to respond to a surge in banking-industry innovations.

****SD: To be clear, this OCC is the Office of the Comptroller of the Currency, not the options SIFMU.

Europe backs “case-by-case” approach to MAR
Julie Aelbrecht – Futures & Options World
Esma has said what constitutes advice will be decided on a “case-by-case” basis
The top European financial regulator has said whether communications that do not refer to a specific financial instrument constitutes investment advice should be assessed on a case-by-case basis, potentially exposing a grey area in the new Market Abuse Regulation (MAR). According to the most recent Question and Answers release from the European Securities and Markets Authority (Esma) on MAR, a communication that does not refer to either a financial instrument or an issuer should not generally be considered an investment recommendation but that producers should evaluate whether they are recommendations on a case-by-case basis.

Trump calls for ’21st century’ Glass-Steagall banking law
U.S. Republican presidential candidate Donald Trump on Wednesday called for a “21st century” version of the 1933 Glass-Steagall law that required the separation of commercial and investment banking, a change the Republican Party also supported in its 2016 policy platform.

Israel seeks to ban sale of binary options overseas with law amendment
Shelly Appelberg – Haaretz
Responding to growing international criticism, the Israel Securities Authority said yesterday it was seeking an amendment to the law that would give it the authority to ban the sale of binary options overseas. The ISA said that Shmuel Hauser, the agency’s chairman, had asked Attorney General Avichai Mendelblit to examine how to rewrite the law, saying he considered trading in binary options to be “in essence gambling.”


How Real is Real-Time Analytics?
Terry Flanagan – Traders News
Market participants across the institutional buy side and sell side are pulling forward their analysis of trading, risk and compliance, to appease ever-more-demanding regulators and clients and to keep up with the competition. In other words, first thing in the morning is no longer good enough as an analytics delivery timeframe. “Firms are increasingly having to use real-time analytics for a range of different purposes,” said Rodney Taylor, Market Development Manager, Europe at technology and data provider Thomson Reuters. “That has changed the way they consume data, the way they analyze data, and the way they disseminate data, throughout the organization.”

Brexit not a big concern for Fidessa
Trading, investment management and information solutions provider Fidessa Group posted its interim management statement on Thursday, for the period since 1 July. The FTSE 250 firm said that while it continued to see “structural and regulatory drivers” within the market, it was also seeing a degree of uncertainty as a result of the Brexit vote.


Goldman’s simple plan for beating the market during earnings season
Alex Rosenberg – CNBC
There’s a simple way to outperform the market during earnings season, according to Goldman Sachs’ options research team: Bet on the stocks that are making investors nervous ahead of their reports. More specifically, the first step of the strategy is to find the companies that have underperformed the S&P 500 by 3 percent or more in the two weeks before their earnings (and also have liquid options). So far this quarter, that would have rounded up 15 stocks.

****SD: Funny article from The Economist about Goldman Sachs called Too squid to fail — uses the phrase “faddish indulgence” which I haven’t heard before.

WTI Options Summary
Lou Pellathy – OptionsCity
WTI futures prices have been range bound in the past few weeks. Oil has slipped back to below $50 / barrel, and the options market confirms a 48% chance of remaining between $47 to $51 in the next twenty days. The largest Open Interest calls are the Dec 2016 $50, $55 and $60 strikes. On the downside, the largest Open Interest strikes are the Dec 2016 $45, $40 and $30 puts. The Open Interest volumes on those strikes are relatively balanced, with a slight downward bias in the recent buying of the $45 puts.

Despite Volatile October, Natural Gas Still Offers Upside Opportunity
James Hyerczyk – Finance Magnates
The December Natural Gas futures contract is going through, which has to be one of the most volatile one-month price swings in recent history. The price action in October has spared no one with both bearish and bullish traders having equal opportunities for tremendous profits and losses. And if you were blessed to catch both sides of the trade then more power to you.

Earnings Week of 10/31 – 11/4
Russell Rhoads – CBOE Options Hub
As always the data below is based on the last three years of earnings results unless the ticker is in italics. The columns show the biggest rally, biggest drop, average move, and what the stock did last quarter in reaction to earnings. Finally, double check the earnings dates as not all were confirmed.


Market Evolution Series, Part 6: Methodologies for Success
George Bollenbacher, Capital Markets Advisors – TABB Forum
Understanding market evolution is critical for all market participants’ survival. But only if firms become accustomed to an ongoing evolutionary effort will they start to see the real benefits. George Bollenbacher lays out guiding principles to help firms respond to market evolution.


Sunny spells, scattered clouds and a typhoon of data
Patrick Thornton-Smith – Chief Marketing Officer-Duco
The 32nd annual FIA Expo in Chicago was, as ever, full of commentary and observation as the industry looked back on the last year and forward to the next.

There is Nothing Like a WILD Event
By John J. Lothian

There is nothing like a WILD event. They have been very successful with their symposiums, with this year being their 5th Annual. The good news about this is that Chicago might get even wilder after the WILD event. Game 6 of the World series will start an hour after the WILD event ends.

On November 1 at the UBS Building in Chicago, Women in Listed Derivatives (WILD) is offering a symposium on the ever-changing nature of the derivatives industry and the role of women within it. The event begins at 3:30 p.m. with OCC CEO Craig Donohue holding a fireside chat with syndicated financial columnist and author Terry Savage, followed by a panel that will cover diversity on boards and executive committees. Lynn Marek of Crain’s will moderate, something I have not seen before. Maureen Downs, Dorri McWhorter, Cynthia Zellanger and Bridget Gainer will be on the panel.

You can get all the details and sign up here.

Also on the wild side, but more tame in a Swiss kind of way, the ICDA’s Burgenstock Conference will be something to watch. You can find details here

The list of speakers is now nicely alphabetized, starting with Cinnober’s Veronica Augustsson

If you want to attend, email me and I will give you a discount code that can save you 15%.


Exclusive: 24Option Signs Sponsorship Deal with “The Notorious” Conor McGregor
Aziz Abdel-Qader – Finance Magnates
24option, one of the biggest brands in the binary options business, has taken another leap in expanding its client base – it is now well set to attract fans of martial arts through the recent sponsorship deal it has inked with the popular Irish martial artist Conor McGregor.

****SD: Deals with Boris Becker, FC Juventus and now Conor McGregor. That’s an eclectic bunch of sportsmen.

The Future of Sports Betting
David Purdum and Ryan Rodenberg – ESPN
There are no immediate plans for Patent No. 0125691. The description contains plain words like “computer,” “real-time” and “online.” Figure 2, an accompanying diagram, shows the system’s entire process in an eight-step flow chart that ends with “determine payout of event.” The patent application, published on May 6 by the United States Patent and Trademark Office, remains pending. But don’t let its apparent simplicity fool you: This patent is held by Microsoft, and it could be a critical piece of a future with widespread legal sports betting in the United States.

****SD: A betting exchange to come? Stay tuned.

Wall Street leaders too insulated, says watchdog for U.S. rescue fund
Patrick Rucker – Reuters
Wall Street executives are too shielded from prosecution and should answer for misdeeds committed by underlings, the watchdog for a multibillion-dollar bailout said on Wednesday. Senior banking officials should attest each year that their companies are free of criminal fraud and civil abuse, said Christy Goldsmith Romero, special inspector general of the Troubled Asset Relief Program.

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