Observations & Insight

Bits & Pieces
By John J. Lothian

William “Bill” Hagerty, Jr., former chairman of the Chicago Board of Trade and one of the industry’s great gentlemen, has passed away at the age of 87.

Bill was the head of what was once the longest tenured member firm of the CBOT, Hagerty Grain, and was a customer of mine when I was a broker.

From that relationship I had the opportunity to get to know Bill and came to respect him greatly. When I ran for the NFA Board of Directors back in the early 2000s as an Introducing Broker representative, he was one of the people I asked to sign a letter recommending my candidacy.

Bill was responsible for helping to bring Robert K. Wilmouth to the CBOT as president. Wilmouth would later move on to become the first NFA president and help create the new self-regulatory organization.

He was a good representative of the member-owned era of the CBOT, participating in its political structure and eventually serving as chairman of the exchange. He also served for many years on the board of the Chicago Board of Trade Clearing Corp.

He was instrumental in helping defeat an initiative to merge the BOTCC and CME Clearing by standing in the lobby of the CBOT soliciting signatures for a petition.

My condolences to the family and friends of Bill. He lived a long and productive life. He left a great legacy and I will always remember him as a thoughtful and gracious gentlemen.

Members of the JLN team are headed to Stockholm on Monday. Spencer Doar and Mike Forrester are accompanying me to Stockholm and will video the presentations there for our MarketsWikiEducation.com website.

We will be also shooting some interviews while we are there for a Special Report about Stockholm as a trading center. We welcome volunteers or suggestions for interview subjects.

JLN is again sending a team to Boca Raton for the FIA International Conference in March. Our new CEO Jim Kharouf, Spencer Doar, Patrick Lothian, myself and our intern, Katherine Lothian will be making the trip. We will be conducting our annual exchange leader video series, as well as interviewing other industry leaders.

Lead Stories

Now Even the Fed’s Worried That Stock Volatility Is Too Low
Dani Burger – Bloomberg
Add the Federal Reserve to the list of worriers about investor complacency as stocks set new records almost daily. A few officials at the central bank “expressed concern that the low level of implied volatility in equity markets appeared inconsistent with the considerable uncertainty attending the outlook” for Donald Trump to deliver on pro-growth campaign policies, according to the minutes from the Fed’s meeting three weeks ago, which were released Wednesday.

****SD: I think I’d rather have a Fed that was more worried than one that was, I don’t know, cheery? Last year a big bank CEO – I’m pretty sure it was Jamie Dimon but I’m having trouble finding the footage – said in an interview that the vast majority of his job is just worrying that things are running smoothly and thinking of things that could wrong. Sounds equal parts hellish and helpful.

Growth in U.S. Listed Options Volumes Hinges on Sustained Market Volatility in 2017, finds TABB Group Research
Globe Newswire
Total volume in the U.S. options market reached 4.06 billion contracts in 2016, a 1.9% decline from 2015. As a lack of sustained volatility has resulted in little perceived volume growth, U.S. listed options volume for 2017 is expected to also remain fairly stagnant, according to TABB Group’s latest research, “U.S. Options Market Outlook 2017: Emerging Catalysts on the Horizon.” The report examines factors that influence options trading activity, identifying key factors that the industry should monitor as catalysts to support trading in 2017. It also examines investor demand, the regulatory landscape and provides context on how volatility will support industry growth.

****SD: Sustained volatility might be a tall task. Almost a sixth of the year is in the books and look at what we’ve had – one day of the VIX above 14 (Jan 3).

Only ‘Blind Faith’ Could Cause Me to Be Long This Market
Doug Kass – RealClearMarkets
Following the breakup of Cream and The Spencer Davis Group, the rock and blues group Blind Faith was formed. An English band consisted of four music legends — Ginger Baker, Steve Winwood, Ric Grech and Eric Clapton — and although they produced only one album (of the same name), they made rock history.

****SD: And yet so much of the world operates on blind faith… By the way, if you are interested in a fascinating portrait of a real troubled character, check out the documentary, “Beware of Mr. Baker,” which details drummer Ginger Baker’s whole career. Not sure about now, but when the movie came out in 2012 he was pretty much broke and living on a ranch (he loves horses as he adopted polo as his sport of choice) in South Africa. How he is still alive is a mystery given what he put his body through. Still smoking like a chimney too.

Euro Bears Emboldened by French Election on Options Radar: Chart
Kristine Aquino – Bloomberg
Sentiment on the euro is turning ever more bearish as the first round of the French election draws closer.

****SD: More macro look from Bloomberg – Euro Bears Return as First Round of France Vote Comes Into Focus

Federal Reserve minutes point to rate hike ‘fairly soon’
Lindsay Dunsmuir and Jason Lange – Reuters
Many Federal Reserve policymakers said it may be appropriate to raise interest rates again “fairly soon” should jobs and inflation data come in line with expectations, according to the minutes of the Fed’s last policy meeting released on Wednesday.

****SD: I. Hate. Fed. Speak.

Correlation Breakdown Between Stocks And Bonds Is Nearing
Mark Melin – ValueWalk
Markets are approaching a fork in the road, Bank of America Merrill Lynch’s Rates Strategist Ralf Preusser notes. With the S&P 500 higher by a statistically notable 121 points in 2017 with less than two months under the belt, Preusser says “we are approaching a ‘show me the money’ moment in markets” as a correlation breakdown will eventually resolve itself. Only one market will be proven correct.

****SD: Breakdown? Time for a raging drum solo!

Wall Street Theory Is You Didn’t Need Trump to Lift Earnings
Joseph Ciolli – Bloomberg
The 2017 stock market: a celebration of Donald Trump’s presidential promises, or the byproduct of influences that predate his election? A cohort of Wall Street strategists is leaning toward the latter.

Exchanges and Clearing

Clearing houses top Bank of England’s agenda
Lucy McNulty – Financial News
The Bank of England plans to turn its supervisory spotlight onto clearing houses, the vital plumbing that underpins the financial system, throughout the rest of 2017.

London Metal Exchange cuts deal with banks to propel gold futures
Peter Hobson – Reuters
The London Metal Exchange has reached a 50:50 revenue-sharing deal with a company founded by a group of banks to promote trade in its new gold futures contracts, sources said, aiming to overcome market scepticism surrounding their launch in June.

****SD: Options look to get some propulsion too.

ASX targets March 20 for futures tech upgrade
Luke Jeffs – Futures & Options World
The Australian exchange said the tech upgrade will happen after the March roll
The Australian Securities Exchange has told clients it will launch its new futures trading platform on March 20 in line with a pledge last week to launch next month but after an initial launch date of November 2016.

****SD: Options expected to move to the new tech in 2018.

Regulation & Enforcement

SGX action against false trading will be risk-based
Wong Wei Han – Straits Times
The Singapore Exchange (SGX) will take regulatory action against false market breaches only if these cases cause extensive and prolonged market risks. SGX chief regulatory officer Tan Boon Gin was clarifying the bourse’s approach on deciding when to move against false trading.

Exclusive: New Israeli Law Will Ban Marketing of Binary Options Abroad
Dan Magen – Finance Magnates
Israel is moving to ban Israeli firms from marketing binary options abroad. Foreign exchange brokers with an Israeli license will not be allowed to offer FX or onboard clients of foreign countries if they don’t hold a license in those countries, according to a draft of the law obtained by Finance Magnates.


Technology Vendor Cinnober Reports Solid Financial Results for 2016
Aziz Abdel-Qadar – Finance Magnates
Cinnober Financial Technology AB (Cinnober), the Sweden-based provider of exchange and real-time clearing technology that caters to international stock exchanges, clearing houses, banks and brokerages, today reported its 2016 financials, according to a corporate statement.


Investors Flock to Supercharged Gold Bet That’s Returned 180%
Direxion ETF sees surge in volume of shares and options; ‘This is a way of maximizing your potential returns,’ TD says
Gold doesn’t offer yield. Junior miners may, and a leveraged exchange-traded fund tracking them has investors flocking to it.

ProShares Trust II(NYSE:SVXY): Big Redemptions Follow Big Gains
ETF Daily News
A Volatility linked fund that benefits when VIX futures fall is SVXY (ProShares Short VIX Short-Term Futures ETF), and the fund has seen some position trimming and profit-taking into the recent move higher in VIX futures and the VIX Index itself.

How To ‘Write’ Covered Calls For Safe 8% Yields
Brett Owens – Seeking Alpha
Most investors buy stocks and hope they’ll go up in price. They do nothing in the interim to generate cash flow from those stocks while they sit in their portfolio – like writing covered calls.


Implied volatility – Important concept for options traders
Sneha Seth – MoneyControl
Implied volatility (IV) is one of the most important concepts a trader should understand before stepping into options trading. In the world of option trading, implied volatility signals the expected volatility in an options contract over its life span. Traders importantly use it to determine option pricing.

Know Your Options: The Basics of Calls and Puts
The Ticker Tape
One of the main things that makes options attractive to some investors is the flexibility they can provide during a variety of market conditions. Regardless of whether the market is going up, down, or sideways there are options strategies that can be used to speculate on the direction of different investments, generate income, and potentially hedge against market declines.


Carstens hails FX hedge as Mexico peso strongest since Trump election
Mexico’s peso extended gains to its highest level since the election of U.S. President Donald Trump on Wednesday, a day after the central bank said it would offer up to $20 billion in currency hedges.

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