Observations & Insight
Back from Miami
By John J. Lothian
I have returned from the sunny skies of Miami back to a brighter Chicago sky than when I left. Thank you to Charley Carey and Greg Doud of the Commodity Markets Council for their hospitality at their State of the Industry 2017 conference in Miami.
My regulatory-focused panel went well, but the recurring theme at the conference was one of uncertainty. This is a theme I will be writing about more soon.
Former CFTC Chairman and NYMEX CEO Jim Newsome was pretty excited about the ability of the industry to go on the offensive after eight years on the defense. It would appear that he is very optimistic about the CFTC’s ability to roll back, ignore and eliminate much of the overreach of the Obama years.
Who the new CFTC Commissioners were going to be was still a mystery, as was whether the current acting Chairman, Chris Giancarlo, will get the permanent nod. His chief-of-staff, Mike Gill, was on my panel and hoping his boss would get the job.
With Giancarlo in place as chairman of the CFTC, the industry could see key issues addressed more quickly, the panel suggested, as he is already up to speed on its agenda. It was noted, though, that Gary Gensler’s 2009 confirmation did not occur until May, so it can take some time to get the commission fully “commissionered,” if that is a word.
It was agreed, though, that the best decisions are made when we have a full commission, and currently we have just three commissioners. Although former Chairman Massad is having a going away party on Thursday in Washington, DC at the CFTC, he is expected to stay on until late February. It is somewhat ambiguous when he will actually leave.
Until he does, the Democrats have a 2 to 1 majority, so expect a lot of nothing until spring. The comment period for Reg AT was put off until May 1, which is perhaps a nod to a do-nothing CFTC until then.
OCC Announces Total Cleared Contract Volume Down Nine Percent In January
OCC, the world’s largest equity derivatives clearing organization, announced today that total cleared contract volume in January was down nine percent from January 2016 with 338,381,588 contracts. Average daily volume at OCC was down 14 percent from January 2016 with 16,919,079 contracts. OCC’s stock loan program reported strong volume numbers in January with year-to-date activity up 32 percent.
Stock Investors Are Finally Starting to Buy Hedges Again
Joseph Ciolli – Bloomberg
With the U.S. equity market waking from its slumber, investors are finally taking the hint to hedge their post-election gains.
****SD: Are the prices good? I’ve been looking for some ornamental shrubbery to spice up the garden.
CBOE Launches S&P 500 Range-Bound Premium Income Index (SPRI)
Chicago Board Options Exchange (CBOE) today announced it has launched the CBOE S&P 500 Range-Bound Premium Income Index, which is designed to serve as a benchmark for investors aiming for consistent income distributions while taking the view that short-term equity returns will be range-bound.
Wolverine Execution Services Enhances Options Algorithm Suite With the Addition of Best-X Options for Spreads and New Vol and TWAP Algorithms
Wolverine Execution Services (WEX), a leading provider of value added technology and execution services, today announced the ability to send complex orders to its Best-X options algorithm and the addition of two FIX based options algorithms, Vol and TWAP.
Europe to stress test clearing houses for liquidity risk
Samuel Agini – Financial Times
Clearing houses, the vital pieces of market infrastructure that stand in the middle of derivatives trades, are to be subjected to a tougher round of stress testing by European regulators. The European Markets and Securities Authority said in a February 1 statement that the second continent-wide round of stress testing will include liquidity risk. The results of the stress test are due in the final quarter of 2017.
Oil Snoozes After OPEC Jolt as Market Awaits Supply Cut Proof
Ben Sharples – Bloomberg
The oil market’s drifting in snooze mode as investors await evidence of global supply curbs aimed at easing a glut. A measure of oil volatility last month averaged the lowest in more than two years and futures in New York have been stuck between $50 and $55 a barrel since OPEC and other producing nations agreed Dec. 10 to reduce output.
Exchanges and Clearing
CME Earnings Preview: Impressive Growth In Trading Volumes To Propel Revenue Growth — Trefis
CME Group’s performance during the first nine months of 2016 was strong and we expect this trend to continue when the company reports its fourth quarter earnings on February 2nd. The consensus estimates suggest nearly 12% growth in the exchange’s revenue and 22% growth in its EPS. Increased volatility in derivatives market across multiple asset classes including oil, metal and interest rates has attracted investors’ attention. This drove nearly 24% growth in trading volumes for the fourth quarter, and 12% for the full year. We believe CME’s efforts to expand its global footprint and its diverse product line to suit the investors’ demand are likely to boost its top-line.
Deutsche Boerse-LSE Said to Extend EU’s March 13 Deal Deadline
John Detrixhe – Bloomberg
European competition watchdogs may again extend their deadline for ruling on Deutsche Boerse AG’s takeover of London Stock Exchange Group Plc, according to people familiar with the discussions, giving regulators more time to review the firms’ clearinghouse operations.
MCX plans new contracts in tea, coffee, brass
Commodity bourse Multi Commodity Exchange of India Ltd (MCX) is considering offering three more commodities for futures trading in addition to the existing 15 commodities that it currently offers.
****SD: Relevant bit – “On the options trading in commodities, Paranjape said that after the comments received from stakeholders on options trading in commodities, SEBI would issue the final notification, following which a decision will be taken on the products to be offered.”
Symbol Migration Schedule for ISE Gemini transition to INET
Effective Monday, February 27, 2017, ISE Gemini will begin migrating symbols to the INET platform. Participants will be required to begin using INET Specialized Quote Feed (SQF) and/or Ouch to Trade Options (OTTO) connections for the migrated symbols on the dates provided below, while continuing to utilize existing ISE Gemini DTI connections for symbols that have not yet migrated.
****SD: No matter how nicely the letters line up, why would you opt to call a protocol OUCH? At that point you might as well go with PAIN or BOOBOO.
The Trading Volume On The Spanish Stock Market Reached EUR56.3 Billion In January, Up 15% From December
The trading volume in the Derivatives market in January reached 3 million contracts, down 8.8% from the same month a year earlier.
BATS Hotspot Starts 2017 on a Positive Note
Victor Golovtchenko – Finance Magnates
The foreign exchange trading business of BATS Global Markets that was acquired by the CBOE last year has kicked off 2017 on a positive note. The company is reporting its third highest total number over the past 12 months in January 2017.
Regulation & Enforcement
Yellen Urged to Halt Talks on Global Bank Rules for Trump Review
Jesse Hamilton and Benjamin Bain – Bloomberg
A key lawmaker wants U.S. banking regulators to halt talks over international agreements until President Donald Trump has a chance to review their work and replace top negotiators.
Off-order book trades exempt from systematic internaliser assessments
Hayley McDowell – The Trade
Off-order book trades reported to a regulated market should be exempt from the thresholds for determining whether a firm is a systematic internaliser, according to the European Securities and Market Authority’s (ESMA) latest Q&A.
Lost your money to binary options? Here’s how some victims got it back
The Times of Israel
Felicia, a single mother from the Asia-Pacific region, came home one day to find her teenage son in tears. Hoping to surprise his mother, he had “invested” over $100,000, using her credit cards, in what he believed to be a legitimate binary options trading site, and made an apparent profit. But the company was not allowing him to withdraw his mother’s money, including ostensible winnings, and he realized belatedly that he had been scammed by one of Israel’s numerous fraudulent binary options firms.
Vijay Mallya, 6 Others Can Square Off Futures And Options Open Positions
Sebi has allowed Vijay Mallya and six others, who have been barred from the securities market in a case related to illegal fund diversions from United Spirits, to square off their existing open positions in the Futures and Options segment. On January 25, the regulator restrained Mallya and six former officials of United Spirits Ltd (USL) from buying, selling or otherwise dealing in securities in any manner whatsoever, directly or indirectly. The order was with respect to a case related to alleged fund diversions from USL.
Blockchain could eliminate fraud on trading platforms
Hayley McDowell – The Trade
Blockchain technology has the potential to completely eliminate fraud on trading platforms created by banks, according to a recent whitepaper.
A Pullback In Stocks May Be Coming, But It’s A Buying Opportunity
Teresa Rivas – Barron’s
The Dow gained 0.5% in the first month of the year, and the S&P 500 is up 1.8% since the start of 2017. Despite a couple of down days to end January, many investors are expecting indexes to keep climbing in February. However, a pause now might be less painful than one later.
How We Run Our Money: Compenswiss
Carlo Svaluto Moreolo – Investments & Pensions Europe
Frank Juliano (pictured), head of asset management at Compenswiss, tells Carlo Svaluto Moreolo what lies ahead for Switzerland’s social security funds
Candy Is Good for You With Hershey’s Options
Steven M. Sears – Barron’s
Hershey looks sweet ahead of earnings and an analyst update meeting. The opportunity lacks sex appeal. You could even call it boring. But it is these types of setups that often prove profitable. In anticipation that the stock (ticker: HSY) rallies in response to those key events, Goldman Sachs is telling clients to buy Hershey’s March $106 call option that expires March 3 (these are weekly options) to catch an expected rally.
Low Volatility Can Be Dangerous
Bob Lang – Trader Planet
As market participants we often look for reasons of market behavior. Some are rational and explainable but others are not. Call it the ‘mystery of markets’. Frankly, it really is no mystery at all, it is simply about money flows in and out. Yet, our minds look for the most complex reasons for moves, as if we are trying to solve a difficult puzzle. The rise and fall in volatility is one of those conditions that continues to confuse market players.
Indicator of the Week: Will Bulls Break the January Barometer?
Rocky White – Schaeffer’s Research
The first month of 2017 is in the books, with the S&P 500 Index (SPX) gaining around 1.8%. The January Barometer is a pretty well-known seasonality indicator, and it tells us we can be pretty optimistic for the rest of the year. Since 1950, when the index was positive for the first month of the year, the next 11 months gained, on average, an additional 12%. Furthermore, 88% of the returns were positive from February through December, when the first month was positive. The returns are not nearly as good when stocks fall in January. In that case, the index averages a gain of just over 1%, with 59% of the returns positive.
The Short Seller Who Crushed Valeant Has Picked His Next Target
The short seller who took down Valeant bets against TransDigm; TransDigm’s Howley is among the best-paid CEOs in America
Andrew Left sure knows how to pick a fight.
****SD: Valeant did themselves in – Left rightly pointed out a crushing was in order. (And yes, I’m biased about issues surrounding drug pricing since I’m a guy who needs to carry an EpiPen…)
GS: A VIX Below 11 Is A Reason To Celebrate Not Worry
Rupert Hargreaves – ValueWalk
Just because the VIX is under 11 there’s no reason to panic. Historically, a VIX reading under 11 has not preceded a market decline that’s according to a research note published by Goldman Sachs at the beginning of this week. The note, which was written by Goldman analyst Krag Gregory Ph.D. notes that while a fix reading below 11 is rare, median S&P 500 returns three months after the fix drops below 11 are generally positive at 2.25% historically.
Gold becomes one of investors’ favorite safe havens with Trump uncertainty
David Randall – Reuters
Some of Wall Street’s largest fund managers have taken a contrarian bet on gold, wagering that U.S. President Donald Trump’s governing style and upcoming elections in Europe will combine to create more stock market volatility and boost the prices of a metal long seen as a safe haven. Fund managers from IVA, Ridgeworth and Fidelity are among those who are bullish on gold at a time when the VIX, Wall Street’s main measure of volatility, is near two-year lows amid a stock market rally that has pushed the S&P 500 up 6.5 percent since Election Day in November.
Specter of Global Trade War Rises as Trump Puts ‘America First’
John Follain, Jeff Black, and Scott Hamilton – Bloomberg
World leaders aren’t taking Donald Trump’s trade barbs lying down. After the U.S. president said Germany and Japan are gaming foreign-exchange markets to win favorable trade terms, Japanese Prime Minister Shinzo Abe joined German Chancellor Angela Merkel on Tuesday in pushing back and leading a global counter-charge to the accusations.
****SD: Whenever the word specter is used, I worry for a moment that they speak of the “SPecial Executive for Counter-intelligence, Terrorism, Revenge and Extortion.”
Prime brokerage scaremongering: Cliff-hangers are not new, but hedge fund pretenders are!
Andrew Saks-McLeod – FinanceFeeds
Remember the days when a meeting with the eFX division of a Tier 1 bank over an artisan-style arrangement of lemon-infused asparagus served on a roof tile atop a lit-within table in an overstyled plate glass restaurant in Cabot Square would result in a prime brokerage relationship having been easily established?
****SD: Some real doozy sentences at the top here, but I think if you can get past a few twisted metaphors it is well worth it.