Observations & Insight

May 2017 Options Exchange Marketshare via OCC
(Click for larger image)

Two notable changes:
-NYSE down from 17.04% total options marketshare in May 2016 to 12.6% in May 2017.
-CBOE up from 36.58% total options marketshare in May 2016 to 44.13% in May 2017 (vast majority of that growth in C2 and CBOE).


Meet My Connection: BSO Finding Ways To Connect Traders To Emerging Markets
Jim Kharouf – JLN
Archimedes is credited with saying, “The shortest distance between two points is a straight line,” but that’s not always the fastest.
Michael Ourabah says the fastest route to and from emerging markets is through his network BSO. The firm, effectively started by Ourabah out of his college dorm room in France in 2004, has found its niche in helping connect trading firms, banks, brokers and technology firms from major financial hubs to developing markets. And with that, revenues have grown from $1 million in year one to more than $25 million.


Sponsored Content
MIAX’s Brown on Number 15 and Complex Order Books

Shelly Brown
Click here to watch

In February, MIAX added MIAX Pearl to the options exchange landscape, bringing the total number of exchanges to 15. In this video from the Options Industry Conference in Scottsdale, Ariz., Shelly Brown, executive vice president, strategic planning and operations at MIAX, talks about figuring out Pearl’s fee structure and the group’s focus on continued development of complex order book functionality.

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Lead Stories

OCC Cleared Contract Volume Up 19 Percent in May
OCC, the world’s largest equity derivatives clearing organization, announced that cleared contract volume in May reached 380,010,098 contracts, a 19 percent increase from the May 2016 volume of 319,533,636 contracts. OCC’s year-to-date average daily cleared contract volume is also up two percent from 2016 with 17,079,885 contracts.

****SD: Growth in index options and VIX futures responsible for majority of that volume boost.

VIX Index Closes Below 10 Again, as Professor Called VIX Level the Biggest Financial Mystery
Matt Moran – CBOE Options Hub
On June 1st the CBOE Volatility Index (VIX) closed at 9.89. June 1st marked only the 14th day on which the VIX Index closed below 10 (its price history begins in 1990). Six of the 14 days on which the VIX Index closed below 10 occurred in 2017 (see Exhibit 1 below for a list of all 14 dates).

****SD: Tons of charts and info packed into this blog post.

Citadel Securities Hires Barclays’s Electronic Equities Chief
Alexander Osipovich – WSJ
Barclays PLC. ‘s head of electronic equities trading is leaving the bank to take one of the top jobs at giant electronic market-making firm Citadel Securities LLC. Joseph Mecane will become Citadel’s new head of execution services, a role in which he will oversee its business in equities, options and exchange-traded funds, Citadel said Friday. He is to start in September, a Citadel spokeswoman said.

****SD: The “Bridging the gap between tech and trading” story below is also about Citadel Securities — The Trade talked to Nicola White, its new COO for fixed income, currencies and commodities.

Asia Volatility Supply Shrinks as Korea’s Callable Bonds Vanish
Narae Kim and Jung Park – Bloomberg
Call it the curious case of South Korea’s callable bonds.
Investors in Asia’s No. 4 economy are souring on the debt, prompting issuers to cut back on sales of the securities that can be repaid after set time periods — sending the average monthly pace of issuance this year to less than half of what it was in 2016. At a time when volatility is vanishing across the globe, the dwindling supply of the volatility-rich options that underpin such debt can have an outsized impact on markets.

****SD: “Because the bonds are usually of relatively long maturity, price changes for options on them lead to large changes in expectations for further changes in price.”

Bridging the gap between tech and trading
Joe Parsons – The Trade
Citadel Securities, the market making business of Ken Griffin’s giant hedge fund, is a frequent poacher of the best talent in the industry. It is constantly making moves to acquire the best personnel in technology and trading as it looks to compete with the top investment banks.

A Tipping Point In The Market
Pamela Rosenau – Forbes
If you haven’t noticed, the U.S. markets have been somewhat complacent recently. The VIX (a gauge of stock market volatility) is at multi-decade lows while the MOVE index (the equivalent index for bond market volatility) is dormant as well. I expect this will change in the near future. For starters, the Federal Reserve is finally tightening and wants to put the Fed balance sheet in run-off mode later this year. What large buyer will have the ability and the desire to pick up the slack and consume nearly $400 billion in Treasury debt? What interest rate level will be enticing enough to provide such liquidity?

****SD: More on “tipping point” issues from Reuters – Oil market to OPEC: Show me the data and Fed marching on despite U.S. inflation slump: Powell

Swedroe: How Volatility Affects Liquidity
Larry Swedroe – ETF.com
The interest in the roles market volatility and liquidity play in stock returns was heightened by both the 2007-2008 financial crisis and the 2010 “flash crash,” when market volatility exploded, liquidity disappeared and share prices plummeted.

****SD: Liquidity in stocks after VIX shocks — not directly options obviously but worth the read.

Exchanges and Clearing

ICE Announces Record Quarter for Bond Trading Platform; Adds Streaming Evaluated Bond Prices
Intercontinental Exchange
Intercontinental Exchange (NYSE: ICE), a leading operator of global exchanges and clearing houses and provider of data and listings services, today announced that volumes for North American corporate bonds on the ICE Credit Trade electronic trading platform increased to $5.7 billion of traded notional in the first quarter of 2017, up 52% compared to fourth quarter 2016 notional traded. Launched in late 2015, the platform has achieved seven consecutive quarters of record notional value of bonds traded. The average trade size executed on the platform now exceeds $1.1 million for U.S. Investment Grade bonds and $700,000 for U.S. High Yield bonds.

CME Group Reached Average Daily Volume of 16.5 Million Contracts in May 2017, up 11 Percent from May 2016
CME Group
CME Group, the world’s leading and most diverse derivatives marketplace, today announced that May 2017 average daily volume (ADV) reached 16.5 million contracts, up 11 percent from May 2016. CME Group May 2017 options volume averaged 3.4 million contracts per day, up 21 percent versus May 2016, with electronic options averaging 2.1 million contracts per day, up 36 percent over the same period last year. Open interest at the end of May was 123 million contracts, up 9 percent from the end of May 2016.

JPMorgan raises indirect stake in Moscow bourse to 5 percent
Moscow Exchange (MOEX.MM) said on Thursday one of JPMorgan Chase’s (JPM.N) companies had increased its stake to 5 percent in the Micex owner.

Regulation & Enforcement

Nadex argues Canada’s binary options ban should apply to fifty/fifties
Maria Nikolova – FinanceFeeds
The volume of comments concerning the proposed binary options ban in Canada has been growing, with North American Derivatives Exchange, Inc. (Nadex), a subsidiary of IG Group Holdings plc (LON:IGG), adding its voice to the chorus of companies, institutions and industry bodies stating openly their opinion on the proposal.

****SD: We don’t put much binary stuff in this newsletter, but this gets at the root of many issues with the product.


Introducing the new Volatility Manager, Charts and Favorites for CityTrader
CityTrader now supports the ability to use custom volatilities for calculating option theoretical values and greeks. We’ve received very positive feedback on Volatility Manager – from both novice options traders who want to better understand volatility to sophisticated traders who have asked for more control over their options pricing. The “Vol Manager” tab allows users to view implied volatilities and easily make manual adjustments.

Bats ETF Implied Liquidity Feed Now Available on Money.Net
Press Release – Bats
Bats, a CBOE Holdings, Inc. company, and a leading global operator of exchanges and services for financial markets, today announced that its Bats ETF Implied Liquidity Feed is now available for use on Money.Net platforms. Money.Net, the innovative new financial information provider, is the first platform distribution partner to offer this new product.

****SD: This is for ETFs but has to make you wonder how long people will accept Bloomberg Terminal rates.


Stay Away From This Sector in June
Schaeffer’s Research
Last week, we took a look at the best stocks to buy in June. It’s now time to take a look at the stocks to avoid during the month, according to historical data from Schaeffer’s Senior Quantitative Analyst Rocky White. We already located one sector that may struggle during June, and below we outline 25 stocks that could underperform in the short term — including two airline stocks.

Low Volatility Means Investors Should Be Buying High Yield Debt?
Rupert Hargreaves – ValueWalk
The lack of volatility has attracted a lot of interest and articles. The key focus is on the volatility index, often referred to as the VIX or fear index. The VIX is based on the cost of purchasing short-dated options on the S&P 500, with a low reading meaning the cost of buying options is cheap. But low volatility wasn’t just limited to the VIX, bond volatility and most other asset classes are low too.

Why Investors Should Warm Up to ICE Stock
After you read this, strongly consider buying June upside calls on the Intercontinental Exchange ASAP as time is of the essence. The Intercontinental Exchange (ticker: ICE) is one of the world’s most important exchange companies; it is misunderstood, underappreciated, and arguably underowned. ICE, as the company is popularly known, is holding its first analyst day meeting on Friday.

VIX Drops Back Below 10, Oil Ignores OPEC, Dollar Ready for NFPs
John Kicklighter – DailyFX
A late-in-the-day jolt of speculative appetite Thursday saved the markets from a lost day. Yet, the US-focused swell did little to budge the fading conviction in the financial system. With the help of a strong ISM manufacturing report and solid beat from the ADP private payrolls figure, economic confidence stirred enough market enthusiasm to push the S&P 500 to a fresh record high. And yet, the financial media again mirrored a lack of enthusiasm from its audience. What’s more, the VIX volatility index dropped back below its basement 10 level. That is now the 6th time in a month that we’ve plunged this extreme low – marking the longest stretch of quiet/complacency on record by surpassing the 1993 and 2006 lulls. This quiet matches seasonal expectations, but its extreme nature should not be approached idly. Shorter duration trading and greater selectivity is the more appropriate market approach in these conditions.


Technology provider of the year (bank): BNP Paribas
When Chicago-based Halo Investing, a technology-focused investment services start-up, saw that US registered investment advisers (RIAs) and their retail clients were being frustrated in their demand for structured products, it wanted to change that. But the company needed partners. This struck a chord with BNP Paribas and Halo identified the bank’s Smart Derivatives platform as having the services and technology that could help it achieve its goal.

Why Do the Young Reject Capitalism?; At the same time, they celebrate entrepreneurs and free enterprise. It’s a curious disconnect.
Warren A. Stephens – WSJ
When did capitalism become anathema to young people—and why? About a year ago the Institute of Politics at Harvard released survey results showing that more than half of respondents between 18 and 29 do not support capitalism, the free-market system that underpins our economy. An astonishing one-third said they support socialism.

*****SD: One in three “supporting” socialism is a far cry from one in three being socialist. But I’d wager this is what happens when a generation doesn’t live through the Cold War (and is, on average, less affluent than their parents at similar age). As a kid with a stint at a (pretty liberal) liberal arts school under my belt, I’m not surprised by the stat. Full disclosure, this millennial never drank from the pink Kool-Aid pitcher.

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