Observations & Insight
The Spread – Bumpy Road – 10/1
A speed bump? For options? Say it ain’t so, Joe! Oh, it is so? Cool. For more details on the latency development at Eurex, tune in to this week’s episode of “The Spread.”
Watch the video and see the stories referenced here »
****SD: Quick note/update via Eurex – the latency protection functionality discussed in the above episode will be available with the annual T7 system release but IS NOT going live in December. The exchange has built the tool and is deciding whether or not it will go live.
Exchange Legacy: WFE Tackles The Question Of The Role Of Exchanges. It’s Much More Than You May Think.
Jim Kharouf – JLN
Can exchanges change the world and shape the future?
This goes well beyond the traditional mantras that derivatives markets help set prices and offset risk, or stock markets help raise capital for companies. Hats off to the World Federation of Exchanges’ General Assembly and Annual Meeting, being held this week in Athens to ask the questions such as: What is the exchange and CCP role in bringing economies back to life? How do they best enable sustainable development? How can they serve their stakeholders better?
Hosted by the Athens Stock Exchange, this year’s meeting venue is located just below the Acropolis, which seems an appropriate locale to ask exchange leaders the compelling question: just what can exchanges do for domestic and global economies, and better yet, what will their legacy be 10 years or 1000 years from now? Greece’s rich history may offer some clues on what will stand the test of time.
To read the rest of this story, go here
The Options Clearing Corporation taps AI to stay ahead of hackers
Dan Swinhoe – CSO (Free Access w/ Registration)
OCC uses machine learning and AI to understand and model how attackers could enter and move around the network.
The world of finance is under constant attack. The financial information it hosts – along with the money it holds and moves – makes the industry an incredibly attractive target for hackers. According to a report from IBM X-Force, it is one of the top five commonly targeted industries.
****SD: I watched some of Monday Night Football yesterday (great game) and got to thinking about how some of the unsung heroes of successful teams are the players on the practice squad who emulate the opposition. Then I read this from OCC CSO Mark Morrison – “I’m a firm believer of ‘you train as you fight, you fight as you train,’ and so we’re doing a lot of testing and putting a lot of emphasis of actually acting and adapting. The red team doing adversarial testing; the blue team looking for flaws in the process of technology.” Here’s another good quote from Morrison – “You’re not building the old WW2 Maginot Line of defense. You need to be able to be agile.”
Option Traders Scared to Bet Against Market Meltup, Sundial Says
Cormac Mullen – BloombergQuint
U.S. equity options traders have never been more bullish, according to Sundial Capital Research Inc.
The ratio of call buying to call selling volume seen in recent months is at record highs, said Jason Goepfert, the firm’s president, in a note to clients Monday. For every 100 options opened with a bearish outlook, 132 were opened with a bullish one, he said.
Goldman Sees Risk That Oil Will Hold $80+ on Iran, Hedging Moves
Alex Longley – BloombergQuint
Goldman Sachs Group Inc. said there’s a risk oil will hold above $80 a barrel toward the end of the year, striking a slightly more bullish tone than it did a week ago, as Iran’s exports plunge and producers pull back from hedging.
Oil futures have gained recently, driven by “one-way financial flow from both consumers and investors,” analysts including Jeff Currie wrote in a report. “Without producer selling, the two-year forward oil price has rallied to $75.50 a barrel, as consumers and investors hedge oil price risks associated with Iranian sanctions.”
****SD: Of the three, which are you thinking more about: the new (not) NAFTA, Brexit or oil?
Volatility is no sideshow for Italian bond investors
Kate Allen – Financial Times (SUBSCRIPTION)
For investors who put their clients’ money into developed nations’ sovereign bond markets, volatility has little appeal — and this is becoming a problem for Italy.
After a turbulent four months since the country’s populist government came to power, it is dawning on money managers that the sharp swings in Italian bonds are here to stay.
****SD: From Bloomberg – Italy Yields Hit Post-2014 High as Borghi Nods to ‘Own Currency’
Proposed rule change to permit the Exchange to list weekly series of VIX on a group basis with a minimum increment of $0.01.
Cboe Rule Filing
Cboe Exchange, Inc. proposes to amend its rules to permit the Exchange to list options on the Cboe Volatility Index (“VIX options”) on a group basis and make conforming changes throughout the Rules, change the minimum increment for VIX options listed under the Nonstandard Expirations Pilot Program (if the Exchange lists VIX on a group basis), and make nonsubstantive changes.
****SD: Ready for some inside baseball?
Basel Committee On Banking Supervision Provides Brief Update On Various Workstreams
Shearman & Sterling LLP
On September 20, 2018, the Basel Committee on Banking Supervision published a press release summarizing the outcome of its meeting on September 19-20, 2018. The Committee committed to consider Pillar 1 and Pillar 3 measures to prevent banks adjusting their balance sheets around regulatory reporting dates to manipulate reported leverage ratios. In addition, the Committee intends to further analyze banks’ exposures to crypto-assets to reach a conclusion on whether action is needed to address the risks that these assets may present.
Exchanges and Clearing
Options Exchange Marketshare – September 2018
CME Group Averaged 17.5 Million Contracts Per Day in September 2018, Up 3% from September 2017
CME Group, the world’s leading and most diverse derivatives marketplace, reached average daily volume (ADV) of 17.5 million contracts per day during September 2018, up 3 percent from September 2017. Open interest at the end of September was 120 million contracts, up 6 percent from September 2017 and up 11 percent from year-end 2017. Third-quarter 2018 ADV reached 15.6 million contracts, down 1 percent from third-quarter 2017.
Strong month for European equity index derivatives
In September, Eurex, Europe’s largest derivatives exchange and part of Deutsche Börse Group, has seen strong demand for its products. Traded European equity contracts increased by 18 percent to 23.7 million, from 20.1 million in September 2017. Demand was particularly high for European equity index derivatives (+21 percent) with 88 million traded contracts (72.6 million in September 2017).
Thomas Book: “We want to further increase fairness in pricing” (part III)
In the final part of his interview with the Börsen-Zeitung, he explains the chances he sees on the Asian markets, volume drivers and the usage of new benchmark interest rates.
****JB: Part I can be found here and Part II here
Nasdaq Rule Filing
The Nasdaq Stock Market LLC, pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 and Rule 19b-4 thereunder, is filing with the Securities and Exchange Commission a proposal to amend Nasdaq Rules 5705 and 5710 to adopt a disclosure requirement for certain securities that seek to provide a return based on a specified multiple or inverse multiple of an underlying index or reference asset.
****SD: Nasdaq wants issuers of leveraged and inverse ETPs to disclose more information about the dynamics of holding those instruments for more than a day. Also, Nasdaq PHLX Lowers Minimum Size for Anticipatory Hedging for NDX and NDXP
Regulation & Enforcement
Lukken Statement on Cross-Border
FIA President and CEO Walt Lukken today made the following statement on the Cross-Border White Paper released today by CFTC Chairman Giancarlo:
“I applaud CFTC Chairman Chris Giancarlo’s effort to rethink the manner in which cross-border regulations are applied to the derivatives markets. The derivatives industry is global in nature, so it is imperative that international regulators come together to design a coherent regulatory framework that recognizes this fact. The deference model utilized by the futures markets has worked extraordinarily well over the thirty years of its existence, even during times of crisis. FIA agrees that a similar recognition model would benefit the broader swaps industry without jeopardizing the safety and soundness of our marketplace. FIA looks forward to providing input on the upcoming rulemakings that will implement these proposed approaches.”
/jlne.ws/2QpyISu (Full Text Above)
Genesis Proprietary Trading Contracts with Trading Technologies to Use the TT Platform
Genesis Proprietary Trading, a leading Australian proprietary trading company, and Trading Technologies International, Inc. (TT), a global provider of high-performance professional trading software, today announced Genesis has contracted with Trading Technologies to use the TT futures trading platform. With this agreement, Genesis’ proprietary traders have access to TT’s fully integrated suite of cutting-edge functionality for trading all TT-connected global markets.
Trading infrastructure testing: the main challenges
Vaibhav Shukla – Itiviti Blog
In previous blog posts, we have discussed the importance of trading infrastructure testing and the regulatory and operational impetus driving its necessity. But when push comes to shove, how easy is it to implement these complex systems? What types of testing solutions are available, and what are the biggest challenges to their adoption?
****SD: Vendor related – Itiviti has had maybe two or three announcements a month for the past few months. The two that particularly caught my eye pertained to Asian firms deploying Itiviti’s options market making technology.
StratiFi and Omni Global Partner To Empower Advisors With Risk Management Technology
Omni has integrated StratiFi’s PRISM Rating technology into its Omniscient CRM platform. The partnership will enable advisors to access risk-management tools that are normally the purview of sophisticated institutional investors.
****SD: Recall that StratiFi is Steve Sears’ employer now and that his insights can be found here.
Scott Visconti joins Vela as CTO
Vela, a leading independent provider of trading and market access technology for global multi-asset electronic trading, today announced that Scott Visconti has joined Vela as CTO, focusing on technology strategy, supporting growth, and the next stage of development of Vela’s product stack, services, and processes.
Scott will be based in Vela’s headquarters in New York and report to CEO Jennifer Nayar. He will lead the global development team and work alongside the executive team to cement the firm’s position as an innovative and transformational leader.
Nomura secures Rahul Darbari as Head of Asia FX Options
Celeste Skinner – Finance Magnates
The new position will see Darbari relocate to Singapore.
Bearish Divergence May Signal Stock Market Warning
Jodie Gunzberg – S&P Dow Jones Indices
Despite escalating trading tensions between U.S. and China that built through Sep., large caps were largely unaffected. The aging Bull market (since March 9, 2009) showed no signs of stopping, as the S&P 500 posted new highs and posted an annualized 16.51% equity return and 18.91% with dividends, as mentioned by Howard Silverblatt in Market Attributes. However, also noted by Silverblatt, Q4 appears to be full of politics and turmoil. Based on the monthly performance measurement of the small cap premium, perhaps the market is showing at least one sign of fear.
About That Short Volatility Trade…
Bernie Schaeffer – Schaeffer’s Research
The long-suffering iPath S&P 500 VIX Short-Term Futures ETN (VXX) continued on Friday to hang (admittedly by just a thread) above its Jan. 11 low of $25.84, despite the increasing pressure of its overhead 10-day moving average. Last week’s relatively unremarkable VXX action capped off a calendar quarter in which the fund, which is designed to mirror the performance of short-term Cboe Volatility Index (VIX) futures, fell nearly 28%.
GE Investor Bets Wrong on Stock But Right on Put Options
Gregory Calderone – Bloomberg
General Electric rallied as much as 16 percent after announcing a new CEO but not all investors are rejoicing in today’s spike. One trader seems to have made an untimely bet Friday morning, selling a block of 6 million shares at $11.51 each.
****SD: *Gasp!* It’s almost like this person hedged his trade and it worked.
Your Guide to the Many Flavors of Quant Investing
Dani Burger – Bloomberg
Quantitative finance has become a buzzword of modern investing, though it’s been around for decades. Thanks in no small part to the success and allure of firms like Renaissance Technologies LLC, quant hedge fund assets have more than doubled over the past eight years, growing to $967 billion by June 2018, according to Hedge Fund Research. All quant strategies use technology and formulas to automate the investment process, rather than rely on an investor’s savvy or a trader’s skills. The resemblance ends there. Some strategies look for a tiny edge that can be exploited in a day; others scour global trends for investments that last for years. Here’s a sampling, from most to least patient.
****SD: Which is the saltiest?
Cboe to Host First Risk Management Conference Tel Aviv
Cboe Global Markets, Inc. (Cboe: CBOE), one of the world’s largest exchange holding companies, will host the inaugural Cboe Risk Management Conference (RMCSM) Tel Aviv on Tuesday, November 6, at the InterContinental Hotel David in Tel Aviv, Israel.
Hedge Funds Burned by Short Trade as U.S. Malls Refuse to Die
Jeremy Hill – Bloomberg
For traders betting on the death of America’s malls, being right and making money are proving to be two very different things.
Reminiscent of Michael Burry of “The Big Short” fame, these hedge funds have piled into a trade that could reap huge profits if loans taken out by beleaguered mall and shopping-center operators eventually go bust.
****SD: Since we’re in October now, it’s probably a good time to read this story and watch “Dawn of the Dead.” (I actually like the original and the remake from 2004.)
Ag Barometer drops to lowest level in two years as farm financial conditions worsen
Agricultural producer sentiment dropped to its lowest level since October 2016 as producers expressed concern over worsening farm financial conditions, according to the latest Purdue University/CME Group Ag Economy Barometer reading. The September barometer reading was 114, down 15 points since August. The barometer is based on a monthly survey of 400 agricultural producers from across the country.
Large declines were also seen in the barometer’s two sub-indices, the Index of Future Expectations, which fell 10 points and the Index of Current Conditions, which fell 25 points, both compared to their respective August readings.