Lead Stories

Oil volatility migrates from flat prices to spreads
John Kemp – Reuters
“Volatility can be neither created nor destroyed, rather it transforms from one form into another,” is a pretty fair summary of how the oil market works (with apologies to physicists). The benchmark price of Brent crude has been unusually stable since the middle of December, but there has been plenty of movement in the futures strip and crack spreads. Hedge funds have amassed an unusually large net long position in crude futures and options betting on a further increase in benchmark prices, but the position has not yet yielded much profit, with prices range bound.

****SD: Also from Reuters: Oil sold out of tanker storage in Asia as market slowly tightens

Hedging is about to make a comeback on global crude oil markets
Narayanan Somasunaram – Business Insider
Global airlines and shipping companies are expected to flock back into oil hedging in a low but rising crude oil pricing environment, Citigroup says. Oil consumers are returning to hedging as spot oil prices have rallied and futures curves have flattened out, pointing to further strength ahead, Citi analysts said in a note.

Hedging risk at peak levels through 2016
FTSE Global Markets
Hedging levels were consistently high throughout 2016 in comparison to other years; however, both interest rate and inflation hedging fell slightly in Q4. Total interest rate liability hedging activity decreased by 6%, to GBP27.9bn, and inflation hedging decreased by 7%, to GBP23.9bn during the quarter.

Equity derivatives traders disappearing after a difficult start
Sarah Butcher – efinancialcareers
Now is not the time to work on a European equities index trading desk. According to Deutsche Bank’s analysts they’ve had a particularly miserable start to the year. This might be why senior European index trading staff are quietly disappearing.

****SD: Deutsche Bank of late is intimately acquainted with misery. Not good when you feel the need to buy full-page ads in national newspapers to apologize.

Trump Tug of War Pits Stock Bulls Against Utility Investors
Dani Burger – Bloomberg
Sentiment on utility stocks pushed to opposing extremes; Bid for yield-cushion arrives in richly-valued market
There’s a fight underway for the heart of the defensive trade: utility stocks. In one corner, optimism is seeping through the options market as power companies head toward their longest stretch of gains in eight months. In the other are exchange-traded fund investors who are yanking assets and driving up bearish bets.

****SD: Trump tug of war — so his handshake style?

New mathematical model could stop future financial crashes
It is widely accepted that the Global Financial Crisis in 2007 was the result of abuse of the financial markets, but could it all have been avoided by with an adjustment to a 20-year-old economic model? The Black-Scholes model was awarded a Nobel Prize in economics for developing a way to price a contract before it had ended, but years later it would find itself cited as the cause of the 2007 crisis and other events like Black Monday in 1987.

****SD: I’d argue for best practices first.

Why the Bull Market May Soon Hit Resistance
Michael Kahn – Barron’s
Make no mistake, the technicals still line up for a continuation of this rally. However, nothing moves in a straight line, and sooner or later there will be a pullback. This is not a call for a top but rather a plea for investors to grab a cup of joe and take a thoughtful look at the current environment. A few problems are creeping into the market that may require a little midcourse correction in thought.

****SD: Because it always will eventually?

The Buyside is Taking the Bull by the Horns—In-sourcing Trade Execution
Nick Savona – Traders News
If hiring levels are an indication, the buyside is taking the bull by the horns, as it were, by in-sourcing trade execution. Many of the new hires come from the sell-side where trading desks have been shrinking for years. As sell-side brokers retrench due to regulations that have increased their cost of capital, there has been a decline in principal trading which was the most effective way to find a counterparty for a large trade. At the same time, the unbundling of sell-side services has shone a light on execution quality—agency trading is less likely to be accepted as a commodity in exchange for research, the value of which is being increasingly questioned by portfolio managers.

Exchanges and Clearing

Eurex set to expand FX derivatives suite
Merle Crichton – Futures & Options World
Exchange cited FX futures, swaps, rolling spot futures and cross currency swaps
Eurex, the largest European futures market, has become the latest market to say it is looking to boost its foreign exchange segment to coincide with the upcoming bilateral margin rules. “We will be launching a bunch of foreign exchange (FX) futures and rolling spot futures, as well as the central clearing of FX swaps and cross currency swaps,” said Byron Baldwin, deputy global head of fixed income and FX derivatives at Eurex, during a panel at FOW’s Evolution of Professional Trading conference in London on Thursday.

CME to go live with triangulation and monthly FX futures
Eva Szalay – FX Week
CME Group is going live with six monthly foreign exchange futures contracts on February 27, as well as launching triangulation, which links the futures, and both the volatility- and premium-quoted options markets. The exchange announced plans to launch six monthly FX futures contracts in January, for six currency pairs – the Australian dollar, sterling, Canadian dollar, euro, Japanese yen and EUR/GBP.

****SD: Finance Magnates – CME Group Expands FX Footprint, Launches Six New Contracts Next Monday

We need to talk about the London Metal Exchange
Andy Home – Reuters
It’s time to talk about the London Metal Exchange (LME). The venerable old institution that sets the global reference price for metals such as aluminum and copper seems to be lurching from crisis to crisis. Volumes are down. They fell 4 percent in 2015 and another 8 percent last year, the first time since the turn of the century activity has contracted over two consecutive years.

Theresa May and Mark Carney urged by leading City executives to halt London Stock Exchange merger
Josie Cox – The Independent
More than three dozen well-known financiers, executives and other City figures have asked Theresa May and Bank of England Governor Mark Carney to delay the planned merger of the London Stock Exchange with Deutsche Börse, saying that a tie-up would be destabilising during Brexit negotiations.

Regulation & Enforcement

SEC will not appeal ruling preventing certain retroactive penalties
Sarah N. Lynch – Reuters
The U.S. Securities and Exchange Commission has decided not to appeal a court ruling that limited its ability to punish bad actors for misconduct that predated the 2010 Dodd-Frank Wall Street reforms, the agency announced Thursday.

U.S. financial regulators meet next week, discuss systemically important firms
The Financial Stability Oversight Council, made up of the heads of the U.S. financial regulatory agencies, will meet on March 2, according to a notice from the Treasury Department on Thursday.

FIA, GFMA, ISDA and EFET jointly submit comment letters to ESMA on position limits under MiFID II
On 22 February, FIA, GFMA, ISDA and EFET jointly submitted two comment letters to ESMA on the position limits regime to be introduced under MiFID II. The first letter relates to the application of position limits to products listed in Annex I, Section C.10 of MiFID II and we argue that position limits should only apply to those products with a link to commodities, i.e. not inflation swaps.

Republicans Call on Fed to Halt Rules Until Trump’s Picks Are in Place
Elizabeth Dexheimer – Bloomberg
Key Republicans in the U.S. House told the Federal Reserve not to issue new rules until President Donald Trump’s pick to lead regulation of Wall Street at the agency is confirmed. Should the Fed defy the request, lawmakers may undo their work, according to a Thursday letter to Fed Chair Janet Yellen from Jeb Hensarling, chairman of the House Financial Services Committee, and 33 other Republicans on the panel.


Data centres help London retain cachet
Philip Stafford – Financial Times
Banks may be contemplating moving staff and operations out of London after the Brexit vote, but there is no sign of the City losing its edge as the home for data centres that help high-speed trading companies based in the US and Asia. Interxion, a Dutch operator of data centres, said on Thursday that it plans to spend EUR35m (GBP30m) to add a third more capacity to its main site on the edge of the City, as requests for computer space from banks and high-frequency traders in the US and Asia increase.

****SD: “Wanna check out my data center?” – The City’s new pickup line

Applying Blockchain to Post-Trade Derivatives Processing
Antony Lewis – TABB Forum
As distributed ledger technology for financial services continues to mature, post-trade infrastructure providers are collaborating with the industry to explore how it can be used to increase the efficiency of systems and processes underpinning the global derivatives markets. R3’s Antony Lewis explores how complex post-trade derivatives processing would change if the industry adopted distributed ledgers.

Cinnober’s Board of Directors has resolved on a directed share issue of up to SEK 180 million
The Board of Directors of Cinnober Financial Technology Aktiebolag (publ) (“Cinnober” or the “Company”) has resolved, subject to the approval of the Extraordinary General Meeting, on a directed share issue of 692,307 shares, which is expected to raise proceeds to the Company of up to SEK 180 million before issue costs.


March Or May? How To Trade A Rate Hike
Johanna Bennett – Barron’s
For those laying odds on when the Federal Reserve might raise interest rates, the May policy meeting is a heavy favorite. But a recent report from BofA Merrill Lynch Global Research argues that a March Move trade “offers a compelling opportunity, especially given the recent Fed minutes stating that ‘it might be appropriate to raise the federal funds rate again fairly soon.’ “

‘BP and Shell won’t be part of my 7pc yielding fund for long’
James Connington – The Telegraph
Investors who need a high level of income from their investments have not had many options recently. The yield on the FTSE 100 index of the UK’s biggest stocks is 3.6pc, and finding investments yielding 5pc or more that do not involve a substantial increase in risk is a difficult exercise. However, there are a number of income funds designed specifically to maximise their payouts. Some of these use complicated financial instruments called “derivatives” to push their yield beyond 6pc.

****SD: I’m not sure why “derivatives” and “sells options” get the quote treatment – implies “so-called.” (Like those old SNL skits with Chris Farley as Bennett Brauer.))

Who’s Wrong On Junk? And What Does It Mean For The VIX?
Seeking Alpha
Three things: volatility, high yield, and a glaring discrepancy. Sounds pretty Heisenberg-ish, no? I get a kick out of how people think about suppressed volatility. Moreover, I do not get a kick out of pseudo analysis. Here’s some pseudo analysis: low realized volatility begets low implied volatility.

Is This An Inflection Point for Equity Volatility?
Bernie Schaeffer – Schaeffer’s Research
The post-election “life cycle” price pattern that’s been on display for front-month CBOE Volatility Index (VIX) futures for December, January, and February appears to be experiencing a divergence in terms of how March front-month futures price action has thus far played out — even as the upside bias to all-time highs in the equity indices appears intact.

Weekly Options Trading Can Supercharge Your Gains
Tyler Craig – InvestorPlace
Trading options around expiration use to be an opportunity that only arrived once a month. Now, it comes every week. For the majority of their existence stock options were listed on a monthly basis with expiration landing on the third Saturday. That all changed a few years back when the wizards at CBOE created Weekly options. These revolutionary products afford investors the ability to trade around expiration every single week.

Earnings Week of 2/27
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.

****SD: Kind of crazy how there’s really only a month and a half between earnings seasons now.


Glencore Hunts Among U.S. Grain Traders for Next Takeover
Javier Blas – Bloomberg
After striking deals in Russian oil and Congolese copper mining, Glencore Plc has set its sights on the U.S. grain-trading industry. The company sold half of its agriculture division to two Canadian pension funds for $3.1 billion last year to fund an aggressive debt-reduction plan. Now, with cash levels rebounding and support from new partners for acquisitions, the Swiss trader is planning to enter the U.S. market.

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