Observations & Insight

Justin Schack, Rosenblatt Securities – Making Modern Market Structure

“The whole point of Reg NMS was to deal with the 10 years of change that had already happened — that of course made things even more complex. And there are things about Regulation NMS that we’re dealing with today that some people find problematic. But it is not a new thing and it’s just another block in what I like to call the Jenga tower of market structure.”

It always pays to have an understanding of history, especially when mass media latches onto a storyline and refuses to let go. In the wake of the financial crisis, one of those storylines was equity market structure. In this video, Justin Schack, managing director at Rosenblatt Securities, revisits the events that led to the market’s current state.

A Rube Goldberg machine is the best analogy for the current equity markets, according to Schack. If someone were tasked with designing market structure anew, the result would be far from the current structure. But regulations have unintended consequences, and attempting to surgically remove a previous, problematic “Jenga block” could set off a domino effect that leads to an even more complex situation.

Despite its negatives, Schack points out that the current market structure has lowered transaction costs for institutional investors. Looks like the Frankenstein monster has a nice smile.

Watch the video »

Lead Stories

One Measure of Investor Worry Just Hit Its Highest Level Ever
Joseph Ciolli – Bloomberg
Anxiety may have been hard to locate in the U.S. equity market before yesterday. But that didn’t mean it wasn’t there. One measure of expected turbulence, the relative cost of options that pay when stocks decline versus those that appreciate when they rise, jumped to the highest level ever recorded just before the S&P 500 Index buckled on Tuesday. Call it the new normal for investors conditioned to expect the worst when it comes to politics, the economy and corporate earnings.

Singing in the Rain!
Themis Trading
This is awesome. There is no other way to describe this academic study, which will make you (as investors) sing, dance, and rejoice when it rains. For a decade we have argued that with regard to speed, our modern markets have “jumped the shark.” While proponents of Modern Markets have argued that speed has improved liquidity and tightened spreads, we have argued the opposite. First, spreads have not meaningfully narrowed in a decade, and in fact have widened some. Second, there is a big difference between liquidity and volume.

****SD: I always loved the way Gene Kelly hopped on the light post and delivered the line, “I’m laughing at clouds.” Just one of many things to like about Gene Kelly in that flick. Here is a link to a PDF of the study in question.

Surging Dollar is Being Blamed for Increased Volatility
Zacks Equity Research
A surging dollar is being blamed for increased volatility in the market lately, with the greenback gaining 2.3% in value versus a group of other main currencies since the start of October. This is the strongest trajectory for the dollar in the past five months.

HSBC: RED ALERT — get ready for a ‘severe fall’ in the stock market
Bob Bryan – Business Insider
HSBC’s technical-analysis team has thrown up the ultimate warning signal. In a note to clients released Wednesday, Murray Gunn, the head of technical analysis for HSBC, said he had become on “RED ALERT” for an imminent sell-off in stocks given the price action over the past few weeks.

****SD: I used to love those Command & Conquer computer games.

Pound Rallies as May Agrees to Let Lawmakers Debate Brexit Plan
Charlotte Ryan and Netty Idayu Ismail – Bloomberg
The pound headed for its biggest gain versus the dollar in a month after Prime Minister Theresa May accepted that Parliament should be allowed a say on her plan for taking Britain out of the European Union.

****SD: Markets Media has a story about an effect of pound volatility – Currency ETPs Benefit From Sterling Volatility. The FT has Sterling sell-off adds to market concerns

The Pressure Builds For A December Rate Hike
The creep toward a December rate hike continues. The 30-Day Fed Fund Futures now show a 69.5% chance of a rate hike in December by the U.S. Federal Reserve. This is a full 11.1 percentage points above the odds in the wake of the Fed’s September 21st pronouncement on monetary policy.

****SD: Queen, and thus, to a degree, Vanilla Ice, has something to say about the state of the Fed.

Risks from yuan-linked derivatives falling: FSC
Ted Chen – Taipei Times
The Financial Supervisory Commission (FSC) yesterday said that exposure to derivatives linked to yuan volatility has continued to decline as the Chinese currency fell to a new six-year low of 6.7 yuan against the US dollar. In terms of total notional amounts and refundable deposits against client defaults, domestic banks’ exposure to yuan-linked target redemption forward (TRF) and double knock-outs (DKO) have continued to decline in the first eight months of this year, the commission said.

Derivatives take retail fancy
Pavan Burugula – Business Standard News
The share of derivatives has gone up sharply in retail trading pie, while that of commodities has been going downwards. Meanwhile, cash trading turnover has remained more or less stagnant. Increase in risk appetite amid sharp increase in volatility is seen driving individual investors towards the futures and options (F&O) market.


Yet Another Stock Market Speed Bump Divides Some Top Traders
Annie Massa – Bloomberg
The latest proposal to slow down the U.S. stock market has divided some of the fastest traders. The Chicago Stock Exchange wants to delay certain kinds of trading, arguing it would make the market fairer by blunting advantages of some speedy traders. Hudson River Trading LLC urged regulators to reject the plan, saying in a letter dated Thursday that it would unfairly boost a subset of traders.

****SD: If you missed John’s column about CHX’s current status, go here.

MIAX Options – Reg SCI / SIFMA BCP Test Day Plan
As previously announced in a MIAX Alert published on September 12, 2016, the MIAX Options Exchange will be participating in the 2016 SIFMA BCP Testing this Saturday, October 15, 2016. All members that are required to test in accordance with Regulation Systems Compliance and Integrity (Regulation SCI) have been notified, however, all participants are encouraged to test.

DGCX Appoints ABN AMRO as Clearing Member for DCCC
Aziz Abdel-Qadar – Finance Magnates
A memorandum of understanding was signed between DGCX and ABN AMRO this week, naming ABN AMRO Clearing Bank N.V. as a Special Clearing Member for Dubai Commodities Clearing Corporation (DCCC), which is a wholly owned subsidiary of DGCX. The partnership will now enable DGCX members to process their clearing obligations for the trades executed on the exchange with the ABN AMRO, which covers 90 of the world’s leading exchanges across Europe, the Americas and Asia Pacific.

NYSE, NYSE Arca And NYSE MKT Short Interest Reports
NYSE today reported short interest as of the close of business on the settlement date of September 30, 2016.

Regulation & Enforcement

Anyone for MiFID 3?
Steve Grob – Fidessa
I was chatting with the Reg folks here at Fidessa Towers yesterday and the spectre of MiFID 3 came up. Before you all jump off the window ledge there is no official notion of this yet, but when will the regulators feel that their work really is done? The direction of travel has been clear for a while – dismantle the current industry and replace it with something that is utilitarian, uniform and, above all, safe.

Trading Firms Beware: Those That House Spoofers Can Be Held Strictly Liable
In US tort law there is a rigid legal doctrine known as ‘strict liability’ which is frequently used by consumers to hold manufacturers of defective products legally responsible for any harm caused by their products. Consumers who bought and used the product and were injured are able to file suit against the manufacturer and seek damages without having to prove that the manufacturer had reckless, negligent, or bad faith intent in producing the product (hence, the rigidity of the doctrine).

US markets braced for trading tax grab from Democrats
Gregory Meyer – Financial Times
Each US trading day, millions of futures contracts, billions of shares and hundreds of billions of dollars of bonds change hands. The volumes provide streams of revenue to exchanges and trading platforms — and some in Washington want to divert a rivulet to the federal government. A group of Democratic politicians have proposed a financial transaction tax on trades of stocks, bonds and derivatives. Hillary Clinton, the Democratic presidential nominee, is seeking a narrower tax on high-frequency trading (HFT), the technique of using computers to execute transactions in fractions of a second.

Reg NMS: Rules of Engagement for an Electronic Era
Chris Kelley, Fidessa – TABB Forum
Perhaps the most sweeping piece of regulation to be imposed upon financial markets in the past 20 years was the SEC’s Regulation National Market System (Reg NMS, for short). A series of reforms designed to strengthen and modernize the US equity market, the new rules marked an unprecedented move toward organization, transparency and fair play. Fidessa’s Chris Kelley explains what Reg NMS meant for the industry then and why it continues to be a transformative force nearly a decade after it took effect.

COOPERMAN: I could settle the SEC’s charges with less than half of what I give to charity
Akin Oyedele – Business Insider
Hedge fund legend Leon Cooperman on Tuesday again defended himself against the insider trading charges he faces. “Information is not a crime,” Cooperman told CNBC’s Squawk Box. “What I look for is insight, not insider information.”

Biggest Fines In Binary Options Industry
Forex News Now
The business landscape is rapidly shifting for binary options and forex brokers around the word. From North America to Europe to Asia, financial regulators have stepped up their crackdown on providers of retail financial services that are flouting the rules and leading investors to untold losses. The regulatory crackdowns have resulted in many binary options broker being put out of business while many others have been slapped with hefty fines. Here are some of the largest fines that have been meted out to binary options operators in 2016.

****SD: Banc de Binary has nothing on Deutsche.


Convergex Launches New Options Algorithm
Convergex, an agency-focused global brokerage and trading related services provider, is pleased to announce that it has recently launched Darkest, a new options trading algorithm. Designed to offer both buy and sell-side clients with enhanced flexibility and functionality, Darkest is a low impact, cost effective liquidity seeking algorithm.

****SD: Did you know that Convergex executes an average of more than 1.05 million options contracts daily? That’s good for some 6.6 percent of all listed equity volume in the U.S.

Greenkey To Launch Mobile ‘Turret’ App For Traders And Brokers
Greenkey, creator of an award-winning voice workspace platform for global financial market participants, today announced that the firm next month will launch a mobile application for iOS and Android devices.

DongXing Securities selects Horizon for option trading
Horizon Software (Horizon), the leading global technology provider for electronic trading and investment management, announced today that Chinese broker, DongXing Securities (DongXing), has chosen Horizon for its equity trading, market making and algorithmic trading.

Crow Point Partners Adds Mobile Access to Trading
Rob Daly – Markets Media
Alternative-investment asset manager Crow Point Partners has taken their trading platform mobile, according to firm officials. The Hingham, Mass.-based hedge fund replaced its Eze Software Investment Suite with LiquidityBooks SaaS-based LBX Buy-Side Trader portfolio-, order-, and execution management system for its global equities, options, futures, fixed-income and foreign-exchange trading.


Indicator of the Week: Do These 13 Stocks Deserve Analysts’ Acclaim?
Rocky White – Schaeffer’s Research
As part of our sentiment analysis on stocks — one segment of our Expectational Analysis methodology — we look at data from Zacks, which tracks how analysts rate individual stocks. The data shows the number of analysts that have a “buy,” “hold,” or “sell” recommendation on a certain stock. From this, I add up the data for all stocks to see the percentage of total “buy” recommendations.


FIA announces finalists in fintech innovator competition
32nd Annual FIA Futures and Options Expo
FIA announced five finalists for the Meet the Innovators competition at the Futures and Options Expo in Chicago on Oct. 18-20. The five companies were chosen from a pool of 18 fintech startup companies that will be featured at the Innovators Pavilion, a showcase for forward-thinking solutions for the futures, options and cleared swaps industry.

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