Observations & Insight

Blockchain That Makes Sense: How Post-Trade Digital Ledger Technology Will Make Banks And Brokers Happy
Jim Kharouf – JLN

When you talk about the potential for digital ledger technology, words like revolutionary and transformative are often mentioned.

Ray Kahn and Thorsten Peisl are not in the disruptor camp. Yet both left solid jobs in the financial markets and launched blockchain start-ups aimed at bringing new efficiencies to the marketplace.

Their message about blockchain was clear at the World Federation of Exchanges annual meeting in Cartagena, Colombia this month. Yes, blockchain is coming. No, it’s not going to turn this industry upside down and replace all of the key functions of the transaction chain. But it will save lots of participants lots of money, they said.

Kahn, founder and principal advisor of Archon Capital Advisors, and Peisl, who launched Rise Financial in January, are firmly focused on using distributed ledger technologies to address post-trade challenges. Each sees tremendous potential for the technology and both are practical about how and where their firms fits in.

Read the rest here.

Lead Stories

OPEC Agrees to Cut Production in Drive to End Record Glut
Grant Smith, Wael Mahdi and Javier Blas – Bloomberg
OPEC clinched a deal to curtail oil supply, confounding skeptics as the need to clear a record global crude glut — and prove the group’s credibility — brought its first cuts in eight years. Crude rose as much as 8.8 percent in London.

****SD: A big deal, but still questions on some details. And as TradingFloor points out, Opec has to prove it can ‘adhere to targets’ — Hansen

A World Without Market Makers
Larry Tabb – TABB Forum
While investors do a great job valuing assets, they have less understanding of the impact of their orders on short-term supply-and-demand dynamics. This is where market makers step in. Market makers sell immediate liquidity, or the ability to trade on demand. By continuously interacting with both sides of the market, the market maker’s bids/offers get lifted and signal that supply and demand may be shifting. This occurs across both single stocks and correlated assets such as futures, options, ETFs, and increasingly, currencies and bonds.
But what if market makers didn’t exist? What would the markets look like? What would be the impact of a world without market makers?

No Absolute Immunity For Exchanges, SEC Tells 2nd Circ.
The U.S. Securities and Exchange Commission told the Second Circuit that national securities exchanges do not enjoy absolute immunity and that the self-regulatory organizations are subject to the jurisdiction of district courts, according to an amicus brief filed Monday in an appeal by several groups of investors to revive their “Flash Boys”-inspired suits. The appeals court asked the SEC to weigh in on the issue, and the agency came down squarely in opposition to a decision last year by U.S. District Judge Jesse Furman, who tossed five related securities fraud suits against seven exchanges along with dark pool operator Barclays Capital Inc. and its parent company Barclays PLC. The suits alleged that the exchanges gave high-frequency traders an unfair advantage, providing them with trading data marginally sooner than other traders, echoing allegations in Michael Lewis’ 2014 book “Flash Boys.”

****SD: There’s a reason not even Superman has absolute immunity.

After Brexit and Trump, It’s Italy’s Turn to Keep Traders Awake
Chiara Albanese, Stefania Spezzati, and Charlotte Ryan – Bloomberg
There’s an acrimonious campaign, a vote and then a cliff-hanger result. The routine is all too familiar for bond and currency traders. After the shock of Britain’s Brexit referendum and Donald Trump’s U.S. presidential election victory, trading desks are readying for another sleepless night on Dec. 4 as they await the outcome of a ballot that again has the potential to disturb the political order.

Outlook for US FCMs Finally Brightens
Tom Lehrkinder – TABB Forum
The US Future Commission Merchant (FCM) community has been under constant pressure for the past eight years. This pressure has come in the form of epic new regulation, stifling capital rules, lousy interest rates, and increasing costs that all are adversely affecting profitability and driving a shakeout in number of players. Despite this wave of challenges, however, the leaders of the FCM community are finally spinning a positive outlook for the industry.

****SD: ValueWalk on the report here.

Transatlantic cables may keep FX routed through London post-Brexit
Jemima Kelly – Reuters
High-speed sub-Atlantic cables may force banks to keep their armoury of currency trading hardware in London for some time, even if the dealers themselves go elsewhere when Britain leaves the European Union. Many of the world’s major financial firms – most of which have their European headquarters in London – say they are making contingency plans to move traders and investment bankers to mainland Europe if the British government does not negotiate unfettered access to the EU’s single market.

****SD: Maybe this will prompt more action on the microwave tower front?

Exchanges and Clearing

CME Group to set monthly trading record, boosted by Trump, says CFO
CME Group Inc (CME.O) will set a monthly record for trading volumes in November, a top executive said on Wednesday, as U.S. President-elect Donald Trump’s victory has fueled uncertainty in markets.

****SD: Given CME’s all-time daily volume record was November 9, this makes total sense. November 9 volume was 44,516,949 contracts, whereas previous record volume on October 15, 2014 was 39,567,064.

CBOE looks for authority to keep trading floors open during disasters
By Hayley McDowell – The Trade
The Chicago Board Options Exchange (CBOE) is seeking authority from the US regulator to continue operating in the event of a physical disaster, system failures or other unusual circumstances.

****SD: Hopefully CBOE gets approval before January 20 since that’s when many people think a disaster will begin.

Nasdaq Phases Out ‘Insecure’ ISE FTP Protocols
Max Bowie – WatersTechnology
Nasdaq is scrapping the FTP report download formats used by the International Securities Exchange’s Gemini and Mercury platforms as it migrates them to its Inet technology platform, citing the existing FTP processes’ “security issues and firewall incompatibilities.”

****SD: I prefer ‘diffident’ rather than ‘insecure.’

Nasdaq’s Extended Life “Bait and Switch” Order
Themis Trading
Nasdaq has formally proposed their new Extended Life Priority Order Attribute. Before we explain why we think this is just another Nasdaq order type that will leak information about retail and institutional investors, it is important to note that this is NOT a universal speed bump that all orders must pass through. This new Nasdaq order type is an optional order that only some customers will be able to use.

CFTC Grants CME Clearing Europe Registration As A Derivatives Clearing Organization
Press Release
The U.S. Commodity Futures Trading Commission (CFTC) announced today that it has issued an order granting CME Clearing Europe Limited (CMECE) registration as a derivatives clearing organization (DCO) under the Commodity Exchange Act (CEA).

CME files to extend eight more incentive schemes
Julie Aelbrecht – Futures & Options World
The Chicago Mercantile Exchange Group has applied to the US futures regulator to extend another eight incentive programs, taking to 20 the number of schemes the US exchange has applied to prolong in the past week.

Fungibility for S&P 500 End of Month and Weekly Options starts December 15
CME Group
On Thursday, December 15, 2016, and pending final regulatory approval, CME Clearing will introduce “options fungibility” for positions in End of Month and Weekly S&P 500 options on futures. This change will allow option positions in the mini and corresponding standard size option products to offset one another in the same way that futures positions do today. The E-mini S&P 500 End of Month Options (EW) and the standard sized S&P 500 End of Month Options (EV) will be eligible for the fungible offset service, together with the corresponding Wednesday and Friday weekly expirations.

Precious metals derivatives: Discontinuation of trading based on the London gold and silver market fixing
Effective 3 April 2017, the Management Board of Eurex Deutschland and the Executive Board of Eurex Zürich AG took the following decisions: 1) Discontinuation of trading of precious metals futures contracts and precious metals options contracts based on the London gold market fixing. 2) Discontinuation of trading of precious metals futures contracts and precious metals options contracts based on the London silver market fixing.

Wide Variety of CBOE Benchmark Indexes Discussed at RMC
Russell Rhoads – CBOE Options Hub
Matt Moran and Bruce Traan, both from CBOE, delivered the second session at this year’s CBOE Risk Management Conference in Hong Kong. Bruce kicked things off with a discussion titled “New Developments in Options and Volatility-Based Benchmarks”. Matt followed with “Options and Volatility Based Benchmark Indexes”.


Citi’s ex-European futures head joins FinTech firm as CEO
Joe Parsons – The Trade
Citigroup’s former European head of listed derivatives has joined machine learning FinTech firm BMLL Technologies as its new chief executive. John MacPherson joined the company in November, almost a year after he left the US investment bank.

Regulation & Enforcement

March margin deadline presents “huge challenge”
Futures & Options World
March 2017 Emir enforcement date may expose a global shortage of collateral
The March deadline for the collateralisation of non-cleared derivatives under European clearing rules has reawakened fears there may be a shortage of eligible assets to cover trades, experts have warned a conference in London. The European Market Infrastructure Regulation (Emir) requires counterparties, which exceed certain thresholds, to collateralise non-cleared derivative transactions with initial margin at the opening of the trade and top up with variation margin on a daily basis.


Wolverine Execution Services Deploys Corvil’s Execution Suite
Jeff Patterson – Finance Magnates
Corvil, a specialist in real-time data analytics and regulatory solutions for the financial services industry, has been selected by Wolverine Execution Services (WEX) to help facilitate and support its trading regime, with an emphasis on the implementation of new technologies to the reconciliation of new regulatory measures for clients, per a Corvil statement.

OptionsCity Launches CityTrader Mobile, Native iOS Futures and Options Trading Application
OptionsCity Blog
OptionsCity Software, a global provider of electronic trading solutions for professional futures and options traders, today announced a brand new mobile version of its cloud-based futures trading platform, CityTrader. CityTrader Mobile offers the same intuitive functionality as its desktop counterpart, such as futures and options trade execution, custom spread-building and RFQs, with the ease of an on-the-go iPhone application.

Saxo Bank Launches New Order Ticket for Multi-Legged Option Transactions
Aziz Abdel-Qader – Finance Magnates
Danish multi-asset brokerage Saxo Bank has released a newly developed type of order tickets which allows contract options traders to simultaneously buy or sell a number of different options that traditionally could only be achieved by placing separate orders.

Portware Upgrades its Multi-Asset Execution Management System with Enhanced AI
Victor Golovtchenko – Finance Magnates
Portware has deployed the latest version of the company’s execution management system (EMS) Portware Enterprise. The company has been at the forefront of the industry when it comes to automation of trading workflows. The company calls its product Portware Enterprise “thinking EMS”.

R3 releases Corda as blockchain strains start to show
Peter Lee – Euromoney Magazine
R3, the financial innovation firm attempting to coordinate a multitude of efforts among a 70-strong consortium of banks and buy-side firms to develop blockchain-based wholesale financial services, released Corda on Wednesday.


Dan Passarelli Discusses Getting a Volatility Edge
CBOE Options Hub
The first presentation at the 2nd Annual Asian version of CBOE’s Risk Management Conference featured an informative tutorial from Dan Passarelli of Market Taker Mentoring. Dan’s talk was titled Directional Options Strategies and Trade Management.

How To Protect Your Portfolio From Black Swans
Bram de Haas – Seeking Alpha
Nassim Taleb’s Incerto contain the blueprint for an improved way of portfolio construction. Unfortunately, he mostly refrains from giving practical pointers which leaves some room for interpretation. This is my interpretation of Taleb’s work in practice; it is not the final answer.

VIX Duration: Why It Matters
Seeking Alpha
It’s been a little over a year since the CBOE launched weekly futures on the VIX Index. As trading volumes begin to grow, now might be a good time to take a closer look to see how useful these futures really are. Apart from expiring on a weekly cycle, the VIX weekly futures are all but identical to their monthly cousins. Like the VIX monthly futures, the weeklys trade on the Chicago Futures Exchange (CFE), a subsidiary of the Chicago Board Options Exchange (CBOE), and are cash settled against a Special Opening Quotation (NYSEMKT:SOQ) of the VIX Index calculated from S&P 500 option prices on the Wednesday morning of their expiry.

2 China Currency Trades For Yuan Float ‘Certainty’ – Emerging Markets Daily
Dimitra DeFotis – Barron’s
Societe Generale thinks the probability of a free-floating Chinese renminbi (RMB) is a “near certainty” by the end of 2019. That’s a long way off, with a lot of unknowns in between. Duetsche Bank’s Taimur Baig, Elina Ribakova and Gautam Kalani noted in research today the following on China’s currency

Asked at RMC – What’s Implied from Implied Volatilities?
Russell Rhoads – CBOE Options Hub
The final session on Day 1 of this year’s CBOE Risk Management Conference in Hong Kong posed the question, “What’s Implied from Implied Volatilities and Volatility Products?” This session was a combination of talks from William Chan, Head of Asia Pacific Equity Derivatives Research for Bank of America Merrill Lynch and Tim Edwards, Senior Director of Index Investment Strategy for S&P Dow Jones Indices.

Options Insight: What’s Driving the Move in Small Caps?
David Bartosiak, Zacks.com momentum stock strategist, discusses the performance of small-cap stocks and his options strategy.

****SD: Answer – More people with smaller heads.


Four reasons the bulls will stay in charge of the stock market
Howard Gold – MarketWatch
Last week the four major U.S. market indices — the Dow Jones Industrial Average, the S&P 500 Index, the Nasdaq Composite Index and the Russell 2000 small-cap index — hit new highs on the same day. And on Wednesday of this week the S&P 500 notched another new high.

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