An Options Contract That’s Not for the Faint of Heart; Why A Resilient Risk Management and Internal Control Infrastructure Matters; “Election Certainty” Not Showing Up In SPX Options Market

Oct 25, 2016

Observations & Insight

Last Chance to Sign Up For London MarketsWiki Education World of Opportunity Event
By John J. Lothian

On Friday the registration for the MarketsWiki Education World of Opportunity event in London will close. You can still sign up your interns, newer employees or anyone interested here. The event is FREE and not to be missed.

We have a great line-up of speakers, though we have a couple of changes to announce. Paul Christensen and Jeremy Grant had to step aside as conflicts came up. The FT’s Phillip Stafford has agreed to step in for Mr. Grant. We are also adding Fleur Binyon from the CME Group to our list of speakers.

Our London events are being held at the Woolgate Exchange in the facilities of the University of Chicago Booth School of Business. We have sessions at 10 AM, 1 PM and 3 PM. We are also holding a social event at the end at a nearby pub.

Our goal here is very simple – provide short 10 to 12 minute talks that cover ideas, trends and opportunities in the financial services space. By doing so, interns and young professionals can learn more about the breadth and scope of our industry, make a connection to our space and get excited about the opportunities. In short – let’s attract the next generation of talent to our industry.

If you know someone who would be interested in learning more about our industry and the opportunities in it, please refer them to the sign-up page. If you have any questions, please contact me at

****SD: Note that we have a real whopper of a newsletter today with a lot to digest. Be sure to give regulation a scan as Reg AT, HFTs, order routing and A.I. all make an appearance. Really, there is a bit of everything today. Happy reading!

Lead Stories

An Options Contract That’s Not for the Faint of Heart
Ben Eisen – WSJ
Here’s an options contract for traders looking to take a walk on the wild side: the weekly VIX option that expires on Nov. 9. That’s a contract tied to the Chicago Board Options Exchange’s Volatility Index, Wall Street’s favorite fear gauge. Investors tend to bet on the VIX when they’re worried about more stock market volatility ahead, but this particular investment has additional risk because of the way its expiration coincides with the U.S. presidential election.

****SD: I’ll say this about the never-ending election news cycle, it got the WSJ to write a story about options contract structure around expiration.

Why A Resilient Risk Management and Internal Control Infrastructure Matters
Adi Agrawal, Senior Vice President and Chief Audit Executive – The OCC
Enhanced focus on internal controls by corporate boards and regulators sometimes appears to be a post-financial crisis phenomenon. Those tasked with designing, executing and assuring the resiliency of a corporation’s internal control infrastructure sometimes struggle with articulating the business case for it as well as defining the business need for internal controls. It is, hence, important to recognize and understand what “controls” are and their value in achieving desired outcomes.

****SD: How often do you get a thought leadership piece that references ancient Egyptian water clocks?

“Election Certainty” Not Showing Up In SPX Options Market
Russell Rhoads – CBOE Options Hub
So we keep hearing that the market is unconcerned with respect to the upcoming election or stated another way the stock market is discounting a victory by Hillary Clinton. I am always skeptical when being told that the market thinks one thing or another without some sort of numbers to back up the statement. With respect to the market discounting a pending event as being a non-event I always turn to volatility. Specifically, implied volatility.

***SD: It ain’t over til it’s over.

Euro Traders Start to Believe Lightning Won’t Strike Twice
Anooja Debnath – Bloomberg
Traders selling the euro are counting on history not to repeat. After being stuck in a range for months, the single currency has fallen below the median end-of-2016 forecast in a Bloomberg survey as investors come to the conclusion European Central Bank President Mario Draghi will extend monetary stimulus in December, just as the Federal Reserve raises interest rates. Options also signal a weaker euro, which may deliver the economic boost Draghi is trying to achieve.

****SD: Sure, it’s rare for lightning to strike twice, but why not keep a Faraday cage close at hand? Also, I saw this article today — Draghi says euro remains vulnerable without banking union

The Art of the Bubble
Ari Pine, TradeCo Global – Trading Technologies
I may be old, but I’m hoping that at least I’m getting some wisdom out of my experience. The MacroTourist recently wrote about the potential for a bubble in fixed income and why you just can’t know. Bollocks! I’m not English. And it may seem that I disagree with The MacroTourist (I highly recommend the blog) about the bond bubble. I do not. Instead, I firmly disagree that you can’t know. Oh, you know! I remember the dot-com era. I was trading stock options toward the end of it. As it turns out, I also happened to be at the epicenter of it in San Francisco.

FELDER: The probability of a market crash is ‘as high as it’s ever been’
Business Insider
As short volatility market positions continue to build – largely as a consequence of central banks suppressing volatility to prevent recessions – maverick money manager Jesse Felder is warning the end result of the volatility trade could be a very painful lesson for investors with significant stock market repercussions.

Volatility Slumped Last Week In The Wake Of Quiet ECB Meeting
Teresa Rivas – Barron’s
Whether or not the CBOE Volatility Index (VIX) really is predictive, it was a quiet week last week, following the European Central Bank’s uneventful meeting.

Iraq is balking at OPEC’s oil output deal, and Baghdad could get away with it
Iraq’s insistence that it should be exempt from a proposed deal to limit oil output may sound audacious coming from OPEC’s second largest producer, but analysts say it’s entirely possible that top exporter Saudi Arabia will give Baghdad a pass.

How the VIX Reads S&P 500’s Future
Joseph Halpern – ThinkAdvisor
In preparation for a potentially close U.S. presidential election it may be beneficial to review how the CBOE Volatility Index (VIX) played out prior to the Brexit vote as well as what this measurement means. On June 6, 18 days prior to the Brexit vote, the VIX closed at 13.65, a relatively low reading for volatility. Within a week, the VIX would reach 21.00, and by voting day on June 24 it had reached 25.76 — that’s a 90% jump in value in just over two weeks. Market participants who were watching VIX knew something big may be coming.

****SD: The answer is tea leaves.

TD Ameritrade’s Deal With Scottrade Is a Temporary Fix
Antony Currie – NY Times
TD Ameritrade’s $4 billion takeover of Scottrade merely delays the inevitable. Uniting the two American online stockbrokers stacks up financially, because of cost cuts, a tax break and a sale of a banking unit. Income and margins should rise, too. But it still leaves TD Ameritrade and rivals like Charles Schwab facing the longer-term competition of index investing and robo advice.

****SD: Also see Barron’s Can TD Ameritrade and Scottrade Outrun the Robos?

Fed’s Evans says wants rates higher so will have room to cut
The U.S. Chicago Federal Reserve Bank President Charles Evans on Monday said he would like interest rates to eventually rise from where they are now so the Fed will have the room to cut rates to stimulate the economy if hit by a shock.

****SD: I said something along these lines as a joke last week… Guess it isn’t a joke. Also regarding Evans — Fed’s Evans sees three rate hikes by end of 2017 and Fed’s Evans says U.S. economy doing ‘quite well’ but constrained


Eurex Exchange’s Equity Index Derivatives newsletter
Eurex Group
The trading volumes in Q3/2016 show very robust demand for Eurex Equity Index Derivatives. Futures and options on European broadbased indexes continue to be very popular, as are derivatives stocks from the European financial sector. Driven by client interest, Eurex expanded the MSCI product offering and introduced SMI Weekly Options.

NASDAQ promotes Jochumsen to deepen relationships in Europe
The Trade
NASDAQ has announced it has promoted Hans-Olve Jochumsen to vice chairman, shifting his responsibilities to deepening the exchange’s relationships across Europe.

SGX brokers struggle to survive as trading volumes fall sharply
S V Krishnamachari – IB Times
SGX posted 16 percent fall in net profit to S$83 million in Q1, FY2017 while CEO Loh Boon Chye warns of low trading volumes ahead.
Brokers on Singapore Exchange (SGX) are finding it tough to survive amid falling trading volumes, reflected in the SGX’s drop in revenues and profit for the first quarter, the results of which were declared last week.

TSX Ignite 2016 Live Event Series in Ottawa on October 27
Toronto Stock Exchange (TSX) and TSX Venture Exchange continue this year’s TSX Ignite live event series in Ottawa on Thursday, October 27. Founded in 2014 in collaboration with Canadian incubators and accelerators, this innovative program is designed to help support the development of small and medium-sized enterprises. TSX Ignite provides companies with insights from Canada’s business leaders on how to build and grow great companies.

Scottish stock exchange group says it has landed big-name adviser
Samuel Agini – Financial News
A group looking to start a stock exchange in Scotland says it has landed Menzies Campbell, the former leader of the Liberal Democrats, as an adviser as it works to give the country its first independent exchange since 1973.

****SD: I don’t care what the fundamentals look like, I’m always short haggis.

Total Value Of Trading Through Smart Phones Reached AED 4.2 Billion In 2016
Press Release
Dubai Financial Market (DFM) honored 11 of its licensed brokerage firms for providing their customers with trading via smart phone applications in 2016, lifting the number of firms that offer this service on DFM to 26 brokerages.

Regulation & Enforcement

CFTC Considers Regulation AT Tweaks
Rob Daly – MarketsMedia
The US Commodity Futures Trading Commission is contemplating a few changes to the regulator’s controversial Regulation AT, according to CFTC Chair Timothy Massad and who spoke at a conference hosted by the New York Federal Reserve Bank in lower Manhattan. Under the initial version of Regulation AT, the CFTC proposed establishing risk controls at the exchange, futures commission merchant, and at the trading firm levels. However, many commenters viewed this approach as too burdensome and complicated.

***SD: Taking a divide and conquer approach would be beneficial in tackling this wide-ranging issue, according to the regulatory panel I attended at Expo. Other takeaways: recognize that FCMs have eight years of post-GFC risk management under their belt; focus on best practices and not generating reports full of stale data; focus less on people inputting trades (pretty much everyone but human resources gets captured by the current regulatory net); and last, firms need to have some sort of recourse should regulators actually want to look under the hood.

ECB and Bundesbank differ over HTFs
Philip Stafford and Claire Jones – Financial Times
The European Central Bank and the Germany’s monetary authority are at odds over the best way to prevent high-speed trading from amplifying market volatility. In two separate studies published this week, the Bundesbank and the ECB arrived at differing conclusions over how best to monitor high-frequency trading. On Tuesday, the ECB suggested using tools already available for exchanges and that more stringent rules “might be detrimental to financial stability and market resilience.”

‘Siri, catch market cheats’: Wall Street watchdogs turn to A.I.
John McCrank – Reuters
Artificial intelligence programs have beaten chess masters and TV quiz show champions. Next up: stock market cheats. Two exchange operators have announced plans to launch artificial intelligence tools for market surveillance in the coming months and officials at a Wall Street regulator tell Reuters they are not far behind. Executives are hoping computers with humanoid wit can help mere mortals catch misbehavior more quickly.

****SD: Okay, so the crooks will just respond, “Alexa, prevent me from being caught.”

EU Eyes Tailoring Global Capital Rules to Spare Ailing Banks
Silla Brush – Bloomberg
The European Union is preparing a rewrite of international capital requirements as part of a growing effort to soften the blow of regulations on struggling banks.

Smart New Rules for Smart Order Routing?
Ivy Schmerken – TABB Forum
Regulators are seeking to boost transparency into the order routing practices of broker-dealers and trading venues that reroute their orders in U.S. listed equities. While institutional investors have been clamoring for more transparency into order handling practices, however, many market participants believe the new rules would not capture all of the institutional order execution activity.

Exclusive: OptionWeb Lays Off Staff Due to New Binary Options Regulations
Victor Golovchenko – Finance Magnates
One of the oldest binary options brokerages in the industry, OptionWeb has laid off a number of employees in recent weeks, a company spokesperson has confirmed to Finance Magnates.


Convergex Signs Exclusive License Agreement For The OptionEyes To Assist Traders With Risk and Portfolio Management
Convergex, an agency-focused global brokerage and trading related services provider, is pleased to announce that it has entered into an agreement granting it an exclusive license to The OptionEyes, a front-end technology platform that helps active traders manage and trade positions in an options or equity portfolio.

Colt To Revamp Japanese Network Infrastructure
Press Release
Colt, a leading international network and ICT provider, today announced a major revamp of their advanced fibre-optic network, as well as extensive Layer 2 network expansion in Japan. This will enable high-bandwidth services with speeds ranging from 10Gbps up to 100Gbps on mass scale, with greater routes and diversity. The phased expansion of both available services and coverage areas is slated to begin in January 2017.

****SD: Did you know that Colt stands for City of London Telecommunications?

Broadridge Deploys CloudSM Service, Tapping into New Digitized Channels
Jeff Patterson – Finance Magnates
Broadridge Customer Communications, the customer communications arm of Broadridge Financial Solutions, has launched Broadridge Communications CloudSM, a new cloud connector that integrates the group’s existing network framework to an expanded pantheon of digital channels, according to a Broadridge statement.


Safe investing strategies for the US election and uncertain times
Jeff Brown – CNBC
If Trump and Clinton supporters have anything in common at all, it’s a sense of dread. Yet the next president’s policies and temperament aren’t their only worries; they fear what a period of uncertainty would do to their investments.

Investopedia Anxiety Index a step ahead of the VIX?
Jeff Benjamin – InvestmentNews
In what could represent a new twist on investment crowdsourcing, the financial encyclopedia website Investopedia has started measuring online searches as a way to forecast activity in the financial markets. Based on some relatively condensed back tests of four years, it appears that this somewhat bizarre, but somewhat logical, new gauge could be another indicator of looming market volatility. What makes it most interesting, and potentially most useful to financial advisers, is that the so-called Investopedia Anxiety Index has shown a pattern of being a few steps ahead of the closely watched CBOE volatility index.

****SD: I’m reminded of the CBOE’s recent endeavors with Social Market Analytics — still finding ways to harness the web for sentiment.

Alphabet hits another all-time high—here’s how to play it
Annie Pei – CNBC
Alphabet is one of the big tech stocks set to report earnings later this week, and one trader is looking to capitalize on a move up for the tech titan. Todd Gordon of believes that Alphabet “should be moving up towards $1,000” even after earnings, as he said Monday on CNBC’s “Trading Nation.” Gordon noted that Alphabet stock has traded in a “consolidation” pattern for the past three months, but the charts show that the stock looks to have broken out of upper range at around $820, signaling that Alphabet shares could keep rallying.

****SD: In a nutshell — “rather than buying the expensive calls, we want to be selling the expensive puts.”

Options Traders Keep Faith in Tata Stocks Despite Board Turmoil
Santanu Chakraborty and Rajhkumar K Shaaw – Bloomberg
Options traders are confident that the ouster of Tata Group Chairman Cyrus Mistry won’t have a long-term impact on India’s $100 billion salt-to-steel business empire, convinced that the individual companies are in stable hands.

****SD: Since its founding in 1868, Tata has had six chairmen. During that same period, there have been 27 presidents in the U.S. (I’m not counting Grover Cleveland twice).

Market Update: The Sword of Damocles (VIDEO)
CME Group
Jack Bouroudjian reminds us to look at the numbers coming out of Europe this last trading week of October. Also, keep a close eye on the 5 Fed governors that are speaking this week. They may help give insight to the future of the banks.

****SD: The implication being that powerful traders can never be happy?

S&P 500 looks poised for a positive breakout
Jamie Chisholm – Financial Times
When the S&P 500 opened on Tuesday it began twitching within a well-worn channel. Since moving above 2,120 in early July and hitting a record close in August of 2,190, the Wall Street barometer has not finished a day below the former level. It’s a range of a little over 3 per cent covering more than three months. That is unusually tight and the longer it goes on the more it encourages speculation about the violence of any breakout.


How to Use Options to Beat the Market
Steven M. Sears – Barron’s
Sooner or later, most investors realize that the stock market is not all it’s cracked up to be. Good stocks don’t always advance. Bad stocks don’t always fall. Reality is rarely ever as bullish, or as bearish, as forecasted by Wall Street’s analysts and strategists. All that is certain is that this quasi-invisible force known as volatility is always lurking about, threatening to disrupt the market’s delicate equilibrium. Investors have two primary ways to respond. They can sit tight and act like long-term investors. Time tends to reward such behavior, though research has shown that it is as difficult to practice as it is uncommon.

****SD: Next up in this series, selling options.

Options 101: Defining Options Contracts, Puts, and Calls
Ryan Campbell – The Ticker Tape
Options give traders, well, options. But options aren’t just for traders; they can give investors options, too. Investors use them to reduce risk and potentially increase returns. Options are not suitable for everyone, however, as they involve significant risks.

Analyzing the VIX to Interpret Market Risk
The Ticker Tape
What exactly is market volatility and why do some traders love it? The term volatility is used in a few different contexts by traders and the financial media. It seems the usage of the term increases when the broader market has been trending lower for a while and the financial media is flashing “Breaking News” alerts across your screen.

VIX Analog: What We Can Learn Now From 2007
Tim Knight –
As the VIX got pounded back into the sub-teens yesterday, it occurred to me to compare the present activity to the period preceding the financial crisis in 2008. What I found was interesting.

Alpha Academic to run advanced trading course
Luke Jeffs – Futures & Options World
London-based training and trading firm plans to launch the diploma next month
Trader training firm Alpha Academic plans to start its first advanced financial trading diploma next month after receiving approval to run the course. City of London-based Alpha Academic, run by chief executive Chris Tubby, said it will open its first level five advanced diploma in financial trading on November 14. The course will run for five weeks and cover financial markets and operations, products and trading techniques.


OptionsCity Unleashes Innovation and Performance at FIA 2016
OptionsCity celebrated its ten year anniversary last week with its largest splash ever at FIA Expo in Chicago. OptionsCity’s industry-leading numbers are impressive (2+ million contracts traded daily, 16 microsecond response times, 15+ global exchanges, 26+ clearing firms, 1000+ users of OptionsCity products globally, and on…) and they drove home their product performance by partnering with another brand that knows something about performance, McLaren.

****SD: Having a MacLaren at the “booth” was an eye grabber. I have to say, it must have been odd to watch somebody wheel that thing into the basement of the Hilton.


Investors Think President Trump Would Make Them Poorer
Adam Davidson – The New Yorker
On September 26th, at 9 P.M., Hillary Clinton and Donald Trump walked onto the stage at Hofstra University, in Hempstead, Long Island, for the first of three scheduled debates. That day was Clinton’s polling nadir. She had fallen, precipitously, from a nearly ninety per cent lock, as predicted by FiveThirtyEight, to a less than fifty-five per cent chance of winning the Presidency. Trump had the momentum. A cough or a slip—of the tongue or the foot—might have done Clinton in, and more than eighty million viewers, eager to see what would happen in this most unpredictable of elections, tuned in for the most-watched Presidential debate in history.

Saxo hikes margin calls ahead of US election
Julie Aelbrecht – Futures & Options World
Danish bank expects the election to be a significant market event
Saxo Bank has increased the margins clients pay on products the broker expects to be affected by the outcome of the US presidential election on November 8, such as equity, index and fixed income contracts for differences (CFD) and certain currency pairs.

****SD: Much like with Brexit, I expect to see more and more reports like this as the day draws nearer.

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