Observations & Insight

EDITOR’S NOTE: JLN Options is happy to have Henry Schwartz, President of Trade Alert, as a guest editor this week.

Henry Schwartz

Sweeping change
Henry Schwartz – Trade Alert

Over the past 30 years the options market has evolved from four exchanges enjoying monopolistic single-listings to a highly competitive landscape of 14 (15 in February) venues with nearly all liquid products listed on all exchanges, fragmenting liquidity and adding a great deal of complexity to even relatively small trades. Leading participants have responded to this market structure with sophisticated ‘smart routers’ designed to optimize executions in the form of maximized liquidity and minimized fees. Sweep trades now make up nearly 40% of average daily option volume – nearly 7 million contracts, with an observable duration well under 1/10th of a second.

(Click for larger image)

This sweep of Oclaro calls lifted offers on 9 exchanges within 3 milliseconds, for a total of 3419 contracts, or nearly 4x the shown BBO size before the trade. Given the investment required to optimize routing under dynamic market conditions it’s no surprise that a handful of firms now provide routing services for the entire market. Interestingly, one algo-specialist at a leading router noted that 3ms is actually much slower than the true duration of the sweep from the point of the trader, which they clock as fast as 300 microseconds in typical market conditions!

Lead Stories

There’s crucial info about the market out there that most investors are missing; MANA Partners’ Manoj Narang on options market data for stocks
Rachael Levy – Business Insider
A hot new hedge fund says it has found a way to beat competitors by parsing info about the stock market that few are looking at. Manoj Narang of MANA Partners told Business Insider that his New York hedge fund would process data from the options market.

***HS: No shortage of signal in the options data, but plenty of noise to filter out.

Safety Trade Turns Risky as Options Players Seek Bond Hedges
Gunjan Banerji – WSJ
Treasury options are signaling the autumn bond rout could soon deepen. Investors are snapping up options that give them the right to sell Treasury futures in coming weeks, when bond prices could come under renewed pressure because of an expected Federal Reserve rate increase Wednesday. Open interest, or total exposure, of bearish put options on 10-year Treasury futures that correspond to a 2.59% yield jumped fivefold between Nov. 23 and Dec. 12, according to QuikStrike, an options pricing and analysis tool that uses CME Group Inc. data.

Fed Raises Rates, Boosts Outlook for Borrowing Costs in 2017
Jeanna Smialek – Bloomberg
Federal Reserve officials raised interest rates for the first time this year and forecast a steeper path for borrowing costs in 2017, saying inflation expectations have increased “considerably” and suggesting the labor market is tightening.

FTSE 100 Seen Hitting Fresh Peak in 2017 as Hedging Costs Slide
Aleksandra Gjorgievska – Bloomberg
The FTSE 100 Index rally that’s made the U.K.’s stock market one of this year’s biggest gainers in the developed world has more to go, whatever the Bank of England says on Thursday. That’s the view that investors and strategists are taking. Options traders have pushed the cost of hedging against declines in the British index to the lowest level since August, while forecasters see the gauge climbing 5.5 percent to a record through the end of 2017. The FTSE 100 is heading for its first annual gain since 2013, thanks to a slump in the pound and recovery in commodity prices.

Trader Makes Bank On ‘Lottery Ticket’ Options Trade
Chris Dieterich – WSJ
A lottery ticket-like options bet on a year-end rally for U.S. stocks has won big. The bullish trade was set up last month and would have paid out more than 20 times what it cost, at least on paper, on Tuesday. The options contracts in play expire at the end of this week. The complex, two-part position caught the attention of MoneyBeat because it harnessed the extremely high prices of protective put options in order to pay for a potent slug of bullish call options. Buyers of call options generally make money from gains in an underlying stock or index.

***HS: Extreme bullish ratio risk reversal pays off bigly.

Wall Street: Dow 20,000?
The Economist
Some time soon, the Dow Jones Industrial Average seems likely to break through the 20,000 barrier, an event that will be greeted with banner headlines and a sign that capitalism is flourishing again. In fact, the Dow is a flawed measure, which uses the odd approach of weighting its component companies by share price. The biggest stock in the Dow is Goldman Sachs and despite its prominence on the campaign trail (and among Donald Trump’s new team), it is hardly the most important company in America; its weight depends on its near-$240 share price.

Exchanges and Clearing

BAML joins CME swaptions clearing service
Joe Parsons – The Trade
CME Group is seeing increased client interest in voluntary swaptions clearing.
Bank of America Merrill Lynch (BAML) has become the latest clearing member for CME Group’s interest rate swaptions clearing service. BAML joins five other banks to clear the product, including Barclays, BNP Paribas, Credit Suisse, Citi and RBS.

NYSE to acquire NSX amid U.S. exchange consolidation
John McCrank – Reuters
Intercontinental Exchange Inc’s (ICE.N) New York Stock Exchange unit said on Wednesday it agreed to acquire the National Stock Exchange, giving NYSE Group a fourth U.S. exchange license. Terms of the deal, which is expected to close in the first quarter of 2017, were not disclosed. ICE said the financial impact of the acquisition would not be material.

NYSE Agrees To Acquire National Stock Exchange
The New York Stock Exchange (NYSE), part of Intercontinental Exchange (NYSE:ICE), today announced that it has entered into an agreement to acquire the National Stock Exchange, Inc (NSX). The transaction is expected to close in the first quarter of 2017, subject to customary regulatory approvals. Terms were not disclosed and the financial impact will not be material to ICE.

CME Group Open Interest Surpasses 120 Million Contracts for First Time in its History
CME Group, the world’s leading and most diverse derivatives marketplace, announced it set a total open interest record of 120.7 million contracts on December 13, 2016, surpassing the previous record of 119.4 million contracts set on December 12, 2016.

***HS: I’d love to see a measure of breadth in terms of holders of open interest.

Market Jolts Lead to Record Trading of Fed Futures Contract
Alexander Osipovich – WSJ
A once-sluggish market for contracts that traders use to bet on Federal Reserve policy has roared to life. Federal-funds futures, used to wager on the central bank’s interest-rate moves, are poised to have a record year in 2016, according to CME Group Inc., the exchange on which they are traded. On average, about 135,000 of the contracts have changed hands each day this year, based on CME data through the first week of December. In comparison, average daily volume was about 18,000 in 2013.

Specialized Sector Derivatives Meet Investors Evolving Hedging Needs
Tom Lehrkinder – TABB Forum
General Index derivatives products traditionally have served a broad brush of investor hedging and speculation needs. But the investing game has changed over the years and become more specialized. Eurex Exchange recognized this trend and has addressed the needs of a wide range of investors by offering Sector Index Futures and Options on European Equities.

Eurex Exchange’s MSCI news
Eurex Group
The recent U.S. uncleared swap margin, capital and segregation requirements have generated significant interest in the Eurex MSCI Futures and Options complex. This has manifested itself in both the increase in enquiries made to the exchange from new locations and in the steady climb of open interest in MSCI Futures and Options, that as of Thursday, 17 November 2016, stands at over 920k contracts equating to in excess of USD 22.6 bn of market exposure. To put this in perspective, the OI at the end of November 2015 was 254k contracts, which represents almost a four fold increase this year.

Derivatives and rates drive systemic risk in banks
Julie Aelbrecht – Futures & Options World
CCP testing and data disclosure does not go far enough, according to the report
Higher derivatives exposures and a flatter yield curve are driving systemic risk for large US banks, according to a new report by the Office for Financial Research. In its analysis of financial stability in the US, the Office for Financial Research concluded that these factors drove systemic risk in banks, more so than the banks’ business structure.

LSE-backed Curve ‘continually’ building volume since launch
Samuel Agini – Financial News
CurveGlobal, the fledgling futures exchange backed by the London Stock Exchange and major banks, is looking to accelerate its growth in the New Year after building its volume and open interest since going live in September. CurveGlobal, which has pitched itself as a one-stop-shop for fixed-income futures trading and clearing, has traded 164,488 lots between its launch on September 26 and December 13, and recorded open interest of 24,540 contracts, according to a spokesman.

GH Financials pledges more exchanges, ISVs in 2017
Luke Jeffs – Futures & Options World
Clearing broker plans more exchange memberships and ISV links next year
Clearing broker GH Financials has signalled its plan to expand its international coverage and work with more tech firms next year, marking the latest sign that non-bank brokers are looking to fill the void left by some of the world’s top derivatives banks.


Goldman Taps Solomon, Schwartz in Biggest Shakeup in 10 Years
Dakin Campbell and Jennifer Surane – Bloomberg
Goldman Sachs Group Inc. promoted Chief Financial Officer Harvey Schwartz and investment-bank co-head David Solomon to co-presidents and said Martin Chavez will succeed Schwartz as CFO in the Wall Street firm’s biggest management shakeup in a decade.

***HS: No relation, unfortunately.

Regulation & Enforcement

The CAT’s Blind Spot Is Futures Data
Patrick Flannery, MayStreet – TABB Forum
While the CAT will give regulators faster access to much richer information on equities trades, it doesn’t cover the futures market. As a result, the SEC, with its not-yet-built fastest- and largest-ever database of equities data, may still be at a disadvantage in deciphering markets compared to market participants.

***HS: Good luck with that.

‘I have no idea how I will pay off my credit card bill’: Mother’s agony after losing GBP12.5k through trading site in a bid to send her sons to university
Louise Eccles and Melanie Newman for The Daily Mail
Deanne Forrest admits she was charmed into submission by Peter Parker — if that ever was his real name. The 50-year-old artist was looking for a way to boost her modest savings and support her teenage sons through university when a friend recommended Banc De Binary — a website that would let her trade on the stock market for instant returns of up to 60per cent. Peter, her smooth-talking Cypriot account manager, assured Deanne that the trades she was placing were ‘absolutely zero-risk’.


LiquidityBook Integrates FactSet Data
LiquidityBook today announced that it has successfully integrated FactSet’s real-time global exchange, reference and benchmark data within both the Buy-Side LBX and Sell-Side LBX POEMS (portfolio, order and execution management system) platforms. The data can be leveraged globally across all asset classes supported by LiquidityBook — equities, options, futures, fixed income and FX.

ISDA SIMM – Swaptions IM in Excel
Chris Barnes – Clarus FT
We build an IM calculator in Excel for Swaptions under ISDA SIMM. The methodology builds on the margin methodology for linear products, and uses very similar formulae. There are some subtleties around multiple currency portfolios that we expand upon. We also introduce the concept of Curvature Margin which is calculated via theta and lambda multipliers.


The $1.35 Million Bet Against the U.S. Dollar
Karee Venema – Schaeffer’s Research
The U.S. dollar has been flying high since Donald Trump claimed victory in the U.S. presidential election. The greenback’s record-setting run has been echoed in the PowerShares DB U.S. Dollar Bullish ETF (UUP) — which replicates the dollar’s movement against a basket of six global currencies; specifically, the euro, the Japanese yen, the British pound, the Canadian dollar, the Swedish Krona, and the Swiss Franc. Since its Nov. 8 close at $25.34, UUP is up 3% at $26.12, and topped out at an annual high of $26.35 on Nov. 23, as the U.S. Dollar Index (DXY) was flirting with 13-year highs. Nevertheless, several pundits are expecting the dollar to slow its roll next year — a theme seemingly echoed in UUP’s options arena today.

VIX-Based Funds Remain Popular, Despite Constant Underperformance
ETF Daily News
We have seen some near-the-money put activity in the largest “Volatility” tracking ETP, a fund that we’ve paid a substantial amount of attention to as of late.

Indicator of the Week: Why the S&P’s Rally Could Continue Through New Year’s
Rocky White – Schaeffer’s Research
With the end of the calendar year approaching and the holidays coming up, the second half of December is an interesting time for stocks, wrapping up one of the most historically bullish months of the year. Below I’ll take a look at how stocks have typically behaved around this time of year. So far this December, stocks have been pretty stellar, with the S&P 500 Index (SPX) gaining over 3% for the month. I’ll also take a look at what the early December gains mean for the rest of the month.

SPDR S&P 500 ETF Trust Keeps Raking It In
ETF Daily News
Analyst Paul Weisbruch in his daily fund flows update points out a jaw-dropping amount of money pouring into the top three S&P 500 funds.


Traders scheme to cash in on Trump tweets
Ben White and Patrick Temple-West -Politico
President-elect Donald Trump issued a single tweet blasting defense contractor Lockheed Martin Corp. at 8:30 a.m. on Monday. By lunchtime, he had wiped $4 billion off the company’s market value. Wall Street traders began dumping the company’s stock after Trump criticized its fighter jet program: “The F-35 program and cost is out of control,” he tweeted. “Billions of dollars can and will be saved on military (and other) purchases after January 20th.”

***HS: More food for the hungry newsbots.

Donald Trump’s market-moving tweets are a huge scandal waiting to happen
LA Times
An undercurrent of amusement has been detectable in some of the news coverage of Donald Trump’s recent market-moving tweets, as though it serves big companies right to have a few billions stripped off their market values because the president-elect is holding them to account. But it’s no laughing matter. Trump’s tweets directed at specific companies are a looming disaster — for investors, citizens, his incoming administration and his own credibility. The risk that they lead at some point to a huge financial scandal at the White House is high. It’s time he knocked it off.

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