Observations & Insight

Predictive Bits & Pieces
Spencer Doar – JLN

Last Friday the CBOE hosted an event on predictive analytics. Some 50-plus people were in attendance to hear from Joe Gits of Social Market Analytics (SMA), Koleman Strumpf of the University of Kansas and Wachi Bandara of Pluribus Labs. While a range of topics were mentioned, much of the focus was on harnessing Twitter sentiment for actionable trade intelligence. The following are a few takeaways:

  • Strumpf, who studies predictive markets — think of sites like Betfair — says that the days of their effectiveness as prognosticators is done. Don’t pay any heed to them.
  • Gits firmly believes that there will be significant alpha to harness from social media for years and years to come.
  • The SEC considers info that goes on Twitter to be public — no need to sweat about insider trading in that regard.
  • Don’t trust economists. This was uttered by Strumpf and Bandara (who are both economists).
  • Gits says that Twitter sentiment is not gameable. It would require someone to come across as a legitimate professional investor/trader/analyst, create an un-biased track record, then get enough other people (think thousands) with the same legitimate track record to get on board with the manipulation. Not the easiest task.
  • One thing that never has differing Twitter sentiment: airlines. Everybody hates airlines.
  • Bandara says that computer science needs to rethink its approach when it comes to this field. In comp-sci 101 class you’re taught to go in with a hypothesis and then test it, but with this type of work it’s kind of the opposite. You want to go to the data first without the hypothesis.
  • Gits’ firm, SMA, which already works in partnership with the CBOE, is in talks for an exchange traded product based on their SMLC index (which picks a portfolio of stocks with the best Twitter sentiment). An options take on the index is in the works too. (I’ll have more on that as the day approaches.)

I wrote about Gits’ efforts a while back when the SMLC was first launched. Read “Twitter’s New Followers — CBOE and Social Market Analytics Team Up for New Sentiment Index Based on Social Media Data” here.


Lead Stories

Options Market Says China Risks Are Underpriced
Gunjan Banerji – WSJ
China’s $8 trillion-plus bond market saw a mini-rout last week as its main stock indexes tumbled. But market jitters haven’t seeped into the options market. Signs of trouble have emerged from China’s credit market as the yuan reached its weakest level since 2008. Meanwhile, President-elect Donald Trump’s anti-trade stance risks escalating the country’s tensions with the U.S., according to a Credit Suisse note, pointing to last week’s report of potential sanctions by China on U.S. auto makers as well as China’s seizure of a U.S. underwater drone in the South China sea.

****SD: Has there ever been an article that says “China is priced to perfection”?

This firm is competing with banks to hire data analysts, developers and even ex-traders
Dan Butcher – eFinancialCareers
Would you work for a clearing house? Options Clearing Corp. (OCC), the largest equity derivatives clearing house in the world (with 14 U.S. equity options exchanges and 115 clearing member firms) is hiring. It added 56 positions this year, largely in technology but is about to start recruiting for data analytics, application development and business process management.

****SD: The OCC’s quest for talent is a bigger deal than you might think.

The monopoly aspirations of exchanges and the CFD rulings: A cartel on the horizon?
Andrew Saks-McLeod – FinanceFeeds
With LSE almost ready to let LCH SA go to Euronext, the entire agenda by the listed derivatives sector to dominate in 2017 is clear

World’s Largest Trading Floor Put on the Block
Peter Grant – WSJ
For sale cheap: the world’s largest trading floor. The property was part of a lavish development in Stamford, Conn., in the 1990s designed to lure what was then Swiss Bank Corp. and thousands of workers away from New York. Soaring 40 feet high, the trading floor was bigger than a football field, unimpeded by columns and soon filled with hundreds of stock, bond and currency traders.

****SD: John L. put the before and after picture of the UBS trading floor on our office door a ways back. Every time I walk out I see that depressing image.

What I Learned at Burgenstock
Gary Delany – OCC
I recently participated in a panel discussion on equity options at the International Commodities & Derivatives Association annual ?Burgenstock? meeting in Geneva, Switzerland. I was joined by Patrice Henault, Director and Head of Futures and Listed Options at Saxo Bank, and Breon Byrne, Head of Options Trading at market maker Susquehanna. Here is what I learned.

SocGen Computer Glitch Said to Ripple Through Bond Derivatives
William Canny and John Detrixhe – Bloomberg
ICE restated open interest on contracts, citing member error; Bank staff said to manually process orders after malfunction
Societe Generale SA suffered a systems failure that rippled through several futures contracts last month, according to people familiar with the matter, raising questions about the derivatives powerhouse’s risk oversight and the reliability of its technology.

****SD: It’s been a glitchy month for exchanges. NYSE Arca went down yesterday – see more in our ‘Exchange’ section.

One Option Trader’s $4 Billion (Notional) SPX Bet
Gunjan Banerji – WSJ
As the Dow inches toward the 20000 mark, one options trader is bullish on another equity index. A market participant bought 20,000 S&P 500 Index calls with a 2500 strike price while selling 2,000 calls with a 2600 strike price, said Option Pit’s Mark Sebastian. Both contracts have a June expiration, according to Trade Alert.

****SD: Someone thinks Trump’s market effects are legit.

What Forex Traders Need to Know About Robo-Trading and Flash Crashes
In the age of robo-trading, forex markets are exposed to potentially extreme volatility. Here’s everything you need to know to protect yourself from future flash crashes.

Exchanges and Clearing

MIH invests in LedgerX Holding Company; secures exclusive product licensing rights for digital currency derivatives
Miami International Holdings, Inc. (MIH), the parent holding company of the MIAX Options Exchange, and Ledger Holdings Inc., the parent holding company of LedgerX LLC, have jointly announced that MIH has completed an investment in Ledger Holdings. MIH also played a key role in bringing together a consortium of other investors who have co-invested with MIH in Ledger Holdings. Early investors in Ledger Holdings include Google Ventures and Lightspeed Venture Partners.

****SD: A little bit more info on last week’s big news. The real question is, “What do the Winklevoss twins think?”

Euronext in exclusive talks for LCH SA
Helen Bartholomew – Reuters
Euronext has entered into exclusive talks with the London Stock Exchange Group regarding a potential acquisition of LCH.Clearnet SA, its Paris-based clearing business.

CME targets Q1 2017 for buy-side clearing membership launch
Joe Parsons – The Trade
CME Group is aiming to launch its new direct clearing membership model in the first quarter of 2017, following a delay of approval from the US derivatives regulator. Its proposal for the new direct funding participant category of clearing membership will allow buy-side clients to directly deposit cash collateral to the clearing house, enabling them to earn interest on cash posted.

HKEX publishes 2016 market statistics, sets new records in derivatives markets
A number of new records were set in Hong Kong’s derivatives markets in 2016, according to market statistics from 1 January to 15 December 2016 published on Hong Kong Exchanges and Clearing Limited’s (HKEX) website today.

Deutsche Bank Downgrades CBOE Holdings (CBOE) to Sell
Deutsche Bank downgraded CBOE Holdings (NASDAQ: CBOE) from Hold to Sell with a price target of $68.00 (from $71.00). The downgrade was tied to valuation. Analyst Brian Bedell said, “The main driver of our downgrade is on valuation whereby the P/E multiple of the standalone company & combined pro-forma CBOE/BATS entity seems overextended given business mix comparatives versus exchange peers. This said, we are forecasting robust volume trends in 2017 given macro backdrop debate potentially spurring enhanced market volatility (though could ebb & flow at times).”

NYSE Exchange-Traded Fund Platform Hit by Tech Glitch
A software glitch forced the largest U.S. venue for exchange-traded funds to close for 15 minutes on Monday, the latest snafu to raise questions about the reliability of markets that rely increasingly on high-speed computers.


ED&F Man re-hires three brokers in surprise move
Luke Jeffs – FOW
London-based broker re-hired on Monday brokers Collins, Stalick and Sweeney
ED&F Man has re-hired three brokers who left the firm earlier this month in a surprise move by the British broker which saw last month two senior futures experts move to BGC Partners. London-based ED&F re-hired on Monday December 19 Daniel Collins, Lucas Stalick and Thomas Sweeney, according to the Financial Services Register.

Regulation & Enforcement

How Can Multi-Broker Spoofing Be Detected?
Michael Friedman, Trillium – Tabb Forum
Illicit traders have begun to slice their tell-tale trading patterns into multiple pieces and then send each piece through a different broker. In this scenario, none of the brokers used sees enough of the pattern to be able to identify it as suspicious. So how can multi-broker spoofing be detected?

Is Israel Burning Its Fingers By Fighting Binary Options Industry?
The once thriving binary options industry in Israel is under attack by the government. The Israel Securities Authority (ISA) has accused binary options firms of running a scam that is causing untold losses to unsuspecting traders. By scamming their clients, the ISA has further accused binary options firms of painting Israel’s global reputation.

Wall Street Wish: Secure, Compliant Communications
Financial services has always been a communicative business, driven by trade negotiations, information sharing and relationship-building schmooze sessions over lunch or drinks. The rise of the internet and electronic trading over the past couple decades upended how much of Wall Street communication took place, as traders and operations professionals migrated from telephone calls and upstairs rooms to e-mails and online chat messages. More recently, the evolution has been driven by regulators pushing market firms to more tightly manage and monitor their employees’ electronic communication.


Use of artificial intelligence technology in financial services to grow: report
Financial services firms are beginning to deploy artificial intelligence technologies to make themselves more efficient and better than their peers — and those without a strategy should develop one now, according to a new report.

TickVault Financial Big Data Management Platform Compatible with Thomson Reuters Tick History
TickSmith’s TickVault Platform is now compatible with Thomson Reuters Tick History, providing the buy side community an in-house solution to manage this data in its entirety through one single interface.


Volatility Update: Going into the unknown
Georgio Stoev – TradingFloor.com
Investors should favour buying options rather than selling in low volatility. Hedging is always an appropriate strategy when the fear factor is low. Valuations in the S&P 500 seem to be near all time high – what choices are there?

Why All the Betting on Lower VIX/Higher Stocks?
Helene Meisler – TheStreet
It was a slow day in the markets, except, that is, for Options Land. Boy, were options traders active, and mostly on the put side of the ledger. The total put/call ratio spiked to 119%. Oh my. Those were the kind of “too bearish” readings we had in the days leading up to the election. It turns out the majority of Monday’s puts were centered on put buying in the VIX. Oh, some will ask how I know it was buying and not selling. I would respond that there is a buyer for every seller and I do not rationalize indicators. Once I start doing that, I’ve gone down a slippery slope of not trusting my indicators because of this or that. It’s not helpful.

(Black) Swan Dive: Are Tail Hedges Still Useful?
Seeking Alpha
If you needed someone to remind you about why some investors are worried about geopolitics 22-year-old Turkish policeman Mevlut Mert Altintas will be happy to remind you. Has some of the “teflon Don’s” bulletproof coating rubbed off on equity markets? Here’s what happens when millennials bet against Trump.

****SD: Don’t let Nassim Taleb see this…


Eurodollar Futures: A Key Barometer Of Global Money Flows
Kira Brecht – CME Group OpenMarkets
This is the first in a series of stories on products critical to futures markets that have defined their progress over 150 years.
The Eurodollar futures complex has achieved unparalleled success since its launch in December 1981. It is one of the most actively traded futures products in the world. While the average investor may know little about the Eurodollar market, by some accounts, the underlying market is a critical component in how banks fund and manage their liability structures. The Eurodollar futures market is “one of the largest liquidity pools on God’s green earth,” says Fred Sturm, executive director of financial research and product development at CME Group.

****SD: Missed this first piece from last week. Looking forward to the rest of the series on CME products.

FIA Cares Corporate Challenge brings 2016 fundraising totals to $625k
The 2016 FIA Cares Corporate Challenge benefitting the Greater Chicago Food Depository raised a record-breaking total of $41,000, far surpassing the challenge’s fundraising goal of $30,000. Along with FIA, 33 organizations took part in the challenge, which raises funds to help GCFD’s work delivering more than 160,000 meals every day of the week.

****SD: Showing the industry cares goes a long way toward changing public perception of predatory financial markets.

The Trump Doctrine: A Work in Progress
Reva Goujon for StratFor – Forbes
The world is in a “frenzy of study,” Henry Kissinger said in a recent interview. At home and abroad, strategists and pundits are trying to piece together a blueprint of American foreign policy under U.S. President-elect Donald Trump from a stream of tweets, some campaign slogans, a few eye-catching Cabinet picks, meetings at Trump Tower, and a pingpong match already underway with Beijing. Highbrow intellectualism can be a handicap in this exercise. Commentators among the Washington establishment have been quick to dismiss Trump’s foreign policy moves outright as erratic and self-serving over the past few weeks.

****SD: Kind of a recap of Trump foreign policy developments.

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