Observations & Insight

Editor’s Note: In yesterday’s options exchange recap, we incorrectly noted that “NYSE Options … reduced the speed of execution by 50 percent,” when in fact NYSE reduced latency by 50 percent (or, when phrased another way, increased the speed of execution).


An Anecdotal Look: The Retail Crowd’s Option Adoption
Spencer Doar – JLN

All of the derivatives conferences I’ve attended in the past few years had a noticeable retail customer presence or focus — be it panel subject matter, attendees from retail oriented companies or just overall mentions in conversation. The same was the case at the Options Industry Conference last week.

There are a few interrelated elements to this options phenomenon: the democratization of advanced investing tools makes access to complex products approachable for retail investors; in our low interest rate environment, people look for income and yield in different areas than they otherwise might; and there is an increased focus on educational resources. There are other variables, but I see those as the keys.

Anyway, at OIC I was chatting up one of the hospitality staffers — an older gentleman I’ll call Bob. Turns out, Bob only works these events some nights for additional income. What does he do during the day? He trades index options.

Now, before anybody makes a misguided comparison to the old story about Joe Kennedy exiting the market before the 1929 crash because his shoe shiner had stock tips, let me point out that Bob was neither a speculator nor uninformed.

It only took minute to see Bob knew the product. He used risk defined strategies. He had his Greeks down. He also wrote covered calls on other holdings for income enhancement. And he was excited. He liked talking about it.

I wrote about millennials adopting options but wanted to make clear that efforts to enhance the retail pie are not just impacting one generation.


Lead Stories

Options Market Structure: Fragmented Reality
Ivy Schmerken, Flextrade – Traders News
Some experts are debating whether the complexity of the listed U.S. options market structure is hurting liquidity providers and driving some market makers out of the business. Options market makers are navigating a fragmented liquidity landscape, rising technology costs, and an arms race around high speed trading. Some electronic market makers, like pioneer Interactive Broker’s Timber Hill unit, have dropped out, citing diminished opportunities for profitability.

****SD: Another take on the subject matter that has garnered much media attention over the last two weeks.

Citigroup launches “credit VIX”
Helen Bartholomew – Reuters
Citigroup has launched a credit equivalent of Wall Street’s “fear gauge” that is intended to provide an accurate metric for risk aversion in the asset class. Citi’s “credit VIX” mirrors the CBOE’s VIX methodology, using a weighted average of option prices on credit default swap indices across a range of strikes.

Mirror, Mirror, Which Asset Class Is the Sleepiest of Them All?
Luke Kawa – Bloomberg
Realized volatility below long-term mean in nearly all assets; JPMorgan strategists warn that term premia are ‘too low’
Equity volatility is starting to evoke comparisons to Snow White — and for good reason. With implied price swings at the lowest levels in more than 20 years, traders are wondering if anything can awaken stocks from their slumber.

****SD: Who trusts magic mirrors these days?

Markets unfazed by UK election, options pricing shows
Ritvik Carvalho – Reuters
Less than a month ahead of general elections in Britain, investors appear to be shelving a typical ploy against risk. One-month pound/dollar implied volatility – an option that allows investors to insure against large swings in prices over the next 30 days – was just over 7 percent on Tuesday, close to its lowest levels since December 2015.

****SD: What will derail this market? Seems like everything and the kitchen sink is being thrown at it.

Cotton Squeeze Sends Prices to Highest Since 2014
Shruti Singh, Megan Durisin and Jeff Wilson – Bloomberg
Estimated futures trading rises to record on ICE in New York; ‘Exports have been really strong,’ INTL FCStone economist says
Cotton prices extended a rally to the highest since June 2014 amid buoyant demand for U.S. exports and signs of a squeeze on July futures. Bullish options jumped for the second straight session as volume surged.

Russian vol slumps as domestic selling dominates
Helen Bartholomew – Reuters
Trading in options linked to Russian stock indices has fallen to its lowest level in almost a year, after a spurt of post-US election activity ran out of steam on escalating geopolitical tensions. Average daily volume in Frankfurt-listed options linked to the US dollar-denominated RDX index fell to just 1,293 contracts in April – almost half the level seen a year previously and down from over 5,000 at the 2013 peak.

****SD: Some numbers for context regarding a market I don’t know much about.

FTSE 100’s record-breaking streak continues
The FTSE 100’s recent record-breaking run showed no sign of ending as the UK’s main share index set another record intra-day high.

****SD: Because all the news I hear coming out of Britain is so darn positive?

“Regularly the only woman in the room”
Julie Aelbrecht – Global Investor Group
A study into diversity in the asset management world has shown that recruitment and culture are key hurdles in achieving diversity in the asset management world. Asset management consultancy Longwater Partners interviewed over 500 female investors and found that 71% of women surveyed said they were “regularly the only woman in the room.”

Exchanges and Clearing

No case for shifting euro clearing after Brexit: City of London
Huw Jones – Reuters
London is good at clearing euro-denominated derivatives deals and there is no case to shift the business to the continent after Brexit, the policy chief for Britain’s financial sector said on Tuesday. The combative stance of Catherine McGuinness, newly appointed head of policy for the City of London financial district, contrasted with the more nuanced position of Bank of England Governor Mark Carney, who has spoken of an “appropriate” amount of euro clearing remaining in London post-Brexit.

REMINDER: Final ISE Production UAT
Reminder, Saturday, May 20, 2017 is the final production UAT for Nasdaq ISE (ISE) prior to the migration to the INET platform. The UAT session will take place from 9:00 a.m. to 1:00 p.m. ET.

Regulation & Enforcement

Why People Persist in Risky Trading
Peter J. Henning – NY Times
After all the publicity about insider trading the last few years, with headline cases and substantial prison terms meted out to defendants, you might think that people would not try it — or at least do a better job hiding it. Yet, two cases filed last week appear to show that some defendants are not doing much to keep questionable trading under wraps.

Futures Industry Association outlines plan to enhance stability of derivatives market
Financial Regulation News
The Futures Industry Association (FIA) laid out a plan to improve the U.S. regulatory framework while enhancing the safety and stability of cleared derivatives markets. FIA’s recommendations fall into seven categories: eliminate the leverage ratio’s punitive impact on clearing; modernize the regulatory toolbox; improve end-user access to risk transfer markets; simplify reporting rules; avoid fragmentation of markets; make regulation efficient, effective, and appropriately tailored; and avoid regulation by enforcement

SEC Names Jaime Klima Chief Counsel
Press Release
The Securities and Exchange Commission today announced that Jaime Klima has been named Chief Counsel to Chairman Jay Clayton.

SEC Names Sean Memon Deputy Chief Of Staff
Press Release
The Securities and Exchange Commission today announced that Sean Memon has been named the agency’s deputy chief of staff.


Nasdaq Announces Launch of the “Nasdaq Analytics Hub” Nasdaq:NDAQ
Nasdaq (Nasdaq:NDAQ), a leading provider of real-time market data and analytics to financial professionals and retail investors globally, today announced the launch of the “Nasdaq Analytics Hub,” a new platform that provides the buy side with investment signals that are derived from structured and unstructured data, and unique to Nasdaq. Today, the platform analyzes social media sentiment, central bank communications, retail sentiment, technical factors, and event based signals.


Volatility Update: VIX options are still expensive
Georgio Stoev – TradingFloor
There’s a lot of noise around the VIX these days and its current levels. Last week it dropped to a new 52-week low at the $9.52 handle as share prices rallied further. For the week the CBOE Volatility Index fell by 1.61%.

Bullish Dollar Bets Were the Most Crowded Trade. Not Anymore.
Lananh Nguyen – Bloomberg
U.S. outlook darkens while Europe political risks abate; Options show falling odds of dollar gain versus euro this year
The dollar has been knocked off its pedestal.


Hedge Fund Makes a Fortune on a $440 Billion Danish Obsession
Jonas Cho Walsgard – Bloomberg
The Danes invented handball and they are mad about football. But their real national sport is deciding when to refinance their mortgages. The $440 billion Danish mortgage bond market is more than 200 years old, and legend has it there’s never been a single default. When Denmark, the country, went bust during the Napoleonic wars, its notoriously efficient mortgage-bond market chugged along without investors taking a hit. Danes are obsessed with checking the price of their bond-backed mortgages to decide when to exercise a call option that lets them buy back their debt and refinance it at better rates.

****SD: If Danes talk about home loans at the bar then I’ll believe the statement they are “obsessed with checking the price of their bond-backed mortgages.”

Regulating the internet giants: The world’s most valuable resource is no longer oil, but data
The Economist
A new commodity spawns a lucrative, fast-growing industry, prompting antitrust regulators to step in to restrain those who control its flow. A century ago, the resource in question was oil. Now similar concerns are being raised by the giants that deal in data, the oil of the digital era. These titans—Alphabet (Google’s parent company), Amazon, Apple, Facebook and Microsoft—look unstoppable. They are the five most valuable listed firms in the world. Their profits are surging: they collectively racked up over $25bn in net profit in the first quarter of 2017. Amazon captures half of all dollars spent online in America. Google and Facebook accounted for almost all the revenue growth in digital advertising in America last year.

****SD: This is from May 6, and not at all about options. But since everybody talks about “data, data, data” like Jan about Marsha, I thought this was worth it since these firms hold so much of our information.

Pin It on Pinterest

Share This Story