Observations & Insight

Wizards of Today’s Markets: Jack Schwager, Part 1
Trading Technologies

We recently ran our third “Wizards of Today’s Markets” Q&A, rounding off our trio of Chicago trading legends with TransMarket Group’s Ray Cahnman. To close out the series, we thought it would be fitting to talk with the originator of the “Market Wizards” moniker himself, Jack Schwager.

Jack authored “Market Wizards”—a series of interviews with some of the most successful traders in a variety of different markets—in 1989 after publishing the more technical “A Complete Guide to the Futures Markets” in 1984 (a revised version of which is coming out this year). Since then, he has followed up with more additions to the Market Wizards series, including “The New Market Wizards” (1992), “Stock Market Wizards” (2001) and “Hedge Fund Market Wizards” (2012). Therefore, we think it’s safe to say that Jack has interviewed more successful traders in depth than any other person.
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Lead Stories

Options Are Pricing In One of the Biggest Stock Moves on Record for the Election
Julie Verhage and Luke Kawa – Bloomberg
Get ready for some volatility. With polls opening nationwide in less than 24 hours, Wall Street is trying to grapple with what different election outcomes would mean for markets across the globe. If options markets are correct, the S&P 500 could move 3.7 percent, or roughly 80 points, the day after the election.
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Hedging activity rises as odds on Donald Trump win fall
Joe Rennison – Financial Times
Investors have rushed to protect their portfolios against market turmoil that could follow a surprise US presidential election result, with trading in futures and options contracts rising sharply. A number of measures of investor nervousness have climbed as polls have recently narrowed between Hillary Clinton and Donald Trump. While the entire first week of October saw just 10m US equity options contracts transacted, that level was surpassed by Tuesday last week.
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Election At Top of Market’s Mind, But More Earnings Could Keep Things Humming
JJ Kinahan – Forbes
After a rough week and a spike in volatility ahead of this coming Tuesday’s U.S. election, expect the focus to be all election all the time as the new week starts.
Heading into voting, we’ve seen the CBOE’s VIX come to life, rising to four-month highs as the S&P 500 (SPX) sold off. VIX is up 70% over the last few weeks. There’s a lot of nervousness about the election, both the presidential and Congress components, and the protective instinct appears heightened. People have woken up to the fact that this election could go either way, and the market is starting to tell us that the race for the White House appears to have tightened.
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Election Update – Volatility Still Abundant Despite S&P 500 Rally
Russell Rhoads – CBOE Options Hub
As I write this the S&P 500 is up 40.00 points on the nose and volatility is dropping. I ran a quick update on different charts I have been using to discuss the markets and the election. All three appear to be saying despite the stock market rally, there’s still some uneasiness with respect to tomorrow’s election.
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Election-inspired stock market volatility is overblown
Wallace Witkowski – MarketWatch
Investors might want to take a break from the polls and position themselves to ride out what’s likely to be a short burst of volatility after Tuesday’s presidential election.
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****SD: Also see Investopedia’s High Anxiety: Why VIX Jitters May Be Overblown (VIX)

Gold Investors Shift Gears As Election Volatility Spikes
Tim Puko and Stephanie Yang – WSJ
The U.S. presidential election is chasing some commodities investors out of gold futures because of high volatility and rising costs.
Gold has been at the center of election-related trading, along with the dollar, the peso and other currencies tied to how investors expect a new president to impact global markets. In the past 10 days, gold has had a series of swings coinciding with revelations about an FBI investigation of Hillary Clinton.
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Comparing the Election to Brexit
Bob Lang – CBOE Options Hub
From a market perspective, the outcome for this week’s election is similar to the brexit vote in United Kingdom earlier this year. That is, a binary event where one extreme outcome is likely to trigger several emotional responses. Remember much of the worry over brexit prior to that critical vote? Wait, there was none? No, I don’t remember it, either. Leading up to the brexit the polls seemed to be convinced voters would not push the referendum through.
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Brexit 2.0? Quantifying the Overnight Election Risk to Bulls
Todd Salamone – Schaeffer’s Research
Perhaps with Halloween just passing, it was appropriate that “scared” traders and investors took center stage last week with the 2016 presidential election imminent. Selling and hedging activity predominated as various polls revealed that Donald Trump was narrowing the gap on Hillary Clinton. As a result, the SPDR S&P 500 ETF Trust (SPY – 208.55) finally moved out of a seven-week trading range, breaking below potential support in the $210 area. In fact, a new streak occurred — nine consecutive losing days.
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VIX Sets New Record With 9 Up Days In A Row
Bill Luby – Investing.com
Over the course of the past few days I have been tracking the slow grind upward in the VIX on Twitter, noting that it had been up seven, eight and eventually nine (as of Friday) days in a row. As the VIX is a mean reverting animal, I find it interesting that until Friday, the VIX had never risen for nine consecutive days in 27 years of VIX data.
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****SD: As of this writing the VIX is down 16.7 percent to around 18.7. Price Action Lab makes a good point in the following piece about the S&P’s losing streak last week — The Nine-Day Losing Streak In S&P 500 Is A Random Pattern

VIX: Fear Gauge Or Election Protection?
Peter Tchir – Forbes
Prior to this week, the last time the VIX index closed above 20 was in June, just ahead of Brexit. There are some who are looking at the rise in VIX ahead of Brexit and are seeing a lot of similarities to this time. Primarily, that once the election is over, much of the uncertainty surrounding the markets will dissipate and stocks can rally.
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Virtu sees trading income plummet amid ‘depression’ of volatility
Hayley McDowell – The Trade
Market maker Virtu Financial reported its net trading income in the third quarter this year dropped almost 25% to $157 million, amid a depression in market volatility over the last three months.
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Citadel taps rival for COO of market-making unit
Financial News
Citadel, Kenneth Griffin’s Chicago-based investment group, has hired a new chief operating officer for its fast-growing market-making unit.
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Exchanges

Tishman Speyer Announces Lease Transaction for OCC at The Franklin
Holly Duran Real Estate Partners LLC – PRNewswire
Tishman Speyer, one of the world’s leading real estate developers and owners, today announced that it has signed OCC, the world’s largest equity derivatives clearing organization, to a long-term lease for approximately 105,000 square feet at The Franklin, a class A office complex that recently underwent a complete repositioning and lobby redevelopment in Chicago’s West Loop.
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CBOE’s Laura Zinanni Named Vice President, Office of the CEO
CBOE
The Chicago Board Options Exchange (CBOE) today announced it has promoted Laura Zinanni to the position of Vice President, Office of the CEO. In her new role, Zinanni will serve as a primary advisor to CEO Edward T. Tilly, providing advice and recommendations on complex issues as identified. She also will advise on enterprise-wide strategy projects, oversee execution of related initiatives and be responsible for cross-function strategy execution.
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Bats Global Markets to Provide Bats One Quote, Trade Data to Morningstar
Bats
Bats Global Markets (Bats), a leading global operator of exchanges and services for financial markets, and Morningstar, Inc., a leading provider of independent investment research, today announced an agreement under which Bats will provide the Bats One Summary market data feed to Morningstar.
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Commodity options will help bring offshore business back to India: Samir Shah, NCDEX
Economic Times
Options promise to revitalise the domestic commodities market, by bringing back business from offshore markets. But it will require time to educate market participants about this new instrument and ensure that there are enough option writers for market making to keep the contracts liquid, says Samir Shah, Managing Director & CEO, NCDEX , in an email interview. Edited excerpts:
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Regulation & Enforcement

CFTC Wants to Decide When to Authorize Source Code Access
Tim Massad, CFTC – TABB Forum
The CFTC approved Friday a revised proposal that would require the Commission itself to make the decision to seek access to the computer code powering trading strategies while stopping short of the initial Regulation AT proposal, which would have provided direct access to source code. Noting that ‘automated trading dominates the markets’ that the regulator oversees, CFTC chairman Timothy Massad called the revised Regulation AT ‘part of what we need to do to keep our regulatory system up-to-date.’ Read the full text of his speech.
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CFTC set to tweak rules for automated trading
Gregory Meyer and Joe Rennison – Financial Times
The main US derivatives watchdog is poised to make changes to proposed rules for automated trading after a backlash from the futures industry. The Commodity Futures Trading Commission’s proposal, known as Regulation AT, tries to tighten oversight for the use of computer programmes to trade futures for markets such as oil and interest rates. As automated trading comprises a bigger share of the market, concerns that an out-of-control algorithm could unleash chaos led the agency to issue the proposal.
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Crunch Time for Options Market Structure Reform
Rob Daly – MarketsMedia
Time is short for the US options industry to address its nuanced market-structure with the US Securities and Exchange Commission, according to industry participants. Although more SROs operate equities and options exchanges, their market structures are not interchangeable, according to Gregg Berman, director of research, market integrity, monitoring and surveillance at Citadel Securities and who keynoted SIFMA’s Listed Options Symposium in lower Manhattan.
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Wall St. Scion Gets 4 Years in Prison for Fraud
Matthew Goldstein – NY Times
Andrew Caspersen, the disgraced scion of a wealthy Wall Street family, was sentenced on Friday to four years in prison for robbing his friends, family members and a large hedge fund foundation in a Ponzi-like scheme. Mr. Caspersen, 40, who pleaded guilty this summer, had sought to lessen his sentence by arguing he suffers from a severe gambling addiction that compelled him to make high-stake trades in the options market.
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Speeding Out of India: The HFT & Algo Trading Debate Quickens in India
Wei-Shen Wong – WatersTechnology
High-frequency trading can be a tough topic to tackle. Regulators around the globe are scrambling to ensure their markets are fair and orderly while drawing in liquidity and lessening spreads. Wei-Shen Wong discusses Indian regulator Sebi’s new proposals targeted at algorithmic and high-frequency trading, and what it could mean for the nation’s burgeoning market going forward.
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Technology

Thomson Reuters to Offer Financial Community Exclusive, Live U.S. Election Day News and Commentary
Thomson Reuters
Thomson Reuters will host live news and commentary on the U.S. elections for Eikon Messenger users via its Global Markets Forum (GMF) as events unfold, offering the market direct access to senior Reuters editors and reporters.
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Strategy

How to Play a Volatility Spike
Bill Luby – Barron’s
When the market is volatile, most investors tend to wait on the sidelines until it shows signs of settling down. Given human nature, volatility begets uncertainty and anxiety, since almost all investors have a perpetual long bias. Not surprisingly, the typical investor equates higher volatility with larger drawdowns and greater risk.
This is part of the reason why the CBOE Volatility Index (ticker: VIX) has become a popular indicator for so many stock-market investors: It helps them decide when to panic and stop trading.
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How to Use Options to Take Advantage of Volatility
Ellen Chang – TheStreet
Volatility could occur in the markets as investors wait for the outcome of the next Federal Reserve meetings and the U.S presidential election, but buying options can help hedge against big moves in the market. While some investors shy away from volatility, others take advantage of the moves by playing defense and constructing hedges with options using a protective put or a protective collar, said Frank Tirado, vice president of education for the Options Industry Council, a Chicago-based industry cooperative.
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Education

Understanding Margin Requirements
Paul Price – The Street
For the typical investor there are few concepts that seem as complex as brokerage firms’ margin requirements.
It doesn’t need to be that tough. I’m hoping to shed some light by providing guidelines to simplify your understanding of this important topic.
Most actively traded shares selling for $5 or higher, listed on major US exchanges, would be considered “marginable,” that is, able to be used as collateral for borrowing against. Low-priced and obscure issues may not qualify for that purpose.
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Miscellaneous

S&P 500 Predicts Donald Trump Has 86% Chance Of Winning
Daniel Tencer – Huffington Post
Trump haters (and there are many of you), brace yourselves.
The polls are showing Democratic contender Hillary Clinton as the odds-on favoured winner in Tuesday night’s election, but the S&P 500 stock market index begs to differ.
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Obama’s Successor Inherits Bond Market at Epic Turning Point
Eliza Ronalds-Hannon and Liz McCormick – Bloomberg
Barack Obama will go down in history as having sold more Treasuries and at lower interest rates than any U.S. president. He’s also leaving a debt burden that threatens to hamstring his successor.
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***JB: I’m pretty sure the president has little to do with (or say in) selling treasuries.

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