Lead Stories

S&P 500 Options Showing Little Fear Over Trump Policy…For Now
Tanvir Sandhu – Bloomberg
S&P 500 options are showing little anxiety over Donald Trump’s policies over the next few weeks, even as rates options capture concerns, according to Bloomberg strategist Tanvir Sandhu. The smoothness of S&P 500 Index’s volatility term structure indicates complacency in factoring in policy shifts by the government, reminiscent of a similar formation three weeks before the U.S. election on Nov. 8 when opinion polls overwhelmingly predicted a Hillary Clinton win.

****SD: “Never say never, because limits, like fears, are often just an illusion.” – Michael Jordan

Investors Prepare for a Wild Stock-Market Ride
Steven M. Sears – Barron’s
As President Donald Trump begins his first full week in office, investors are positioning for emerging market stocks to decline and the U.S. stock market’s risk premium to surge. The trading patterns reflect concerns that Trump may initiate protectionist trade policies and perhaps even trigger a trade war, which could harm nations, including China, that have traditionally made goods for the developed world.

****SD: The problem with wild rides is that sometimes they lead to vomiting.

Liquidation risk hangs over oil and gas price
John Kemp – Reuters
The threat of liquidation hangs over oil and gas prices in the short term as hedge funds have built the most bullish positions in both commodities since 2014. Hedge funds are running enormous net long positions in crude and gas even though prices have risen sharply in the last year, and they may have reason to expect further price strength in 2017.

****SD: A bit more on this in our “strategy” section.

Euro options suggest investors unruffled by Le Pen risk
Reuters via CNBC
The cost of hedging euro volatility against the dollar in the three months leading to the first-round of France’s presidential election dipped on Tuesday, with investors showing few immediate signs of concern about a possible win for the far-right candidate Marine Le Pen.

****SD: Keep in mind this is a person who said over the weekend, “2016 was the year when the Anglo-Saxon world woke up, 2017 will be the year where the population of continental Europe wakes up.” What could go wrong?

The Evolution of the Markets: The Business of Market-Making
George Bollenbacher, Capital Markets Advisors – TABB Forum
Market-making is the most important and perplexing area affected by market evolution. Over time, the market-maker of the future will evolve into a set of complex algorithms monitoring the things humans monitor today, but probably in a volume many times larger than people can handle, and many times more quickly.

Market Liquidity Is Great, Until It Isn’t
Noah Smith – Bloomberg
In his confirmation hearing the other day, Treasury secretary nominee Steven Mnuchin used the word “liquidity” when talking about several financial regulatory policies. He echoed banks’ concern that the Volcker Rule — which prohibits banks from engaging in many kinds of trading — would reduce asset market liquidity. He also expressed support for the continued existence of Fannie Mae and Freddie Mac, the government-run companies that support the mortgage market, saying those entities create liquidity. But what is “liquidity”?

****SD: Know what else is great until it isn’t? The use of that phrase.

Cost of Tail Risk Hedges Spikes While VIX Remains Calm: Chart
Cecile Vannucci – Bloomberg
While the CBOE Volatility Index remains near its lowest level since July 2014, a gauge tracking the cost of out-of-the money S&P 500 Index options jumped to levels last seen in June with the Brexit vote.

Exchanges and Clearing

At 34, the LME’s Newest Leader Ranks as One of the Youngest CEOs
Eddie Van Der Walt and Mark Burton – Bloomberg
The London Metal Exchange’s new chief is also one of the youngest in the industry. Matthew Chamberlain, 34, was named interim head of the LME on Monday, making him the youngest among major exchange heads as he takes over from Garry Jones, who retired at 58.

Press Release: Deribit Options & Future Exchange Announces Quarterly Future And Rebate For Makers
Deribitlogo, the biggest Options exchange for bitcoin in the world, is announcing its new quarterly future. The newest future can be traded with 25x leverage, expires on March 31 2017 and has started trading since the beginning of January.

Regulation & Enforcement

CFTC extends comment period for Reg AT
Julie Aelbrecht – Futures & Options World
Reg AT extension is first act of republican acting CFTC chairman Giancarlo
The US Commodity Futures Trading Commission has extended the comment period for the much-maligned Regulation Automated Trading, in the regulator’s first move under new acting chairman Christopher Giancarlo. The comment period for the new supplemental proposals has been extended by the US regulator to May 1 of this year, the regulator said on Monday.

Esma chair calls for clearing equivalence reform
Julie Aelbrecht – Futures & Options World
Equivalence has been framed as the UK’s way forward post-Brexit
European Securities and Markets Authority chair Steven Maijoor has said the European Union should redesign its clearing equivalence regime to address issues in the EU and abroad. In a speech, Maijoor highlighted two concerns with the EU’s current equivalence regime for central counterparties (CCPs). Firstly, he suggested the equivalence regime in its current guise offers more benefits to CCPs outside of the EU.

Regulator circles binary options broker that pushed its client to the limit
Maria Nikolova – FinanceFeeds
23traders.com that allegedly led to the suicide of a 61-year old Canadian man, attracts the attention of Denmark’s financial regulator.

****SD: We had the story about the suicide in the newsletter last week. Some of these so-called “brokers” are beyond irresponsible.


FINCAD Adds Scenario Analysis to Portfolio Valuation and Risk Solution
John D’Antona Jr. – Traders News
FINCAD, a provider of sophisticated valuation and risk analytics for multi-asset derivatives and fixed income portfolios, announced that its F3 solution has been enhanced with advanced scenario analysis capabilities and a more flexible reporting framework. These enhancements enable improved portfolio and risk management decisions, helping clients to achieve superior investment returns.

BNP and Calypso Technology Partner to Offer Integrated Post-Trade Processing
John D’Antona Jr. – Traders News
BNP Paribas Securities Services, a provider of clearing and custody services, has partnered with fintech company Calypso Technology to provide investment banks with a full, end-to-end post-trade services offering across asset classes.


Traders Chase Commodities, Short VIX and SPX Futures
Alex Eppstein – Schaeffer’s Research
Traders have been taking relatively extreme positions on a number of commodities and other investment vehicles. Below, we’ll take a closer look at recent Commitments of Traders (CoT) data, drilling into how investors have been aligning themselves on everything from gold and oil, to volatility.

****SD: This is funny — “Net short positions on CBOE Volatility Index (VIX) futures are at their second highest point ever — topped only by a mid-September reading — hinting at investor confidence. This has historically functioned as a warning signal for stocks, as extreme VIX short positions have tended to precede volatility pops.”

Trump is building a wall of worry, and that might be good news for stocks
William Watts – MarketWatch
Should investors stop worrying and learn to love the uncertainty that surrounds the dawning of the Trump administration? It’s a conundrum. After all, markets supposedly hate uncertainty, according to one oft-repeated market maxim. On the other hand, bull markets often see stocks “climb a wall of worry,” according to another axiom.

****SD: When you paint a post-apocalyptic picture of America (overrun with gangs, drugs and the ruins of once great bastions of manufacturing) when the country isn’t in bad shape, it will be easy to say in the future, “Hey, look at my accomplishments — we’re not in bad shape anymore.” But, we never were in bad shape in the first place.

The S&P 500 is on course to do something it hasn’t in 52 years
Alex Rosenberg – CNBC
The S&P 500 has traded in a mere 1.6 percent range in the month of January through Monday’s open. If the month were to end now, that would make January the month with the narrowest range since 1965, according to Oppenheimer.

****SD: I’ll tell you what was more notable in 1965 – the Voting Rights Act.


ETF market-maker Susquehanna lands in London
Tim Cave – Financial News
One of the world’s largest electronic market-makers in exchange-traded funds has opened a new office in London, ahead of European rule changes that are expected to help drive trading volumes in ETFs. Susquehanna, a 300-strong firm headquartered in New York, already has a European presence in Dublin, Ireland, but added a new sales office on Old Broad Street in the heart of the City at the start of 2017.

****SD: Well, not everybody’s looking to flee in the wake of Brexit.

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