Observations & Insight

Holiday Publishing Note

Due to Thanksgiving, we will not be publishing this newsletter on Thursday or Friday. We will be back on Monday, albeit a few pounds heavier.

A quick “Did you know?” about the holiday: Everybody has heard the old refrain that eating turkey makes people tired because of the amino acid tryptophan. However, turkey has pretty much the same amount of tryptophan as other meats and research shows that turkey doesn’t have any significant effect on drowsiness. In fact, simple overeating is the most common cause of post-meal lethargy.

Tired or not, enjoy your Thanksgiving, watch some American handegg (football), try not to talk politics with the relatives, and be safe.

Cheers to leftovers and hot turkey sandwiches!

Lead Stories

Sectors Go Wild: S&P 500 Correlations Crumble
Gunjan Banerji – WSJ
Sectors and styles in the S&P 500 index have started to move independently after seven years of depressed volatility and tighter correlations. The catalyst is the U.S. presidential election, which Republican Donald Trump unexpectedly won, causing stocks to rally. Among the sharpest collapses is the link between financial stocks in the S&P 500 and the broader gauge. The correlation between the two over the last month has fallen to 0.59, compared with 0.89, where it was on Nov. 7, the day before the election, according to FactSet data. A correlation of 1 would indicate the two are moving in perfect sync.

Clearinghouses Park Billions in New Fed Accounts
Katy Burne – WSJ
Financial firms are lining up for the hottest new account on Wall Street: checking with interest at the Federal Reserve. CME Group Inc. and the Options Clearing Corp. are among large companies that have parked billions of dollars in new accounts at the Fed, reflecting a recent rule change that made the accounts more widely available and the attractive rates paid by the central bank on deposits.

Yuan Options Most Bearish Since June as Traders See Sharper Drop
Traders are paying more to bet on a yuan decline with options as the currency slumps to an eight-year low amid the dollar’s ascent. The extra cost for options to sell the yuan against the dollar over contracts to buy reached 1.88 percent in Hong Kong on Wednesday, three-month risk-reversal prices show. That’s the highest since June 30, and more than double the level reached before Donald Trump’s victory this month.

A Cutting-edge Option Pricing Research by CUHK Business School Suggests Arbitrage Opportunities
A cutting-edge option pricing research at CUHK Business School reveals flaws in the derivatives markets. The study not only challenges our fundamental understanding of how these markets operate, but it also opens the door to sustainable and predictable profit-making opportunities. The results have turned heads on Wall Street and may rewrite the manual on trading strategies.

JP Morgan lays out new global electronic trading team
Joe Parsons – The Trade
JP Morgan has laid out a new markets execution team, as it looks to refocus its trading strategy towards electronic execution. Following the hire of David Hudson as head of markets execution earlier this year, it has named Richard James, its current head of currencies and EM execution services, and Peter Ward, head of futures and options executions services, as co-heads for the division’s macro products.

Volatility Update: Giving Thanks to VIX
Frederic Ruffy – The Ticker Tape
Thanksgiving. It’s time for turkey, yams, and pumpkin pie! But Thanksgiving is about much more than the food we eat. It’s a time to give thanks for the opportunities we have, our freedoms, and to the people around us that help in the good times and bad. In the context of volatility (which is what this weekly update has strived to be all about), we can give thanks to the CBOE Volatility Index (VIX) and other barometers that can help us make sense of the daily ups and downs of the sometimes-chaotic financial markets.

London-based props eye Amsterdam on Brexit fears
William Mitting – Futures & Options World
FIA Epta vice chair said London firms want to relocate ahead of Brexit talks
At least four major London-based proprietary trading firms are seeking to relocate operations to Amsterdam in advance of Brexit negotiations, the deputy-head of a prop trade body has said. Amid fears uncertainty around the UK’s exit from the European Union will hit the City of London, Mark Spanbroek, vice-chairman of the FIA European Principal Traders Association, said he has spoken with members and non-members looking to relocate to Amsterdam from London.

****SD: “US firms, such as DRW, CTC, Quantlab, Jump Trading, Ronin Capital and Jane Street, all have their EU operations based in London. It is not known if any are among those seeking to relocate to Amsterdam.”

Exchanges and Clearing

CME Futures: Asia Got U.S. Election Fever, Europe Next?
Dimitra DeFotis – Barron’s
Of the contracts traded on CME Group (CME) exchanges on U.S. election day, nearly half originated in Asia. A total of 44.5 million contracts traded Nov. 9 on CME exchanges, 18 million came from Asia, CME reported in a Tweet. This illustrates the growth opportunity in Asia for CME as individual traders and others seek out ways to use futures and options tied to risk and volatility, says CME Asia-Pacific head Christopher Fix. In the video below, he talks about why China is a growth opportunity, and India is under-represented in trades.

CHX Readies IEX-Style Speed Bump
John D’Antona Jr. – Traders News
Imitation is said to be the most sincere form of flattery – and it holds true on Wall Street where the Chicago Stock Exchange is ready to introduce a speed bump mechanism into its marketplace – just like exchange operator IEX. The proposal to adopt a Liquidity Taking Delay that seeks to introduce a delay of 350 microseconds for liquidity-taking orders before they are processed by the CHX order book. The LTAD is a direct response to recent declines in CHX volume and liquidity in the SPDR S&P 500 trust exchange-traded fund (“SPY”).

Nadex suspends trading in binary bitcoin contract
Julie Aelbrecht – Futures & Options World
De-listing was caused by a technical issue linked to its overnight market-maker
The North American Derivatives Exchange (Nadex) suspended trading in the industry’s only bitcoin binary option on Tuesday due to a technical issue with its overnight market maker. The contract de-listed at the opening of US business on Tuesday and re-listed two hours later, after the exchange found a problem with its liquidity provider.

****SD: Finance Magnates’ take here

Product innovation key theme in commodity exchange space: MCX
Business Standard News
The commodity market may see product innovations and has huge untapped opportunities in options, indices and derivatives like weather and freight, going forward, a senior industry official said today. “Product innovations in the commodity markets will be the leading differentiator in the commodity exchange space, going forward. From options to indices to exotic derivatives like weather and freight, this market has huge opportunities still lying untapped,” Multi Commodity Exchange of India (MCX) Managing Director and Chief Executive Mrugank Paranjape said.

Business in Brief: Tel Aviv Stock Exchange board weighing ouster of chairman
The Tel Aviv Stock Exchange’s board has resumed efforts to try and oust chairman Amnon Neubach. Sources close to the board said on that the board’s weekly meeting last Thursday, directors discussed two options – cutting Neubach’s pay to coax him into resigning or entering into negotiations.

Regulation & Enforcement

FINRA moves to speed up market manipulation crackdowns
John McCrank – Reuters
Wall Street’s industry-funded watchdog took steps to crack down more quickly on manipulative trading practices in the securities markets but needs more authority, according to a regulatory filing. The Financial Industry Regulatory Authority (FINRA) is concerned that it has no quick means to stop disruptive trading activity after it has been identified without resorting to proceedings that can take years to complete, according to a filing on Monday with the U.S. Securities and Exchange Commission.

CFTC reforms to face greater scrutiny – lawyer
Luke Jeffs – Futures & Options World
Dodd-Frank, Reg AT, positions limits in scope, argues reg expert Dawn Stump
A US derivatives regulation expert said she expects controversial US reforms such as Dodd-Frank and Regulation Automated Trader to survive the imminent change of US administration but possibly in a different form. Commodity Futures Trading Commission key reforms Dodd-Frank, which took effect in 2012 but has faced growing opposition in the past two years, and Regulation Automated Trader, which is only now being passed into law, have been called into question since Trump’s shock win two weeks ago.

Global regulation clouded after Trump and Brexit
Samuel Agini – Financial News
The UK’s vote to leave the European Union and Donald Trump’s surprise victory in the US presidential election have delivered heavy blows to rulemakers attempting to reform financial markets across the globe, according to City executives.

SEC’s Seidel Set to Replace Departing Trading and Markets Director Luparello
John D’Antona Jr. – Traders News
And that makes two. Just two weeks after the U.S. Presidential election and the subsequent announcement by Chairman Mary Jo White that she would be leaving the Commission at the end of the current administration’s term, a second top regulator is leaving. Stephen Luparello, Director of the Division of Trading and Markets, will leave the agency by the first of the year.


Can Speed Bumps Unleash Predatory HFT?
Les Kovach – TABB Forum
Speed bumps have been billed as an attempt to mitigate the advantages enjoyed by high-frequency traders. But do they really improve market outcomes and fairness? A recent academic study argues that speed bumps could enable substantial information leakage of trading intentions, resulting in fleeting liquidity and an increase in quote fade.

The New IT Experience: Cloud as a Solution to Legacy System Problems in Financial Services
Cliff Moyce – TABB Forum
To try to fix or replace everything in the legacy systems infrastructure is to oversimplify the problem and to overinvest in the solution. The project is simply too big, expensive and risk-laden to contemplate. Cloud computing, which makes sense in its own right, offers a strategic solution for resolving legacy systems problems. DataArt’s Cliff Moyce explains the benefits of cloud migration and offers some approaches best suited to large, complex environments.


Buy Stocks With Cheap Optionality
Newer traders aren’t wrong for putting themselves into situations where they can risk a little to make a lot. Buying an option comes with capped risk and unlimited reward. But achieving the skewed risk/reward profile in the options market comes at a cost that can drastically erode returns.

Managing clients’ portfolios amid volatility
FT Adviser
The rule of thumb for advisers when it comes to managing clients’ portfolio is to focus on long-term objectives and simply ignore the daily noise of the markets. However, the markets have made a great deal of commotion in the past year.

Flat Or Down: Using Options Data To Predict Future Prices
Seeking Alpha
Every day, our research platform takes account of the whole equity option market and derives a series of predictive metrics for investors. The least understood of these metrics is Gamma Exposure or “GEX.”


High-frequency traders discredit Japanese stock market narratives
Leo Lewis – Financial Times
Most trading days, just after the morning trading session finishes, a few familiar faces pile into the Seattle’s Best Coffee branch next to the Tokyo Stock Exchange (TSE). They linger over espressos before returning to an office that stands about 10 metres from the bourse. Regulars are fairly certain the espresso-drinkers are high-frequency traders; the securities regulator and the TSE are suddenly very keen to know for sure. And then, more critically, to see exactly how and what the HFTs are trading.

Virtu Sees Human Error Hampering Part of the ETF Market
Annie Massa – Bloomberg
Virtu Financial Inc., one of the world’s top electronic traders, said U.S. regulators need to stamp out the risk of human error in a key segment of the stock market.

Larry Tabb hands over the reins of Wall St research firm
Tim Cave – Financial News
Larry Tabb is to take a step back from running his eponymous capital markets research and consultancy house – which has received outside capital for the first time from an investment group committed to aggressively growing the business.

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