Simplex Trading’s Book; CFTC chair complains to European Commission over regulation jibe

Jun 20, 2019

Observations & Insight

WILD Celebrates 10 Years of Networking, Education, and More
Women In Listed Derivatives (WILD) is celebrating its 10 year anniversary in 2019. In this video, WILD President Cathey Curley and Vice President Katie Cleland spoke with JLN about how WILD started as a networking group and how it has evolved over the years to offer more technology-specific and regulation-focused events, as well as other opportunities for women in the financial industry.
Watch the video »


Pinnacle Miscellany
Sarah Rudolph – JLN

The 2019 Managed Futures Pinnacle Awards dinner was held last night, sponsored by CME Group and BarclayHedge.

At some juncture in the last week or so, CME Group and BarclayHedge pulled a fast one and swapped the host-and-entertainment for last night’s Managed Futures Pinnacle Awards. It was initially going to be Wanda Sykes, but was changed late in the game to Jeff Garlin.

Fortunately, Garlin turned out to be very funny, the kind of natural comedian who doesn’t need much prepared material and can make things up as he goes along. He made much of the fame of Sol Waksman, president of Backstop BarclayHedge, and he said he sincerely found the managed futures folks to be great people. “Really,” he said, “I thought you would all be jerks.”

The winner of this year’s Pinnacle Achievement Award was Martin Lueck, who is known for his 30 years of work on quantitative trading strategies and is co-founder and research director of Aspect Capital, a $7.3 billion systematic investment manager.

The winner of the best large cap CTA category was Bridgewater Associates; the 5-year best large cap CTA was IPM Informed Portfolio Management.

You can find more information about the award winners, as well as videos about their achievements, here.

****SD: I am not a successful emerging CTA, but I did get to hold the award – they’re pretty hefty. For the array of folks that won two, they’d make good free weights.


At Least One Active ETF Outperforms Comparable Hedge Funds
Russell Rhoads – TABB Forum
TABB Group has been looking at various alternative ETFs relative to their hedge fund counterparts. Our goal is to see if hedge fund-like returns can be realized using an ETF. With the increase in the number of smart beta, alternative, and actively managed ETFs, we assumed there must be some ETFs that have found a niche and put up good performance.
Our most recent dive into the space involved an analysis of alternative ETFs that have a track record of less than five years. The earlier analyses eliminated ETFs with a performance record under five years, but we had noticed that there were some newer funds putting up impressive numbers during their short lives. One fund that we found particularly interesting was the Hull Tactical ETF (HTUS), run by Blair Hull, who has been an icon in the investment and derivatives space for decades.

****SD: Congrats to Blair, Petra Bakosova and Alex Kment on their work! (The firm is our neighbor on the 16th floor of the CBOT.) If you’re not familiar with Hull’s operation, take a look at this Crain’s piece about Ketchum closing. It covers the background. If you want to go into the weeds a bit more, check out this piece about Bakosova’s 2018 research paper “Return Predictability and Market-Timing: A One-Month Model.”

Lead Stories

Simplex Trading’s Book: An Educational Tool Hiding in Plain Sight
Paul Rowady – Alphacution
If you happen to be reading this note while occupying a seat at a firm like Wolverine Trading or Peak6 or D. E. Shaw or AQR or any number of other mythological market creatures that we have yet to model, please don’t fret. We will get to you soon enough…
For now, we are going to leverage some recent modeling on Simplex Trading – a name not as well known (yet) as some of the others – to reinforce our plot (just in case some of you have lost sight of it in all of the numbers, vernacular, and other perceived complexities) and try to teach you something new about the market ecosystem we are all playing in or otherwise indirectly tethered to.

****SD: More good stuff from Paul. Glad he’s doing it – scrubbing through all those regulatory filings and cleaning them up is not a simple task. From the story: “Option market makers are going to be long and short premium within each option matrix. Simplex trades in ~3,000 option matrices. The 13F report shows long positions in ~3,000 calls and ~3,000 puts. We can be fairly certain that there are corresponding short premium positions in calls and puts for the same ~3,000 names as well. We might also guess that there are 1,300 – 1,500 short stock positions (because 1,600 longs plus 1,400 shorts equals ~3,000 option matrices that all have associated underlying positions – and with further digging we could actually list those names for the date of the 13F report) and ~100 short ETF positions (because, while not shown, Simplex is currently carrying ~300 ETF option positions in calls and puts).”

CFTC chair complains to European Commission over regulation jibe
Philip Stafford and Jim Brunsden – Financial Times (SUBSCRIPTION)
A top US financial regulator has taken an unusual swipe at his EU counterparts in a deepening row over how to supervise international trading.
Christopher Giancarlo, chair of the Commodity Futures Trading Commission, wrote last week to Valdis Dombrovskis, the European Commission vice-president responsible for financial services, to publicly criticise comments made by an EU official at a conference this month.

Bond Market’s Marching Orders to Fed: Don’t Dawdle on Rate Cuts
Liz McCormick – Bloomberg (SUBSCRIPTION)
It looks like the U.S. Treasury market has goaded the Federal Reserve into shifting gears on interest rates, to consider the first reduction in more than a decade. Now, the world’s biggest bond market has further marching orders for Chairman Jerome Powell and his colleagues: Don’t dawdle on those cuts.

****SD: I’ve been told there has been some serious trader blood in the water at CME’s eurodollar options pit of late. Last graf of the piece: “Some eurodollar options traders are already moving toward the possibility that the Fed will cut by 50 basis points next month. NatWest’s economics team is a believer in the quick-cut thesis. They’ve been predicting two 2019 rate reductions, one in September and another in November, but just brought that closer to the present, now forecasting cuts in July and September.” Also from Bloomberg: Bond Traders Have the Fed Firmly on Their Side

A Fresh Look At Option CEFs From Eaton Vance
Seeking Alpha
As many of my readers know, I’m not a huge fan of most things equity, including equity CEFs. In my mind, you just don’t get much of a value-add from an equity CEF compared to an open-end mutual fund or exchange-traded fund.
Even for those that are highly risk-averse, an allocation to option-income equity CEFs should be considered as part of a high income portfolio. These CEFs generate income by selling (writing) options that produce “premium” in addition to the dividend income from the underlying stock positions. An option-income CEF tends to hold either individual stocks or some type of market index on which they write call options on.

Nasdaq seeks comments on non-professional fees for market data
Hazel Bradford – Pensions & Investments
Nasdaq said Wednesday that it wants public comment on its ideas for distinguishing between professional users of market data and Main Street investors when it comes to fees.

Exchanges and Clearing

SG Americas Securities – 2016048771702 NYSE American
On March 23, 2016, SG Americas consented to findings that it violated Rule 17a – 3(a)(6)(i), Nasdaq PHLX LLC (“PHLX “) Rules 748 and 760, and NYSE American Rules 320(e) and 956NY, in connection with its failure, during cycle and cause examinations conducted on behalf of NYSE American and PHLX between May 1, 2012, and May 17, 2013, to: (i) make and keep an accurate record of the order receipt time for ten options orders; and (ii) make and keep an accurate record of the order transmission time for 40 of 40 sampled options orders. SG Americas was censured and fined $20,000, evenly allocated between PHLX and NYSE American.

****SD: Nice little tidbit buried in this filing: “The Firm handled approximately 30,080 manual options orders in 2016, approximately 45% of which were manual customer orders routed to options exchange floors for execution.”

Notice of Filing and Immediate Effectiveness of Proposed Rule Change to Amend Chapter VI, Section 5 of the Rules of The Nasdaq Options Market to Extend Through December 31, 2019 or the Date of Permanent Approval, if Earlier, the Penny Pilot Program in Options Classes in Certain Issues
Nasdaq via SEC
The purpose of this filing is to amend Chapter VI, Section 5 , to extend the Penny Pilot through December 31, 2019 or the date of permanent approval, if earlier . 4 The Exchange believes that extending the Penny Pilot will allow for further analysis of the Penny Pilot and a determination of how the program should be structured in the future

ASX upgrades co-lo data centre to support power-hungry FPGAs
Rohan Pearce – ComputerWorld
The Australian Securities Exchange has officially launched new high-density pods at its Tier III co-location data centre.
The ASX says that the new pods at the Australian Liquidity Centre (ALC) in Gore Hill — the co-lo facility launched by the exchange in early 2012 — will support customers that want to run power-hungry systems including increasingly sophisticated FPGAs to support data analytics and machine learning.


Cboe Expands U.S. Equities Leadership Team with New Senior Hire
Cboe Global Markets, Inc. (Cboe: CBOE), one of the world’s largest exchange holding companies, today announced that Adam Inzirillo, a longtime veteran of U.S. equities trading, will join as Senior Vice President, Head of U.S. Equities in New York. In this role, Adam will be responsible for overseeing the product development and strategic growth of Cboe’s U.S. equities business globally.

Sterling Trading Tech Names Erik Schmidt Managing Director of Client Services
Sterling Trading Tech (STT) is pleased to announce the appointment of Erik Schmidt as Managing Director of Client Services. Erik is an industry veteran with two decades of experience in capital markets. His career began on the trading floors of Chicago, which led him to Europe and Asia where he opened and managed trading offices to run international portfolios.

Regulation & Enforcement

The Value of Speculation Limits, or Lack Thereof
CFTC Commissioner Daniel Berkovitz recently spoke to the FIA Commodities Symposium, in Houston, Texas, about the reduction of systemic risks and the strengthening of market integrity under the Dodd-Frank Act. He gave the usual disclaimer, that the views he expressed in this address were his own not those of the Commission. Still, they are worth the attention of anyone interested in how the derivatives markets in the United States function.

SEBI sets up panel to review margins on derivatives
Ashish Rukhaiyar – The Hindu
Based on the feedback that the existing margin requirements in the derivatives segment is pushing up cost of trading while not managing risk in the most efficient manner, the Securities and Exchange Board of India (SEBI) has decided to review the current framework of margins in the futures and options segment.

Basel closes in on IM offset for leverage ratio
Philip Alexander – (SUBSCRIPTION)
Bank regulation standard-setters may be on the verge of settling a long-running dispute over the leverage ratio, with three sources expecting a final standard on the ratio’s treatment of client clearing margin following a meeting of the Basel Committee on Banking Supervision on June 19 and 20.


Keeping the robots honest
Alexander Campbell – (SUBSCRIPTION)
The robots need minding. But the human monitors needed to make algorithmic trading safe are in short supply.
“There’s no script for algo trading risk management,” said Jason Conn, head of electronic trading operational risk management at Citi, at the OpRisk North America conference on June 18. “We know some of our peers are doing it differently. Some have engaged model risk teams and some have not.”

First Derivatives now full owner of tech firm Kx Systems after buying up shares
Ellie Donnelly and Margaret Canning – Belfast Telegraph
Global software business First Derivatives, which is based in Newry, has said it has reached a major milestone in becoming the full owner of technology firm Kx Systems.


As the S&P 500 bumps up against 3,000, Wells Fargo says cash in on gains
Barbara Kollmeyer – MarketWatch
The Federal Reserve seems to have successfully walked a tightrope of market expectations on monetary policy, and investors are cheering — at least for now.
The S&P 500 is on the verge of fresh highs Thursday following a dovish Fed meeting that has helped to heighten chances of a July interest rate cut. That is even amid some concerns that the picture for equities may dim down the road.


Don’t have too much faith in our central banking superheroes
Vishnu Kurella – Financial Times (SUBSCRIPTION)
Pressures are clearly building for a once-in-a-decade blitz in the stock market by the end of next year.
Though the market has experienced some choppiness lately, last year’s turmoil is generally viewed more as a fleeting nightmare than as a cautionary tale. Nonetheless, investors should pay heed as the sell-off exposed some alarming fragilities. In essence, the market has flashed a sneak preview of its true crash potential.

CME Group and Shanghai Gold Exchange to Launch New Gold Futures Contracts Connecting Global Market Participants to Chinese Gold Markets
CME Group
CME Group, the world’s leading and most diverse derivatives marketplace, today announced that Shanghai Gold Exchange (SGE), the world’s largest physical gold exchange, will grant CME Group a license to use, create and list futures contracts based on SGE’s Shanghai Gold Benchmark PM Price.

Chinese Yuan: Beware of Boundaries
Bluford Putnam – CME Group
Boundaries impact market behavior, whether they are explicit or embedded. For the Chinese yuan (CNY), the psychological boundary is 7.0 to the U.S. dollar (USD). Market participants need to pay attention to the economics of boundary-value dynamics. As trade tensions escalate, volatility may be dampened near the boundary even as risks rise for a sharp currency devaluation. Alternatively, if trade tensions ease, there can be an orderly drift toward appreciation.

Recording Electronic Warehouse Receipts on a Distributed Ledger: Possibilities and Pitfalls
Katherine Cooper – Murphy and McGonigle Commodity Corner
Although distributed ledger technology offers significant potential to streamline financial transactions, it does not come without potential challenges to its use to record electronic warehouse receipts – a fundamental part of the financial plumbing supporting cash commodity and commodity derivatives transactions.

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