Observations & Insight

Something is going to happen
Spencer Doar – JLN

So, there’s this thing happening that is a real big deal. As a result, I’ve added a U.S. Election section to the newsletter.

Hopefully, we will know who won by sometime around 10 p.m. Central tonight, which was about when the 2008 and 2012 elections were called. If that is the case and it looks like there will be a peaceful transition of power, I expect our U.S. Election section will go the way of the dodo in short order.

If we get some Florida nonsense or cray volatility or pigs start flying, well, get used to the section being there for more than just a few days. I pray we can quickly put this thing to bed and go back to focusing on negative rates and Italeave and China and oppressive regulation and Brexit and the myriad other issues challenging our planet’s markets.

Oh, and to those stateside, go vote (in Chicago you get a little “I voted!” wristband that makes it look like you went to a 21+ electoral house party).

Lead Stories

SPX Options Market Not Certain on Election Results
Ellen Chang – TheStreet
The stock market is showing signs of concern on the outcome of the U.S. presidential election with volatility in the options market. The pre-election and post-election expirations demonstrate the uncertainty and SPX options, which expire after November 8 are at a premium to SPX options that expire before election day, said Russell Rhoads, director of education at the CBOE Options Institute, a Chicago-based educational arm of the Chicago Board Options Exchange. Rumors that the market is not concerned with the results of the election or that the “stock market is discounting a victory by Hillary Clinton,” are not true.

****SD: Goldman thinks it will be Hillary. And she just won Guam, whatever that portends.

Cost of Hedging Europe Stocks Rises to Brexit High as U.S. Votes
Namitha Jagadeesh and Aleksandra Gjorgievska – Bloomberg
As Americans cast ballots for their next president, European stocks rose, while traders paid up the most since the Brexit referendum for protection against declines. The cost of bearish options on the Euro Stoxx 50 Index has jumped about 50 percent relative to bullish contracts in the past two weeks, data compiled by Bloomberg show.

Election 2016: Must-Read Market Theories for Before and After the Vote
Kirra Fedyszyn – Schaeffer’s Research
The presidential election has been a leading catalyst in stock market moves in recent weeks, with anxiety flying high as the much-anticipated event approached. As Americans head out to vote today, investors will be keeping their eyes on how stocks may be affected by the outcome of this election.

****SD: One theory — it’s all rigged! Buy gold! And canned goods! And guns! Anybody see how Smith and Wesson wants to change its name?

On Election Eve, Volatility Indexes for Stocks, Gold, Currencies & Volatility Fall By More than 8% (after Record 9-Day Up-Streak)
Matt Moran – VIX Views
Last week I heard about quite a bit of new interest in portfolio protection strategies, and on November 4 the CBOE Volatility Index (VIX) rose on a ninth consecutive day (a new all-time record for the VIX Index over its price history dating back to January 1990).

Record VIX Dislocations: Why The Huge Spreads Right Now?
Mark Melin – ValueWalk
VIX Dislocations among biggest ever – what does it mean? Goldman Sachs explains With the S&P 500 up nearly 43 points on Monday, is a Goldman Sachs relative value election trade beginning to play out before the election concludes? A report from Goldman’s option analyst notes that the CBOE VIX index had significantly dislocated from S&P 500 implied volatility. This spread is likely to close, a November 7 report said, with the likely outcome coinciding with the bank’s previously stated election prediction.

U.S. Election

Volatility Managers Prepare for Post-Election Fallout
Andrew Barber – Institutional Investor
In the days leading up to the extraordinarily contentious U.S. presidential election, the CBOE Volatility Index — commonly referred to as the VIX — reached its highest levels since early summer, when markets trembled during the run-up to the June Brexit referendum in the U.K. After an election cycle that has proven to be wildly unpredictable, managers of volatility-focused funds in the U.S. now face an outcome with the potential to cause major swings in their portfolio values.

****SD: Better safe than totally screwed, as they say. Also see Reuters’ Banks, brokers gird for Brexit-style tumult following Tuesday’s election

Brexit Scars Made Wall Street Masters Timid Election Bettors
Anna-Louise Jackson – Bloomberg
Opinions are free. Betting on them isn’t. So even with Hillary Clinton a 3-1 favorite, money managers steered clear of aggressive new positions in the runup to Tuesday’s election.

****SD: Also see Bloomberg’s Markets Have That Brexit-y Feeling as Americans Head to the Polls

Trump Win Could Catapult VIX 60% Higher
Chris Dieterich – WSJ
How high would a win for Republican Donald Trump send the CBOE Volatility Index? Based on what happened in the wake of “Brexit,” in June, the fear gauge should climb to at least 40% higher than Monday’s close and likely more than 60%, said Michael Purves, head of equity derivatives research, at Weeden & Co.

Pity the Election Forecaster
Conor Sen – Bloomberg
When election season rolls around, Americans want the news before it happens. The journalistic innovation of poll aggregation tries to meet that demand with political forecasts, and it’s become a booming business. But there’s a problem. The credit for this business, and perhaps the blame, belongs to FiveThirtyEight, which earned its reputation by using others’ polls to forecast the outcomes of the 2008 and 2012 presidential elections.

****SD: Mr. T is on it.

Dollar Volatility Drops as Clinton Leads in Final Election Poll
Charlotte Ryan and Maciej Onoszko – Bloomberg
Gyrations in the $5.1 trillion foreign-exchange market waned as opinion polls put Hillary Clinton ahead of Donald Trump before U.S. voters cast their ballots in the presidential election. A JPMorgan Chase & Co. gauge of expected swings in global currencies fell the most since June on Monday. At the same time, speculators paid higher prices for protection against the dollar tumbling versus the yen — a scenario markets have associated with a surprise Trump victory.

Stock market rally Even If Donald Beats Hillary Tomorrow
Bala Murali Krishna – ValueWalk
Stock market rally ahead whether Trump or Clinton? Maybe. No matter who wins, ready to party. That’s the upbeat message from Deutsche Bank ahead of a close, and bitterly fought, presidential race between Republican Donald Trump and Democrat Hillary Clinton

****SD: For a different view, see CNBC’s All of a sudden, traders think the election will hardly budge the market

This Election Has One Sure Thing: A More Dysfunctional Congress
Billy House – Bloomberg
As voters head to the polls Tuesday, one outcome is already a near-certainty: A dysfunctional U.S. Congress is going to get even more unworkable, particularly if Hillary Clinton wins the White House. Whichever party wins control of the Senate is likely to claim power by the slimmest of majorities, making the 60-vote margin needed to advance legislation more elusive. Republicans are expected to keep the House, but they too will have a smaller majority, giving more leverage to a group of ultra-conservatives who have pushed to shut down the government in the past.

****SD: See the WSj for another issue — Next President Faces a Raft of Foreign-Policy Quandaries

US Election: Why this vote means less than you think
Juhani Huopainen – TradingFloor
Noise is what drowns out both voices and our understanding of the underlying message. In financial markets, short-term volatility could be called noise. It is reinforced by the media’s endless need to provide catchy, click-baiting headlines. Sell-side trading desks hungry for more trading and visibility in the media play the same game as well. It is easy to get distracted by that noise. It is easy to lose sight of the actual, long-term drivers of market prices, and the phase of the current cycle.

****SD: Gotta have the more contrarian viewpoint, right?


CME takes emergency action to prepare for Election Day volatility
CME Group Inc took emergency action on Monday to allow bigger-than-normal price swings in its interest rate futures on Election Day on Tuesday, as the market operator warned that the U.S. presidential vote could increase volatility. The owner of the Chicago Board of Trade and Chicago Mercantile Exchange said it will widen price fluctuation limits in interest rate products from 5 p.m. Central (2300 GMT) on Tuesday to 7:20 a.m. Central (1320 GMT) on Wednesday.

In Battle of World’s Biggest Oil Exchanges, One Gets Turbo Charge From Exports
Alex Longley – Bloomberg
In the battle for supremacy between the world’s two largest oil exchanges, one of them is enjoying a turbo charge from the U.S. government. Traders bought and sold an average of almost 1.1 billion barrels of West Texas Intermediate crude futures each day in 2016, a surge of 35 percent from a year earlier. The scale of the gain was partly because of the U.S. government lifting decades-old export limits last year, pushing barrels all over the world, according to CME Group Inc., whose Nymex exchange handles the contracts. By comparison, ICE Futures Europe’s Brent contract climbed by 13 percent.

Deutsche Boerse-LSE Said to Face EU Antitrust Objections
Aoife White – Bloomberg
Deutsche Boerse AG’s acquisition of London Stock Exchange Group Plc faces a so-called statement of objections cataloging the European Union’s antitrust concerns over their merger plans, according to a person familiar with the matter.

SGX reports market statistics for October 2016
Total Derivatives volume was 11.5 million, down 14% month-on-month and up 2% year-on-year.

SGX and the Baltic Exchange confirm completion of acquisition
Singapore Exchange Limited (“SGX”) and The Baltic Exchange Limited (“Baltic Exchange”) are pleased to announce that the acquisition of the Baltic Exchange by SGX has been completed today as planned, bringing together complementary strengths of Singapore and London, two of the world’s most important maritime centres.

Intercontinental Exchange Appoints Jonathan Reeve as Global Head of Connectivity and Consolidated Feed Businesses
Intercontinental Exchange (NYSE:ICE), a leading operator of global exchanges and clearing houses and provider of data and listings services, today announced that Jonathan Reeve has been appointed Global Head of ICE Data Services’ Connectivity and Consolidated Feed businesses. Reeve will report to Lynn Martin, President and Chief Operating Officer of ICE Data Services, and will be responsible for strategic oversight and day-to-day management of ICE’s Secure Financial Transaction Infrastructure (SFTI), colocation and Consolidated Feed businesses.

IME, TAIFEX launch coop. on options contract
Mehr News Agency
Cooperation between Iran Mercantile Exchange (IME) and Taiwan Capitalization Weighted Stock Index (TAIEX) was promoted on the sidelines of WFR annual meeting in Colombia.


Former Eurex head of Singapore joins Stellar
William Mitting – Futures & Options World
Henk Huitema left the German exchange in May
Former Eurex executive Henk Huitema has joined Stellar Trading Systems in Singapore. Huitema was head of the Eurex Singapore office from 2010 to May this year and joined Stellar last month.

Regulation & Enforcement

Election Marks Crossroads for SEC
Tatyana Shumsky – WSJ
The Securities and Exchange Commission is likely to get a new chairman no matter who wins Tuesday’s presidential election, raising doubts about the agency’s priorities. The SEC has yet to complete three major initiatives that would change corporate financial reporting. A new leader could shelve work on rules governing the disclosure of executive pay, corporate sustainability efforts and a push to streamline financial filings, a signature project of the agency’s current chairman, Mary Jo White. An incoming chairman also could revive rules requiring companies to report their political spending, which Ms. White dropped from the SEC’s agenda, or focus on new issues, shifting the regulatory outlook for corporate America.

Most Firms Aren’t Ready for MAR – Must Close FICC Surveillance Gap
Stefan Hendrickx, Ancoa – TABB Forum
The EU’s MiFID II and MAR regulations will require firms to extend market surveillance capabilities to fixed income, currencies and commodities, as well as capture market manipulation intent by reporting suspicious orders and suspicious transactions. While most firms have systems in place providing coverage of electronic equities trading, asset classes such as fixed income, currencies and commodities require a different treatment altogether due to their different characteristics.

Wall Street Frets About Cybersecurity as U.S. Demands More Data
Andrew Ackerman – WSJ
In the wake of the financial crisis, federal regulators are demanding a vast trove of private data to help them better monitor markets. But in the age of routine, sophisticated hacks, many in the financial industry worry the government will be unable to keep that sensitive information secure.

Data protection is key concern with new Reg AT
Julie Aelbrecht – Futures & Options World
Trade body the FIA has strongly condemned the new Reg AT proposal
The safety of source code sent to the US regulator is still the industry’s chief concern when it comes to the new Regulation Automated Trading proposal, according to an industry expert. “The real industry concern lies in data protection when firms transfer source code to the regulator. What are the assurances that the data is secure? There were little details in the supplemental proposal on how it could be stored or transferred or what the rules would be for the regulator to look at the source code,” Jonty Field, head of EMEA at Quantitative Brokers, told FOW.


Sunny Skies for Financial Services in the Cloud
Chuck Mackie, Maven Wave Partners – TABB Forum
The financial services industry has been slow to adopt cloud technologies, but numerous indicators point to a change in acceptance, including demographic trends and a counterintuitive boost from new regulation. What led to the initial cloud reluctance, and what direction is cloud for financial services headed in the future?


Betting on a Sharp Move In Emerging Markets
Steven M. Sears – Barron’s
Emerging markets are at a crossroads on the eve of one of America’s most polarizing modern presidential elections. Since Oct. 25, the iShares Emerging Market exchange-traded fund (ticker: EEM) – a proxy for the sector – is down about 3.7%, a move that reflects concerns about the presidential election and potential changes to U.S. interest rates.

Get out the vote!
Steve Claussen – OptionsHouse
Pre-market futures are pointing to a much higher opening, looking to stem a 9 day losing streak in the major stock market averages. Traders are hyper focused on the election Tuesday! Sunday, the FBI announced no reasons were found to charge presidential candidate Hillary Clinton after it reviewed the new emails. The threat of indictment had been attributed to the market’s tailspin last week. Actually the Trump surge in the polls last week coupled with the news today, could manufacture an election result of continued Washington gridlock – the Republicans retain the Senate majority, but Clinton wins the presidency. In the past markets have responded favorably to gridlock. Regardless – traders are hyper focused on the election Tuesday.

Options Insight: How to Play VanEck Vectors Russia ETF (VIDEO)
Jim Strugger, MKM Holdings derivatives strategist, discusses the performance of financial markets and his options strategy for the VanEck Vectors Russia ETF


Brexit uncertainty to the fore at Polish event
Luke Jeffs – Futures & Options World
FOW’s Warsaw delegation said they were unsure what will happen with Brexit
A Polish delegation said on Tuesday it is uncertain how, when or even if Britain will leave the European Union following a debate on the possible implications of the UK’s shock decision in June. The 200-strong delegation at FOW Derivatives World Central and Eastern Europe said it was unclear what will happen as Britain seeks to move ahead with its plan to exit the European Union.


Popularity Is Now a Curse for Malaysia and Indonesia’s Currencies
Y-Sing Liau – Bloomberg
The popularity of Malaysia’s ringgit and Indonesia’s rupiah among global investors has made them Southeast Asia’s most volatile currencies, just as the region heads for troubled waters.

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