Observations & Insight

CBOE Lifer Ed Provost Reflects on Nearly 42 Years at the Exchange

Ed Provost retired as CBOE president and COO after the completion of the Bats deal. It marked an end to a 40-plus year career at the exchange.

One of 13 kids, Provost came from a largely musical family. He was always interested in markets due to his father’s rapt attention to early television coverage of stocks, and Provost thought he would go the traditional financial path by entering the banking industry. In the end, it was the chance choice of the then upstart CBOE as subject matter for a college paper which exposed him to the fledgling options exchange industry.

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Lead Stories

There’s a Big Technical Reason for Low Volatility in Stocks
Tracy Alloway – Bloomberg
To understand the listless VIX, look to Greek letters. So say equity-derivatives analysts at Deutsche Bank AG, who argue that part of the reason the Chicago Board Options Exchange’s Volatility Index is hovering at multi-decade lows has to do with hedging by large banks, along with rebalancing activity tied to exchange-traded products.

****SD: Nice! A gamma story getting some traction today.

Blame Twitter for the Death of Volatility?
Mark Gilbert – Bloomberg
Mark Mobius, the executive chairman of Templeton Emerging Markets Group, reckons he’s identified a surprising culprit for the slump in volatility currently afflicting financial markets — the rise of social media. Moreover, a survey of 2,800 millionaires in seven different countries by UBS Group AG’s wealth management unit delivers at least some support to his contention that a glut of untrustworthy information is suppressing price moves.

****SD: I’m probably over sensitive, but this is kind of a cagey way to blame millennials.

Brokers Saddled with 75% of CAT Costs
John D’Antona Jr. – Traders News
Nothing in life is free. There’s always a cost and someone always pays. And when it comes to the yet-to-be constructed consolidated audit trail or CAT, which the SEC mandated be built to help track equity trading data and assist it in monitoring and policing the market, it looks like the brokers are going to pay for the lion’s share of the costs. Big time.

****SD: Those most hit: big exchange holding companies, to the tune of almost $2m a year, and almost $1m a year for largest brokers. Overall cost: approximately $50m for the first year and $37m for the years after.

efutures Announces New Service Offerings, Launches New Website, and Education Portal, Trader Central
efutures, a division of Wedbush Securities, has announced its new futures and options service offerings, trading platform, and market commentary center on its newly revamped website at http://www.efutures.com. The new, distinct features include epro – its independent online trading plan, eplus – its broker-assisted trading plan, and an education portal – Trader Central. The new trading platform, efutures Platform is powered by CGQ.

Exchanges and Clearing

Deutsche Boerse CEO says no big mergers on the cards for now
Big stock exchange mergers are currently off the table for German stock exchange operator Deutsche Boerse (DB1Gn.DE) following a failed attempt to link up with London Stock Exchange (LSE.L), CEO Carsten Kengeter said on Wednesday.

Regulation & Enforcement

Quadruple-Levered ETF? SEC Hits Pause on Its Approval of an Exotic Investment
Dave Michaels and Chris Dieterich – WSJ
The Securities and Exchange Commission will reconsider its initial approval of a risky, first-of-its-kind exchange-traded fund that promises four times the daily price moves of S&P 500 futures contracts, according to people familiar with the matter.

****SD: You mean to tell me that a 4x leveraged ETF doesn’t make total sense? That it doesn’t have obvious use cases? Blasphemy. I mean, the 3x leveraged products have been used so seamlessly without issue, a 4x product would definitely be without hiccups. Seriously though, if this isn’t the death knell for ForceShares’ attempt, I’m a monkey’s uncle. For a look at how bad an idea this is, check out Themis Trading’s blog on the matter.

Wall Street regulator detects fewer signals of illegal ‘layering’
Sarah N. Lynch – Reuters
A surveillance program by Wall Street’s self-funded regulator has seen a huge decline in alerts that may indicate potential market manipulation, after it launched a new initiative last year to help brokerages spot problematic clients. Robert Cook, the chief executive at the Financial Industry Regulatory Authority, announced at the group’s annual conference on Wednesday that FINRA has seen a 68 percent drop in “layering exceptions,” or possible indications of a type of manipulative trade.

****SD: But how do you measure manipulators getting smarter at avoiding detection?

SEC obtains asset freeze order against “lead trader” at helm of fraudulent investment firm
Maria Nikolova – FinanceFeeds
The United States Securities and Exchange Commission (SEC) has managed to secure a court order to freeze assets and halt the activities of an ongoing investment fraud, spearheaded by a recidivist. The scheme involves a company named 2waytrading, which offers stock trading tips and investment advice, with the focus of operations being on options trading. The self-proclaimed “lead trader” and operator of the fraudulent entity is Mohamud Abdi Ahmed, who had already been in jail for investment fraud but hid that fact from the clients of his new company.


Historic Link Between High-Yield Bond Market and VIX
Mark Melin – ValueWalk
There has been much consternation over the death of stock market volatility. Some market observers say there is nothing to fear about the CBOE VIX index diving below ten – a historic lack of concern for stock market volatility. Others point to a tight range of the VIX – which is compiled based on put buying and selling in the S&P 500 options – as highlighting dangerous complacency and foreshadowing market downdrafts ahead. Moody’s Chief Economist John Lonski, however, takes a more circumspect view in a research note titled “Much Doubt Surrounds VIX Index’s Optimism.” He links the VIX to the high-yield bond market and says profit growth needs to advance from current levels to justify this historic market complacency.

Bets on a Rebound for Volatility Are Paying Off
Cecile Vannucci – Bloomberg
Traders who spent the past few weeks betting on a rise in equity swings are seeing their wagers pay off. The open interest for CBOE Volatility Index calls has surged 79 percent since the April monthly expiration, reaching a record 9.8 million contracts and more than three times the number of puts.

Eurex on using equity derivatives to manage volatility (VIDEO)
The Trade
Eurex’s Zubin Ramdarshan talks about how its clients are using equity index derivatives to manage event-driven volatility.

Best Forecasters See No Reprieve for Dollar as Trump Woes Mount
Netty Idayu Ismail – Bloomberg
The dollar is set to extend its decline as the turmoil engulfing President Donald Trump will make it harder for him to deliver his pro-growth agenda, some of the best currency forecasters say.


Lowest volatility in a decade stings Dutch prop trader
Samuel Agini – Financial News
An Amsterdam-based proprietary trading firm closing in on three years without a day of trading losses suffered during the opening months of 2017 amid low levels of volatility. Flow Traders, which specialises in quoting bid and ask prices in exchange-traded funds, said that its first-quarter net profit fell by 41% to EUR13.6 million year-on-year, with trading revenue lower across its businesses in Europe, the Americas, and Asia.

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