Observations & Insight

Welcome to FIA EXPO Week
By John J. Lothian

Welcome to FIA EXPO week in Chicago. The global derivatives/financial/technology industry converges on the Hilton on South Michigan Avenue tomorrow as the conference officially begins then.

It will be a week of news, meeting colleagues and old friends and a little bit of socializing. Just be careful out there.

The Windy City is living up to its name as tremendous winds, not created by blow-hard politicians, has descended on the city.

John Lothian New will be out in force at the conference, and we will again be shooting video in the Cinnober booth on the trading floor. Thank you to our good friends at Cinnober for again giving us this opportunity. Collaboration is a great thing.

Our video series will be focusing on regulation and solutions to overcoming the new rules since the passage of Dodd-Frank. How are you doing? And, how are you doing it?

I want to encourage everyone to buy a ticket to the gala for Thursday that supports the Greater Chicago Food Depository. It is a great thing this industry and conference does to help battle hunger in Chicago where one in eight people needs some assistance. We do well, so let’s do some good too.

Have a great week and please say hello to me or my team if you see us.

****SD: FYI, the booth is #314.

A Tangled Web: Exploring The Explosive U.S. Growth Of Options On Futures
Spencer Doar – JLN

In 1982, the CME became the first exchange to offer options on futures products. That was nine years after the Chicago Board Options Exchange standardized the equity options market and five years after the CBOE were allowed to list puts.
While options on futures, also called futures options (or, even better, OOFs), have a 34-year history, the period since the financial crisis marks a new era for the market amid continually shifting currents. In 2011, 500 million contracts were traded. In 2015, industry volumes hit 756 million contracts, a 51 percent increase. Do not be mistaken, the volumes of options on futures were already on the march upwards in the years prior to 2008. In 1999, 115 million contracts were traded compared to 584 million in 2008. But the current environment rekindled that growth.
To access the rest of the article, click here

****SD: If you missed it yesterday, here’s my take on the OOFs landscape.

Lead Stories

Traders of ETF Options Deviate From Forecasters on OPEC Deal
Gunjan Banerji – WSJ
One corner of the markets appears to be putting faith in OPEC’s plan to cut crude production. Options on a U.S.-listed exchange-traded fund that tracks oil and gas explorers have turned bullish, even amid skepticism on whether the cartel’s agreement will lead to reduced output. The Organization of the Petroleum Exporting Countries surprised traders Sept. 28 when it struck a deal to slash production by up to 700,000 barrels a day later this year, its first major agreement since the oil bear market began in 2014. The price of Brent crude—the international benchmark—has jumped 12% since the proposal to $51.52 a barrel.

****SD: From Barron’s — Russia’s Oil-Buying Spree: A Sign For Prices?

OCC Comments on Essential Aspects of CCP Resolution Planning
On October 17 OCC provided comments to the Financial Stability Board (FSB) on the issue of essential aspects of CCP resolution planning. OCC supports the work being done regarding CCP resiliency and recovery, but reiterated its concern that in providing guidance regarding resolution, the FSB and other policymakers should not prevent a CCP like OCC from fully implementing its recovery plan and should avoid suggesting steps or processes that undermine the CCP recovery process. OCC said that it is very important in planning for CCP resolution that policymakers focus on resolution planning that promotes market certainty while giving resolution authorities and CCPs the flexibility to deal with actual events as they occur.

****SD: The above is a link to the comment letter.

Bumpy Ride Ahead for Investors as Presidential Election Looms
Dan Rosenberg – The Ticker Tape
American flag: Could markets get choppy ahead of the presidential election on November 8? When U.S. presidential campaigns heat up during the final stretch, investors often experience a bumpy ride. That’s the lesson looking back at 20 years of historical volatility as tracked by CBOE’s VIX, the so-called “fear” index. During the October 1 to November 1 period leading into the last five presidential elections starting in 1996, VIX increased an average of 21%, according to CBOE data.

****SD: Bumpy ride for everybody…

‘There is but one rule: Hunt or be hunted’
Neil Staines – TradingFloor
With all the politicking and positioning going on on both sides of the Brexit debate it is interesting to hear the views and comments of one of the founding architects of monetary union and the first chief economist at the European Central Bank, Otmar Issing.
“One day the house of cards will collapse” – Otmar Issing
Ahead of this week’s ECB meeting Issing expressed his view that the “European Central Bank is becoming dangerously over-extended and that the whole euro project is unworkable in its current form.” He also stated that “the euro has been betrayed by politics that has degenerated into a fiscal free-for-all” and that the EU itself is a “House of Cards…The moral hazard is overwhelming”.

****SD: I was under the impression the one rule was “don’t talk about hunting.”

How Volatility Affects E*TRADE’s DARTs
Robert Karr – MarketRealist
E*TRADE Financial (ETFC) reported DARTs (daily average revenue trades) of ~153,000 during 2Q16. The company’s DARTs fell 8% from the previous quarter and rose 2% YoY (year-over-year). The activity fell sequentially, as overall volatility fell marginally after the UK’s Brexit referendum. In 3Q16, daily trades are expected to have risen on increased volatility as markets have risen across the sectors. Options formed almost one-fifth of the total daily average revenue trades—a level relatively consistent with the past couple of years.

Expensive lessons for rand traders as Gordhan battle rages
Xola Potelwa and Colin McClelland – Bloomberg
Rand is a daily ‘nightmare,’ Credit Agricole strategist says; ‘Personality politics’ make forecasts volatile, Nomura says
The wheels are coming off the rally in the South African rand. The currency has swung to being the emerging world’s worst performer this month, from best in the third quarter, after a move to prosecute Finance Minister Pravin Gordhan sparked a sell-off of South African assets. Volatility has jumped to the highest among currencies tracked by Bloomberg, catching out investors and driving others to steer clear of South African markets until the political storm has passed.


CBOE commits to Vector ahead of Bats deal
Luke Jeffs – Futures & Options World
The Chicago options giant plans to merge with Bats Global Markets
CBOE Holdings has said it plans to forge ahead with its own technology project until the US options market merges with Bats Global Markets which will trigger CBOE moving its trading markets to Bats technology. CBOE has been working this year on an ambitious technology project called Vector that was slated to make its first delivery late this year when the CBOE Futures Exchange was due to move to the new technology.

****SD: CBOE hedging their tech.

CBOE Vest Launches CBOE Vest Defined Distribution Strategy Fund (VDDIX)
CBOE Vest, an investment manager focused on Target Outcome Investment strategies, today announced it has launched the CBOE Vest Defined Distribution Strategy Fund (VDDIX). VDDIX seeks to generate consistent monthly distributions, non-correlated to equity or bond markets, of 5.25% annualized over the one-month Treasury yield, before fees and expenses, while preserving capital over the long term. VDDIX is the second mutual fund launched by CBOE Vest, following the August launch of the CBOE Vest S&P 500 Buffer Protect Strategy Fund (BUIGX).

****SD: Barron’s has CBOE Vest Launches Second Mutual Fund Focussed On Defined Distribution

ICE considers appeal after watchdog demands Trayport sale
Philip Stafford – Financial Times
Intercontinental Exchange may appeal against a rare ruling by UK competition authorities that it sell an energy trading software platform it bought last year, and fight off potential interest for the asset from IHS Markit. After a five-month investigation, the Competition and Markets Authority said on Monday ICE could use its $650m purchase of Trayport to reduce competition against rivals such as Nasdaq, CME Group and European Energy Exchange.

CME Group and Duco Launch of Fee Data Control Service for Member Firms
CME Group
CME Group, the world’s leading and most diverse derivatives marketplace, and Duco Technologies, a global fintech provider of award-winning data control services, today announced that Duco’s innovative data control and reconciliation services will be available to CME Group member firms starting in January 2017. The launch follows a successful six-month trial period with a limited number of futures commission merchants (FCMs).

World Federation Of Exchanges publishes Response To CPMI-IOSCO Consultative Report On CCP Resilience & Recovery
Press Release
The World Federation of Exchanges (“WFE”), which represents more than 200 market infrastructure providers including exchanges and CCPs, today published its response to the CPMI-IOSCO Consultative Report: Resilience and Recovery of Central Counterparties (CCPs) – Further Guidance on the Principles for Financial Market Infrastructure (PFMI).

MIAX Options Exchange: Enhanced MIAX Data Products For Complex Orders
MIAX has received approval from the Securities and Exchange Commission to trade complex orders (See SR-MIAX-2016-26). MIAX will begin trading complex orders on October 24, 2016 starting with options overlying the iShares Russell 2000 ETF (IWM).

MIAX Options – Additional Limited Service MEI Ports Available
Effective immediately, the MIAX Options Fee Schedule will be amended. The Exchange proposes to offer to Market Makers the ability to purchase an additional two (2) Limited Service MEI Ports per matching engine over and above the current four (4) additional Limited Service MEI Ports per matching engine that are available for purchase by Market Makers. Market Makers will now be limited to purchasing six (6) additional Limited Service MEI Ports per matching engine, for a maximum of eight (8) per matching engine. The Exchange proposes to charge the same amount that it currently charges, $50 per month, for each extra Limited Service MEI Port per matching engine. All other fees and maximum port counts related to MEI Ports shall remain unchanged.

Regulation & Enforcement

CFTC Puts Nymex, Comex Through Rule Enforcement Tests
FTF News
A rule enforcement review of the New York Mercantile Exchange (Nymex) and the Commodity Exchange (Comex) by the CFTC’s Division of Market Oversight has yielded a recommendation that both exchanges institute a better way to monitor position limit exemptions. Market participants can exceed position limits as long as they apply for exemptions.

Why does Cyprus license brokers with a history of malintent?
Finance Feeds
IronFX and Banc de Binary. Two large and infamous names, whose prominence in the media has over the last few years been less than salubrious. Banc de Binary, the largest brand to which SpotOption provides its binary options platform along with market making services, has been the subject of an $11 million fine and restitution order by the United States Commodity Futures Trading Commission (CFTC) and Securities and Exchange Commission (SEC) for illegally soliciting American customers, as well as standing out as a flagship brand of the nefarious and fraudulent OTC binary options business that governments around the entire world are doing their utmost to extinguish once and for all.

****SD: Pertinent to the article is the news that Banc De Binary was banned from of Belize, of all places.


Start-Up Taking Aim at Bloomberg Terminals Hires Former Bloomberg Head
Nathaniel Popper – NY Times
Norman Pearlstine is tasked with building a news feed for Money.net that will be based on machine-generated news bulletins and stories. A start-up looking to take on the financial information behemoth Bloomberg L.P. is hiring a former Bloomberg executive to begin a new financial news service.

****SD: Sounds like a good move.

Rival Systems Adds Connectivity to Nasdaq Futures
Globe Newswire
Chicago-based Rival Systems (Rival), a leading provider of trading and risk management software, today announced it now offers connectivity to Nasdaq Futures, Inc. (NFX), giving clients expanded access to energy markets and the ability to easily trade and manage like products across multiple exchanges. Rival is the latest software provider accepted into the NFX Preferred Vendor Program. Launched in 2015, NFX offers key energy benchmarks in futures and options on oil, gas and U.S. power.

AMP Activates The Technancial Company AND CQG’S Hosted Real Time Risk Manager, To Manage Risk
The Technancial Company (TTC) in conjunction with CQG and AMP Global Clearing announced today that AMP Global Clearing will utilise TTC’s JANUS™ Risk Manager platform (JRM) hosted by CQG to enhance their client services with real time risk monitoring.


Earnings Foliage turning colorful!
Steve Claussen – OptionsHouse
As dependable as the autumn leaves, exposing the multiple colors in the fall foliage week by week, the October earnings season is expanding to show an increasingly diverse group of sectors in the companies which report their ‘true colors’ of results this week. Last week the stream of earnings was focused on the major banking names Citigroup (C), JPMorgan (JPM) and Wells Fargo (WFC) which reported generally positive results. Financials continue to lead the sectors this week, with Bank of America (BAC) leading off before the market opened Monday with a positive result.


How Inefficiency Affects Your Trading Day
Kurt Dew – Seeking Alpha
This article is the fourth in a series considering the relationship between law and economics in financial markets. These articles question the quality of the law that governs our right to trade – to efficiently, non-violently, transfer financial property. Are the contracts that govern financial transactions today responsive to the needs of traders and the public at large? My answer is a resounding “No.” Financial instrument trading is the new “Wild West.”

Netflix Jump in New Users Fuels After-Hours Stock Surge
Shalini Ramachandran and Maria Armental – WSJ
Netflix Inc. blew through its forecast for subscriber additions in the September quarter, reassuring investors who were skittish about the streaming giant’s growth trajectory and sending its shares soaring 20% in after-hours trading. The better-than-expected performance came mainly in international markets, where the company has completed a massive, near-global expansion this year. Netflix is making a big bet that the same mix of edgy original content and library programming that has taken the U.S. media world by storm will translate overseas.

****SD: People selling 105 calls before the close yesterday… Ouch.

Chicago’s Coolest Offices 2016
Crain’s Chicago Business
2016 brought us plenty of office design trends to love: residential elements such as Oriental rugs; leasing programs that bring in rotating collections of high-end art; and a move toward softer color palettes with accents of blush and gold. But while design trends change year to year, some values always ring true: attractiveness, originality and functionality.

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