Observations & Insight

World Federation of Exchanges publishes Annual IOMA Derivatives Report
The World Federation of Exchanges (“WFE”), which represents more than 200 market infrastructure providers including exchanges and CCPs, has today published its annual report into the global derivatives market. Highlights of the report are as follows: 1) Derivatives volumes continued to grow in 2016 – increasing by 2.2% on 2015 – reaching a total number of 24.9 billion derivatives contracts. 2) This was made up of 9.4 billion options (38%) and 15.5 billion futures (62%) traded.

Lead Stories

Trading firm Virtu Financial to buy KCG for about $1.4 billion
Virtu Financial Inc (VIRT.O) said it would buy rival KCG Holdings Inc (KCG.N) in a $1.4 billion deal that brings together two major players in the U.S. electronic trading space. The deal comes at a difficult time for high-frequency trading as low volatility squeezes the profits it can make from rapid-fire trades.

****SD: It’s official and KCG’s and Virtu’s stock is surging. Press release via Benzinga here.

Mystery trader ’50 Cent’ can’t stop betting on a stock market shock
Joe Ciolli – Business Insider
After taking $89 million in losses so far in 2017, one trader is doubling down on bets the US stock market is in for a rude awakening. The mystery trader’s investment vehicle of choice is the CBOE Volatility Index, or VIX, a measure of expected price swings in US equities that serves as a barometer for investor nervousness. It generally climbs as stocks fall, so purchases of VIX contracts translate to bearish wagers on the S&P 500.

****SD: Another update on our favorite vol trader. Worth noting that his/her rapper namesake is known for recent bankruptcy proceedings.

Euro, currency volatility jump ahead of French election first round
Patrick Graham – Reuters
The euro jumped around half a percent against the dollar on Thursday as some traders shut down broad bets against the common currency and French assets ahead of the first round of presidential elections on Sunday.

****SD: I don’t like weekend uncertainty — rain always seems to impact my grill plans.

Forget Marine Le Pen and the far right. Investors now fear France will elect radical socialist Jean-Luc Mélenchon
Eshe Nelson – Quartz
For a long time, investors have considered the biggest risk to the status quo in France’s presidential election to be far-right candidate Marine Le Pen. Now, just days before the first round of voting, a late surge in support for Jean-Luc Mélenchon has surfaced an unexpected new threat: the far left.

****SD: I like Risk reversals because it usually means I’m getting my dad’s cavalry out of North America. Also see Bloomberg’s Euro Hits Three-Week High Amid Short Covering Before France Vote.

A Case of Volatility Futures Leading an Index
Russell Rhoads – CBOE Options Hub
The first round of the French Election occurs this coming weekend and the implied volatility of broad based options in Europe is taking notice. The European version of VIX is VSTOXX which is based on Euro Stoxx 50 Index options. Today VSTOXX closed over 24.00 as Euro Stoxx 50 options are pricing in high volatility over the next few weeks in anticipation of the market’s reaction to the French Election.

Operator-led cartels try to thwart short sellers by ‘banning’ F&O securities
Santosh Nair – Moneycontrol
Market operators are exploiting a technicality in the calculation of marketwide position limits in the futures and options (F&O) segment to push securities into the “ban period” at will, say brokers familiar with the modus operandi. This is being done mostly to thwart short sellers and keep the stock price firm, they say.

Exchanges and Clearing

SGX reports 3Q FY2017 net profit of $83 million
Derivatives revenue declined 9% to $75.2 million ($82.2 million), contributing to 37% (40%) of total revenue.

China’s Stock Market Shocks the World by Going Nowhere Fast
Alex Frew McMillan – TheStreet
China’s stock markets are so famously volatile that it’s not unusual for the entire stock market to double, halve, then double again. This happened in 2007 (up 190%), 2008 (down 70%) and 2009 (up 107%).

Updates To Complex Order types And Complex MIAX Options Price Collar
Please refer to the following MIAX Options Regulatory Circulars for updates to Complex Order types and Complex MIAX Options Price Collar (“MPC”).


KCG’s electronic trading head Charles Susi to depart
Joe Rennison – Financial Times
Charles Susi, head of institutional sales & electronic trading at KCG, has announced internally that he is leaving the firm, according to people briefed on the departure.

Regulation & Enforcement

U.S. House banking chairman unveils Dodd-Frank replacement
Pete Schroeder – Reuters
The head of the U.S. House of Representatives’ banking panel has unveiled the Republicans’ most ambitious plan so far to loosen financial regulations, a 600-page bill to replace the Dodd-Frank financial reform law.

MiFID II Transaction Reporting Challenges for the Buy-Side
Shawn Kenyon – TABB Forum
Slated for implementation on Jan. 3, 2018, MiFID II will impact every stage of the buy-side investment process and nearly all asset classes. But transaction reporting is arguably the most disruptive MiFID II requirement in terms of technology and compliance.

New SEC Alums Swarm ‘Revolving Door’ to Financial, Law Firms
Andrew Ramonas, Bloomberg BNA – Big Law Business
More than half the high-ranking SEC officials who left the agency since January 2016 landed at law and financial firms, with Debevoise & Plimpton LLP leading the pack. Debevoise, private equity manager Blackstone Group LP and other firms hired 15 of the 26 Securities and Exchange Commission officials Bloomberg BNA tracked since their departures were announced in 2016 and 2017.

****SD: I’m imagining a Three Stooges “caught in the doorway” moment but in this case all the stooges are wearing expensive suits.


Derivatives veterans’ fintech fund to provide order – founders
New fintech funds Capital Markets SEIS and EIS FinTech will seek to provide order in the financial technology markets, founders Brendan Bradley and Jeff Gale told Global Investor. Derivatives veterans Bill Templer, Cathryn Lyall, David Feltes, Jeff Gale and Bradley are gearing up to launch the Capital Markets SEIS and EIS FinTech funds to invest in the financial technology industry.

****SD: Take a look at FOW’s new website.


Edges are Ephemeral
The Reformed Broker
Wall Street Journal: “BOSTON— Jack Meyer trounced rivals when he ran Harvard University’s endowment in the 1990s. But as a hedge-fund manager, he is struggling. His Convexity Capital Management LP has lost $1 billion of its clients’ money over the last few years as once reliable options trades backfired. Investors pulled more than $3.5 billion from the bond shop last year, its fifth down year in a row. The firm laid off a tenth of its staff in recent months.” This is one of the most frustrating aspects of the investment management business. Performance does not persist and strategies, upon becoming successful, can often start to fail once enough imitators show up or the market wizens up about someone keeping a big, giant edge to themselves.

****SD: I’m amazed by the poor condition of many folks’ kitchen knives — life is a lot easier with a decent whetstone. Sometimes you need to revisit your perceived edge as it dulls imperceptibly.

Which Breaks First, Stock Prices Or Uncertainty?
Some significant technical trend lines are in play, so we take a closer look at market technicals and sentiment this week. The longer-term technicals continue to look strong, and an evaluation of global market breadth suggests the path of least resistance remains higher for stocks. However, sentiment remains a much more mixed picture indicating that market volatility could finally be heating up.

How One XLF Options Trader Made $1.7 Million
Schaeffer’s Research
Bank stocks are in focus this week, with earnings season getting into full swing. Not surprisingly, options traders have set their sights on the Financial Select Sector SPDR Fund (XLF). Today, put options on the exchange-traded fund (ETF) are crossing at 1.6 times the usual intraday rate.


Greeks: Your Earnings Season Foreign Language Requirement
Kevin Hicks – The Ticker Tape
Springtime is upon us—a time for new beginnings, and new seasons. Like baseball, for instance, and earnings. Are you among those considering options strategies this season? After all, earnings “surprises” can be positive or negative, and a stock’s reaction can be moderate or extreme.


ETFs Create Stock Markets That Are Both Mindless and Too Expensive, Study Says
Dani Burger – Bloomberg
Exchange-traded funds are making stock markets dumber — and more expensive.

****SD: I find it hard to avoid certain ETF stories in this newsletter, given that in 2016 options on ETFs accounted for almost 41% of all options volumes.

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