Observations & Insight

Stepping Forward in London
By John J. Lothian

Well, it is about time. I will be delivering my first presentation as part of MarketsWiki Education World of Opportunity in London on Monday.

Due to a scheduling conflict, Jock Percy of Perseus had to withdraw from the event on October 31. Stuff happens and you roll with it.

So it will be my turn to step up and be a presenter. The question in my mind is whether I can keep my presentation in the 12 to 14 minute segments we allow the speakers.

I am going to speak on the role of disintermediation on one’s career.

We still have some room in the spacious University of Chicago Booth School of Business meeting room in London, so send your newer employees or interns to our free event.

Complete details on the line-up and sign up are available at www.marketswikieducation.com

Lead Stories

Uneasy Calm Grips Markets Suddenly Silent Before U.S. Vote
Joseph Ciolli and Ye Xie – Bloomberg
It’s happening again. Markets around the world, from stocks to metals and bonds, have slowed to a crawl, revisiting lows in volatility that have stood for two years. Muted moves just sent a cross-asset gauge of price swings in equities, rates, currency and commodities to the lowest since 2014. That everything should go quiet at once just before the U.S. election is especially alarming to a cadre of market watchers who see threats stretching from Washington to Beijing.

****SD: From the Financial Times Investors discount surprises from the US election, Fed

Option Writing Mutual Funds Gain Fans in Volatile Times
Gregg Greenberg – TheStreet.com
How did option writing mutual funds get so popular all of a sudden? “Visibility for option writing strategies has seen tremendous growth,” said Michael Buckius, portfolio manager for the Gateway Fund (GATEX) . “Increasing use in pension plans, growth in the number of mutual funds and assets using them, a new Morningstar category. It’s really taking off.” Buckius said the option market is attractive now because premiums increase with volatility.

****SD: Another effect of the far-reaching search for yield.

Rates Are Poised to Rise But the VIX of Treasurys is Super Low: What Gives?
Chris Dieterich – WSJ
Treasury investors aren’t quaking in their boots at the prospect of a rate hike. Federal Reserve officials have made clear that they’re gearing up to raise short-term interest rates, and yet the “fear gauge” for government bonds is sitting at multi-year lows. The CBOE/CBOT 10-year U.S. Treasury Note Volatility Index, which uses options prices to measure the expected price swings in benchmark 10-year U.S. Treasury notes, has languished since the summer and is close to its lowest levels since May 2013 — before the Fed’s signals of reduced stimulus touched off the “taper tantrum” bond selloff.

****SD: See what happens when the December Fed meeting is less than 30 days out. Then let’s talk about the TYVIX.

Wall Street’s Speed Demons Are Heroes
Camila Russo and John Detrixhe – Bloomberg
Academic research favors automated trading firms by 2-1 margin; Contrary to ‘Flash Boys’ image, HFTs improve market quality
Across the wider world, Wall Street’s speed demons are all too often cast as the villains of the stock market. As computerized trading firms have become the dominant buyers and sellers of equities, they’ve been blamed for exploiting investors and causing bouts of extreme volatility, and were famously portrayed by Michael Lewis as part of a rigged system in “Flash Boys.”

****SD: A demon hero? I think Bloomberg just equated HFTs with the comic book character Hellboy.

No Volatility, No Bueno for Managed Futures / Macro
Gavekal Capital Blog via ValueWalk
For those who trade volatility for a living – this is starting to feel a lot like the dog days of mid-2014. Two years ago, the markets were overly complacent. And we’re not just talking the VIX and stock market volatility. It was everywhere – energies, Currencies, Grains, as well as stocks and bonds. We wrote about the coiling of volatility, wondering what was going to uncoil all that pent up energy and make the cork pop. A couple months later, we knew the answer was crude oil and its major sell off. Fast forward to today, and it’s easy to see that Managed Futures/Global Macro managers are chomping at the bit to see a volatility uptick.

Brexit Optimism Fizzles as Cost of FTSE 100 Hedges Inflates
Sofia Horta E Costa and Julie Edde – Bloomberg
As U.K. stocks hover near all-time highs, the optimism that took them there is starting to fade. Investors are paying the most since early June to hedge against swings in the benchmark FTSE 100 Index relative to the regional Euro Stoxx 50 Index. The U.K. gauge, up 12 percent this year thanks to a slumping pound, has been hovering around 7,000 for most of the month, though it failed to maintain a record reached intraday on Oct. 11. It slipped 0.5 percent at 8:29 a.m. in London.

****SD: Was it really “optimism” that took the FTSE back? Or was it more the realization that the initial move was an overreaction?

Trump, Brexit and prediction in an age of uncertainty
Tim Harford – Financial Times
If 2008 was a sharp reminder that banking matters, then 2016 has reminded us that politics matters too — and, in both cases, the reminder has not been especially welcome. How should economists respond? Until recently, both banking and politics tended to be something of a niche interest in the economics profession. This isn’t quite as insane as it might seem: if you want to analyse a complex world, you’re going to have to make some simplifying assumptions.

India must press on with commodities trading changes – commentary
Sarika Rachuri – Nikkei Asian Review
India’s commodity derivatives markets were mired in skepticism and unease at the end of 2015 as they prepared for the impending transfer of regulatory authority from the Forward Markets Commission to the Securities and Exchange Board of India. These misgivings have been laid to rest, at least for now, following the unexpected emergence of SEBI as a catalyst for development. But the regulator needs to press ahead with its reform agenda.


CBOE Launches Smile Index Based on Implied Volatilities of S&P 500 Options
Chicago Board Options Exchange (CBOE) announced today that it has launched the CBOE S&P 500 Smile Index (Ticker: SMILE), a premium-capture strategy benchmark index based on the steepness of the curve of implied volatilities of S&P 500 Index (SPX) options — often referred to as the “smile.” The CBOE Smile Index’s strategy alternates between selling a strangle (sell put/sell call) when the options smile is steep, and selling a risk reversal (sell put/buy call) when the options smile is relatively flat. Historically, a flatter smile has been associated with market bottoms and suggests a higher probability of a market upturn.

****SD: Say cheese! Reuters on the index here

LSE’s CurveGlobal trades 60,000 lots in first month
Luke Jeffs – Futures & Options World
LSE-backed venue went live on September 26 with six contracts for trading
The London Stock Exchange’s new European interest rate futures market traded over 60,000 lots in its first full month of business, underlining a solid start for CurveGlobal. Curve, which launched on September 26, traded over 63,000 contracts in its first full month of activity, which amounted to 22 trading days.

Nasdaq profit falls 5.1 percent on higher acquisition costs
Trans-Atlantic exchange operator Nasdaq Inc (NDAQ.O) reported a 5.1 percent fall in quarterly earnings, hit by costs related to a string of acquisitions made in the first half of the year.

Asian trading slumps in third quarter – data
Julie Aelbrecht – Futures & Options World
Exchanges in the Asian region saw trading volumes drop 18% last quarter
The world’s top futures markets saw big drops in volumes for the third quarter of this year, with the Asian exchanges suffering the greatest losses, according to new data Futures and options exchanges in mainland Asia and Asia Pacific reported for the three months to the end of September an 18% decline in volumes compared with the third quarter of last year, while European, African and North and South American exchanges saw volumes fall 7%, according to Euromoney TradeData.

****SD: Huge drop in Asian equity and equity index derivatives — down 46 percent from Q3 2015.

Setl to launch currency blockchain, eyes derivatives
Julie Aelbrecht – Futures & Options World
The tech firm launched equities settlement on blockchain earlier this year
Technology firm Cobalt DL and blockchain start-up Setl said they will launch next year a distributed ledger-based post-trade platform for foreign exchange firms, while Setl is looking to roll-out its technology to other asset classes including derivatives. The FX settlement distributed ledger is being developed by Setl in partnership with peer-to-peer network firm Cobalt and already has 15 participants committed to the service, the firms said in a statement on Wednesday.

****SD: From The Trade — Top FX institutions sign up for SETL and Cobalt’s blockchain post-trade tool

London Derivatives Exchange Unveiled Following Restructure
Press Release
London Derivatives Exchange (LDX) Group today announced its rebranding, following separation from GMEX Technologies. Incorporating London Derivatives Exchange Limited and Global Derivatives Indices Limited (GDI), the new structure will enable the company to deliver an expanding range of products responding to changing market dynamics.

Nigerian bourse pushes back derivatives launch to 2017 – CEO
Nigeria’s stock exchange, Africa’s second largest, will push back the launch of derivatives trading to 2017, starting with stocks futures once a clearing house has been established, its chief executive Oscar Onyema said on Friday. “We have been working very hard to set up a central counter-party clearing house that meets G20 standards,” Onyema told Reuters in an interview on the sidelines of a Nigeria investment summit at the London Stock Exchange.

****SD: Missed this from the weekend. Yes, it’s futures, but the development of African derivatives markets is worth keeping an eye on.

NYSE, NYSE Arca And NYSE MKT Short Interest Reports
Press Release
NYSE today reported short interest as of the close of business on the settlement date of October 14, 2016.

Regulation & Enforcement

ECB calls for light touch on high frequency trading
Francesco Canepa – Reuters
The European Central Bank called for a gradual approach to regulating ultra-fast trading on Tuesday, fearing stringent rules on the practice might jeopardize financial markets. High-frequency trading (HFT), which uses super-fast computers and connections to place trades, has been blamed for accentuating market swings and penalizing other investors by flooding trading venues with orders that immediately get canceled or go unfilled.

ICAP-Tullett Deal Said to Face Regulator Query on Licensing
Will Hadfield, Suzi Ring and Manuel Baigorri – Bloomberg
The FCA is said to scrutinise ICAP’s licensing framework; The combined TP ICAP will be the world’s largest voice broker
U.K. regulators are examining the licenses needed for the $1.5 billion tie-up between ICAP Plc and Tullett Prebon Plc, raising the possibility that the deal may be delayed beyond the firms’ end-of-year target, according to people with knowledge of the situation.


Machine learning and automation set to transform data centre operations
Matthew Finnegan – Computerworld UK
Artificial intelligence is expected to transform a wide range of industries, as simple tasks are automated and carried out by machines. The IT sector is no different, with machine learning algorithms increasingly being targeted at automating and improving data centre operations.


Analyzing Equity Market Sector Risk and the Election
Russell Rhoads – CBOE Options Hub
So, what do Mexico and the Biotech industry have in common? They both seem to be braced for excess volatility following the US Presidential election. Before jumping into all that I’ll explain the table that sums all this up. A couple of days ago I posted a blog showing that SPX option implied volatility jumped about 2 points when comparing at the money options. Our friends at CBOE LiveVol calculates ATM implied volatility for all option markets. Using that information and a little leg work I put together a table comparing IV on Weeklys that expire just before and just after election for various sector ETFs.

Election Week SPX Expirations on Monday, Wednesday and Friday, with Higher Implied Volatility for SPX Puts on Nov. 9
Matt Moran – CBOE Options Hub
In the October 22 Striking Price column in Barron’s, Steve Sears wrote – “keep an eye on the CBOE Volatility Index, or VIX. Already, some investors are preparing for significant volatility around the Nov. 8 election. Investors recently bought about 6,000 VIX Nov. 30 calls and about 9,000 Nov. 17 calls.”

Indicator of the Week: The 20 Best (and Worst) Stocks to Own Until April
Rocky White – Schaeffer’s Research
Stocks have stalled some over the past few months. The S&P 500 Index (SPX) has been fairly flat since early July. The good news is that the most bullish six-month period is coming right up. This week I’ll take look at the November-through-April period for stocks, and compare it to the other six months of the year (May through October). I’ll also show some individual stocks that have historically been especially bullish over the upcoming six-month period.

Should Commodities Be in Your Portfolio?
Whether investors should allocate to commodities is often a topic of debate. A few years back, the Wall Street Journal profiled 8 investment professionals on the issue. The opinions were mixed. Common arguments for including commodities in a portfolio are that they can act as an inflation hedge and that they diversify core equity and bond holdings.

Volatility Getting Ready to Snap Back to Life?
ETF Daily News
The FX markets are experiencing their lowest volatility of the year with some pairs barely budging more than 10 points for hours at a time. But currencies are not the only markets that are asleep. Equities are treading water as well. The VIX has recorded five straight days of declines. As a matter of fact, it’s been the quietest rolling, three-month period across all futures-traded markets in over 20 years. There. Is. Literally. Nothing. Going. On.

Rouble stability masks the real story
Nadia Kazakova – TradingFloor.com
These are interesting times for the Russian rouble. On the surface, the currency is doing well. It has appreciated by over 20% against dollar since the start of the year on rising oil prices, high interest rates and, more recently, subdued volatility. For the oil bulls, the Russian currency might be a good leveraged bet on the further rise of the oil price. For the brave, an unhedged RUB deposit could bring double-digit USD returns. For those with the stomach for Russian credit risk, there is always the FX interest rate swap market.

****SD: In Soviet Russia, blah blah you.

Asia gas market to stay tepid until 2020 on weak fundamentals
Asia’s gas market will likely remain soft until the end of the decade as supply continues to grow while demand is expected to stay tepid amid weakness in the global economy, industry observers said on Wednesday. China’s slowdown, the volatility in financial markets, as well as uncertainties over Britain’s exit from the EU, have been weighing down on the global gas market, Singapore minister for trade and industry S Iswaran said at the 4th Gas Asia Summit.


The Co-Founder of Long-Term Capital Management Wants You to Learn Your Financial Formulas
Tracy Alloway – Bloomberg
“You’re invited to a talk by a hedge fund manager who was a partner at a fund that famously flopped about 20 years ago. You turn up, hoping to hear some valuable insights, or at least some entertaining tales, but instead you are offered a stake of $25 to take out your laptop to bet on the flip of a coin for thirty minutes. You’re told the coin is biased to come up heads with a 60 percent probability, and you can bet as much as you like on heads or tails on each flip. You will be given a check for however much is in your account at the end of the half hour.”

****SD: Coin flipping — so simple yet so much to learn.


OCC’s Craig Donohue To Speak at SIFMA Listed Options Conference
OCC Executive Chairman and CEO Craig Donohue will be the featured speaker at the November 3 SIFMA Annual Listed Options Conference in New York. In a conversation with Tom Wittman, EVP and Head of Global Securities for Nasdaq, Mr. Donohue will discuss the role of centralized clearing in today’s marketplace and the impact of clearing equivalency and other regulation on the listed options market. Mr. Donohue will explain what OCC is doing as a SIFMU to create more capital efficiencies for market participants, the need for innovation in technology, and the evolution of OCC as an industry advocate.

****SD: The lineup is stellar.

WFE Announces Its Forthcoming General Assembly & Annual Meeting
The World Federation of Exchanges (“WFE”), which represents more than 200 market infrastructure providers including exchanges and CCPs, is pleased to announce its 56th General Assembly & Annual Meeting. The meetings take place from 2-4 November 2016, in Cartagena, Colombia.

****SD: Our own Jim Kharouf will be there, moderating a panel on blockchain.


UPDATED: Forex Brokers Are Prepping for US Election
Aziz Abdel-Qader – Finance Magnates
Finance Magnates has learnt that some key brokerage firms have already begun raising their margin requirements, mostly on US stocks and indices, while others warns to do ahead of the US Presidential election on November 8, 2016.

SEC to weigh ‘universal’ proxies sought by investors
Ross Kerber – Reuters
U.S. securities regulators on Wednesday will consider allowing investors to pick directors from a single ballot, in what would be the latest move to open up the governance process of large corporations. The rule changes to be considered by the U.S. Securities and Exchange Commission could also empower activist investors looking to add directors to corporate boards, depending on the recommendations of the agency’s staff.

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