Virtu aims for new revenue mix; War stories from the trading desk; Liquidity risk

Nov 8, 2018

Virtu aims for new revenue mix; War stories from the trading desk; Liquidity risk

Nov 8, 2018

Observations & Insight

Bits and Pieces
Spencer Doar – JLN

SIFMA’s Listed Options Symposium is next Thursday, November 15, in New York. If you’re like me and can’t attend, SIFMA is offering a webinar, too. Register here.

John pointed out in this morning’s newsletter that NYSE’s FANG+ Index Futures posted record ADV in October of 3,100 contracts. But NYSE’s options on that index are not getting much volume – each time I check it’s a handful or two of contracts. As of this writing, today 11 contracts have changed hands.

Today is Molly McGregor’s last day with Hanweck. The firm is looking for a new Director of Marketing. Information about the job can be found here.

The Options Industry Council celebrated its 25 years of existence by hosting an “Options Jeopardy” tournament. See if you know the “question” to this “answer.” In the category “BEEP! BEEP! Option Strategy BEP’s (Break-Even Points)” the answer is “This strategy’s BEP calculations involve the short put strike minus credit received and the short call strike plus credit received.” Scroll down to our “Miscellaneous” section for the question.

Of all the earnings announcements after the bell today, Disney’s is poised to be the most important. (Other announcements of note come from Yelp, Dropbox and Activision Blizzard.)

The Financial Times is out with a fascinating story about How the mafia got to our food. Did you know that the estimated annual turnover by Italian mafia syndicates is ~$170 billion?

Lead Stories

Virtu aims for new revenue mix with second billion-dollar deal in 2 years
Declan Harty – S&P Global Market Intelligence
Virtu Financial Inc.’s blueprint for integrating Investment Technology Group Inc. may already be in place. The New York-based trading giant agreed to acquire the independent agency brokerage known as ITG for $30.30 per share, or approximately $1.00 billion. The deal is Virtu’s second large-scale purchase in as many years and the latest sign that proprietary trading companies are still exploring scale acquisitions, new business lines and cost-cutting measures to stay afloat and find consistent growth, something Virtu believes it has in ITG.

War stories from the trading desk
Todd Harrison – MarketWatch
Things were finally starting to come together. After joining the Morgan Stanley Equity Derivative desk as a wet-nosed kid in 1991, I did the types of things that earn a young man stripes. I arrived each morning at 5 a.m. to “write up” positions for the head of the desk, Chuck Feldman, and spent the rest of my day clerking, quoting, fetching and running. It was modern day pledging minus the niceties of the college experience or the rewards of young co-eds. I didn’t mind as I had my eye on the prize and knew that if I was gonna play, I had to pay.

****SD: This is great. The story can be boiled down to this line, “the mechanics of my swing outweighed the results of the at-bat.” (Without spoiling too much, the result of the at-bat was an epic strikeout.)

Why a SIFMU Must Always Manage Liquidity Risk
John Fennell – OCC Blog
Before the 2008 financial crisis, the emphasis of risk management leaned more toward credit risk, with liquidity being a secondary concern. However, during the crisis it became clear that liquidity, and the velocity with which it can evaporate, could render an entity unable to meet its contractual obligations. The events surrounding the crisis, in other words, pointed to liquidity risk as being an accelerant toward the ultimate default of a market participant.

JPMorgan’s Kolanovic Says Midterms May Make Trump Drop Trade War
Joanna Ossinger – Bloomberg (SUBSCRIPTION)
Strategist sees potential in Russell 2000, MSCI EM indexes; October crash fueled by ‘miscalculations’ by Fed, White House
A split Congress is the best outcome for global markets as it may ease trade war tensions and lead to a rally into the year-end, JPMorgan Chase & Co. strategist Marko Kolanovic wrote in a note Wednesday.

****SD: The VIX futures term structure is back to a more normal contango. Here’s another Bloomberg story that references Kolanovic – All Eyes on Stock Buybacks as Smart Money Sticks to the Sideline.

‘Red October’ proves to be a gift for brokers and exchanges; Market volatility pumps up trading volumes after quiet spell
Philip Stafford – Financial Times (SUBSCRIPTION)
Brokers and exchanges have emerged as the big winners in October’s market turmoil, and the futures market suggests investors are braced for further volatility. Monthly statistics from the world’s biggest exchanges and trading venues show flows swelled during ” Red October” when fears over faster interest rate rises pushed the 10-year US government bond yield towards an eight-year high. That led to heavy falls in equities, led by a sell-off in technology stocks.

****SD: I am a big fan of the “Red October” moniker that’s been given to last month.

How replication simplifies pricing of vol exotics; Barclays quants replicate knock-out corridor swaps using barrier options in bid to make pricing easier
Nazneen Sherif –
Derivatives Dealers in Asia have a problem. Retail structured products such as autocallables add vega risk to their books. But the hedge they came up with five years ago – the corridor variance swap – is not an ideal solution. Corridor variance swaps provide payments to the investor based on the realised variance of the underlying when it falls between two strikes, in exchange for a fixed payment. When the underlying moves outside of the barriers, the swaps no longer accrue the realised variance, but the investor would have to post margin anyway.

****SD: Stuff like this makes my head spin. (FYI, this piece is not paywalled.)

Wall Street Analysts Are Now Selling More Data, Less Analysis
Wall Street analysts are doing data differently. Banks for years have crunched data on company earnings, price targets and other mundane metrics for clients who might use the information to make investing and trading decisions. Now they are pulling data from social-media sentiment, geospatial mapping and other unorthodox sources. They are also increasingly making their data feeds available directly to clients, without the surrounding research notes that often go unread.

October was worst month for hedge funds in 7 years
Lindsay Fortado – Financial Times (SUBSCRIPTION)
Hedge funds suffered their worst month in October in seven years as equity strategies were hit by a sell-off in technology stocks.
Hedge Fund Research’s index that tracks all strategies was down about 3 per cent, its worst monthly decline since September 2011, the data provider said. That brings the index’s performance to negative 1 per cent for the year.

Jump: inside the secretive e-trading giant
Robert Mackenzie Smith – (SUBSCRIPTION)
Secretive, unassuming, huge and wildly successful. That’s how outsiders describe Jump Trading, one of the world’s biggest – and most mysterious – proprietary traders.
For the two decades since its birth, Jump has remained largely hidden from public view. The company’s co-founders, Bill DiSomma and Paul Gurinas, shun media interviews. Its website is pretty much empty.
Even those in the prop trading community in Chicago have limited knowledge of how the firm works.

****SD: It really is too bad this is paywalled. But maybe that adds to the mystery even more?

Exchanges and Clearing

A proposal to amend Chapter IV, Securities Traded on NOM, Section 8, Long-Term Options Contracts
The Exchange proposes to amend its rules at Chapter IV, Securities Traded on NOM, Section 8, Long-Term Options Contracts, in order (i) to clarify the number of long-term option contract (“LEAPS”) expiration months that may be listed on the Exchange on underlying securities under the current rule, and (ii) to expand the number of LEAPS expiration months that may be listed in options on the SPDR S&P 500 exchange-traded fund (the “SPY ETF”) in particular.

Dalian Commodity Exchange CEO Wang Fenghai: Continue To Provide Industry Enterprises With Risk Management Channels And Instruments
The “2019 Iron & Steel Industry Chain Development Summit”, organized by Dalian Commodity Exchange (DCE) and others, is held in Hangzhou on October 26 to 27. DCE CEO Wang Fenghai says that the Chinese futures market has entered into a new era with diversified derivatives instruments and a direct and open environment. DCE will continue to strengthen efforts on intensifying market regulation, improving existing contract rules and systems and enhancing the market operation quality and the completeness of derivatives instruments, and keep providing industry enterprises with risk management channels and instruments, thus giving further play to the futures market’s capacity of serving the real economy.

Regulation & Enforcement

US CFTC Chairman: DLT Can Help Regulators Better Oversee Markets
Ana Alexandre – CoinTelegraph
The U.S. Commodity Futures Trading Commission (CFTC) Chairman Christopher Giancarlo said in a speech Nov. 7, that technological advances, including Distributed Ledger Technology (DLT), could help regulators better oversee trading markets.

Industry fears EU ‘Google tax’ will hit trading venues, CCPs
Samuel Wilkes – (SUBSCRIPTION)
Industry sources fear the scope of a new digital services tax (DST) that the European Union intends to levy on internet titans – such as Amazon, Facebook and Google – will inadvertently capture electronic trading venues and other market infrastructure providers unless a broader exemption is inserted into the text.


Press Release: Chartis Research Recognizes Hanweck as a RiskTech Quadrant “Best-of-Breed” Provider for Risk as a Service > Hanweck
Chartis Research has named Hanweck as a RiskTech Quadrant “Best-of-breed” provider in its report Risk as a Service (RaaS) for the Buy-Side. Chartis is an independent research and advisory firm that provides technology and business advice to the global financial risk management industry.


The Breakdown in Oil Price Continues
Jason Pfaff – Nadex
It’s been a brutally rough start to the fall season for oil bulls and the charts and fundamentals point to scant signs of hope for a shift in the current bearish sentiment pervading markets.
With the newly imposed sanctions on Iran going into effect this week, and with geopolitical tensions still brewing in the background with Saudi Arabia, one would think there is enough risk to supply to establish the framework of a bullish case.
However, the current fundamentals around supply and demand are strong and so bearish, they are overwhelming just about everything else right now for oil traders.


Options Jeopardy “Question”
What is an Iron Condor?

What the next financial crisis will look like, according to one fund manager
Shawn Langlois – MarketWatch
‘The next crisis is not likely to be another Lehman, but another Japan – a widespread zombification of global economies to avoid the pain of a large repricing of sovereign bonds, which leads to massive tax hikes to pay the rising interests, economic recession, and unemployment.’
That’s how Daniel Lacalle, chief economist and investment officer at Tressis Gestion, sees the next market mess unfolding.

Powell Better Brush Up on His Fed History
John Authers – The Washington Post (SUBSCRIPTION)
With what seems like indecent haste, markets move from the U.S. midterm elections on Tuesday to the conclusion of a Federal Reserve meeting on monetary policy Thursday. This Federal Open Market Committee meeting, if all goes according to plan, will be the last one that is not followed by a news conference. Chairman Jay Powell now intends to talk to the press after all eight meetings each year, rather than the four press conferences instituted by former chairman Ben S. Bernanke.

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We visit more than 100 websites daily for financial news (Would YOU do that?)

“John Lothian and Company… our industry intelligence.”

Rick Lane

CEO, Trading Technologies

Past Options Newsletters

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