Observations & Insight

Things I Learned About Finance Bros by (Briefly) Dating a Finance Bro
Tara Isabella Burton – The New Yorker
It’s not that they’re actually ever mad at the valet. They just want him to learn.

****SD: Good for your daily dose of laughs (and some cringes). “They will take you to very trendy experimental-cocktail bars that they read about on Gothamist. They will encourage you to try something with twenty ingredients. They will order an Old Fashioned. Every. Single. Time.”

Lead Stories

Virtu and Citadel Securities go head to head in HFT
Philip Stafford and Nicole Bullock – Financial Times
After a decade in which high-frequency trading has transformed the US stock market, Wall Street’s “flash boys” are now discovering the flipside of disruption. A combination of subdued volatility across financial markets and rising costs have thinned the ranks of hyper fast computerised trading firms, persuading New York-based Virtu Financial to pay $1.4bn last week for rival KCG Holdings.

Multi-asset services key for buy-side execution
Hayley McDowell – The Trade
Brokers offering the buy-side multi-asset services and capabilities will thrive as they allow for a simpler route when executing orders, according to a panel at TradeTech. The buy-side panellists agreed sell-side firms and technology vendors offering a ‘one-stop shop’ for services are more appealing to trading desks.

Why do asset prices move?
Eric Lonergan – Philosophy of Money
Discussions of volatility tend to reveal eccentric views of asset price determination. ‘Uncertainty’ is deemed to increase and decrease with remarkable frequency. This is particularly odd given that what we don’t know now was presumably part of what we didn’t know before. Do perceptions about how little we actually know about the future really change – is it not more likely that correlated emotional responses periodically grip market participants?

Lucky, Good or Tipped Off? The Curious Case of Government Data and the Pound
Mike Bird – WSJ
Some investors could be trading with knowledge of U.K. official statistics before they are published, according to a comparison of currency trading data for the Swedish krona and British pound. Sweden and Britain, two European countries with widely traded currencies, have very different approaches when it comes to policy on who sees official economic data before it goes out.

****SD: I suppose I should put this in strategy…

Pound Bulls Emboldened by Election Look Ahead to Key Milestone
Vassilis Karamanis – Bloomberg
The case for the pound to climb above the psychologically important level of $1.30 is strengthening, as technical indicators point toward an extension of its post-election announcement rally and bearish options bets lose traction.

****SD: Well, there’s still more than a month before IDX for this to change. Hopefully.

Here We Go Again: Another Futures Fund Is Caught In A “Short Gamma” Trap
Zero Hedge
Remember when the catalyst for the relentless, seemingly inexplicable broad market melt-up in mid-February was revealed to be an overeager short-biased hedge fund, which had been caught in a “short gamma” feedback loop, forced to buy more S&P futures the higher the market went? Well, as RBC’s Charlie McElliggott writes, the “short gamma” feedback loop appears to have returned as yet another fund is now caught in the same trap, and the market will soon test just what the fund’s point of margin call max pain is, potentially taking the S&P to 2,400 – if not far higher – on short notice.

****SD: I don’t buy the “one fund catalyst for a melt up” storyline, but still worth looking at.

Investors Are Taking On More Risk Across Markets
Edouard Senechal – Barron’s
Despite last year’s significant market surprises and macro risks, namely the U.S. election of Donald Trump and Brexit, we have seen an overall decline in implied volatilities. As implied volatilities have declined, we believe this may be a confirmation that investors’ risk appetite is coming back after the significant risk oppression that took hold and has persisted following the 2008 global financial crisis. The return of risk appetites could signal the end of an era of insatiable demand for safe assets that has characterized markets since the 2008 crisis.

****SD: WCGW?

Mexico’s Pemex Takes Out Its Own Oil Hedges
Anthony Harrup – Fox Business
Mexican state oil company Petróleos Mexicanos said Tuesday it has taken out oil price hedges to protect its income this year from a possible decline in prices, tapping derivatives markets for the first time in more than a decade.

Exchanges and Clearing

CBOE’s 44th Anniversary
Russell Rhoads – CBOE Options Hub
CBOE turns 44 today, and we thought we’d provide 44 “fun facts” to mark the occasion.

****SD: This list is fodder for the most niche Jeopardy category of all time. Did you know that Barron’s Steve Sears first referred to the VIX as “The Fear Index” in 1998?

ICE says being asked to shift operations from London to continent
The InterContinental Exchange has been asked by several European Union countries whether it would move its clearing operations to the continent, the exchange’s chief executive Jeff Sprecher said on Wednesday.

Brexit Should Leave LSE Worried for Future Listings, Irish Say
Peter Flanagan – Bloomberg
The U.K.’s move to leave the European Union should cause London Stock Exchange Group Plc to fear losing business to Ireland and other European markets, a senior executive at the Irish Stock Exchange said.

****SD: Since when do the English listen to the Irish?

Acquisitions help Nasdaq beat profit estimates
Nasdaq Inc posted a better-than-expected quarterly profit as the transatlantic exchange operator benefited from its acquisitions. Nasdaq’s net income increased 28 percent to $169 million, or 99 cents per share, in the first quarter ended March 31. Excluding one-time items, Nasdaq earned $1.10 per share, beating the average analyst estimate of $1.06, according to Thomson Reuters I/B/E/S.

****SD: Nuts and bolts of the quarterly earnings here.

Nasdaq ISE Announces Updates To Technical Specifications
Nasdaq Options Technical Update #2017
Nasdaq ISE (ISE) has updated the technical specification documents with critical information needed to ensure a smooth transition from ISE technology to the Nasdaq INET platform. T

****SD: Also Nasdaq ISE Announces Updates to ISE FX Options Opening Time


JPMorgan zooming in on Warsaw for new global back office center
Marcin Goclowski and Anjuli Davies – Reuters
U.S. bank JPMorgan Chase (JPM.N) is zooming in on Warsaw as a destination for its new back office operations center which could eventually employ several thousand people supporting the bank’s European and Asian business, sources said.

Regulation & Enforcement

SEC working ‘diligently’ on plan to test lower exchange fees
John McCrank – Reuters
The U.S. Securities and Exchange Commission is preparing a proposal for a pilot plan to test how lowering stock exchange fees would affect market quality and the behavior of market participants, a senior official at the regulator said on Wednesday.

Republican Bid to Gut Dodd-Frank Renews the Debate About Breaking Up the Banks
Elizabeth Dexheimer – Bloomberg
The roll-out of legislation this week that would rip up much of the Dodd-Frank Act marks a pivotal moment for Republicans’ efforts to overhaul post-crisis financial rules.

Brokers “must specialise in research or execution” post-MiFID II
Hayley McDowell – The Trade
Unbundling requirements under MiFID II will force brokers to specialise in either research or trade execution, according to a panel of experts at TradeTech. The panel agreed the move will have a positive impact on the industry as brokers will increasingly demonstrate trade performance and invest specifically in those services.

Commodity option settlement expected to be complex process
Business Standard News
The Securities and Exchange Board of India (Sebi) approved trading in commodity options on Tuesday. Actual trading in options, however, will take some time to start as the finance ministry will first have to amend the relevant rules, by issuing a notification. The regulatory board has found a way out by which the proposal will not be required to go to parliament. The existing Securities Contract abd Regulation Act (SCRA) gives Sebi all powers to permit options. However settlement will be much more complex than in the case of equity options because in commodities, options will devolve or expire in futures.

****SD: This on the heels of final clearance to trade futures options in commodities.

The Consolidated Audit Trail: Complying With Error Rates
TABB Forum
This is the third in a series of articles on the Consolidated Audit Trail by the London Stock Exchange Group. In this article, David Morris looks at error rates and how they will be applied under the CAT. He assesses what areas firms should focus on to reduce error rates and the tools and processes clients have at their disposal. Read the previous articles, by Maryse Gordon, here.


Vela Launches European Best Bid Offer Solution
Vela Trading Technologies (Vela), a global leader in high performance trading and market data technology, has launched a fully-managed European Best Bid Offer (EBBO) solution in response to increased client demand to comply with the changing pre-trade transparency and best execution rules which will come into force with MiFID II in January 2018.

ABG Sundal Taps Fidessa to Support its Equities and Derivatives Business
Finance Magnates
ABG Sundal Collier, a Nordic investment banking powerhouse, has selected Fidessa’s workflow platform to provide its clients with robust brokerage services across both equities and derivatives. Under the terms of the agreement, ABGSC is enhancing sales and execution business by tapping Fidessa’s workflow capabilities, order analytics and low-latency execution.

Asia investors boost use of unorthodox data sources in battle to beat benchmarks
Saikat Chatterjee – Reuters
Sometime in the third quarter of 2016, Blackrock’s (BLK.N) scientific active equity team, which manages $80 billion globally, began picking up increased signs of construction activity on the ground in China by using satellite imagery.

Colt introduces managed FPGA market data service with NovaSparks
Colt announced today that participants can now receive TSE’s Flex Full market data feed normalised with an FPGA solution1 as part of its market data portfolio for Capital Markets customers.


The Link Between Chess and Options Trading (VIDEO)
Hikaru Nakamura, one of the top chess players in the world (number 7 right now), joined Bloomberg’s Joe Weisenthal on “What’d You Miss?” to talk about using some of the same tactics in chess to trade options.

****SD: Essentially: In both, you need to know when to take your risks. That’ll save you 5 minutes of of watching the video. Not really any different from the poker and backgammon players who turn to trading (or vice versa). I listened to a panel recently geared toward college students about how to get into trading. This wasn’t meant to necessarily be taken as advice, but out of a panel of 10 or so, one person mentioned that he was a sports gambler before catching the trading bug and another was an avid poker player. It’s a common theme is all I’m saying.

What a Massive VIX Drop Means for Stocks
Andrea Kramer – Schaeffer’s Research
The results of the French presidential election over the weekend eased widespread fears of a future “Frexit,” sparking a global relief rally for stocks. What’s more, as traders once again whet their collective appetite for riskier assets, the CBOE Volatility Index (VIX) — the stock market’s “fear gauge” — collapsed by 26% on Monday. According to data from Schaeffer’s Quantitative Analyst Chris Prybal, this dramatic VIX drop represents a signal that’s flashed just three other times in history. Below, we’ll take a look at what that could mean for the VIX and stocks going forward.

Goldman Sachs on option straddles during earnings season
Joe Ciolli – Business Insider
With stock volatility hovering near a pre-financial crisis low, some investors might see an opportunity to take a breather. To the derivatives strategists at Goldman Sachs, it’s an opportunity to reap outsized gains.

****SD: Goldman Sachs says “look for mispriced options.” How much did someone get paid for that heady bit of wisdom?

Morgan Stanley strategists add to U.S. equities in cross-asset allocation
Morgan Stanley’s cross-asset strategy team upped its allocation to U.S. equities on Wednesday, saying better global growth and low interest rates can continue to support a market that a growing majority of investors are finding expensive.

****SD: “According to the U.S. broker, option pricing shows the probability of a 15 percent rally on the S&P 500 from current levels is the lowest it has been in the last 12 years.” That’s a relief.

Europe Enters The Tour De France
1) Though political considerations have dominated the conversation around European investing (for good reason), fundamentals are the main driver. 2) Europe has emerged from its earnings recession, and expectations for 2017 appear optimistic given the economic fundamentals. 3) European election results that do not roil markets and decent earnings expansion in the first quarter will be key for further European equity strength.

****SD: If indeed we’re in the Tour De France, I guess that means everybody is juicing. Which at least makes for a new level playing field.

Credit Suisse Announces the Launch of a USO Covered Call Exchange Traded Note: the Credit Suisse X-Links Crude Oil Shares Covered Call ETNs
Credit Suisse today announced the launch of its X-LinksTM Crude Oil Shares Covered Call ETNs (the “ETNs”), which are listed on the NASDAQ exchange under the ticker symbol “USOI” and are eligible to begin trading today.

****SD: Don’t usually include options strategy funds in the newsletter but I saw a few today — part of the ongoing trend. The other – Rational Funds Completes Merger of Iron Horse Covered Call Fund


2017 CBOE Risk Management Conference Europe
CBOE Holdings, Inc. will host the 6th annual CBOE Risk Management Conference (RMC) Europe, from September 11 through September 13, 2017, at The Grove Hotel in Hertfordshire, UK.


Not an inside job: How two analysts became SEC whistleblowers
Sarah N. Lynch – Reuters
Four years ago, two analysts who liked to swap notes on numbers they thought looked odd took a fateful step and tipped off U.S. regulators about a company that one of them had watched for months. Orthofix International NV caught one of the analysts’ attention in 2012. The Texas-based medical device maker kept hitting ambitious earnings targets and many analysts had “buy” recommendations for the stock.

LME Swaps Bazooka for Ear Trumpet to Woo Back Traders
Jack Farchy and Mark Burton – Bloomberg
When the London Metal Exchange faced a crisis over its warehousing system five years ago, the head of the company’s parent promised to aim a “bazooka” at the problem. For Matthew Chamberlain, who was named LME chief executive officer last week, the weapon of choice is less warlike: a discussion paper.

****SD: When’s the last time you thought about an ear trumpet? When listening to Beethoven?

Wake up investors — you ignore conspiracy theories at your peril
Izabella Kaminska – Financial Times
Market efficiency is predicated on the notion of rational agents. But what if markets are being misled by the empowerment of a particular type of irrational agent in the economic system? The issue is one of information blind spots. And perhaps the biggest and least talked about blind spot — possibly due to its taboo nature — is the highly monetised market for conspiracy theories. Here, people like Alex Jones, a prominent US conspiracy theorist and talk-show host, seem to have more influence than politicians.

****SD: I like the conspiracies that claim people create conspiracies as a distraction for what’s really going on.

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