Observations & Insight

Bits & Pieces
By John J. Lothian

John Lothian News has learned that OCC President and COO Mike McClain has resigned and left the organization. His last day was two days ago when the OCC held a goodbye event in Chicago.

The official narrative is that he left for personal reasons, including the continued attention to his wife, who is battling illness. Other sources have cited the high turnover the OCC has seen in recent years and some of the pressures at the core of that for McClain’s departure.

McClain had been with the OCC for 15 years and risen to the title of president under the leadership of OCC Executive Chairman and CEO Craig Donohue

A replacement for McClain is being sought, and given the pattern of hires recently, odds are on a current or former CME Group employee for the position. Since Donohue has come to the OCC, seven former CME Group employees have joined the OCC in senior positions as he works to change the structure and culture at the clearinghouse.

MIAX came to Chicago yesterday to talk up their MIAX Pearl Exchange that was recently started. They had a good turnout from the Chicago options community at an event at Mastro’s. In the first 5-plus weeks, MIAX Pearl grabbed just under 1 percent marketshare in options volumes. Look for them to get more aggressive in the marketplace in the coming months. As MIAX Chairman and CEO Thomas P. Gallagher told his guests, this is a start-up exchange, launched in 2012, that has an experienced staff of people who come from every other US options exchange. It now has 103 employees and continues to pick up talent from the former ISE team and from CBOE/Bats mergers. Jeromee Johnson and Shelly Brown are working to grow their options business with an eye on other opportunities. They are worth keeping on your radar.

We also present our second Exchange Leaders interview from FIA Boca, with CME President Bryan Durkin. It too is well worth a look.


JLN Exchange Leader Series 2017: Durkin Says CME Growth Is All About Customers

CME Group is proud of the diversity in its product lines – from a broad range of commodities to a full suite of interest rate, index and FX contracts. That range of contracts has allowed the exchange to “hit” consistent winners somewhere on the board, as markets move from one sector to another. Bryan Durkin, president of CME, told JLN at the FIA Boca 2017 conference that energies, metals, interest rates and FX posted solid if not record volumes last year. This year, they hope that diversity continues to pay off.

Read the rest and watch the video »

Lead Stories

Virtu and KCG: A Tale of Technical Leverage?
Paul Rowady, Alphacution – TABB Forum
The consensus seems to be that the unsolicited bid by Virtu for KCG is all ‘about the little guy.’ In other words, this deal is all about the position of a wholesaler relative to retail order flow. Whether this deal is about the little guy or not, the fact is that both of these firms have seen better days, argues Paul Rowady, Alphacution.

****SD: Can you hear my tiny violin?

Wall St volatility gauge closes at highest level of 2017
Adam Samson – Financial Times
A measure of expectations for US stock volatility closed on Thursday at its highest level of the year as the Trump trade that pushed equities to record highs showed signs of losing momentum. The Vix index, which tracks options to project expectations for volatility over the next month, climbed 0.31 point on Thursday to 13.12, the first time it has closed above the 13 mark since December 30, according to FactSet data.

****SD: MarketWatch on the VIX here. Also from MarketWatch The Trump stock rally is not over — at least until this danger sign flashes

Cowen Group in talks to buy brokerage Convergex
Nicole Bullock – Financial Times
Financial services company Cowen Group is in talks to buy Convergex, a brokerage, according to people briefed on the matter, as scale becomes increasingly important in the brokerage industry due to rising costs and low trading volumes.

****SD: I’m not surprised that Convergex is on the table given the activity in the sector as a whole and the fact that (near as I can tell from their website) GTCR doesn’t have any other financial services investments of Convergex’s ilk other than Dash Financial (and Dash just got LiquidPoint off of Convergex – aka the most applicable part).

A Month Out From French Vote, Traders Bet on Europe Stock Calm
Aleksandra Gjorgievska – Bloomberg
VStoxx put volume surges, with traders paying up for options; Put-to-call ratio of 1.3-to-1 contrasts with 0.4 for VIX
With the first round of French voting less than a month away, one could be forgiven for betting on an increase in European equity volatility. But the opposite is happening.

****SD: I do like that people appear to be ignoring the noise…

Hedging fatigue apparent even as stocks rally is tested
Saqib Iqbal Ahmed – Reuters
Concerns over U.S. President Donald Trump’s ability to deliver on promised healthcare reform, tax cuts and other measures aimed at promoting economic growth dealt U.S. stocks their worst shock in months this week, but options traders are not rushing to protect themselves.

****SD: … but maybe they should listen a little bit more.

The Dangers of Enhanced Income Funds
Cherry Reynard – Morningstar
Enhanced income funds seem like a seductive solution to the difficulty of generating income in a low interest rate world. Paying income levels of 5% and higher, these funds have found a ready market with some funds now over GBP1 billion in size. However, a recent Hargreaves Lansdown report starkly showed the extent to which investors were sacrificing capital growth for income in some cases.

Hard Times For HFT
Themis Trading Blog
Yesterday we wrote about how the HFT community has begun to lobby to eliminate the Order Protection Rule. It’s no surprise to us that they are trying to change the rules now since their cash machine, which unofficially began in 2007 (with the implementation of Reg NMS), seems to be grinding to a halt. After squeezing every last arbitrage (latency, regulatory, rebate) penny out of Reg NMS for the past 10 years, the HFT community now wants new rules so they can create new arbitrage opportunities. So why now?

****SD: See my very first comment.

Exchanges and Clearing

China’s Dalian Commodity Exchange plans to launch corn options
Hallie Gu and Dominique Patton – Reuters
China’s Dalian Commodity Exchange said on Friday it is planning to add corn options as its prepares to launch its first-ever options contract next week.

****SD: Just so long as the rollout isn’t botched, setting back the options revolution in China.


Bloomberg’s Tradebook CEO departs
Samuel Agini – Financial News
The chief executive and president of Bloomberg’s agency brokerage business has left the firm after little more than two years. Glenn Lesko’s final day at Bloomberg Tradebook was on March 22. A spokeswoman confirmed the departure. A direct replacement has yet to be named.

Regulation & Enforcement

Misconduct rife in derivatives – ex-CFTC enforcement chief
Karen Freifeld – Reuters
A “massive amount of misconduct” in futures, options and swaps markets goes undetected because of insufficient data mining, Aitan Goelman, who until last month was enforcement chief for the top U.S. derivatives regulator, said in an interview.

****SD: Giancarlo knows this — it is why he’s revamping (or at least wants to revamp) the CFTC’s surveillance apparatus.

The Countdown to MiFID II – Post-Trade Priorities :: TabbFORUM
Tony Freeman, DTCC – TABB Forum
MiFID II will alter the landscape for post-trade processing and will require affected firms to adapt their middle- and back-office activities accordingly. There is still a tremendous amount of work to be done before the industry can claim it is ready for its implementation in January 2018.

Acting SEC chair plans test to lower exchange fees
Sarah N. Lynch – Reuters
The acting head of the U.S. Securities and Exchange Commission has directed the regulator to launch a pilot plan that would test how the market would be affected if exchanges lowered the fees they charge brokers to execute trades.

The difficulty of identifying multi-broker spoofing
Michael Friedman – Automated Trader
Trading through multiple brokers has been used by spoofers to help avoid detection. New regulations for cash equity markets in the EU and US are designed to curtail the practice.

SEC chair Piwowar takes aim at Dodd-Frank
Julie Aelbrecht – Futures & Options World
CFTC chair Giancarlo has said that there was no plan to roll back all of Dodd-Frank
Acting chairman of US securities regulator the Securities and Exchange Commission Michael Piwowar has slammed the Dodd-Frank Act as he announced a special study into the securities market. Piwowar, who is a republican economist, suggested that the post-crisis reform Dodd-Frank was an example of “wanting a serious crisis to go to waste,” as it was enacted before inquiries into the causes of the financial crisis had been completed.


The next stage in outsourcing
Joe Parsons – The Trade
The future of any business in the derivatives and securities market is being heavily influenced by cost considerations. The only way to stay competitive is to be efficient. At a time where firms are being further constrained by regulation, outsourcing vendors are becoming all the rage.

FactSet in $205m deal with buy-side trading software firm
Hayley McDowell – The Trade
Information and analytics provider FactSet has acquired performance and buy-side software firm BISAM Technologies for $205 million. BISAM Technologies – formerly owned by Aquiline Capital Partners – provides multi-asset, risk and portfolio management technology to large asset managers, which has been integrated with FactSet’s analytics and reporting tools.


An Interview With Harvest Volatility Management’s Rick Selvala
In late February, FINalternatives’ Garrett Baldwin sat down for a Q&A with Rick Selvala, CEO and co-founder of Harvest Volatility Management, LLC (Harvest) to discuss his firm’s strategies, current events and expectations for the markets moving forward. Selvala graduated from the University of Michigan with a BSME in 1985 and received his MBA at Harvard Business School in 1990. His career has taken him from the corporate treasury world to the hedging of commodities, currencies, fixed income and equities. After joining Credit Suisse in 2002, he would become the co-head of Volaris, a wholly owned subsidiary focused mostly on covered call strategies for clients with large concentrated equity positions.

Stock Exchange: Does Headline Risk Make Trading Unsafe?
Jeff Miller – Seeking Alpha
Many seem convinced that market risk is elevated – perhaps at an all-time high. I know this from contacts on my vacation, where I see many high-net worth people, messages from my clients (an intelligent and cool-headed lot), and even some objective measures of angst. Whether it is uncertainty about the new President and policy, revisiting issues about valuation, or concern about foreign challenges – it is a popular time to be worried. Charlie Bilello of Pension Partners looks at SKEW. While VIX has not generated warning levels, SKEW suggests an all-time high in crash risk.


Special Report: How banks lost the ear of Britain’s government over Brexit
Andrew MacAskill, Anjuli Davies and Huw Jones – Reuters
One afternoon in mid-January, Prime Minister Theresa May walked into a meeting room in the Swiss resort of Davos to face Wall Street’s most powerful bankers. May had delivered her vision two days earlier for pulling Britain out of the European Union’s single market. Now the Wall Street banks, fearing Britain was headed for trouble, wanted to hear more about her strategy.

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