Observations & Insight
OCC Announces Promotions to Leadership Team
OCC, the world’s largest equity derivatives clearing organization, today announced several promotions to its leadership team.
“To fulfill its role as an effective and efficient Systemically Important Financial Market Utility and serve as a forceful advocate for the U.S. exchange-listed options industry, OCC must be seen as a destination for top talent,” said Craig Donohue, OCC Executive Chairman and CEO. “Through the work of our entire team, OCC has been able to attract and retain very knowledgeable individuals across a wide range of expertise who are adding value to the work we do every day for market participants.”
****SD: No new additions, all promotions. Big personnel shift at Optiver today, too (see our third lead story). Also, OCC’s President and COO John P. Davidson and Mary Savoie, OCC first vice president, industry services and OIC executive director, will take part in ringing Nasdaq’s closing bell today in honor of the OIC’s 25th anniversary.
Cybersecurity is very, very tough: How a SIFMU’s cyber chief sees the threat
Spencer Doar – JLN
It’s alarming and getting ugly.
The Equifax hack in March compromised the personal information of an estimated 40 percent of the United States population. The Bangladeshi central bank is down $81 million after the SWIFT messaging system was hacked in early 2016. The SEC recently disclosed that a 2016 hack of its EDGAR database may have resulted in trading on nonpublic information for personal gain.
Then there are the cyber breaches of retailers: Target in 2013, which settled for $18.5 million, and Home Depot in 2014, which settled for $19 million, plus the recent backdooring of CCleaner, the compromise of the U.S. Office of Personnel Management in 2015, the WannaCry attacks targeting a variety of industries — the list continues and the costs are enormous.
None of this is lost on the financial services sector, which has multiple points of entry and plenty of critical data to protect. It is in this environment that OCC hired its first chief security officer (CSO), Mark Morrison, in May. Morrison spent 30-plus years working in cybersecurity for various government agencies, including the National Security Agency and Department of Defense. After retiring from the government, Morrison headed to State Street in 2013 before becoming the OCC’s CSO. Beyond Morrison’s hire, the OCC has tripled the number of security staff in the last five years.
Read the rest HERE.
****SD: In case you missed the story yesterday.
VIX options volume jumps as trader hedges against stock market sell-off
Saqib Iqbal Ahmed – Reuters
Trading volume in CBOE Volatility Index options more than tripled on Monday from its average daily amount and was on pace for one of its busiest days ever, boosted by a record-sized trade hedging against a stock market sell-off.
****SD: CBOE press release on record day for VIX options HERE. Total VIX options activity ended up being 2,612,952 contracts. Key reason for the pop – “More than 2 million contracts changed hands in a spread trade, the largest ever in VIX options, according to Trade Alert data.” Russell Rhoads has a breakdown of the trade – Block Trade Analysis – VIX Roll Trade.
Back in Vogue: Betting on the VIX to Fall
Gunjan Banerji – WSJ
As market volatility receded once again, some investors wagered that one of Wall Street’s favorite trades this year will continue to mint money.
Hedge funds and other speculative investors ramped up bearish bets on the CBOE Volatility Index, or VIX, to the most in over a month, according to data from the Commodity Futures Trading Commission. Net bearish bets on the VIX outnumbered bullish bets by the group by 96,601 contracts for the week ending Sept. 19. Those investors had 70% more short bets than long bets on the index for the week ending Sept. 19.
****SD: Back in vogue? When did it go out of vogue? This strategy has been strutting its stuff on the runway for multiple seasons now.
Former Goldman Sachs partner to run leading HFT
Samuel Agini – Financial News
The chief executive of Amsterdam-based Optiver has decided to retire, sparking the latest change at the top of one of the world’s big high-frequency trading firms this year.
Optiver, which trades across listed derivatives, cash equities, exchange traded funds, bonds and currencies, said in a statement that Paul Hilgers will leave at the end of 2017.
Low Vix Does Not Boost High Sigma S&P 500 Drawdown Chance
Rupert Hargreaves – ValueWalk
Explaining the low vix can be a challenging task. Just ask Daniel Fenn, HSBC’s Multi-Asset Quantitative Strategist. He looks at the current geopolitical environment, with risk seemingly apparent at every corner, and wonders aloud why volatility is so low? But it is not just obvious factors such as increasing tensions both home and abroad that are challenging analysts. Even correlation relationships between implied and realized volatility are vexing. In a September 25 report, “The Bonfire of the Volatilities: Why is volatility so low?” HSBC addresses the question on so many investor minds.
Global Markets on Edge as Elections Thrust Politics Back to Fore
Luke Kawa and Liz McCormick – Bloomberg
For global financial markets, politics are back at the fore.
Look no further than the foreign exchange market, where the New Zealand kiwi and the euro were battered after weekend elections delivered unexpected results and the dollar surged as tension rose on the Korean peninsula. In the U.S., equity volatility surged as benchmark stock indexes slumped the most in two weeks.
****SD: FX is the one area that stands out when looking at charts of varying asset classes’ volatilities.
Hedge fund positions in oil look stretched
John Kemp – Reuters
Hedge funds have become strongly bullish on the outlook for all parts of the petroleum complex, amid signs global crude stocks are declining and fuels will be short supply after hurricane-related refinery outages.
****SD: Also see Bloomberg’s Citi Says Get Ready for an Oil Squeeze
Augmented Reality Becomes a Reality for Trading
Ivy Schmerken, FlexTrade – TABB Forum
Augmented reality is emerging as the next big thing to transform the trader’s workspace. Combined with technologies like artificial intelligence, augmented reality can empower traders with a completely new way to visualize and interact with data. And many of the top tech companies, including Microsoft, Google, Apple and Facebook, are investing in AR technology, so it is bound to evolve over time. But to gain momentum on trading desks, AR will have to offer tangible benefits.
****SD: Imagine a world where the pits come back to life as simulations. You could be “in the CBOE pit” in LA trading with someone “in the CBOE pit” in Singapore.
Proprietary Trading Group Chooses Rival Systems for CME Options Trading
Charlesworth, a Chicago-based proprietary trading group of Marquette Partners, has switched their trading technology to Rival Systems because of Rival’s superior speed, ease of use, and amazing customer support. After running Rival side by side with other vendors the choice was easy – with Rival, Charlesworth can efficiently quote in the most competitive CME options markets without getting picked off, capture edge with Rival’s Electronic Eye, and easily integrate with proprietary trading strategies.
Five components that artificial intelligence must have to succeed
Gurjeet Singh – Bloomberg Professional Services
It seems like it was only a few years ago that the term “big data” went from a promising area of research and interest to something so ubiquitous that it lost all meaning, descending ultimately into the butt of jokes.
Thankfully, the noise associated with “big data” is abating as sophistication and common sense take hold. In fact, in many circles, the term actually exposes the user as someone who doesn’t really understand the space. Unfortunately, the same malady has now afflicted artificial intelligence (AI). Everyone I meet is doing an “AI play.”
Pay Attention To What’s Under The Hood In Your Trading Application: Nothing Compares to C++ for Trading
Everyone knows that what you can’t see can hurt you and this is especially true for professional traders. In a world where competition is fierce and efficiency is constantly being pushed further and further, it’s critical to pay attention to each and every technical aspect of your trading. And just as it matters to know the specifications of your hardware and the details of your network connectivity, it’s also critically important to get down to the basic level of what language is used to develop the critical elements of your trading system. No other language can match C++ when it comes to efficient trading systems.
****SD: Missed this blog from last week. For another coding story, see Automated Trader’s Python for analysing financial markets
Exchanges and Clearing
LCH to start clearing CDS options on October 10
Julie Aelbrecht – Global Investor Group
The London Stock Exchange’s clearing house LCH has applied with the US futures regulator to start clearing options on credit default swaps on October 10.
Pending a regulatory review period of 10 days, LCH intends to start clearing options on index credit default swaps (CDS options) next month, according to a series of regulatory filings seen by FOW.
****SD: Yet another appearance of swaptions in the wild.
Intercontinental Exchange Announces ICE Futures U.S. Contract Based on NYSE FANG+ Index of Tech Stocks; Efficiently Hedge or Gain Exposure to Key Tech Sector Stocks with Futures
Intercontinental Exchange (NYSE:ICE), a leading operator of global exchanges and clearing houses and provider of data and listings services, announced the launch of the NYSE FANG+TM Index, an index that provides exposure to a select group of highly-traded growth stocks of next generation technology and tech-enabled companies. On November 8, 2017, ICE Futures U.S. plans to launch a quarterly futures contract based on the NYSE FANG+ Index, subject to regulatory review.
****SD: Focus on the “+” in the title as Alibaba, Baidu, NVIDIA, Tesla and Twitter are included in index. Plus, ICE has Apple and Amazon in there, making for a 10 stock offering rather than just four. Then again, BANANA GTFT doesn’t have the same ring as FANG+. (I don’t even know what bananas add to the “generous-tit-for-tat” strategy in game theory.) The real question is are we going to get options on the futures?
Bank of England policy shift boosts ICE trading
Philip Stafford – Financial Times
Expectations of a UK interest rate rise by the Bank of England in the coming months are providing a boost to the financial futures business of Intercontinental Exchange, the US exchanges operator.
Regulation & Enforcement
CFTC Looks to Blockchain to Transform How It Monitors Markets
Gabriel T. Rubin – WSJ
The Trump administration has promised to modernize the federal government’s operations, aiming to run it more like a Silicon Valley technology giant.
The Commodity Futures Trading Commission, a market regulator, is conducting an early test of that initiative. The regulator hopes to use blockchain—the ledger technology that underpins the digital currency bitcoin and increasingly is being used by financial institutions and others to record and track transactions—to help it better analyze immense amounts of data. But it faces many hurdles embedded in government rules.
UK regulator wants derivatives deal to avert Brexit ‘cliff edge’
Huw Jones – Reuters
A deal between Britain and the European Union to allow 20 trillion pounds of derivatives contracts to run their course after Brexit will be critical to avoid a disruptive “cliff edge”, a top British regulator said on Monday.
Andrew Bailey, chief executive of the Financial Conduct Authority (FCA), said the issue of potential derivatives contract disruptions after Britain leaves the bloc in March 2019 cuts both ways.
Indian MFs may get nod for trading in commodity derivatives in 6 months
India’s capital markets regulator is likely to allow mutual funds to trade in commodity derivatives and a decision is expected within six months, a senior official said on Tuesday.
Trading Technologies seeks to reverse another Patent Trial and Appeal Board decision
Trading Technologies is seeking to reverse a PTAB ruling from August this year, which found that some of the claims about its ‘996 patent concerning “click based trading with intuitive grid display of market depth” are patent-ineligible.
SEC’s Clayton Criticized by Both Parties Over Response to Hack
Benjamin Bain – Bloomberg
U.S. Securities and Exchange Commission Chairman Jay Clayton faced criticism from both sides of the political aisle Tuesday over his agency’s handling of a 2016 cyberattack that may have allowed hackers to profit from trading on nonpublic information.
****SD: Plenty of blame to be assigned here, but I will say that Clayton didn’t know about this until after he was confirmed. (I wonder if had he known beforehand if that would have altered his willingness to run the agency…)
For Blockchain, a Coming Wave of Change
Jason Gottlieb, Daniel Isaacs and Christopher Pendleton – National Law Journal
Virtual currencies present a host of new opportunities for businesses of all kinds, from entrepreneurs seeking to raise capital from unusual quarters, to traders looking for the next structured derivative market.
As with any new product, however, legal and regulatory pitfalls may arise. To say that the regulatory landscape for virtual currencies is not yet set is an understatement.
Banks Lobbying to Stem MiFID’s Spread Spark a U.S. Client Revolt
Robert Schmidt and Benjamin Bain – Bloomberg
Wall Street brokerages are quietly lobbying regulators to ensure new European rules that will upend banks’ investment research operations don’t spread to America. But the campaign is causing tension with public pension funds and other large investors that are some of their biggest clients.
US court-appointed receiver confirms $7.4 million frozen in binary options fraud case
Maria Nikolova – FinanceFeeds
Binary options firms, targeted by the United States Commodity Futures Trading Commission (CFTC) in a fraud case, have invoked their Fifth Amendment right against self-incrimination and have been reluctant to provide the court-appointed Receiver in the case with the required information.
****SD: Hard to get info out of shady binary shops? How very not surprising. (Three of the companies in question are based in Bulgaria, the Marshall Islands and Anguilla, respectively.)
Riding China to the Top
Steve Sears – Barron’s
Think of China as the national equivalent of Amazon.com.
Just as Amazon was long criticized by investors who failed to see the company’s potential, China is often misunderstood.
****SD: TL;DR = sell 165 strike puts to buy BABA on pullbacks.
Option Traders Aren’t Buying the Yuan’s Latest Pullback
The last time the yuan retreated like this, options traders piled into short bets against the currency. This time, they’re sticking to the sidelines.
CBOE Vest Plans Covered Call ETF
CBOE Vest, a firm focused on what it calls “target outcome” investments, has filed for an ETF that will seek to pair two income-focused strategies—dividend investing and covered-call writing—in one package.
Maverick Trading Celebrates 20-Year Anniversary
Maverick Trading, the premier proprietary trading firm, recently celebrated its 20th anniversary. Founded in 1997, Maverick Trading has two divisions, focused on options trading and foreign currency trading. It is one of the few proprietary trading firms that discourage day trading and one of the only firms that allows its traders to actively trade options.
Treasure map of the ETF world revealed
Chris Flood – Financial Times
Asking an exchange traded fund provider “just who is buying your ETFs?” often prompts the unsatisfactory reply “all types of investors”.
A peculiarity of the $4.4tn ETF industry is just how little is known about many of the institutions that own these marketable securities that track an index, commodity or bond. This is a big obstacle for asset managers trying to expand in a rapidly growing sector.
****SD: Check out this line: “ETFGI’s report identifies ETF holdings of at least $1bn at four hedge fund managers: Passport Capital, Citadel, Two Sigma and Parallax Volatility Advisers.” I didn’t realize the San Franciscans (Passport Capital and Parallax) had such a presence…
The Daily Prophet: North Korea Proves Adept at Market Timing
Robert Burgess – Bloomberg
Whether intentional or not, North Korea’s latest salvo in the war of words with President Donald Trump was especially worrisome, at least from the standpoint of markets. It is if traders suddenly woke up to the risks, however remote, of nuclear combat. Yes, tensions have been rising for months and markets moved on each time, but Monday was different because Pyongyang chose do some saber-rattling during U.S. trading hours rather than the dead of night otherwise known as Asian trading hours.