Observations & Insight

OIC Stories Recap
Below are links to the columns and articles the JLN team wrote while attending the Options Industry Conference in Scottsdale, Ariz.

How Do You Save the Capital Markets?; Kennedy Looks to Lead Market Revamp by Jim Kharouf
Not as Bad as it Seems: Schwartz Addresses the State of the Options Industry
Millennials and Options: A Perfect Match?
All Together Now: Exchange Leaders Call For Cooperative Approach To Changing Market Structure
Options Industry Conference Update: Congress Continues To Push For Avoiding Unintended Consequences in Tax and Dodd-Frank reforms


Options Industry Conference: Exchange Highlights For Each US Options Exchange
Jim Kharouf, JLN
Each year at the Options Industry Conference, each exchange has five minutes to talk about highlights for their respective market. Here are some notables:

BOX is still hoping to launch its new trading floor in the CBOT building soon, pending regulatory approval

CBOE extended its trading hours which is attracting new customers, specifically hedge funds

MIAX has applied for a new CFTC regulated exchange for digital currency called LedgeX

Nasdaq will finish the ISE integration by the end of this summer and launched a new trading floor for PHLX in April in Philadelphia

NYSE Options upgraded its technology and reduced the speed of execution by 50 percent. It also has a new instant messaging technology called Imprint that allows for order entry using its YellowJacket system.

Lead Stories

Interview: Volatility index creator seeks to invent new tool to measure ‘ambiguity’
Kenji Kawase – Nikkei Asian Review
One of the hottest topics being discussed in global stock markets these days is volatility — or rather, the lack of it. The most widely quoted benchmark, the Chicago Board Options Exchange’s volatility index, better known as the VIX, has fallen below a reading of 10 during the past few weeks, approaching its lowest point since its inception in 1993. The big question is why the index, which is considered to be a gauge of fear in the stock market, has been so low, particularly during a time of uncertainty, including the geopolitical risk posed by North Korea and the unpredictability of U.S. policy under President Donald Trump.

****SD: In other words, the VIX should not be viewed as predictive and we need more indicators.

Unusually Low Volatility Can Be Dangerous for Markets
Mohamed A. El-Erian – Bloomberg
The smoother the road, the faster people are likely to drive. The faster they drive, the more excited they are about getting to their destination in good, if not record time; but, also, the greater the risk of an accident that could also harm other drivers, including those driving slower and more carefully.

The Strangest VIX Fact
Peter Tchir – Forbes
On Monday, VIX had its lowest closing value since 1993. The 10-day realized volatility of the S&P 500 is the lowest it has been in the past decade (I didn’t got farther back than that).
Single stocks and sectors have some volatility but the broad indices, especially the S&P 500 are going nowhere. Yes, it hit a new closing high of 2,399.63 on Wednesday, but it had closed at 2,395.96 as far back as March 1st.

Eldorado Trading is latest Chicago firm to wind down
Lynne MArek – Crain’s Chicago Business
Eldorado Trading is the latest Chicago trading firm to call it quits, at least in terms of its recent business model.
The trading firm dismissed the bulk of its traders a few weeks ago, according to sources familiar with their exits. “We’re looking to pursue new avenues,” firm co-founder Jim Pappas said. Asked in an interview if he’s selling the firm, he said he’s always open to negotiating and then declined further comment.

****SD: Eldorado was primarily a CME-focused firm but indicative of the concerns echoed in markets about the prop (and market making community) for quite some time.

Goldman is starting to get worried Wall Street is acting too calm about Trump
Fred Imbert – CNBC
Wall Street might be a little too confident in President Donald Trump’s ability to get tax reform done in the near term, analysts at Goldman Sachs said this week.
Goldman noted policy uncertainty is growing as the Republican-led Congress tries to tackle a number of issues, including tax reform, with the House being in session for just 39 days before the August recess.

Here are 3 reasons why Trump drama isn’t rattling the bull market
Michael Santoli – CNBC
People are bothered that the markets are so unbothered by the political fuss and ferment in Washington.
As President Trump helps fuel conflict and alarm among political parties, other branches of government and the D.C. media, Wall Street is as calm and unhurried as it’s been in decades. Amid the sudden firing of an FBI director and even warnings of a Constitutional crisis, the major stock indexes have spent the past two weeks in a vanishingly tight 0.8 percent range near their record highs.

Russian vol slumps as domestic selling dominates
Helen Bartholomew – Reuters
Trading in options linked to Russian stock indices has fallen to its lowest level in almost a year, after a spurt of post-US election activity ran out of steam on escalating geopolitical tensions.
Average daily volume in Frankfurt-listed options linked to the US dollar-denominated RDX index fell to just 1,293 contracts in April – almost half the level seen a year previously and down from over 5,000 at the 2013 peak.

U.S. Shale’s Favorite Financial Trick Is Getting Less Attractive
Alex Nussbaum and Jessica Summers – Bloomberg
Options skew tumbles, reflecting drop in U.S. producer hedging; Move could portend fall in production, SocGen analyst says
Oil bulls, take heart! U.S. drillers have dramatically reduced their hedging activity, a move that could portend a break in the production gains that have upended global crude prices.

****SD: Is it esoteric? Sure. But financial trick?! How is hedging a “trick”?

Exchanges and Clearing

CME Group Announces Record Open Interest of 125.7 Million Contracts
CME Group
CME Group, the world’s leading and most diverse derivatives marketplace, announced it set a total open interest record of 125.7 million contracts on May 11, 2017. The new record follows four consecutive record open interest days. Prior to this four-day streak, the previous open interest record of 123.1 million contracts was set on March 9, 2017.

Regulation & Enforcement

Britain’s Labour plans ‘Robin Hood Tax’, tax avoidance crackdown
Britain’s opposition Labour Party would crack down on tax avoidance and introduce a “Robin Hood Tax” on financial transactions to fund public services if it wins next month’s national election, it said on Saturday. Labour, which is trailing Prime Minister Theresa May’s ruling Conservatives badly in opinion polls, said that 4.7 billion pounds ($6.1 billion) could be raised through a Robin Hood Tax by modernizing the tax regime on share trading.

Ex-SEC Employee Pleads Guilty to Lying About Trading Securities
Gary DeWaal – Lexology
On May 9, David Humphrey, a former branch chief in the Securities and Exchange Commission’s Division of Corporate Finance, pleaded guilty to charges brought by the US Department of Justice before a US court in Washington, DC, to making false statements in government filings in order to conceal his unauthorized trading of options and securities at various times while employed by the SEC from 1998 through 2014.


Volatility And Holidays Are An Opportunity To Sell Premium
Bob Lang – CBOE Options Hub
Whenever we come upon a holiday it’s time to take a breath and step back. But as option traders, there is no such break as we are mindful of volatility and the option decay that constantly exists in these derivatives.

The stock-market storm is coming—but the reason might surprise investors
Shawn Langlois – MarketWatch
In contrast to the complete madness of the world outside, an eerie stillness continues to hang over the stock market. Not that investors are complaining. They just keep riding out cyberattacks, North Korean missile launches, Donald Trump’s [take your pick], and any number of other nerve-rattling developments, while major indexes stubbornly remain in the neighborhood of record highs.

Hedge Funds Are Dumping Gold Bets at Fastest Rate Since 2008
Susanne Barton – Bloomberg
Expectations for another boost in U.S. interest rates are wearing down gold bulls. Hedge funds and other large speculators cut long positions in bullion futures and options by the most in more than eight years last week.

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