Lead Stories

Weighing the Impact of Proposed Tax Reform on Centrally Cleared Markets
FinReg|Alert – Q&A with Craig Donohue, OCC Executive Chairman and CEO
Tax reform is climbing back to the top of the White House agenda, with President Donald Trump telling The Wall Street Journal last week that overhauling the tax code is his next priority following healthcare legislation.
While it’s still tough to project exactly what that tax overhaul might look like, some market participants are already voicing concern about the potential for unintended consequences.

Please Stop Talking About the VIX So Much
If anyone reading this has always meant “recent realized return volatility” when commenting on the VIX, and has never attached much importance to it beyond that, please stop reading as the below has little point for you. But if you think the VIX is much deeper than that, read on!
It has become quite commonplace to note that the VIX is very low and to worry about it. Indeed, the VIX really is very low right now (i.e., less than 1st percentile low).

****SD: A perfect example of “stop talking about it” from Money Morning – Why the Market’s “Most Powerful Index” Is Dead Right Now. A number of things are bothersome: the Fox Business clip has an intro in which the anchor says “let me tell you about the number that nobody is paying attention to, that everybody should, and that is the VIX. This is Wall Street’s fear factor.” The VIX is everywhere, that’s why the above piece exists, so who isn’t paying attention? And I only hear “fear gauge” not “fear factor” — the latter is too reminiscent of the Joe Rogan show where people ate bugs for money. Second, it refers to “the guy that helped develop the VIX, Shah, to see whether the record lows there are cause for concern.” At first I thought they were talking about Devesh Shah, because, one, it’s industry practice for journalists to use the last name, and two, when at Goldman he had a hand in developing a tradeable VIX. But the reference is to Shah Gilani. On the about page of Gilani’s website (notice I didn’t say “Shah”?), it says he spent years as “one of the most successful traders with a seat on the Chicago Board of Exchange.” Must be pretty easy to be a successful trader at an institution that doesn’t exist…

Derivatives Behind Equities Boom or Bust at Europe’s Major Banks
Donal Griffin – Bloomberg
As fixed-income traders across European banks grappled with a slowdown in activity, their counterparts in equities units showed they could save the second quarter — or make it worse.
BNP Paribas SA posted a surprise 26 percent jump in revenue from trading stocks and equity derivatives, leading its total trading to the smallest decline among major firms that have reported results. European rivals Deutsche Bank AG and Credit Suisse Group AG, meanwhile, both suffered drops of more than 20 percent from equities.

****SD: If you look at one thing, check out the chart comparing banks’ YoY profit changes by trading desk.

Uncertainty Can Create Confidence
Corey Hoffstein – ETF.com
By its third anniversary, it had already been dubbed “the most hated bull market ever.” For those keeping score at home, that was over five years and 100 percentage points ago in the S&P 500.
Being consistently wrong has not stopped market soothsayers from reading the tea leaves and predicting doom and gloom all the way up. While we are sure that a prediction of “the market will go down” will eventually prove true—especially when repeated ad nauseam—to quote Howard Marks, “When you’re early by six or more years, it’s not clear you can ever be described as having been right.”

Wall Street isn’t ready for a 1,100-point tumble in the Dow industrials
Mark DeCambre – MarketWatch
The U.S. stock market has been on such a parabolic march higher that Wall Street investors may have forgotten what a typical, sharp downturn feels like.
Indeed, much has been made about the lack of volatility. The CBOE Volatility Index VIX, +4.28% otherwise known as the “fear gauge,” had been flirting with its lowest close on record, implying that market expectations for a sharp, sudden fall are near rock bottom, as the Dow Jones Industrial Average DJIA, +0.33% S&P 500 index SPX, -0.03% and the Nasdaq Composite Index COMP, -0.35% scale new heights. (The Dow notched a fresh record on Friday to end the week 1.2% higher.)

The Option Queen Newsletter
Jeanette Young – The Option Queen Newsletter
Chaos in Washington along with a divided congress have weighed heavily on the US Dollar. This has had a positive effect on the price of commodities, which has been good for agriculturals, energies and precious metals. The weakened US Dollar is also helping the multinationals with exports insomuch as their exports become more competitive as the US Dollar weakens, this has had a positive effect here in our own markets. This is exactly what the Federal Reserve wanted to see. Although we are far away from inflation, a weaker currency helps increase inflation. Why because imports cost more due to a weaker dollar, and thus domestic companies likely will have greater sales.

Exchanges and Clearing

London Metal Exchange: what’s next for the new lord of the ring?
Lucy Burton – The Telegraph
When investment banker Matthew Chamberlain was advising on the historic sale of the London Metal Exchange five years ago, he had no idea that by the age of 34 he’d become its boss.
“That was not on the radar,” the former UBS banker says from the LME’s new headquarters in Moorgate – its fourth base since it was created in 1877 above a hat shop in Lombard Street.

****SD: The other big metal news today is two stories below and related.

Acquisitive Euronext CEO not ruling out Trayport
Samuel Agini – Financial News
Exchange operator Euronext is still on the hunt for acquisitions that can diversify its sources of revenue.
Stéphane Boujnah, chairman and chief executive, told analysts on a call that Euronext will consider opportunities as they arise and, when asked, did not rule out a move for the energy trading software provider Trayport.

****SD: We knew Euronext had eyes on prizes when news came out that they were looking into buying potential spinoffs from the (failed) LSE/DB deal.

Intercontinental Exchange to Launch New London Silver Daily Futures Contract; Facilitates Central Clearing for the LBMA Silver Price Auction
Intercontinental Exchange
Intercontinental Exchange (NYSE:ICE), a leading operator of global exchanges and clearing houses and provider of data and listings services, announced that ICE Futures U.S. plans to launch a new London Silver Daily Futures contract on September 5, 2017, pending regulatory review. The contract offers physical delivery of unallocated silver held in a London Precious Metals Clearing Limited vault.

****SD: There are not daily options contracts offered. A bit of a stretch but I see a comparison to expanding expirations in the equities world bringing us closer to daily expiries.

Regulation & Enforcement

Mnuchin: Bank ‘Systemic Risk’ Label Should Start at $250 Billion
Jeff Bater – Bloomberg BNA
Treasury Secretary Steven Mnuchin told House lawmakers the asset threshold that marks banks as systemically important financial institutions should be raised to at least $250 billion, and that he wants to address the lingering issue “quickly.”

Low Securities Transaction Tax Driving Retail Investors To Options, Says SEBI
Sajeet Manghat – Bloomberg
The market regulator may consider measures to curb exposure of retail and individual investors in the derivatives market as low Securities Transaction Tax is driving higher volumes.

****SD: From the article: “Proprietary trades and individual investors contribute 43 percent and 26 percent, respectively, of the volume of the equity derivatives in India, according SEBI.”

CFTC releases review of the Nadex regulated Binary Options exchange
The U.S. Commodity Futures Trading Commission’s (CFTC) Division of Market Oversight announced today that it has issued the results of a rule enforcement review of the North American Derivatives Exchange Inc. (Nadex), with the review results being fairly positive. Nadex is a regulated Binary Options exchange, owned by UK based online trading leader IG Group Holdings plc (LON:IGG).

The Biggest Worry for British Bankers Isn’t Brexit
Therese Raphael – Bloomberg
The financial sector would like to ignore the Labour Party leader. But if he one day takes power, they’ll wish they had been better neighbors.

****SD: Provides larger British political context for the big news last week of a Labour-proposed financial transaction tax.

Chinese finance high-speeds into unknown territory
Qian Han – East Asia Forum
On 23 June 2017, a court in Shanghai charged the international trading company Eastern Dragon with market manipulation in the Chinese futures markets during the 2015 stock market crash. Eastern Dragon was slammed with a US$101 million fine and two of its traders were handed out suspended prison sentences. This sets an important precedent as the first time a Chinese court has ruled on foreign high frequency trading in China.

****SD: A futures case, but indicative of the risks presented by an ever-developing regulatory framework for high speed trading in China.


Blockchain Patent Applications Almost Double in Q1 2017: USPTO Data
Joshua Althauser – CoinTelegraph
The number of Blockchain technology and digital currency-related applications that were filed with and published by the US Patent and Trademark Office (USPTO) between January and July 2017 has almost doubled.
Based on data from the agency, there were 390 applications filed during the period, up by 90 percent from the 204 applications in the same period in 2016.

****SD: Included in light of the LedgerX approval last week.

Your Robo-Adviser May Have a Conflict of Interest
Hugh Son – Bloomberg
Robo-advisers offer the promise of impartial investment guidance, but the newest ones may not be totally immune from Wall Street’s ways. Wealth management units at big U.S. banks including Morgan Stanley and Bank of America Corp. have rushed to build so-called robo-adviser services. The products, which were pioneered by online upstarts Wealthfront Inc. and Betterment LLC, use algorithms to pick investments tailored to a customer’s appetite for risk. They cut out a lot of the costs of working with flesh-and-blood financial advisers, and, it would seem, some of their biases.


Shorting VIX a dangerous game that could end in tears
Steven M. Sears via The Australian
As stocks keep dancing around rec­ord highs, and the Volatility Index of the Chicago Board Options Exchange remains historically low, some investors are preparing for a violent end to one of the world’s most popular trades: shorting volatility.
A one-day S&P 500 correction of 3 to 4 per cent could force some funds that short futures on the index, such as the ProShares Short VIX Short-term Futures ­exchange-traded fund and the ­VelocityShares Daily Inverse VIX ST ETN, to cover their positions. That could make the VIX skyrocket.

****SD: The time on the byline proves it – it’s tomorrow today in Australia.

The VIX Trade No One Is Talking About
Peter Tchir – Forbes
You will see a lot of stories about VIX ETFs and ETNs over the coming days. I have written about the potential for a ETN driven spike in VIX (here).
I have seen a lot of stories about how investors are ‘suddenly’ nervous about selling volatility and the will typically look at recent fund flow data.
At first glance, this chart supports that view. VXX, a long VIX product, has seen strong inflows in the past few weeks. The combination of SVXY and XIV, both short VIX funds, have seen large outflows. That seems simple, but it doesn’t tell the whole story.

An Options Strategy for Long-Term ETF Investors
Lewis Braham – Barron’s
Long-call condor, iron butterfly, collar, straddle—no investment but options has such strange terminology, halfway between nature book and sex manual. Ordinary exchange-traded-fund investors can ignore most of these terms. But there’s one that should be on your radar now—Long-Term Equity Anticipation Securities, or Leaps.
Options are financial contracts that give the purchaser a right to buy (a call option) or sell (a put option) a stock or ETF at a specific price by a specific expiration date.


Identifying Black Swan Events; Attempt to Protect Portfolio
Bruce Blythe – The Ticker Tape
In a Wall Street arena often characterized as a battle between bulls and bears, there’s another, very different kind of “animal” that can spook even the most seasoned market professionals: the black swan.

****SD: If you see Natalie Portman, sell and stockpile cash.

All you wanted to know about…The India VIX
The Hindu Business Line
As the Nifty sailed past 10,000 points last week, the stock market promptly divided into two warring camps. One argued stocks were too hot to handle and the other asserted they still had steam left. At such times, if you’re a follower of behavioural finance, you’d look at the extent of greed and fear among market players to gauge the market mood. One widely used fear gauge is the India VIX. The India VIX at the time of writing this was hovering at 11.98. The number indicates that market participants are not exactly quaking in fear, worrying about uncertainties ahead.


What’s Left of Noble Group as Trader Retreats to Its Asian Roots
Jasmine Ng – Bloomberg
It’s the end of an era for Noble Group Ltd. Some three decades after its founding, and from a perch among the world’s top commodity traders, the company is abandoning its global ambitions and falling back to its Asian roots in a last-ditch effort to survive.

****SD: I mentioned it once before, and I’ll say it again, the 1988 NBC TV mini-series “Noble House” (based on the 1,000+ page book by James Clavell) about a Hong Kong trading firm under stress is worth a watch (if you can find it). Pierce Brosnan stars. Plot points revolve around bank runs, criminal ties, stock issuances – it’s a fun market movie that could have easily used “back to its Asian roots in a last-ditch effort to survive” in its tagline.

OPEC Has a Crippling Problem: Its Members Can’t Stop Pumping
Benoit Faucon in London, Lynn Cook in Houston, Summer Said in Cairo and Georgi Kantchev in St. Petersburg – WSJ
OPEC, the once powerful oil cartel, is struggling to hold the line in a make-or-break fight to limit oil production, prop up crippling low prices and prove its relevance.

****SD: For a specific look at oil and options, see Crude oil’s short-tenured options smirk eases balanced vol smiles, costless collars for hedging in H2’2017 from SocGen via the EconoTimes. Here are a couple of oil stories from Reuters about some risks facing two OPEC members – Niger Delta leaders threaten to pull out of peace talks if demands not met by November 1 and Oil markets brace for possible U.S. sanctions on Venezuela.

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