What’s Driving the Unusual Calm in Currency Markets

Mar 18, 2019

Observations & Insight

The Small Exchange: Building a new ecosystem for the little fish
Jim Kharouf – JLN
It’s about time this industry got smaller.
It’s no secret futures markets have been built largely for the average multinational commercial operation, well capitalized market markers, hedge funds, CTAs and proprietary trading groups. Retail participants, despite the rise of “mini” contracts pioneered by the CME, are generally thought of as perch swimming with sharks, whales and barracudas – bait.
But The Small Exchange is aiming to change that by offering a slate of retail sized futures contracts to retail traders on equity indexes, bonds, FX, energies and metals. Contracts will be priced in dollars and cents and sized so that individual investors can trade them within their portfolios. Trading will be done on The Small Exchange’s self-developed trading and matching engine, designed specifically for this market. A clearinghouse has been identified but not announced yet. The exchange made a little more progress this past week at the FIA Boca conference with the announced connection to CQG and trade surveillance with Eventus Systems.


Boca Bits – FIA Boca 2019 Day Three and Recap
Chuck Mackie, JLN via Medium
The final day of FIA Boca is always the “poor relation” when it comes to content and attendance, and that was further exacerbated this year as the golf event was moved from Friday morning to Thursday afternoon, prompting a lighter agenda and smaller crowds for the final conference sessions. Still, the final day covered the extremely topical subjects of politics and cryptocurrency/DLT so there was a lot to talk about.
Overall, FIA Boca was a bit smaller this year and the bitcoin frenzy that permeated 2018 is a thing of the past, but conference attendees voiced confidence and optimism regarding the state of the industry and generally reported that the business climate at FIA Boca was as good as it has been in years.


Who Wants to See a Movie About High-Frequency Trading? High-Frequency Traders
Alexander Osipovich and Ira Iosebashvili – WSJ
Doctors, lawyers, soldiers and even journalists have all seen movies made about their professions—then gone on to complain about how Hollywood got it wrong.

****SD: I’m going to see this in the coming weeks. I need to know what new Hollywood misconceptions to gripe about.

Lead Stories

What’s Driving the Unusual Calm in Currency Markets
Things have gotten quiet in currency markets, and too quiet for some traders. The sense of calm is shown by remarkable stability in exchange rates and the cost of hedging against big swings in them. The worry is that volatility has gotten abnormally low, which could make any future market moves more disruptive. The suppressed volatility is especially evident in the top-traded currency pair—the U.S. dollar against the euro, which has traded sideways since the beginning of October. A broader measure of volatility maintained by Deutsche Bank , which follows nine major currency pairs, has dropped by a quarter since the beginning of the year.

****SD: Lots of talk of this in Boca – there is agreement that people are sitting on their hands until there is some Brexit clarity and trade tensions finally simmer down.

U.S. Treasuries Trade Like 1965 After Fed Kills Volatility; No one wants to test the tightest trading range in decades, but they wish others would.
Brian Chappatta – Bloomberg (SUBSCRIPTION)
It’s starting to feel like the world’s biggest bond market will never be exciting again. That’s an exaggeration, of course, but only slightly. Benchmark 10-year Treasury yields did fall to 2.58 percent on Friday, the lowest since January, only to climb back within their well-defined range. A few weeks ago, I asked if bond volatility was too quiet, given that Bank of America Corp.’s MOVE Index, which tracks price swings on U.S. Treasury options, was near the lowest since 1988. Turns out it wasn’t — the gauge fell to almost the exact same level last week.

****SD: Also from Bloomberg – Volatility-Hungry Bond Traders Fret That Fed Will Add to Malaise

What OCC has achieved under Donohue; Letter to the editor: Under the executive chairman’s leadership, OCC is transforming how it does business to better serve the users of its markets, writes Senior VP David Prosperi.
Crain’s Chicago Business
I am responding to “A storied name in Chicago trading stumbles” (March 1) to highlight the progress and momentum achieved by Options Clearing Corp. under Craig Donohue’s leadership as executive chairman.

****SD: “The capital plan decision made by the board reflected the limited choices available at that time given its then-urgent need for capital and the fact that prior refunds to clearing members had depleted capital. Today, notwithstanding the SEC’s decision, OCC has sufficient capital above its base target of $247 million, and over the life of the capital plan, OCC issued refunds to clearing firms in the aggregate amount of $268 million. That detail would have provided a more balanced portrait.”

Meanwhile, High Above the Grand Havana Room with Izzy Englander
Paul Rowady – Alphacution
There was a time, years ago, when I had a cigar attached to some part of my body pretty much 24/7. Like a disgustingly satisfying man-binky, if I wasn’t smoking it, I was definitely chewing on it – and it didn’t matter where I was. Polite company or public spaces did not deter the guile to sneak a chomp on the soggy end of a previously-lit robusto. And then, Cigar Aficionado magazine came along and ruined my enjoyment with the oncoming herd of the impending fad.

****SD: He’s got a Citadel case study coming up soon.

Budo Group: “Rival has the Best Enterprise Risk Solution on the Market”
Rival Systems
Budo Group, a multi-strategy firm trading futures, equities and options leverages Rival to monitor real time risk and P&L across all of their accounts. Before migrating onto Rival in 2016, Budo struggled to find a risk management solution to consolidate their trading activity across different front-end systems and clearing firms while also obtaining accurate real-time analytics for all their accounts.

****SD: I had a chance to catch up with Rob D’Arco at FIA Boca. That interview, which covers some of the above technology updates, as well as a broader look at market trends, will be coming as we release our Annual Industry Leader Series.

Germany’s Deutsche Bank, Commerzbank to hold talks on merger
Geir Moulson – AP
Deutsche Bank, Germany’s biggest bank, and domestic rival Commerzbank have decided to open talks on a possible merger, the lenders said Sunday in an announcement that followed months of speculation about such a combination.

Exchanges and Clearing

CME Group Announces All-Time Eurodollar Options Open Interest Record of 55.8 Million Contracts
CME Group
CME Group, the world’s leading and most diverse derivatives marketplace, reached an all-time Eurodollar options open interest record of 55.8 million contracts on March 15, 2019. Open interest has continued to grow since reaching the previous record of 52.4 million contracts that was set on March 15, 2018.

Women’s History Month at Cboe
We’re celebrating Women’s History Month throughout March. Check back regularly as we add new profiles, quotes and more, or follow along on your favorite social media channel with #CboeWomen.

Why Bitcoin Market is Better Without CBOE Futures Contracts
BTC News
There is no future in Bitcoin futures, at least at Chicago Board Options Exchange (Cboe).

****SD: ?!? WSJ has the full story, Cboe Abandons Bitcoin Futures

OCC boosts clearing fees after capital plan rejection
Louisa Chender – Global Investor Group (SUBSCRIPTION)
The Options Clearing Corporation proposes to increase clearing fees by 10% per contract

Proposal to amend the minimum increment for complex orders, update defined terms in its Rules, delete obsolete and redundant language and make other nonsubstantive changes.
Cboe Exchange, Inc. (the “Exchange” or “Cboe Options”) proposes to amend the minimum increment for complex orders with ratios of greater than three -to-one or less than one -to-three, update defined terms in its Rules, delete obsolete and redundant language, and make other nonsubstantive changes. The text of the proposed rule change is provided in Exhibit 5.


Rob Mackay appointed new CEO of Itiviti
The Itiviti Board of Directors has carried out a thorough search process to find a new CEO. Rob Mackay was selected for the position by virtue of his experience as a successful industry executive with a strong track record and customer focus.

Regulation & Enforcement

ECB attacks EU plans for boosting supervision of clearing houses
Jim Brunsden and Claire Jones – Financial Times (SUBSCRIPTION)
European Central Bank officials have strongly criticised EU plans for boosting supervision of clearing houses, saying they leave it without crucial powers to fend off crises in the EUR660tn market for euro-denominated derivatives and violate its independence.

Half of Insider-Trading Defendants Net Less Than $60,000; They typically make relatively modest gains, and many are friends and relatives of company employees close to market-moving information, research shows
Dave Michaels – WSJ (SUBSCRIPTION)
Insider trading evokes images of Wall Street whizzes whispering lucrative secrets, but many offenders are friends and family members of company employees who score modest illegal gains, according to new research.

Illinois lawmakers make case for financial transactions tax
Cole Lauterbach – Illinois News Network
Supporters are making a case for instituting a new tax on financial transactions in the state of Illinois. The legislation would require a $1 fee on any financial transaction done in the state with the exception of securities held in a retirement account or a transaction involving a mutual fund.


JPMorgan Sees Less Need for Hedges in Volatility Bear Market
Joanna Ossinger – Bloomberg (SUBSCRIPTION)
Volatility is probably lower than it should be, but that doesn’t mean investors should turn defensive, according to JPMorgan Chase & Co.

JPMorgan Says Tesla Options Understate Risks in SEC Vs. Elon Musk
Joanna Ossinger – Bloomberg (SUBSCRIPTION)
Derivatives market has no volatility premium for legal events; Buy puts to monetize the mispricing, strategist Quigg says


The need for weed: why Wall Street is getting hooked on cannabis; Hedge funds, investors and mutual funds are piling in after Canada allowed recreational usage
Nicole Bullock – Financial Times (SUBSCRIPTION)
Wall Street is developing a bit of a drug habit. Nelson Peltz, the veteran activist investor, signed on this week as a strategic adviser to Aurora, a Canadian cannabis producer, picking up a load of stock options in the process. News of the appointment sent Aurora’s New York-listed shares up 14 per cent, bringing gains for the year to more than 80 per cent.

Pound falls as lawmakers challenge May’s Brexit deal before third vote
Tom Finn – Reuters
The pound fell towards $1.32 on Monday as Prime Minister Theresa May tried to salvage her Brexit deal by winning over doubtful lawmakers with threats and promises to avoid any move to oust her.

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