Breaking News

CBOE to launch bitcoin future contracts; LedgerX Will Transform Cryptocurrencies; Traders are betting big on a stock market shock

Observations & Insight

July 2017 Options Exchange Marketshare via OCC
(Click for larger image)
****SD: In case you missed the OCC’s release yesterday about July cleared volume, you can find that here.


The Concept of Basis – Gregg Doud

“The beauty of this industry is, I don’t care how much artificial intelligence or how many algorithms you use, you’re still going to have to have somebody that understands where stuff is supplied, where it comes from and where it goes and the trade flows associated with it.”

In this video from MarketsWiki Education’s World of Opportunity event in New York, Gregg Doud, president of the Commodity Markets Council, discussed the concept of basis and how it applies to the financial industry. According to Doud, basis is a fundamentally important concept in the world today. Doud also talked about Dodd-Frank and how it affects commodity markets.

Read the rest and watch the video »

Lead Stories

CBOE to launch bitcoin future contracts
Philip Stafford – Financial Times
CBOE, which has the largest share of US options markets, is gearing up to launch options and derivatives on bitcoin, just as the controversial cryptocurrency embarks on its experiment that will help determine its future.
The Chicago exchange on Wednesday agreed an exclusive licensing deal to take bitcoin data from Gemini Trust, the virtual currency exchange run by twin Cameron and Tyler Winklevoss.

****SD: I was wondering which exchange operator would be next to enter the crypto fray. My level of surprise is near zero on this one. What is slightly surprising to me is the potential for it to be launched as early as Q4 2017. CBOE has a ton on its plate still with the Bats acquisition. Adding a new product with great potential to the CFE in Q4 seems like a stretch to me, given that the CFE is undergoing huge change by migrating to Bats tech – the official migration from Equinix NY4 to NY5 will start at the end of February 2018 (pending regulatory review) – although preparations, as you’d expect, are already underway. This angle is probably why the exchange hedged their bets by saying “or early 2018.” Here are more sources on the Gemini deal – CoinDesk; Financial News; CBOE release; WSJ; Reuters and Finextra.

LedgerX Will Transform Cryptocurrencies
Aaron Brown – Bloomberg
The Commodity Futures Trading Commission granted LedgerX — a cryptocurrency trading platform — registration as a clearinghouse for derivatives contracts settling in digital currencies. This indicates increasing official acceptance of cryptocurrencies. More important, the move could redefine them.

****SD: When LedgerX got its DCO approval, I wrote a blog post that laid out the LedgerX timeline and some random factoids about the crypto world. Here’s some more color from the Musings on Markets blog The Crypto Currency Debate: Future of Money or Speculative Hype? and from the Financial Times Crypto currencies are mirroring pre-crash banking systems.

Traders are betting big on a stock market shock
Joe Ciolli – Business Insider
Volatility traders haven’t been this sure of a stock market shock in almost two years.
These investors buy and sell options on the CBOE Volatility Index, or VIX, as they predict swings (or a lack thereof) in the S&P 500. The VIX typically spikes when stocks decline and falls in a steadily rising market. And right now traders are not betting that things will stay quiet.

****SD: I wonder if there were more people buying “lotto tickets” on the VIX in Illinois during the period this summer when the state’s finances dictated stores stop offering Powerball and Mega Millions…

US Options Volume Shows Positive Momentum in Q2 2017
Tom Lehrkinder – TABB Forum
Showing some signs of positive momentum, listed options volume increased in the second quarter of 2017, the best quarter since 3Q2015. Trading in the period totaled 1.05 billion contracts, a 2.3% quarter-over-quarter increase and a 3.9% increase from the 2Q2016 total. The first half of 2017 is up 1.1% compared to 1H2016.

Hedge funds turn to dark web to gain an edge
Tabby Kinder – Financial News
In the race for new data to better inform investment decisions, hedge funds have scraped Twitter, logged Amazon reviews, and monitored satellite images of oil tankers. Now they are turning to a more controversial resource: the dark web.
Access to the dark web is one service being offered by business intelligence experts, who specialise in doing deep dives into businesses and the people who run them, to hedge funds, according to a number of people familiar with the providers.

***JB: The dark web (not to be confused with the “deep web”) is a pretty skeevy place. No telling what one might dig up there.

The demise of Libor is not a done deal for markets; Moving more than $350tn of derivatives pegged to benchmark will take longer than five years
Alexandra Scaggs – Financial Times
Reports of the death of Libor may be exaggerated, particularly in US markets.
The UK markets regulator, the Financial Conduct Authority, has set a rough timeline for banks to prepare for a transition away from the floating interest rate benchmark that is crucial to world markets. By the end of 2021, it will no longer require banks to contribute to its calculation for rates in sterling, it said.

****SD: For more on the entanglements of LIBOR and derivatives see LIBOR and Derivatives – how close are they? and Valuing Rates Derivatives Using OIS Discounting.

The Oil Market’s Hidden Signals Show U.S. Producers Are Hedging Again
Alex Longley, Michael Roschnotti and Conor Molumby – Bloomberg
Look under the hood of the oil market and one thing becomes apparent — shale producers seem to be hedging again.
Demand for the contracts that producers use to guarantee price levels soared after 2018 West Texas Intermediate crude returned to $50 a barrel. At the same time a raft of trades were reported to U.S. regulators last week that showed some producers hedging at levels as low as $45 a barrel, according to data compiled by Bloomberg.

****SD: Put demand/options skew story.

Sleepy Japan Stocks Set for Rude Awakening, Strategists Say
Min Jeong Lee, Hiroyuki Sekine, and Toshiro Hasegawa – Bloomberg
If history is any guide, the months-long lull in Japanese equities could take an abrupt turn in the second half.
Japan hasn’t been an exception to a rare period of historically-low volatility in global equity markets, coupled with lofty stock prices in the first half. The Nikkei Stock Average Volatility Index has been hovering around its lowest levels in more than a decade, with the Bank of Japan’s massive purchases of exchange-traded funds cited as a factor in keeping a lid on any extensive price swings.

****SD: BoJ’s ETF purchases pegged at some $54 billion a year.

Exchanges and Clearing

OCC securities lending activity increases significantly
Securities Lending Times
OCC’s securities lending central counterparty (CCP) activity was up 27 percent in new loans last month.

****SD: From the OCC’s Annual Report – In 2016, “securities lending reached a new high with more than 1.9 million cleared stock loan transactions, representing growth of 37 percent from the previous year.” Average daily loan value was more than $147 billion.

CME sees dollars in data sales, but struggles to grow
John McCrank – Reuters
CME Group Inc, the world’s biggest exchange operator by market value, is looking to the lucrative business of selling data to boost revenue, spawn new financial products, and change the way many futures contracts trade.

CME Group Reached Average Daily Volume of 14 Million Contracts in July 2017
CME Group
CME Group, the world’s leading and most diverse derivatives marketplace, today announced that July 2017 average daily volume (ADV) reached 14 million contracts, down 1 percent compared with July 2016. CME Group July 2017 options volume averaged 2.9 million contracts per day, down 8 percent versus July 2016, with electronic options averaging 2 million contracts per day, up 21 percent over the same period last year. Open interest at the end of July was 113 million contracts, up 9 percent from the end of July 2016.

Eurex passes global fire drill with excellent results
Eurex Exchange
Eurex Clearing has once again demonstrated the reliability and quality of its default management process. During the last week of April, Eurex Clearing, LCH Swapclear and CME simulated the default of a major participant – based on the Brexit market conditions as of 24 June 2016.
At Eurex Clearing, the defaulted member’s portfolio represented one of the largest clearing members with open positions in listed equity (index) derivatives, pending cash equity settlements, as well as open interest rate swaps and listed fixed income derivatives transactions.

MCX seeks SEBI nod for co-location server facility, gold options contract
Commodities bourse Multi Commodity Exchange has sought permission from the Securities and Exchange Board of India for co-location server facility, Moneycontrol has learnt from sources.

Regulation & Enforcement

US regulator moves to loosen Volcker rule
Barney Jopson – Financial Times
A bank regulator appointed by President Donald Trump has taken a first step towards loosening the Volcker rule banning banks from placing market bets with their own capital, targeting a post-crisis prohibition that is reviled on Wall Street.

Esma adviser says position limits to be published in November
Michael McCaw –
The European Securities and Markets Authority (Esma) will announce position limits on commodity derivatives in November, an adviser to the regulator has told, flagging possible fire sales of contracts to comply with rules that come into force on January 3, 2018.

Margin trading: Sebi gives more borrowing options to brokers
Economic Times
Markets regulator Sebi today allowed stock brokers to borrow funds through issuance of commercial paper and unsecured loans from directors and promoters in order to provide margin trading facility to their clients.


Is Amazon’s cloud service too big to fail?; Financial regulators have raised concerns over concentration risk in a vital area of banking infrastructure, but others say reinforcements are unnecessary
Yolanda Bobeldijk – Financial News
Gavin Jackson, head of Europe, the Middle East and Africa at Amazon Web Services, loves to talk about snowballs. Not the lumps of mush and ice that children chuck at each other, but Amazon’s portable information storage devices, big grey suitcases that hold huge amounts of data.

****SD: AWS the new SIFMU?


Swedroe: Volatility As A Strategy
Economists have long puzzled over the simultaneous demand from consumers for risk-reducing insurance and risk-increasing lottery tickets. Every year, people spend trillions of dollars on the two combined. These behaviors may seem unrelated, but they are actually symmetrical forms of risk transfer.

How Brexit Changed the way Pound Sterling is Traded Across Different Timezones
Pound Sterling Live
The Brexit vote in June 2016 didn’t just lower the value of the Pound exchange rate, it also changed age-old patterns in the way Sterling is traded in the different time-zones that make up the 24-hour FX market.

****SD: And I’m sure people have adjusted their algos accordingly.

Should Investors Be Worried About Low Volatility?
Institutional Investor
A period of high price volatility in a given market does not mean a crash is around the corner — if anything, the opposite may be true, at least according to new research.
In a study of 40 historical financial asset bubbles, researchers from the Swiss Finance Institute found that the majority burst following a period of lower price volatility. Of these cases, which included the stock market bubbles preceding the Great Depression and Japan’s “Lost Decade,” 65 percent crashed when volatility was low, found authors Didier Sornette, Peter Cauwels, and Georgi Smilyanov.

When Volatility Can Ruin Your Options Position
As volatility has reached low levels, its impact on stocks and options has been largely ignored until recently.
Volatility has often deterred investors from taking a position, but the FDA’s announcement on July 28 on its intention to reduce nicotine levels in cigarettes drove down tobacco stocks nearly immediately.

****SD: More on what happened to Altria in particular from Barron’s.

Cramer’s charts reveal the ultra-low fear index could be on the rise
Elizabeth Gurdus – CNBC
With the Dow Jones average inching towards 22,000, even Jim Cramer found cause to wonder whether the stock market’s continuous rally is truly sustainable.
“We always need to ask ourselves if we’ve gotten too complacent. That’s just a necessity. You do that as part of being a disciplined investor,” the “Mad Money” host said.

****SD: TL;DR – get ready for a sell-off in the coming weeks. I had to chuckle at the phrase “Cramer found cause to wonder…” I think he can find cause for anything.


London’s gold amount revealed in transparency move
Neil Hume and David Sheppard – FT
Almost 7,500 tonnes worth nearly $300bn sitting in city vaults, industry body confirms

****SD: This number could be much much higher, though, as it does not include the immense gold holdings of Gringotts Wizarding Bank.

Crazy For Cryptocurrency: Why South Koreans Are Risking It All On Ethereum
Elaine Ramirez – Forbes
“It’s not safe right now. I gotta tell everybody to get out of the market,” says Bobby Kim mid-interview as he frantically posts to his Twitter page and Naver Band chat rooms about the looming downturn of Bitcoin. As a trader and adviser on Bitcoin Seoul, he has seconds to warn his subscribers and followers to buy or sell. The market gets increasingly tricky to read when banks swoop in to buy big on the dip, he says. Later that day, July 25, the market dropped 10% before rebounding.

****SD: In light of so much options-related crypto news, the above is some international context.

Greenspan Sees No Stock Excess, Warns of Bond Market Bubble
Oliver Renick and Liz McCormick – Bloomberg
Equity bears hunting for excess in the stock market might be better off worrying about bond prices, Alan Greenspan says. That’s where the actual bubble is, and when it pops, it’ll be bad for everyone.
“By any measure, real long-term interest rates are much too low and therefore unsustainable,” the former Federal Reserve chairman, 91, said in an interview. “When they move higher they are likely to move reasonably fast. We are experiencing a bubble, not in stock prices but in bond prices. This is not discounted in the marketplace.”

****SD: Speaking of stock, who puts any in what Greenspan says anymore? Related story from Bloomberg Wall Street Is Mapping Stock Trades for a Post-Bond Bubble World

***JB: Says the guy who saw the housing bubble coming. Oh wait…

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Graduate of University of Minnesota School of Journalism and Mass Communication