Observations & Insight
BOXing: Let the Bodies Hit the (Options) Floor
Spencer Doar – JLN
Golly, there’s been a ton of action in options markets lately.
First, the surge of crypto news.
Last week, MIAX’s investment in LedgerX received airtime as LedgerX was approved as a derivatives clearing organization (DCO), paving the way for bitcoin options.
Then CBOE got into the fray with its announcement yesterday that it has partnered with Gemini, the cryptocurrency endeavor backed by the Winklevoss twins, to use its market data to create bitcoin futures. (I expressed my skepticism of the timeline laid out by CBOE yesterday, as they mentioned a possible Q4 launch or early 2018. I am dubious of Q4 given CFE is the exchange migrating to Bats technology. Throw a new product in there with rockstar potential… seems like a big lift.)
After the JLN Options newsletter came out on Wednesday, BOX received SEC approval to open a new open outcry options floor. Woof. This is huge.
The proposal garnered 10 comment letters: three from Nasdaq, three from Chicago Trading Company (CTC), two from CBOE, one from NYSE and one from Group One Trading. Nasdaq “neither supports nor opposes the BOX proposal,” but did express concerns. The rest of the companies explicitly opposed the idea. There were differing reasons presented, but I’d put them in two general categories:
- Overarching proliferation concerns – This is the biggest of them all. As CTC’s Head of Market Structure Steve Crutchfield says in his July 10 comments: “Approval of the proposal would very likely result in a number of copycat proposals from other SROs seeking to make the same flawed argument BOX made” and “would therefore open the floodgates to every options SRO to launch nearly-empty ‘trading floors’ in disused office space and broom closets.” Options markets are already dealing with fragmentation — the argument is this will worsen the issue, degrade liquidity and add more costs to a trading community already buckling under tech and data expenditures. But if opening more floors makes money, why not do it? Pretend I work for a (publicly traded) exchange when I say that.
- Market making issues – Much of the rule minutiae deals with when and where a market maker or number of market makers must be on the floor. At first the BOX proposal allowed for a floor broker to execute a trade without a market maker present. That was altered to mandate that one market maker must be present. There are concerns one is not enough to ensure proper price discovery — the more the merrier.
BOX President Lisa Fall filed four comments/amendments in response to these concerns. Whether BOX adequately addressed concerns is not for me to say as I’ve never run an exchange and some of the issues at hand are subjective, but there were a few bits worth mentioning.
BOX was focused on its proposal and not the broader scope. Fall writes: “A review of the role of trading floors in general as an aspect of the U.S. capital markets is beyond the scope of this filing.” Consider that the partial rebuttal to the first point above.
And one of the more amusing bits was a “shots fired” moment from Fall in her February 21 comment. “Two comment letters are from competing organizations [CBOE and Nasdaq] that operate trading floors, and thereby have a vested interest in the delay or disapproval of the proposal. The third comes from a firm [CTC] which has a history of objecting to certain aspects of trading floors in general.” That’d be a fun catch phrase for an organization – “CTC: Home of the chronic complainers.”
Part of the issue is we really don’t know how exactly this will affect markets as there is no data out there to study (regarding the effects on liquidity and the like) until this new floor opens. Keep in mind there has never been a floor opening like this — this is a de novo endeavor. So we’ll have to wait and see.
This is the tip of the iceberg. All comment filings can be found here so you can parse through them.
Below is a picture of BOX’s office space for its new floor.
It’s in the second floor atrium area right across from the fitness center of the CBOT building. I’ve walked by a number of times since the BOX logo popped up on the door and have never seen so much as a fly. But on Wednesday, some unknown soul had the baseball game rolling on a TV.
And so we enter a brave new world.
Plan for New Trading Pit Triggers Feud in U.S. Options Market
Gunjan Banerji – WSJ
Box Options Exchange’s plan to create a new open-outcry floor has become a lightning rod issue, with exchanges and market makers filing critical letters
****SD: A story from July about the process and the beef between market participants and BOX.
Chicago’s Newest Trading Floor Will Be Staffed by Humans
Brian Louis – Bloomberg
Chicago will get its first new open-outcry trading floor in years after BOX Options Exchange won regulatory approval to open a new one at a time when trades are increasingly done on computer screens.
Standard Chartered eyes New York energy trading, bucks Wall Street trend: sources
Catherine Ngai and Florence Tan – Reuters
Standard Chartered is planning to launch an energy trading business in New York, two sources familiar with the matter said, in what appears to be the first major bank move into the sector in the United States after years of retreat on Wall Street due to cutbacks and stricter regulation.
****SD: New energy options player.
Complex short Vix products draw fire as vol plumbs lows; Hedging effects mean popular exchange-traded products vulnerable to big losses if volatility spikes
Nazneen Sherif – Risk.net
With US stock market volatility creeping lower and lower, investors searching for yield have piled into exchange-traded products (ETPs) that are short volatility. They have performed phenomenally well: three out of the top five short volatility products in terms of assets have almost doubled in value in just a year’s time. As such, investors, particularly retail, have flocked to the product (see Table A).
****SD: I’ve mentioned this before, but ViX [sic] is also a bikini brand. Apparently Hilary Duff wore one and posted about it on social media the other day and it keeps popping up in my searches. Annoying.
Lehman Vs Citi Could Change The Derivatives Game For The Dumber
Owen Davis – Dealbreaker
Lehman Brothers is not dead. It still roves around, like a ghost of crisis past, to visit former counterparties, remind them of past sins, and demand resolution to derivatives disputes. To date, Lehman has reached closure with all but a handful of the roughly 6,600 derivatives counterparties it once had. Most of the biggest banks – Goldman Sachs and Deutsche Bank among them – signed onto a broad settlement in 2011.
****SD: So how are Jim Carrey and Jeff Daniels involved again?
Investment banks, not HFTs, fuel flash crashes – FCA research; High-frequency traders are often blamed for sharp rises and falls in the stock markets
Samuel Agini – Financial News
High-frequency trading firms, so often blamed as the forces behind flash crashes and soaring rallies in the stock markets, have been handed a line of defence by the UK’s financial watchdog.
“Someone” Is Pinning the Stock Market So It Can’t Fall
A reader recently wrote in asking why I’m so bearish.
I want to be clear; I’m not bearish because of the economy, nor because of stocks trading at bubble-level valuations (though both of those issues concern me).
I’m most bearish because of the ongoing market rig that is setting the stage for a massive 1987-type crash.
****SD: Conspiracy! Surprised the plunge protection team wasn’t mentioned…
Stocks Face Showdown as VIX Is Set to Soar
Charles Bovaird – Investopedia
Investors who have been lulled to sleep by the market’s recent calm are likely in for a rude awakening this month, as the VIX (CBOE Volatility Index) has historically experienced sharp increases in August, according to Bloomberg. This benchmark gauge of volatility has risen an average of 12% during the month, according to data spanning the last 20 years that was compiled by Bloomberg. (For more, see also: Tracking Volatility: How the VIX is Calculated.)
****SD: Maybe and maybe not. CNN has a story titled The stock market hasn’t been this calm since 1996. It has such a random lede graf – “Mark Zuckerberg was 12 years old the last time the stock market was this calm.” Huh? Lebron James was 11. Donald Trump was 50. Elon Musk was 25. Why not use one of those? So arbitrary.
Exchanges and Clearing
Bitcoin Adoption ‘Virtuous Cycle’ Can Start Thanks to LedgerX: Bloomberg
William Suberg – CoinTelegraph
LedgerX attaining regulatory approval for selling derivatives contracts could set off a “virtuous cycle” for mass crypto adoption, Bloomberg says.
****SD: In case you missed Bloomberg’s story yesterday, here’s some more on the argument presented.
Bitcoin Futures, Options to Appear On Chicago Exchange
Alexander Geralis – CoinTelegraph cointelegraph.com
Summary: In a groundbreaking agreement the stage is set to give traders access to Bitcoin through a traditional and well-regulated market. The CBOE and Gemini plan to allow more sophisticated options to traders as soon as later this year.
****SD: Yesterday’s big news in case you missed it.
Miami International Holdings, Inc. Reports July 2017 Trading Activity for MIAX Options and MIAX PEARL; MIAX PEARL Sets New Market Share and Contract Records; MIAX Options Launches New Functionality
Miami International Holdings, Inc. today reported the July 2017 trading activity for its two fully electronic options exchanges – MIAX Options and MIAX PEARL (together, the MIAX Exchange Group). The MIAX Exchange Group collectively executed over 17.9 million contracts in July
2017 for a combined average daily volume (ADV) of 898,601 contracts, representing a total U.S. equity options market share of 6.49%.
Intercontinental Exchange Reports July Statistics: ICE ADV up 11% y/y led by 14% Increase in Financials ADV & 12% Increase in Energy ADV; Open Interest up 10% y/y
Intercontinental Exchange, Inc. (NYSE:ICE), a leading operator of global exchanges and clearing houses and provider of data and listings services, today reported July 2017 trading volume and related revenue statistics, which can be viewed on the company’s investor relations website at http://ir.theice.com/ir-resources/supplemental-information in the Monthly Statistics Tracking spreadsheet.
****SD: More ICE stuff – dividend release and second quarter results. From Finance Magnates – ICE’s FX, Futures Volumes Plunge in July in Spite of Mounting Volatility
Bats Global markets slams NYSE and Nasdaq for being ‘hypocritical’
Matt Turner – Business Insider
There’s a two-on-two rumble taking place amongst America’s stock exchanges to decide how the trading day ends.
Bats Global Markets, which is now a part of CBOE, has proposed Bats Market Close, a new offering that would allow NYSE- and Nasdaq-listed securities to be matched on Bats at the end of the trading day. The proposal is a direct attack on the NYSE and Nasdaq model, and it comes at a time when more and more trading is conducted at the end of the day.
****SD: It’s an equities story, but as I’ve said before, if it does equate to increased volatility around the close, it’s worth keeping an eye on.
LSEG interim results for the 6 months ended 30 June 2017
London Stock Exchange Group
Strong financial performance with income growth across all business areas and 23% AEPS growth
Is Gary Cohn a Good Pick to Head the Fed?
Jeanna Smialek, Max Abelson and Dakin Campbell – Bloomberg
In their decades of dominating the intersection of Wall Street and Washington, Goldman Sachs Group Inc. bankers have captured many of the world’s most powerful economic and financial positions. Gary Cohn, a longtime Goldman president and Donald Trump’s top economic adviser, is now within arm’s reach of the holy grail—chairman of the Federal Reserve.
Trading Firms Pick Amsterdam Over London as Brexit Bites
Will Hadfield, Brian Louis and Silla Brush – Bloomberg
Electronic markets operator Tradeweb joins Radix, Hard Eight; Dutch regulator favors speed traders, platforms, firms say
Two U.S. algorithmic-trading firms are picking Amsterdam over London as the location for their first European office, reinforcing the Dutch city’s standing as a financial hub post Brexit.
Regulation & Enforcement
‘London Whale’ Has a New Target: J.P. Morgan’s Top Brass
Lucy McNulty, Gregory Zuckerman and Rebecca Davis O’Brien – WSJ
The U.S. case against two former J.P. Morgan Chase & Co. traders charged with concealing billions of dollars in losses fell apart because a key witness known as the London Whale shifted blame to Chief Executive Officer James Dimon and other top executives, according to a person familiar with the matter.
The biggest financial scam you’ve never heard of is taking over the internet – and I just spent weeks investigating it
Josie Cox – The Independent
We live in a low-return, high-cost world of deep economic uncertainty, so how would you feel if I suddenly granted you access to a pot of cash – for argument’s sake GBP20,000 or more – and said that you could do with it whatever you liked?
****SD: It takes a bit to get to the scam in question — it’s shady binary options providers.
Trade Surveillance, False Positives, and Parameter Settings
Michael Friedman, Trillium – TABB Forum
Trade surveillance platforms often generate a lot of alerts, many of which are false positives. A common response to that problem is to adjust the system’s parameter settings to reduce the number of alerts. But such adjustments are fraught with risk. The goal of any adjustments must be to improve accuracy. Reduced alert counts alone cannot be the primary goal.
Smart Contracts and Distributed Ledger – A Legal Perspective
Smart contracts and distributed ledger technology (DLT) are increasingly being seen as a way for the derivatives industry to realise operational efficiencies and cut costs. With these new technologies potentially transforming how derivatives are executed and managed through the entire lifecycle, it seems the derivatives market is on the cusp of significant modernisation.
****SD: This link is to the page with the PDF download.
Choosing Strike Widths for Vertical Options Spreads
The Ticker Tape
Experienced options traders understand how buying single-leg options and vertical spreads can help you take advantage of directional moves, but with defined risk. And because single-leg options and vertical spreads have a vega component, they can be useful if you have a view on implied volatility.
Sugar takes centre stake in clash between Bcom, SocGen analysis
Sugar emerged at the centre of battle of commodity forecasts – with the Bloomberg Commodity Index seeing them as a leader of a revival in softs, while Societe Generale cautioned that a setback could lie in store.
****SD: “‘When risk is underpriced, almost all commodities moved lower by an average of 2.3% in the following month,’ SocGen said.”
3 reasons a stock-market correction is coming in late summer or early fall
Howard Gold – MarketWatch
It’s August, the dog days of summer, but stocks just keep chugging higher.
On Wednesday the Dow Jones Industrial Average hit a new all-time closing high above 22,000, while the S&P 500 index and the Nasdaq Composite index closed near record peaks. The CBOE Volatility Index the so-called “fear” index, at one point last week tumbled to a record intraday low below 9. It’s a bit higher but remains in a low range not seen in two decades.
****SD: Or, from CNBC, There is no reason to cut and run in this market
Rare Options Signal Points to Strong Second Half for Stocks
The 10-day moving average for the Options Clearing Corporation’s (OCC) put/call volume ratio on the “index/other” category just fell below 0.85 for the first time since May 13, 2014, according to Schaeffer’s Quantitative Analyst Chris Prybal. Per the OCC, the “index/other” designation refers to cash-settled products — essentially, excluding stocks or ETFs — and the monthly volume report indicates that 95% of July’s volume was generated by the SPX or VIX. Specifically, 57.87% of the July volume revolved around the VIX, with the SPX accounting for 38.49%.
Yuan Watchers Strengthen Forecasts on Dollar Drop, PBOC Support
Ronnie Harui and Emma Dai – Bloomberg
Yuan watchers are strengthening their estimates for the currency, citing a declining dollar and support from Chinese policy makers.
For A Different Look At Volatility, Look To The SKEW
The VIX is still near historical lows while the SKEW is near the high end of its range.
Recently high-profile analysis by Oaktree’s Howard Marks and JPMorgan’s Marko Kolanovic may have awakened the VIX and its lesser known sibling, the SKEW index.
Gold Investing: Coins, Bars, Futures, Mining Stocks, and ETFs
Brian Lund – The Ticker Tape
Gold. It’s the yellow metal, the “barbarous relic,” but it’s also a medium of exchange that’s been respected as a store of value since ancient Egypt, and an asset class that some investors might consider as part of a diversified portfolio.
Bearish on TSLA in Front of Earnings
Russell Rhoads – CBOE Options Blog
Teva Pharmaceutical Industries Limited (TEVA) at 31.10, a Bull Put Spread traded 520 times. The trader sold the Aug 4th 34/32 spread for a credit of 1.57. TEVA is expected to report earnings on Thursday, August 3, before the market open.
****SD: Some of what was trading.
FinJS Chicago, September 6 at 5:30 p.m.
FinJS is a capital markets network that showcases innovations driven by web technologies. FinJS events are invite-only and include CTOs, eCommerce managers, development managers, product managers and other thought-leaders from banks, buy-side and industry-leading technology platforms.
US IG: Goldman warns bond investors that it may not exercise calls
Will Caiger-Smith, Reuters via Nasdaq
Goldman Sachs has told investors to not expect the bank to always exercise the call options that have become a regular feature in its bond issuance over the past year.
****SD: We had a story this week about puttable bonds, now a story about callable bonds. Unusual.
A Baccarat Binge Helped Launder the World’s Biggest Cyberheist
Alan Katz and Wenxin Fan – Bloomberg
How do you make $81 million stolen from the Bangladesh central bank disappear? Run it through an Asian laundromat