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SEC “Abdicated Responsibility” Regarding OCC Capital Plan; tastytrade buys Seed Futures; Gundlach’s Options Bet

Observations & Insight

Seed Futures Acquired by tastytrade
Seed Futures LLC (“Seed Futures”) today announced that its business has been acquired by dough, Inc. (d/b/a tastytrade).

****SD: This is a development worth following. The tastytrade/dough team and their new(ish) brokerage tastyworks continue to disrupt business. Seed Futures is a subsidiary of Seed CX, the SEF started two years ago (SEF designation came in August 2016) to initially trade forwards and options on industrial hemp products. Geared to all “emerging commodities,” as they phrase it, the exchange now has tradeable products like Hass avocados, organic soybeans and Persian limes.


SEC failed to make specific findings in approving OCC capital plan
Amy Leisinger, J.D. – Jim Hamilton’s World of Securities Regulation
A D.C. Circuit panel remanded an SEC order approving the Options Clearing Corporation’s proposed rule change to implement a capital plan to help fulfill its role as an FSOC-designated systemically important financial market utility. According to the court, the Commission order was arbitrary and capricious in that the agency did not make specific findings that the plan avoids undue burdens, protects investors and the public, and does not discriminate among interested parties. Instead, the SEC accepted OCC’s findings with minimal evidence of the basis for the company’s own determinations, the court found (Susquehanna International Group, LLP v. SEC, August 8, 2017, Garland, M.).

****SD: Link to PDF of yesterday’s decision here. Our lead story today is a bit more general while the above is a bit more “for the industry.” The crux of the story is the SEC just got chastised. The court didn’t have to delve into the more specific arguments about competition among OCC contributors, since (as per page seven of the decision linked to above) the “SEC’s Order approving the plan fails in a more basic respect: the Commission did not itself ‘find[]’ or ‘determin[e]’… that the Plan met any of those requirements. Instead, the SEC effectively abdicated responsibility to the OCC…” Now, back to you, Jay.

Lead Stories

Appeals Court Orders SEC to Reconsider Options-Industry Fee Plan
Dave Michaels – WSJ
A federal appeals court on Tuesday criticized the Securities and Exchange Commission for approving a fee plan by the options industry’s major clearinghouse and told the regulator to redo its work.
A three-judge panel of the U.S. Court of Appeals for the D.C. Circuit wrote that the SEC “effectively abdicated” its responsibility to review Options Clearing Corp.’s plan and provided “few indications that the SEC even knew what the evidence was.”

What Happens if the VIX Spikes?
Crystal Kim – Barron’s
Given how low volatility has been lately, the notion of the CBOE Volatility Index or the VIX spiking seems improbable. ProShares VIX Short-Term Futures (VIXY) gained 0.87% on Tuesday, while the VelocityShares Daily Inverse VIX ST ETN (XIV) declined by that much.

****SD: Theory outlined by Barclays’ Maneesh Deshpande: “We show that the VIX futures demand due to [leveraged VIX exchange traded products] negative gamma does not increase linearly but eventually saturates for large positive moves. In our shock scenario we estimate a demand of ~$110Mn vega which is only 10% of the likely VIX futures volume. On the other hand, for a large drop in VIX futures, the supply is not bounded and is thus a bigger concern.”

Billionaire bond guru Gundlach predicts he will make 400% on his bet against the stock market
Evelyn Cheng – CNBC
DoubleLine CEO Jeffery Gundlach expects his bet for a decline in the S&P 500 will return 400 percent.
“I’ll be disappointed if we don’t make 400 percent on the puts, and we don’t even need a big market decline for that to happen,” Gundlach said Tuesday on CNBC’s “Halftime Report.”

****SD: I can see him pointing the bat at the left field bleachers while he said it. Dealbreaker with commentary – In His Soul, Jeff Gundlach Knows That He Can Make 1,000% Betting Against The S&P

Options traders turn cautious on South Korea ETF
Saqib Iqbal Ahmed – Reuters
As U.S.-North Korea tensions escalate, traders’ positioning in a key South Korea exchange traded fund’s options has turned significantly more defensive this year versus recent trading history, data show.

****SD: This and other news can be found in the August edition of “Duh Magazine.” See below for more on the N. Korea tumult.

How Trump’s threat of ‘fire and fury’ is rattling stock-market calm
Mark DeCambre – MarketWatch
The U.S. stock market, along with the rest of the world, is on high alert after President Donald Trump on Tuesday echoed World War II-era comments made by 33rd U.S. President Harry S. Truman before ordering the use of nuclear force against Japan.

****SD: Lays out price action in the wake of Trump comments yesterday. Crazy how the yesterday’s “biggest S&P drop in a month” was only .2 percent(?!).

Exchanges and Clearing

India Allows MCX to Start Trading First Options Contract in Gold
Santanu Chakraborty and Swansy Afonso – Bloomberg
The Multi Commodity Exchange of India Ltd. said it will start the country’s first gold options contract, about a year after the market regulator permitted options trading in commodities.
The Securities & Exchange Board of India has approved the bourse’s plan to offer kilogram contracts and the bourse will release product details in about two weeks, MCX Spokesman Girish Dev said by phone on Wednesday.

****SD: Livemint with a take here.

Vietnam launches derivatives market to boost liquidity
Vietnam’s derivatives market will be officially launched on Aug. 10, the Hanoi Stock Exchange said on Tuesday, with stock futures contracts the first to begin trading.

NSE lowers fee for equity options, currency derivatives
India Infoline
In order to bring more liquidity into derivatives segment, National Stock Exchange (NSE) significantly lowered the transaction charges in equity options and currency derivatives. This move is expected to aid in reducing the trading and hedging costs for various entities, including small and medium enterprises.

Regulation & Enforcement

Wall Street Claim That Rules Imperil Trading Undercut by SEC
Benjamin Bain – Bloomberg
U.S. Securities and Exchange Commission economists are throwing cold water on Wall Street’s persistent complaints that post-crisis regulations have made markets more susceptible to shocks.
The market dynamics of recent years weren’t necessarily caused by stricter rules imposed by U.S. and international regulators after the 2008 financial meltdown, the SEC’s Division of Economic and Risk Analysis said in a 300-plus page report to lawmakers released Tuesday. The report examines the extent to which measures such as the Volcker Rule and capital requirements associated with Basel III have impacted trading in a range of asset classes including equities, government and corporate bonds, as well as some derivatives.

****SD: Bloomberg’s Matt Levine with his take in today’s column.

Banking watchdog warns of risks from cliff-edge Brexit
Caroline Binham – Financial Times
The UK’s most senior supervisor of banks and insurers has given his starkest warning to date over the risks the financial system faces from a cliff-edge Brexit without a transition period.

****SD: So just get a hang glider already.

Who was convicted because of the global financial crisis?
Kara Scannell and Richard Milne – Financial Times
In the decade since the beginning of the credit crisis, US authorities have collected $150bn in fines and consumer relief from financial institutions. But it is another statistic that garners more attention: zero senior Wall Street executives have been prosecuted.

Should F&O lot sizes increase? Sebi needs views by tomorrow
Amit Mudgill – Economic Times
Legendary investor Warren Buffett calls derivatives the ‘financial weapons of mass destruction’.
Yet, individual investors account for about 33 per cent of equity derivative trades in the Indian market and 60 per cent of turnover in the non-institutional, non-proprietary category.


Equinix now offers SAP Cloud Portfolio
Equinix has announced it is offering direct and private access to SAP cloud portfolio in Sydney’s International Business Exchange (IBX) data centre and other regions.


A Record Percentage of MBAs Don’t Want to Work on Wall Street
Julie Verhage – Bloomberg
Just 19% listed bulge bracket firms as top employer of choice; Consulting and corporate development gaining preference
Wall Street?
A new survey shows that jobs outside of Wall Street are becoming increasingly enticing to recent MBA graduates. According to data from Training the Street, bulge bracket banks were a top employment choice for just 19 percent of respondents. Not only is that a drop of 7 percent from last year, it’s also the lowest level in the eight-year history of the survey.

****SD: Is it possible this is a good thing? Maybe the first to jump ship are the bandwagoners who are more concerned about aesthetics/pay/glamor? That maybe now the doors might open to candidates who are qualified but never got a shot before? Idle thoughts.


Short Sellers, Options Traders Gear for More Volatility in Retail Stocks
Gunjan Banerji, WSJ via Fox Business
Short sellers and options traders are betting on more turbulence for the struggling American retail sector.
U.S. retailers are shuttering stores at the fastest pace in more than a decade. A wave of bankruptcies has hit the group, and an exchange-traded fund tracking major retailers has declined 7% in 2017.

VIX can attempt to break through the barn door
Reuters via Times of India
In wake of a new all-time intraday low on Jul 26 coming with key reversal, VIX bucking its way higher
Early action Weds has VIX once again forging above its 200-DMA (11.98), clearing way for test of major resistance line from early 2016.

Volatility In Gold Declines
Volatility in gold has been decreasing recently. What does it mean for the gold market?

****SD: This is about an overall low volatility regime in gold. Large percentage-wise move today but small history-wise: GVX (CBOE Gold ETF Volatility Index) is up to nearly 12 from yesterday’s low of 10.38.

Losing Trades: Patience is Key
Sage Anderson – tastytrade blog
A “virtue” is described as a “behavior showing high moral standards.” According to that definition, patience in everyday life is without question a virtue.
And according to new tastytrade research presented on Options Jive, patience may also be one of the most important tools in a trader’s utility belt.
While we strive to win the highest percentage of trades possible, the reality is that many of them get tested. Responding appropriately to that type of adversity isn’t always easy – emotion can often get the best of better judgement.

If this red flag is any indication, a 1929-style market crash isn’t so ‘unimaginable’
Shawn Langlois – MarketWatch
Much has been made lately about how the CAPE ratio — a popular valuation measure applied to the S&P 500 — has ballooned to levels not seen since the dot-com bubble, and before that, all the way back to 1929.
CAPE stands for cyclically adjusted price-to-earnings. It’s also known as the Shiller P/E ratio, named for the Yale professor who created it. While the metric has its share of critics, it’s still considered a standard measurement of market valuation.

Jackson Hole gathering looms for investors
Mohamed El-Erian – Financial Times
With a supportive US Federal Reserve, solid corporate earnings, a “goldilocks” global economy and ample liquidity muffling political and geopolitical spillovers, many investors head out on holiday with the comforting expectation of a quiet August for financial markets. Indeed, the only known major economic uncertainty this month relates to policy signals out of Jackson Hole, the annual central bank symposium. Even here, the focus should be a lot less on the Fed and more on the European Central Bank.

Why investors are ignoring political dysfunction—for now
Russ Koesterich, Blackrock via Nasdaq
At this stage of the bull market, investors are contending with more than a few enigmas: Do valuations even matter? Will interest rates ever rise? And how do you explain the divergence between U.S. political dysfunction and the unnatural calm in financial markets? That last one has become particularly troubling. Most volatility measures are near all-time lows while Washington appears in complete disarray. Nonetheless, investors are likely to continue to look past political dysfunction, at least as long as financial conditions remain this easy. Back in May, I first wrote about the relationship between policy uncertainty and market volatility . As a proxy for political uncertainty I used the popular Economic Policy Uncertainty indexes, measures based on real-time news flow.

How Do You Spell V-o-l-a-t-i-l-i-t-y? Suddenly, It’s VIX
Bruce Kamich – The Street
Just when the pundits declared that volatility was dead because of all the passive investing and indexing, bam! The VIX spiked higher yesterday and today. Traders now are looking back at what Jeffrey Gundlach, DoubleLine CEO, said yesterday on CNBC.

****SD: I did not know before today the “moving average convergence divergence” was a trend-following indicator.


Five things we learnt from the US earnings season
Ed Crooks – Financial Times
The headline on the summer’s reports of US corporate earnings is that they are likely to have grown at a double-digit rate — just about — for two consecutive quarters, for the first time since 2011.


5 Questions with Scott Shellady aka @ScottTheCowGuy
Brian Mehta, CMO – Trading Technologies
Scott Shellady has a broad, strong range of technical and trading experience in both commodities and financial products focused on North America, Europe and Asia.

Dimon Sides With Bears, Says Sovereign Bonds Are Too Pricey
Jennifer Surane – Bloomberg
Jamie Dimon is siding with the bond-market bears.
“I do think that bond prices are high,” the chief executive officer of JPMorgan Chase & Co. said Tuesday in an interview on CNBC. “I’m not going to call it a bubble, but I wouldn’t personally be buying 10-year sovereign debt anywhere around the world.”

What European CFOs Are Saying About Threat of a Strong Euro
Sofia Horta E Costa – Bloomberg
Adidas has hedged currency risk for the next 18 months; Merck says second half “will not be a walk in the park”
Europe’s soaring currency, a source of headache for its stock market, has also been a recurring theme for the region’s executives in the latest earnings season.

Trump nominating Gary Cohn to replace Yellen at Fed raises uncertainty
Pedro Nicolaci da Costa – Business Insider
In normal times, a looming changing of the guard in the world’s most powerful central bank would be dominating Wall Street’s attention. But these are not normal times.

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Graduate of University of Minnesota School of Journalism and Mass Communication