Observations & Insight
Save the Date for OIC 2018
Mark your calendar for next year’s Options Industry Conference, which will be held May 2-4, 2018, at the picturesque Omni Amelia Island Plantation Resort, located just off the coast of Florida.
OCC News August/September 2017
In this issue: Q&A with OCC’s Chief Security Officer Mark Morrison, updates from Capitol Hill, advocacy and charitable endeavors.
Business and Friendship Went Together For Leo Melamed, Bob Wilmouth and Leslie Rosenthal
John Lothian – JLN
Leo Melamed lost two good friends in the last few days in Bob Wilmouth and Les Rosenthal. I stopped by Melamed’s office to share my condolences and have him share some thoughts on these two futures industry leaders.
He told me the futures industry as a whole lost two people who were critical to the success of the industry in the U.S. and who worked with him to help create what the late Merton Miller called the “modern era of finance.” He told me how these two CBOT leaders became his good friends.
Options Market Plugs Away
Terry Flanagan – MarketsMedia
For exchanges, trade handlers and technology providers, the U.S. options market recently has been the equivalent to a three-star restaurant review on Yelp: the meal was okay, it had its moments and there was no big problem, but overall it wasn’t anything to get excited about.
****SD: M&A, exchange proliferation, order flow, the ORF — this is a rundown of the state of the industry. Dash Financial CEO Peter Maragos, IMC MD Paul Jiganti, Jerry Hanweck (of the eponymous risk analytics firm) and NYSE’s options head Ivan Brown lend their insight and concerns to the piece.
The Sizzling Stock Market Is Making Investors Uneasy
Dani Burger – Bloomberg
Nasdaq 100 ETF’s three-month skew rises to bearish level; Cheaper stocks pick up steam amid stretched valuations
Stocks are at all-time highs, and investors holding the priciest ones are starting to get uneasy.
****SD: Well, I hope we’re using oil with a high smoke point, otherwise this sizzling will get out of hand – who’s got the avocado oil?
Millennials – a new investor group with new needs
Gary Delany, OIC – TradingFloor.com
Millennials are emerging as a distinct demographic to the investing community. Typically, they are in the 25-35 age range, as opposed to Generation X (36-51 years old) and baby boomers (52-70 years old). A 2016 study by Fidelity Investments shows that 60% of millennials interviewed had investment accounts and had started saving for retirement or an emergency fund. The study shows that 46% saw themselves as savers as compared to only 9% who saw themselves as investors. Finally, 40% of those interviewed worried about the state of their finances.
ETF Graveyard Grows as Leveraged Funds Fall Victim to Calm
Carolina Wilson – Bloomberg
Add another item to the list of things low volatility is doing to the market: record amounts of ETF closures.
By the end of September, 42 exchange-traded funds are set to close, the most ever in a single month, according to data compiled by Bloomberg. Of those, 21 are leveraged or inverse funds, which tend to attract investors when prices are volatile but can fall out of favor when stocks are as calm as they have been all year.
****SD: Hah – an ETF with the ticker DULL is closing.
Sun Trading up for sale as sector struggles with low volatility
Joe Rennison and Nicole Bullock – Financial Times
Sun Trading has become the latest proprietary trading firm to come up for sale, according to people with knowledge of discussions, as the industry grapples with historically low volatility and heightened competition.
Interactive Brokers Announces Strategic Investment in Tiger Brokers
Interactive Brokers Group, Inc., the largest US electronic broker based upon daily average revenue trades, announced today that it has agreed to make a strategic investment in Tiger Brokers, an online stock brokerage startup established for global Chinese retail and institutional clients.
The Next Step in the Fed’s Beautiful Normalization
Mohamed A. El-Erian – Bloomberg
The Federal Reserve on Wednesday is expected to provide details on the implementation of the next step in what so far has been an orderly gradual multiyear normalization of unconventional policies, a process that has confounded many who saw the May 2013 “taper tantrum” as a precursor to the unsettling volatility to come. Here is how to think about the what and the why, and their potential implications for what’s ahead.
Exchanges and Clearing
Eurex Group – Fixed Income Highlights
Fixed income markets have remained relatively resilient despite the slow-down in global markets overall. Both futures and options volumes are up versus previous years as geopolitical risks and central bank divergence continue to be the main drivers. Open interest across fixed income markets remains robust despite the underperformance of realized volatility. Although government bond spreads have remained in relatively tight ranges, we have seen a small widening, which has helped volumes in periphery products. The flat Euro yield curves are helping suppress volatility in the long-end. When we do witness spikes in volatility they continue to be short term and a lot of risk premium had been taken off the table in the summer month. Implied volatility also remains low and hence there is the concern that the market is underpricing geopolitical and event risk.
****SD: Options on Euro-BTP futures (BTP referring to Italian bonds) will Launch October 2. Options volumes on Euro-Bund, Euro-Bobl and Euro-Schatz futures in August 2017 compared to August 2016 are up 103.06, 48.94 and 120.50 percent respectively. Not too shabby.
At Deutsche Boerse, time and support dwindle for CEO Kengeter
Tom Sims and Andreas Framke – Reuters
Support for Deutsche Boerse CEO Carsten Kengeter on the exchange group’s supervisory board is weakening as investigations into insider trading allegations drag on, according to a person with knowledge of the matter.
How to Efficiently Put Alternative Data to Use
Paul Lashmet, North Castle Integration LLC – TABB Forum
Alternative data could be any type of data, depending on your point of view. What’s unique or new to one will be common and well understood by another. What are the challenges of leveraging alternative data, and how can firms put alternative data to use in the most efficient and practical manner possible?
Regulation & Enforcement
EU-US officials ‘negotiating intensely’ to avoid market schism from Mifid rules
Philip Stafford – Financial Times
A transatlantic regulatory deal to prevent incoming Mifid II rules from splitting securities and derivatives markets may be finalised with just a few weeks to spare, according to a senior EU official.
Ahead of the Mifid II implementation in January, one outstanding issue is that Europe will have to recognise countries like the US as having equivalent market rules.
Breaking: Binary Options Technology Provider Former CEO Arrested in New York
Victor Golovtchenko – Finance Magnates
In what appears to be a first for the industry, the Chief Executive Officer of a binary options technology provider has been arrested in New York. The event took place two days ago after an investigation led by the FBI claimed wire fraud and conspiracy to facilitate wire fraud charges were brought forward.
If I Knew Then What I Know Now
Euan Sinclair – Highly Evolved Vol
I love cars (actually I find engineering in general fascinating). When I was about eight I was watching a Formula One race and the commentators mentioned that the current car was a big improvement over that of the year before. I remember vividly that this struck me as odd. If the same people made the improved car, why didn’t they just make that version first? Whether this thought was unusually astute or just stupid isn’t the point here. The point is that we can’t improve until we have something to improve on. We don’t just learn from mistakes, we also improve on our successes.
Why Selling a Big Position of Puts the Day Before the Crash of ’87 was a great trade
Jim O’Shaughnessy – What Works on Wall Street
Tada Viskanta saw a series of tweets I did when reading about the new book, “A first Class Catastrophe” by Diana B. Henriques which chronicles the 1987 crash, the largest one-day crash in U.S. Market history and he urged me to write up my experience at the time. While I have not yet read the book, in my tweets I reminisced about what it felt like to me. I was 27 years old and had been investing—or more properly—speculating in the market since age 21.
At the time, I was using a much different methodology for determining buys and sells then I do now, and I had, for several weeks before the crash, been accumulating a large put position on the OEX, which represented the S&P 100.
Block Trade Analysis: Big Emerging Market Index Put Sale
Russell Rhoads – CBOE
Everyone knows the equity markets have been putting up a solid 2017. The S&P 500 is up about 12% and developed markets, excluding North America, as measured by the MSCI EAFE (MXEA) Index is up about 17.5% for 2017. However, emerging markets, as displayed by the performance of the MSCI Emerging Markets Index (MXEF) has gained almost 29%. The chart below shows the performance for MXEF in 2017.
Short Strangles: No Need For Bullish Bias
Sage Anderson – tastytrade blog
Whenever the next protracted selloff does materialize, there’s absolutely no doubt that many traders in the market will increase their long delta exposure.
While that may be the appropriate course of action for some investors, new research published by tastytrade suggests that volatility traders may be best served checking a long delta bias at the door – especially as it relates to short premium strangles.
****SD: Blog from tastytrade Monday was Evaluating Opportunities in Precious Metals
Short vol trade keeps raking in gains
Reuters via Times of India
Investors don’t appear ready to give up on the short-volatility trade just yet; $1.3 bln in shorts on three volatility ETPs post double-digit percentage gains over one week (S3 Partners data, see table
****SD: Business Insider has more here.
Is Hurricanes’ Impact Beginning to Ripple Through to Economic Data?
Bruce Blythe – The Ticker Tape
Massive natural disasters like Hurricanes Harvey and Irma take relatively little time to devastate entire cities; recovering and rebuilding of course takes a very long time—months and years.
Social Proof in the Markets
Ben Carlson – A Wealth of Common Sense
The world has a strange way of not ending, despite the prognostications for the end of days by a number of cult leaders over the years.
Why Do Options Prices Move So Much?
Thursday, September 21; Time: 3:30 – 4:30 p.m. CT
There is a rational reason why option prices move the way they do. There are a number of moving parts that impact an options price. Believe it or not, those factors are easy to understand. Join our panel as we build on last week’s webinar on the “greeks”. We’ll offer a number of perspectives on what to focus on when it comes to understanding option prices in your portfolio.
Stock bull market is 2nd best since World War II
We’re officially in the second-largest bull market since World War II.
A week ago Monday, the S&P 500 index’s bull market became the second-best performing in the modern economic era. Stocks have climbed by about 270% from their March 2009 low over the past eight years, according to data from LPL Financial.
TALKINGPOINT: Valuing embedded optionality and other complexities in energy contracts
FW moderates a discussion on the complexities of energy contracts between Dr James Dimech-DeBono, Patrick Hébréard and Nils von Hinten-Reed at CEG.
****SD: This read is not for the faint hearted.
Deutsche Bank ‘Beyond Repair’ as Trading Drops, Autonomous Says
Deutsche Bank AG may be “beyond repair” unless there’s a “miracle” boom at its once-mighty bond-trading business, according to Autonomous Research LLP.
Toys ‘R’ Us Will Live Because Mattel and Hasbro Can’t Let It Die
Matthew Townsend and Eliza Ronalds-Hannon – Bloomberg
Rest easy, kids. Toys “R” Us Inc. isn’t going anywhere, at least not if the makers of Barbie and Transformers have their way.
The toy chain filed for bankruptcy-court protection Monday night, another in a string of specialty retailers felled by Wal-Mart Stores Inc., Amazon.com Inc. and the rest of the online onslaught. Toys “R” Us had been hobbled by more than $5 billion in debt, which required over $400 million a year to service.
****SD: Since I wrote about the Toys R Us effect and some related options market activity yesterday, the above is some more on the story. And then there’s also Bloomberg’s How Toys ‘R’ Us Collapsed So Quickly; Bain, KKR, Vornado Suffer Wipeout in Toys ‘R’ Us Bankruptcy and It’s Not Just Toys ‘R’ Us. More Credit Weak Spots Emerge. Something for everyone in this story.