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VIX short fears overblown; Rule-based monetary policies to keep vol low; G-Sib postponed

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Observations & Insight

Showerthoughts: Lewis in 1989, Gambling and Edge
Spencer Doar – JLN

From “Liar’s Poker” –

“…The attraction of options and futures, our specialty item, was that they offered both liquidity and fantastic leverage. They were a mechanism for gambling in the bond markets, like superchips in a casino that represent a thousand dollars but only cost three. In fact, there are no superchips in casinos; options and futures have no equivalent in the world of professional gambling because real casinos would consider the leverage they afford imprudent. For a tiny down payment, a buy of a futures contract takes the same amount of risk as in owning a large number of bonds; in a heartbeat can double or lose his money.” – Michael Lewis

Yet, there are indeed instances where casinos get caught (albeit accidently) providing better odds to gamblers.

The above quote came to mind when reading about Phil Ivey. Ivey, an internationally renowned gambler, lost his case yesterday against a London casino who accused him of cheating using the technique known as “edge-sorting” during games of baccarat in 2012. Edge-sorting helps players spot minute differences in the backs of card designs. He won some $10 million. The whole affair is fascinating and not just limited to his London adventure.

Ivey claimed it was a legitimate means of gaining, well, an edge and the casino disagreed. The court sided with the casino.

This is philosophically intriguing when it comes to examining the notion of an “edge” since Ivey lost the case when every one of his actions were approved by the casinos in question.

The Financial Times had a story yesterday about traders trying to find an edge through natural language processing.

Let’s just hope whatever edge you find doesn’t land you in the sights of lawyers.


Lead Stories

VIX short volatility stock market fears look overblown
Joe Ciolli – Business Insider
For months, stock market doomsayers have warned about the glaring lack of price swings taking place.
And they’ve been particularly harsh on the herd of investors betting against volatility, arguing that the quick profits they’re enjoying are setting the market up for a catastrophic event in the longer term.

****SD: Hah! Yesterday was what? Like a .4 percent decrease in the S&P 500? Give us 2 or 3 percent down and let’s see what happens.

Rule-Based Monetary Policies Will Keep Volatility Low
Ben Emons – Bloomberg
The global economy is enjoying its first synchronized upswing since 2007. As a result, more central banks are looking to retreat from quantitative easing and other unconventional monetary policies implemented in the wake of the worst financial crisis since the Great Depression. The latest example is the European Central Bank, which will likely announce on Thursday that it will cut its monthly bond purchases by as much as half to 30 billion euros ($35.3 billion).

Fed postpones G-Sib capital change; Industry reprieve granted on proposal that threatens $10 billion capital increase
Louie Woodall – (Paywall)
The Federal Reserve has delayed the implementation of a controversial change to the way it assesses systemic risk, which could increase capital requirements for the largest US banks by more than $10 billion.
On October 23, the Fed revised a proposed rule change first published on August 24, which would oblige banks to include all cleared derivatives transactions in its Banking Organization Systemic Risk Report, known as FR Y-15. The revision pushes back the proposed implementation date of the change from December 31 this year to March 31, 2018. It also extends the original comment period by 30 days to November 23 this year.

****SD: Sometimes when I access this it’s paywalled, and sometimes it’s open. Try your luck as the G-Sib is a big issue.

Earnings Are Fraying Nerves Already With Amazon and Google Still to Come
Cecile Vannucci – Bloomberg
Maybe it’s because there’s so little volatility in the market, but this earnings season is proving a particularly jarring one in individual stocks.
That’s according to Goldman Sachs Group Inc., which looked at 67 companies that posted results and found their shares moved an average 4 percent after earnings this quarter, among the biggest reactions of the past five years. Commodity and industrial stocks have had the biggest fluctuations, said the report, which examined firms with liquid options trading.

****SD: Seems like it’s always earnings season these days.

Stock Rally Is Trump’s Magical Market Mystery Tour
Stephen Gandel – Bloomberg
The market is threatening to have its first three-digit down day for the Dow Jones Industrial Average since early September.
Even so, the market has been on a remarkable run recently. In the past 30 trading days, the market has been down just nine, the worst of which looks to be Wednesday, with the Dow off more than 140 points, or 0.6 percent, and the S&P 500 Index down about the same. Still, the market is up more than 14 percent this year, and roughly 19 percent since President Donald Trump was elected — the Trump Bump. The president has not been shy about trumpeting the advance, citing it frequently as a barometer of the success of his administration.

****SD: I’m having some trouble imaging President Trump rocking out to The Beatles in the Oval Office.

NOT The Only Thing To Fear
Brad Zigler – WealthManagement
In the darkest days of the Great Depression, Franklin Roosevelt’s first inaugural address exhorted the country to look unflinchingly toward recovery by saying “the only thing we have to fear is fear itself.”

Breaking Through: Brynne Kelly, Part 1
Kara Grygotis – Trading Technologies
Welcome back to Breaking Through: How Three Women Took on the World of Trading, our blog series interviewing female trading pioneers. In our first spotlight, we spoke with Margie Teller, who navigated her way through the CME trading pits to become a floor trading Hall of Famer. If you missed it, see Breaking Through: Margie Teller, Part 1 and Breaking Through: Margie Teller, Part 2.

Exchanges and Clearing

The largest options exchange in the US is moving in on a $1.6 billion bitcoin opportunity
Business Insider via
Bitcoin represents a $1.6 billion revenue opportunity for Wall Street’s exchanges.
That’s according to a wide-ranging report on cryptocurrencies by Bank of America Merrill Lynch, which said exchanges could benefit from a “significant revenue stream” from bitcoin. And one exchange group has moved to the front of the queue to take advantage of this potential opportunity.

****SD: A fun companion from Quartz – Even Wall Street’s “dean of valuations” can’t value bitcoin. If you missed the Tod Skarecky of Clarus Financial Technology piece from Tuesday, Bitcoin Meets OTC Derivatives, check it out.

MIAX Offers Historical Options Data
Max Bowie – WatersTechnology (Paywall)
MIAX will provide historical data corresponding to its Top of Market (ToM) feed, its Administrative Information Subscriber (AIS) feed, its MIAX Options Order Feed (MOR), and the Complex Top of Market (cToM) feed from its MIAX Options market, and the Top of Market (ToM) feed and Pearl Liquidity feed from its MIAX Pearl market.

Carsten Kengeter To Step Down As CEO Of Deutsche Börse As Of 31 December 2017
Carsten Kengeter today informed the Supervisory Board of Deutsche Börse AG (DBAG) that he would like to step down as Chief Executive Officer of DBAG effective 31 December 2017 in order to allow the company to focus on business, clients and growth, and to avoid further burdens caused by the ongoing investigation.

****SD: Can’t say this came out of nowhere.

CME Group Inc. Reports Strong Third-Quarter 2017 Financial Results
CME Group
CME Group Inc. today reported revenue of $891 million and operating income of $568 million for the third quarter of 2017. Net income was $309 million and diluted earnings per share were $0.91. On an adjusted basis, net income was $406 million and diluted earnings per share were $1.19. Financial results presented on an adjusted basis for the third quarters of 2017 and 2016 exclude certain items, which are detailed in the reconciliation of non-GAAP results.

****SD: Reuters with the breakdown – CME profit beats on higher transaction fees

Intercontinental Exchange to Launch SONIA Futures Contract
Intercontinental Exchange
Intercontinental Exchange, a leading operator of global exchanges and clearing houses and provider of data and listings services, today announced that on December 1, 2017, ICE Futures Europe expects to launch a new one month, cash-settled futures contract based on the Sterling Overnight Index Average (SONIA) rate.

****SD: This comes the day after CurveGlobal announced plans to list futures on SONIA. Coincidence?


Citadel data chief leaves three months after joining from Uber
Financial News (Soft Paywall)
Citadel’s chief data officer has left only three months after joining the hedge fund firm from ride-hailing app Uber, according to people familiar with the matter.
Laszlo Korsos, formerly of Uber Technologies, Goldman Sachs and Nuveen Investments, has stepped down as Citadel’s chief data officer, the people said.

RJ O’Brien taps Giemza to lead risk department
Global Investor Group (Paywall)
US broking firm RJ O’Brien has appointed finance veteran Brad Giemza as managing director and chief risk officer.

Regulation & Enforcement

Judge denies CFTC request to drop mediation in binary options fraud case
Maria Nikolova – FinanceFeeds
Judge Timothy J. Corrigan of the Florida Middle District Court denied the CFTC motion to withdraw reference from mediation of the so-called “Millionaire Money Machine” case against binary options fraudsters.

Deutsche Bank to pay $220 million in U.S. Libor probe
Jonathan Stempel – Reuters
Deutsche Bank AG has agreed to pay $220 million to settle U.S. regulatory charges that it defrauded government and nonprofit entities by manipulating Libor and other benchmark interest rates.


FinTech opportunities and challenges mapped out at FIA Expo in Chicago
Brad Rosen – Jim Hamilton’s World of Securities Regulation
In his address before the 33rd FIA Futures & Options Expo held in Chicago, Illinois, CFTC Chief Innovation Officer, Daniel Gorfine, provided updates for LabCFTC initiative launched earlier in the year, surveyed the fintech landscape including significant areas of innovation, and identified related opportunities and challenges, as well as the evolving role of the CFTC.

Exploring the Three C’s of Cloud Technology
Karl Wyborn, CloudMargin – TABB Forum
For many, the term ‘cloud technology’ conjures up images of storing data somewhere outside the firm’s computers. And the cloud often is associated with lower costs and increased agility. But this only scrapes the surface of what cloud technology is about. It doesn’t explain why cloud technology is becoming so dominant and why fintech companies are virtually all cloud-based.


CBOE: Straightforward Pick With 15% Upside
Warren Fisher – Barron’s (Partial Paywall)
Unlike most financials, CBOE Global Markets has a fairly straightforward business model.
Even without a full understanding of complicated derivative strategies, an analyst can easily model this business. With monthly volume updates and daily information on trading statistics and market share on its website, any analyst can track a real-time tally of CBOE’s (ticker: CBOE) transactions. While the commission rate on these products varies, it is essentially a transaction-based business model.

****SD: We usually don’t have much on stock prices of exchanges, but CBOE is kind of remarkable when comparing charts. The major exchanges are all up over the course of the last year – ICE went from $53 to $65, CME from $102 to $136 and Nasdaq from $64 to $72 – but CBOE’s path is a linear trajectory up while the other three have had much more choppy action along the way up.

Growth stocks beating value options for a good reason
Miles Johnson – Financial Times (Subscription)
The quip that the long rally in US equities is “the most hated bull market in history” has become so frequently repeated it risks becoming a modern financial cliché. Less common is the simple question: who exactly are the grumps doing all this hating?

How To Hedge Against A Stock Market Plunge: Bank of America
Mark Kolakowski – Investopedia
Despite historically high valuations, investors seem to be ignoring the risks inherent in equities, even as the major market indexes soar to record levels. Additionally, there is “elevated geopolitical and policy risk globally” that could send the markets plunging, warns Nikolay Angeloff, equity derivatives strategist at Bank of America Merrill Lynch (BAML), in a research note quoted by CNBC. Indicative of what may be irrational exuberance in the stock market, Angeloff indicates that, as of his writing on Tuesday, 334 days had passed since the last 5 percent pullback, the fourth longest stretch of this kind since 1928, just before the 1929 stock market crash that preceded the Great Depression of the 1930s.

****SD: Another rundown of BAML’s call from yesterday.


Passive Should Never Laugh at Active
Kevin Muir – The Macro Tourist
…But first, let me tell you a story. I was lucky enough to have a ringside seat for the coming of age of equity index derivatives. Sure they existed before my time, but the true widespread global adoption occurred in the 1990’s. In Canada, when I first sat down on the institutional desk, clients had little interest in what the young kids with their fancy SUN workstations were doing. Yet as money flowed into the derivatives complex, what had first just been a strange little science experiment, suddenly started moving the underlying market. Our index arbitrage flows became significant, and regular plain vanilla clients began took notice.

METALS-London aluminium hits over 5-year high on China supply cuts
London aluminium surged to its highest in more than five years on Thursday on expectations of dwindling supply of both aluminium and its raw materials, as China imposes restrictions on industrial output over winter.

David Davis warned over Brexit vote promise for MPs
The government is under pressure from rebel Tory MPs and Labour to guarantee a Commons vote on Brexit before the UK leaves the EU in March 2019.

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Graduate of University of Minnesota School of Journalism and Mass Communication