Observations & Insight
What Organizations Need to Know about Risk Culture Audits
John Fennell – Risk Management Monitor
Today’s risks require more proactive oversight by boards of directors on the issue of risk management. Transitioning to this approach is easier said than done, however. The trouble is that many organizations are weighed down by antiquated risk management frameworks that prevent them from being proactive. Even today, how financial services and other industries address risk is deeply ingrained in organizations’ character, requiring a broader change which extends beyond simply implementing new risk management frameworks.
U.S. Securities Markets Coalition Opposes Senator Wyden’s Proposed Amendment “Modernization of Derivatives Tax Act of 2017”
The members of the U.S. Securities Markets Coalition (the “Coalition”) write to share our opposition to Senator Wyden’s filed amendment (Wyden #11, Committee #155) to the Chairman’s Mark of the Tax Cuts and Jobs Act that would add the language of his proposed Modernization of Derivatives Tax Act of 2017.
VIX-Yield Curve: At the Door of High Volatility?
Erik Norland – CME Group
We freely admit: Figure 1 is probably the strangest chart that you will ever see, at least in finance. You may be wondering: did they throw blue spaghetti noodle on paper for inspiration and then write an economics article about it? Or, have they spent too much time with disciples of psychologist Timothy Leary, a proponent of experimenting with psychedelic drugs?
****SD: Can’t argue with the blue spaghetti comment. I haven’t seen charts that look like these… ever? Maybe I accidentally drew something similar in Microsoft Paint back in the day.
Option Traders See Limited Pound Gains on Brexit Bill Deal News
Vassilis Karamanis – Bloomberg
Demand for outsized swings falls as worst outcome avoided; Implied volatility rises, yet stays below recent averages
Option traders got it right when they played down hype that next month’s European Union summit could be a one-stop shop for Brexit solutions. They are now betting the pound’s latest rally will be short-lived.
S&P 500 sector correlations near record lows
Joe Rennison – Financial Times (Soft Paywall)
Credit Suisse said on Wednesday that the correlation between price movements in different sectors of the S&P 500 is approaching a new record low, contributing to a lack of volatility in markets that echoes the build-up to the bursting of the tech bubble.
These Market Moves Are Masking Trouble Beneath the Surface
Lu Wang and Sarah Ponczek – Bloomberg
It seems like every few weeks, the bull market’s foundation starts to creak, and then a handful of stocks show up to keep it from toppling. Retailers plunge, Amazon gains. Insurers buckle, Home Depot jumps. Cable firms fall and Netflix rises.
Tyler and Cameron Winklevoss Discuss Bitcoin and Bitcoin Futures at FIA Asia
Russell Rhoads – Cboe
One of the first points made was that electronic money transfers between countries often take longer than physically moving cash. For example, if you wanted to transfer money from New York to Singapore on a Friday afternoon, it may be quicker to fly the physical cash across 15 time zones as opposed to using banks for a transfer. In the crypto space you can transfer bitcoin as quickly as it takes to send an email.
****SD: Rather unfortunate they had to get on stage the day their exchange went down.
Crypto derivatives arrive early in nascent market – panel
Jack Ball – Global Investor Group (SUBSCRIPTION)
Newly announced derivatives on bitcoin could potentially be too early given the nascent stage of the cryptocurrency’s cash market, according to a panel of experts.
“I think the derivatives that are coming in could potentially be early for the state of development of the cash market,” said David Olsen, who oversees post trade strategy at Chicago-based proprietary trading firm Jump Trading, during a panel discussing Asia’s automated trading landscape.
****SD: Speaking of Jump Trading, recall the news yesterday about some personnel moves – CTO Steve Hunt and Head of Liquidity Strategy Samuel Tegel are leaving/have left the firm.
Liquidity And Volatility – A Direct Linkage.
John Davi – ValueWalk
Are you surprised by VIX sub 10? You shouldn’t be. There is a direct linkage between liquidity and volatility as shown in the chart below.
Exchanges and Clearing
Other Voices: An Open Letter on Bitcoin Futures
Carl Gilmore via John Lothian News
A lot of ink has been spilled over bitcoin and its variants. Lately, the conversation seems to be focused on whether trading bitcoin futures is a good idea. For what it’s worth, my view is that it isn’t a good idea – it’s a great idea.
Gold: Options converted into gold futures in first settlement
Ram Sahgal – The Economic Times
Mumbai: The first settlement of gold options took place on commodity derivatives bourse MCX on November 28, with 47 lots (1 lot is 1 kilo) being converted into underlying gold futures contracts, market sources told ET. They termed the event a “fair success” given it’s the settlement of the first new product launched in the commodity derivatives market since its inception 24 years ago.
****SD: Kind of nuts it’s been 24 years.
Bitcoin Volatility Intensifies While Exchanges Struggle With Demand
Lily Katz and Eric Lam – Bloomberg
Bitcoin continues its reversal from the all-time high, slumping as much as 11 percent Thursday, as online exchanges struggle to keep up with a jump in customer interest.
Increased importance of renminbi brings opportunities – HKEx chief
Global Investor Group (SUBSCRIPTION)
Some of the major “transformative opportunities” for Hong Kong Exchanges and Clearing (HKEx) stem from the increasing importance of the Chinese currency on the global stage, according to the exchange group’s chief executive Charles Li.
Nasdaq Preps for Bitcoin Futures
Rob Daly – MarketsMedia
The competition in the bitcoin futures market unexpectedly grew a bit more crowded as a Nasdaq client leaked the exchange operator’s plans to list bitcoin futures to the Wall Street Journal.
****SD: In case you missed it.
Euronext Buys Irish Stock Exchange for ETFs in Brexit Play
Peter Flanagan, Viren Vaghela, and Will Hadfield – Bloomberg
Euronext NV is expanding into Ireland by acquiring the nation’s stock exchange, a hub for ETFs that’s set to benefit as financial activities leave the U.K. after Brexit.
****SD: In case you missed it.
Regulation & Enforcement
Remarks Of CFTC Commissioner Brian Quintenz At The Technology And Standards: Unlocking Value In Derivatives Markets Conference London, United Kingdom
Innovation is the ever-present theme of our time. Change is all around us, motivating us, challenging us: new technologies result in new products, new processes, even new commodities in the global marketplace. Indeed, Spitalfields is an appropriate place for this discussion as any.
****SD: Lot of ground covered in this address.
Bitcoin and other cryptocurrency derivatives – Why The CFTC Needs To Step Up To The Plate
The paper cites a remarkable open letter printed in The Wall Street Journal, November 15, 2017, addressed to J. Christopher Giancarlo, the Chairman of the Commodity Futures Trading Commission. The letter, Dangers of Clearing Bitcoin and Cryptocurrency Derivatives in Same Clearing Organization and Other Products, by Thomas Peterffy, Chairman of Interactive Brokers, reacted adversely to a proposal by the Chicago Mercantile Exchange to allow Bitcoin and other cryptocurrency derivatives to be cleared in the same clearing organization as other products.
SEC Nominees Face Delay as Democratic Senator Puts Up Roadblock
Dave Michaels – WSJ (SUBSCRIPTION)
A Democratic senator says she won’t agree to quickly confirm two nominees to the Securities and Exchange Commission until they outline their views on whether regulators should rein in activist investors, stock buybacks and executive pay.
Amazon adopts open cloud technology as competition heats up
Salvador Rodriguez – Reuters
Amazon.com Inc on Wednesday announced its adoption of Kubernetes, a popular open-source technology, in a sign of increased competition in the cloud computing business, which Amazon Web Services has long dominated.
E*TRADE Adds Snapshot Analysis and Option Testing to Active Trading Platform
E*TRADE, the New York-based online brokerage, added new technology to its ActiveTrader platform this week, including snapshot analysis and an option income backtester tool.
Christopher Lee Fix appointed to the board of Bursa Malaysia Derivatives
New Straits Times
Bursa Malaysia Bhd has appointed Christopher Lee Fix to the board of directors of its subsidiary, Bursa Malaysia Derivatives Bhd and its clearing house, Bursa Malaysia Derivatives Clearing Bhd effective November 27.
Rob Finn Joins Citi from Deutsche Bank to co-Head its FX Options Unit
Jeff Patterson – Finance Magnates
Rob Finn is the latest foreign exchange veteran to shift employers in H2 2017. The longtime Deutsche Bank executive is heading to Citi after more than a decade, maintaining his focus on the FX options space in New York.
Adaptive Volatility: A Robustness Test Using Global Risk Parity
David Varadi – CSSA
In the last post we introduced the concept of using adaptive volatility in order to have a flexible lookback as a function of market conditions. We used the R-squared of price as a proxy for the strength of the trend in the underlying market in order to vary the half-life in an exponential moving average framework.
****SD: Ready for a heavy piece? No? Then don’t click on this.
Diversifying an Options Portfolio
Sage Anderson – tastytrade blog
Traditional investment philosophy tells us that diversifying our portfolios is a good method of reducing concentrated exposure(s).
While a volatility approach is far from traditional, some aspects of “diversification” are still applicable to options trading. Concentrated exposure in the volatility realm is a potential pitfall, and must be actively risk-managed.
Rolling Option Calendar Spreads
The Ticker Tape
So you’ve put on an at-the-money calendar spread in XYZ (which is trading around $50 a share) by buying a deferred-month 50-strike call and selling a nearer-term 50-strike call. Fast-forward a few weeks. How did the spread fare? In other words, looking at figure 1 below, are you above or below that breakeven line? Hint: If the underlying hasn’t strayed too far from the 50-strike, you’re probably in the black thus far.
Options Trading and Holiday Markets
T.J. Neil – The Ticker Tape
It’s late December, and you’ve taken the last two weeks of the year off. The kids are visiting friends, your spouse is out doing some shopping, and you’re home all alone on a weekday. As an active retail trader, you decide to turn on your computer and take a look at the markets. With no work obligations, it seems like the perfect time to start making some trades … but is it?
****SD: Beware the junior traders manning the trading desk fort!
Where’s the volatility?
Ed Usset – Corn and Soybean Digest
If you failed to take advantage of Black Friday deals, you have another chance; options are at their lowest prices in years.
RMC Europe 2017: The Evolving Dynamics of VIX Futures (VIDEO)
Cboe via Youtube
Interview with Alex Orus, Founder and Partner, Principalium Capital AG.
****SD: A ton of other videos from the RMC at the Cboe’s Youtube video page.
RMC Europe 2017: Implementing Volatility Strategies within Institutional Portfolios (VIDEO)
Cboe via Youtube
Interview with Jack Hansen, Chief Investment Officer, Parametric-Minneapolis Investment Center.
Here’s why you can’t trust market signals any more
Nicholas Spiro – South China Morning Post
Over the past several weeks, the flattening of the so-called “yield curve” for United States government debt has become a focal point of market analysis and commentary. The yield curve – the line that plots the yields on bonds of various maturities – has been under increasing scrutiny since November 21 when the spread, or gap, between yields on 2- and 30-year Treasury bonds fell below 1 per cent, or 100 basis points, for the first time in 10 years.
Bitcoin: Everything You Need to Know
Paul Vigna – WSJ
The digital currency bitcoin jumped to a fresh high above $11,000 Wednesday before quickly dropping below $10,000 again. Its outsized gains this year however are sparking curiosity. If you’re curious but confused, here’s a brief explainer.
****SD: By my tally this is a 1000 word article – so no way it includes “everything” you need to know. You would probably need something close to the length of a Tolstoy work.