Breaking News

Grain volatility and La Niña; Chicago futures options fraud case; Cboe on crypto


Observations & Insight

An Update on the Consolidated Audit Trail

At STAC’s 92nd Annual Mid-Winter Meeting, JLN spoke with Shane Swanson, chief compliance officer with Thesys CAT LLC, about the state of the Consolidated Audit Trail (CAT). The CAT will be a large trade data repository for options and equities used for surveillance and tracking. Thesys CAT is the recently formed subsidiary of Thesys Technologies tasked with developing the CAT.

The plan was intended to go live in November 2017, but as the date neared, the SROs put in a one year exemptive request. While the SEC has not granted the request, it did agree to work toward a new timeline. In the interim, the industry is using the proposed November 2018 deadline as a guidepost. Now, Swanson says Thesys CAT is in an iterative process that will have much more industry involvement.

A new draft of the industry spec will be ready on February 15, with a final spec ready in late October 2018. Feedback and questions are encouraged.
Watch the video and read the rest here »

Lead Stories

La NiÒa: Grain Options’ Implied Volatility Languishes (VIDEO)
Erik Norland – CME Group
Grains are showing little concern for the La NiÒa in the Pacific Ocean, with options’ implied volatility for corn and soybeans languishing.

Chicago Futures Trader Pleads Guilty to Fraud That Sunk His Firm
David Glovin – Bloomberg
Chicago futures trader Thomas Lindstrom pleaded guilty to federal charges stemming from a $13 million fraud that led to the collapse of his firm, the U.S. said.

****SD: He used OTM treasury options to misrepresent the performance of the firm and thus inflate his pay.

Cboe ‘Measured’ on Crypto
Shanny Basar – MarketsMedia
Ed Tilly, chairman and chief executive of Cboe Global Markets, said the US exchange is taking a measured approach to cryptocurrencies after launching and conducting the first settlement of bitcoin futures.

****SD: A little heavy on crypto news today as options content is a little thin (but it’s all tangentially related).

Popularity of bonds driven by risk aversion
Alice Ross – Financial Times (Subscription)
Fixed-income assets were unusually popular last year among UK investors. In a year when big equity indices worldwide rose by more than a tenth, fixed income was the best-selling asset class for six months in a row, according to the Investment Association, the UK trade body.

****SD: Silver lining to this as pertains to the newsletter – “BlackRock managers have increasingly protected multi-asset portfolios via derivatives.”

It’s starting to feel a little bit like 2006, Barclays CEO warns
Silvia Amaro – CNBC
Sudden changes in volatility and monetary policy could spark an “interesting” period for stock markets in the next couple of years, the CEO of Barclays warned Thursday.
Speaking at the World Economic Forum in Davos, Jes Staley noted that financial conditions are somewhat reminiscent of the run-up to the global financial crash of 2008.

Exchanges and Clearing

NYSE, Nasdaq Fighting to Keep Their Grip on the Stock Market’s Close; The SEC gave rival Cboe the green light for its closing-auction plan last week
Alexander Osipovich – WSJ (Subscription)
The New York Stock Exchange and Nasdaq are making a last-ditch effort to retain their grip on the crucial 4 p.m. closing auctions that determine end-of-day prices for thousands of stocks. The two big exchange groups will appeal a regulator’s decision that would allow a rival, Cboe Global Markets, to siphon off trading activity from the closing auctions for NYSE- and Nasdaq-listed securities, threatening the two firms’ revenues from trading fees. The duo revealed their plans to keep fighting Cboe’s plan in filings posted late Wednesday on the website of the Securities and Exchange Commission.

****SD: There is an expectation that altering the close could affect volatility.

CME Group Announces All-Time Daily Open Interest Record for Eurodollar Futures of 14.5 Million Contracts
CME Group
CME Group, the world’s leading and most diverse derivatives marketplace, today announced it reached an all-time daily open interest record for Eurodollar futures of 14.5 million contracts on Jan. 23, 2018. The previous single-day open interest record was 14.4 million contracts, set on Dec. 13, 2017.

****SD: The record is in futures, but obviously options are a part of this trend.


Chicago HFT embarks on cryptocurrency hiring drive
Samuel Agini – Financial News
A leading US proprietary trader is hiring cryptocurrency experts at home and abroad as the world’s big financial firms differ on whether or not to embrace the booming, but volatile, market for digital money. Chicago-based DRW Holdings has been an early mover in this area. Its Cumberland Mining unit has been active since 2014, trading around 20-30 cryptocurrencies including bitcoin, ethereum, zcash and monero.

****SD: Can’t stop, won’t stop.

A Wall Street behemoth is going after top tech talent with a worldwide competition
Frank Chaparro – Business Insider
Citadel and Citadel Securities are looking to attract top tech talent with a worldwide data competition. Such talent is in high demand as data revolutionizes Wall Street and other fields.

Regulation & Enforcement

Regulators Are Looking at Cryptocurrency; At the SEC and CFTC, we take our responsibility seriously.
Jay Clayton and J. Christopher Giancarlo – WSJ
Distributed ledger technology, or DLT, is the advancement that underpins an array of new financial products, including cryptocurrencies and digital payment services. Many have identified DLT as the next great driver of economic efficiency. Some have even compared it to productivity-driving innovations such as the steam engine and personal computer.

Japan’s FSA Will Not Support Cryptocurrency Futures, For Now
Adam Reese – ETH News
An official with Japan’s financial regulator has said that it will not allow the sale of cryptocurrency futures on the country’s exchanges any time soon, though it may revisit the matter later.

Seoul mulls taxation on virtual currency transactions: finance minister
Yonhap News Agency
South Korea is considering imposing taxes on virtual currency transactions as part of its efforts to curb excessively speculative investment in cryptocurrencies, the country’s top economic policymaker said Thursday.


Robinhood adds zero-fee cryptocurrency trading and tracking
Josh Constine – TechCrunch
No-commission stock trading app Robinhood will let you buy and sell Bitcoin and Ethereum without any added transaction fees starting in February, compared to Coinbase’s 1.5 to 4 percent fees in the US. And as of today Robinhood will let all users track the price, news, and set up alerts on those and 14 other top crypto coins, including Litecoin and Ripple.

****SD: This comes on the heels of Robinhood announcing it was launching free options trading. And of course it corresponds to the big news of the day regarding TT and GDAX – see below.

Trading Technologies and Coinbase Announce a First-of-its-Kind Bridge Between the Futures and Cryptocurrency Markets
Trading Technologies
Trading Technologies International, Inc. (TT), a global provider of high-performance professional trading software, and Coinbase, which owns and operates Global Digital Asset Exchange (GDAX), one of the world’s largest and most trusted digital asset exchanges, today announced a strategic partnership to provide professional cryptocurrency trading functionality and market access to the institutional trading world. Beginning March 2018, the partnership will allow TT customers to trade both spot and derivative markets side by side for the first time.

****SD: More context from JLN here.


BAML: Global markets are ‘starting to get a little stretched’ ó here’s how we’re guarding against a downturn
Akin Oyedele – Business Insider (Soft Paywall)
Markets are “starting to get a little stretched” as they grind higher, says James Barty, the head of global cross-asset and European equity strategy at Bank of America Merrill Lynch.
With US stocks already up 6% this year, Barty’s team has moved the options positions they are using to protect against a sell-off to higher strike prices.
Stocks could have another double-digit gain this year, thanks to earnings and economic growth, he said.

Billionaire investor Howard Marks says investors are getting desperate
Joe Ciolli – Business Insider
Howard Marks thinks investors are being pushed to extreme means to make money in this market.
In his year-end 2017 memo, the billionaire founder of the hedge fund Oaktree Capital lamented the lack of potential returns across a wide range of asset classes, which he says has traders behaving in uncharacteristic fashion.

Can anything stop the stock market’s relentless rise?
Stan Choe and Marley Jay – Chicago Tribune
It’s been 365 days since the Dow Jones industrial average first crossed 20,000, and it’s already up another 30-plus percent as the stock market’s relentless rise to records keeps going.
Few market watchers see a sharp reversal for stocks anytime soon, at least this year. But press them on what could possibly derail the market’s run, and they usually land on a similar list of potential threats.

Speculative Exposure At An Unprecedented Level
The price of the puts compared to calls is 2 standard deviations below the 5 year average as you can see in the chart below. You would think with stocks going up in a straight line, investors would seek to buy protection to lock in their gains. However, euphoria makes investors care less about the downside; stocks haven’t had a 5% correction in almost 400 trading days. Secondly, put buying gets expensive if you must keep rolling it over and it never ends up being worth anything. It’s like buying an expensive back up oxygen tank when you go in a submarine (assuming you need to buy a new one every time you go in it). Shorting the VIX, selling puts, and buying calls have been trades that have worked for a while.


Blackstone’s Disputed CDS Trade Set for Court Hearing
Sridhar Natarajan and Chris Dolmetsch – Bloomberg
A deal struck between Blackstone Group LP’s GSO Capital Partners and a homebuilder that has gripped traders and investors in the credit derivatives market will get its day in court.
The plan hatched on the sidelines of a marquee conference in Miami and set in motion in the final hours of 2017 is now at the center of allegations of fraud and manipulation that will be addressed Thursday in Manhattan federal court. Hedge fund Solus Alternative Asset Management wants to temporarily block GSO and the builder, Hovnanian Enterprises Inc., from completing the funding deal pending outcome of its suit.

****SD: Not options. Just nutty.

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Graduate of University of Minnesota School of Journalism and Mass Communication