Breaking News

Shortwave Trading Mystery Continues; VIX ETF Love Affair

Observations & Insight

Sweet Home Chicago
SD – JLN

JLN’s first round of our annual MarketsWiki Education series wrapped up in New York on Wednesday – another successful installment with great speakers and a sellout crowd of interns. Thanks to all our speakers and sponsors and Nasdaq and Reuters for letting us use their spaces to host the TED-styled talks. After a late night delay at LaGuardia, the JLN team was back home a hair before midnight Wednesday night.

As we’re still piecing ourselves back together from the NY hecticness and heat, there will not be an episode of “The Spread” today, but there will be one early next week. There will be plenty to cover.

That being said, it is (unsurprisingly) a bit of a slow one on the options news front today – a hot, dog days, “see ya at the beach” example of the TGIF summer effect on markets. I’ll direct your eyes specifically to the shortwave trading lead story and the CFTC enforcement action against Lansing Trade Group.

Here is a question to chew on over the weekend: Which do you think would have the most immediate short term impact on options markets, revamping the Volcker Rule or adjusting the current exposure methodology (CEM)? Think about that same question as applied to the mid- and long-term, too.

Have a good weekend!

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CFTC Orders Commodity Trading Firm To Pay $3.4 Million Penalty For Attempted Manipulation Of Agricultural Markets
CFTC
The Commodity Futures Trading Commission (CFTC) today issued an Order filing and settling charges against Lansing Trade Group, LLC (Lansing), a commodity merchandising firm with headquarters in Overland Park, Kansas, for the attempted manipulation of the price of certain wheat futures and options contracts that were traded on the Chicago Board of Trade (CBOT) and for aiding and abetting the attempted manipulation of the cash price for yellow corn from Columbus, Ohio (Columbus Corn).
/goo.gl/LMptKY

****SD: This is very different from the usual regulatory penalties we have in the newsletter which pertain to some dummy trading OTM options based on insider knowledge (frequently in an illiquid name, which makes it more obvious). According to the CFTC, Lansing’s tactic involved cancelling wheat shipping certificates with the aim of increasing the value of its spread and options positions. The CFTC says a Lansing trader spoke with the “writer of a market newsletter” who then disseminated the cancellation info. For more depth, see the CFTC’s full order.

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Mueller Indicts 12 Russian Spies for Hacking in 2016 Campaign
Bloomberg
Special Counsel Robert Mueller indicted 12 Russian intelligence officers for hacking offenses related to the 2016 U.S. presidential campaign, Bloomberg News reports.
/bloom.bg/2KRJpi4

Lead Stories

Shortwave Trading, Part III – Fourth Chicago Site, East Coast, Patent, Regulation, and Farmer Kevin Mystery
Bob Van Valzah – Sniper In Mahwah
I’ve heard that years ago, there was a stable business selling microwave data radios to local governments for networking their offices. Then the traders discovered microwave and everything changed for the radio vendors. Their new customers weren’t so much concerned about the cost – they just wanted the lowest-possible latency in the radios and repeaters.
bit.ly/2LglzJd

****SD: Bob’s detective work continues! If you haven’t been following the story, be sure to check out Part I and II.

VIX ETF Love Affair Endures as Volatility Falls
Sarah Ponczek – Bloomberg (SUBSCRIPTION)
UVXY has taken in $220 million this month with no outflows; Inflows come as volatility plunges below its five-year average
Exchange-traded fund investors can’t shake their volatility addiction.
Since the week after the infamous “volpocalypse” in early February, the ProShares Ultra VIX Short-Term Futures ETF, or UVXY, has seen net inflows of $308 million. More than 70 percent of that has come since July 3.
/goo.gl/ieQ2Y9

****SD: People have glommed onto “vol-pocalypse” but I still prefer “vol-cano.” After all, people survive volcanoes – not so much when the Four Horsemen come ’round.

US Treasury market structure could pose systemic risk – report; Industry group says rise of prop trading firms and electronic trading requires new rules
Joe Rennison – Financial Times (SUBSCRIPTION)
The current structure of the US Treasury market could pose a risk to financial stability, an industry advisory group to the Federal Reserve Bank of New York has concluded.
/jlne.ws/2L4lGul

****SD: There have been a number of Treasury stories in the newsletter this week – for good reason. But is this really news? I mean, if a key player blows out (combined with a spiderweb of bilateral agreements), of course that’s a huge systemic risk, right? You could say the same thing about options markets if a key liquidity provider went under. (You know the handful of outfits I’m talking about.) The last paragraph of the above article to keep in mind: “While the likelihood of such a disruption in the Treasury market is remote, the TMPG believes a discussion of the clearing and settlement processes and practices now is prudent and could help improve the Treasury market’s resiliency to stress events.”

ISDA lays out options for money market ‘fallback’ rates
Reuters
The International Swaps and Derivatives Association (ISDA) has launched a market-wide consultation on potential money market fallback rates for derivatives contracts worth trillions of dollars.
/goo.gl/WJXjDM

****SD: It’s a slow day, so let’s talk about LIBOR! No one on the retail side of the spectrum gives a hoot, but the effects and import of LIBOR trickle down to everybody given how much it underpins (that’s not meant to refer to Reaganomics at all, fyi).

Conflicting perspectives raise eyebrows
BNP Paribas via FXStreet
Speculative positioning in VIX futures shows investors expect volatility to remain low, which implies an absence of growth or inflation shocks.
The flattening of the US yield curve shows investors expect slower growth.
These conflicting views may reflect differences in investment horizon but in the end, only one of the two can get it right, which is a source of concern.
/goo.gl/ckY6B9

Technology

OptionMetrics Announces New Leadership Structure to Reflect Company Growth
Business Wire
OptionMetrics, an options database and analytics provider for institutional and retail investors and academic researchers, has restructured its management leadership as it continues to expand into new markets. David J. Hait, Ph.D., founder of OptionMetrics, formerly President of the company, is now Chief Executive Officer. Eran Steinberg, formerly Vice President of Sales and Marketing at OptionMetrics, now serves as Chief Operating Officer and Chief of Staff. Garrett DeSimone, Ph.D., also recently joined the team as Head of Quantitative Research.
/jlne.ws/2L57qle

Regulation & Enforcement

CFTC seeks to impose monetary penalty of $56m on binary options marketers
Maria Nikolova – FinanceFeeds
The US regulators continue their fight against binary options scams, with the United States Commodity Futures Trading Commission (CFTC) now asking for a heavy monetary penalty to be imposed on binary options marketers Michael Shah and his company Zilmil, Inc.
bit.ly/2KX7dBv

****SD: In an aforementioned thin Friday, here’s some binary action. For a primer on the state of binary around the world, check out the FT story from the start of the month – Binary options trading is dead – though few will mourn it. Meanwhile in the States, Cantor and Nadex are the only real legit operations, as those operations are regulated. Nadex just put out a release saying Q2 2018 volumes were up 18 percent YoY.

Strategy

How to Play a Chinese Stock Rebound; Options buyers have opportunities to pocket nice gains in Alibaba and Sina shares without spending too much.
Gunjan Banerji – Barron’s (SUBSCRIPTION)
Alibaba Group Holding stock has fallen 10% from its recent record high as investors ditched it and shares of other Chinese companies amid an intensifying trade dispute. But options investors don’t seem to be fazed by the recent slump.
/goo.gl/CC4Q3C

Education

The Short Option: A Primer on Selling Put and Call Options
Scott Connor – The Ticker Tape
The term “short” has been given a bad rap over the years. And for good reason. Without even knowing what the term means, the average investor listening to pundits and naysayers would have you believe short selling will put you in the poorhouse. Or they’ll say short selling was part of what sunk the economy just a few years ago. But in reality, although shorting is inherently risky, it can be useful when used wisely. It’s in the hands of a reckless trader that problems can begin.
bit.ly/2NN9w7S

****SD: An update on that ever-important, widely traded stock known as “XYZ.”

Miscellaneous

Citadel Hedge Funds Jump 8.8%, Extending Hot Streak
Bloomberg
Ken Griffin’s flagship multi-strategy funds extended their solid performance this year through the first half, returning 8.8 percent.
/bloom.bg/2KRO3N2

****SD: A check-in on Citadel’s other businesses (this is not about their options market making.)

Why The Future of Energy Could Be U.S. Natural Gas
Bruce Blythe – CME OpenMarkets
Geology dictates that crude oil and natural gas go hand-in-hand. Drill a well for one, and there’s a good chance you’ll also find the other.
bit.ly/2NLxAYB

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Graduate of University of Minnesota School of Journalism and Mass Communication