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Cboe’s problems don’t end with the VIX

Observations & Insight

The Spread – A Rising Tide Lifts All Exchanges – 11/2

It seems like everybody in the options exchange space is busy setting records, and there were positive developments on the regulatory front. It’s been a good few weeks for the industry.

Watch the video and see the stories referenced here »

Lead Stories

Cboe’s problems don’t end with the VIX
Lynne Marek – Crain’s Chicago Business (SUBSCRIPTION)
“Angry Chris” Concannon was on full display at a Securities & Exchange Commission meeting in Washington recently to discuss stock market data fees.
Concannon, president of Cboe Global Markets, a major U.S. stock and stock option exchange, described himself that way in a futile attempt to defuse a public battle with clients over what they called “greedy” and “unconscionable” fees.

Derivatives Risk Optimisation Gains Ground
Shanny Basar – MarketsMedia
In just three years since launching, Quantile Technologies has won LCH and CME as clearing houses for its compression and margin optimisation services and the start-up aims to expand by adding more clearers and foreign exchange services.

****SD: See last week’s announcement from CME – CME Group’s First Multi-Lateral Equity Options Compression Cycle Successfully Reduces Nearly 590,000 Contract Sides

China Trade Talks Triggers Bets on Rebound
Gunjan Banerji – WSJ (SUBSCRIPTION)
After a crushing year for Chinese stocks, investors are turning to options to bet on a comeback.
Investor sentiment toward China’s market soured in 2018, and the nation’s factories took a hit as a trade spat with the U.S. dragged on. China’s Shanghai Composite Index, for example, rallied last week but fell Monday. It is down about 19% year to date.
But investors have been wagering a rebound is on the horizon for the $7 trillion equity market. They’ve made the bets through options on U.S.-listed exchange-traded funds that invest in Chinese stocks.

Wall Street Plays Defense in Attempt to Dodge Midterm Punches
Austin Weinstein and Vildana Hajric – BloombergQuint
Risk of market chaos seen limited, yet firms still cautious; Traders surprised by Trump’s upset win brace for a late night
Kevin Giddis doesn’t expect much in the way of surprises from the U.S. midterm elections. But then again, that’s what he thought two years ago as well.
That fateful night, Giddis, head of fixed-income capital markets at Raymond James & Associates, went to a Memphis Grizzlies basketball game — Hillary Clinton’s presidential victory all but assured. By the time he got back to the firm’s office a few hours later, the market chaos was already in full effect.

VIX Could Go Much Lower Just as Hedge Funds Bet on Its Futures
Joanna Ossinger – Bloomberg (SUBSCRIPTION)
MRA’s fair-value model sees ‘fear gauge’ reverting lower; Large speculators often ‘dead wrong’ at extremes – Schaeffer’s
U.S. stock volatility may be ripe for significant declines. A fair-value model based on economic fundamentals suggests that the Cboe Volatility Index — the equity market’s “fear gauge” — should be at a much lower level, according to Vinay Viswanathan and Dean Curnutt of Macro Risk Advisors.

Hedge funds turn negative on oil
John Kemp – Reuters
Hedge fund managers were net sellers of petroleum-linked futures and options for a fifth week running last week as concerns about sanctions on Iran evaporated and investors refocused on economic worries.
The net long position in the six most important petroleum-linked futures and options contracts was cut by a further 73 million barrels in the week to Oct. 30.

Hedge Fund Manager Stakes Own Cash on a Bet Against Credit ETFs
Natasha Doff – BloombergQuint
Ex-Fir Tree director shorts U.S., emerging market bond funds; ETF structure ‘isn’t designed’ for credit rout: Black Bear
After quitting his job at a $7 billion hedge fund to go it alone three years ago, Adam Schwartz happened upon a short so certain he built a notional position amounting to half his fledgling firm’s assets on it.
He’s been borrowing shares and stockpiling bearish options on exchange-traded funds that track major credit indexes, confident that a blow-up in fixed income will hit these passive vehicles the hardest.

XP Hedge Fund Makes the Most of Brazil Election With Derivatives
Felipe Marques and Vinicius Andrade – BloombergQuint
Fund predicted first round would produce a clear favorite; Wager helped make fund best performer of the election season
A near-fatal stabbing, a jailed former president vying for another term and record-breaking market rallies. Brazil’s presidential election had it all, and one equity hedge fund made the most of it.

****SD: “To put in place their contrarian call, XP’s team combined different maturities of options for the state-owned oil giant, Petroleo Brasileiro SA. The move consisted of selling a November-maturing option and buying a larger number of shorter-term ones.”

Exchanges and Clearing

Record Volume Month for S&P 500 Options
Matt Moran – Cboe
Both volatility and trading activity increased in the S&P 500 index options market over the past month as investors evaluated proposed tariffs, trade negotiations, deficits, valuations, rising interest rates and the November 6 U.S. elections.
In October 2018, S&P 500 options set a new all-time record with 41.4 million contracts traded, the highest trading volume in a single month for S&P 500 options.

****SD: It was also a good month for their European equity activities.

Intercontinental Exchange Reports October 2018 Statistics
Intercontinental Exchange
Intercontinental Exchange, Inc. (NYSE:ICE), a leading operator of global exchanges and clearing houses and provider of data and listings services, today reported October 2018 trading volume and related revenue statistics.

****SD: Equity options ADV up 54 percent y/y.

CME Group completes acquisition of NEX Group, retires the NEX name
CME Group will retire the NEX name and brand but will continue to operate its individual Markets and Optimisation businesses as sub-brands including BrokerTec, EBS, Traiana and TriOptima. Corporate headquarters will remain in Chicago, with London continuing to serve as CME Group’s European headquarters.

****SD: Somewhere there is a large closet full of unusable swag… Michael Spencer was just the subject of a “Lunch with the FT” longform, if you want to learn about expensive wines and London finance in the ’80s.

Regulation & Enforcement

SEC Charges Family Friend of Former Investment Banker With Insider Trading
…Using allegedly misappropriated information, Ettu and Sonoiki made approximately $93,000 in illegal profits by using Ettu’s brokerage account to purchase the call options of companies that were about to be acquired and then selling these positions after the deals were announced. In one instance, they generated returns of more than 318 percent in less than one month.

Proposed Revisions to Prohibitions and Restrictions on Proprietary Trading
…Section 13, commonly known as the Volcker Rule, contains certain restrictions on the ability of a banking entity and nonbank financial company supervised by the Board to engage in proprietary trading and have certain interests in, or relationships with, a hedge fund or private equity fund. A majority of FIA’s member firms that are registered with the Commodity Futures Trading Commission as futures commission merchants are “banking entities”, as defined under the Rules. F IA’s membership also includes commercial firms that rely on other banking entities to help support covered funds’ financing of capital-intensive projects. FIA, therefore, has a significant interest in the Rules as applied.

Leave Ordinary Investors Out of the High-Speed Data Battle
James Angel – Traders News
Wall Street firms and stock exchanges have been feuding for over a century over the price and quote data that fuel the markets: Who owns it, how much should it cost and what is the role of government in regulating it?

****SD: Also from Traders – SIP Reform Outlook Unclear


Python is becoming the world’s most popular coding language
The Economist
“I certainly didn’t set out to create a language that was intended for mass consumption,” says Guido van Rossum, a Dutch computer scientist who devised Python, a programming language, in 1989. But nearly three decades on, his invention has overtaken almost all of its rivals and brought coding to the fingertips of people who were once baffled by it. In the past 12 months Americans have searched for Python on Google more often than for Kim Kardashian, a reality-TV star. The number of queries has trebled since 2010, while those for other major programming languages have been flat or declining.

****SD: See this recent post from Artur Sepp for more – Why Python for quantitative trading?

Trading systems: the need to take an enterprise testing approach
Vaibhav Shukla – Itiviti Blog
It goes without saying that it’s imperative for trading technologists to thoroughly test their systems before the put them in a production environment. Clearly, building a market-beating trading platform requires a high level of uptime and a propensity for failure that’s as close to zero as possible. And for years technologists have used a range of tools to test the various components of their trading platforms, across all aspects of the order workflow.


Options Strategies to Play This Market’s Mixed Signals
Todd Salamone – Schaeffer’s Investment Research
In discussing long-term moving averages last week, I was referring to the E-mini S&P futures contract in response to an article in The Wall Street Journal that had pointed out the break below its 200-day moving average. My discussion last week about the historical significance of the 80-week moving average also applied to the S&P 500 Index (SPX – 2,723.06) and SPDR S&P 500 ETF Trust (SPY – 271.89), and the fact that more often than not, breaches of the 200-day moving average have signaled lows or near-lows during this bull market cycle — though volatile, choppy price action frequently occurs in the days and weeks following the breakdown.

What the path to an ‘honest-to-God vicious selloff’ by year end could look like
Shawn Langlois – MarketWatch
The stock market is coming off a rather limp rebound last week, as the S&P 500 clawed back just a chunk of the prior week’s losses. Keeping the move in check, Apple’s disappointing report and hand-wringing over U.S.-China trade created more questions than they answered. Toss midterms in the mix and this week has all the makings of another spike in volatility — one that could persist at least through the end of the year.

Stock Options That Could Pay Off if Trump’s Trade War Cools
Al Root – Barron’s (SUBSCRIPTION)
Trade tensions have created an interesting opportunity in options on beaten up stocks, according to JPMorgan.


Could the 2018 Mid-Term Elections Impact Financial Markets?
Jason Pfaff – Nadex
After an October that left markets with steep declines, sharp twists and plenty of red numbers, analysts and traders now prepare for the mid-term elections this Tuesday in the United States.
Politically speaking, this is a massively consequential election with long term implications.
But, in the short term for those trading forex, oil or stock indices, its no more than the next stop on a seemingly never-ending tour of political and event risk that continues to roil markets.

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About Author

Bergstrom is chief information officer of John J. Lothian & Co. He edits MarketsWiki and JLN Options.