Shortwave trading; “Quitaly” update; Warning bells

Jun 19, 2018

Spencer Doar

Spencer Doar

Associate Editor

Observations & Insight

OCC 2017 Interactive Annual Report
On behalf of the Board of Directors and my fellow colleagues at OCC, I am pleased to share with you our 2017 annual report. Over the past year, the team achieved a number of key milestones that position OCC for continued resiliency, innovation and growth while strengthening our role as an industry leader and market influencer.

****SD: I like the multi-media aspect of this report – videos with Walt Lukken, Bill Brodsky and more are included. Some numbers – $78.7 million refunded to clearing members; $15.2 billion held in clearing fund at year end; $122.8 billion in margin held at year end and average fees of .034 dollars per contract side.


Square’s market capitalization is nearly greater than the Nasdaq and Cboe combined
John Detrixhe – Quartz
Square’s market capitalization is about to overtake the combined value of financial stalwarts Nasdaq and Cboe, which operate some of the world’s most important exchange-trading platforms.

****SD: These analogies always strike me as stupid and arbitrary, but this one jumped out given the groups being compared. Square got its recent boost due to approval to trade bitcoin on the app.


Wall Street’s ‘fear index’ has biggest one-day jump since May
Ryan Vlastelica – MarketWatch

****SD: More market action from Reuters – Wall Street tumbles, Dow erases 2018 gains as trade worries worsen – #TradeWarsAreEasyToWin?

Lead Stories

HFT Traders Dust Off Century-Old Tool in Search of Market Edge
Brian Louis, Nick Baker and John McCormick – Bloomberg (SUBSCRIPTION)
Jump Trading, Virtu appear to be testing shortwave for trading; Sites are located just miles away from CME’s futures exchanges
The latest twist in the race to be fastest in high-frequency trading sits just down the road from the Promise Equestrian Center, a sprawling stable and horse-riding complex about 45 miles west of downtown Chicago. It uses a super-charged version of techniques dear to amateur radio operators worldwide.

****SD: Credit where credit is due – the shortwave mystery was revealed on the Sniper in Mahwah blog more than a month ago. The phenomenon is not new. Props to Bob Van Valzah for some awesome detective work. Following his journey of discovery in the blog is more fun than reading the story, if you have the extra time. And there is a second part to the story which was posted just a few weeks ago, too.

‘Quitaly’ risk premium lingers even as Italy’s new government commits to euro
Dhara Ranasinghe, Sujata Rao, Ritvik Carvalho – Reuters
Italian financial assets still carry a risk premium regardless of the new government’s commitment to euro membership, with the coalition’s promised spending plans still expected to trigger a clash with European Union authorities later his year.

U.S. Stock Bulls Refuse to Listen to the Warnings to Bail
Retail options market showing optimism last seen in 2000, 2007; Yet stocks are poised for the biggest decline in three weeks
Wondering how the U.S. stock market keeps skirting disaster? It’s not complicated. For all the drama at their doorstep, trader positioning remains overwhelmingly

****SD: The retail options market is showing optimism last seen before bubbles right as Robinhood opens up free options trading… Hmmm.

Blockchain in the Derivatives Market: Not to Be Dismissed
Bill Dwyer, Numerix – TABB Forum
Venture capital firms have invested $2 billion into blockchain in just four years. The hype can be irritating, but the fundamental transformative potential of distributed ledger technology for the financial services industry is nevertheless enormous. But there is still a lot we do not know about the changes to come. We need to understand how DLT and blockchain can be a solution to some issues facing the derivatives business, as well as the barriers to adoption the technology faces.

Elon Musk goes after individual shorts on Twitter with 3 week warning
Lora Kolodny – CNBC
Tesla CEO and chairman Elon Musk went after shorts on Twitter over the weekend. He generally warned investors selling his electric vehicle venture short that they have about 3 weeks to cover if they don’t want to lose their money.

Exchanges and Clearing

HKEx to expand equity derivs suite next month
Jack Ball – Global Investor Group (SUBSCRIPTION)
Hong Kong Exchanges and Clearing (HKEx) said it will expand its stock derivatives offering next month, just one month after average volumes in the suite rose more than 20% compared to May 2017.

****Futures story, but five other stock options being launched, too. HKEX’s May options ADV is about 440k contracts, up 12 percent on May 2017.

tZERO And BOX Digital Markets Sign Deal To Create Joint Venture
Press Release
tZERO and BOX Digital Markets LLC (“BOX Digital”) announced today they have entered into a joint venture, which is expected to become the world’s first regulated exchange for trading security tokens. Security tokens are electronic tokens defined as “securities” under U.S. law. The joint venture will seek approval from the U.S. Securities and Exchange Commission (SEC) prior to beginning operations.

****SD: Recall the announcement last month that the groups signed a letter of intent to this end.

An Ethereum Futures Future? U.S. Commodities Giants Lie In Wait After SEC Surprise
Michael del Castillo – Forbes
Chicago-based commodities giants Cboe and CME Group are exploring the ethereum cryptocurrency with a $49.6 billion market value in a number of different ways. The problem is, until last week, U.S. regulatory uncertainty was preventing them from taking one crucial step.


Credit Suisse hiring old-school traders as rest of Wall Street bets on bots
Business Insider Prime (SUBSCRIPTION)
Credit Suisse is hiring flesh-and-blood traders who help clients buy and sell stocks as part of its so-called high-touch offering, bank executives told Business Insider.

****SD: Seniorization, eh?

Regulation & Enforcement

Tighter HFT capital rules will only harm eurozone market trading
Philip Stafford – Financial Times (SUBSCRIPTION)
Tighter capital rules for high-frequency traders is the last thing Europe’s already liquidity-constrained financial markets need.
A regulatory push for banks to set aside more capital against their trading operations has constrained their ability to support two-way prices across markets. This has opened up opportunities for high-frequency traders to act as a key source of liquidity on exchanges and in private trading venues. Their activity accounts for roughly a third of trading in EU equity markets, and is higher in some futures markets.

Statement of FIA President and CEO Walt Lukken on the unanimous vote of House Financial Services Committee in passing H.R. 5749, the “Options Market Stability Act”
Statement of FIA President and CEO Walt Lukken on the unanimous vote of House Financial Services Committee in passing H.R. 5749, the “Options Market Stability Act.”

Brokerages Are Said to Seek Tax Easing for Offshore India Trades
Santanu Chakraborty – Bloomberg (SUBSCRIPTION)
Brokerages representing offshore investors are asking for more concessions to trade in India’s nascent international financial hub in Gujarat, according to people with knowledge of the matter.

Quebec Regulator Announces Roundtable for Proposed Derivatives Regulation
Celeste Skinner – Finance Magnates
On Tuesday Quebec’s Autorité des marchés financiers (AMF) announced it will hold a roundtable on Wednesday, September 12, 2018. The aim of the meeting is to discuss two draft regulations proposed by the Canadian Securities Administrators (CSA). The regulations surround registration and commercial derivatives trading.

JPMorgan to pay $65m fine for dollar benchmark manipulation
Gabriel T. Rubin – Financial News London
JPMorgan has agreed to pay a $65m fine to settle claims that it tried to manipulate a global interest rate benchmark, the latest fine levied by US regulators to punish crisis-era manipulation schemes by large banks.


Industry Stakeholders Partner On Blockchain Based Margin And Collateral Solution
ABN AMRO Clearing, EuroCCP, Euroclear and Nasdaq have completed a joint proof of concept to make the use of securities more efficient when used to cover margin calls, including after business hours, using blockchain, or distributed ledger technology (DLT).


Market Correlations Like 2016 Suggest Dominoes Are Lining Up to Fall
Yakob Peterseil and Dani Burger – Bloomberg
While on-again, off-again risk aversion is the mantra for global markets in this age of trade spats, here’s a sign that the latest flight to safety may endure beyond Donald Trump’s next tweet.
A Morgan Stanley index that tracks correlation among regions and asset classes has reached its highest level since December 2016, a possible signal that the market’s defensive positioning could prove more lasting, according to a note from Tim Emmott, executive director at Olivetree Financial Ltd.

Hedge funds score hat trick with euro, yield curve, volatility bets: McGeever
Jamie McGeever – Reuters
The euro is weakening, the U.S. yield curve is flattening, volatility is falling and last week, hedge funds were on the right side of all three moves.

Investors Are Bailing from Emerging-Market ETFs
Carolina Wilson and Olivia Schaber – Bloomberg
Rising U.S. interest rates weigh on emerging-market assets; iShares EM fund had $2.2 billion in outflows last week

****SD: From the story – “The options market makers, the people who have the ability to underwrite options, they foresee volatility remaining elevated so that they can continue to make money on that. Otherwise, they wouldn’t write you an option and wouldn’t take the other side of that trade.”


A brief guide to working on the trading floor during the World Cup
The FIFA World Cup has begun. Goldman Sachs has devised an algorithm that says Brazil will win, so maybe it’s a foregone conclusion. Some teams (eg. the U.S.) haven’t even qualified. Even so, when you work in a bank, there are a few things you need to know about World Cup season. I’ve lived through several, and they require careful handling.

China Rout Has 1,023 Stocks Plunging 10% in One Day
Sofia Horta e Costa and Abhishek Vishnoi – Bloomberg
In a stock market where investors are used to being disappointed, Tuesday’s plunge still shocked.
China’s benchmark equity gauge sank almost 5 percent at one point and by the close, the escalating tensions with the U.S. had sent 1,023 stocks down by the daily 10 percent limit — or more than one in four. Greasing the losses was the Shanghai Composite Index’s slide below 3,000, a level previously breached during market crashes in 2015 and 2016.

****SD: Circuit breaker field day.

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