As literally everyone who deals with derivatives will know by now is that the European Market Infrastructure Regulation (EMIR) makes no sense grammatically, but has nonetheless been agreed by the all-seeing druids of the European Commission.

The intentions seem laudable enough – to bring increased visibility and tighter security measures to the OTC derivatives market, primarily by forcing  those trades through clearing houses. But behind a relatively simple premise is a great deal of complexity, much of which is either being kept under wraps, or is still seemingly absent entirely.

One of the prime areas of concern being brought into the spotlight is so-called ‘Third-Country Provisions’. Whilst this may sound like some UN foreign aid initiative, it is actually a part of the regulation that covers traders that want to clear EU-based derivatives via non-EU CCPs.

EMIR will permit this in theory, however it does this under the condition that the third country needs an equivalent framework/standard for permission in the other direction. This really begs the question: who decides what ‘equivalent’ is and indeed, what does ‘equivalence’ really mean?

Looking in from outside the table of the policymakers, it would seem that the European Commission feel it is themselves, working alongside the related bodies around the globe, such as the CFTC and SEC in the US. And there is certainly a strong desire internationally for this to happen, so whilst it may be rather glib for now, it is very much a work in progress and as the regulations develop, so too will clarity on this issue.

But is there not a wider implication here? Where is the stopping point? Surely, if all the regulators are agreed on these matters then how long until – much like we are seeing with exchange megamergers over the last few years – all the regulatory bodies begin to merge, too? And if that is the case, is that necessarily an entirely bad thing? Certainly these are things that need to be discussed, but this article is not the place for a thesis on the effects of macro-regulatory unification.

Looking back to the present, the underlying concept behind the Third Country Provision is to harmonise the global clearing house market so that an EU clearing house is not at a direct disadvantage to a non-EU house.

If this sounds familiar, it could be because it bears more than a passing resemblance to the Dodd Frank act in the US. While it hasn’t been admitted directly, on the face of it, it would appear to have taken more than a few leaves out of their regulatory books. Indeed, wording in the US act has similar implications – in Title seven of Dodd Frank it informs us that ‘activity which has a direct and significant connection with commerce in the US will be subject to the clearing (and various other) obligations’.

There is already a distinct concern that putting these types of policies into practice may force the hands of those nations that do not wish to follow their rules. Even if you are outside the EU and/or the US, you might very well still find yourself beholden to their regulatory governance.

To give one real-world example of this, the CFTC has released draft rules around registration, so even if your trade takes place outside the US you may still have to register with American authorities. And if that is the case, then this could mean similar problems, such as theoretically being required to clear in two places at once. Clearly this cannot happen, but what it does do is highlight that these issues are ones that need addressing.

According to a statement by Michel Barnier, EU markets commissioner, EMIR meant that “the era of opacity and shady deals” was over now that the OTC, or off-exchange, derivatives markets were being brought under tighter supervision.

But as we have illustrated in just one of several areas, markets are still in the dark about how this will actually work in real terms. How do you comply with regulation – or even plan your future strategies – when you have no real clarity about how to apply them?

Another area leaving traders with nothing more than a question mark is the definition of ‘standardised’. According to EMIR, standardised derivatives that are deemed eligible must go through clearing houses. This definition will eventually be decided by ESMA (the European Securities & Markets Authority), but that decision is still very much up in the air right now, leaving those out of the debate, out of the loop.

This of course begs a further question: What of those ‘non-standardised’ derivatives? Where are those exceptions? And will those exceptions line up with those in Dodd Frank, etc.? And once we DO know what the exceptions are, will we not just end up in the same situation as we are currently in, the one which regulators and politicians are so keen to avoid? Without almost superhuman attention to currently absent detail, this entire bill has the potential to become little more than a long-winded moving of the goalposts.

Despite the relative fanfare, once you peel away the wrapping, what lies underneath appears to be something of a damp, prohibitively expensive, potentially contradictory and unenforceable piece of legislation that hasn’t even been translated into all EU languages yet, let alone voted through.

Is EMIR, as REM put it so eloquently, the ‘end of the world as we know it’ for OTC derivatives, or is it merely taking them down a more scenic route? Only time, and ESMA, will tell…

The impact of EMIR will be a key topic under discussion at TradeTech Swaps & Derivatives, the conference dedicated to the technology, platforms, connectivity and strategy to trade and clear OTC on exchange, 28-30 May 2012, London. For more info, reports, whitepapers, videos, Q&As and other invaluable content visit tradetechderivatives.com.

At this point, TCA is nothing new.

But the way in which it’s changing and influencing the PM/Trader relationship is a constant evolution.

Ian Domowitz, Managing Director, ITG, is a pro on the subject, and in this video interview, he briefs us on how TCA is changing to become a better toolkit for traders and how it affects the PM/Trader relationship.

In addition, Ian also comments on the industry’s call for a “new vocabulary,” after recently publishing a paper on the topic. The time is ripe for a new lexicon as regulators look to better define advancements and changes in the equity trading landscape.

Take a look at the brief video below.

Doubts have been cast over the future of a Tobin tax on Europe’s financial markets after British prime minister David Cameron vetoed an EU treaty that would have included a financial transaction tax.

The move has widely been welcomed by the City, but if it does make its way into EU law – and indeed in the US as well – what will its impact be on trading?

Nicknamed after Nobel prize-winning economist James Tobin, who suggested the introduction of a small tax on currency market transactions in the 1970s, the modern-day tax would largely discourage high frequency trading in Europe and generate funds for the debt-ridden EU.

Mr Cameron chose to veto the tax during European crisis talks in early December, claiming that it would drive business out of the UK and towards America and Asia. It would have seen a 0.1 per cent levy on shares and bond trades and 0.01 per cent on all derivatives.

“We want the Eurozone countries to come together and solve their problems,” he said. “But we should only allow that to happen within the EU treaties if there are proper protections for the single market, for other key British interests.”

Angela Knight, chief executive of the British Bankers’ Association, told the Evening Standard that an EU-wide Tobin tax “would have had a disproportionate impact on the UK as it is Europe’s biggest financial centre”.

Also arguing against the tax is Stuart Fraser, policy chairman at the City of London Corporation, who told the news provider that it would have acted like a tax on the UK, noting that the European Commission’s impact assessment showed that of the €57 billion (£48.6 billion) it would raise from the tax, €40 billion would have been from the UK.

“The Commission also highlighted that between 70 per cent and 90 per cent of all derivatives trading could move outside the EU, together with hundreds of thousands of jobs,” he added.

“Driving that volume of internationally mobile business outside Europe would have defeated the whole purpose of the Tobin tax.”

Chancellor of the exchequer George Osborne also promised in his Autumn Statement that the City would be protected by the tax, arguing that it is a “tax on people’s pensions” and not one on bankers.

Instead, Mr Osborne introduced a permanent bank levy of 0.088 per cent from January 2012 in order to put some restrictions on trading.

Indeed, according to an economic sub-committee of the House of Lords, the tax could cost Britain’s economy up to 20 times the amount it raises.

Forbes’ Tim Worstall stated that the levy could act as a tax on consumers and workers, will increase price volatility in the markets and will not even raise any money.

While the debate continues in Europe, the Tobin tax could also be introduced in the US. Critics there, most notably the Congressional Budget Office, have also warned that it would send traders out of the country to markets that do not impose the fees.

Writing a blog for the Wall Street Journal, Jason Zweig claimed that high frequency traders will be the first people to head overseas.

“After all, in a world of instantaneous electronic trading, buyers and sellers will immediately transfer their activity to the venue with the lowest cost of buying and selling,” he noted. “Capital will flash away to wherever it is taxed the least.”

He cited similar taxes in the past, including an 1863 tax on speculative trades in gold, which have only gone on to either humiliate Congress or have no effect on speculative trading at all.

Another problem that could arise from the Tobin tax, Mr Zweig suggested, is that by reducing trader’s net profits, they will only go on to trade even more in order to generate the lost revenue.

“There may be too much trading too fast, and governments may need to find new ways of raising revenue. But a transaction cost is unlikely to help, and it will probably hurt,” he argued.

Governments are desperately attempting to consolidate their budgets, however, and while they might come to regret it, a financial transactions tax is inevitable.

The Tobin Tax will be a key topic under discussion at TradeTech, the largest global trading conference, 24-26 April 2012 in London. For more info, reports, whitepapers, videos, Q&As and other invaluable content visit  tradetecheurope.com.

By Carson Dahlberg, CMT

Special to the TradeTech Blog

The (EEM) iShares MSCI Emerging Index Fund exemplifies the outperformance this sector has had recently over the S&P500 benchmark that many use (3.25% above over the last 21 trading days). Also new products like the CBOE Emerging Markets ETF Volatility Index (VXEEM) make it possible to do things which previously were not. Namely, we can now look at the specific implied volatility of the underlying versus using the VIX for the S&P500. This gives us more accuracy when incorporating volatility analysis into our work, as we try to find not only what to buy but when and at what price to do it.

Let’s take just a few examples from aligning the daily charts of EEM and its Volatility Index. I have circled extreme readings in the Volatility Index, using our volatility-based technical analysis. There are many ways to examine extremes in volatility, but for simplicity’s sake, in this example I’m just using our N Bands (which are designed to give immediate support or resistance). These circled areas represent where volatility and/or price should not be/have gone too far too fast; and definitely out of bounds in terms of support/resistance. I have highlighted the areas of support and resistance that pertain to our discussion. Incidentally, our support and resistance are derived from volatility as well.

These circled examples were on the following dates: 8/5-8/9, 10/3, and 11/25. These all represented peaks in volatility which correspond to troughs in price. You could just have easily focused on the reverse. So what we see is that by combining two sets of data (price and implied volatility) we can confirm high probability inflection points but avoid multi-colinearity. We also achieve a greater level of precision in gauging where a security has hit an extreme.

So, how about some objective analysis? From the volatility chart, we can see that there is a clearly defined range of support and resistance. We can also see that volatility continues to fall toward layered support. However, the volatility chart is not yet extremely extended (oversold as some might say). Simultaneously, the underlying EEM is nearing the first level of volatility-based resistance. One scenario could be that volatility remains low, trapped in said range, and the EEM pauses/slows its advance near this level. You could use this info to combine with your research to come up with other views or strategies. You could then use objective, statistically significant levels to monitor the emerging market.

Bringing it back full circle, let’s take a look at relative strength. From the relative EEM/SPY chart, a few things stand out:

• The Upper N Band, which is immediate volatility-based resistance, is now pointed upwards and the ratio is making a right translation of the trough. This is statistically significant and can mean a pause versus an about face.
• The move has been so strong that the ratio is testing the immediate resistance level – this is also usually a bullish development.
• The level which has served as resistance since mid-December (shaded green) is now serving as support. This makes sense as the EEM itself is now reaching resistance and may pause before continuing its advance.

So all in all, it looks like we have some more clues of the ‘risk-on’ trade picking up steam.

On a side note, we would like to announce that we will be presenting in NYC for the Market Technicians Association’s Annual Symposium – Technical Analysis Applied: Quantitative Investing in a Qualitative World. You can read more about this event at this link. We will be discussing the use of volatility-based technical analysis.

Carson Dahlberg is the Chief Technical Strategist and Partner at Northington Trading, LLC.

by Carson Dahlberg, CMT

Special to the TradeTech Blog

I am writing this on 12.29.2011 during Thursday’s regularly scheduled session. There are few interesting things lining up that I have observed worth sharing about gold. These line up the odds and make this a very interesting observation with the potential for a lot of market participants being on the wrong side of a pullback in a long term uptrend. This is also an example of using multiple facets of technical analysis in a quantitative and objective way; avoiding multi-colinearity.

This part is subjective, but there’s been extremely negative sentiment on both the miners and the commodity, with a ton of “most read news” recently (there is also a significant increase in the frequency of news). Usually the print media ramps it up at the extremes. This is shown on the intraday chart of the Gold Continuous Contract below.

The Junior Gold Miners Index is also now coming to multi time framed support (volatility and volume-based). From a smart money/large options trading point of view, big bullish bets on the GDXJ (Market Vector Junior Gold Miners Index) occurred over the last couple of days. It usually pays to watch for this kind of options activity because typically the smart money will leverage their ideas in the options market.

The Gold Continuous contract is now coming to multi time-framed support (derived from volatility and volume). The green shaded areas are showing where the projected buying pressure is. This is from work we do to validate volatility based support levels through transactional analysis.

Below are the weekly and daily Gold VIX charts. The trend still looks down in the near term (daily) with a multi time framed range between 19-33. As a side note, be careful not to commit the sin of thinking that a volatility chart is always in an inverse correlation relationship with the underlying. However, a falling volatility environment typically does mean less fear and smaller moves going forward.

Finally, the comparative relative strength chart of (GC1GOLD)/SPX(S&P500) is nearing support as well as being extremely oversold. This adds an additional dimension of analysis, from the point of money flow heading to an outperforming asset (Gold is set to be one of the best performer asset classes this year, only outdone by US10Yr, Brent Crude Oil, and the German 10yr Bund, and of course volatility – VIX).

To summarize, we’ve applied analysis on sentiment, options activity, trend and momentum, support and resistance, and volatility (implieds) using volatility-based technical analysis. Looking at the technical clues of what gold will do, they all point to the probability that gold could be due for a pause/reversal of its precipitous downtrend. This has also been an example of how technical analysis can be used objectively to get a holistic, robust view of a market or security.

Carson Dahlberg is the Chief Technical Strategist and Partner at Northington Trading, LLC.

by Carson Dahlberg, CMT

Special to the TradeTech Blog

We’ve all had that gut feeling when seeing high correlations among assets – that it might not be good – but perhaps without having a way to measure its effect. Some try to avoid correlation by holding a portfolio of non-correlated/low-correlated assets. Some try to monitor correlation as a gauge for market risk (the more correlated assets are, the more likely that risk in the market is high). This is an insight that does seem to make sense – I don’t need to add to all that’s been written about how when market panics occur all assets basically head to a correlation of 1.

What happens when correlations remain elevated for significantly long periods of time? This is a timely question for the S&P500 Index. In our business, it is not possible to sit on the sidelines, at least not for long. Is there additional actionable info to pull out of the concept of correlation other than “stay alert?”

One of my mantras is “add precision to insight” and I will do just that using the CBOE S&P500 Implied Correlation (IC) Index. The IC Index is a market estimate of the average correlation of the stocks that comprise the S&P500 Index, calculated by using options prices. You can read more about the IC Index here.

Here we have two daily charts: the S&P500 (top) and the CBOE S&P500 IC Index (bottom). We will graphically demonstrate that Volatility Based Technical Analysis (VBTA) can be used to attain actionable info, even out of small changes in correlation readings.

On the IC Index, I have circled the instances where VBTA from our MetaSwing for Bloomberg Professional has signaled significant moves in volatility (objective signals) in the IC Index. On the S&P500 chart accompanied with it, I have drawn arrows that correspond to said moves. Green arrows are a result of the tops in correlation while red arrows are the bottoms.

What is the conclusion? Bottoms in the IC Index are uh-hem, “correlated” to tops in the market and vice versa. This is actually counter-intuitive. Most analysts will warn when correlations are high, but it’s actually and actionably already too late. From our analysis regarding volatility of correlation and from knowing when “how high is too high” and “how low is too low,” it actually works in quite the reverse. Additionally, getting long something when the masses are not participating can mean that there is sidelined money to push your asset/security higher and vice versa.

This is an intriguing zero gravity idea (not being weighed down as to what cannot be accomplished): technical analysis, used quantitatively, and incorporating volatility can parse out actionable intel even from correlation. We have written previously about using VBTA to dissect stocks, bonds, fx, commodities, options charts, implieds, and volatility. Now we see that it can be used for correlation. I find this satisfying because it goes beyond, “correlations are high, so let’s stay alert” type of vague analysis that we often see in the media which is often useless, or worse counter-productive.

Taking this idea just one step further, you could marry the idea of a high probability correlation signal with other high probability concepts like volatility based support/resistance. Now you have signals of high or low correlation that are actionable with a level to lean against and manage risk and levels to calculate reward. This would also be an approach that not many are taking, with all the benefits that such an approach holds. But, most of all, this exercise has shown what is capable through creative application of objective technical analysis.

By Carson Dahlberg, CMT

Special to the TradeTech Blog

There have been some interesting behavioral finance studies that are shedding light into the mindsets of crowd behavior. That, in turn, gives newfound significance to technical analysis concepts. One example and idea that I’ve used in the past is the anchoring effect.

One way that this manifests itself is in a common indicator known as the 52-week high/low. This seems to be an area where a price’s advance will be inhibited for a time. But, what if you’d like to know when a security will halt if it’s already at an all time high/low? Or, what about the scenario where a 52-week high/low is continually happening? Projecting extreme levels above and below is an area where Volatility Based Technical Analysis (VBTA) excels, even extremes that have never been visited before by price.

One stock that I had posted about recently on twitter is (SPRD) Spreadtrum Communications, Inc. This was a great example of a security making a new 52-week high, and doing so several weeks in a row. We were able to predict a statistically significant level of resistance on 4/29/2011, 28 weeks in advance, that was in fact the turning point. See the chart below.

 Volatility can help pinpoint a predictive and projected area of support/resistance. Volatility is more of a concept applied to whatever the task at hand needs to be. So conceptually volatility as it applies to a tradable instrument is just a measurement of an instrument’s price, in terms of rise or fall, within a given time frame. In this case, it has been worked into a tool that can project an extreme that might be reached, within a reasonable probability. In this case, it is an extreme that was yet to be reached.

We express volatility graphically in two ways: the N Bands and the projected support/resistance (SR) levels. The N bands are the dynamically changing immediate SR. The projected SR levels are extrapolated from the significant peaks and troughs of the bands. These represent the extreme ebbs and flows of volatility. Both concepts test out to be significant and hence predictive. You can view the results here.

Predictability is the name of the game in the markets and combined with support and resistance, you have a great combination. Those that argue oppositely are probably in the “random market” camp. In case you were wondering, I am not. The reason we search for highly probable scenarios ahead of time is manifold. For starters, we want time to be able to strategize. Additionally, we want to know specific levels to take action: precisely where to enter and exit, and where to manage positions through – that are statistically significant. That way we can be proactive in taking the initiative vs. being purely reactive to what the market is giving us; including all time highs.

Carson Dahlberg is the Chief Technical Strategist and Partner at Northington Trading, LLC.

…And more importantly, how can you avoid it?

In this next video in our series from TradeTech Architecture back in October, I caught up with Rodney Morrison, VP of Products at SL Corporation, who produce software monitoring solutions to find out some of the typical reasons applications and application monitors fail, how automated solutions can help circumnavigate any problems before they ever affect stability and your trade execution and gives us his top tips for improving your application monitoring provisions right now.

For more content on trading architecture data, including whitepapers, reports, presentations and more, visit the TradeTech Architecture Europe Download Centre

By Carson Dahlberg, CMT

Special to the TradeTech Blog

I always like to blog about something I don’t see very often, and topics that make people think. So I was doubly excited to get this idea after having our tools examined by many analysts/traders/risk managers/PMs last Thursday and Friday, in New York. (We just completed our launch of MetaSwing for Bloomberg Professional on Monday, November 7th 2011. This is our suite of volatility-based quantitative technical analysis solutions. And, you can get a free 30-day demo by typing APPS CS:MS ).

Usually the first thing that happens is the analyst/trader picks the most obscure security (read – something that tends to “break” the technicals). And, that’s exactly what happened! They started pulling up, of all things, price charts of options contracts. Options on futures, indices, VIX charts, etc… Surprise, it worked! This is due to extensively and correctly testing our tools, but also because of what the tools are based on: volatility. Volatility is the key to getting something to be truly adaptive to a time frame or market. However, there are a lot of great talking points here to explore!

Many have told me that there is nothing that you can discern from these types of charts, including seasoned options traders. If all you had to work with was the typical set of indicators, I’d probably agree with that. However, our work is volatility-based and hence, it fits very well into dissecting a derivative’s traded history for actionable info.

Whenever possible, I always trade off of the chart that I am trading vs. some sort of proxy. This seems so logical but often we are forced to do our analysis on some benchmark or highly correlated security. An example would be using the VIX vs. looking at the actual implied chart for the security itself. I’ve written about this recently here.

So, why not look directly at the option’s pricing history instead of or along with the underlying? It may seem like a strange question, but to me it’s absurd to not consider it. I also find this interesting because many times I hear options traders speak of how easy it should be to hit (insert ridiculous number here) % return on an option trade. Well, how about knowing a level that the actual option itself was probabilistically going to encounter a headwind/resistance? As a trader, I’d say that is one useful piece of intel.

This is the 11/19/11 expiration 170, and calls for GLD, SPDR Gold Trust ETF (left) with the stock chart (right). I have highlighted two examples: 1) is a with-trend trade while 2) is counter-trend.

From a setup point of view, the stock chart (right) and the options chart (left) are identical: a) trend outlook is positive (or negative for 2), b) momentum is at an extreme, c) a directional signal(s) identifies a favorable condition, and d) this is right against volatility-based support. The major difference is that I have a clear idea of what my profit potential is, vis a vis objective and predictive resistance. My risk to reward is clear given the levels (using the options chart, example 1 is 3:1 and example 2 is 6:1). Green arrows are drawn to demonstrate a first level of resistance-based targets.

This approach has many benefits. For one, I can eliminate low reward or high risk trades. Additionally, I can gain a greater level of precision in both entering my trade and managing the risk of the trade. Finally, I can get an idea of the bang for my buck that the leverage a particular contract is garnering. All of this could easily complement an existing framework of trade considerations.

Carson Dahlberg is the Chief Technical Strategist and Partner at Northington Trading, LLC.

High-frequency trading (HFT) companies typically trade a huge volume of contracts operating on the tiniest of margins. This means even the smallest of price movements can essentially be make or break for business. This makes choosing the right technology an absolutely critical decision.

In an increasingly crowded marketplace, much of the focus for European HFT firms is on low latency, which basically means high speed. Strategies based on algorithmic derivatives rely on timings down to the millisecond, with orders being communicated as quickly and accurately as possible.

A recent research paper was released by Tabb analyst Kevin McPartland, entitled High Frequency Swaps Trading: Market-Making and Arbitrage. It argued that additional regulation – not least in the form of MiFID II – is likely to boost trading volumes across Europe as more diverse contracts are made accessible on electronic platforms.

Companies looking to exploit this opportunity will need the lowest-possible latency from connections between markets, data providers and counterparties to safeguard against price volatility and ensure trading decisions are executed flawlessly. When it comes achieving low latency, a lot of critical factors are beyond the HFT firm’s control, but through careful and considered selection of market and telecoms provider, they should be able to use any given trade gateway effectively.

One of the hottest trends at the moment is for traders to explore the possibility of investing in wireless solutions which promise a robust alternative to fibre, as well as reduced costs and ultra-low latency. A recent report by High Frequency Traders looked at the rise of wireless trading technology and its place in the industry’s future.

Historically, HFT firms seeking the fastest-possible connections between markets have turned straight to fibre-optic networks, which has largely been successful. But the very nature of today’s intensely competitive markets means innovative companies are constantly in pursuit of even faster times, which could have a major impact on a HFT company’s bottom line.

Much of the industry’s focus is currently trained on wireless, which forward-thinking traders hope will give them the edge in years to come. HFT firms across Europe and in the US are battling to secure licensed radio frequencies which harbour the potential to reduce the time needed for data transfer between certain financial centres by up to 40 per cent.

“One advantage of stepping away from fibre is the simple matter of distance. A signal transmitted through the air can take a considerably more direct route than a cable which has to negotiate geographical features such as large bodies of water or built-up metropolitan areas,” explained the High Frequency Traders report, published in October.

Len Gee, Sales Director at Cielo Networks, said the cost effectiveness of wireless technology can level the playing field by making ultra-low latency circuits accessible to more HFT firms. Gordon Moller, Chief Executive at Cielo, added: “As a supplier of microwave radio systems used in traditional telecom applications, we noted the nascent HFT networks opportunity early and quickly developed low-latency optimised versions of our systems.

“We’ve been delivering these systems for some time, while concurrently pursuing further latency innovations for our customers. Our sole focus in the HFT market is to provide the world’s lowest latency point-to-point communications technology; we’re faster than fibre now and steadily pulling out ever more circuit latency,” Moller said.

In an increasingly crowded marketplace, the choice of which technology to pursue has never been more critical. In fact the strength of tools available to HFT firms is fast becoming as important, if not more important, than the strength of the market itself.

The future of High Frequency Trading will be one of the key topics under discussion at TradeTech France, 13 Feb 2012 in Paris. For more information, interviews, whitepapers and more visit tradetechfrance.com