by Chris Kimble
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Thursday, March 20, 2014
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21 Billion Global Trades
We’re almost a quarter of the way through 2014, and the folks at the FIA (Futures Industry Association) have finished crunching the numbers on just how many trades there were across all derivative exchanges last year in releasing its annual survey, and the numbers – as always – are eye-popping; with over 21 BILLION futures and options trades done last year across the globe.
That’s up a slight 2.1% after a decline of 15% in 2012, and nearly four times higher than 10 years ago – but still well below the record number of futures and options contracts traded back in 2011:
“According to statistics gathered by FIA from 84 exchanges worldwide, 21.64 billion futures and options contracts were traded in 2013, an increase of 2.1% from the previous year, but still well below the number of contracts traded in 2012 and 2011.”
(Disclaimer: Past performance is not necessarily indicative of future results)
Chart Courtesy: FIA
Now here’s where things get tricky for those of us dealing with exchange traded futures and options on futures in the US; as a huge portion of this overall volume comes from stock options. When you pull those out of the equation, and look at just the trades us futures folks are involved in day in and day out – we can see futures trading was actually up 10%, while Options Trading was down -6.8%.
Chart Courtesy:FIA
10% more futures trades might not seem like all that much, until you see that’s 1.2 Billion more contracts traded in 2013 – somebody somewhere in the clearing business had a good year! Where’s it coming from? Asian trading as a whole was down, but Asian stock indices was anything but.
“One of the more interesting trends of the year was the surge in the volume of equity derivatives based on Asian stock indices. For example, greater investor interest in the Japanese stock market led to much heavier trading in futures and options based on the Nikkei 225, the leading index of Japanese stocks.
At the Osaka Securities Exchange, trading in the regular size Nikkei 225 futures and the mini Nikkei 225 futures rose 58.3% and 79.3% to 30.91 million and 233.86 million contracts. At the Singapore Exchange, Nikkei 225 futures rose 39.6% to 39.09 million contracts. At the CME, the yen-dominated Nikkei 225 jumped 105.1% to 11.79 million and the dollar-denominated Nikkei 225 futures jumped 176.9% to 4.68 million contracts.”
Now, we’ve discussed multiple times what exchange (CME vs ICE) holds dominance over each other (here, here, & here), and the CME was able to hold the number one position in contracts traded, despite the ICE’s international push to take over global exchanges, as well as the battle over which Oil contract gets traded more, WTI or Brent.
Chart Courtesy: FIA
If we’re discussing future contract volume, we can’t omit the most common futures contract, the Eurodollar. It not only keeps its position as #1 in volume, but experienced a 21% growth in just a year.
Chart Courtesy: FIA
What’s it all mean… well, for one – that the CME should reconsider the removal of the trader waiver for data fees (you guys seem to be doing alright, leave the small retail trader alone). But the overall take is that futures markets remain one of the most voluminous trading markets there is – providing that all too important ingredient for the professional who play their trade on the futures markets – liquidity
Using Your NCAA Bracket to Help Your Investing
by Jeff Miller
Regular readers know that I love using sports to find investment insights. There are three reasons:
- Plentiful data – both before the event and afterwards;
- Specific odds from prediction markets and pundits – even better than we have in stocks;
- The comparison forces investors to abandon market preconceptions, thinking about questions in a different way.
What can we learn from the problem of filling out your NCAA bracket?
The Popular NCAA Upset
Investors who listen to the "bracketology pundits" for a few minutes will find it familiar. There are plenty of buzzwords and opinions, but little supporting data.
One popular theme is that you should search for a good upset in your brackets and the best place to start is when the Regional 5-seed plays the 12-seed. There is some logic here. Let's look at the actual a priori odds for these games, taken from the excellent TeamRankings site:
These are the odds of advancing for each round, so the last column is "winning it all."
5 Oklahoma West 65.3% 34.1% 10.0% 4.2% 1.4% 0.5%
5 Cincinnati East 61.5% 26.8% 11.6% 5.7% 2.3% 0.9%
5 Saint Louis MidW 56.8% 14.4% 4.3% 1.6% 0.5% 0.2%
5 VCU South 69.9% 37.5% 13.3% 6.4% 3.0% 1.2%
Using these percentages, which have proven accurate over time, what is the chance of all four five seeds wining?
That is an easy probability question. It is the product of the four percentages or about 16%. It would be very surprising if we did not see a 12 seed beat a 5 seed. The problem for figuring out your bracket is simple: Which one?
Investment Application
This same probability blunder is a daily feature in investment commentary. Instead of bogging down in the technical definitions, let me just call this backward reasoning. The pundit starts with a conclusion (like the 12 versus 5) and then grabs any single instance as a likely candidate.
To take one of many current examples, let us consider margin debt and market tops. Investors are bombarded with charts showing the history of market tops at times of high margin debt, implying that this is a high-risk factor. Try putting the question the other way:
In all of the occasions where margin debt reached a peak, what were the investment results? Bespoke Investment Group (via Jeff Saut and Raymond James) provide the results:
Conclusion
The popular margin debt meme is yet another misleading argument, a trap for investors who do not understand how to analyze causality. Here is an investment tip to save money:
To Eliminate Flight 370 Theories, Start with a Ruler, Pencil and Map
by Charles Hugh Smith
No conventional scenario accounts for the methodical disabling of the communications systems, the bizarre altitude changes and professional navigation to way points, or the presumed turn south and a flight path that extended to at least 8:11 a.m.
UPDATE ON POSSIBLE DEBRIS: the 24-meter (79-feet) object is located far to the south of the search field indicated on the map below. The remote area is known as a floating junkyard, so while this could be yet another false lead, it appears to be the only credible lead at this point: If this is the debris of Malaysia Airlines Flight 370, what happens next?
Every plausible theory about what happened to Flight 370 has to not only fit the most reliable facts (radar tracks and satellite data) but basic geography. A widely circulated scenario proposed by Chris Goodfellow theorizes that a fire (from either a smoldering front tire or electrical fire) filled the cockpit with smoke and caused the pilots to head for the nearest major runway which happened to be to the west on Langkawi.
The reason why the transponder and ACARS systems were deactivated is the pilots pulled all the fuses in an attempt to control the electrical fire.
In Goodfellow's reconstruction, this gallant effort failed and the pilots were overcome by fumes and lost consciousness. The aircraft then flew on the westward heading on autopilot until it ran out of fuel and crashed into the sea.
THis scenario has been critiqued on a number of points: Here's What Pilots Think About The New Idea That The Missing Plane Flew For Hours After A Fire Killed The Pilots documents that full-face oxygen masks were easily accessible, nixing the notion that the pilots could not possibly have had time to radio air traffic control.
A “Startlingly Simple Theory” About the Missing Airliner is Sweeping the Internet. It’s Wrong addresses other problems with the scenario.
I've prepared a map with the "it has to be somewhere along this line" arc based on satellite data and Flight 370's last known west-bound heading. This heading has been confirmed by both Malaysian and Thai military radar.
if the pilots lost consciousness and the aircraft continued west on autopilot, the 777 would have been approaching India before its fuel ran and and it ditched into the sea. This is not even close to the arc traced by the satellite transmission at 8:11 a.m. 
The satellite data also conflicts with theories that have Flight 370 being diverted to Diego Garcia, a U.S./British military base 1,200 southwest of Sri Lanka, which is well away from the arc.
The problem is that various pieces of data do not support conventional scenarios based on past losses of commercial airliners. We can start with the fact that the Boeing 777 is one of the safest aircraft in commercial use. The only fatalities occurred quite recently as a result of pilot error.
The fire scenario in which pilots can't find time to radio ATC (air traffic control) but they manage to navigate multiple way points using the flight computer is not plausible. Not only do the masks and the safety record of the 777 make this a stretch (not to mention that a DC-8 is not necessarily a useful analogy to a 777) it's not yet clear (due to conflicting reports) whether the pilots could deactivate the ACARS system from the cockpit; some reports suggest that requires opening a floor compartment in the aisle outside the cockpit.
The methodical disabling of the two separate communications systems is inconsistent with an emergency that allowed the pilots enough time to change course via the flight computer, navigate to way points and change altitude.
The bizarre altitude changes (climbing to 45,000 feet, well beyond the aircraft's designed ceiling and then descending to 23,000 feet, according to Malaysian military radar) and lengthy flight path along navigational way points do not align with the pilot suicide scenario. In the two previous instances of pilot suicide (both denied by the host nations for reasons of face), the suicidal pilot dove the aircraft into the sea early in the flight.
The complex flight path westward does not align with this unless the pilot was aiming to ditch the aircraft beyond the reach of recovery. And if this were the goal, why climb to 45,000 feet and then descend to 23,000?
My pilot sources report that the 777 (along with all other commercial aircraft) are designed to fly within a narrow envelope of efficiency to conserve fuel. It's pushing the envelope hard to take an almost fully loaded airliner above its designed ceiling (around 43,000 feet). What possible motivation could there have been for this action, and the subsequent drop to 23,000 feet?
A struggle with hijackers comes to mind, but there is no solid evidence that any of the passengers or other crew members had the motivation or training to hijack the aircraft and either fly the 777 in the professional manner demonstrated or coerce the pilots to disable the communications systems and proceed west.
The passage over known Malaysian military bases suggests to some observers that the pilots may have been trying to draw a response, i.e. force the Malaysian Air Force to scramble fighters, but this did not happen.
That leaves a struggle between captain and co-pilot as one explanation for the wild changes in altitude, but if that occurred, the rogue pilot retained control and the communication systems remained off.
Since there is no evidence (after 12 days) that Flight 370 headed north and landed or crashed on land, official speculation has turned to the southern arc.
In order to reach the southern reaches of the arc, Flight 370 had to have turned south sometime after Malaysian and Thai military radar lost contact with the 777 around 2:30 a.m. Once again, this decision (the only possible choice left if the northern route has been ruled out) does not align with hijacking aimed at stealing the aircraft or holding the passengers hostage, given the paucity of potential landing sites. And if the presumed hijacking was intended to be an act of terrorism that murdered all 239 people on board, why fly the 777 six hours beyond the point when the presumed hijackers took control of the cockpit?
While it is certainly possible that the pilots were incapacitated by some event after they turned the aircraft south and the 777 flew on autopilot until it crashed somewhere close to this arc, the fact that the aircraft was obviously being piloted up to that turn south only deepens the mystery.
No conventional scenario accounts for the methodical disabling of the communications systems, the bizarre altitude changes and professional navigation to way points, or the presumed turn south and a flight path that extended to at least 8:11 a.m., almost six hours after the aircraft flew beyond the Malaysian military radar's range.
As noted in my previous entries on Flight 370, it is possible that the U.S. Navy's SOSUS (Sound Surveillance System)(Wikipedia) may be active in the region of interest. According to this article on the Sound Surveillance System (SOSUS), an advanced version was put in place in the mid-2000s.
On 26 April 1999 Lockheed Martin Corp., Manassas, Va., was awarded a $107,031,978 firm-fixed-price contract for Phase II of a deep water, undersea surveillance system. This system is a long life, passive acoustic surveillance system that can be configured for multiple mission applications. It has the capability to provide long-term barrier and field acoustic surveillance, long-range acoustic surveillance coverage of open ocean areas, and acoustic surveillance in areas with high ambient noise. This contract contains one option, which, if exercised, would bring the total cumulative value of this contract to $153,234,288.
Although there is no public indication that the SOSUS system detected an acoustic signal that could have been Flight 370 crashing into the sea, we can anticipate that no public announcement would be made. Rather, various naval assets would be directed to search in the appropriate area.
Unfortunately, even if the black box is recovered, we may never know what transpired in the cockpit from 1:00 a.m. on, as the black box only records the previous two hours of cockpit voice data (it records 25 hours of other flight data). If the aircraft was on autopilot those last two hours (or was flown by a silent human pilot), there may well be little record of events in the cockpit prior to the two-hour mark.
It increasingly appears to be a mystery that will never be solved with any certainty.
US monetary policy moving in the right direction
The Fed struck a somewhat more hawkish tone today - certainly enough to spook the markets. Expectations for the first rate hike have shifted forward by nearly a quarter, pointing to late spring of 2015 as the starting point.
This monetary stance, combined with another $10bn taper was the right move. Here are the reasons:
1. The $10bn cut per meeting removes much of the remaining uncertainty around taper trajectory. The reductions are on autopilot. Often it's not the policy itself but the uncertainty surrounding it that creates issues for the economy. That was one of the key problems with this open-ended QE - the fear of a painful exit put the economy on hold.
2. It is unclear if extremely low rates stimulate credit growth at all, and in fact some argue it could be the opposite. At the same time, savers, including many retirees, have been punished by negative short term real rates for years. This zero rate policy needs to end.
3. The US economy is stronger than is commonly believed. "How dare you say that, you heretic - don't you read all the financial blogs?" That has been the response from many. Perhaps. But it may behoove some folks to pay attention to the data ... More on this later. The point here is that the US economy will be fine without QE and with higher interest rates.
4. The current environment has created such hunger for yield that investors are increasingly taking higher risk in order to target the same performance they experienced in the past. Insurance firms, pensions, individuals - the behavior can be seen in a number of areas. The Fed's exit should help adjust some of the distortions.
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