Lead Stories

Bond Volatility Approaches Record Low as Fed Drains Convexity
Liz Capo McCormick, Bloomberg
The Federal Reserve’s decision to hold borrowing costs steady into 2015 and buy mortgage debt each month is reducing bond market volatility and demand for options that hedge against changes in interest rates.
Mortgage bond holders often use swaptions, or options on interest-rate swaps, to guard against swings in rates, which can trigger changes in levels of expected mortgage refinancing and the debt’s value.
http://jlne.ws/PDDeYN

Derivatives Rule Changes in Europe to Roil Bourses
Vladimir Guevarra, The Wall Street Journal
Stock exchanges are facing a shake-up in Europe over the next few years, as continental lawmakers establish new rules to boost competition in the profitable derivatives-trading sector.
Currently, European derivatives trading is led by Deutsche Börse AG and NYSE Euronext. The sector contributes more than 36% of Deutsche Börse’s revenue and about 25% of NYSE Euronext’s, but their dominance could be threatened by proposed European Union legislation.
http://jlne.ws/OGYAIf

Flash crash or a turning point for oil prices?
John Kemp, Reuters
Monday’s sudden dive in oil prices appears more and more unusual with hindsight, and poses questions for traders, regulators and exchanges alike about just who or what caused such a major turnaround in the market…
By September 11, hedge funds and other money managers, betting prices would rise further, had amassed a near-record long position in WTI and Brent-linked futures and options equivalent to 410 million barrels of crude, according to position data published by the CFTC and ICE.
http://jlne.ws/PXAiZf

Emerging Stocks Drop Most in Eight Weeks on China, Japan
Michael Patterson and Sridhar Natarajan, Bloomberg
Emerging-market stocks fell the most in two months as data signaling contractions in Chinese and European manufacturing as well as an increase in jobless claims in the U.S. eroded confidence in the global economy…
The iShares MSCI Emerging Markets Index exchange-traded fund, the ETF (EEM) tracking developing-nation shares, dropped 1.4 percent. The Chicago Board Options Exchange Emerging Markets ETF Volatility Index, a measure of options prices on the fund and expectations of price swings, rose 2.9 percent.
http://jlne.ws/PDFRtJ

Don’t Blame Hedge Funds for Financial Crisis, Study Says
Juliet Chung, The Wall Street Journal
The verdict is in: Hedge funds did not cause the financial crisis that roiled the world’s economies several years ago, according to Rand Corporation.
Not that many people really thought they did. Still, it doesn’t mean these funds won’t play a role in the next one, according to a study released Wednesday by the nonprofit think tank.
http://jlne.ws/PXwrLQ

VIX Continues to Burn, Part II
Wall Street Sector Selector
The VIX index and VIX ETFs continue to crash and burn this week alongside idle markets and bored investors.  Fear has definitely left the marketplace this week after Dr. Ben’s “easing” words last week, as the VIX index lost an additional 2.12% today to close at ’13.18,’ well below the average ’20′ mark.  VIX ETFs followed along today, although they did not move so much, as the iPath S&P 500 VIX Short Term Futures ETN (NYSEARCA:VXX) lost .11% today while the VelocityShares Daily Inverse VIX ETN (NYSEARCA:XIV) added .11%.
http://jlne.ws/PDCWBo

Where’d All the Fear Go?
Steven Russolillo, The Wall Street Journal
So much for fear creeping back into the stock market. It is nearly non-existent these days.
The Chicago Board Options Exchange’s Volatility index, or VIX, is back below 14 and pushing against five-year lows. More global monetary easing appears to have been the best medicine to cure investor anxiety.
http://jlne.ws/PDGjbu

Ex-CME Software Engineer Admits to Trade-Secrets Theft
Andrew Harris, Bloomberg
A former CME Group Inc. (CME) software engineer confessed to stealing trade secrets from his ex- employer, the operator of the world’s largest futures exchange…
Yang admitted to downloading more than 10,000 files containing source code for the CME Globex electronic-trading platform, acting Chicago U.S. Attorney Gary Shapiro said in a statement.
http://jlne.ws/PXxg76

Exchanges

Top futures exchanges agree to algo testing rules
Tim Cave, MarketWatch
Three of Europe’s leading derivatives exchanges have agreed to new standards for “stress testing” trading algorithms in a move that could pave the way for new revenue streams in the future.
NYSE Liffe, CME Group and the IntercontinentalExchange have all signed up to new guidelines issued by the Futures and Options Association, under which they will provide their market data “to replicate a live trading environment and test algorithms.” 
http://jlne.ws/PDDUxp

Direct Edge CEO Says Focused on Prospects as Independent Company
Nina Mehta, Bloomberg
Direct Edge Holdings LLC is focused on expanding its business on its own, according to its chief executive officer, a sign that buyout talks that were reported in July may have cooled.
The owner of two U.S. equity exchanges based in Jersey City, New Jersey, continues to review its capital market options, William O’Brien said in a phone interview. The Wall Street Journal reported two months ago that TMX Group Inc., (X) the parent company of the Toronto Stock Exchange, was negotiating to acquire the fourth-largest U.S. stock exchange operator.
http://jlne.ws/PDEATw

CME to adjust pit grain trading as USDA shifts report times
Reuters
CME Group will adjust the open-outcry trading hours for grain futures and options next year when the U.S. Department of Agriculture changes the time it releases key crop reports.
http://jlne.ws/PDGyDl

Regulation

SEC no match for high-tech traders
Stephen Foley and Arash Massoudi, Financial Times
The Securities and Exchange Commission is hopelessly outgunned in resources and technical savvy by the computerised traders it regulates, a leading US senator has warned ahead of a hearing into recent stock market glitches.
Senator Jack Reed said a hearing set for Thursday will be the first in a series investigating whether the market structure created by the SEC contributed to the near failure of Knight Capital and the botched flotations of Facebook and BATS Global Markets. It will also examine whether some high-frequency traders have an unfair advantage.
http://jlne.ws/QoPZ8M

Strategy

Exploit High Volatility Before the Earnings Boogieman Comes
Use a ‘short strangle’ to harness a suddenly volatile RVBD
Tyler Craig, InvestorPlace
While the majority of trading bets are directional in nature, the options market provides a class of trades focusing primarily on volatility. When it comes to trading volatility, the question of which direction takes a backseat to two more important questions: how fast and how far.
Rather than accurately predicting direction, a volatility trade might look to exploit a situation where a stock is poised to move faster and further than currently reflected in option prices, or, alternatively, slower and not as far as the options are discounting.
http://jlne.ws/PDDJlF

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