JLN Options: FINRA Targeting Options Manipulation; Trend to overcharge and overtrade persists

Sep 17, 2012

Lead Stories

FINRA Targeting Options Manipulation
Peter Chapman, Traders Magazine
The Financial Industry Regulatory Authority is investigating allegations of manipulation in the options market.
Specifically, the regulator is targeting newly discovered types of “mini manipulation,” or the trading of an option’s underlying equity in order to profit from movements in the price of the option.

Trend to overcharge and overtrade persists
Jonathan Davis, Financial Times
The damning money-weighted rates of return analysis carried out by Simon Lack in his book The Hedge Fund Mirage has prompted a useful debate about the true returns recorded by hedge funds. Industry lobbyists have not had much luck in undermining his critique, which is hardly surprising as the data, interpreted correctly, is essentially unanswerable, although the conclusions people draw from the data is another matter.

Futures and options bonanza defies summer lull
Helen Bartholomew, IFR Asia
Futures and Options open interest on the CBOE’s Volatility Index hit record highs on Friday as investors sought to protect gains on the S&P 500, which broke above 1,470 in Friday’s intraday trading for the first time since 2007.
A renewed risk-on outlook took hold following Bernanke’s announcement of the central bank’s third round of monetary easing in the form of mortgage debt purchases totalling US$40bn per month.
Futures and options markets saw a flurry of interest late in the week as investors sought to hedge their gains, with many markets hitting record trading levels following the quietest August for five years.

RIAs Gain Foothold in Tricky Options Market
Joyce Hanson, AdvisorOne
Welcome to the world of options investing, advisors. Now put on your thinking cap and figure out how you can make your visit to this competitive marketplace worthwhile.
That was essentially the message to registered investment advisors (RIAs) at an equity options conference held by the Options Industry Council (OIC) and the Futures Industry Association this week in New York.

Traders betting dollar’s recent woes nearing an end
Doris Frankel, Reuters
The dollar has been hammered in the last several days, particularly against the euro, but some in the equity options market seem to believe the greenback’s woes are nearing an end.
Traders on Friday aggressively scooped up bullish options in an exchange-traded fund tied to the U.S. dollar index.

Fed’s Selling Volatility Into The Market Will Force Mispricing Of Risk 
Credit Suisse has made an important point with respect to the Fed’s purchases of MBS. As we know, a mortgage borrower is long an option to prepay. That means a mortgage lender is short this same prepayment option. Therefore a buyer of MBS is an options seller and the Fed is in effect selling vol into the market.

A comedown may be waiting after Fed high
Edward Krudy, Reuters
Comparing the Federal Reserve to a rehab clinic offering addicted investors a synthetic high has been a favorite of Wall Street wags ever since the first round of Fed stimulus nearly four years ago. The punch line is that you always need more and more to get the same high and each bout of euphoria is followed by a crashing comedown.
After the frenetic reaction brought about by the announcement of the Fed’s latest stimulus program – $40 billion pumped into the U.S. economy each month – the coming week is likely to bring a more sober period for markets as investors digest what it means in the longer run and turn their attention to the remainder of the year.


Nasdaq pushes into post-trade monitoring
Philip Stafford, Financial Times
Nasdaq OMX, the US exchanges operator, is moving into risk management of post-trade services such as clearing as brokers look to exert greater control over their ability to monitor and halt risky trades.
Bank of America Merrill Lynch has become the first broker-dealer to use technology from the bourse’s FTEN subsidiary to monitor trading through its European cash equities clearing business.


Killing Dodd-Frank Softly
To block financial regulations, industries and their congressional allies delay, delay, delay—and if necessary, sue.
Patrick Caldwell, The American Prospect
On August 16, a group of 32 members of Congress—27 Republicans and five Democrats—sent a seemingly innocuous request to Richard Cordray, the director of the Consumer Financial Protection Bureau, regarding a new rule on international money transfers. “We urge you to delay the effective date of these rules and to undertake a comprehensive study of their impact before moving forward to avoid irreparable harm to consumers,” they wrote. The regulation, set to go into effect in January, will force companies to disclose the full extent of the fees they charge when people send money overseas. While the letter raised concerns about the rule, the members of Congress didn’t ask the CFPB to scrap it; instead, they entreated Cordray to hold off on the rule until January 2015.

Hedge Fund Association Seeks Clarity from SEC
Ricardo Kaulessar, eVestment|HFN
Changing a longstanding regulation in the investment world can either provide stability or create uncertainty.
In the case of the Hedge Fund Association, its response to the Securities and Exchange Commission’s pending lift of the longstanding ban on hedge fund advertising is to request further clarification pertaining to investor accreditation before it is finalized.

SEC fines Nyse $5m for market data distribution failures
The Securities and Exchange Commission has fined the New York Stock Exchange $5 million for giving proprietary customers a head-start by sending them market data before it went out to the public.
In first-of-their-kind charges, the watchdog says that over an “extend period of time” beginning in 2008, Nyse sent out data through two of its proprietary feeds – Book Ultra and PDP Quotes – before sending it to the consolidated tape, violating SEC Regulation NMS.

NSE cuts connectivity cost for brokers (India)
Business Standard
Competition between stock exchanges in India is benefiting stockbrokers. Their overhead costs are coming down as the country’s largest bourse, the National Stock Exchange (NSE), today took yet another step to keep members happy. After allowing brokers to off-set annual membership fee of Rs one lakh with transaction charges, the NSE has now cut connectivity cost by 50 per cent.
However, brokers say that use of VSAT and leased line technology is on a decline as most prefer Internet-based trading.


International Securities Exchange Joins IPC’s Connexus Financial Extranet
Press Release
IPC Systems, Inc., a leading provider of voice and electronic trading communications solutions to the world’s top financial services firms and global enterprises, today announced that the International Securities Exchange (ISE), operator of a leading U.S. options exchange, has joined IPC’s Connexus Financial Extranet service.< br />Using IPC’s Connexus, numerous capital market participants around the globe can access a variety of services from ISE. In addition to trading applications such as ISE’s FIX interface and PrecISE Trade, Connexus is also offering connectivity to ISE’s market data products such as the ISE Premium Hosted Database (ISE PhD). ISE PhD is a fully managed historical tick database of full OPRA data including all quotes and trades from all exchanges, U.S. equities level-one data, pre-computed implied volatilities and Greeks, full corporate action histories, and ISE Open/Close trade data.

Volant Dives Into Routing
Peter Chapman, Traders Magazine
Volant Trading is entering the options routing business. The proprietary trading firm recently hired two executives formerly involved with Goldman Sachs’ options routing business to head the new initiative. In building a routing business, which involves paying retail brokerages for their flow, Volant will compete against such giants of the industry as Citadel, Susquehanna and Citi/ATD.

Actant releases CBOE CMi 2.0 compliant options trading applications
Press Release
Having offered programmable trading solutions to CBOE participants since 2003 when the exchange first introduced CBOE Hybrid, the Hybrid Trading System, Actant has taken this opportunity to re-write its CBOE market interface, delivering performance improvements to traders mass quoting with Actant Quote.
Coupled with enhancements designed to negate pick-off risk, market makers can now leverage CMi 2.0 offers, quoting tight options markets on underlying products. Incorporating smart trade and portfolio hedging, Actant’s ExStream fast edge taker also utilises CMi 2.0 market access to CBOE, CBOE C2 , CBOE Futures Exchange and CBOE Stock Exchange.


How to Win the Fed’s New Game
An options strategy that allows hedging, while also giving you a chance to cash in on a big rally.
Steven M. Sears, Barron’s
If one doesn’t think too deeply, or too far into the future, it was a good week, and the next month will likely be even better.
The stock market surged, and equity risk premiums sharply declined, following the Federal Reserve’s announcement of a third round of quantitative easing. And the Dow Jones Industrial Average is within 5% of its historic high of 14164.53, set on Oct. 9, 2007.

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