Observations and Insight

Market Attributes: Risk & Volatility Dashboard, February 2015
Tim Edwards – S&P Dow Jones Indices (reprinted with permission)

After a rocky start to the year, the past two weeks have provided respite to U.S. equities. Nonetheless, it remains an interesting time in global markets: 13 out of the 15 measures of volatility shown are above their average for the last 200 days.

The S&P 500 is making new highs yet again and the VIX is back at 15.45, down by more than five points versus one month ago. Part of the increasing demand for U.S. equities is based on U.S. dollar strength. With currency wars breaking out across the globe, correlations between the U.S. dollar and the S&P 500 are on the increase, while correlations between U.S. and global equities have declined.

Meanwhile a modest rally in oil prices has been converted into a newfound enthusiasm among retail investors for high yield bonds (among which energy is the dominant sector); large flows into associated ETFs accompanied a tightening of CDS spreads by nearly 40 basis points.

Volatility measures for currencies, U.S. Treasuries, oil and gold all gained this month and remain historically elevated. More worryingly, a chorus of commentators has been pointing to vast flows from retail investors into a high yield bond market that remains challenged on the fundamentals.

With negotiations with Greece regarding their bailout package ongoing and in light of the recently announced €1.1 trillion stimulus package from the ECB, it is no surprise to see that the euro judged to be most at risk among currencies. Nor should we be surprised at retained high volatility in the oil markets; concerns over the energy sector have fed through to the current high reading in Canada’s S&P/TSX 60 equity volatility.

The S&P Daily Inverse Short-Term VIX index was the only one of our investable volatility indices to outperform the vanilla equity exposure over the last month. Over 12 months, nothing beat a resurgent S&P 500.

The VIX futures curve has steepened, but not unduly given the decline in the VIX. Volatility of volatility (our final measure above) has also declined, suggesting that there is an increased confidence from the market that the next spike in volatility will be manageable.

Download the dashboard on the S&P Dow Jones Indices web site => http://jlne.ws/1CNCsB3

Lead Stories

AT&T’s Predicament Rattles Investors as FCC Vote Looms: Options
Michelle Davis – Bloomberg
Traders are bracing for losses in AT&T Inc. before an FCC decision that threatens to upend the way the nation’s second-largest wireless carrier does business.
Demand for options that protect against losses in shares of AT&T rose to the highest level in more than three years relative to bullish ones, data compiled by Bloomberg show. The number of AT&T shares sold short has climbed to the most since 2007.
***DA: Hold your breath.

A pair of indicators are flashing a warning for stocks
Anora Mahmudova – MarketWatch
The S&P 500 closed at a record Tuesday, while the CBOE Vix, a measure of market volatility, fell to 16, down from elevated levels in January.
But Randy Frederick, managing director at the Schwab Center for Financial Research, says two measures in the options market are flashing warning signs to investors.
***DA: If you liked it at 16 yesterday, you’ll love it at 15 today.

Stock options arrival signals new asset class for Shanghai
The Trade News
With the introduction of stock options, the Shanghai Stock Exchange has launched a new phase of derivatives trading this month, and trader interest has taken off more rapidly than envisaged.
Investors are now able to trade options on the Shanghai Stock Exchange 50 A-Share Index exchange-traded fund. Based on data from the Shanghai Stock Exchange, open interest more than doubled from 8,651 to 20,459 contracts in the first two days. Trading activity increased from 18,843 contracts to 23,436 contracts.  
***DA: All those predictions of pent-up demand for options trading in China are proving to be right.

What’s Behind the Mixed Signals from VIX Speculators?
Adam Warner – Schaeffer’s Investment Research
I noted the other day that it was difficult to read much into the news that hedgies had gotten more bullish on CBOE Volatility Index (VIX) into actual VIX strength. Going with the trend isn’t generally the best signal for the rest of us, in my humble opinion. But hey, opinions vary!


CBOE Delivered Record Volumes On Index Option Growth In Q4 – CBOE Holdings
Mitchell Warren – Seeking Alpha
South LaSalle Street in Chicago may not have the name recognition that Wall Street does in New York, but for option traders it is the center of their financial universe. CBOE Holdings (NASDAQ:CBOE) is the largest options exchange in the United States with a market capitalization over $5B (28.6% market share). The Chicago based firm owns the Chicago Board Options Exchange, C2 Options Exchange, and CBOE Futures Exchange. Two of their most actively traded products, the S&P 500 options and CBOE Volatility Index options, helped contribute to more than 1.32B contracts traded in 2014.

Eurex latest exchange to see strong fourth quarter
Luke Jeffs – Futures & Options World
Eurex has become the latest large exchange to credit strong trading in the latter part of last year for solid 2014 financial results and see decent volumes this year.
Deutsche Boerse, which owns the Eurex, said late on Wednesday revenue on the futures and options exchange grew 29% in the three months to the end of last year to €222m, making the futures trading platform the strongest unit in the group….

ICE Benchmark Administration to Administer the LBMA Gold Price from 20 March 2015
Press Release – ICE
Intercontinental Exchange (NYSE: ICE), the leading global network of exchanges and clearing houses, announced today that ICE Benchmark Administration (IBA) expects to launch the new LBMA Gold Price, which replaces the long established London Gold Fix, on 20 March 2015.
Finbarr Hutcheson, President, ICE Benchmark Administration said: “Under the administration of IBA, the new LBMA Gold Price will benefit from increased transparency, and the robustness of the data used to calculate the benchmark will give a better representation of the market price. We would like to thank the London Bullion Market Association and the precious metals industry for their work and support in the transition of this globally important benchmark.”

Regulation and Enforcement

Interactive Brokers must pay $667,000 for portfolio selloff mishap -panel
Suzanne Barlyn – Reuters
Interactive Brokers LLC must pay $667,000 to a hedge fund after an arbitration panel found the discount brokerage firm’s system for selling securities from clients’ accounts to pay margin debt had backfired leaving the fund with hefty losses.
The hedge fund, Glen Lyon Long Term Options LP, filed the claim in 2012, seeking between $1 million and $3 million. It said the brokerage used a flawed “auto-liquidation” system, according to a Financial Industry Regulatory Authority (FINRA) arbitration panel ruling late Tuesday.
***DA: Oops. My bad.


High-Speed Firm Virtu Revives IPO Plans
Bradley Hope – WSJ
One of the world’s biggest high-frequency trading firms is betting that the “Flash Boys” furor is behind it.
Virtu Financial Inc. is reviving its plan to go public, and is expected to file a revised IPO prospectus with the Securities and Exchange Commission within days, according to people familiar with the matter.
***DA: The first failed IPO would have valued the firm at $3 billion. The stake it subsequently sold to Temasek last year valued the firm at $2 billion. So, in its amended prospectus, will it change the “one losing day in 5 years” claim to “two losing days?”

Physicist says it is possible to use ships to facilitate high-frequency trading
Eric Garcia – MarketWatch
A physicist said that it is possible that ships may be used to facilitate high-frequency trading overseas.
In an article for Nature, Mark Buchanan, a physicist and science writer based in the United Kingdom, wrote about the possibility as airborne laser networks that can be used to facilitate high-frequency trading begin to span to oceans.
***DA: Using ships to gain an informational advantage in trading. How 19th Century.


Binary Options Strategies: Chapter 1. Straddle Strategy
FX Empire
A popular trading strategy among many binary traders, the straddle uses a call and a put option with the same strike price and expiry time simultaneously.  This strategy is best used when you are unsure of which direction the price of an underlying asset will move towards but you are confident that the fluctuation will be significant.
In order for the straddle trading strategy to be effective, it must first meet several conditions.

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