Observations and Insight

New Rules: NFA’s Dan Roth on Confirmations, Residual Interest and the Corzine Rule

After the twin scandals of MF Global and Peregrine Financial rocked the futures industry in 2011 and 2012, the National Futures Association, underwent a review, not only of its internal procedures, but also of its rules. In Part Two of this two-part John Lothian News exclusive, NFA CEO Dan Roth summarizes the changes made to the agency’s rules to restore customer confidence.
Watch the video »

Lead Stories

BATS Global Markets Names Chris Concannon CEO
Press Release – BATS
BATS Global Markets (BATS), a leading operator of U.S. and European markets, today announced that President Chris Concannon will be appointed to the additional role of chief executive officer, effective March 31, 2015.
Mr. Concannon arrived at BATS as president in December 2014 with nearly 20 years of experience as an exchange executive, regulator and industry participant, and played a major role in the Hotspot FX acquisition announced January 16, 2015.
http://jlne.ws/1JHO3s3 (PDF)
***DA: In a commentary a few weeks ago, JLN’s Jim Kharouf wrote that they “are swinging hot BATS in Kansas City.” Worth a read.  http://jlne.ws/1Fp8T8Y

Bond ‘Fear Gauges’ Jump; Rates Rise in Focus
Chris Dieterich – Barron’s
Worry indicators are flashing red for big swings in bond prices and interest rates with Janet Yellen poised to take the podium on Capitol Hill.
Credit Suisse says its options-based Interest Rate Volatility Index rose last week to near a one-year high. Trader expectations for price moves in the iShares 20+ Year Treasury Bond ETF (TLT) over the next three months, measured by the ETF’s implied volatility, are near the highest since 2013.
***DA: Ten year yield dropped 7 basis points on Yellen’s comments. Read on:

Bonds rally, dollar falls after Yellen emphasizes flexibility
David Gaffen – Reuters
The dollar edged lower and bond yields fell after U.S. Federal Reserve Chair Janet Yellen said on Tuesday it would be several months before the Fed expects to raise interest rates, while European equity markets gained after Greece produced a list of proposed economic reforms.

Is Now the Right Time to Try an Options-Based Fund?
Adam Warner – Schaeffer’s Investment Research
Why ‘stock plus options’ ETFs tend to outperform over the long haul
***DA: I would say five years ago was the right time; just after the Fed declared war on volatility.

Flash Boys Help Markets, Not Just Themselves, BOE Study Finds
John Detrixhe – Bloomberg
A year after Michael Lewis’s book brought the supposed menace of high-frequency trading to public attention, researchers at the Old Lady of Threadneedle Street suggest speedy trading may not be so bad for markets after all.
Electronic trading makes stock markets more efficient by enabling them to react more quickly to new information, the Bank of England working paper concluded. The authors took the FTSE 100 Index’s 20 largest stocks and examined how they traded on the London Stock Exchange in the four months through the end of 2012. They compared the trades of 10 HFT firms with the orders placed by 10 investment banks.
***DA: That’s what they have been trying to tell us – HFT has simply changed the structure, the way market makers are incentivized to take the other side of orders. In so doing, they also made the market tighter and more efficient.

Big Investors Shun Emerging Markets, Warm to U.S.
Steven M. Sears – Barrons
A key emerging market proxy is flashing bearish signs.
Major institutional investors, cloaked in the secrecy of electronic markets, have spent recent weeks adjusting or establishing massive put positions in iShares Emerging Market Index (ticker: EEM ). Puts increase in value when security prices decline.
Last week, an investor sold 70,000 EEM March $36 puts at nine cents to buy a 57,000 April $34/$36 put spread for 11 cents. Another investor bought 25,000 February $40.50 puts. These trades anticipate EEM, which traded recently for $40.26, falls below its 52-week low of $37.23.
***DA: The hot money is quietly returning to safety, or at least hedging its bets.


OCC Appoints Two New Public Directors to its Board
Press Release – OCC
OCC announced today that Thomas R. Cardello and Robert R. Litterman were appointed to its Board of Directors, increasing the number of public directors on OCC’s Board from 3 to 5.

Regulation and Enforcement

5 Things to Know About Spoofing in Financial Markets
Bradley Hope – WSJ
“Spoofing” is an illegal type of market manipulation that works like bluffing: A trader places big orders for stocks, bonds or futures to get others to think the price is going up or down. Then, in the blink of an eye, the spoofer cancels those orders and puts in opposite orders to take advantage of those traders. Spoofing can earn a big payoff but can undermine confidence in the markets and hurt other traders, The Wall Street Journal reports.
***DA: One could argue, though, that the “others” in the example above thought they were gaming the system by stepping in front of a big order and got exactly what they deserved.

U.S. commissioner calls for more rigorous review of risky ETFs
Ashley Lau – Reuters
A top member of a U.S. securities regulator on Monday called for a more transparent and rigorous review process before approving rule changes to list riskier exchange-traded funds that she believes could harm retail investors.
Securities and Exchange Commission Democratic member Kara Stein called for the reforms as part of a three-page dissent over a rule change that paved the way for seven new exchange-traded funds from AccuShares Investment Management LLC to list on the Nasdaq stock market exchange.


Aggressive HFT Is Not Dead
Irene Aldridge and Steven Krawciw – Traders Magazine
Recently, some articles have declared high-frequency trading (HFT) dead. One industry observer even suggested that “poor” HFT firms should be “pitied” as their strategies have been wiped out by volatility and dog-eat-dog competition for faster, better, ever more expensive technology undermining all profits.
According to research from AbleMarkets.com, nothing could be farther from truth. Aggressive HFTs quietly, but significantly, prosper, and more so in the presently volatile market conditions.


Options Trading Strategies: Lessen Volatility on your Portfolio
Bob Lang – CBOE Options Hub
Random price movements leave us with very little edge when it comes to reading the charts and technical’s.  Nevermind fundamental analysis, which is simply impossible to explain a how stock can move violently after a news event.  The market is simply designed around accumulation and distribution, seen very clearly on a price and volume chart.  Yet, when these buyers and sellers are pulled in each direction by the market there is an uneasy feeling about participating.

Options Education

The VIX: What It Is, What It Isn’t, What To Do About It Now
Peter F. Way – Seeking Alpha
The basic equation of stock option valuation contains several interrelated factors, including the underlying stock’s price, which when solved provides an appropriate price for each of the several available strike-price and expiration-dated option contracts. One of the key input factors common to all the contract price solutions is the issue of uncertainty present for the underlying stock’s future price.


The Options Industry Council Announces 2015 Spring Seminar Schedule
Press Release – OIC
The Options Industry Council (OIC) launched its evening seminar program for the first half of 2015, continuing the successful three-part series that was first offered in 2014. OIC will also host Advanced Strategies and Volatility seminars this spring.

CBOE RMC, March 4-6 2015, Carlsbad California
Now in its 31st year in the U.S., the annual CBOE Risk Management Conference (RMC) is the premiere financial industry conference designed for institutional users of equity derivatives and volatility products. Hosted by the Chicago Board Options Exchange (CBOE), RMC is an educational forum dedicated to exploring the latest products, trading strategies and tactics used to manage risk exposure and enhance yields. RMC brings together top traders, strategists and researchers, enabling participants to learn the state-of-the-art in investment risk management from true experts in the field.
***DA: Hey, that’s in one week!

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