Observations & Insight

Kansas City Swinging Hot BATS
Jim Kharouf, JLN

BATS Global Markets reported its 2014 results yesterday. Quite a year for an exchange that weathered the media and regulator storm in the wake of Michael Lewis’ “Flash Boys.”
Despite all the negativity surrounding the HFT space, BATS posted its best market share in US equities and options and held the top spot in equity market share in Europe.

BATS’s equity options total market share was 6.3% in December 2014, up from just 2.8% a year earlier, according to the OCC, and comes during a time when the options industry continues to show slow but steady growth. Last year, the 12 US options markets posted total volume across all exchanges of 4.11 billion contracts, an increase of almost 4 percent from a year earlier.

Given the rocky start in equities in 2015, this may be another banner year for BATS. The Kansas City-based exchange also announced it plans to open an office in Chicago and expand its New York office, as part of its Direct Edge purchase.

It also released on Tuesday, plans to shake up the equity markets with a new fee structure which it says will reduce fees by more than 80% in the most liquid US securities. BATS says this could reduce costs for the industry by $850 million annually.

So now, we’re seeing the thaw from the Dodd-Frank Act and rule making process, as exchanges begin to offer new and different cost savings to participants and customers. BATS is certainly not alone here. The Intercontinental Exchange is also looking to change its equities structure and other exchanges are looking for new and compelling ways to lower costs within a new framework of higher regulation and higher capital requirements.

Regulatory certainty + volatility + innovation = opportunity. Let’s see if the folks from Kansas City can continue to swing a hot bat in 2015.

Lead Stories

Bats Global Markets Sets Full-Year Market Share Records In U.S. Equities, Options, And Remains #1 In Europe Equities
Press Release
Company Remains on Track to Complete Direct Edge Integration January 12, 2015
BATS Global Markets (BATS) today reported its best annual market share performance in its U.S. equities and U.S. options businesses in 2014, reporting 20.4% U.S. equities market share for the year on a pro forma basis, up from 10.4 % in 2013, and 4.8% U.S. options market share for the year, up from 3.7% in 2013.

Bats Global Markets Sets Full-Year Market Share Records In U.S. Equities, Options, And Remains #1 In Europe Equities

**JK – BATS hitting on all cylinders.

Shanghai Stock Exchange to Allow Same-Day Trading for ETFs
Some international investors have been reluctant to use the Hong Kong-Shanghai exchange link because of the Chinese requirement to pre-deliver securities to a broker for sale before a settlement. Hong Kong Exchanges & Clearing Ltd. has been working on an enhanced system to reduce compliance risks for fund managers.
Separately, the China Securities Regulatory Commission has approved trading of SSE50 ETF options from Feb. 9, Shanghai Securities News reported, citing the regulator.

**JK – The opening of options in China.

China derivatives push gathers steam
Gabriel Wildau, Shanghai, FT
The Shanghai Stock Exchange will launch simulated trading of stock options, China’s securities regulator said on Friday, the latest in a series of steps by regulators in recent weeks to develop the country’s nascent derivatives market.

CBOE Holdings Peak New 52-Week High on Robust Volumes – January 8, 2015
Shares of CBOE Holdings Inc. (CBOE – Analyst Report) have been riding on a strong growth momentum in all three trading sessions this week, scaling a new all-time 52-week high of $67.29 on Jan 7, 2015. The improved traction was based on the solid report of trading volumes released earlier this week.

**JK – CBOE’s stock charges onward and upward.

Bull Market Hedging Was a Boon for Exchange Volume in 2014
By Sofia Horta e Costa and Inyoung Hwang, Bloomberg
Three years without a correction in the Standard & Poor’s 500 Index is spurring enough anxiety to keep options volume marching higher. More than 16.9 million puts and calls a day changed hands last year on U.S. exchanges, up 3.7 percent from 2013, according to data from the Chicago-based Options Clearing Corp. That’s the highest level after an all-time high in 2011. Traders snapped up contracts to hedge against losses or speculate on more gains as American stocks posted their third consecutive advance exceeding 10 percent. The average daily volume this year was 17.3 million through Jan. 7.

Oil Set for Seventh Weekly Drop as OPEC Reaffirms Supply
Implied volatility for at-the-money options in the front-month WTI contract advanced to 60.2 percent this week, the highest level in more than three years, data compiled by Bloomberg show. It’s about 46 percent today, while Brent’s volatility is near 44 percent.

The Week in Review: Volatility High, Prices Low
Economy Watch
U.S. equities saw a fall and recovery amidst greater uncertainty about falling prices in Europe and in the U.S.


CME Can Thank the Fed for Record Trading While ICE Sees Decline
By Matthew Leising, Bloomberg
Central bank efforts to resuscitate the American and European economies are at different stages, and that’s driving a divergence in fortunes at two of the top derivatives exchanges.

***DA: The difference, or at least one big difference, is the growth in options on futures, as evidenced by this infographic from CME Group. And read on for the full story:

Infographics: Futures and Options Grow as Volatility Returns
CME Group – Press Release
Both futures and options volumes grew significantly across multiple asset classes at CME Group during the year. Annual volume averaged a record 13.7 million contracts per day in 2014, with October monthly volumes averaging an all-time high of 17.6 million contracts daily. On October 15, overall exchange volume marked a single-day record of 39.6 million contracts traded, including a record 7.3 million options contracts.

**JK – CME posted a monthly options record of 3.5 million contracts average daily volume in October 2014.

Regulation & Enforcement

Derivatives: Fractured derivative market needs to regain global strength
The CFTC chairman, Timothy Massad, has stated the agency may revise that method. I couldn’t agree more with him because I thought there

FINRA’s holiday ‘CARDS’
By Hester Peirce, contributor, and Kristine Johnson, The Hill
Few Americans have even heard of the Financial Industry Regulatory Authority (FINRA), but the securities regulator is about to become intimately familiar with all Americans’ investment portfolios. FINRA recently proposed the Comprehensive Automated Risk Data System, known by the less scary-sounding shorthand “CARDS.” In the name of investor protection and investor confidence, FINRA plans to monitor all securities accounts and transactions. Investors should run from this kind of protection.


F&O Tracker: Don’t go long just yet, bounceback not a trend
The Economic Times
Decline of implied volatility by almost 150 bps of a day’s bounce back and mainly calls IV’s reducing are also not encouraging. Also, we have seen some unwinding in calls in Thursday’s session. Taking this into consideration, we suggest that for taking fresh short positions, one should now wait for either FIIs shorting in index futures or Brent crude below $50bbl.

VIX drops to 17 as rally continues
Equity indexes continued to rebound, pushing the S&P 500 and Nasdaq 100 into positive territory for the year and driving the CBOE Volatility Index back down to 17.
The S&P 500 jumped 36.24 points, or 1.79 percent, to 2062.14. The SPX has climbed back above its 10- and 20-day moving averages and closed just above resistance. The next level of resistance is 2080, with support is 2000.

Chicago Trader: Rally back is too emotional
The S&P’s 100-day moving average was indeed the 2015 welcome mat for bulls as that’s right about where the market pivoted. Amazing to see the snap back of nearly three percent in just two sessions, but I believe this is the new normal of the realized volatility moves we will incur in 2015. (“Realized volatility” is the actual daily movement of the index.)

Options Check-Up: Clean Energy Fuels, SunPower, and SunEdison Inc
Schaeffer’s Investment Research
Among the stocks attracting attention from options traders lately are natural gas concern Clean Energy Fuels Corp (NASDAQ:CLNE), as well as solar energy concerns SunPower Corporation (NASDAQ:SPWR) and SunEdison Inc (NYSE:SUNE). Below, we’ll break down how option buyers are positioning themselves.

Doubling of Yuan Volatility is Boosting Dim Sum Yields
One-month implied volatility in the yuan traded in Hong Kong, a gauge of expected moves used to price options, climbed to 4.3 percent on Dec. 31 from 2.3 percent a year earlier. The average yield on offshore yuan bonds jumped 101 basis points, the first annual increase in Deutsche Bank AG data going back to 2011. Traders are the most bearish on the currency in three years, based on the difference between the cost to buy or sell the currency using the derivatives.

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