Bond Traders Can’t Get Enough Low Yield Hedges: Chart of the Day
Liz Capo McCormick – BloombergBusinessweek
As low as long-term U.S. interest rates are, derivative traders are snapping up options that provide insurance against them heading further south.
The CHART OF THE DAY shows the difference between volatility, a gauge of price and demand, on three-month options that allow investors to lock-in paying fixed rates on 10-year interest-rate swaps and those that grant the right to receive them. The so-called swaption skew has collapsed below zero as demand for the contracts that profit if long-term yields decline below current levels has outstripped that for those that gain if they rebound.
***DA: Fewer and fewer people believe in central banks’ ability to combat deflation long-term. Important reminder on the day the ECB reloaded its QE arsenal.
S&P 500 Volatility Streak Worst Since ’12 as Swings Widen
Callie Bost and Michelle F. Davis – BloombergBusinessweek
Volatility in the U.S. stock market is getting harder to ignore with each passing day, a trend Goldman Sachs Group Inc. says is poised for a reversal.
The Standard & Poor’s 500 Index (VIX) rose 0.5 percent yesterday and moved 1.3 percent from its lowest to highest levels. That’s the 14th straight swing of more than 1 percent intraday, the longest stretch since an 18-day run ending on June 21, 2012, data compiled by Bloomberg show.
***DA: If Mark Twain were alive today he would say of the VIX, “You don’t like the level at which it is trading? Wait five minutes.”
Growing Risk Aversion Unmatched by Volatility: Chart of the Day
David Wilson – Bloomberg
Investor caution is less than extreme even though a market-based indicator suggests otherwise, according to Pierre Lapointe, Pavilion Global Markets Ltd.’s head of global strategy and research.
The CHART OF THE DAY tracks the barometer, the Citi Macro Risk Index, which ranges between 0 and 1. Higher numbers signal greater risk aversion. Readings from Jan. 2 through yesterday were at least 0.93, near peaks when the global financial system faltered in 2008 and European sovereign debt tumbled in 2011.
Bearish Bets on India Banks Climb to 8-Week High as Stocks Rally
Santanu Chakraborty – Bloomberg
Investors trading in Indian bank options are buying the most protection in eight weeks as a gauge of lenders’ shares rallied to a record high for a fourth straight day.
The number of outstanding puts per call in the 12-member CNX Bank Nifty index rose to 1.67 at 4:20 p.m. in Mumbai, the most since Nov. 24. The underlying Bank Nifty, the second-most popular security for derivatives trading in India after the 50-stock CNX Nifty Index, climbed 0.4 percent to 19,917.65 to close at an all-time high. A put with a strike price of 19,000, which may become profitable for a buyer below that price level, was the most active among its options by outstanding contracts.
***DA: Expecting a not-so-nifty 2015?
Another Forex Surprise? Blame Canada
Adam Warner – Schaeffer’s Investment Research
Another Forex Surprise? Blame Canada
A closer look at Canada’s surprise rate cut and CBOE Volatility Index (VIX) options expiration
***DA: Beauty idea, eh?
Videocast: VIX futures falling fast
SGX Plans China Equity-Index Options on Futures Demand
Jonathan Burgos and Adam Haigh – Bloomberg
Singapore Exchange Ltd. (SGX), Southeast Asia’s biggest bourse, plans to start trading Chinese equity-index options as investors seek ways to hedge risks in the world’s most volatile stock market.
SGX is in talks with the China Securities Regulatory Commission on when the Singapore bourse can introduce options on the FTSE China A50 Index, with approval likely to come after such products are introduced on the mainland, President Muthukrishnan Ramaswami said in an interview. Volume on China A50 futures traded in Singapore surged 183 percent in the three months ended Dec. 31.
BATS Successfully Completes Direct Edge Integration; U.S. Market Share Remains 21%
Press Release – BATS
BATS Global Markets (BATS), a leading operator of securities markets in the U.S. and Europe, today reported the successful and complete migration of the legacy Direct Edge stock exchanges, EDGX and EDGA, to the proprietary BATS technology.
The final phase of the integration took place Monday, January 12th, and the EDGX and EDGA Exchanges functioned as expected on the BATS system throughout the week, handling more than 1 billion orders with message rates exceeding 170,000 messages per second. The integration was led by Chris Isaacson, global CIO at BATS.
***DA: Well done. Take a bow, Bill. Uh, Bill? Where did you go Bill?
Regulation and Enforcement
Firms are Revising Client Rules to Guard Against Next “Swiss Shock”
Zachary Tracer and Silla Brush – BloombergBusinessweek
Financial firms stung by last week’s surge in the Swiss franc are changing client rules and trading practices to weather future currency swings.
FXCM Inc. (FXCM:US), the New York-based retail broker, said Wednesday it’s increasing margin requirements for clients who trade currencies and gold after customers’ losses forced it to seek a $300 million lifeline. CME Group Inc. (CME:US), owner of the Chicago Mercantile Exchange, is altering how it handles volatility in emergencies after it was buffeted by trading halts last week.
***JB: Good job guys closing the barn door after the horse has bolted.
CME says takes emergency action on price limits after Swiss franc moves
CME Group Inc has taken emergency action to ease its rules for adjusting trading limits following extreme moves in the Swiss franc futures market last week, the exchange operator said on Wednesday.
Fake Liquidity Prompts European Probe Into High-Speed Trading
Eduard Gismatullin – BloombergBusinessweek
The European Union is investigating whether high frequency traders provide liquidity that benefits financial markets as a whole in the 28-nation bloc.
The EU’s financial watchdog, the European Securities and Markets Authority, will look at whether automated trading adds fake, or ghost, liquidity to markets, said Steven Maijoor, the regulator’s chairman.
***DA: Like punching a cloud.
Lack of Liquidity Affects Most Markets
Bob Lang – CBOE Options Hub
We have become accustomed to low volume, low volatility markets. On certain days you can just feel the intensity and flow potential from the start. Markets gap up and hit morning highs, rest and then run hard to finish the day — and all the bulls rejoice. A runaway gap down and follow through has everyone stumped and waiting for a snapback rally, which may not occur, bids disappear and prices run hard to finish the days on their lows.