Observations and Insight
Slick Transition: ICE Clear Europe’s Paul Swann Talks NYSE Integration
ICE Clear Europe is at the center of the Intercontinental Exchange’s effort to expand across Europe, as well as integrate NYSE Liffe products into its market. The clearing house has been busy trying to adjust to new regulations and structural changes in the industry, not to mention merge business lines with the former NYSE family of exchanges.
Paul Swann, president and managing director of ICE Clear Europe, said the clearing strategy for ICE has expanded greatly from just clearing energies in 2008 to now clearing credit swaps and a new host of NYSE Liffe contracts.
CBOE SKEW Index Rose to 143.26, Its Highest Level Since 1998
Matt Moran – CBOE Options Hub
The median of the daily closing values of the CBOE Volatility Index (VIX) so far this year has been 13.7, which is below the long-term median value of 18.3 for the VIX since 1990. The fact that the VIX lately has been below its long-term median has led some people to ask whether there now is too much complacency in the markets. However, in the charts below, the SKEW Index and the SPX volatility skew could suggest that some investors are not complacent at all, and there is demand for out-of-the-money (OTM) protective puts on the S&P 500 (SPX) Index.
Low VIX Could Be Lower Still
Chris Dieterich – The Wall Street Journal
The VIX is low, but by one metric, it could be even lower.
The CBOE Volatility Index, an options-based reading of expected swings in the S&P 500, last week hit a more than seven-year low of 10.61, although this week its bounced a touch higher. That has many traders thinking the VIX has nowhere to go but up.
However, when comparing the VIX to the actual levels of volatility in the market, it’s still high.
UK banks can sell some derivatives within ‘ring-fence’
Britain said it will allow domestic retail bank operations that are being separated from riskier investment banking to provide some basic derivatives products to small business customers, in a move welcomed by business groups…
…It now plans to allow banks to sell basic options allowing a company to hedge against any changes in currencies, commodities and interest rates. Under draft proposals, retail banks would not have been able to offer small businesses options to hedge risks.
Old VIX Record Low Illustrates Push for Income: Chart of the Day
David Wilson – BloombergBusinessweek
Record lows for a barometer of U.S. stock volatility may have more to do with investors’ search for income than anything else, according to Michael Shaoul, chief executive officer of Marketfield Asset Management LLC.
The CHART OF THE DAY displays the Chicago Board Options Exchange OEX Volatility Index, also known as the old VIX. Two days ago, the index fell to 8.86, its first close below 9 since calculations started in 1986. The indicator is based on prices paid for options on the Standard & Poor’s 100 Index.
Will This Small-Cap Shift Prompt a Spike in Volatility?
The rebalancing of the RUT is slated for this Friday
Adam Warner – Schaeffer’s Investment Research
I want to take another break from our recent obsession with the lack of volatility to bring you one possible driver of volatility.
This Friday marks the long-awaited Russell Reconstitution! This, from Ron Bundy on the Russell Investments Blog — not to be confused with Russell Rhoads’ blog on the Chicago Board Options Exchange (CBOE) — which led me here:
Wall Street to take hit from new swap platforms -study
Wall Street banks are set to take a hit from new rules forcing swaps trading onto regulated platforms, a change expected to lower prices and cause further revenue drops, a study showed on Wednesday.
The new rules, which took effect in February and were required by the 2010 Dodd-Frank financial reform law, could cause revenue in the derivatives business to fall by up to 35 percent, the study by consulting firm McKinsey said.
There’s Something Going On In Derivatives Land
ETF Daily News
”There’s something going on in derivatives land,” is the warning from ADM’s Andy Ash and as Paul Mylchreest notes the relationship between VIX and SKEW suggests the options market is pricing in the possibility of a major market event.
The process enables professionals to maintain the illusion of calmness in VIX while hedging their positions (as they attempt to unwind as we have shown).
Whether this ‘event’ is a crash or melt-up is historically unclear but given the taper and the trend of the last few years, we suspect the former more likely that the latter.
Intercontinental Exchange Announces Closing of Euronext Initial Public Offering
Press Release (ICE)
Intercontinental Exchange (NYSE:ICE), the leading global network of exchanges and clearing houses, announced the closing of the initial public offering (IPO) of the ordinary shares of Euronext N.V., the pan-European exchange group. Euronext’s ordinary shares are listed under the symbol “ENX” on Euronext Paris, Euronext Amsterdam and Euronext Brussels and commenced trading on June 20, 2014.
ICE, through a wholly-owned subsidiary, sold 42,248,881 ordinary shares of Euronext in the IPO at EUR20 per share, 23,352,000 ordinary shares of Euronext to a group of European institutional investors that will replace ICE as reference shareholders at EUR19.20 per share and 188,296 ordinary shares of Euronext to eligible Euronext employees at EUR16 per share. ICE has granted the underwriters an over-allotment option of up to 4,210,823 ordinary shares of Euronext, which can be exercised for 30 days after the first trade date.
McGraw-Hill, CME Said to Weigh Joint Bid for Barclays Index Arm
Matthew Monks – BloombergBusinessweek
McGraw-Hill Financial Inc. and CME Group Inc. are interested in acquiring Barclays Plc (BARC)’s index business and merging it with S&P Dow Jones Indices LLC — manager of the benchmark S&P 500 Index (SPX) and Dow Jones Industrial Average, according to people familiar with the matter.
CBOE, C2 And CFE Trading Schedule For Independence Day Holiday (NASDAQ:CBOE)
Press Release (CBOE)
BSE sees record derivatives turnover
The Times of India
MUMBAI: A series of trades in three put option contracts in the sensex on Tuesday helped the BSE take a lead over its bigger rival NSE in terms of turnover in the derivatives segment. Although for years NSE had been the leader in both cash and derivatives segments, of late BSE, with new and much faster trading technology has been attracting investors to trade on its platform, market sources said.
Regulation and Enforcement
Exchanges Get Test to Curb Dark Trading in SEC Program
Dave Michaels – Bloomberg
U.S. stock exchanges will be permitted to test a restriction that could shift more trading to their venues as part of a pilot program announced by the Securities and Exchange Commission.
The experiment was sought by exchange operators including Nasdaq OMX Group Inc. (NDAQ) and Intercontinental Exchange Inc. (ICE), which have seen their share of trading fall as private platforms such as dark pools have taken 37 percent of share volume, according to data compiled by Bloomberg. The test will prevent trading outside the exchanges unless a competing venue or broker offers a significantly better price or size lot to investors, according to an order posted on the SEC’s website yesterday.
Senate, House unveil dueling budget plans for SEC, CFTC
Sarah N. Lynch – Reuters
The U.S. Senate and House of Representatives have released dueling fiscal 2015 budget proposals for the country’s top two financial market regulators, with Democrats seeking more funding and Republicans urging more belt-tightening and limits on how money is spent.
The two opposing spending bills mark the latest partisan dispute over how much money to allocate for the Securities and Exchange Commission and the Commodity Futures Trading Commission.
U.S. House votes to loosen derivatives’ regulations with CFTC bill
Douwe Miedema – Reuters
The U.S. House of Representatives on Tuesday voted to weaken the Commodity Futures Trading Commission’s power to regulate swaps overseas and take other steps likely to loosen regulation in derivatives markets, a shift critics say could weaken market stability.
The bill, which reauthorizes the agency’s mandate, would reverse the CFTC’s tough rules on U.S. businesses’ swaps with counterparties abroad, requiring it to draw up a new regime together with the Securities and Exchange Commission.
Thomson Reuters expands access to CME Group commodity markets in Eikon
Thomson Reuters Eikon customers registered to trade on CME Group markets can now access CME Direct, a front-end trading platform for CME Group’s commodity futures, options and OTC markets. This agreement provides commodities professionals with seamless access to CME Direct’s electronic execution capabilities alongside the news, charting and analysis tools available in Thomson Reuters Eikon.
Volatility is not risk
As part of the standard package of modern portfolio theory (MPT) statistics, standard deviation is the go-to measure of total risk within the investment community. While widely used and accepted by investors, my experience is that it is still a misunderstood and often misused metric. Let’s first walk through what exactly standard deviation measures.
Binary Options 101
Darrell Martin – Benzinga
Maybe you’ve heard the term “Binary Option” and wondered, “What is a binary option?” Maybe you’ve heard bad things about binaries and have even seen a trader warning others to avoid them.
However, you can easily find someone who says to stay away from anything, be it stocks, leveraged ETFs, futures, forex, options, binaries or other tradeable instruments. It is important to listen to those who understand the instrument when making decisions and to be well informed.