Observations & Insight

MarketsWiki Education Chicago 2015
Chicago Intern Education Series Day 3 Wrap-Up
Sarah Rudolph – John Lothian News

For our final day of the 2015 MarketsWiki Intern Education Series in Chicago, hosted by Trading Technologies, our special guest was the city’s mayor, Rahm Emanuel, who told the audience of summer interns that Chicago is the No. 1 destination for young people looking to start their careers right after graduating from college. Chicago is a great destination for several reasons, he said, including that it has the most diverse economy of any U.S. city., incorporating industries such as healthcare, transportation, professional services, and of course the financial sector and risk management in particular.

“No single sector drives more than 15 percent of the city’s economy,” Emanuel said. “And Chicago is the country’s capital for financial technology. It is also a third of the cost of either New York City or San Francisco.”

He took questions from the audience on the impact of Chicago on the financial sector at large; where crime fits in in the larger picture of the city; and, as floor trading ends, what the city is doing to keep Chicago the center for risk management and finance.

Read about the rest of the Day 3, including talks from CME Group‘s Phupinder Gill, CHX CEO John Kerin, industry veteran Mary McDonnell and CBOE‘s Andrew Lowenthal at JohnLothianNews.com.

Lead Stories

CBOE to Launch Weekly VIX Options in October
Steven M. Sears – Barron’s
In early October, as the stock market starts a historically volatile month, investors will be able to trade their own fear more precisely, along with that of others.
For the first time, CBOE Holdings (ticker: CBOE) will list weekly options on the CBOE Volatility Index, or VIX, a measure of implied volatility on the Standard & Poor’s 500 index. The listing on Oct. 8 follows the July 23 introduction of weekly VIX futures contracts, a prerequisite for dealers to be able to support the options.
Weekly VIX options are likely to generate substantial trading volume by addressing a disconnect that has frustrated investors.
jlne.ws/1UySpni

Tension Runs High in VIX as Stock Insurance Costs Most Since ’06
Callie Bost – Bloomberg
Speculators’ appetite for protection from stock-market tempests has reached the highest in nine years.
Options predicting a rise in the Chicago Board Options Exchange Volatility Index are the most expensive since 2006 relative to those betting on a drop. With gains narrowing, investors are hedging through calls on the VIX, which usually rises as the Standard & Poor’s 500 Index falls.
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***DA: This morning’s broad-based rally might cool the jets a bit.

The Irresistible China Trade That Keeps Burning Investors
Cindy Wang – Bloomberg
It looked like a no-brainer for buyers of Chinese shares in Hong Kong.
Valuations in April were 25 percent cheaper than in the mainland, monetary stimulus was just getting started and money was pouring in through Hong Kong’s new exchange link with Shanghai. Bulls snapped up funds tracking so-called H shares at a record pace, while analysts at some of the world’s biggest banks predicted big gains to come.
jlne.ws/1Ner99s

***DA: Maybe it’s me, but I have no problem resisting the urge to buy at the top of a parabola.

In ‘Wild West’ of after-hours trading, some find profit, others pain
Noel Randewich – Reuters
Medical student Syed Shah loves to trade tech stocks when most on Wall Street have called it a day.
In what many professional investors view as an inhospitable trading landscape starved of liquidity and fraught with dramatic price swings, Shah and others see buying stocks outside of normal trading hours as a chance to get in early on those swings after popular companies such as Facebook (FB.O) and Chipotle Mexican Grill (CMG.N) post quarterly reports.
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***DA: All markets have pockets of illiquidity around critical reports. Market makers are paid to take the other side of all orders, and the fee is a small mathematical advantage to perceived fair value. When perceived fair value is hazy, the bid-ask spread must widen.

Copper Has Been Getting Pummeled, and Hedge Funds Say More Pain Is Coming
Marvin G Perez – Bloomberg
Hedge funds are betting that the worst is yet to come for copper.
Prices for the metal used in everything from homes to cars to appliances are stuck in the worst slump in more than two years. Stockpiles jumped 11 percent in Shanghai last week. With China’s economy showing little signs of recovery, money managers are increasing wagers that copper will fall further, pushing their net-short position to the most bearish since April 2013, U.S. government data show.
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***DA: Which is why I scoff at those buying China shares on government buying. The fundamentals point downward.

On The Fence – Weekly Market Outlook
Price Headley – CBOE Options Hub
Once again, stocks managed to end the trading week on the fence, pressured lower by bearish momentum, but perking up at a very important support line when push came to shove on Friday. How we begin the new week is uncertain, but in the current market environment even the first move out of the gate isn’t necessarily an indication of the trend’s true direction.
jlne.ws/1NlzrMQ

The Week in Russell 2000 Trading – 8/3 – 8/7
Russell Rhoads – CBOE Options Hub
The Russell 2000 (RUT) was down 2.57% last week, over twice the drop that occurred in the large cap focused Russell 1000 (RUI). This puts large cap stock performance solidly in the lead relative to small caps in 2015. For the year RUT is now up (a strong word for this) 0.18% while RUI is up 1.25%.
jlne.ws/1NlzxUJ

Be Ready for the Next Investing Crisis
Gregory Zuckerman – WSJ
Get ready for the next crisis.
Six years into a bull market for stocks and bonds, there is no shortage of reasons to prepare for trouble.
U.S. stocks are close to their most expensive levels since 2004, even as interest rates seem headed higher. China’s economy and financial markets have turned fragile, Brazil is under pressure and a bailout of Greece might not work. The U.S. tech-stock boom could go bust and high-profile investors are gearing up for a crisis in the expanding world of exchange-traded funds.
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Exchanges

BATS Receives SEC Approval to Launch EDGX Options Market
Press Release – BATS
BATS Global Markets (BATS), a leading operator of exchanges and services for financial markets globally, has received approval from the U.S. Securities and Exchange Commission (SEC) to launch its second options market – EDGX Options. BATS is planning to open the new market on Monday, November 2, 2015.
EDGX Options will be based on a customer priority/pro rata allocation model and is designed to complement its BZX Options market, the fourth-largest U.S. options market with a record 10.8% market share in July, which is a pure price-time priority market. The launch of EDGX Options will enable BATS to compete for a new segment of order flow that does not trade on the price-time markets that BATS currently operates.
jlne.ws/1N3V9qI (PDF)

Vietnam set to open derivatives market next year
Thanh Nien Daily
A market for index futures and government bond futures will be opened in Vietnam next year, sometime between the third and the fourth quarter, the government website reported this week.
The country’s first derivatives market will be established at the Hanoi Stock Exchange, it quoted the Ministry of Finance’s latest order for the State Securities Commission of Vietnam as saying.
jlne.ws/1T0ak95

CBOE Holdings Completes Acquisition of Livevol Data, Analytics Platforms
Press Release – CBOE
CBOE Holdings, Inc. (NASDAQ: CBOE) announced today that it has finalized the acquisition of the market data services and trading analytics platforms of Livevol, Inc., a leading provider of equity and index options technology and market data services to professional and retail traders, effective August 7. Financial terms of the deal were not disclosed.
CBOE Holdings’ acquisition includes the Livevol Core, Livevol Pro and Livevol X trading analytics platforms, as well as Livevol Enterprise and other market data solutions products. Livevol Securities, Inc., the company’s broker-dealer unit, was not part of the deal.
The deal, which was announced in June, was approved by the boards of directors of both CBOE Holdings, Inc. and Livevol, Inc.
jlne.ws/1N3q6vg

BOX Price Improvement Activity for July
Press Release – BATS
In the month of July, price improved contracts on BOX Options Exchange (“BOX”) averaged 255,150 per day. Price improvement versus the prevailing NBBO for contracts submitted via BOX’s price improvement auction, PIP, averaged $538,457 per day, while total savings to investors in July was $11.86M. With this, BOX has saved investors over $650M since its inception in 2004. Overall average daily trading volume on BOX in the month of July was 407,728 contracts.
jlne.ws/1gXGKjX (PDF)

Regulation & Enforcement

Options exchanges to testify at US state hearing
Luke Jeffs – Futures & Options World
The top US options exchanges are set on Thursday to appeal to the US Department of Labour to water-down planned rules that they argue could significantly impact the US options market.
The US Securities Markets Coalition, representing the largest US options markets and the main US options clearing house, will testify at the Department of Labour’s open hearings on proposed plans to redefine the types of assets against which brokers are allowed to charge individuals holding retirement accounts when giving that person advice.
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Technology

Markit Launches New Forex Derivatives Trade Confirmation Service
John D’Antona – Traders Magazine Online News
In response to the fast growth in trading in the $5.3 trillion per day foreign exchange market, traders are about to get a new trade confirmation system designed to speed up and maximize efficiency in the trade lifecycle.
The new Markit service matches FX option trade terms to generate legally binding trade confirmations which are recorded centrally, allowing counterparties to manage trade lifecycle events more efficiently.
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Strategy

How Much VXX is Enough?
Adam Warner – Schaeffer’s Investment Research
Another week, another churn with a sour ending, and another mediocre CBOE Volatility Index (VIX). I will say this, though — it’s incredibly fairly valued for this backdrop. Ten-day realized volatility in the S&P 500 Index (SPX) is in the low 10s. VIX typically sees a four-point premium to that, thanks to the open-ended nature of volatility pops, and the fact that the entire world wants to either protect against a downside market move or speculate on one.
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