Observations & Insight

Creative Juice: Sir Ken Robinson and FIA Boca 2015
Doug Ashburn – JLN

At each year’s FIA Boca conference, a certain topic, issue or person becomes “the thing everyone talks about.” It may be an impending rule, a disruptive new technology, or an outlandish comment made at the exchange leader panel. Two years ago it was then-CFTC chairman Gary Gensler displaying his dance moves after planting a rumor he would be up for another stint as head of the regulator. In 2007 it was the envelopes slid under the hotel room doors of Charlie Carey and Bernie Dan announcing ICE‘s competing bid for the CBOT.

This year it was last Wednesday’s luncheon keynote by creativity expert Sir Ken Robinson. Robinson, whose lecture, “How Schools Kill Creativity” is the most popular TED Talk of all time, offered up 20 minutes of the most thought-provoking, intelligent and laugh-out-loud funny commentary ever on display at a Boca conference.
Photo courtesy of Brian Mehta, Trading Technologies
From Wednesday on, at every meeting or social engagement I attended, the name Sir Ken Robinson was dropped at some point, and it was as though each person received a personally gift-wrapped message.

Read the rest of the commentary at JohnLothianNews.com

Lead Stories

Central bank anxiety creates major macro volatility
Alex Rosenberg – CNBC
These days, real excitement isn’t in the stock market.
While sharp intraday moves in the S&P 500 have become more common of late, overall volatility has remained low. Meanwhile, big swings in bonds, commodities, and especially currencies are running rampant.

***DA: We are sailing in uncharted waters here. A little jumpiness is warranted.

Informed traders prefer options – academic research
Automated Trader
Research from a group of academics suggests that skilled investors find profitable trading opportunities prior to and immediately following information being made public.
By correctly predicting the timing of events and their effect on stock values, they are able to make smart trading decisions around public announcements.

***DA: “Correctly predicting the timing of events…” Oh, is that all I need to do?

VIX is coming of age
Jaime Toplin – Futures Magazine
Imagine trading and your screen goes blank. Even with thousands of traders, there are no bids, at any price, and there’s no more money.
That’s what happened on Black Monday in October 1987, when the Dow dropped more than 500 points in a day. Though trading was still being done face to face then, eyes were down and hands were in pockets.
Market crashes are scary, even with products to hedge market exposure. But while futures allowed traders the ability to do so, there was no measure of volatility.

***DA: It still acts like a teenager some days.

Options Market Sees Bottom in Gold With Urgency on Hold at Fed
With gold showing signs of recovery after its longest slump in 17 years, investors are staking a claim that the precious metal is reaching a bottom.
Short interest in the SPDR Gold Shares exchange-traded fund is near the least since April, according to data compiled by Bloomberg and Markit Ltd. Investors own about 680,000 options betting on a decline in the ETF, compared to about 1.4 million contracts wagering on a rise. That’s around the lowest ratio of puts to calls since September, Bloomberg data show.

***DA: As the world settles into deflationary mode, the traditional inflation hedge is looking bullish. Go figure.

The Sun Is Shining Again For The VIX
Anna Coulling – Investing.com
With yesterday’s FOMC brouhaha now out of the way for another month, it’s an apposite time to consider the VIX for the ultimate barometer of risk, and perhaps the best analogy here is of a guitar string, with the sound wave from each plucked note, dying away as the vibrations subside.
This has been the price action for the VIX over the last few months, with a sudden volatile move higher, then duly calming as the markets recover. This was the response in November which saw the index touch an intraday high of 31.06 before returning to test the strong platform of support in place in the 12 region.

With Fed No Longer ‘Patient’ Interest Rate Hike Could Come As Soon As June
Samantha Sharf – Forbes
On December 16, 2008 the Federal Open Market Committee slashed its target for the federal funds rate to a range of between 0% and 0.25% from the already low 1% rate. The FOMC wrote at the time: “Since the Committee’s last meeting, labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined. Financial markets remain quite strained and credit conditions tight. Overall, the outlook for economic activity has weakened further.”

ETFs to Hedge Volatility If Fed Hikes Rates
Tom Lydon – ETF Trends
Federal Reserve interest rate changes could incite greater swings in stocks and goad the CBOE Volatility Index, along with related exchange traded funds.
Jim Strugger of MKM Partners LLC argues that while the Fed rate hikes have not fueled volatility over the past two decades, the central bank’s decision this time around could be different, reports Michelle Davis for Bloomberg.

***DA: This will be a slow motion normalization. Think decades, not years.

Citi Had No Time for Former Goldman Partners’ FX Losses
Matt Levine – Bloomberg
Up until January 15, the Swiss franc was capped against the euro and was pretty quiet against the U.S. dollar, trading at about 1.02 francs to the dollar as of that morning. Then the Swiss National Bank removed the cap and the franc spiked to 74 centimes to the dollar, before pretty quickly bouncing back part of the way. It’s now back around parity. If you were short the franc against the dollar at 4:30 a.m. New York time that day, you had lost more than a third of your money less than half an hour later. But half an hour after that, your losses were back to a more manageable 15 percent. And two months later they had pretty much disappeared.


Eurex eyeing alternative clearing models
Cian Burke – Futures & Options World
Eurex, Europe’s largest derivatives exchange, is working to offer a new clearing model to help investors, such as larger funds and corporates, struggling to find traditional clearers.
Tough new leverage ratio rules are increasing the capital costs on banks clearing buy side firms, meaning these firms are increasingly struggling to find banks to act as clearing member for their trades.

Regulation & Enforcement

Non-cleared derivatives margin rules pushed back in win for industry
Jon Watkins – The Trade News
Regulators have delayed an increase in margin requirements by six months to 1 September 2016 much to the relief of derivatives market participants.
The new rules are set to apply to OTC derivatives not subject through central clearing in line with reforms mandated from the G20 meeting in 2009.

Banks Win 9-Month Swap Margin Rules Delay From Basel Group
Jim Brunsden – Bloomberg
Banks won a delay in the introduction of minimum global rules on the collateral needed to back trades in the $691 trillion market for swaps and other over-the-counter derivatives.
International regulators said the date for beginning to phase in the measures would be September 2016 compared with previous plans for a December 2015 start. The rules were approved in 2013 to ensure lenders have sufficient safeguards in place when a trading partner defaults.


Regulators Outpace Physicists in Race to Catch Flash Boys
Regulators are testing the limits of science in their drive to stop high-frequency traders from manipulating European securities markets.
The European Securities and Markets Authority wants high-frequency trading venues to synchronize their clocks to within a nanosecond, or one-billionth of a second, to help supervisors better track potential market manipulation.


How Does UVXY Work? – ProShares Ultra VIX Short-Term Futures ETF
Vance Harwood – Seeking Alpha
Exchange Trade Fund ProShares Ultra VIX Short-Term Futures (NYSEARCA:UVXY) and its Exchange Traded Note cousin VelocityShares Daily 2x VIX Short-Term (NASDAQ:TVIX) are 2X leveraged funds that track short-term volatility. To have a good understanding of UVXY (full name: Ultra VIX Short-Term Futures ETF) you need to know how it trades, how its value is established, what it tracks, and how ProShares makes money running it.

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