Observations and Insight

CFTC’s O’Malia taking a hard look at HFT

Michael Lewis’ book “Flash Boys” stirred up debate about high frequency trading like no other. Regulators, such as the Commodity Futures Trading Commission (CFTC) are taking a more in-depth look at the trading method to determine if there might be problems with HFT in the futures space as well.

CFTC Commissioner Scott O’Malia, speaking to John Lothian News for its market structure series, said that HFT has been on the agency’s radar screen for some time, and has created a sub-committee to bring experts on both sides of the debate.

Watch the video »

Lead Stories

Small-Cap Rout Approaching 10% With Fear Gauge Highest Since ’07
Joseph Ciolli – BloombergBusinessweek
Deepening losses in shares of small U.S. companies have pushed a measure of investor concern to the highest level since the start of the last financial crisis.
The Russell 2000 Index (RTY) has fallen 9.5 percent from a March 4 record amid concern that prices have outrun earnings. Options costs tied to the equity gauge, which increase as expectations for volatility rise, are at the highest level since February 2007 compared with contracts on the Standard & Poor’s 500 Index. The small-cap benchmark was down 0.3 percent as of 11:26 a.m. in New York.

Bank of America: Options Traders Plan for More Pain
Ben Levisohn – Barron’s
More than any other banking giant, the past month has not been kind to Bank of America (BAC).
Bank of America has fallen 11% during the past month, and only JPMorgan (JPM), which has fallen 9.1%, comes even close. Citigroup (C) has dipped 0.3%, Morgan Stanley (MS) has declined 2.2% and Goldman Sachs (GS) is off 1%.

UBS Brings Low-Touch Trading to Derivatives
John D’Antona Jr. – Traders Magazine
UBS has launched a new algorithm trading platform designed to handle more complicated equity derivatives and their strategies.
The bulge firm’s goal – make the trading of more complex Over-The-Counter derivatives as simple as trading cash equities.

Implied vs Realised Volatility
To those actively trading the FX markets, the implied-to-realised volatility spread is a very familiar quantity, says Prof. Jessica James and Dr. Jonathan Fullwood, Commerzbank
It is used to predict spot changes. It is used to predict volatility changes. Folk even do technical analysis on it.
We lost count of the times that we were asked, when visiting a client, ‘What have you got on implied-to-realised vol spread as a predictor?’ We usually sighed and said that we had not really found it to be useful, but that perhaps others were smarter than we were. Driven by the fear that we were missing something important, we performed a comprehensive study and the results emerged.

Options? In Texas? Play That Again For Me …
Timothy Bourgaize Murray – WatersTechnology
Austin, of course, is much more though. A hotbed of technology talent, it now hosts offices of Pine River Capital, whose CTO was profiled in Waters last year, and a frequent source of ours, Broadway Technology, among many other investment and shops and software providers focused on finance.
In fact, education was the theme throughout my trip last week, as it popped up—if in a far more refined form—throughout the annual Options Industry Conference, held this year at Lost Pines.
***SR: Bear with him for a few paragraphs – he does get to the Options Industry Conference eventually.

Sensex Rises to Record as Options Soar Before Vote Result
By Santanu Chakraborty, Bloomberg
Indian stocks rallied, with the benchmark index rising to a record, on speculation election results next week may show a victory by the main opposition party. Option prices climbed to the highest level since 2009.

Dow Closes at Record High; U.S. Stock Indexes End Higher
Matt Jarzemsky, The Wall Street Journal
Stocks rose on Friday, with the Dow Jones Industrial Average closing at a record and small-company shares bouncing from recent selling.
The Dow rose 32.37 points, or 0.2%, to end at 16583.34, slightly above its April 30 record closing high of 16580.84.

Videocast: Big VIX June call buy

The Hedge Fund That Ate Chicago
Les Leopold – The Huffington Post
There’s a battle royale raging in Chicago. It pits hedge funds, the Chicago financial exchanges, real estate interests and Mayor Rahm Emanuel on the one side, against public employee unions and community groups on the other.
At issue is whether public employee pension benefits should be slashed. Mayor Emanuel claims that “If we make no reforms at all across our pension funds, we would have to raise City property taxes by 150%…. Businesses and families would flee, not just from our city but from our state.” By 2017, He argues that the city will have to pay $2.4 billion a year into the pension fund.

Equity indexes lose early gains
Chris McKhann, optionmonster.com
Equity indexes gave up early gains and finished in the red yesterday, but the CBOE Volatility Index was almost unchanged.
The S&P 500 dropped 2.58 points, or 0.14 percent, to close at 1875.63. That was right at its 10-day moving average and in the middle of the day’s range. The SPX climbed to 1889 before sliding all the way down to 1870. It has resistance at that 1889 level and support at 1850.


TMX Group Limited reports results for the first quarter 2014
The Wall Street Journal
 — Revenue of $182.1 million, up 6% from Q1/13
 — Diluted earnings per share of 86 cents, up 23% from 70 cents in Q1/13
 — Adjusted diluted earnings per share of $1.05, up 35% from 78 cents per
      share in Q1/13
 — Adjusted diluted earnings per share of $1.05 excludes:
 — 14 cents per share of amortization of intangibles related to acquisitions
 — 5 cents per share charge related to Maple Transaction and integration

BOX Tops Half a Billion Dollars in Cumulative Savings to Investors!
Press Release (BOX)
Boston, May 8, 2014 – BOX announced today it has achieved half a billion dollars in savings for investors through its price improvement period (PIP). April was also an impressive month in BOX’s history with price improved contracts averaging 300,510 per day, which represented a 38% increase over the same period last year.
http://jlne.ws/1qnhDcL (PDF)

Regulation and Enforcement

Industry to meet regulators on FX options clearing plans
Eva Szalay – FX-Week
Industry utility CLS, central counterparties and trade bodies will meet with global regulators and supervisors in June in a bid to continue discussions on establishing a viable framework for clearing physically settled FX options.
Market participants and regulators have been trying to come up with a solution to moving physically settled over-the-counter FX options into central clearing, without incurring a same-day liquidity shortfall of potentially as much as $161 billion in a stress event, or other unintended consequence, such as disrupting the global payments system.

Brokers’ Order-Router Role Needs Review, SEC’s Stein Says
Dave Michaels – Bloomberg
Investors should be given more information about where brokers send a stock order to be filled and whether that decision yielded the best price, a member of the U.S. Securities and Exchange Commission said today.

Goldman Sachs in probe of high-speed trading, hiring
Justin Baer – MarketWatch
 Goldman Sachs Group Inc. said it had drawn scrutiny in regulatory inquiries related to its high-frequency trading and whether its hiring practices complied with U.S. antibribery laws, according to a securities filing.

The SEC on Bitcoin: Here there be monsters
Chuck Jaffe – MarketWatch
The U.S. Securities and Exchange Commission this week finally issued a blanket investor alert about the potential dangers of investments in and with virtual currencies like Bitcoin.
 It was too little, but not entirely too late, because it’s clear that the more cryptocurrencies are accepted and used by the general public, the more they will be promoted and abused by hucksters, sharpies and fraudsters.


Russell 2000 Options Can Provide Cushion to Manage Small-Cap Exposure
By Matt Moran, CBOE Options Hub
In 2013 the Russell 2000 Total Return Index rose a strong 38.8%, but since hitting its all-time high on March 4, 2014, the index has dropped 9 percent.

Options Education

Developing a Watch List
Dan Passarelli – The Options Insider
If you are a hockey fan you probably know that we are smack dab in the middle of the NHL playoffs. Teams are gathering information about their opponents and trying to gain the upper hand over them which ultimately could lead to a victory. Just like in option trading, a well though out and well kept watch list can help a trader in a variety of ways including scoring profits.


2014 CBOE Risk Management Conference Europe
Press Release (CBOE)
The Chicago Board Options Exchange (CBOE) and CBOE Futures Exchange (CFE) will host the 3rd Annual CBOE Risk Management Conference (RMC) Europe, from September 3 through 5, 2014, at the Powerscourt Hotel in County Wicklow, Ireland.

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