Observations & Insight

Options Industry Perspectives: Exchange Leaders Trade Viewpoints at OIC 2015
Sarah Rudolph – John Lothian News

At the Options Industry Conference this year, the exchange leaders panel directly followed a presentation by Andy Nybo, the head of derivatives at The Tabb Group, which offered a rather bleak look at the options industry. Total volume year-to-date was down 8.7 percent compared to a year earlier, bid-ask spreads have been getting wider, and options exchanges are finding it difficult to compete in a field of 12-going on-14 players.

Given that “dark cloud” the industry appears to be under, moderator John Lothian asked the panel what the industry could do to turn it around.

Exchange leaders agreed that the lack of liquidity was a big problem and that, as the ISE’s Boris Ilyevsky said, a major cause was that the current market structure does not incentivize active, liquid quoting.

Read the rest of the article on JohnLothianNews.com

Lead Stories

China’s stock index futures unseat S&P to become world’s most traded
Saikat Chatterjee – Reuters
Chinese stock index futures have surpassed S&P 500 futures in turnover to become the world’s most traded equity futures as global investors expanded their exposure to one of Asia’s top-performing markets.

***DA: It is an exciting time to be trading the CSI 300. Far less clear is what turnover will be like once the China bubble does what all bubbles eventually do.

It’s Back On in Germany as DAX Traders Send $638m to ETF
Roxana Zega – Bloomberg
German stocks, rejected by investors in April, are luring them back in May.
Buyers added the most in a year — more than 570 million euros ($638 million) — to the biggest exchange-traded fund tracking the equities last week. The benchmark DAX Index had its biggest jump in two months on Friday, and options data show traders are betting on further gains. The most-owned contract is calling for a 2.5 percent advance by June.

April U.S. Options Volume at 327.6m, Down from March as Spreads Tighten
John D’Antona Jr. – Traders Magazine Online News
The winter run-up in options volume took a pause in April, as volume dropped for U.S. listed contracts to at 327.6 million contracts for April 2015, 2.8 percent % lower than last month’s 337.0 million contracts, according to Tabb Group.
In its most recent Options LiquidityMatrix (OLM) report, the consultancy also noted that overall option market spreads, adds tightened to 31.6 cents.

***DA: If you missed Sarah Rudolph’s story from Friday, Keeping Tabbs on the Options Industry it is worth a read.

Barclays Notes Volatility Hedges Benefited From S&P Hiccup
Mark Melin – ValueWalk
In its May 6, VIX Compass publication, Barclays PLC (NYSE:BCS) (LON:BARC) researchers provided a comprehensive look at risk management methods across a variety of volatility-based strategies as pricing has firmed across durations.

Why Buy Volatility Products Now?
Adam Warner – Schaeffer’s Investment Research
“Despite gathering clouds, don’t bet on a volatility storm.” At least, that’s what this pundit says on what some are calling the greatest Yahoo! Finance interview ever.

***DA: Well, at least that is what one person is calling it. Click the link to get the joke.

Why Would Anyone Want to Restart the Credit Default Swaps Market?
Tracy Alloway – Bloomberg
Last week, Bloomberg reported that BlackRock, the world’s biggest asset manager, is leading a push to revive a type of derivative known as the single-name credit default swap. Readers may remember that such CDSs were blamed for exacerbating the financial crisis of 2008. So why, one might ask, would anyone want to revive this particular corner of the credit market?
Here’s a rundown.

***DA: Answer: Because CDS did not cause or exacerbate the crisis. The concentration of risk did. Robust tools for risk management, when used properly and sensibly, make the world a better place.

Regulation & Enforcement

US unveils details of two-year tick size scheme
The Trade
US regulators have confirmed details of a pilot scheme to test the impact of tick-sizes on liquidity in smaller stocks.
The Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) told US exchanges last year to submit proposals for how such a pilot scheme might work.
The SEC has now revealed it will run a pilot for two years, which will widen the minimum tick size for a number of small-cap stocks.

***DA: For a summary of the rule, check out the page in MarketsReformWiki

Sarao training firm calls for trading reform
Alice Attwood – Futures & Options World
A director at the prop firm that trained the British futures trader arrested over US market manipulation last month has said an industry-wide culture change is required to improve transparency in futures trading.
Director of business development for prop trader training academy at Futex, Dan Goldberg, told FOW implementation of an ‘Integrity Time Delay’ could go some way to help this culture change.

***DA: Good luck with getting industry buy-in.

CFTC Takes Quick Action Against UAE Traders for Alleged Spoofing
The National Law Review
On May 5, 2015, the U.S. Commodity Futures Trading Commission (CFTC) filed a single-count complaint in the Southern District of New York against two individuals alleging disruptive trading practices in violation of Section 4c(a)(5)(C) of the Commodity Exchange Act (Act). The CFTC alleges that Heet Khara (Khara) and Nasim Salim (Salim), both residents of the United Arab Emirates, engaged in spoofing and aided and abetted each other’s spoofing by entering orders for Gold and Silver futures contracts on COMEX (part of CME Group) without intending to execute those orders.


The Week for Russell 2000 Trading – 5/4 – 5/8
Russell Rhoads – CBOE Options Hub
Small cap stocks played a little catch up last week with the Russell 2000 rising 0.55% while the Russell 1000 gained 0.35%. Like all broad based market indexes in the US last, the positive performance came from the market’s reaction to Friday’s employment report. Large cap stocks actually ruled the day on Friday with the benchmark Russell 1000 gaining 1.2% while the Russell 2000 rose by about 0.75%. For a perspective on the relative performance of large and small cap stocks in 2015 I put together the chart below.

The Week in VIX – 5/4 – 5/8
Russell Rhoads – CBOE Options Hub
VIX was slightly higher and the futures were mostly lower with a couple of exceptions last week. There was a bit of excitement in the middle of the week so I included an extra piece to the graph below and decided to show Wednesday’s highs for VIX and the futures market. If I had not done that it would be pretty difficult to see there are two different lines showing VIX closing levels on the 1st and the 8th.

The Week in Volatility Indexes and ETPs – 5/4 – 5/8
Russell Rhoads – CBOE Options Hub
Despite a dip midweek, the S&P 500 recovered to put up a winning week on the heels of the non-farm payrolls report. Friday’s 28 point rally salvaged weekly performance, but this was not enough to push VIX to a week over week loss. Since January 1990 there have been 178 weeks where the S&P 500 and VIX were both higher. I ran some quick numbers and of those 178 weeks, the S&P 500 was higher the 102 times and lower the other 76 weeks after both moved higher in sync. I was a little surprised there were not more down weeks after both SPX and VIX move higher, but that’s why I run the numbers, to test assumptions and either prove or disprove them.


Is Options Trading Risky?
Investor’s Business Daily
If you’ve been trading options for any length of time, you’ve probably experienced some surprises in your P/L. When using options, changes in volatility and changes in prices can result in a quick profit or you could experience a quick loss. How do you handle this?
This is not an easy question to answer but there are step you can take to improve your results. Over the years, I’ve realized how important it is to understand and manage your risk.

How to hedge with married puts
Kenneth Roberts – MarketWatch
There are a variety of tools available for investors who want to hedge their holdings. To hedge means to limit your downside risk in some way.
If you’re investing in stocks, you should be a long-term investor and be prepared to stay in the market during the inevitable declines. You should have realistic expectations about market volatility. However, if there are times you want protection, it is readily available.
One hedging tool is known as the married put.

Do you really need derivatives?
Aarati Krishnan – Business Line
Few readers, even of financial newspapers, may voluntarily delve into a book that features both the words ‘economics’ and ‘derivatives’ in its title, unless they’re cramming for an exam. But events in recent years, from the US sub-prime crisis to the six-year stretch of runaway food inflation, to the National Spot Exchange scam, have made it clear that even if you want to have nothing to do with the derivatives market, it can still exercise a significant influence.
The Economics of Derivatives is a surprisingly accessible book which steers clear of mathematical formulae, the Greek alphabet and investment lingo. It debates the contribution of the derivatives market to economic wellbeing. Touches of dry humour liven up a dry subject.

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