Observations & Insight

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Lead Stories

Crude oil volatility may be here to stay
Financial Times
A measure of market expectations of oil-price volatility has surged this year amid the intense turbulence in the commodities market.
The CBOE’s Crude Oil ETF Volatility index has roared higher by some 40 per cent this year, notching its highest closing level since 2009 on Wednesday.
on.ft.com/20jhHbZ

****SD: For more on oil, see yesterday’s Oil Rises in Biggest Rally Since August Amid Volatility Surge and today’s Top Oil Trader Mercuria Sees Market Bottom as Producers Bleed from Bloomberg. Also, the FT’s Bulls storm Wall Street amid oil rally

The Only Thing to Fear is a Lack of Fear
Adam Warner – Schaeffer’s Research
One of the biggest reasons to panic right now remains the utter lack of panic. Yes, the CBOE Volatility Index (VIX) has lifted lately, but not nearly to to extent one might expect given the very ugly market backdrop. We noted this the other day, though more that VIX was simply rising in line with the market declines.
bit.ly/20jhyFE

Currency Exchange Risks Worry Treasurers
David M. Katz – CFO
Although currency exchange volatility jumped onto the list of their most worrisome risks last year, many treasury and finance professionals are only just starting to put together plans to hedge those exposures, according to the Association of Finance Professionals’ annual risk survey released earlier this week.
bit.ly/20jdUvp

****SD: “Martin observed that in the face of such volatility the survey’s finding that only 50% of the finance pros’ companies had plans in place to mitigate interest rate, currency, and commodity risks was ‘not good.'” According to this study, approximately 60 percent of companies with $1 billion or more in revenues had hedging strategies in place.

Saudi Riyal Option Ban Came After ‘Exponential’ Corporate Demand
Dale Crofts and Riad Hamade – Bloomberg
The Saudi Arabian Monetary Agency told banks to stop offering options contracts on riyal forwards after a rapid increase in their use by corporate users, the chairman of the country’s treasurers committee said.
bloom.bg/20jdN2R

Exchanges

Stock Exchanges Are Eating Your Returns
Larry Tabb – Bloomberg
Over the past decade, the widespread availability of information and new technologies has helped establish the most level playing field in financial markets we’ve ever seen.
But there’s an exception to this positive trend: Exchanges are quietly, yet dramatically, increasing the fees they charge for market data and access to compensate for their own dramatic declines in market share as the revenues of brokers, specialists, market makers and other users of stock-exchange services have toppled. The result is that the exchanges are making it more expensive to trade, and that’s harming investors.
bv.ms/1NppwDL

Regulation & Enforcement

Corporate & Regulatory Compliance: Are You Asking the Right Questions?
Greenberg Traurig LLP – Lexology
Due to regulatory changes made in response to the financial crisis of 2008, market participants entering into over-the-counter derivative transactions and their associated agreements face a vastly different landscape than several years ago. Competing (and sometimes inconsistent) legal regimes across jurisdictional boundaries create opportunities for regulatory arbitrage; more often, however, they merely create confusion.
bit.ly/20jfhu7

CFTC Launches Whistleblower Program’s Website
CFTC
New Website Improves Public Interface and Allows Users to Submit Tips and Apply for Monetary Awards
The U.S. Commodity Futures Trading Commission (CFTC) today launched the CFTC Whistleblower Program’s new website, www.whistleblower.gov. The new website provides an improved interface that educates the public about the Whistleblower Program and allows users to submit tips about potential violations of the Commodity Exchange Act (CEA) and apply for monetary awards.
goo.gl/R9W87v

Technology

2016 Outlook: The Return of the Bespoke Algorithm
Traders News
Sometimes, less is more.
It was almost 20 years ago that the first algorithm appeared in the equities market. The VWAP algo was a simple electronic trading tool for a simple time. Over the years, as market structure changed, so did the algorithms that traders needed for their trades. Simple VWAP and TWAP algos morphed into more complex varieties, such as implementation-shortfall and liquidity-seeking types. Then came tools designed specifically for operating in dark pools, those that searched actively and passively, as well as those that sniffed out so-called predatory traders.
bit.ly/20jkLow

****SD: “Our development process is like Lego blocks; we can just string together the right components and build them into an algorithm,” Margulies said. “There’s virtually nothing built from scratch anymore, and thus lead time has shrunk dramatically.” Generally, I’m prone to appreciating any Lego reference, but this comparison misses the mark. Individual Lego blocks are available specifically to build things from scratch. #LegoLove

Davos: ‘Future of Jobs’ Report Predicts Fintech Shift
Anna Reitman – Finance Magnates
For anyone watching the way one asset class after another is going electronic, the prediction that robots will be running trading systems of the future might seem axiomatic.
But does that mean there’ll be fewer jobs in the industry of the future as well?
bit.ly/1nDACAf

Strategy

Private Bankers’ Advice on Navigating Volatile Markets
Abby Schultz – Barron’s
Asian clients told to buy European high yield bonds and use options strategies in India and South Korea.
This is the time of year when private bank investment strategists hit the road to talk with clients about what the year ahead might look like. But the year didn’t begin according to anyone’s plan, with worries about China’s slowing economy and oil’s slide below $30 a barrel sending markets skidding across the globe. “Clearly no one expected this,” says Simon Smiles, chief investment officer for ultra-high net worth investors at UBS Wealth Management.
bit.ly/20jdyF8

Earnings Week of 1/25 – 1/29
Russell Rhoads – CBOE Options Hub
Next week is the heaviest part of earnings season as you can see on the table below. It is a holiday shortened week next week, but there’s plenty going on in the world of earnings as we start to move into the heavier part of earnings season.
bit.ly/20ji3zg

What Rout? European Stocks Will Rebound 20%, Strategists Say
Roxana Zega – Bloomberg
The worst start in years for European stocks is doing little to dim the view of the region’s strategists, who are mostly holding on to calls for gains of almost 20 percent through December.
bloom.bg/20jjL3G

****SD: Something about watching the usual Bloomberg suspects report from outside at Davos with puffy coats on tickles me.

Sector ETFs With The Richest Options Premiums
Dan Neagoy – See It Market
Investors and options traders sell puts and put spreads to generate additional income or acquire stock. In many cases, traders attempt to time their entry by waiting for oversold extremes. Once the market is oversold, they sell out of the money spreads with the hope that the level they’re selling isn’t reached.
Rather than simply look at price, traders can also look at both implied and realized volatility to filter candidates for selling puts.
In this example, we’ll look at sector ETF’s and endeavor to find sectors with the richest options premiums.
bit.ly/20jhzsZ

Education

Impatient investors head for the exits
Dan McCrum, David Oakley and Roger Blitz – Financial Times
Violent deaths for felines are metaphorically useful for physicists and stock traders alike. Schrödinger locked them in safes with hydrocyanic acid, while investors throw them out of windows.
“From a fundamentals perspective the answer is ‘weeeee?.?.?.?splat!!?.?.?.?boing!’, or whatever a dead cat sounds like,” Michael Every of Rabobank told clients this week.
The head of Asia-Pacific financial markets research was wondering what to conclude about stock markets after the new year plunge was followed in recent days by a rebound. The question asked by investors everywhere was what sort of market do they face, or, as Mr Every put it: “Is this all a turning point at last, or is it the epitome of a ‘dead cat bounce’?”
on.ft.com/20jiYzI

No, Markets Aren’t Revisiting 2008
Nir Kaissar – Bloomberg
Yes, markets have beaten up everyone so far this year. Investors are looking for answers and struggling to identify a culprit — just read the headlines. According to my Bloomberg colleagues, some observers are even beginning to wonder whether a repeat of the nightmarish 2008 meltdown is underway.
All of this sudden soul searching is odd. Overseas markets have been in turmoil for much of the last two years. The MSCI EAFE Index returned a negative 4.5 percent to investors in 2014 and a negative 0.4 percent in 2015. The MSCI Emerging Markets Index returned a negative 1.8 percent and a negative 14.6 percent, respectively, over the same period.
bloom.bg/1JoSWqR

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