Observations & Insight

JLN Heads to London
JLN Staff
Jim Kharouf is off to London today, and John Lothian, Doug Ashburn and intern Colin Ashburn head there on Saturday night.

This is gearing up to be a great conference. Much of the industry conversation has moved to Europe, as evidenced by today’s newsletter. Big changes at NLX, an overhaul of all things regulatory as the industry prepares for MiFID II, and the lingering cross-border disputes are but a few of the stories making headlines today and on the docket for IDX

We will see if John’s newly partially replaced right shoulder can handle the flight and trip, schlepping his luggage around the airport and London.

We will be conducting video interviews at IDX, with Colin Ashburn and Alison Fay manning the cameras. We also will be shooting some video for a John Lothian Productions contract. Since the production work requires the schlepping of extra gear – multiple cameras, lights and such, at least one staffer suggested the shoulder surgery was a hoax meant to exempt John from portage duty.

The next edition of JLN will be coming to you from London. See you then.

Lead Stories

Draghi Gets the Volatility He Foresaw as Global Bonds Surge Back
By David Goodman and Susanne Walker Barton – Bloomberg
Mario Draghi’s laissez-faire approach to bond-market volatility is pouring fuel onto the fire.
Since touching an eight-month high earlier on Thursday, yields on German 10-year bonds reversed their gains, while U.S. Treasuries also rebounded. The 17 basis-point trading range on 10-year bunds was about four times the daily median in the past year and followed a slump in the bonds this week that triggered the worst two-day drop in the history of the euro area. The global rout gathered pace Wednesday when the European Central Bank president said markets should be ready for periods of higher volatility.

***SD: Ahhh, the joy of being right — and the dislike of those who disagreed with you realizing they were wrong.

Market Volatility Could Be Exacerbated by Computer Driven Hedge Funds
By Giles Turner And Laurence Fletcher – WSJ
The volatility endured by markets across the globe Thursday could be exacerbated by the actions of computer driven hedge funds, according to fund industry insiders.
These funds, also known as Commodity Trading Advisors, or CTAs, which follow trends in markets and tend to trade similarly to one another, could be among the worst hit by the latest bout of volatility. Investors are concerned the funds could be forced to reverse their positions en masse if markets fall further, fueling still more volatility.

***DA: Could be exacerbated by comments by the head of one of the most powerful people on the planet who just cautioned about volatility.

Call Stupid Buyer in VIX Options [Yesterday]
By Russell Rhoads – CBOE Options Hub
I came across a trade from Wednesday and headed down to the VIX pit to ask some questions before putting up a block trade blog. The response I got was, “Do you want to hear about something more interesting than that?” Usually when a question is answered with a question it is an indication that you should go elsewhere for answers. This is not one of those cases.

We All Hate the Market, But What Are We Doing About It?
By Adam Warner – Schaeffer’s Investment Research
Disbelieving rallies certainly makes sense in 2015, seeing as we’re in a never-ending churn. Thing is, though — even with all the fits and starts, we sit very close to all-time highs in pretty much every index, and that’s even after an ugly day yesterday.

***SD: Maybe it’s more of an ambivalent attachment scenario, Adam. Hate is such a strong word.

Is Suppressed Market Volatility Ready To Move Higher?
By Paban Raj Pandey – See It Market
The saga continues, as the Volatility Index (VIX) continues to get sold off around 15. This is an interesting development to monitor in the days ahead as market volatility again seems to be simmering.
Since April, the so-called fear index has traded above 15 intra-day nine times, and only once has it been able to close the session above 15 (see chart below). That was April 1, but the VIX closed under 15 the very next session. The latest attempt was Tuesday; 15 was tagged, and that was it. Now it is sitting right on its 50-day moving average.

***DA: Part of it is the current base. The talking heads were breathless yesterday in their coverage of the 170 point drop in the Dow, but that was not even a one percent move. And one percent annualized to a shade under 16. When I started in the business the S&P was at 300, and three point moves were not uncommon.

FII’s aggressively building positions in Nifty to bet on higher volatility
By Biswajit Baruah – The Economic Times
Foreign institutions are aggressively building positions in Nifty options to bet on higher volatility over the next three weeks. These investors are buying Nifty options with the index falling below the 200-day moving average (DMA) -a key sentiment indicator -amid worries about below-normal monsoon, Greece’s loan repayment deadline and Fed’s monetary policy meeting. A fall below 200 DMA indicates sentiment is weak, which usually results in a jump in volatility.

Aussie hedge fund’s global bond market fear gauge arrives just in time
By Jonathan Shapiro – The Sydney Morning Herald
Only two months ago, Bloomberg reported that the lack of action in the bond market had led some traders to work just three days a week. Since then, few have been brave enough to take toilet breaks as chaos has broken out.

North Asia Currency War Seen Heating Up on Taiwan Dollar Shorts
By Lilian Karunungan and Justina Lee – Bloomberg Business
Taiwan is winning allies in its battle to weaken the local dollar with sell calls mounting on Asia’s best-performing currency.
BNP Paribas SA said May 29 that it favors using options to short the island’s dollar, after the yen’s biggest weekly drop this year exacerbated a currency war between Japan, South Korea and Taiwan. Australia & New Zealand Banking Group Ltd and Westpac Banking Corp. are suggesting clients bet against the Taiwanese currency using derivatives and buy offshore yuan.

***SD: Taiwan’s paper does have, in my humble opinion, more aesthetically pleasing imagery. If only that factored into the battle.


CBOE Russell 2000 BuyWrite Index (BXR) Hits All-time High
By Matt Moran – CBOE Options Hub
The BXR is a benchmark index that measures the performance of a theoretical portfolio that sells Russell 2000 Index (RUT) call options, against a portfolio of the stocks included in the Russell 2000 Index. A “buy-write,” also called a covered call, generally is considered to be an investment strategy in which an investor buys a stock or a basket of stocks, and also sells call options that correspond to the stock or basket of stocks. This strategy can be used to enhance portfolio returns and reduce volatility.

BOX Price Improvement Activity for May
Press Release
In the month of May, price improved contracts on BOX Options Exchange (“BOX”) averaged 207,930 per day. Price improvement versus the prevailing NBBO for contracts submitted via BOX’s price improvement auction, PIP, averaged $341,729 per day, while total savings to investors in May was $6.83M. With this, BOX has saved investors over $631M since its inception in 2004. Overall average daily trading volume on BOX in the month of May was 341,010 contracts.

Regulation & Enforcement

Japan’s FSA issues warning about binary options broker Platinum Option
By Maria Nikolova – LeapRate
Japan’s Financial Services Agency (FSA) has earlier today updated its “Black list” of overseas securities companies that are not allowed to offer their services to Japanese clients but nevertheless do so.

Insider Traders Made Some Easy Money on Stock Offerings
By Matt Levine – Bloomberg View
One thing that I like to say about insider trading is that people think it is illegal because it is unfair, but it is actually illegal because it is theft. Unfairness is just a fact of life, and of markets: People who are better at research will do better research, smarter people will have smarter insights, people with faster computers will trade faster, etc. Random individual hobbyist investors are not entitled to trade on a level playing field with people who invest billions of dollars for a living. Much regulatory lip service is paid to the idea that they are, for reasons that elude me, but it is obviously untrue.

***SD: The JLN skeleton crew contemplated putting this in strategy.

EU gives banks, pension funds more breathing space over derivatives
By Huw Jones and Toby Sterling – Reuters
The European Commission will give banks in the EU another six-month exemption until December from having to hold extra capital to cover transactions at clearing houses that don’t meet the bloc’s standards.

Germany’s debt office set for derivatives clearing
By Joe Rennison – FT.com
Managers of German’s government debt issuance are set to follow the call from global regulators for stronger derivatives standards. The Finanzagentur, Germany’s debt management office, which uses interest rate derivatives to manage risk in the course of its sales, plans to push these trades into a centralised clearing house — a key feature of post-financial crisis reform.

U.S. oil price manipulation lawsuit settled for $16.5 mln
By Jonathan Stempel – Reuters
Oil traders have reached a $16.5 million settlement of a U.S. class action lawsuit accusing Arcadia Petroleum Ltd, its Parnon Energy unit and two traders of illegally manipulating the price of crude oil in early 2008.


The rise of the robo volatility strategist
While the institutional derivatives audience has remained largely oblivious to low cost web based so-called roboadvisors — quantitative allocators that provide comprehensive portfolio services for individual investors — a new company is the first in what is likely to become a trend of overlay managers relying on models and cloud computing rather than human experience.

Comment: Time for trading technology to grow up
By Veronica Augustsson – FT
About 18 months ago I was talking with the head of trading at a large bank in New York. She mentioned that in 2013, they had recorded 300 separate instances where technology glitches stopped her team from executing trades on one of the dozens of exchanges and venues around the world. They were literally out of business for a few, very expensive minutes. In some cases they were unable to trade for a few hours.


Keep Your Pants On: From A Naked Put Sale To A Call Purchase
By Greg Loehr – Benzinga
The naked put sale: It’s a mainstay of many option-trading veterans who are bullish, or at least not bearish and really don’t think a stock will move much lower. And why not, proponents ask? When options end up out of the money (OTM) and worthless at expiration, the option seller can make money (excluding fees and other costs).

TLT: Strangle Profits Out of the Bond Market
By John Jagerson and Wade Hansen – InvestorPlace
Recently, traders have become increasingly stressed that bond yields will continue to rise and potentially get a little out of control. Comments this week from the European Central Bank’s Mario Draghi didn’t do very much to calm these fears, which means that a sudden spike lower is a higher probability than it has been recently.

The Easiest Way I Know To Make Triple-Digit Profits
By Jared Levy – NASDAQ.com
Over the past few decades, we’ve seen many advances in how the stock market functions. Today, exchanges and brokerage houses exist almost entirely online, and everyone is competing for microseconds of speed.
We’ve also seen the idea of “investing” evolve into something much more advanced and complicated than it was in the early days.

Call Stupid Buyer in VIX Options Today
By Russell Rhoads – CBOE Options Hub
I came across a trade from Wednesday and headed down to the VIX pit to ask some questions before putting up a block trade blog. The response I got was, “Do you want to hear about something more interesting than that?” Usually when a question is answered with a question it is an indication that you should go elsewhere for answers. This is not one of those cases.

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