JLN Options: Europe ‘fear index’ hits five-month high as Greek woes spread; Euro implied volatility jumps on Greek woes; Stocks all over the world are dropping after Greek crisis talks fell apart in 45 minutes

Jun 15, 2015

Observations & Insight

Bits & Pieces –
IDX 2015 Wrap-up: London’s Construction Boom, Algo Expansion, New Standards And So On
Doug Ashburn, JLN

Part of the allure of sending a team to London for the International Derivatives Expo each June is the ability to meet up with and receive updates from our European friends – subscribers, sponsors and market participants in general – on their turf. I came away with a new appreciation for just how much is happening in London and beyond.

And I am not just talking about the number of high-rise cranes dotting the London landscape (I stopped counting at 30; the property boom is for real). Progress is being made on the ground as well.

The London Metal Exchange is making progress on its move to Finsbury Square. The building will allow the exchange offices to consolidate under one roof and include a brand new ring, demonstrating the commitment to preserve the face-to-face trading system as necessary, even as the exchange (and the rest of the world) continues to electronify. I would call this the last trading pit to ever be built, but I recall saying the same thing when I moved to the CME’s upper trading floor in 1993, and again a couple years later when the CBOT added its new trading room.

Speaking of building, I had a chat with Cinnober CEO Veronica Augustsson about the Financial IT Quality Assessment (FIQA) standard they are promoting. The idea has merit, and if you would like to see for yourself, have a look at the paper they published on the topic

Also on the subject of building, as well as on the subject of research papers, Fidessa‘s Yuriy Shterk recently published the latest installment of the firm’s series on algos in futures markets and the challenges specific to derivatives markets. The upshot? Algos are getting smarter, on both the sell-side and buy-side, and that is not necessarily bad news. What’s good for the goose is good for the gander (my words, not his). View it HERE

Historically, open interest has been used to define the robustness of a contract or asset class. LCH.Clearnet’s Dan McGuire argues that the trend toward lower outstanding notional in interest rate derivatives is a good thing, because it means capital efficiency. Here are the numbers; do the math yourself. There was roughly $426 trillion outstanding at the beginning of 2014. About $643 trillion cleared last year, and about $300 trillion matured. But by the end of the year, there was only $362 trillion left outstanding, and that number has since been reduced to $295 trillion at last count. The difference is the effect of netting and compression.

As I continue with the “building” theme, perhaps the biggest takeaway from the conference (aside from the curry dinner we ate Thursday night), is the excitement around the adoption of blockchain technology to aid in the clearing, payment and settlement of financial contracts. One firm making the rounds, Cryex, generated a fair bit of buzz in its push to become a derivatives clearing organization and trade matching engine that uses a cryptocurrency such as bitcoin as a common denominator in cash and derivative transactions. Look for more on Cryex in an upcoming JLN Special Report.

Finally, and this piece is more of a remodeling project than new construction, FIA distributed the first issue of its newly-rebranded print magazine. Futures Industry is now called MarketVoice, and features a bit of the old, such as volume reports, but also a fresh new look at emerging trends as well as emerging firms. The futures industry is a whole lot more than the futures industry these days, if you get what I mean. MarketVoice attempts to reflect that trend.

***Addendum for JLN Options***

The above commentary appeared in this morning’s John Lothian Newsletter.

As is generally the custom, we would go through the newsletter and add a bit of color to the stories. Today, however, there seems to be only one comment applicable to pretty much every story in the newsletter. Volatility is low, abnormally low, considering the possible fallout from a Grexit.

Lead Stories

Europe ‘fear index’ hits five-month high as Greek woes spread
Lionel Laurent – Reuters
A top gauge of European stock-market volatility rose to its highest since mid-January on Monday, after talks on ending the deadlock between Greece and its creditors broke up in failure and spooked financial markets.
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Euro implied volatility jumps on Greek woes
Anirban Nag – Reuters
The cost of hedging against sharp swings in the euro rose on Monday, with traders citing increased worries about whether Greece could honour its debt repayments and remain in the euro zone.
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Stocks all over the world are dropping after Greek crisis talks fell apart in 45 minutes
Nigel Stephenson – Financial Post
Global financial markets suffered their first bout of significant contagion from the Greek crisis this year on Monday after 11th hour talks between the near bankrupt country and its creditors collapsed.After weeks of minor ebbs and flows on the stop-start negotiations, bond markets across the euro zone signalled alarm that a deal may not be reached by mid-year, when Athens must repay 1.6 billion euros (US$1.8 billion) to the International Monetary Fund.
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Volatility fears push nervous investors toward puts
Sophie Baker – Pensions & Investments
Investors increasingly are hedging downside risk through put options as a way to stay in attractive equity markets while dealing with their fears of increased volatility and market shocks. “We are seeing more and more conversations and people looking at puts as a product,” said Hamilton Reiner, New York-based managing director, head of U.S. equity derivatives at J.P. Morgan Asset Management (JPM), and a portfolio manager. JPMAM has $1.7 trillion of assets under management.
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Is ‘Sharp’ Money Chasing VIX Paper?
Adam Warner – Schaeffer’s Investment Research
Stop me if you think you’ve heard this one before, but… Everybody wants to buy some CBOE Volatility Index (VIX) calls! There was a also a huge call spread roll this week that bumped some of that open interest out to July, so basically there’s a “bet” on both a very near- and not-quite-as-near-term on a sizable VIX pop. And as Bloomberg notes, we’ve seen this before. Last time the open interest got this lopsided was September 2014, and it preceded a rather ugly October in the markets.
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Seeking More Clarity on Derivatives in Mutual Funds
Daisy Maxey – WSJ
Financial advisers say they would welcome more information on mutual funds’ use of derivatives, something a recent proposal by regulators would require. But some asset managers say they must tread a fine line. While advisers say they are for transparency, disclosing too much information about fund holdings could make it more difficult to generate strong returns, by allowing competitors to trade ahead of them, for example.
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Will Fed Show Its Hand, Stir Stocks From Stagnant June?
JJ Kinahan – Forbes
The S&P 500 (SPX) has seen its fair share of ups and downs in the first half of June, but the overall direction lacks conviction. Or is that changing? Like, real soon. This week kicks off with some noise due to failed weekend talks to rescue Greece. Just a little volatility primer before attention turns to the midweek Federal Reserve meeting.
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Where We Stand Now – Weekly Market Outlook 6.15.15
Price Headley – CBOE Options Hub
Despite Wednesday’s heroically bullish day, Monday’s and Friday’s tumbles were enough to translate into about a breakeven for last week… against a (mostly) bearish backdrop. That is, although the S&P 500 (SPX) (SPY) made a very modest gain last week, it made even bigger losses in each of the prior two weeks, and is still knocking on the door of some very critical support levels.
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Exchanges

The Last Days of Floor Trading
Lynne Marek – Crain’s Chicago Business
When CME Group begins dismantling more than half of its 35 trading pits on July 2, it will be a major step toward extinguishing a form of commerce that established Chicago as the financial center of the Midwest and helped define the city in popular culture as a place where savvy operators could make their fortunes.
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CBOE extends VIX and SPX options trading hours as global growth in VIX continues to build
Paul Stephens – Hedgeweek
Back in March of this year, the Chicago Board Options Exchange (CBOE) introduced extended trading hours for VIX options and SPX (S&P 500 Index) options to give global money managers greater flexibility to trade VIX and SPX products outside of normal US trading hours.
SPX is often used by money managers as a proxy for the global market. And VIX is considered the benchmark for global volatility. Traders now benefit from an additional six hours and 15 minutes of trading, five days a week.
This follows the decision by CBOE in June 2014 to extend trading hours for futures on the CBOE Volatility Index (VIX) to nearly 24 hours a day, five days a week.
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JPX Head Saito Says Earnings Leaks to Local Press Not Unfair
Tom Redmond and Nao Sano – Bloomberg
The outgoing head of Japan’s bourse is unperturbed about a disclosure practice that has characterized the nation’s stock market for years.
Publishing companies’ financial results in the local press before they are officially announced isn’t unfair, Atsushi Saito, chief executive officer of Japan Exchange Group Inc., told reporters in Tokyo on June 12. As long as media outlets aren’t trading on the information, it’s difficult to criticize them, he said.
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Regulation & Enforcement

Trade bodies urge regulators to sort out derivatives reporting
Huw Jones – Reuters
A wide range of market participants called on Monday for regulators to end confusion over derivatives trades reporting, which was brought in to help avert another financial crisis.
The Group of 20 economies called in 2009 for off-exchange swap trades to be reported to create a snapshot of who is exposed and to spot destabilising risks early. New reporting requirements came in at the start of 2014.
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Education

What does it take to become a futures trader?
Alice Attwood – Futures & Options World
As a plethora of trader training academies, courses and prop houses tout their wares, Alice Attwood takes a look at some of the prop trader training options.
For those who dream of a trading career, a quick scour online shows that there are numerous trading houses and education programmes available, but it is hard to know which firm to go with.
While rumours of “dodgy” and “churn and burn” approaches to practical training for trading are still rife, with experienced traders able to regale unsavoury practices in trader trading, a number of firms are trying to dispel such rumours with their own trading offerings.
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