JLN Options: Exclusive: U.S. stock options markets agree to need for trading halts on big moves; Remembering the Great VIX Panic of Fall 2014; Now that everyone’s a volatility seller…

Oct 23, 2014

Observations and Insight

Pat Kenny, vice president of client relations, CQG – Transition from the floor to electronic trading, where are the opportunities?
JohnLothianNews.com

“Build those relationships because those relationships last forever.”

Dubbed “The Most Interesting Man in the World,” Pat Kenny, vice president of client relations at CQG, discusses his transition as a trader to his current role. After working as a water skiing instructor and bartender, Kenny found himself with an opportunity to become a runner on the floor of the Chicago Board of Trade. From there, Kenny took a position as a phone clerk and took customer orders. Eventually, he found his true passion of being involved with the sales side of the business. His experiences, combined with the network of several individuals helped lead Kenny to his current role at CQG. Kenny’s key message was that it’s not always what you know that may help lead to new opportunities, it’s also a matter of who you know that can help open up new doors and unlock different paths in your career.

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Lead Stories

Exclusive: U.S. stock options markets agree to need for trading halts on big moves
John McCrank – Reuters
U.S. options market operators have agreed in recent months on the need for new automatic trading halts when stock options prices suddenly surge or plunge, in a bid to reduce excess volatility and blunt the impact of erroneous trades, according to five sources with knowledge of their discussions.
The plan, which takes its cue from a rule known as “Limit Up/Limit Down” that U.S. stock markets put in place in response to the May 6, 2010 “Flash Crash,” is still in the early stages, with market operators trying to figure out how a similar rule could be applied to options trading, the sources said.
http://jlne.ws/1nB0ITc
***SR: They agreed to the need, but will they agree to the plan?

Remembering the Great VIX Panic of Fall 2014
Adam Warner – Schaeffer’s Investment Research
Remember The Great CBOE Volatility Index (VIX) Panic of Fall 2014? That was so last week. I mean, literally, last week. VIX hit a high of 31.06 on Oct. 15. Just four trading days later, it bottomed at 16.03, not too far from a 50% retracement in under a week. Not sure I’ve ever seen that happen. It dropped over 10% three days in a row, which I know I’ve never seen because it’s unprecedented, according to Bloomberg.
http://jlne.ws/1rrWYyV
***DA: You think that was big, take a look at VXST, the short-term index. It topped out at nearly 40 before retracing to 16.

Now that everyone’s a volatility seller…
Izabella Kaminska – Financial Times
In February 2012, Macro Risk Advisors drew our attention to an explosion in the market cap of the TVIX ETP, the 2x Vix exposure ETP offered to the market by Velocityshares, but backed by Credit Suisse.
As it happens, that fact turned out to be a perfect forward indicator to a whole sequence of shenanigans and suspensions to come in the ETP, confirming a general rule in our minds that whenever ETP market caps explode, beware, there’s probably someone somewhere (not the dumb money, of course) unearthing an arbitrage at the expense of the vanilla investor.
http://jlne.ws/1tgDkMH
***DA: I agree with Izabella, except for her use of the word “probably.”

Markets Are Calmer, but Worrying Signs Remain
Neil Irwin – NY Times
Like a summer rainstorm, the bout of volatility in global financial markets that arrived two weeks ago has come and gone. It was thunderous at the time, but has not appeared to have lasting consequences.
A big rally in early trading Thursday has brought the index to within 3 percent of its all-time high. The spurt of panicky activity followed by a rapid calming over the last week is perhaps best captured by the Vix, an index of expected stock market volatility.
http://jlne.ws/1rrX6hN

New market fear: Investors aren’t worried
Lee Brodie – CNBC
Given the massive moves in the market, it would stand to reason that worry in the market should be growing from bad to worse.
Swings in the Dow Jones industrial average have been sharp enough to give even the most intrepid investors an upset stomach.
However, looking at Wall Street’s favorite gauge of fear, the CBOE Volatility Index, pros appear to be moving in the other direction.
They’re growing less fearful, not more.
http://jlne.ws/1rrWPLO

Goldman, BoA and Morgan Stanley Top N American Equity Derivative Brokers
John D’Antona Jr. – Traders Magazine
Some things just don’t change.
Goldman Sachs, Bank of America Merrill Lynch and Morgan Stanley have all maintained their top 3 positions and rankings as the leading brokers of flow equity derivatives to North American institutional investors. It was the same trio last year, according to Greenwich Associates.
In Europe, where the flow equity derivatives field is more crowded, the field changes with Deutsche Bank, Morgan Stanley and J.P. Morgan in the lead as the tri have been busy establishing strong delivery platforms across these more esoteric products.
http://jlne.ws/1nB4aNP

JP Morgan hires former RBS head of FX options, Americas
Robert Mackenzie Smith – FX Week
Salvatore Rubino, former head of foreign exchange options for the Americas at Royal Bank of Scotland (RBS), has joined JP Morgan in a market risk role, according to a source.
Based in New York, Rubino is understood to not have taken a trading role at the US bank. JP Morgan declined to comment on the hire.
http://jlne.ws/1tgBpro

Low-Volatility ETFs Deliver, but See Little New Cash
Chris Dieterich – WSJ
So-called low-volatility exchange-traded funds proved their mettle in recently choppy trading.
But if any investors noticed, few seem to have plunked new money the funds.
The $4.5 billion PowerShares S&P 500 Low Volatility Portfolio ETF saw an outflow of $146 million over the past month, according to ETF.com. The $2.9 billion iShares MSCI USA Minimum Volatility Index Fund took in just $125 million.
http://jlne.ws/1rrVODv

Buysiders Expected to Trade More Futures in Next 12 Months
John D’Antona Jr. – Traders Magazine
With the derivatives market working its way through a bevy of new regulations, bonds providing limited upside and equities looking like they’ve peaked for the year, buysiders are eyeing up the futures market as the next best place to trade.
http://jlne.ws/1nB1PCx

Fresh turbulence tests post-crisis financial markets
Lionel Laurent – Reuters
A dramatic upswing in volatility is putting post-crisis financial markets to the test, as curbs on banks’ ability to take risks and an increase in technology-driven trading expose potential new cracks in the system.
While investors and traders say markets have become safer since the 2008 financial crisis – there is less leverage in the system and banks are better able to withstand shocks – they worry that the post-crisis rule book has reduced the market’s ability to absorb sharp spikes in buying and selling.
http://jlne.ws/1rrWkBw
***DA: Until they repeal the law of supply and demand, large order imbalances will lead to drastic price swings.

Exchanges

Canada’s TMX plans options to curb high-speed trading
Alastair Sharp – Reuters
Canada’s biggest stock exchange operator plans to offer trading options for investors who fear speed-based computer strategies are undercutting them, a move it hopes will keep clients from leaving for rival marketplaces.
TMX Group Ltd (X.TO: Quote) plans a “speed bump,” minimum order sizes and rebates for active flow on its smaller Alpha exchange, the company said on Thursday.
http://jlne.ws/1nB3ZSH

Regulation and Enforcement

CFTC chairman offers hope to derivatives end-users
Mark Pengelly – Risk.net
Timothy Massad, the new chairman of the US Commodity Futures Trading Commission, seems to be steering the agency towards a more deliberate and pragmatic approach to Dodd-Frank regulation.
During the past five years, when the financial world has not been gripped by budgetary battles in the US Congress or economic turmoil in the eurozone, it has increasingly been fixated on the actions of regulators.
http://jlne.ws/1nB0tYf

Technology

Speed-of-Light Trading Grows in Europe With McKay Network
John Detrixhe – BloombergBusinessweek
European trading is poised for an upgrade.
McKay Brothers International, a Geneva-based provider of networks for trading firms, plans to activate a microwave data link covering the 370 miles (600 kilometers) between Basildon on the outskirts of London, where markets including Intercontinental Exchange Inc. house computers, and Frankfurt, another financial center where Eurex is based. The goal is to migrate McKay’s Quincy Extreme Data service from a third-party system onto the company’s own wireless network.
http://jlne.ws/1nB0gnW

Barchart introduces on-demand equity options market data
Press Release – Barchart
Barchart.com, Inc., a leading provider of market data and information, today announced the availability of US and Canadian equity options price data through Barchart OnDemand. Barchart OnDemand is a cloud-based service developed for accessing and delivering market data and information using web services APIs.
http://jlne.ws/1D2WxkO (PDF)

Strategy

The Problem With Volatility Investing – ProShares Short VIX Short-Term Futures ETF (NYSEARCA:SVXY)
Jeroen Blokland – Seeking Alpha
Volatility is back. And it has not gone unnoticed. As the VIX index spiked to above 25 for the first time since June 2012, US equities plunged 8%. We have seen somewhat of a rebound in recent days, but it looks far from solid. And, thus, stories about the benefits of volatility investing are popping up again.
http://jlne.ws/1rrVnJl

Options Education

Trading Markets Has Become a Challenge – Know Your Timeframe
Bob Lang – CBOE Options Hub
If you have a bit of an upset stomach watching the massive ups and downs in this market over the last couple of weeks, well you  are not alone.  I have been keeping a bottle of pepto bismal within reach (only kidding – actually more like three bottles!).  We can see and feel the anxiety with every market open, and it soon becomes a game of chicken to see who can get out the door first.  A far cry from the conditions we have been living with for the past few years, but then when the landscape changes we have to identify and make our move.
http://jlne.ws/1rrWAjY

Find the Fool and Trade Against Them
Brandon Wendell – The Options Insider
I have a friend and I will spare him the embarrassment of mentioning his name here, who always seems to buy and sell stocks at the wrong time.
He watches a lot of TV and gets excited at the prospects of becoming rich quickly from any publicly traded company that happens to make the news. It struck me after having watched my friend lose plenty of money throughout the years that there are many others who get involved in the markets the same way. They hear a hot tip, listen to a broker who pushes some brokerage inventory or watch the top performer lists on their computers.
http://jlne.ws/1nB0POB

The Right Way To Trade Options (Video)
Brianna Valleskey – Benzinga
Randy Frederick says that people probably use to think that options traders were always speculating, taking a lot of big risks and putting a lot of money down waiting for big gambles to pay off.
Frederick is the managing director for trading and derivatives at Charles Schwab. He recently joined Benzinga’s #PreMarket Prep to talk about the two different types of options traders and why they need each other for the market to work.
http://jlne.ws/1nB4iN9

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