Observations & Insight

Why the Daleks and Vogons were right about financial markets
by Steve Grob, Fidessa
An interesting debate broke out here at Fidessa Towers this morning concerning the infamous Sci-Fi phrase “resistance is useless”. Should it be attributed to Dr Who’s nemesis, those metallic, warbly-voiced Daleks, or to the slug-like, green-skinned Vogons that appear in Douglas Adams’ The Hitchhiker’s Guide to the Galaxy? Anyhow, whilst folks furiously searched Google for the answer it got me thinking about the contrast between resistance and true resilience. The difference is more than just semantics. Resistance is all about hardwiring pre-programmed responses to known threats, whereas resilience is something more subtle altogether. Resistance assumes that you can deconstruct a system into its component parts, see how they fit together and so understand how it all works. This works well in simple systems, but global financial markets are now so complex and interconnected that this just won’t work; if anything, it makes the probability of some non-linear calamity actually more likely. Despite this, regulators around the world obsess on resistance by setting hard limits on some activities, banning others altogether and trying to impose blanket taxes.

***DA: For all of you Americans who are saying “What about the Borg,” the Borg did not appear until Star Trek: The Next Generation in 1987. Besides, the Borg said “resistance is futile.”

Lead Stories

“Fear gauge” drops as sentiment ameliorates
Financial Times
Calm is returning.
The CBOE Vix index, a gauge of expected market volatility that is inversely correlated to stock market returns (see chart below) and often known as Wall Street’s “fear gauge”, has fallen sharply on Thursday.

***DA: But still elevated relative to the level of the S&P 500. And for good reason. I am getting nosebleeds from the G-forces of these moves.

Market Tracing Familiar Pattern as S&P 500 Plunge Stops at 4%
Joseph Ciolli and Oliver Renick – Bloomberg
Traders whose bullishness on the Standard & Poor’s 500 Index (SPX) surged to the highest levels in 12 months last week finally got a break.
U.S. stocks rallied for the first time since the start of the year yesterday, rising 1.2 percent after suffering the fifth decline of 4 percent or more since last January. Relief that Federal Reserve minutes signaled no change in interest rate policy and optimism on employment growth helped break an 88-point slide in the benchmark gauge for American equity.

How A High VIX Makes A Sudden Drop More Likely
Michael Ide – ValueWalk
With the VIX picking up, you might be wondering if it’s time to reduce your exposure to risky assets a bit until the market calms down. According to new research from First Quadrant Analytics that might not be a bad idea because the chance of a Sharp Corporation (ADR) (OTCMKTS:SHCAY) (TYO:6753) , two or three sigma, drop is a lot higher during high volatility regimes.

***DA: Reversion to the mean? But which mean; short term or long term?

Derivatives Show Traders Are Undeterred on Rates by FOMC Minutes
Liz Capo McCormick – Bloomberg
Derivatives show minutes from the Federal Reserve’s last meeting did little to alter traders’ expectations that policy makers will begin raising interest rates this year. That’s where the similarities on the outlook for rates between the bond market and the central bank ends.
Federal funds futures show a 59 percent chance of the Fed raising its near-zero policy rate in September, little changed from before the release of the Dec. 16-17 meeting minutes. For the years ahead, traders see the Fed increasing rates to only about half the 3.75 percent peak level policy makers predict.

What’s Next for VIX and Oil Volatility?
Adam Warner – Schaeffer’s Investment Research
Just how wild a volatility ride have we seen in oil? Check out this graph of CBOE Volatility Index (VIX) compared to CBOE Crude Oil Volatility Index (OVX) (the VIX methodology applied to crude) over the past half-year.

***DA: Nosebleed indeed.

S&P 500 Option-Implied Volatility
Myles Udland – Business Insider
In 2015, every big strategist on Wall Street expects the S&P 500 to rise.
Some strategists see the benchmark index adding just a few percentage points this year, while others expect the S&P to extend its three-year streak of double-digit gains.

In praise of market volatility
Fox Business
We are not participating in the annual ritual of trying to predict what markets will do in the coming year. So let’s discuss current market conditions.
We follow three main indices for US markets: The PowerShares QQQ Trust Series ETF (QQQ), the Russell 2,000 and the benchmark S&P 500 Index.

Options data points to market bearishness
Anand James – The Economic Times
The last month of 2014 had seen both Bank Nifty as well as Nifty Futures falling from record peaks, followed by a recovery rally. With this week’s fall, such recovery attempts have been hammered down, casting doubts on the sustainability of the broad uptrend. FII data shows that they have been net sellers in the index futures segment, while the rest have been buyers in index options.


US still the dominant superpower in derivatives trade
Financial Times
Like two cold war superpowers, US derivatives exchanges CME Group and Intercontinental Exchange are turning asset classes and geographies in the world’s markets into their own private duel.

***JB: A lyric from a song in the movie “Team America: World Police” is popping into my head. If you know it you know why I can’t print it. If you don’t know it probably better if you don’t find out.

Credit Suisse Issues Underperform Rating to CBOE Holdings, Inc
Stafford Daily
Major Brokerage house, Credit Suisse maintains its ratings on CBOE Holdings, Inc (NASDAQ:CBOE). In the latest research report, Credit Suisse raises the target price from $56 per share to $63 per share on the counter. According to the latest information available, the shares are now rated Underperform by the analysts at the agency.

ICE troubled by volume drop for Financials
The Trade
Average daily trading volumes in the financials product line at the Intercontinental Exchange group fell 21% in 2014, compared to the previous year, the company confirmed today.
The fall was attributed to a drop in trading activity in short-term interest rates, which fell by almost a third in 2014, compared to 2013.

Southeast Asia derivatives trading hit record high
Jeremy Grant – Financial Times
Derivatives volumes on the three biggest exchanges in Southeast Asia hit record highs in 2014 in a sign that the region’s capital markets are diversifying beyond equity capital raising and trading into offering risk management and hedging.
The development also shows that the bourses are managing to tap a growing middle class of domestic investors who are becoming familiar with futures trading, which is riskier than equities but can offer higher returns.

***DA: A an area of the world that is maturing rapidly.

MIAX Options Exchange: New Equity Rights Program For 2015
Press Release via Mondovisione
The Exchange filed for immediate effectiveness to implement an equity rights program pursuant to which units representing the right to acquire equity in the Exchange’s parent holding company, Miami International Holdings (“MIH”) would be issued to a participating Member in exchange for payment of an initial purchase price or the prepayment of certain transaction fees and the achievement of certain volume thresholds on the Exchange over a 29 month period.

HEFFX Options Exchange Extends to Singapore, Japan, Hong Kong – Live Trading News
Live Trading News

Regulation & Enforcement

Republicans Lose House Vote on Bill Easing Dodd-Frank
Billy House and Erik Wasson – BloombergBusinessweek
On the second day of Congress’s new session, U.S. House Republicans lost a bid to quickly pass legislation to relax some requirements under the 2010 Dodd-Frank financial regulatory law.
The measure would delay until July 2019 a provision of the law’s Volcker Rule intended to limit risky investments by banks, and make other changes.

***DA: It will happen, just not yet. Some Congressmen still need to be lobbied over a steak dinner.


Tellefsen and Exactpro Systems Team Up to Help Clients with REG SCI
PR Newswire, via CNBC
Meeting the demanding new requirements imposed upon firms by SEC Regulation SCI is a key issue for many firms, especially in the areas of independent systems testing and certification. Tellefsen and Company, L.L.C. (Tellefsen) and Exactpro Systems (Exactpro) have today announced a marketing partnership in which both firms will collaborate to provide key industry constituents with market structure consulting, financial technology infrastructure testing and software quality assurance testing services.

***DA: Reg SCI, like Dodd-Frank, is placing burdens on financial participants. But one firm’s burden is another firm’s opportunity.


How to Trade the VIX; Profit From Volatility
Steven M. Sears – Barron’s
A view is emerging across Wall Street that sudden spikes in options volatility should be sold in anticipation of sharp moves lower.
These “volnado” trades, as we have called them, are based on the view that investors are overreacting to tremors in global markets and are too worried about what could happen in America.

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