Observations & Insight

Eris: New Money, New Opportunities with CBOE Partnership
Doug Ashburn – JLN

CBOE Holdings and Eris Exchange announced a strategic partnership between the two exchanges today. CBOE will take a minority equity stake in Eris, which lists cash-based interest rate swap futures and licenses its methodology for other products, including variance swap futures traded on CBOE’s futures exchange. The two firms also plan to work together on new product initiatives.

“We are not private equity investors here, looking for a pure financial payoff,” said John Deters, CBOE’s chief strategy officer in an interview with John Lothian News. “We’re in it for the strategic benefits of a collaboration with Eris.” Deters, who will become CBOE’s representative on Eris’ board of directors, sees it as a natural extension of the firm’s nascent reach into the interest rate world. “As we step out into the rates world through our investment in and affiliation with CurveGlobal, we are gaining a clear appreciation for the intense challenges facing OTC swaps market participants.”

Through the tie-up. Eris adds an exchange to its stable of investors, which include banks and asset managers such as: Morgan Stanley, SocGen, BlackRock, State Street and Fidelity, as well as liquidity providers DRW and KCG

Though no specific product plans were announced,Eris CEO Neal Brady dropped hints as to what could be expected. “Clearly options are in our roadmap,” Brady said, noting that the upcoming Basel mandate will create margin challenges for uncleared positions and drive the need for standardized swaptions. He sees the partnership as an opportunity to further expose CBOE members to Eris products. Both Brady and Deters see product collaboration working both ways as well, which makes sense given CBOE’s command of its VIX methodology and Eris’ swap futures methodology.

If the past is an indication as to what to expect, given each firm’s history of product innovation, the next big thing may be coming.

(See the related press release under “Exchanges”)


Lead Stories

Fed Chair Yellen Has The Stock Market On Edge, Contrarians Look For A Rally (Option Trade Included)
Fred Oltarsh – Forbes
There is uncertainty in the markets over the outcome of this week’s pending talk by Fed Chair Janet Yellen. Announcements typically provide the opportunity for everyone to provide their opinion. It’s like waiting for the Preakness Stakes or the Western Conference Basketball Playoffs. Opinions abound, but the uncertainty remains. The uncertainty of the next Fed move provides an opportunity for contrarians to excel.

Brexit Spurs Torrent of Options Trading in Last Hedging Rush
With only one month to go before the U.K. votes on whether to remain in the European Union, investors are piling into contracts protecting against stock swings, paying prices not seen in more than a year for the hedges.

***JB: Polls aside, the current book on Brexit is an 82% chance the U.K. will stay in the E.U.

The Treasury warns of a “do-it-yourself” recession after a Brexit vote
The Economist
THE government’s strategy for winning the referendum on Britain’s membership of the European Union has long been to focus on the risk that Brexit poses to the economy. A month ago George Osborne, the chancellor, published a long-term Treasury study which came up with a “central case” estimate that leaving the EU would make Britain’s GDP 6% smaller by 2030 than remaining would—a figure that he translated into an annual cost of GBP4,300 ($6,200) per household. Brexiteers sneered that Treasury forecasts were usually wrong and also pointed to the huge uncertainty in any attempt to look 15 years ahead.

***JB: Maybe CNBC can start a new “DIY Recession” program.

Should Investors Consider Brexit in Their Trading Strategy?
Dan Rosenberg – TD Ameritrade
British voters face a big decision on June 23: Whether to remain in the European Union.
Investors also face a big decision: Whether to factor Britain’s vote into their trading strategy during the weeks ahead and after the referendum, should Britain exit.

UK equity market could fall 15% under Brexit
Hayley McDowell – The Trade
A recent study has found the equity market in the UK could plummet 15%, should Britain decide to leave the EU in June this year.

Volatility Update: Fed’s rhetoric scares some but not enough
Georgio Stoev – Tradingfloor
For a bull or a bear this market could cause an equal amount of anxiety. Equities continue their grind away in “la-la” land – one day up, another down. Just like in a game of musical chairs, investors quickly found their seat on Wednesday when the Fed suggested a possible June rate hike.

The Option Queen Newsletter
J.A. Schwarz
The steep uptrend of the major indices began in March of 2009 and ended in July of 2015. No, it was not the end of the “Bull Market” but this was the end of the steep uptrend. Since that time, the indices have halted the upward climb and have been range bound with no progress to the up or down sides. This range bound market apparently emerged when the FOMC stopped fueling the markets with asset and treasury buy-backs and, more recently, with a tiny rate hike. This past week, the FOMC minutes indicated that another uptick in rates could come as soon as June. That said, we believe that this group will also recognize the Brexit vote, and might hesitate because of that vote. We also believe that if a rate hick is to occur, it will likely be seen either months prior to the US Presidential Election or after that election.

Hall of Fame: CBOE’s Tom Knorring, ‘The Mathematician’
It is poetic harmony that someone who is naturally talented in mathematics would end up spending 38 years at an options exchange. Tom Knorring knew he was good at math from an early age, when he calculated that it was much easier to carry around one skinny math book than a stack of heavy history books.


CBOE Holdings Takes Equity Stake in Eris Exchange Holdings and Companies Announce Strategic Product Partnership
Press Release – CBOE
CBOE Holdings, Inc. (NASDAQ: CBOE) and Eris Exchange, LLC (Eris) announced today that CBOE Holdings has made a minority equity investment in its parent, Eris Exchange Holdings, LLC. Eris is a U.S.-based futures exchange group offering swap futures as a capital-efficient alternative to over-the-counter (OTC) swaps. Concurrent with this investment, CBOE will join Eris’ board of directors.
CBOE and Eris are launching this strategic partnership to develop product solutions that are expected to address the impact of international regulatory reforms, including Basel III, European swap clearing and trading mandates, and margin for un-cleared swaps. The CBOE S&P 500 Variance Futures currently listed for trading at CBOE Futures Exchange (CFE) are based on the Eris Methodology™, and the CBOE and Eris partnership will allow the two companies to develop new proprietary products and indexes across asset classes. The companies also plan to collaborate to enhance distribution of Eris Interest Rate Swap Futures and related market data.

CME Upgrade Soothes Critics Who Viewed Prior System as Unfair
Brian Louis – Bloomberg
CME Group Inc., the world’s largest exchange operator, just completed an upgrade traders said would eliminate a shortcoming that gave some participants an advantage.
Under the old system, data connections that linked customers to CME — where key products like Treasury futures and contracts tied to the Standard & Poor’s 500 Index trade — had noticeably different speeds, opening up the potential for gaming, according to traders and other experts. Those who knew how to gain faster access could increase their odds of being first in line to trade.

France Warns Over Stock Exchange Merger Deal
Sky News
France has raised concerns about the GBP21bn tie-up between the owner of the London Stock Exchange and Germany’s Deutsche Boerse, saying it could cause competition problems.

Nasdaq goes nuclear on the SEC
Yahoo Finance
In a letter to the US Securities and Exchange Commission, Nasdaq’s law firm, Gibson Dunn, said that the SEC could be sued if it approves IEX’s application to become an exchange.
IEX, the upstart trading venue made famous by Michael Lewis’ book “Flash Boys,” filed with the SEC in September to become a stock exchange, kicking off a heated debate of the merits of its application.

Bank Nifty index’s options contracts to be available for trading on National Stock Exchange
Biswajit Baruah – Economic Times of India
Traders from the derivatives market who have fancied volatility in banking sector due to barrage of news flows related to regulations , policies, financial performance and others can start taking positions in weekly Bank Nifty index’s options contracts from June series or this Friday, which shall be available for trading on National Stock Exchange (NSE).


Volatility Is Set To Spike — Here’s What To Do
When I first began my career at the Chicago Board of Trade, I felt like a newly hatched alligator being released into the wild. I was swimming around much bigger and more experienced animals that wanted to turn me into a quick lunch and take me out of the game.
In that ultra-cutthroat environment, where I competed against Goldman Sachs and billion-dollar hedge funds every day, I had very little time to develop my trading technique and confidence.

For Now, Avoid Shorting UVXY – ProShares Ultra VIX Short-Term Futures ETF
Nathan Buehler – Seeking Alpha
Hello everyone, it has been a while since the last volatility update. Due to a different school schedule and location I have been very busy. Thank you for the support some of you gave my classroom earlier this year. With the summer rapidly approaching I am looking forward to getting back into our great discussions.


Trading Places: Why Stock, ETF And Futures Options Are So Difficult To Trade
Fred Oltarsh – Forbes
As an Options Trader in today’s electronic markets you have the advantage of transparency. Market Prices are in front of you all of the time. You can use a live feed of Options Prices to evaluate numerous Options Trading Strategies and determine which Strategy meets your risk/reward requirements. In addition, you can quickly evaluate the Liquidity of the Market and whether algorithms are competing with you.

Smart VolatilityTM: Dynamic Management of Volatility as an Asset Class
CBOE Options Hub
The dips in August 2015 and January 2016 have served as reminders that the U.S. equity markets are now in the eighth year of a bull run, and equity crises happen on a regular basis. In the last 30 years, there was Black Monday, the Savings & Loan Crisis, the Russian Financial Crisis, the Tech Bubble Collapse, the Credit Crisis, the Flash Crash, and the Greek Crisis, just to name a few. Based on the Shiller P/E Ratio and the real bond yield (nominal yield minus inflation), stocks and bonds are more expensive than they have been at least 90% of the time over the last century.

A Market Under Distribution
Bob Lang – CBOE Options Hub
The stock market is under distribution, this is a fact. Simply put, professional selling overwhelms the buying and prices head lower. As the markets ebb and flow with the money coming in/out we are constantly reminded about the psychological effects of a bear market. Yes, even after the huge rally off the February lows this could still be considered a bear market. Some of the strongest rallies occur during bear markets, but we cannot dismiss the internal characteristics. Each day we compound and analyze the activity which gives us enormous clues as to the current sentiment and project that onto a future probability, based on prior patterns. But how do we navigate around a market in distribution?

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