Lead Stories

Floor Seen in Retail Options After Worst Start Since ’08
Inyoung Hwang – Bloomberg
Options traders are betting the worst has passed for U.S. retailer shares, which posted the biggest decline to start a year since 2008.
The cost of using options to protect against losses in an exchange-traded fund tracking supermarket owners and clothing chains has fallen to the lowest level since September 2011, data compiled by Bloomberg show. That’s after six of the 10 worst-performing stocks in the Standard & Poor’s 500 Index (SPX) this year were retailers, including Best Buy Co., Staples (SPLS) Inc. and Bed Bath & Beyond Inc., which fell more than 20 percent.

ICE’s Sprecher sees risk amid VIX lows
Helen Bartholomew – IFRe
“It feels like there is something about to happen,” Jeffrey Sprecher, chairman and chief executive of the InterContinental Exchange, told delegates at the event this morning on a panel of exchange leaders.
“It doesn’t feel like calm to me as it’s hard to see how central banks will change their policy…It feels like we’re on the cusp of something. I’m a contrarian to the VIX.”

Cheap Options Entice as Hedge to Stock Risk
Steven M. Sears – Barron’s
What goes down usually will come back up, although not necessarily right away. So it is with currently depressed market volatility.
As long as global markets continue to grind higher, the CBOE Volatility Index (VIX) could fall below last Friday’s low of 10.7, which was reached in reaction to the European Central Bank’s decision to lower interest rates.

Is a Confident Stock Market a Good Thing?
John Kimelman – Barron’s
With both the Dow and Standard and Poor’s 500 indexes hitting all-time highs once again Monday, the market’s growing confidence continues to be a front-burner issue.
A measure of market fear, the CBOE Volatility Index, or VIX, closed at 11.15, near its low for this year and close to its all-time low of 9.3 reached in 1993. Contrast that with the fact that the VIX reached more than 80 during the financial crisis and you’ll see how different investor moods are these days.

Small Cap Volatility: “Small Cap Premium,” or Difference in Implied Volatility Between U.S. Small Cap and U.S. Large Cap Stocks, Was Much Higher in April and May 2014 Relative to Full-Year 2013, According to the CBOE Russell 2000 Volatility Index and CBOE Volatility Index (VIX)
Press Release (via MarketWired)
For April and May, implied volatility for the U.S. small cap equity market as reflected by closing prices for the CBOE Russell 2000 Volatility Index(SM) (RVX(SM)) increased and as of May 30 was significantly higher than large cap volatility as measured by the CBOE Volatility Index (VIX).
Small cap volatility is almost always higher than large cap volatility. This “premium” averaged 28% in 2013. However, for April and May 2014 the premium averaged 50% with average RVX level of 20.00 and VIX level of 13.34. And as of Friday, May 30, RVX was 17.74 and VIX was 11.40, a premium of 56%.

Volatility Traders Have More to Fear than Fear Itself
Spencer Jakab – The Wall Street Journal
The latest big worry to hit markets is an unusual one: calm. With stock prices high and various gauges of risk low, investors appear to have thrown caution to the wind.
That isn’t entirely true, though. Exchange-traded notes that profit handsomely from market-shaking events have boomed since the financial crisis. But they have two big shortcomings: They may not work as designed in another financial crisis since their value ultimately depends on the bank backing them. And, due to the way the products work, anyone holding these for the long term will inevitably see their value erode.

VIX: Index of fear, complacency or ignorance?
Stephen Sedgwick – CNBC
Here we go again. More gumpf last week about the precipitous decline of the VIX and how the “Index of Fear” has gone down to seven-year, pre-crisis lows.
Maybe if I say “Index of Fear” enough times I can convince myself, and anyone reading this column, that it is a big, scary concept that really is so terrifying we should all run for cover when it ticks up or that we are set for eternal peace when it continues lower.

Low yields and low volatility a growing bubble
Damian Handzy and Timothy Rudderow – Risk Magazine
Former US Federal Reserve chairman Alan Greenspan, with his lock-step 25 basis point lowering of interest rates, effectively removed risk from the financing equation, thereby increasing the risk in the rest of the world. It was not only possible, but actually quite simple, to predict US short-term rates with laser-sharp precision. The resulting complacency was clearly one of the causes of the global financial crisis, which can be described as the hunt for, and subsequent creation of, novel ways to generate yield in an otherwise yieldless investment environment.

Time to worry? 3 signs of investor complacency
Adam Shell – America’s Markets
In a flashback to 2013, stocks are again hitting record highs on a daily basis. Investors have embraced a “don’t worry, be happy” attitude. Ironically, the thing investors should fear most is the lack of fear.
Sure, the stock market is making another run at big, round numbers it’s never seen before. The Dow Jones industrial average is edging closer to 17,000 for the first time. And the Standard & Poor’s 500 stock index is nearing 2000.

ABN Amro Shuts Equity Derivatives, Asia Markets Business
Maud van Gaal – Bloomberg
ABN Amro Group NV, the Dutch state-owned bank, will cut about 100 jobs as it exits equity derivatives and shutters its Asian markets business.
About half of the roles are support functions, Arien Bikker, a spokesman for the Amsterdam-based bank, said by telephone. ABN Amro will also stop offering its own structured products, he said.

Monte Paschi’s 5 bln euro share sale causes confusion on Milan stock exchange
Silvia Aloisi and Andrea Mandala – Reuters
Italian bank Monte dei Paschi’s 5 billion euro capital raising caused confusion on the Milan stock exchange on Tuesday, where the bank’s shares have jumped 40 percent in two days but have not traded…
…Analysts and traders said one element affecting the market were call options – or options to buy Monte dei Paschi shares – being exercised during the rights issue, forcing those who sold them to buy the relevant number of shares on the market.


Euronext to Be Valued at up to $2.4 Billion in IPO
Géraldine Amiel – The Wall Street Journal
Stock-market operator IntercontinentalExchange said Tuesday its Euronext NV unit would be valued at between EUR1.33 billion and EUR1.75 billion ($1.81 billion-$2.38 billion) following its initial public offering later this month.
Euronext shares will be sold at between Eur19 and EUR25 a share in the listing, which will raise between EUR880 million and EUR1.158 billion, assuming the full exercise of the overallotment option.

Central clearing in the equity derivatives market – ISDA releases clearing study
Futures Magazine
The approval of the first central counterparties under the European Market Infrastructure Regulation has focused attention on how a clearing determination will be applied across the European Union. This paper outlines the composition of the equity derivatives market and the extent of central clearing today, as well as the criteria that should be assessed when determining whether a clearing mandate should apply in the EU. In addition, the paper examines whether the liquidity of the underlying reference share – proposed by ESMA as a possible method of defining a class of product – is appropriate for clearing mandate determinations.

Regulation and Enforcement

Senate panel to probe high-speed trading, broker conflicts
A Senate investigative panel said on Monday it plans to hold a hearing next week to probe the role that high-speed trading plays in the markets and whether it is harming investor confidence.

‘Dark Pools’ Face New SEC Probe
Scott Patterson, Jean Eaglesham and Bradley Hope – The Wall Street Journal
The Securities and Exchange Commission is investigating a number of big “dark pools,” according to people familiar with the probes, as stock-market regulators ramp up pressure on the private trading venues.
Investigators are exploring whether the trading systems are properly disclosing to clients how they operate, treating all investors fairly and protecting confidential client information, among other concerns, the people said.

Antitrust: Commission sends Statement of Objections to ICAP for suspected participation in yen interest rate derivatives cartels
Press Release (European Commission)
The European Commission has informed the UK based broker ICAP of its preliminary view that it may have breached EU antitrust rules by facilitating several cartel infringements in the market for interest rate derivatives denominated in the yen currency. The sending of a statement of objections does not prejudge the final outcome of the investigation.
Interest rate derivatives (e.g. forward rate agreements, swaps, futures, options) are financial products which are used by banks or companies for managing the risk of interest rate fluctuations. These products are traded worldwide and play a key role in the global economy (see MEMO/13/1090). They derive their value from the level of a benchmark interest rate, such as the London Interbank Offered Rate (LIBOR) or the Tokyo Interbank Offered Rate (TIBOR) for the yen.


Trading Technologies’ MultiBroker Network Achieves Milestone with Participation from More Than 25 Global Brokers
Trading Technologies International, Inc. (TT), a provider of high-performance professional trading software, announced it has expanded its global MultiBroker ASP service to include more than 25 sell-side firms.
Sell-side participation in MultiBroker is being driven by buy-side demand for TT’s service, which launched to production in July 2013. In the first five months of 2014 alone, monthly volume has nearly doubled.

Fidessa integrates US Treasuries with futures and options platform
Press Release (via Finextra)
Fidessa group plc (LSE: FDSA) today announced the next phase in the rollout of its global futures & options trading platform with the integration of US Treasuries and intelligent connectivity to BrokerTec and eSpeed.
Faced with ongoing economic and regulatory pressures, sell-side customers including FCMs are continuing to rethink their business models to take advantage of the ‘new normal’ in which they find themselves operating. Challenged by low interest rates and regulatory uncertainty, they need to save money whilst at the same time improve customer service and transparency.


What the Apple Inc. (AAPL) Split Could Mean for Options Traders
Will Apple’s ‘new’ price impact implied and realized volatility?
Adam Warner – Schaeffer’s Investment Research
If you own Apple Inc. (NASDAQ:AAPL), and get all your stock news from Squawk Box, you may have spit out your coffee this morning:
Of course unless you live in a cave, you probably know that AAPL split 7:1, effective after Friday’s close. Even if you live in a cave, you probably know that, assuming you have an iPad and/or iPhone, and can get WiFi in there. And let’s face it, the fact that even cave dwellers in 2014 own Apple products is a good reason why the stock continues to do so well and can “afford” to split in 2014.


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