Observations & Insight

Daily Racing Form, Options Exchange Edition
Sarah Rudolph, JLN

With the U.S. options exchanges numbering a baker’s dozen, it is not an easy task to keep straight all of the names of these entities, let alone the new initiatives, updates and other exchange happenings. Fortunately, once a year we gather them together in one room. This year, that room is in Miami at the iconic Fontainebleau Hotel.

The Options Industry Conference got underway on Wednesday with the exchanges updates panel, where representatives of each exchange tell attendees what’s new and what’s ahead for their exchanges.

Here are some of the highlights from that panel.

Read the full exchange rundown at JohnLothianNews.com


Clearing Evolution: Michael McClain on the changes at OCC

Industry players are gearing up for this year’s Options Industry Conference. One of the key speakers at the event is Michael McClain, president and COO of The Options Clearing Corporation. We talked with McClain in advance of the conference about the changes at OCC and their effect on its resilience and risk management capability. He also looked at securities lending, options education, and the controversy over OCC’s capital plan.
Watch the video »

Lead Stories

German-Bond Investors Just Lost 25 Years of Yield in 14 Days
Over the past couple of weeks, investors in German government bonds have received a crash course in “duration,” a geeky concept that is nevertheless a driving force in fixed income.
Buying longer-dated bonds with longer duration has been a popular strategy for investors seeking higher returns in an era of low interest rates. It can be risky, given that such debt is extremely sensitive to changes in interest rates and yields. When they go up, the price of bonds with a greater duration will fall a lot more than that of shorter-dated debt.

***DA: It is the same reason bond investors have been making money even as yields shrank over the past decade. People tend to forget that part.

This Is What Happens When Bill Gross Ignores Bill Gross
Miles Weiss – Bloomberg
Bill Gross should have listened to Bill Gross.
Just before the selloff in German government bonds, the manager of the Janus Global Unconstrained Bond Fund said the debt was the “short of a lifetime.” Yet instead of betting all-out against German bunds, Gross wagered they would trade in a narrow range for the time being, fund holdings posted on the website of Denver-based Janus Capital Group Inc. show.

***DA: It is easy to second-guess Bill from the safety of one’s armchair. He got burned a couple years ago jumping the gun on yields. If bunds are truly the short of a lifetime, there is still time to get in.

Bearish Options Bets Pile Up In High-Yield Corporate Bond ETF
Saumya Vaishampayan – WSJ
Investors are making big, bearish options bets on high-yield corporate bonds ahead of an expected increase in interest rates from the Federal Reserve.
The idea is that as the Fed begins raising rates, safer assets such as Treasurys will begin yielding more. That means investors won’t have to seek out riskier assets like high-yield corporate bonds and junk bonds in order to get returns. With the Fed evaluating when it can start boosting interest rates—and many thinking it will do so by the end of the year – some of those yield trades are already going out of favor.

***DA: Can yields normalize without affecting the market at large? Remember, for every lender who is yielding more, there is a borrower who will be expected to pay more.

OCC Says Listed Options Markets Must Remain Vibrant in the Eyes Of Regulators and Investors
Press Release – OCC
At the 2015 Options Industry Conference in Miami, Michael McClain, President and Chief Operating Officer of OCC, the world’s largest equity derivatives clearing organization, today said, “As the foundation for secure markets, it is important for OCC to ensure that the listed options markets remain vibrant and liquid in the eyes of regulators and the investing public. Speaking to over 400 retail and institutional investors and financial advisors, McClain noted, “This underscores the importance of continued education. We share your view that a strong education program contributes to better and more effective policy making, and fosters more knowledgeable and prudent investors. To that end, OCC continues to support the work of The Options Industry Council as it relates to education programs and the development of powerful thought leadership, and we applaud the work of our OIC partner exchanges and member firms.”
McClain announced the results of a study fielded by the Leo Burnett Business agency to measure the impact of advertising on The Options Industry Council (OIC).

***DA: Well said, sir.

Buffett Climbs From Derivative Hole That Swallowed Berkshire AAA
Noah Buhayar – Bloomberg
Warren Buffett’s derivatives wagers sapped earnings during the financial crisis at his Berkshire Hathaway Inc. and were part of the reason the company lost its triple-A credit rating. Things are looking rosier now.
Liabilities on the contracts shrunk to $3.5 billion on March 31 from about $15 billion six years earlier. Some of the derivatives are long-term bets that equities will rise, while others protect bondholders against losses if borrowers fail to meet their obligations.

***DA: Weapons of mass protection.

TYVIX Index, Measure of Interest-Rate Volatility, Rises for the 8th Day in a Row
Matt Moran – CBOE Options Hub
The CBOE/CBOT 10-year U.S. Treasury Note Volatility Index (with a new ticker symbol: TYVIX) rose today (Wednesday) for the 8th trading day in a row. TYVIX measures the expected volatility of the price of 10-year Treasury Note futures. The price of these T-note futures is tied by arbitrage to the price of 10-year U.S. Treasury notes, which are a core instrument of the U.S. fixed income market. TYVIX futures also are available for investors.

***DA: When the story ran in this morning’s John Lothian Newsletter, I said “if early indications hold, this will mark day nine.” With this morning’s equity market rebound, it appears that the TYVIX streak will be snapped at eight.

Investors On Edge After European Market Rout
European markets showed signs of stabilizing after several sessions of declines Thursday, but investors remained on edge.
Having slumped to a two-month low early in the day, the Stoxx Europe 600 recovered to trade around 0.1% lower by midafternoon.
Individual country indexes also reduced earlier losses, and bond markets recovered too, but investors said that the next few days and weeks would likely remain highly volatile and that it was too early to call an end to the rout.

What Are Option Prices Really Telling Us?
Adam Warner – Schaeffer’s Investment Research
We’re smack in the midst of our (seemingly) weekly bout of extreme market ugliness. Could this be the “Big One”? Is it the time to back up the volatility truck?

***DA: Nah. Not ripe yet.

Societe Generale reshuffles global markets division
Futures & Options World – Let’s Talk Derivatives
Societe Generale has reorganised its global markets business with a major management reshuffle that will see the French bank appoint a new head of derivatives.
Richard Quessette, formerly the global head of cross-asset solutions, will be promoted on May 18 to head the newly created equities and derivatives business.
Bruno Benoit, the former deputy head of global equity flow, will become Quessette’s deputy.

***DA: Félicitations, messieurs.


Intercontinental Exchange – IMC Becomes e-Specialist on NYSE Amex Options
Press Release – ICE
NYSE Amex Options, part of the Intercontinental Exchange (NYSE: ICE) global network of exchanges and clearing houses, today announced that IMC Financial Markets (IMC) has become the newest e-Specialist on the exchange. IMC has been allocated 20 issues and will be subject to the heightened market making conditions and quoting requirements taken on by all Specialists and e-Specialists to improve liquidity and market quality on NYSE Amex Options.
e-Specialists are off-floor market makers that function alongside traditional specialists and market makers on the NYSE Amex Options trading floor to create an efficient trading environment with diverse participation across more than 643,880 options series.

BATS Sets Monthly Records in U.S. Options, Europe Trade Reporting
Press Release – BATS
BATS Global Markets (BATS) today reported April volume, market share, and monthly highlights including its best month on record for U.S. Options market share, 9.9%, and second-best month on record for U.S. equities market share, 21.2%.
BATS Options’ April 2015 market share rose from 4.2% one year ago and surpassed the previous monthly market share record of 9.4% set in March 2015. Also in the U.S., BATS remained the #1 U.S. market for ETF trading in executing 26.3% of all ETF trading volume.

BATS Options Reports Record U.S. Options Market Share of 9.9%
Press Release – BATS
BATS Global Markets today reported volume, market share, and monthly highlights for its options business, BATS Options, including record market share of 9.9%, up from the previous record of 9.4% set in March 2015 and 4.2% one year ago.
jlne.ws/1GRl91x (PDF)

BATS Chi-X Europe Reports April Volume and Activity
Press Release – BATS
BATS Chi-X Europe (BATS) today reported April volume, market share, and monthly highlights including the best month ever for the exchange’s trade reporting facility, BXTR, and exceptionally strong market share across key European equity indices.
More than EUR506.9 billion was reported in total to BXTR during April, an average of EUR25.3 billion each trading day, up from EUR21.4bn the prior month. BATS has continued to expand the functionality of this service for participants: on April 13, BATS Chi-X Europe and ICAP announced new services, when combined, enable market participants to trade fully cleared equity index Exchange for Physical (EFP) transactions anonymously.
jlne.ws/1H3WFaP (PDF)

ASX expands clearing services
Taylee Lewis – Investor Daily
ASX has partnered with SunGard to enhance its clearing capabilities and prepare for further ASIC regulation, a SunGard-issued statement said.
ASX Equity FlexClear helps reduce the regulatory costs of OTC transactions and improves capital efficiency by providing margin offsets between OTC portfolios and ASX equity derivative contracts, a statement issued by the ASX said.

World’s leading binary option platform provider, SpotOption, launches first U.S. white label, Forest Park BX
Press Release
SpotOption announces its entrance into the U.S. market with its first custom white label, Forest Park BX. The brand is owned by Ambassador Capital Management, LLC (Forest Park FX, Forest Park BX and Forest Park Binary Exchange) and is registered with the Commodity Futures Trading Commission (CFTC) as an Independent Introducing Broker. They are also a member of the National Futures Association (NFA).

Regulation & Enforcement

SEC Order – Tick Size Pilot Plan, 2015
Doug Ashburn – MarketsReformWiki
On May 6, 2015, the SEC approved a proposal by the national securities exchanges and the Financial Industry Regulatory Authority (FINRA) for a two-year pilot program that would widen the minimum quoting and trading increments – or tick sizes – for stocks of some smaller companies. The SEC plans to use the pilot program to assess whether wider tick sizes enhance the market quality of these stocks for the benefit of issuers and investors.[1]
The program is set to begin by May 6, 2016.

Ex-MF Global trader to settle manipulation claims by U.S. regulator
A former trader at the broker-dealer unit of MF Global Holdings Ltd’s has agreed in principle to settle a U.S. regulator’s claims that he tried to manipulate palladium and platinum futures prices, according to a court filing.

Navinder Sarao’s ‘Flash Crash’ Case Highlights Problem of ‘Spoofing’ in Complex Markets
Bradley Hope, Chiara Albanese and Aruna Viswanatha – WSJ
When trader Navinder Singh Sarao was arrested last month, U.S. prosecutors said he violated market-manipulation laws and contributed to the May 2010 meltdown that came to be called the “flash crash.”
On Wednesday, Mr. Sarao, 36 years old, made his first public comments since being detained in London.
“I have not done anything wrong apart from being good at my job,” he shouted from behind a glass wall after his lawyer’s request for looser bail conditions was denied by a British judge.

Europe moves to tackle commodity futures rules
Cian Burke – Futures & Options World
The European Securities and Markets Authority (Esma) published guidelines clarifying the definition of commodity derivatives under Mifid I, in a move designed to harmonise the application of a new reform by national regulators.
In a statement released on Wednesday, the regulator said it published the guidelines to address the absence of a commonly adopted definition of derivatives across Europe.

Autorité des marchés financiers
Binary options – Suspicious schemes target Quebeckers
The Autorité des marchés financiers (“AMF”) is urging Québec consumers to exercise caution given the recent rise in the number of suspicious schemes by unregistered foreign companies encouraging them to invest in binary options via on-line trading platforms.
“In the past few weeks, AMF investigators, in particular the cybersurveillance team, noticed that companies based mainly in Cyprus, the Virgin Islands and the United Kingdom were using tactics that seem to target Quebeckers,” said Jean-François Fortin, Executive Director, Enforcement. “Our investigators discovered web banners with special offers for Québec investors as well as demo accounts posting lots of profits, which is quite unusual,” he added.


How to Find Stocks for Iron Condors?
Dan Sheridan – CBOE Options Hub
I am often asked how I find stock in which to enter into the Iron Condor strategy. Not every strategy works with every stock in every kind of market, but I have a set of guidelines or criteria I use when looking for those stocks.
#1 use stocks you would buy 100 shares of in your retirement account
#2 use very liquid stocks near $100 or higher: Examples would be AAPL, NFLX, AMZN, GOOGL, PNRA, XOM, DIS, IBM, TSLA, LNKD, PCLN, etc.
#3 If I did 4 stock Iron Condors every month, I would trade 2 with implied volatility levels under 25 and 2 with implied volatility levels over 25.
#4 Diversify Stock iron Condors into at least 2 different industries

Why I Will NOT Buy or Sell that First Big Move
Bob Lang – CBOE Options Hub
In the game of trading there is always a rush to be the first one in or out, state it in real time and then wait to take a victory lap. It’s great fun and an ego stroke to be able to ‘call that shot’, whether it’s a bottom or top. Yet, these decisions are often impulsive and without much thought. When a stock plunges for whatever reason it may seem appropriate to stick your hand in and take a slice or even a big chunk, without ever understanding the technical damage that could be taking place. On the flip side, a stock that is rising may be a good pickup but we have seen more fakeouts lately that have burned those buyers. In addition, shorting/selling a breakout may also be premature.


New Study on Funds’ Use of Options for Managing Volatility & Practitioner Round Table
Where: Quinn’s Bar and Grill, 356 West 44th Street, New York, NY
Start time: Wed, May 27, 2015 – 5:34 PM
Ending time: Wed, May 27, 2015 – 8:34 PM
Wednesday, May 27th. Open to members and non-members. All are welcome to attend.
“New Study on Funds’ Use of Options for Managing Volatility and Increasing Risk-Adjusted Returns”
Keith Black, Ph.D., CAIA, CFA, Managing Director of Curriculum and Exams for the CAIA Association
Edward Szado, Ph.D., CFA, Assistant Professor, Finance, Providence College

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