Lead Stories

Get Used to Higher Stock Volatility, Deutsche Bank Says: Options
Callie Bost – Bloomberg
While unanimity is the buzzword for strategists forecasting gains in the U.S. stock market this year, another consensus is developing among options analysts.
Deutsche Bank AG became at least the third major bank telling equity derivatives clients to prepare for more frequent bouts of turbulence in 2015 as the Standard & Poor’s 500 Index (VIX)’s bull market approaches its seventh year. The opinion came before the benchmark gauge plunged as much as 1.9 percent today and the Chicago Board Options Volatility Index increased for the fifth time in six days.

A Final Look at VIX in 2014
Russell Rhoads – CBOE Options Hub
In 2014 VIX managed to reach the highest levels seen in over two years.  This happened despite a fairly bullish year for the S&P 500 with the index achieving a record high more than fifty times.  also, as seen below most of the VIX action occurred in the 3rd quarter after a fairly quiet summer.
***DA: No in-betweens these days. It is either a slow, boring grind higher, or unquantifiably volatile.

Expect Higher Stock Volatility in 2015
David A. Levy – Barron’s
A year ago, we wrote that rising leverage in the corporate sector would cause corporate bond spreads to widen, and that Treasury returns would likely outpace returns on corporate bonds in 2014. More recently, we wrote to our clients about another consequence of that rising leverage: a shift towards a higher range of volatility for at least the next several quarters.
It is no coincidence that corporate leverage and stock market volatility tend to move together. As we argued at the end of 2013, rising leverage foreshadows widening corporate bond spreads, which reflect growing business sector financial vulnerability and thus tend to contribute to higher volatility.
***DA: Duly noted. Today’s meltdown has pushed the VIX back above 20.

Volatility, Bond Yields Pack Trading Cues
JJ Kinahan – Forbes
There’s no limping into January for a Wall Street that closed the books on a powerful advance in 2014. Now the focus turns quickly to jobs data, as the often-market-moving monthly payrolls report hits on Friday. Interest rates, Federal Reserve chatter, and big moves in energy prices (crude prices were essentially cut in half in 2014) remain potential drivers. Plus, don’t look now, but another earnings reporting season sits just around the corner.
***DA: Sometimes the market does not wait for earnings season.

Are Volatility Pops Becoming More Frequent?
Adam Warner – Schaeffer’s Investment Research
On Dec. 24, as the market settled in for its year-end snooze, CBOE Volatility Index (VIX) sat at 14.37, up 0.65 point on the year. With a slow week expected, it was highly likely that VIX would drift and we would see those meager gains disappear. But, alas, the market crumbled in the last week, and, of course, volatility exploded.
OK, scratch that — the market didn’t actually crumble. SPDR S&P 500 ETF Trust (SPY) essentially did nothing for the week into the Dec. 30 close, then dropped 1% on the last day of the year. That’s far from an implosion.
***DA: Um…yeah.

Will U.S. Markets Maintain Lead Into 2015?
Tom Lauricella – WSJ
As 2015 gets under way, investors face a divided landscape: an improved U.S. economy and weakness just about everywhere else.But unlike the past year when U.S. markets were a winning bet, many think U.S. stocks and bonds will have a harder time maintaining their lead.
***DA: How bad are things outside the U.S. and how far will contagion spread?

The Option Queen Newsletter
Does the Fed’s action or verbiage indicating that it will normalize its policy tell us that its policy is abnormal? Perhaps, it tells us that this was a failed policy that they need to retract without admission of failure. Yes, we believe that the Fed’s policy failed the middle class and that the beneficiaries of these policies were the banks, corporations and the wealthy omitting the average wage earner. Simply put, the Fed greased the wrong gears leaving the average person with little cash in their pockets to spend on discretionary items.

Traders on Hottest Streak in Decade Amid Divergence: Currencies
Lukanyo Mnyanda – Bloomberg
Currency traders are starting 2015 on their hottest winning streak in a decade.
An index of foreign-exchange returns rose for the past six months, the longest stretch since 2005 and turning last year into the best since 2008. That marks a comeback for traders who, as recently as September, were facing a fourth year of losses as record-low volatility limited opportunities to make money.

Volatility, NFL Playoffs, and the True Value of a Harbaugh
Adam Warner – Schaeffer’s Investment Research
The already high (on a relative basis) CBOE Volatility Index (VIX) got significantly higher on Wednesday. Again, it’s kind of unusual given the holiday week and the fact that realized volatility is rather low. Smart money? Usually not, but we’ll see. We’ll also cover it more extensively next week when everyone’s back at work. For now? Football! Playoffs!


Nasdaq buys US index provider for $225m
Financial Times
Nasdaq is pushing further into indexing and the growing market for exchange traded funds with the purchase of Dorsey Wright, a US index provider and analytics group.
The exchange expects that the $225m deal, funded with a mix of debt and cash, will help boost growth in the coming years as part of a strategy to diversify its business, write Nicole Bullock in New York and Philip Stafford in London.

No More Trading Disruptions, Intercontinental Exchange Vows ICE CME
Ciaran McEvoy – Investor’s Business Daily
Beginning Jan. 14, Intercontinental Exchange (NYSE:ICE) will ban disruptive and potentially manipulative trading practices on two of its commodities futures exchanges.
ICE Futures U.S. and Canada will be affected by the prohibition on practices such as deceiving others into canceling orders by flooding the exchanges with data and spoofing — intending to cancel an order before executing it.
***DA: I am more worried about trading interruptions, i.e., glitches. It would be nice if there were no more of those.

CBOE Holdings Reports Record Trading Volume for 2014
Press Release – CBOE
CBOE Holdings, Inc. (NASDAQ: CBOE) reported today that trading activity reached new all-time highs in total volume and average daily volume (ADV) in 2014.
CBOE Holdings consolidated trading volume for options contracts on Chicago Board Options Exchange (CBOE) and C2 Options ExchangeSM (C2SM) and futures contracts on CBOE Futures ExchangeSM (CFE) totaled 1.3 billion contracts, an increase of 12 percent over the 1.2 billion contracts in 2013.  Average daily volume was 5.3 million contracts, an increase of 12 percent from the 4.7 million contracts per day in 2013.
New records for annual total volume and average daily volume were also set at CBOE, C2 and CFE in 2014.

ISE Reports Business Activity for December and Full Year 2014
Press Release – International Securities Exchange, LLC
For full year 2014, ISE and ISE Gemini combined for 16.0% equity options market share, excluding dividend trades, with an ADV of 2.4 million contracts.
ISE Gemini had an ADV of over 500,000 contracts in 2014.
Dividend trades made up 1.6% of industry volume in 2014, the lowest since ISE began tracking the statistic in 2010.

CME Group Volume Averaged a Record 13.7 Million Contracts per Day in 2014, Up 9 Percent from 2013, with Annual Average Daily Volume Records for Interest Rates and Treasuries
Press Release – CME Group
CME Group, the world’s leading and most diverse derivatives marketplace, today announced that December 2014 volume averaged 13.6 million contracts per day, up 25 percent from December 2013.  Total volume for December 2014 was more than 299 million contracts, of which 87 percent was traded electronically.  Options volume in December averaged 2.6 million contracts per day, up 27 percent versus December 2013, with electronic options growing 44 percent over the same period.

Total trading volume at Eurex Group at 2.1 billion contracts in 2014
Press Release – Eurex
The international derivatives markets of Eurex Group ended 2014 with a turnover of approximately 2.1 billion contracts (2013: 2.2 billion contracts). The total volume for 2014 splits into 1.5 billion contracts traded at Eurex Exchange (2013: 1.6 billion) and 607.4 million contracts traded at the International Securities Exchange (ISE) (2013: 638.8 million). This corresponds to a daily average trading volume of 8.3 million contracts, thereof 5.9 million contracts at Eurex Exchange and 2.4 million contracts at ISE.

The Options Industry Council Announces December Options Volume Grew 11% With 2014 Volume Rising Almost 4%
Press Release – OIC
The Options Industry Council (OIC) announced today that 354,607,999 total options contracts were traded in December, which is a 10.74 percent increase compared to the previous December when 320,209,356 contracts were traded.
Total options trading volume for the year stood at 4,265,368,807 contracts, an increase of 3.75 compared to last year’s 4,111,275,659 total options contracts exchanged. This marks the fourth consecutive year annual volume was more than 4 billion contracts with 2014 becoming the second highest volume year on record (behind 2011’s record volume of 4.6 billion contracts). Equity options volume came in at 3,845,073,167 contracts, 3.20 percent more than the 3,725,864,134 contracts traded in 2013.
Last year also saw $1.2 trillion in options premium change hands, the eighth consecutive year above $1 trillion.

OCC Announces Officer Promotions
Press Release – OCC
OCC announced seven officer promotions today including some as part of a reorganization supporting the company’s efforts to meet the heightened expectations of regulators and market participants for systemically important clearing houses like OCC.
***DA: The guy who keeps track of the organizational flow chart at OCC has gone through a lot of white-out this past year.

BitMEX to Launch Bitcoin ‘Fear’ Index
Joon Ian Wong – CoinDesk
Derivatives exchange BitMEX will publish an index on 5th January that it hopes will become the bitcoin world’s version of the VIX– the so-called ‘fear index’ that is used to gauge uncertainty in the wider financial markets.

December 2014 Options Marketshare (via email from OCC)

December 2014 Total Options Marketshare:
AMEX-                 10.41%
BATS-                     6.31%
BOX-                       1.97%
CBOE-                   28.35%
C2-                          1.98%
GEM-                      2.07%
ISE-                          9.50%
MIAX-                     3.93%
NOBO-                    0.61%
NSDQ-                    10.12%
NYSE Arca-            9.62%
OMX PHLX-         15.12%

December 2013 Total Options Marketshare:
AMEX-                  12.69%
BATS-                      2.28%
BOX-                        1.84%
CBOE-                    26.82%
C2-                            1.79%
GEM-                       2.86%
ISE-                          13.00%
MIAX-                      2.54%
NOBO-                     0.58%
NSDQ-                      9.08%
NYSE Arca-             9.62%
OMX PHLX-           16.91%

December 2014 Equity Options Marketshare:
AMEX-                  11.52%
BATS-                      7.03%
BOX-                        2.20%
CBOE-                    20.45%
C2-                            2.19%
GEM-                        2.30%
ISE-                         10.57%
MIAX-                       4.39%
NOBO-                     0.68%
NSDQ-                     11.27%
NYSE Arca-             10.57%
OMX PHLX-          16.83%

December 2013 Equity Options Marketshare:
AMEX-                  13.97%
BATS-                      2.52%
BOX-                       2.03%
CBOE-                   19.44%
C2-                            1.97%
GEM-                       3.16%
ISE-                        14.32%
MIAX-                     2.80%
NOBO-                    0.64%
NSDQ-                    10.01%
NYSE Arca-          10.49%
OMX PHLX-         18.65%

Regulation and Enforcement

Stiglitz Blocked From SEC Panel After Faulting Speed Traders
Dave Michaels – BloombergBusinessweek
Joseph Stiglitz, the Nobel laureate economist who called for a tax on high-frequency trading, has been blocked from a government panel that will advise regulators on issues facing U.S. equity markets, according to people familiar with the matter.
Stiglitz’s rejection shows the partisan infighting that has bogged down Securities and Exchange Commission Chair Mary Jo White’s plan to set up a panel of experts to advise the agency on topics ranging from rapid-fire stock trading to dark pools.
****SR:  Quote from Stiglitz: “I think they may not have felt comfortable with somebody who was not in one way or another owned by the industry.”

Pimco fires money manager after CME Group violation
Luciana Lopez – Reuters
California-based bond giant Pimco has dismissed money manager Rahul Seksaria after CME Group Inc, the world’s largest futures market operator, fined him for a trading violation.
“Mr. Seksaria has been dismissed from the firm based on a violation of the firm’s policy regarding personal trading,” Pimco spokesman Daniel Tarman said in a statement.


Daily Market Outlook- Why the Next Week of Trading is Crucial
Sam Collins – InvestorPlace
New Year’s Eve closed one of the best years for stocks in five years with a round of profit-taking that continued from Tuesday. Despite the final two days of selling, the Dow Jones Industrial Average gained 7.5% in 2014, the S&P 500 rose 11.4%, and the Nasdaq popped 13.4%.
Trading volume on Wednesday was one of the lowest of the year with just 650 million shares trading on the NYSE. Selling was primarily centered on groups that did the best during the year.

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