Observations and Insight

Focused: What The Industry Knows About Transparency (Part 3)

Back in November, the industry gathered for the annual FIA Expo event in Chicago. There, John Lothian News used an exhibitor booth (Thanks Cinnober!) as its studio to ask industry participants key questions about transparency issues in today’s markets.

Part 3: How will futures and options markets look in the future, in terms of transparency?
Watch the video »

Lead Stories

Goldman Says Naptime For Put Sales
Steven M. Sears – Barron’s
Goldman Sachs is out today telling clients that put selling, one of the greatest trades on Wall Street since 2009, is no longer as attractive.
“While we continue to expect one-month put selling to be profitable, we see risks as balanced. Over the past six trading days, the VIX has declined five-points to 17 and the SPX is up 3% to 2052. We estimate the attractiveness of one-month 5% (out-of-the-money) SPX put selling is at median levels relative to the past 18 years,” the bank’s derivatives strategists wrote portfolio managers in a recent advisory.
***DA: Is Goldman calling an imminent correction, or simply that the math has changed given the recent volatility of volatility?

FXCM options activity surges after Swiss shock
Saqib Iqbal Ahmed – Reuters
Losses from the surprise move by the Swiss National Bank nearly crippled brokerage FXCM (FXCM.N), but all the attention has resulted in a surge of activity among options traders on the online forex broker.
FXCM’s shares fell nearly 90 percent on Tuesday after the company faced $225 million in losses on the SNB’s shock decision last week to remove the cap on the Swiss franc. It then agreed to an emergency loan from Leucadia National Corp (LUK.N).
***DA: A market that is full of surprises.

Have no fear: Behind the VIX plunge
Alex Rosenberg – CNBC
The market’s jitters appear to be melting away.
Even as the S&P 500 is slightly down on the year, the CBOE Volatility Index has plunged, indicating that investors are becoming less interested in hedging their market positions.

The Fed, Earnings Season & GDP – Weekly Market Outlook 1.26.15
Price Headley – CBOE Options Hub
Despite Friday’s lull, the market took a pretty big bullish step last week, following through on the reversal hints it was dropping before the three-day weekend. It’s still not over its biggest hurdles, but at least it’s not knocking on the door of a rather serious breakdown. On the other hand, the hurdles ahead are very big, and backed by stress-inducing fundamentals.
We’ll take a technical and fundamental look below. Let’s first paint some broad brush strokes with last week’s economic numbers and a preview of what’s in the lineup for this week.
***DA: Fundamentals? We don’t need no stinkin’ fundamentals.

The Option Queen Newsletter
There was no lack of excitement and volatility this past week. The ECB has now officially begun their own style of QE which is much like the QE that the FOMC ended. This will naturally depress the euro vs. the US dollar. So what does that do to trade and deflation that appears to be on the horizon? US products, because of the strong US dollar, will become too expensive to purchase. Competitive economies, with cheaper comparable products, should perk up as demand for their goods increases, helping their economies. As a result, imports to the USA will increase.

Markets Get Bumpier as Fed Withdraws Safety Net
E.S. Browning – WSJ
Markets are slowly weaning themselves from their over-reliance on the Federal Reserve.To many money managers, this is excellent news because it means the economy and financial markets are becoming more normal after the 2008 financial crisis, when markets seized up and the Dow Jones Industrial Average fell 54%.
***DA: Actually, it is the ECB’s turn to prop up the market. Last fall it was the BoJ. The Fed will resume next year when the ECB has run through its trillion euros of QE.

What the 1990s Can Teach Us About Today’s VIX
Adam Warner – Schaeffer’s Investment Research
CBOE Volatility Index (VIX) is showing “All Quiet on the Western Front” now, but it wasn’t all that long ago that fear ruled the roost. I’d say, about a week. One Mr. James Cramer took note of this on a recent “Mad Money” as he channeled my friend Mark Sebastian of Options Pit.
As Mark notes, VIX only closed above 20 four times between 2012 and August 2014, but since then it has closed above 20 on 14 separate occasions. Is that cause for worry? Well …

The Past Year In VIX And Volatility
Bill Luby – Investing.com
This is the seventh year in a row I have offered a retrospective look at the year in VIX and Volatility, which is my attempt to cram some of the highlights of the year in volatility onto one eye chart graphic with a (somewhat) manageable number of annotations.
***DA: That is one busy chart.

On Forex Market Efficiency: Greek Election Results Long Priced into Euro Rates
Victor Golovtchenko – Forex Magnates
If there is any proof of the efficiency of the foreign exchange market it is the price action in the aftermath of the Greek election. Since the market opened, the euro has actually rallied, despite the anti-austerity parties winning.
Aside from an occurrence serving as proof that the forex market is efficiently working as a news discounting mechanism, the price action this morning serves to display that there is no market place which is more liquid than foreign exchange.
***DA: The ECB did give itself a trillion euro head start last week.

Crispin Odey says equities will get devastated
Julia La Roche – Business Insider
British hedge fund manager Crispin Odey thinks we’ve entered an economic downturn that is “likely to be remembered in a hundred years,” and central banks won’t be able to stop it.
In his Odey Asset Management investor letter dated Dec. 31, 2014, Odey writes that the shorting opportunity “looks as great as it was in 07/09.”
***DA: A hundred years from now we will still be saying what a cool name Crispin Odey is.


CME Starts Gold Futures in Hong Kong in Price-Benchmark Race
Glenys Sim – Bloomberg
CME Group Inc. (CME) started physically delivered kilobar gold futures in Hong Kong as it joins other exchanges vying to establish new price benchmarks in the top user region.
The contract listed on the Comex is tied directly to the price of bullion of 99.99 percent purity in Hong Kong and will be physically delivered to vaults in the special administrative region. CME, owner of the largest futures exchange, said in September that trading may begin in the fourth quarter of 2014.

ICE Benchmark Administration Introduces New Calculation Methodology for ISDAFIX from
Press Release – ICE
Intercontinental Exchange (NYSE: ICE), the leading global network of exchanges and clearing houses, today announced that ICE Benchmark Administration (IBA) will introduce a new calculation methodology for ISDAFIX from February 16, 2015.
ISDAFIX is the leading global benchmark for interest rate swaps. It represents the average mid-market swap rates for three major currencies: Euro (EUR), British pound (GBP) and U.S. dollar (USD), at selected maturities on a daily basis. Market participants use ISDAFIX to price and settle their derivatives contracts and as a reference rate for floating rate bonds.

Regulation and Enforcement

An Uncertain Future for Dodd-Frank
The Editorial Board – NY Times
There have been powerful reminders in recent days that the financial system needs more regulatory vigilance, not less. But they come just as Republicans are setting their agenda in Congress, complete with vows to weaken the Dodd-Frank reform law.
On Thursday, The Times’s Nathaniel Popper reported that Goldman Sachs is using the bank’s money to make big bets in real estate. That appears to be a violation of the spirit, if not the letter, of Dodd-Frank, which aims to avoid bailouts by reducing concentrated risks at banks.

CME Group fines Credit Suisse, JPM units for trading violations
Tom Polansek – Reuters
CME Group Inc on Friday fined a unit owned by JPMorgan Chase & Co $210,000 and an affiliate of Credit Suisse $175,000 for various trading violations.
It was the second time in just over two months that CME Group, the world’s largest futures exchange operator, fined Credit Suisse for problems with its automated trading systems in 2012.
Credit Suisse and JPMorgan declined to comment.

High-Frequency Probe’s First Target Is Barclays
Keri Geiger and Sam Mamudi – Bloomberg
New York Attorney General Eric Schneiderman’s 10-month investigation into high-speed trading has so far led to one big target: Barclays Plc. (BARC)
Almost a year after New York’s top cop made a splash with subpoenas of six high-frequency trading operations, the names of some of these firms cropped up in documents filed this week in the state court in Manhattan. The firms aren’t defendants, though. They are listed as part of Schneiderman’s proposed updated complaint against Barclays, which ran the private trading venue, or dark pool, where these firms traded.


Are Investors Less Anxious? Perhaps Not – Stocks to Watch
Steve Sears – Barron’s
With U.S. stocks wobbling a day after the European Central Bank’s quantitative easing news, the CBOE Volatility Index (VIX) is edging lower.


CBOE Risk Management Conference March 4 – 6, 2015
Press Release – CBOE
The Chicago Board Options Exchange (CBOE) and CBOE Futures Exchange (CFE) will host the 31st annual CBOE Risk Management Conference (RMC), from Wednesday, March 4 through Friday, March 6, 2015, at the Park Hyatt Aviara in Carlsbad, California.
Top traders, strategists and researchers are expected to attend this year’s RMC to discuss the latest products and strategies for managing risk exposure, enhancing yields and lowering portfolio volatility.  This year’s conference features 17 sessions, with presentations from more than 30 leading risk management practitioners.  Strategy discussions are typically overlaid with examples of actual trades and real-market applications.


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