Observations and Insight

Kansas City Swinging Hot BATS
Jim Kharouf – John Lothian News

BATS Global Markets reported its 2014 results yesterday. Quite a year for an exchange that weathered the media and regulator storm in the wake of Michael Lewis’ “Flash Boys.”

Despite all the negativity surrounding the HFT space, BATS posted its best market share in US equities and options and held the top spot in equity market share in Europe.

BATS’s equity options total market share was 6.3% in December 2014, up from just 2.8% a year earlier, according to the OCC, and comes during a time when the options industry continues to show slow but steady growth. Last year, the 12 US options markets posted total volume across all exchanges of 4.11 billion contracts, an increase of almost 4 percent from a year earlier.
***DA: In case you missed it in last Friday’s newsletter, here it is again.

Lead Stories

Greek Contagion Concerns Attract Bears to Spain, Italy: Options
Inyoung Hwang – Bloomberg
Traders are buying up protection should Greece’s potential exit from the euro trigger a domino drop in Spanish and Italian stocks.
Investors are pulling out of exchange-traded funds tracking the equities, while driving up costs to hedge against declines. The price of bearish options versus bullish ones on the iShares MSCI Spain Capped ETF hit a 20-month high last week, while the cost of the contracts on the iShares MSCI Italy Capped ETF jumped 27 percent since early December, according to data compiled by Bloomberg.
***DA: The ghost of 2011 is reappearing.

Market’s ups-and-downs spell end of low volatility era
Saqib Iqbal Ahmed – Reuters
In the last month, the U.S. stock market is down just 0.8 percent, but it’s been a bumpy ride: Since Dec. 9, the S&P 500 has had a 4 percent selloff, a 6 percent rally, and a 4 percent drop that ended Thursday with a two-day gain of 3 percent. Equities were hit hard again Friday – down almost 1 percent.
Investors made queasy by the sharp selloffs and snapback rallies might want to prepare themselves for more of the same. A growing number of market watchers say the low-volatility regime that dominated in 2013 and 2014 has ended, and the roller-coaster ride going on now has become the norm.
***DA: I always preferred the roller coaster to the merry-go-round.

Engage sick bags as stormy markets show no signs of calm
Shawn Langlois – MarketWatch
Better pop some Dramamine.
The market hasn’t even dropped 1% in the past month, yet it feels like we’ve been drawn, quartered and sprinkled with margarita salt. A 4% drop here, a 6% surge there, and the trading action over recent weeks bears no resemblance to the calm march higher we’d become accustomed to.

Those Who Nailed 2014 See Volatility This Year
James B. Stewart – NY Times
Volatility will be the new normal in 2015.
That’s the overriding theme that emerged in my annual survey of investment professionals who got it right last year. And if this week’s market action is any indicator, their prediction is already being borne out. Stocks soared on Thursday, with the Dow Jones industrial average gaining over 300 points, the fourth straight session of triple-digit moves. Interest rates and oil prices have also gyrated.
***DA: Amen.

Will 2015 Turn Into 2008?
Adam Warner – Schaeffer’s Investment Research
Another week, another overbought CBOE Volatility Index (VIX) — and another (brief) end to an overbought VIX.
Here’s an update to the table I run when this happens. If you’re new to the show, here’s how it works: I count VIX as officially “overbought” when it closes 20% or more above its 10-day simple moving average. I then see how the SPDR S&P 500 ETF Trust (SPY) does going forward from that point over one-month and three-month time frames, and also how it does from the overbought VIX close to the next VIX close under the 10-day (with the duration of that hold, measured in trading days). I include random one-month and three-month performance figures as a frame of reference.


Trying to clean up with listed derivatives
Chris Hall – Financial News
Will 2015 be the year that exchange-traded derivatives volumes finally take off and exceed their pre-crisis peaks? Regulators certainly hope so – since 2009 they have been trying to move derivatives away from over-the-counter trades and on to exchanges, where they can be monitored and counterparty risk reduced through use of clearing houses.

China to launch first stock options next month
Malay Mail Online
China will start trading its first stock options next month, according to the securities regulator, with state media saying today that the move could cause greater market volatility.
The Shanghai Stock Exchange will begin offering options on an exchange-traded fund from February 9, the China Securities Regulatory Commission (CSRC) said in a statement, which described the launch as a “trial”.
***DA: Options markets create volatility? Those are fightin’ words around here.

CBOE, C2 and CFE Trading Schedule For the Martin Luther King, Jr. Holiday
Press Release – CBOE
CBOE Holdings, Inc. (NASDAQ: CBOE) announced the following trading schedule for Chicago Board Options Exchange (CBOE), C2 Options Exchange (C2) and CBOE Futures Exchange (CFE) in observance of the Martin Luther King, Jr. holiday:

Regulation and Enforcement

Kicking Dodd-Frank in the Teeth
Gretchen Morgenson – NY Times
The 114th Congress has been at work for less than a week, but a goal for many of its members is already evident: a further rollback of regulations put in place to keep markets and Main Street safe from reckless Wall Street practices.
The attack began with a bill that narrowly failed in a fast-track vote on Wednesday in the House of Representatives. It is scheduled to come up again in the House this week.
***DA: For each point in the article, there is another side to the story. Where grassroots groups see loopholes, other firms see changes necessary to the proper functioning of the market. Read it and decide for yourself.

SEC Charges Direct Edge Exchanges With Failing to Properly Describe Order Types
Securities and Exchange Commission
The Securities and Exchange Commission today announced that two exchanges formerly owned by Direct Edge Holdings and since acquired by BATS Global Markets have agreed to pay a $14 million penalty to settle charges that their rules failed to accurately describe the order types being used on the exchanges.  The penalty is the SEC’s largest against a national securities exchange, and the case is the SEC’s first principally focusing on stock exchange order types.

MiFID II – A Radical Contribution To The Development Of Data Law?
Richard Kemp – Mondaq
Away from the hubbub about HFT (High Frequency Trading) a quiet storm is blowing in to the EU that will radically change securities trading in bonds, OTC derivatives and other asset classes. The new MiFID II1 rules, top off the alphabet soup of an extensive new rule book that, after the European Parliament’s ‘Super Tuesday’ on 15 April 2014, is finally set to become law.


High-Speed Trader Virtu Finds New Home for its Algorithms
John Detrixhe – BloombergBusinessweek
High-speed trading firm Virtu Financial Inc. has found a new venue for its algorithms: a U.K.-based futures exchange that seeks to alleviate the pain caused by increased trading costs for some of the most popular derivatives.
Virtu will join Global Markets Exchange Group International LLP’s new market when it launches in April, according to a joint statement today. The high-frequency trading firm will help the fledging platform by contributing bids and offers for futures that mimic interest-rate swaps.


The Year of a Volatile VIX?
Steven M. Sears – Barron’s
Wise traders trade the market they have, not the market they wish they had. At the end of the first full week of trading in 2015, volatile volatility is apparently the market we have.
Stock prices fell so far at the start of the year’s first week that many investors feared the bull market would end. By week’s end, stock prices surged and investors rejoiced, but stocks retreated Friday.

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