Observations & Insight

So I Found You Again On Facebook: LSE and Deutsche Börse Dating Again
Jim Kharouf and Doug Ashburn, JLN

Well, here we go again. The on again, off again affair between the London Stock Exchange and Deutsche Börse is, well on again. The two exchanges are looking to create “an exchange of equals” which would pair two powerful securities, derivatives, clearing, products and services companies in the global exchange space.


LSE made a run at Deutsche Börse, just prior to the DB’s IPO in February 2001 but the deal fell through when shareholders in London objected. The second deal proposal between the two in 2004 ended with more shareholder disdain. And now here we are in 2016 with another run at it with two different CEOs at their respective controls – Xavier Rolet of the LSE and relative Deutsche Börse newbie Carsten Kengeter, who started in June 2015.

Read the rest of the report at JohnLothianNews.com


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Lead Stories

Hedge Fund Cash Flows Back to Bets That VIX at 20 Won’t Last
Joseph Ciolli – Bloomberg
Hedge funds and investors in exchange-traded notes are plowing money into bets that pay off should last week’s soothing of U.S. stock market turbulence prove temporary. With the Chicago Boards Options Exchange Volatility Index closing below 20 for just the third time this year, a pair of securities that track the gauge have seen combined inflows of $140 million over the last week after losing almost $1 billion to start 2016. Hedge funds hold more long bets on VIX futures that any time since September, data from the U.S. Commodity Futures Trading Commission show.

****SD: Business Insider has the clickbait version, Hedge funds preparing for Armageddon with a different chart

Cost of sterling insurance rises steeply
Rochelle Toplensky – Financial Times
The cost of insuring investment portfolios and business activities against a weaker pound rose sharply on Wednesday as Brexit fears dominated currency trading.
As sterling slumped to its lowest level in seven years — falling below $1.39 to the US dollar — a measure of implied volatility in the exchange rate rose to 13.9, as investors sought insurance from bigger swings in the currency during the next six months.

****SD: Thanks Boris Johnson. Also see Bloomberg’s ‘Brexit’ Risk Widens Chasm Between Pound, Inflation Volatilities: Analysis

What Is the Options Market Telling Investors? Buy
Ben Eisen – WSJ
Britain may leave the European Union. The threat of a hard landing in China persists. Banks are facing the worst capital markets environment in recent history. People are worried about bond market liquidity. Deflationary forces are running rampant through many markets.
But at least one market indicator is flashing a buy signal.
Call it the Options Activity Tell. According to Bill Rafter, president of Mathematical Investment Decisions Inc., investors can gain a glimpse into the stock market’s future by looking at whether bullish or bearish options traders are more active in updating their positions.

Indicator has a big warning for the market
Lawrence Lewitinn – Yahoo Finance
A little-known event in the CBOE Volatility Index (VIX) may be flashing a warning sign that the market will see a big downside move this year. To be sure, the VIX itself is a popular measure of expected volatility in the S&P 500 (GSPC). Options and futures contracts against it vigorously trade hands every day. And since the start of the year, the VIX has been elevated, something that happens when the market is worried. For most of 2016, it has been trading mostly above 20. That’s well above times of complacency, such as the period from mid-2012 to mid-2015, when the index was often found in a range between 11 and 20. The VIX’s counter-market tendencies lead some to call it the “Fear Index.” Yet the VIX’s level in the spot market may not be the only indication of volatility in the months ahead, according to Russell Rhoads, director of education at the CBOE’s Options Institute.

WisdomTree Launches CBOE S&P 500 PutWrite Strategy Fund (PUTW) Nasdaq:WETF
Globe Newswire
WisdomTree (NASDAQ:WETF), an exchange-traded fund (“ETF”) and exchange-traded product (“ETP”) sponsor and asset manager, today announced the launch of the CBOE S&P 500 PutWrite Strategy Fund (PUTW), on the NYSE Arca. PUTW seeks to provide investment results that, before fees and expenses, generally correspond to the performance of the CBOE S&P 500 PutWrite Index (PUT) and has a net expense ratio of 0.38%.

****SD: See “New Study by Black and Szado Analyzes Six Options-Based Benchmarks” in our Education section for some context regarding options strategy based benchmarks.


ISE Mercury Completes Second Successful Product Rollout
International Securities Exchange, LLC
The International Securities Exchange Holdings, Inc. (ISE Holdings) today announced that as part of its initial rollout process, ISE Mercury™ has completed a rollout of fifty additional options products. ISE Mercury now lists 62 products for trading, following its successful launch on February 16, 2016.

TradEqual Debuts First of its Kind Binary Options Exchange Based on Peer-to-Peer Trading Network
Ultima Capital Ltd, a financial services company today announced the debut of TradEqual [https://www.tradequal.com/Default.aspx ], a game changing binary options exchange platform. TradEqual is the only 3rd Generation Binary Options Trading platform making it possible for traders to not only buy options but also write (sell) their own profitable binary options to other traders in a global, open, fair and equal exchange platform.

****SD: We live in a world of saddening middlemen.

Experts see clearing issue with LSE, D. Boerse
Luke Jeffs – Futures & Options World
The proposed merger between Deutsche Boerse and the London Stock Exchange could be blocked by European anti-competition authorities over fears of concentration in the clearing layer, according to experts, but there is uncertainty which way the lawyers will go on this. Deutsche Boerse, which owns Frankfurt-based futures market Eurex, and the LSE Group, which is the majority shareholder in London clearing house LCH.Clearnet, said on Tuesday they were talking about a planned “merger of equals”, the third time in 15 years the exchanges have discussed a combination. Industry experts reacted by saying the merger as it stands will be heavily scrutinised by European anti-trust regulators over concerns the new entity could be too strong in the clearing segment.

****SD: You don’t need to be an expert to see the issue.

Bats Promotes Barchetto
Press Release
Bats Global Markets (Bats) today announced the promotion of Tony Barchetto to Executive Vice President, Head of Corporate Development, effective immediately.

Cox: Let the Chinese buy Chicago’s stock exchange
Rob Cox – Reuters
The Chicago Stock Exchange is so obscure that Google doesn’t even know who’s behind it. Plug the question into the search engine, and up pops the logo of National Hockey League champions the Chicago Blackhawks. For the avoidance of doubt, the Stanley Cup winners do not own the city’s stock market. A group of Chinese investors would like to, however, and a gaggle of Republican congressmen are up in arms about the prospect. They are badly missing the point. An acquisition of the minuscule Midwestern bourse would give its new Chinese owners an important lesson on the importance of robust disclosure, smart regulation and the merits of free capital markets. That’s a good thing.

****SD: Hate to put a damper on an otherwise amusing illustration of CHX’s small stature, but I Googled “who’s behind the Chicago Stock Exchange” and all of the first page results were CHX related (and I’m a Blackhawks fan).

Regulation & Enforcement

SEC Weighs Testing Potential Investors
Soon, wealth may not be enough to qualify as an accredited investor. The U.S. Securities and Exchanges Commission is reviewing how individuals qualify as accredited investors — those with enough financial acumen to fend for themselves in the opaque world of private capital markets.


High-speed firms plan second 1,000-foot tower in Kent
James Rundle – Financial News
High-frequency trading firms KCG Holdings and Jump Trading want to build a giant communications mast in rural England, a mile away from a rival’s planned tower that has already drawn objection from local residents.

****SD: If more tower ideas keep cropping up, Kent will need an update to its “Garden of England” nickname.

CFTC feels pressure on HFT rules
Mike Kentz – International Financing Review
Market participants on Monday turned up the heat on CFTC regulators with regard to a proposed rule that would allow the agency unfettered access to the algorithms high-frequency trading firms use in futures markets without a subpoena. The proposal requires automated trading firms to file source code information into a repository that can then be accessed by the CFTC via a separate set of rules. Futures users called the provisions ‘unprecedented and unreasonable.’

Apple-FBI Fight Asks: Is Code Protected as Free Speech?
Adam Satariano – Bloomberg
IPhone maker is seeking to use First Amendment as a defense
Case may set precedent for considering software as expression
Is software merely a set of instructions, telling a computer what to do? Or is it a unique, creative work that expresses a point of view and is protected under the First Amendment of the U.S. Constitution? The answers to these questions get to a key part of the legal fight between Apple Inc. and the U.S. government.

****SD: A case determining how the law will view coding is overdue. Given the SEC’s ongoing development of algo regulation — see above — this is well-worth the inclusion.


Options: Understanding Synthetics, Butterfly Spreads, and Verticals
Greg Loehr – The Ticker Tape
What do a call option butterfly, a put option butterfly, and an iron butterfly have in common? Well, surprisingly, they all share a similar risk profile. That’s right, these three trades are similar, thanks to something called synthetics.


New Study by Black and Szado Analyzes Six Options-Based Benchmarks – BXM, PUT, BFLY, BXMD, CMBO, CNDR
Matt Moran – VIX Views
A new study examines six benchmark indexes that write S&P 500 (SPX) index options, comparing their performances with those of traditional stock, bond and commodity benchmark indexes. The study, “Performance Analysis of CBOE S&P 500 Options-Selling Indices,” is the first comprehensive study that examines the performance of options-strategy benchmark indexes that incorporate iron condor and iron butterfly strategies. Commissioned by CBOE and co-authored by Keith Black, Ph.D., CAIA, CFA, managing director of the Chartered Alternative Investment Analyst Association, and Edward Szado, Ph.D., CFA., assistant professor of finance at Providence College and director of research at the Institute for Global Asset and Risk Management (INGARM), the study analyzed benchmark index performances for the 29½-year period from mid-1986 to the end of 2015. The options-based benchmarks studied were the CBOE S&P 500 BuyWrite Index (BXM); CBOE S&P 500 PutWrite Index (PUT); CBOE S&P 500 Iron Butterfly Index (BFLY); CBOE S&P 500 30-Delta BuyWrite Index (BXMD); CBOE S&P 500 Covered Combo Index (CMBO); and CBOE S&P 500 Iron Condor Index (CNDR).


CBOE RMC, Feb. 29-Mar 2, 2016, Bonita Springs, FL
Now in its 32st year in the U.S., the annual CBOE Risk Management Conference (RMC) is the premiere financial industry conference designed for institutional users of equity derivatives and volatility products. Hosted by the Chicago Board Options Exchange (CBOE), RMC is an educational forum dedicated to exploring the latest products, trading strategies and tactics used to manage risk exposure and enhance yields. RMC brings together top traders, strategists and researchers, enabling participants to learn the state-of-the-art in investment risk management from true experts in the field.

OIC: 5 Options Greeks for Next-Level Traders
March 15, 2016, 3:30 p.m. CST
What you’re seeing with your options quotes is only half the story. When you understand the value of options Greeks – and the benefit they can bring investors and traders – you’ll be taking the next steps towards a better understanding of how options can work for you.

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