Lead Stories

Herd Mentality in U.S. Stocks Is Making for Wilder Rides in VIX
Callie Bost – Bloomberg
Big moves in U.S. stocks have been so rare lately that when they do happen, the rush to hedge is violent.
Anxiousness among investors has led to unusually large jumps in the Chicago Board Options Exchange Volatility Index, which measures hedging costs on the Standard & Poor’s 500 Index. When calm has been restored, the volatility gauge has dropped just as quickly.

BlackRock Vies With State Street to Tap Currency-Hedged ETF Boom
Rachel Evans – Bloomberg
The world’s biggest money managers are staking a claim in the surging market for stock and bond ETFs that strip out currency risk.
Industry giants BlackRock Inc. and State Street Corp. are rolling out hedged exchange-traded funds at an unprecedented clip after smaller rivals lured the bulk of $41 billion of inflows this year. BlackRock started 11 of the funds this month, including ETFs protecting against moves in the Australian dollar and Mexican peso, while State Street opened a euro-focused version in June.

VIX Calls, Greece, and the George Costanza School of Negotiation
Adam Warner – Schaeffer’s Investment Research
It’s now officially official: the bear market has ended! Greece has taken a page from the George Costanza School of Negotiation and apparently agreed to a deal worse than what was made available a few weeks ago.
Or at least that’s what they tell me on TV. I really only follow this story because it’s The Only Story That Matters for the moment.

China stock suspensions opens can of derivatives worms
Michelle Price – Reuters
The suspension of hundreds of mainland China stocks during a market plunge from mid-June could lead to disputes between banks and their clients over the valuation of billions of dollars of equity derivatives.
Banks dealing in derivatives are concerned that valuation terms covering market disruptions in other Asian markets, such as trading halts when stocks move up or down by the exchange’s daily range limits, might not apply to the wave of stock suspensions in China.

S. Korea to open mini-sized derivatives market
South Korea will open a mini-sized futures and options market next week to offer investors wider choices for hedging and trading and revitalize the once-vibrant derivatives market, the main bourse operator said Tuesday.
The Korea Exchange currently operates the futures and options trading based on the KOSPI 200 index, a flagship index composed of the top 200 stocks by market capitalization.

Chinese Stock Recovery Coming: Thanks, Beijing
Steven M. Sears – Barron’s
China is experiencing an existential stock market correction.
The dramatic losses in recent weeks have attracted much attention, but the declines mask a more significant issue: China’s financial markets are at risk of becoming something much different than intended by the government.

Here’s What We Learned From the Official Report on the ‘Flash Crash’ in U.S. Treasuries
Tracy Alloway – Bloomberg
On Oct. 15, Wall Street watched in collective shock as the yield on the benchmark 10-year U.S. Treasury plunged before careering upward again on seemingly little news.
U.S Treasuries are meant to be one of the most liquid markets in the world, meaning they should in theory be impervious to big jumps in their price. Market participants have blamed a number of culprits for the day’s wild swings. These include new regulations that make it more difficult or more expensive for large banks to make markets in a number of fixed-income securities, the rise of high-speed electronic trading in the U.S. Treasury market, and heavy one-way positioning by big investors.
On Monday, the U.S. government released its report on the day’s dramatic swings. Here’s what we learned about the day’s events.


No Exit for Investors as India Dithers on Stock Exchanges’ IPOs
Santanu Chakraborty and Bhuma Shrivastava – Bloomberg
Toronto-based Caldwell Securities Ltd. chose India over China in 2007, buying about 5 percent of what was then the Bombay Stock Exchange. Eight years later, Chairman Thomas Caldwell is frustrated because he has few exit options.
The 140-year-old bourse, now renamed BSE Ltd., and its younger rival, the National Stock Exchange of India, haven’t yet sold shares to the public. Policy makers have long viewed the bourses as public utilities to promote an equity culture in the world’s second-most populous nation rather than as a business.

[India] BSE to launch multi-legged order entry in derivatives from August
The Economic Times
BSE today said it will introduce multi-legged order entry facility in its equity derivatives segment from next month, a move that would allow a trader to place a combination of orders across different F&O contracts.
Under the new facility, the trader will purchase or sell a variety of different futures and options at the same time, which otherwise would need separate orders for different contracts.

Regulation & Enforcement

‘Clawbacks’ Could Backfire
Dealbook – NY Times
Clawbacks are coming to corporate America.
After the financial crisis, regulators forced Wall Street to adopt programs to be able to “claw back” — or recover — compensation that had been paid to bankers or traders if deals they were involved in soured later. The idea was that traders would be more responsible if they knew they would have to return some of their income should risky trades blow up years after they were made.
Now the Securities and Exchange Commission is extending the clawback idea far beyond Wall Street to all publicly traded companies.

Man who chewed up insider trading tips settles with SEC
Jonathan Stempel – Reuters
A Brooklyn, New York man, who passed stock trading tips on napkins and Post-it notes at meetings in Grand Central Terminal before swallowing the evidence, has reached a civil settlement with the U.S. Securities and Exchange Commission.
The SEC said on Monday Frank Tamayo was unlikely to owe a civil penalty after providing “extensive cooperation” in its investigation against his alleged accomplices, former Morgan Stanley stockbroker Vladimir Eydelman and law firm clerk Steven Metro.

[India] Why Sebi’s new rules for derivative contracts may have unintended consequences
Mobis Philipose – LiveMint
Capital markets regulator Securities and Exchange Board of India (Sebi) wants to limit the participation of retail investors in the equity derivatives segment. It has increased the minimum contract size for the segment from Rs.2 lakh to Rs.5 lakh.
But its plans may fail. Here’s why.


Thomson Reuters Extends Low-Footprint, High-Performance Direct Feed Service to Derivatives Exchanges
Press Release – MarketWatch
Thomson Reuters has today announced that it has expanded its Elektron Direct Feed service to include the Options Price Reporting Authority (OPRA). This provides customers with high-performance access to real-time options data with a low hardware footprint.
Financial services firms are increasing their investment in low-latency feeds as speed is becoming less of a differentiator and more a core component of market data infrastructure. This can create a challenge, however, as many are at the same time looking to reduce their total cost of ownership. Feeds from OPRA in particular can present server capacity – and therefore investment – challenges owing to the amount of data they carry.


RUT Alternative to an IWM Put Spread
Russell Rhoads – CBOE Options Hub
Every Saturday morning my ritual includes grabbing the latest issue of Barron’s and turning directly to the Striking Price column which is regularly authored by a good friend of CBOE Steve Sears, who is credited with coining term ‘fear index’ for VIX. This weekend another good friend of CBOE, Bill Luby the chief investment officer of Luby Asset Management and the publisher of the VIX and More blog site (www.vixandmore.com) was the guest author of the Striking Price column which had the headline “Seizing Opportunity From Volatility”. Needless to say, I was pretty excited when I saw that headline.


Volatility As An Opportunity Class – A PIMCO Viewpoint
Is volatility an asset class? It’s a question we often debate, internally and with clients. There’s no simple answer. Either way, though, it’s an academic point that matters less than our belief that volatility is an “opportunity class” – one with a variety of tactical and macro implications. Moreover, as financial luminaries from European Central Bank President Mario Draghi to Federal Reserve Vice Chairman Stanley Fischer have warned, volatility is likely to rise as the Federal Reserve approaches its first rate hike in almost a decade. Likewise, the opportunities created by volatility are likely to rise in the coming years.

How to Protect Your Portfolio From Stock Market Turbulence
Ken Roberts – The Street
Volatility in the stock market is what makes investors nervous. Not all volatility is bad, though, for without volatility stock prices would never rise. Volatility is typically measured as the standard deviation of returns for a particular stock or market index. It’s downward volatility of the market that causes fear and panic.

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