Observations and Insight

A few tidbits from London IDX
Jim Kharouf and Doug Ashburn – JLN

This year’s IDX, like most conferences, began on a serious note, slowly lightened up and, by the end of the final day, was rather lighthearted. IDX began this year with a panel of exchange leaders worried about regulatory complexity and ended with the CEO of the FIA donning a kilt. A selection of the day’s finer moments follows.

Steve Grob of Fidessa offered up perhaps the best tech joke of the conference, repeating a friend’s comment:

“Switching front end trading vendors is like getting divorced and remarried. Switching back office vendors is like getting a sex change. You better be committed to the idea.”

A prominent industry participant (who wished to remain anonymous for obvious reasons) said to me upon hearing the CFTC had named Aitan Goelman its new director of enforcement, “It is a very telling sign from the commission that, despite all of the lingering regulatory issues crippling the industry, Chairman Massad’s first order of business was to make sure the enforcement division is squared away.” Hmm.

The most talked-about panel of the day was a spirited look at the post-G20 interest rate swap market, subtitled “A Tennis Debate.” Under the watchful eye of an umpire, contestants volleyed the big issues facing the swaps market, while the audience judged and kept score. Hopefully the conference planners took note that, regardless of the content, the more interactive panels always generate more buzz.

In the day’s final panel, “The Changing Nature of Vendor Relationships,” Bill Templer, managing director of Faventus Consulting, expressed worry that there is a lack of interest in the fin-tech space at the college level. He followed with a plug for our MarketsWiki Education Summer Intern speaker series (headed to London July 1st and 2nd), saying it is the type of thing needed to attract the next generation of users and participants in our markets. Here is a link to sign up or sign up your summer interns: http://jlne.ws/1jYEkz6

Speaking of interns, often times they get the short end of the stick in terms of assignments – data entry, file organization and the occasional latte run. Other times they get the plum assignment. Our summer intern, Alison Fay, who happened to be in London during IDX week with her father, Russell Investments’ Pat Fay, was given such an assignment. While dad was attending the conference, she was asked to tour the city, from Threadneedle Street to Canary Wharf, filming video clips to be used as b-roll for John Lothian News and John Lothian Productions. Some life.

At Wednesday’s gala, FIA CEO Walt Lukken put on the kilt for Futures for Kids, and helped the organization reach a milestone – £2 million raised for the charity since its inception. He passed the kilt-wearing duty to FIA Europe head Simon Puleston-Jones, who will take the magic sporran to IDX 2015, joining such illustrious Kilt Challenge alumni as Clive Furness, Simon Rostron, Jeremy Grant and, of course, our own John Lothian, who did the honor in 2011. Carl Gilmore of KCG stepped up and bid £365 for our JLN marketing/advertising space in the newsletter for a week.

Good show, chaps, great cause and truly one of the brightest and best organizations in our industry.

Among our final visits of the week is a trip to DTCC, the clearing, data collection and trade repository organization, which is interestingly located on Snowden Street in London. They will no doubt be checking Doug Ashburn’s credentials twice from now on.

Lead Stories

How $170,000 in Options Moved Clorox Shares $450 Million
Callie Bost – BloombergBusinessweek
Just before 1 p.m. on June 9, 5,700 options tied to Clorox Co. (CLX:US) were bought on U.S. markets for about $170,000. Traders snapped up the underlying stock and within half an hour, more than $450 million had been added to the bleachmaker’s shares.
Ten days earlier, RadioShack Corp., the struggling electronics retailer, jumped as much as 33 percent, adding $40 million to its stock capitalization, after someone purchasing $600,000 in bullish call contracts ignited a rally in the equities. The stock rose to $1.45 from $1.32.
Rallies in companies from Clorox to Molson Coors Brewing Co. (TAP:US) show how options influence shares and create signals for traders.

The ‘death of volatility’ forces traders to get creative
Alex Rosenberg – CNBC
Stocks aren’t the only thing that have gone quiet. Anticipated and actual volatility in many heavily traded commodities have also plunged over the course of this year. And this “all quiet on the Western front” market is forcing traders to rethink the way they turn profits.

Goldman’s Blankfein: Stock Market Volatility Won’t Stay Low Forever
Dan Weil – MoneyNews
While stock market volatility has dropped to a seven-year low as major indexes continuously rise to record highs, that blissful investing state can’t last forever, says Goldman Sachs CEO Lloyd Blankfein.

Direxion Files for Volatility Response and Leveraged ETFs
Zacks (via NASDAQ)
2014 saw a shaky start with heightened volatility in the global markets. The U.S., Europe, China and Japan are all more-or-less unsteady at present, spurring fund issuers to tap the volatility factor of the market more and more.
While several fund managers including iShares and SPDR rushed to put out some low volatility and low risk products, Direxion recently filed for an ETF targeting the S&P 500 Volatility Response Index and intends to allocate the assets in risky and risk-free options.

Videocast: Reversal in VIX trades

As Traders Vanish, Here’s One Way to Fix FX
Katie Martin and Chiara Albanese – The Wall Street Journal
While George Osborne wants to make manipulating currencies benchmarks a criminal offense, the industry’s already working on other possible solutions to the problem of potential market rigging, especially around the so-called fix.
One aim: take fallible human traders at banks out of the equation.
A unit of State Street Corp this month launched a new tool to help investors trade directly against each other, and, crucially, get the fix rate at the end, without the involvement of banks that typically facilitate trades.

Is The Fed Engineering A Market Pullback?
Donald Dale – Seeking Alpha
Having been a Chief Options Strategist and Senior Derivatives Trader for over 20 years, this central bank induced complacency has me very confident that the market is going to have a correction soon. The difference this time is that it may be accompanied by much less panic and increased volatility than in past corrections, at least initially.

Asia Risk corporate rankings 2014
Risk Magazine
According to Patron, clients are now also looking to use options in forex transactions to hedge downside risk.
“Corporates are now starting to understand optionality as a strategic resource and are using options more now than they did three to four years ago to hedge downside risk. Historically corporates were allergic to the concept of options because of the need to pay a premium up front. This has changed on the back of accounting rule changes and the understanding of the strategic advantage of an option in this current market,” he says.

Markets need high-frequency trading, say global exchange chiefs
Joel Clark – Euromoney
High-frequency trading (HFT) has become an important component of financial markets and, despite widespread criticism, it can be a stabilizing factor during market stress events, according to a group of senior exchange officials.
Speaking at the Futures Industry Association’s International Derivatives Expo in London on Tuesday, the chief executives of several global exchanges hit back at the media frenzy that has engulfed HFT in recent weeks, after the publication of Michael Lewis’s HFT exposé Flash Boys.


Euronext launches Spotlight Options in Amsterdam and Brussels
Through a combination of liquidity provider support and dedicated promotion by sponsoring brokers, underlying assets with notable market events or activity will be put in the spotlight via options.
On the new Spotlight segment Euronext will initially admit for trading options on Euronext-listed underlying values at the request of and supported by market participants. This will create additional investment and trading opportunities in SMEs and newly listed stocks. The added liquidity and visibility will allow the classes to grow to become mature option classes.

Liffe Sets Daily Volume Record in MSCI World Euro Index Futures
Press Release (ICE)
Intercontinental Exchange (NYSE: ICE), the leading global network of exchanges and clearing houses, announced today that Liffe reached a daily volume record of 205,570 contracts in MSCI World Net Total Return (NTR) Euro Index futures on June 11, 2014. The previous record of 197,264 contracts was set on March 14, 2014.

Euronext and Dalian Commodity Exchange sign MOU
The exchanges will also look to develop new strategies for improving the safe operation of orderly futures and options markets and discuss the feasibility of cooperatively developing new products.
The two exchanges have agreed a series of engagements to research the demand for commodity products in new geographic areas and to develop strategies for the distribution and trading of these products in safe and orderly markets.

Euronext Delays Open of Markets on Connectivity Fault
Alexis Xydias – Bloomberg
Euronext NV, operator of exchanges from Paris to Amsterdam, delayed the start of trading in cash markets and single-stock options by 30 minutes today due to a connectivity problem.
Markets opened at 9:30 a.m. Paris time after a technical fault disrupted the processing of data in the main trading venue for stocks from ING Groep NV to Sanofi. The halt affected cash markets for stocks, warrants and certificates, structured notes, bonds and exchange-traded funds, the exchanges operator said on its website. Single-stock options opened late as a result.

Regulation and Enforcement

Mickelson Didn’t Trade Clorox Securities, Lawyer Says
David Glovin – BloombergBusinessweek
Professional golfer Phil Mickelson didn’t trade in shares or options of Clorox Co. (CLX:US), his lawyer, Gregory Craig, said in response to news reports that a U.S. probe of alleged insider trading involves his client as well as gambler William Walters and billionaire Carl Icahn.
News organizations reported in the last two weeks that the Federal Bureau of Investigation and the U.S. Securities and Exchange Commission are probing whether inside information was used to trade in securities of Clorox ahead of a buyout bid by Icahn.

House rejects CFTC funding shift
Cristina Marcos – The Hill
The House on Wednesday defeated a proposal to allow the Commodity Futures Trading Commission to spend more money on regulatory efforts and less on information technology.
Rejected 194-227, Rep. Rosa DeLauro’s (D-Conn.) amendment to the 2015 Agriculture appropriations bill would reduce the funds set aside for the CFTC’s information technology account from $52.5 million to $35 million.

Clock ticking to resolve third country CCP rules
The Trade
Regulators are running out of time to agree on cross-border rules for listed and OTC derivatives clearing and risk damaging Europe’s financial markets, according to panelists at the International Derivatives Expo (IDX) 2014.
Speaking at the event in London yesterday, Kim Taylor, president of CME Clearing, said the clock was ticking to resolve disagreements among regulators over substituted compliance for third countries.

U.S. wins first guilty plea from individual in Libor probe
Jonathan Stempel and Aruna Viswanatha – Reuters
A former Rabobank NV trader pleaded guilty on Tuesday for his role in manipulating Libor, becoming the first person to admit guilt in a worldwide probe into alleged manipulation of interest rate benchmarks.
Takayuki Yagami, a Japanese national who specialized in yen derivatives, pleaded guilty to one count of conspiring to commit wire fraud and bank fraud before U.S. District Judge Jed Rakoff in Manhattan, the U.S. Department of Justice said.


IDX 2014: Exchanges warn financial institutions on cyber-threats
Market participants need to be better communicate with each other about how to mitigate the risks of cyber-attacks.
“A lot of market participants do not talk about cyber-threats because of confidentiality reasons but this needs to change,” said Jeffrey Sprecher, chairman and chief executive officer (CEO) at Intercontinental Exchange (ICE), speaking at the International Derivatives Expo (IDX) 2014 in London.

Official Flash Crash Report Questioned In New Study
Mark Melin – ValueWalk
Considering volume and price data, HFT researcher says official report fingered the wrong criminal in flash crash, which led to more serious problems.
A new report authored by high frequency trading critic Eric Hunsader, founder of software firm Nanex, makes a key statement about the flash crash of 2010 that has been whispered in certain market making and algorithmic trading circles: HFT was to blame in the May 6, 2010 flash crash, the conclusions of which differ from official regulatory reports.


Want to Get the Most From a Pricey Stock?
Steven M. Sears – Barron’s
Want a way to turbocharge your returns in a pricey yet calm stock market? Consider swapping a high-priced stock with low-priced call options on that stock.
With just a little bit of money, investors who use options can realize extraordinary gains. They can also book big losses, so remember the risks as well as the rewards as we examine this smart technique.

How to Make Volatility Work for Your Trading
Examining how realized and implied volatility impacts option pricing
Adam Warner – Schaeffer’s Investment Research
As we mentioned last week, the CBOE Volatility Index (VIX) is wildly overpriced, even at a full of 11. That’s because the 10-day realized volatility (RV) in the SPDR S&P 500 ETF Trust (SPY) and the S&P 500 Index (SPX) is hovering below 5.
Of course, realized vol. looks backward, and implied volatility (IV) prices forward. So, just because the rearview shows that buying 11.5 implied volatility probably lost money for options owners, it doesn’t mean that buying options right here, right now will not work.

SPX Super LEAPS – For a Long-Term Market View – Part 2 [Video]
Shawn Howell – CBOE Options Hub
Shawn Howell from Pro Market Advisors brings us Part #2 of his SPX Super LEAPS series.  He explains how investors believing the S&P 500 would go higher over the next 30 months could use December 2016 SPX Super LEAPS to take advantage of that opinion.

Options Education

June is Russell Reconstitution Time
By Russell Rhoads – CBOE Options Hub
For many people June means getting out of school for summer break, warmer weather, and vacations. For me it means Russell Reconstitution time. For those of you unfamiliar with the Russell Reconstitution process I’ll explain a little more –


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