JLN Options: In Allergan Bid, a Question of Insider Trading; Predatory Traders Front-Ran Bill Ackman's Botox Buy; Naked Short Put Options – Warren Buffett's Little Secret

Apr 23, 2014

Observations and Insights

Keep it Simple: Peter Nabicht on Liquidity and Simplicity of Market Structure

Today’s financial markets can be summed up in three words – global, fast, and complex. But as the market structure evolves, so must the regulatory structure that oversees it. John Lothian News has spoken with several industry experts to create this series on the evolution of financial market structure.

In Part 2, Peter Nabicht, senior advisor of the Modern Markets Initiative looks at the nature of liquidity and how high-speed traders have aided liquidity over the last decade.

Watch the video »

Lead Stories

In Allergan Bid, a Question of Insider Trading
William D. Cohan
One trading day after announcing the news that the huge hedge fund he runs, Pershing Square Capital Management, had partnered with Valeant Pharmaceuticals International to make an unsolicited $45.6 billion cash and stock takeover bid for Allergan, William A. Ackman is sitting on a paper profit of more than $1 billion on the Allergan shares and options he had been secretly buying over the past two months.

Predatory Traders Front-Ran Bill Ackman’s Botox Buy
Matt Levine – BloombergView
Did news of Bill Ackman’s $4 billion of Allergan stock purchases leak into the market? Yep! The Wall Street Journal has the gory details — “Even after stripping out Mr. Ackman’s buying, the volume of stock trading in Allergan during the 10-day period before Monday’s announcement was 86% higher than its average over the previous year” — but you don’t even need to look at volume; price will do:

Naked Short Put Options – Warren Buffett’s Little Secret
The above quote regarding derivatives should be ringing a bell for most Buffett followers. Both Buffett and Munger have revealed deep concerns regarding financial derivatives. What has not been discussed extensively is how Warren Buffett (Trades, Portfolio) used those time bombs in his favor, especially when it comes to lowering his purchase prices of common stocks of the companies he was trying to acquire a major stake in.

No Fear Here
The Wall Street Journal
As the stock market has returned to its rallying ways, the good-old fear gauge has promptly gone back into hibernation.
The Chicago Board Options Exchange Volatility Index, or VIX, finished Tuesday at 13.19. It is down 23% over the past two weeks and is essentially flat for the year. The VIX is calculated from the prices investors are willing to pay for options tied to the S&P 500. A decrease in demand for portfolio hedges can push the price of the VIX lower.

The mystery behind the VIX
Lawrence Lewitinn – Yahoo Finance
The market appears to be bearish on fear.
One of the most important measures of expected risk, the CBOE Volatility Index (the “VIX”) has sold off considerably in the past several days. After trading as high as 17.5 on April 15, it closed at 13.19 on Tuesday.

Why market calm is making BoE uneasy
James Mackintosh – Financial Times
In the latest minutes of the BoE’s Monetary Policy Committee, policy makers find it “somewhat surprising” that the demand for insurance against near-term rate rises is so low.
It is certainly low. A proxy for the cost of options to protect against rate rises – the 1-year implied volatility on short sterling futures – shows them at the cheapest since Lehman failed in 2008. Investors are not panicking about imminent rate rises, even as the economy booms.

Settlement time for U.S. trades closer to being shortened
John McCrank – Reuters
The Depository Trust & Clearing Corporation, which processes all U.S. stock and fixed income trades, said on Wednesday it supports shortening the settlement cycle for U.S. equities, corporate and municipal bonds, and unit investment trust trades.

Last year Wall Street cheerily recalled 1995; what year is replaying now?
Michael Santoli – Yahoo Finance
Last year Wall Street flashed back pleasantly to 1995, a year of relentless ascent for stock prices, supported by a determined Federal Reserve and broadening faith in a healing economy. Investors looking for a suitable playlist for 2014 might want to skip ahead a decade to 2005, a year of sideways churning in which stock indexes digested big gains, and market pros searched for the next growth catalyst as Fed policy turned less generous.


ICE buys Algo Technologies for Nyse overhaul – Bloomberg
IntercontinentalExchange has acquired Algo Technologies and will use the vendor’s matching engine to boost the performance of the New York Stock Exchange, according to Bloomberg.

Killing Dark Pools Is CME Chairman’s Fix for Stock Market
Matthew Leising – BloombergBusinessweek
Terrence Duffy, who as executive chairman of CME Group Inc. oversees the world’s largest futures exchange, has a solution for those seeking to fix the U.S. stock market: kill dark pools.

It is imperative for China to be open to competition
Leo Melamed – Futures
Remarks by chairman emeritus of CME Group Leo Melamed at the BOAO Forum for Asia Annual Hainan Conference April 8-9, 2014.
It is always a great danger for a foreigner to offer advice to a foreign country. However, I have two strong reasons to take this risk. First, I feel that I would fail in my mission today if I neglected to state my opinion on what I believe are imperatives for China to next institute.

How IEX Is Combating Predatory Types Of High-Frequency Traders
Elvis Picardo – Forbes
Michael Lewis’ bestseller “Flash Boys: A Wall Street Revolt” stirred a hornet’s nest by shining the spotlight on the controversial subject of high-frequency trading (HFT). The book chronicles the journey of a small group of intrepid individuals on Wall Street who stumble across predatory behavior by high-frequency trading firms, and in a bid to provide a more balanced marketplace, create an exchange named IEX. Here’s how IEX is attempting to combat predatory trading.

Regulation and Enforcement

Recordkeeping Requirement Irks OTC Industry
The derivatives industry is pushing back against a proposal by the Commodity Futures Trading Commission that would require all participants on a swap execution facility or a derivatives exchange to record all pre-execution trade information.


Sell in May and Go Away Alternatives (Part 1-BXM)
Russell Rhoads – CBOE Options Hub
I love Wall Street sayings.  There is usually some truth behind them, but being a numbers guy I always like to trust these statements but also do some verification.  The Wall Street saying that comes around this time of year is, “Sell in May and go away”.  This basically means that investors would do well by only being in the stock market from November to April each year and then exit the market from May through October.

Potash Stock Will Help Your Portfolio Grow
Just don’t buy now—unusual options trading suggests shares could fall on earnings news.
By Steven M Sears, Barron’s
Potash helps farmers’ crops retain water and grow stronger roots. Options help investors hedge stocks, and retain their profits when questions arise about prices.
And so it is a neat coincidence that Potash Corp. of Saskatchewan (ticker: POT), one of the world’s largest potash producers, is attracting the financial equivalent of potash ahead of Thursday’s earnings: puts.

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