Observations and Insight

Small Caps Coming Up Big: Russell’s Pat Fay on the One-Year Anniversary of the CBOE Russell 2000 Volatility Index
JohnLothianNews.com

Investors have been flocking to equities lately, but the interest in small caps is outpacing that in large caps. JLN spoke with Pat Fay, director of listed derivatives for Russell Investments, at FIA Expo, who talked about the “disconnect” between large cap volatility and small cap volatility starting in February, which is also represented in the options volume. Small cap options volume has risen significantly, whereas large cap volume has grown, but not nearly as much.

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Lead Stories

In Draghi They Trust as Europe Stocks Tempt Bulls Again: Options
Sofia Horta e Costa – Bloomberg
Options traders and investors are rediscovering their taste for European stocks.
Mario Draghi and his European Central Bank colleagues may move a step closer to full-scale quantitative easing when they meet tomorrow in Frankfurt. That hope spurred investors to send money to a fund tracking the region’s equities for the first time in five months.
http://jlne.ws/1zQwooM
**JK – VStoxx, volatility futures and options on the EuroStoxx 50, may be worth watching here as well. Volumes January through November were up 32% to an ADV of 27,467, and an ADV in options of 12,762, up 55% from a year earlier. In November VStoxx futures posted an ADV of 23,940 contracts, while options had an ADV of 18,431. Monthly Statistics are here at Eurex – http://jlne.ws/1zQQVcK

Option pricing shows yen’s loss of safe-haven status
Hideyuki Sano – Reuters
Once known for its safe-haven characteristics of appreciating fast and depreciating slowly, the yen is being treated in a diametrically opposite fashion by an options market that is pricing in faster falls than gains in the Japanese currency.
As the yen buckles under the Bank of Japan’s massive money printing, just about every market player expects a weaker yen but the pricing in options suggests the fall could be even faster than anticipated.
http://jlne.ws/1zQuzIv
***DA: Abenomics is one big flight into uncharted territory. Once the strategy was laid out, it became difficult to navigate a slow currency debasement.

A Little More Color on Yesterday’s Big VIX Option Trade
Russell Rhoads – CBOE Options Hub
Yesterday I participated in a webcast with Mark Sebastian from Option Pit shortly after the market closed. The first thing he said to me was, “did you see that big VIX put trade today?” Since then there has been more discussion of VIX put volume and the buyer of VIX Dec 12.50 Puts that came into the market yesterday.
http://jlne.ws/1vnwsgM
**JK – The CBOE VIX futures were trading at 12.56 at 11:30 am today. This guy needs it to close below 12.37 by next Tuesday. Stay tuned.

Gold Volatility Reaches 9-Month High on Whipsaw in Oil
Debarati Roy – Bloomberg
Oil is making gold investors cross-eyed.
Because gold traders often track the cost of oil, which can impact consumer costs and inflation, a whipsaw in crude futures is spurring the biggest price swings for bullion in almost nine months. Adding to the pain for investors in the metal is a dollar rally that’s curbing demand for alternative assets.
http://jlne.ws/1zQCpBO
***DA: In other words, one does not need to hedge inflation risk in a deflationary environment.

What’s Really Behind the Apple Inc. (AAPL) ‘Flash Crash’
Adam Warner – Schaeffer’s Investment Research
It was quite the morning for Apple Inc. (NASDAQ:AAPL) on Monday. The stock has performed very well just short of forever. But for one brief, shining moment, the bears had their day — or their minute.
http://jlne.ws/1vnxB7V

Futures and options set for record volume in 2014
Futures & Options World
Early signs show exchanges set to achieve strong year-on-year growth.
Some of the world’s top futures and options exchanges said a solid November has topped up a bumper October for trading to propel them to the verge of an all-time record year for trading activity.
Early trading figures suggest futures and options exchanges continued to see strong trading last month, up year-on-year but down on October’s record volumes.
http://jlne.ws/1zQInmf

Commodity Swings Could Trigger Higher VIX Readings – Focus on Funds
Chris Dieterich – Barron’s
A consensus is building that recently wild swings across commodity markets will usher in anxious stock trading in the weeks ahead.
The CBOE Volatility Index has been pinned below its long-term average almost without exception since the start of 2013. It crested above 14 on Monday for the first time in a month before retreating 7% to 13.29 on Tuesday. It remains well below its long-term average of 20.
http://jlne.ws/12ni9N7

Low Volatility Ahead? VIX Put Options See Heightened Activity
Saumya Vaishampayan – WSJ
Trading in options on the market’s so-called fear gauge indicates that some investors are preparing for a few weeks of calm.
The CBOE Volatility Index, which measures expectations for future swings in the S&P 500, is down 8.2% to 13.12 on Tuesday.
http://jlne.ws/12nikrO

Mini-SPX (XSP) – Recent Record Highs for Index and for Options Open Interest
Matt Moran – CBOE Options Hub
In November 2013 CBOE launched Mini-SPX (ticker XSP) options with PM-settlement, and, as shown in the chart below, the maximum open interest for the XSP options has grown in all 12 months since the contract launch.In the past month the XSP options hit an all-time high open interest of 292,227 contracts, and the XSP Index hit its all-time daily closing high level of 207.28 on November 26.
http://jlne.ws/1ygg0zI

U.S. Bitcoin Binary Options Now Live at North American Derivatives Exchange
Avi Mizrahi – Forex Magnates
The North American Derivatives Exchange (NADEX) has just announced to its traders that, starting today, they can trade binary options on the price of the digital cryptocurrency, Bitcoin.
NADEX, IG’s CFTC regulated exchange, described bitcoins to its members as, “one of the newest phenomena in the global financial markets,” and says that, at the venue, they can now be traded on with, “limited risk, short-term Bitcoin binary options.”
http://jlne.ws/1zQIWfP

Why Are So Many Hedge Funds Closing Up Shop This Year?
Ritesh Anan – Benzinga
The year 2014 has turned out to be the worst for the hedge fund industry, both in terms of returns and in terms of the number of hedge funds that have shut shop. According to Hedge Fund Research, 461 hedge funds have seen closure in the first half of 2014, matched only by the numbers seen at the height of the financial crisis.
Bloomberg’s Joseph Weisenthal and Erik Schatzker recently discussed why so many hedge funds are closing down and why investors choose to stick with the largest ones even at the cost of mediocre returns.
http://jlne.ws/1zQAduj
***DA: How much would you pay to underperform the index?

Exchanges

ICE says Nov average daily volume for futures, options falls 14%
MarketWatch
Average daily volume for futures and options declined by 14% in November from the year-earlier period, while cash equities rose 9%, Intercontinental Exchange ICE, -0.11% said Wednesday.
http://jlne.ws/1zQul4f

SGX Head Bocker Says Sorry as Regulator Slams Second Disruption
Adam Haigh and Joyce Koh – Bloomberg
Singapore Exchange Ltd. (SGX) suffered its second trading disruption in less than a month, prompting Chief Executive Officer Magnus Bocker to apologize to investors and brokers amid criticism from the financial regulator.
Southeast Asia’s biggest stock market opened 3 1/2 hours late today because of a software error, less than a month after the bourse operator halted trading for more than two hours on Nov. 5 due to a power-supply failure. The delay was “unacceptable,” the Monetary Authority of Singapore said in an e-mailed statement, with the regulator pledging to take supervisory action against SGX if needed.
http://jlne.ws/1yhhMN7

CME raises GFI offer to match BGC’s hostile bid
Amrutha Gayathri – Reuters
Futures market operator CME Group Inc raised its agreed-upon offer for derivatives broker GFI Group Inc to $5.25 per share from $4.55, matching inter-dealer broker BGC Partners Inc’s hostile bid for GFI in October.
CME’s stock-and-cash offer follows BGC’s all-cash tender offer of $5.25 per share for the 86.5 percent of GFI that it does not already own.
http://jlne.ws/1zQyLYA

CME Group and GFI Group Announce Revised Offer for GFI Group Stockholders
Press Release – CME Group
CME Group Inc., the world’s leading and most diverse derivatives marketplace, and GFI Group Inc., a leading intermediary and provider of trading technologies and support services to the global OTC and listed markets, today announced that they have revised their definitive agreements to increase the consideration payable to GFI Group stockholders from $4.55 per share in CME Group stock to $5.25 per share, payable in a mix of shares of CME Group Class A common stock and cash. This new offer price represents a 5% premium above yesterday’s closing price of $5.00 per share of GFI Group common stock and a 69% premium above the closing price of $3.11 per share of GFI Group common stock on July 29, the last day of trading prior to the announcement of the transaction.
http://jlne.ws/cjpXe7

Completion of Acquisition
Press Release – London Stock Exchange Group
London Stock Exchange Group plc (“LSEG” or the “Group”) is pleased to announce that following satisfactory completion of all outstanding conditions, the Group has today completed the acquisition of Frank Russell Company (“Russell”).
As previously announced, the comprehensive review of Russell’s investment management business is making good progress and is on track to be completed early in 2015.
http://jlne.ws/1CEPrYX

Regulation and Enforcement

Wall Street Called Out by Regulators for Stalling on Swaps Rule
Jesse Hamilton and Silla Brush – BloombergBusinessweek
U.S. regulators are getting fed up with Wall Street’s attempts to stall a restriction on risky swaps trades.
JPMorgan Chase & Co. (JPM:US), Citigroup Inc. (C:US) and other lenders have already won one delay of the measure that forces them to move derivatives out of units with federal backstops. Getting another reprieve is crucial for banks, because it would give them time to persuade a Republican-led Congress to kill the requirement.
http://jlne.ws/1yP5yyX

Hackers With Wall Street Savvy Stealing M&A Data
Alan Levin and Michael Riley – Bloomberg
Hackers with Wall Street expertise have stolen merger-and-acquisition information from more than 80 companies for more than a year, according to security consultants who shared their findings with law enforcement.
A group dubbed FIN4 by researchers at FireEye Inc. (FEYE) has been tricking executives, lawyers and consultants into providing access to confidential data and communications, and probably using the information for insider trading, FireEye said in a report today. The hackers’ sophistication suggests they’ve worked in the financial sector, Jen Weedon, FireEye’s manager of threat intelligence, said in an interview.
http://jlne.ws/1zQEgGS

Canadian Consumer Commission Weary of Binary Options, Bitcoin
Adil Siddiqui – Forex Magnates
A consumer protection authority in the eastern part of Canada has issued a note on its website warning users about possible investment threats. The Financial and Consumer Services Commission (FCNB) noted that it had identified emerging threats facing investors in 2015, including schemes involving binary options, marijuana-related businesses, stream-of-income investments and digital currency. The move comes as Canada’s main financial regulator continues its onslaught against binary options and non-regulated brokers.
http://jlne.ws/1zQJjHc

Strategy

Be careful to hedge ‘equity over bonds’ in 2015, Morgan Stanley warns
Jamie Chisholm – Financial Times
“It’s the most wonderful time of the year” . . . if you like analysts’ forecasts.
Up to the Christmas break we shall feature interesting bits from a selection of notes. Today, Morgan Stanley’s “2015 Global Strategy Outlook”.
http://jlne.ws/1BdNiln

Performance Divergence Among Asian ETFs
Moby Waller – CBOE Options Hub
One of the nice things about ETFs is the broad diversity they offer in terms of exposure to a vast variety of stock sectors within the US — but they also have exposure to a growing number of international countries (and in some cases, multiple choices within a single country or region), commodities, currencies, volatility, bonds, etc.  All of which can be traded in a single brokerage account (or brokerage retirement account).  In general, we tend to look for outperforming and underperforming ETFs for our specific option trades in the ETFTRADR program — as well as non-correlated prices moves, among other factors.
http://jlne.ws/1vnwTHP

Options Education

Risk Management in Trading Trumps All
Bob Lang – CBOE Options Hub
During the recent period of high volatility many of my client portfolios took a ride up and then down then back up again, which may be of some concern.  I received a phone call from of them (of which I rarely do) and she asked if I could just ‘sell stuff before the market goes down and buy stuff right before it goes up’.  I certainly wish it were that easy!  Yet, my job is to make money for clients regardless of the direction, and with options my timing has to be nearly perfect.
http://jlne.ws/1vnx7ia

Events

How Are You Adapting to the New OTC Regulatory Landscape?
PRMIA Chicago
On December 4, PRMIA Chicago will host a lunch and discussion at CME Group’s Executive Conference Center, which will look at the challenges in trade reporting, reconciliation and margin as a result of global regulatory changes. Hear presentations from the experts at CME Group and TriOptima in a panel moderated by John Lothian News’ Doug Ashburn. The event is free for market participants, but space is limited.
http://jlne.ws/1wZ1Kqu
***DA: I hear there are a few spots left. Lunch will be served. And I am moderating. And lunch will be served.

Options Alliance Annual Conference Dec 8
Join us on December 8 for a deep dive into the exploding world of financial startups. Meet and mingle with your fellow entrepreneurs as you learn how to market, grow and fund a wide range of financial startups. The program begins at 1 pm at the Arditti Center for Risk Management at DePaul University’s Chicago Loop campus. The three panels cover the marketing, growth in AUM and funding of startup firms. A networking cocktail reception follows.
http://jlne.ws/1xe5PuU
***Panelist firms include OIC, CME Group, Tradelegs, RCM Asset Management and more.

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