Observations and Insight

CBOE RMC Highlights
Doug Ashburn – JLN

Today marks day two of the CBOE Risk Management Conference taking place in Carlsbad, California. Outside the conference hall it is mid-70s and sunny all week – a far cry from the single-digit temperatures in Chicago.

Inside the conference hall it is sunny as well, or so it appears from my vantage point in Chicago. For those wishing to stay abreast of the happenings in Carlsbad, I encourage you to click over to the CBOE Options Hub,  http://www.cboeoptionshub.com/ where no fewer that eight new posts have been uploaded within the past 24 hours, including:

– CBOE’s Ed Provost offered a summary of new initiatives at the exchange, including VIX trading hours and new licensing agreements with MSCI and LSE Group.

– Researcher and fellow CAIA member Keith Black walked everyone through his latest research that says options-based funds had a lower standard deviation than benchmark indices over the last 15 years.

– CBOE’s Matt Moran also posted summaries of the panels and presentations from day one of the conference, such as the evolution of options-based strategies, a look at options benchmark indices, and analysis of volatility and VIX term structure.

Options Hub is the next best thing to being there.


Fintech Exchange 2015: A Chicago Story

Fintech is more than just a buzzword. Fintech is a movement – a global, top to bottom overhaul of financial systems, from consumer transactions at the grocery store to speed of light derivatives trades, to multi-billion dollar interbank payments. And on April 23, 2015, the center of fintech will be Chicago.

Barchart OnDemand, in association with FinTEX Chicago, will host Fintech Exchange 2015, a half day event featuring live presentations, a panel discussion and networking, all centered on the state of technology for financial markets and trading firms.
Watch the video »

Lead Stories

ISE Preps Third Options Exchange
International Securities Exchange will have its ISE Mercury exchange ready for trading by the end of the second quarter, though the launch remains subject to approval by the U.S. Securities and Exchange Commission.
New York-based ISE’s flagship ISE options exchange has market share of about 10.5%, 3rd-most of 12 U.S. options exchanges, while its Gemini exchange, launched in August 2013, has a 3.1% share, according to the OCC.
***DA: The more the merrier?

Bullish bets seen as options market readies for June Obamacare ruling
Saqib Iqbal Ahmed – Reuters
Options on U.S. hospital companies were unusually active on Wednesday, with bets leaning to the bullish side as the U.S. Supreme Court heard arguments on a major challenge to President Barack Obama’s healthcare law.
Shares of major hospital operators rose as investors interpreted comments made by Supreme Court justices during arguments as favorable toward upholding the Affordable Care Act, commonly known as Obamacare.
***JB: A great overview of the arguments made and the Supreme Court’s reaction can be found here: http://jlne.ws/1G2bhmC (you can either read or listen to the story…I recommend listening to it as it provides a better feel for the tenor of the proceedings).

***DA: Nothing drives a bull market like a blank check from the gummint.

VXX Still Defying Gravity — But For How Long?
Adam Warner – Schaeffer’s Investment Research
Speaking of iPath S&P 500 VIX Short-Term Futures ETN (VXX) … it continues its 2014 pattern of behaving unhorribly (for lack of a better word). We got fairly close to taking out the all-time lows of 25.64 set all the way back on Dec. 5, but alas, the Nazz hit 5,000 and that apparently became a psychological symbol and time to start selling stocks. Or, at least, time to take a break chasing them higher.

What CME Group is not telling you about closing the futures pits
Bradley S. Glass – Futures Magazine
From the Feb. 4 announcement that the “open outcry” future pits on the CME Group Exchanges at 141 W. Jackson were closing and the trading floor was being consolidated to accommodate only the option pits, the entire futures trading community has been abuzz that an era is coming to a premature end.
***DA: As a publicly held company, CME’s responsibility is maximizing shareholder value in the least disruptive way possible. The board feels it has upheld more than its share of the bargain made with floor traders upon demutualization.


How will closing the trading pits affect market performance?
Paul Peterson – Dairy Herd Management
CME Group’s recent announcement regarding the scheduled July 2 closing of most futures trading pits has triggered a range of reactions. News stories have covered related issues such as displaced floor traders and the effect on membership or “seat” prices, but there has been little discussion about the impact of these closings on the performance of the agricultural futures markets used by farmdoc daily readers. This article examines three questions of interest to market participants.

2015 Risk Management Conference: CBOE President and COO Edward Provost on New Initiatives
CBOE Options Hub
CBOE President and COO Edward Provost kicked off Day Two of RMC with an update on recent CBOE developments, highlighting the exchange’s efforts to broaden access to its marketplace and to   expand and diversify its product offerings.
Provost began with an update on CBOE’s extended trading hours initiative.  Last June, CFE implemented near 24-hour trading in VIX futures.  Approximately 9 percent of all VIX futures trading currently takes place outside of regular U.S. trading hours.  Provost added that “on days where there is breaking market news outside of U.S. trading hours, we’ve seen that figure rise as high as 20 percent.”

BATS Chi-X Europe Reports 23.7% Market Share in February
Press Release – BATS
BATS Global Markets (BATS) today reported February volume, market share, and monthly highlights including its second best month on record for U.S. Options market share, which was 8.2%, up from 3.6% one year ago.  
http://jlne.ws/1wXVPD6 (PDF)

Regulation and Enforcement

Mifid II to hit derivatives trading profits
Alice Attwood – Futures & Options World
The profitability of trading derivatives and commodities will be impacted by the introduction in 2017 of Europe’s controversial Mifid II reforms, according to new research.
A recent survey of risk and compliance heads by consultancy Protiviti said that once fixed income, derivatives and commodities contracts are brought within the scope of the second version of the Markets in Financial Instruments Directive (Mifid II), profitable trading is expected to drop in these asset classes while liquidity in fixed income is also expected to decrease.

BOX’s Second Comment Letter on SR-OCC-2015-02
Press Release – BOX
Re: Options Clearing Corporation (“OCC”), Notice of Filing of Proposed Rule Change Concerning a Proposed Capital Plan for Raising Additional Capital; SEC File No. SR-OCC-2015-02 (January 30, 2015).


Humans Lose Out as Robots Take Tokyo Stock Exchange
Yuji Nakamura and Toshiro Hasegawa – Bloomberg
Yuji Honkawa knew the humans were losing by April 2010, when no matter how fast he sent orders to be filled at the Tokyo Stock Exchange, a machine beat him.
Unemployed now after 20 years dealing equities at seven different brokerages, the 47-year-old Honkawa watched as the market sped up and automated traders went from generating 10 percent of orders at the start of 2010 to as much as 72 percent last year. Among the men and women he battled to get prices for clients, 80 percent have left the industry, he estimates.

High-Frequency Trading Explained Through Bad Pick-Up Lines on Twitter
Michael P Regan – Bloomberg
There is an unwritten rule among weisenheimers that if you have to explain your jokes, you probably need either new jokes or a new audience.
This was true yesterday with a bunch of trading nerds who had each other giggling on Twitter with a nascent meme known as  #HFTPickupLines. As the hashtag suggests, these were pick-up lines that all had double-entendres involving the controversial practice of high-frequency trading.

Trading Technologies Enters into Agreement with Fundamental Analytics to Provide New Data Analysis and Visualization Services to TT Customers
Press Release – Trading Technologies
Trading Technologies International, Inc. (TT), a global provider of market-leading connectivity and trading solutions for the financial community, and Fundamental Analytics, a leading provider of charting and analytics software for energy and agricultural markets, today announced they have partnered to offer Fundamental Analytics to Trading Technologies’ customers for no additional charge. Additionally, the two companies are working together to expand the Fundamental Analytics service to include coverage of fixed income markets.

Options Education

The Perks of Trading Coffee Options
Shobhit Seth – Investopedia
“Soft commodities,” which include cotton, cocoa, coffee, and sugar, are appearing in portfolios as an alternate class of trading assets. Though many other agricultural produce like orange juice, sugar, and cotton enjoy the benefit of subsidies at the regional, national, and international levels, facilitating their trade, coffee production and export do not enjoy the same number of subsidizations for international trade. So while it is the world’s favorite drink, coffee is challenging to trade and price.

Use the Volatility Index to Buy Insurance for Your Portfolio
Mark Sebastian – The Street
The CBOE Volatility Index (VIX) is sometimes referred to as the fear index because it tends to move higher during times of fear and panic on Wall Street.
I think a better term is the insurance index. Your insurance price is at its highest right after you’ve been in an accident. But there are some things that can be extrapolated from the VIX. The most important question is how is it moving relative to the S&P 500 ? Right now, the two look quite simpatico. S&P is rallying, slowly, and the VIX tanked during that incredible February recovery.

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