Observations and Insight

Bits and pieces from IDX
Jim Kharouf – John Lothian Newsletter

If this year’s International Derivatives Expo (IDX) in London reflects one thing, it is that regulation continues to dominate the conversation. Phupinder Gill, CEO of CME Group sounded the alarm at the exchange leaders’ panel about regulatory arbitrage.

He said that futurization of swaps and margin requirements for non-US entities trading on futures markets is pushing that order flow out of US exchanges and back over to European bourses and elsewhere.

And that is just one of many issues that are cropping up for firms who are dealing with capital and reporting requirements.

So what is an FCM, bank, broker or trading firm to do? IDX’s exhibit hall is loaded with vendors that are offering any number of risk management and post-trading services. Contango Markets unveiled its tool to reconcile post trade swaps, while any number of vendors are pushing compliance functionality on their trading software. Others are trying to reduce clearing costs in a variety of ways. Other firms such as OpenGamma and Sungard, for example, are trying to help clearing member firms cut clearing costs and provide capital allocation tools.

David Hardy, chairman of GCSA, is pushing an insurance product for clearing houses that would ultimately help clearing member firms reduce the amount of capital needed in the default fund.

In short, firms continue to look for two things – reporting and compliance technologies to meet requirements, and ideas, discussions and products that will ultimately free up capital.

If Gill is correct about the regulatory arbitrage issue, firms may be looking for the next technology that gives them the regulatory edge.

Lead Stories

It’s Not the VIX That’s Vexing the Market
Michael Kahn – Barron’s
Part of the job of a technical analyst is to assess the psychology of the market. Charts help us see what investors are doing. To get a handle on what investors are thinking—which can suggest what they might do in the future—we turn to sentiment analysis.
Right now, several measures of investor sentiment are at very optimistic levels. Indeed, some are “too optimistic,” which suggests everyone who is going to buy stocks has already done so. Without fresh demand, just a paucity of new buying can be enough to start a correction.
http://jlne.ws/1pIrFBU

VIX: More to Fear Than Fear Itself
Brendan Conway – Barron’s
Spencer Jakab in the Wall Street Journal this week reminds investors that the idea of “trading” market volatility is more complicated than buying one of the ready-made securities with “VIX” or “volatility” in the name:
http://jlne.ws/1pI8PdV

Missing – Market Volatility
Kirsten Donovan – Reuters
Volatility, whether you consider it friend of foe, the simple fact is it’s gone, vanished, disappeared.  So is this a sign of financial market sanity, or investor complacency?
The U.S. Federal Reserve worries it is the latter, recently adding low volatility to the list of issues weighing on the central bank’s collective mind, but Breakingviews’ economics editor Edward Hadas argues it is the former, albeit there are no guarantees it will last.
http://jlne.ws/TKNOEv

With VIX Low, What’s Wall Street To Do?
Peter Cohan – Forbes
Wall Street profits from trading volume. And trading volume depends on sparking human emotion. Sadly for Wall Street, fear has left the building and greed has not replaced it.
This means that Wall Street will be firing excess traders and investors ought to consider buying S&P 500 index funds — at least until the market’s price/earnings ratio starts spiking towards the nosebleed levels it reached in 2000 and 2007.
http://jlne.ws/1oVe0pz

Inside Futures: Relevant trading-focused information authored by key players in the futures, options and forex industries
David Moenning – Inside Futures
Back in March, we spent some time exploring how investors could use the VIX in order to help them determine safe entry points in the market after corrections. We looked at a couple of different buy signals that were tied to the VIX. As we discussed a really simple approach to identify turning points in the market after a correction is to wait for the VIX to first spike and then reverse lower.
http://jlne.ws/1l9x0fW

Asia-specific Vix indexes fail to ignite market interest
Justin Lee – Risk Magazine
The Asian volatility index market is at a nascent stage with a number of Asian exchanges launching volatility-based indexes and futures products on the back of them. However, uptake has been slow, with liquidity and low volatility hampering widespread trading.
The idea of an option-based implied volatility benchmark (Vix) was first introduced by the Chicago Board Options Exchange (CBOE) in 1993. This was met with limited success and in 2003, the CBOE updated the Vix methodology with the first exchange-traded contract launched in March 2004. However, it was only following the 2008 crisis that volumes on Vix futures and options have increased substantially with daily average volume for Vix options at 792,668 contracts for January (see chart).
http://jlne.ws/TKSQRz

I Dream of VIX Trading
VIX futures will soon be tradable overnight
Adam Warner – Schaeffer’s Investment Research
If there’s market-moving news in our overnight, you can now try to pick off some stale VIX futures order. So, here’s some advice: Don’t leave open orders out in VIX if you’re not awake. In fact, that’s good advice in any product. By morning and regular hours, VIX futures will be basically wherever they would have been anyway.
http://jlne.ws/Uubbmz

Videocast: Buying puts in the VIX
optionMONSTER
http://jlne.ws/1pIsOcp

Regulations and Enforcement

CFTC agrees to settle Arcadia oil manipulation case
Reuters
The U.S. Commodity Futures Trading Commission has reached an agreement in principle to settle its oil manipulation case against Arcadia Petroleum and Parnon Energy, taking a step closer to ending a high-profile, years-long lawsuit.
http://jlne.ws/1pI9NXQ

Challenges in Requiring High-Frequency Traders to Register as Dealers
The National Law Review
In a June 5 speech, Mary Jo White, Chair of the Securities and Exchange Commission (SEC), outlined a broad proposal to address market structure issues in light of the increase in electronic and off-exchange trading in recent years.[1] Among the initiatives outlined in the Market Structure Speech, Chair White indicated that she has asked the SEC staff to prepare a recommendation to the SEC for a rule to clarify that high-frequency traders come within the meaning of the term “dealer” and have to register as such with the SEC.
http://jlne.ws/TKLrBw

U.S. Swaps Regulator Names Goelman to Lead Enforcement
Silla Brush – Bloomberg
Aitan Goelman, a former federal prosecutor and criminal defense lawyer, was named director of enforcement at the U.S. regulator in charge of rooting out fraud and manipulation in derivatives markets.
Goelman, a Washington-based partner at Zuckerman Spaeder LLP, will join the Commodity Futures Trading Commission, agency chairman Timothy Massad said yesterday in a statement announcing his first high-profile personnel move since he was sworn in last week.
http://jlne.ws/TKLEEN

Strategy

A Safe Bet On Volatility
Amit H. Shah – Seeking Alpha
Remember what happened on September 14, 2008? If you are an investment banker, then chances are that you remember very well; for the rest of us, that was when Lehman Brothers declared bankruptcy. This single incident sent ripples throughout the global financial infrastructure and in part, affected many subsequent fiscal decisions.
http://jlne.ws/1oVc40t

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