Observations and Insights


Matthew Rees, R.J. O’Brien – Three Old Words For New Generations of Futures Trading

Matthew Rees, chief relationship officer at R.J. O’Brien & Associates, discusses a different perspective on technology, and the importance of keeping the human element when building and maintaining relationships with customers. Rees mentions that there is a “sweet spot” when utilizing new communication tools and staying connected to the “traditional world.” He also gives a warning about how new technology could inadvertently isolate customers.

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Lead Stories

Jana Bought $4 Billion of Protection as Volatility Waned
Miles Weiss – Bloomberg
Barry Rosenstein’s Jana Partners LLC bought more than $4 billion worth of protection against declines in the equity market during the second quarter, taking advantage of relative calm to add cheap insurance.
Jana, which oversees about $10 billion, held put options on 11.8 million shares of the SPDR S&P 500 ETF Trust, an exchange-traded fund that represents all of the companies in the Standard & Poor’s 500 Index, according to a regulatory filing last week. The hedge-fund firm also had put options on 19 million shares of the Energy Select Sector SPDR Fund (XLE), which holds stakes in about 45 large oil and gas companies, including Exxon-Mobil Corp. and Baker Hughes Inc.

After Tesla Sets Record(s), Options Traders Don’t See More Big Moves
Saumya Vaishampayan – WSJ
Shares of Tesla Motors Inc.TSLA -1.22% have rallied to yet another series of fresh records, but options traders aren’t betting on continued big moves in the day-trader favorite.
Tesla hit new record highs every day last week. Shares gained steam after Deutsche Bank upgraded the company, noting the electric-car maker’s prospects for stronger-than-expected growth in the next few years.

A Lesson in Numbers: The George Soros Edition
Adam Warner – Schaeffer’s Investment Research
Anyone inclined to follow the giants into and out of stocks must have gotten chills reading about what George Soros is doing in his portfolio.

China options market faces margin and settlement challenges
Justin Lee, Xiao Wang – Risk.net
Margin calculation methodology and settlement rules preventing market-makers hedging underlying option exposures are the two main challenges that need to be overcome before the expected launch of equity index options in China at the end of this year, while the launch of single stock options has been suspended, say market insiders.

Investors dine on fresh menu of credit derivatives
Tracy Alloway and Michael Mackenzie – Financial Times
In March of last year, Kyle Bass, founder of the hedge fund Hayman Capital Management, made a startling proclamation: aggressive young bankers in Japan were pushing complex over-the-counter derivatives similar to those that rapidly soured during the financial crisis of 2008.
Mr Bass warned of the return of the spectre of AIG, the giant insurer that required a huge bailout during the depths of the crisis, after selling billions worth of credit default swaps (CDS) that offered payouts to investors in defaulted mortgage bonds.

Key economic number rebounds
Andrew Wilkinson – Futures Magazine
Housing starts rebounded in July with the added boost of positive revisions to a dire reading for June. In addition the outlook seems decent given the accompanying pick-up in permit applications. The rebound lifted overall starts to a 1.093 million level, which easily surpassed the estimated pace of activity of 965k.

Tabb Predicts “Downright Corruption” Will Occur in HFT
Mark Melin – ValueWalk
Larry Tabb, founder and CEO of the Tabb Group, has a bone to pick with US Senator Carl Levin over high frequency trading (HFT).Tabb said that eliminating payment for order flow, a contentious issue in HFT, would in fact create more challenges and magnify conflicts of interest. Levin has proposed eliminating the little known and often undisclosed practice of stock brokerage firms accepting cash payments from trading venues for investor stock orders.


Brazil overhauls derivatives market
Elliott Holley – Banking Technology
Brazil’s BM&F Bovespa exchange has begun a major new project to bring all of its four clearing houses onto a single technology platform. Billed as the “world’s largest clearing project”, the Brazilian derivatives market – one of the world’s largest – has been moved first.

[Korea] Market makers to receive more incentives
Kim Eun-jung – GlobalPost
Broker-dealer firms and futures companies that act as market makers in the local derivatives market will temporarily receive a partial reimbursement of their transaction fees, the local bourse operator said Tuesday.
Under the move, which stems from the government’s efforts to facilitate futures trading, the firms will also be exempt from stock exchange taxes starting next year, the Korea Exchange (KRX) said.

Regulation and Enforcement

CFTC issues no-action letter for Chicago Mercantile Exchange
The US Commodity Futures Trading Commission (CFTC) has issued a no-action letter stating that it will not take enforcement action against the clearing house of the Chicago Mercantile Exchange.

Buy-side struggling to report collateral of transactions according to new report
Andrew Saks-McLeod – LeapRate
One year has passed since the finalization of the entirely overhauled rulings on OTC derivatives in North America, with the Commodity Futures Trading Commission (CFTC) and Securities and Investments Commission (SEC) having ended three years of consultation, bureaucracy and Senate meetings. This year is Europe’s turn to finalize its continental rulings, conforming to the global standards spearheaded by the United States last year.


Systemic risks of e-trading demand new pre-trade risk controls
Charlie Woodward – The Trade
The increasing complexity of electronic trading systems pose fundamental risks to the stable functioning of financial markets and their participants, claims a new report, which proposes a set of pre-trade risk control best practices for tier I and II sell-side institutions.
The report – published by UK-based consultancy GreySpark Partners – says a combination of machine and human errors have contributed to an increasing number of ‘flash crashes’ and market glitches in recent years. Caused by improperly implemented and designed automated trading systems, these systemic failures have contributed to considerable lapses in liquidity across global markets, which in turn can lead to a breakdown in trade execution flow.

Options Education

12 Key Stats Re: VIX Index
Matt Moran – CBOE Options Hub
The column noted that there are “widespread worries that investors are too complacent or somehow missing the larger picture.” Some observers have questioned whether the CBOE Volatility Index (VIX) has been low in light of overseas tensions, while other commenters have noted that the historic volatility of the S&P 500 Index generally has been even lower than the VIX Index throughout most of this year.
We see and hear many comments and questions on the popular VIX Index and related products; here are twelve key stats –

The Mental Part of Trading
Bob Lang – CBOE Options Hub
One of the things option traders and stock traders struggle with is the mental part of the game.  There is NOBODY out there who trades each day that is unaffected by the emotions displayed by the markets.  That is because the market, price action and volume are a sea of emotions displayed on a chart.  We can visibly see moments of fear and greed in the minds of players just by seeing the green and red bars (buys and sells) in price movements.  The parameters do not change.  Think of it as a football field, with fear on one side and greed on the other.  We are all trying to move up/down the field with the minimal amount of emotion, but we are often pulled to one sideline or the other for various reasons.



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