Observations and Insight

Boca Bits & Pieces, Day Two
Sarah Rudolph – JLN

Wednesday’s big news came from Nasdaq, which announced plans to enter the energy futures market, challenging the dominance of the CME and ICE. Named Nasdaq Futures (NFX), the new market will launch around midyear with support from leading energy companies.

“What do the CME, ICE and Hillary Clinton have in common?” Nasdaq’s CEO Bob Greifeld asked reporters. His answer? “All seem to have a monopoly on their exchanges.”  

“We’re here to disabuse you of that idea,” he added. “Monopolies are against the natural order of competitive forces.”

Not one of Nasdaq’s customers wanted the new exchange to be a vertical silo model, he said. So the new market will be a horizontal model, clearing through the OCC rather than an exchange-owned clearinghouse.

The exchange has 12 FCMs committed to NFX, representing about 25 percent of the energy marketplace.

Read the rest of the column, including a summary of the Exchange Leaders panel, at JohnLothianNews.com — http://jlne.ws/1B7EFU8

Lead Stories

Nasdaq looks to halve energy trading cost
Gregory Meyer – Financial Times
Nasdaq plans to halve the cost of trading energy with the launch of a new, low-cost futures exchange that executives believe will challenge the current dominance wielded by the CME Group and Intercontinental Exchange.
The US exchange group, best known as a stock market operator, took aim at what it called a “monopoly” as it formally announced the launch of Nasdaq Futures, a commodity market that will list contracts in oil, natural gas and US power.

CBOE’s ‘fear gauge’ trades in steep drop
Tracy Alloway and Philip Stafford – Financial Times
Investors and traders have dramatically cut their bets on the movement of the Vix, the volatility index operated by the Chicago Board Options Exchange that is sometimes dubbed the “fear gauge” of Wall Street.
Open interest of Vix futures and options — which allow investors to make bullish or bearish bets on the index — has shrunk by half over the past six months. The outstanding number of Vix futures, calls and puts has dropped to 7.3m contracts compared with a peak of more than 14m in late 2013 and 13.7m as recently as July of last year.

February U.S. Listed Options Volume Down at 302.5 Million Contracts
John D’Antona Jr. – Traders Magazine
February options trading activity dropped to 302.5 million shares after a strong start in January.
According to Tabb Group, U.S. listed options volumes were around 355 million contracts in January. A drop in volatility was most likely to blame.

Nasdaq Volatility Surges as Dollar Rally Puts Celebration on Ice
Callie Bost, Joseph Ciolli and Michelle Davis – Bloomberg
The party has been postponed.
Less than two weeks after the Nasdaq Composite Index climbed within 1 percent of its dot-com era record, a surging dollar and interest-rate speculation have stopped the gauge in its tracks. Volatility in the Nasdaq 100 Index has surged by almost 20 percent in the past week, the biggest increase of the year on a rolling basis, as Netflix Inc. and Intel Corp. dropped.

With the Greenback Gaining, Euro Puts Heat Up
Adam Warner – Schaeffer’s Investment Research
I believe we have coalesced behind an official driver of this week’s market unrest. Blame the cratering euro!
I understand the concept that a big move in a prominent asset class can cause a ripple of jitters throughout the marketplace. But practically speaking, it’s going to settle at some point. And it mitigates the even bigger fear in the marketplace that the Fed deletes the word “patience” at some point sooner than the market expects (yes, I know that’s something too terrifying to contemplate).
Is the Fed really raising rates so fast in the face of a soaring currency? It seems very doubtful.

Bond Trading Just Keeps Getting Worse as Treasury Prices Swing
Lisa Abramowicz – Bloomberg
It’s taking less and less these days to make the $12.5 trillion U.S. Treasury market jump.
And it’s been jumping a lot lately: The bonds gained 2.9 percent in January, then plunged 1.7 percent the following month, according to Bank of America Merrill Lynch’s U.S. Treasury index. That 4.6 percentage-point swing in returns was the biggest to start any year since at least 1978.

Fed Rate Hike Cycles And Bond Yields
Brian Romanchuk – Seeking Alpha
In the post-1990 era, most Treasury bond bear markets are associated with Fed rate hike cycles. (There have been some counter-trend selloffs, such as the “Taper Tantrum” of 2013.) The 1994 episode was a notorious bear market that persisted throughout the hike cycle, whereas later bear markets tended to be more front-loaded, with losses concentrated before the Fed even starts to hike rates. This is what one would expect in an environment where the Fed is transparent about its policy actions.

CME Group Announces Winners of the 12th Annual Trading Competition
Press Release via IT Business Net
CME Group, the world’s leading and most diverse derivatives marketplace, today announced the winners of its 12th annual CME Group Trading Challenge. The four-week electronic trading competition is open exclusively to teams of currently enrolled graduate and undergraduate students around the world. The students compete on a real-time professional trading platform, provided by CQG, while learning about market events by accessing live Dow Jones newsfeeds and The Hightower Report. The competition is designed to offer students an educational and professional trading experience by giving them the chance to trade a variety of CME Group products across all major asset classes. This year brought record level participation with more than 500 teams made up of 2,000 students participating from 37 countries around the world.


Orc expands Nasdaq connectivity to include new energy futures exchange
Press Release – Orc
Orc, a global leader in trading technology, today announced they will expand coverage of Nasdaq markets to include Nasdaq Futures Inc. (NFX), the exchange group’s U.S.-based designated contract market (DCM), on its first day of trading.
Through NFX, Nasdaq will expand its commodities business with futures and options on key energy benchmarks including oil, natural gas and U.S. power, which will launch in 2015. Market participants will be able to manage their trading and hedging needs in a cost-efficient manner, using an innovative horizontal clearing solution operated by The Options Clearing Corporation.

Eurex Supervisory Board member and ISE Holdings Chairman inducted in FIA Hall of Fame
Press Release – International Securities Exchange, LLC
David Krell, Chairman of ISE and a member of the Supervisory Board of Deutsche Börse AG, and Jürg Spillmann, member of the Supervisory Board of Eurex Frankfurt AG and member of the Board of Directors of Eurex Zürich AG, have been inducted into the Futures Industry Association (FIA) Hall of Fame at the yearly FIA Boca derivatives conference. This honor recognizes a lifetime of outstanding contributions of members of the futures and options community.

ICE Futures U.S. Sets Daily Volume and Open Interest Records in ICE U.S. Dollar Index
Press Release – ICE
Intercontinental Exchange (NYSE: ICE), the leading global network of exchanges and clearing houses, announced today that ICE Futures U.S. reported record daily volume and open interest in the ICE U.S. Dollar Index (USDX) on March 11, 2015.
USDX traded 159,577 contracts on March 11, 2015; the previous daily volume record of 118,608 contracts was established on December 11, 2014. Open interest currently stands at a record 158,884 contracts.
Introduced in 1985, ICE’s USDX futures contract is the global benchmark for the value of the U.S. dollar and is the world’s most heavily traded currency index futures contract. ICE USDX futures and options trade exclusively on ICE Futures U.S.
ICE offers a broad range of currency futures contracts.

Regulation and Enforcement

CFTC to move from rule writing to implementation (speech)
Timothy Massad via Resource Investor
We knew that before the global financial crisis, but the crisis certainly drove that lesson home.  The absence of regulation allowed the build-up of excessive risk in the over-the-counter swaps market.  That risk intensified the crisis and the damage it caused.  We must never forget the true costs of the crisis:  millions of jobs lost, homes foreclosed and dreams shattered.
As a result of the financial crisis our country took action to address those risks.  We are implementing a new regulatory framework for swaps, one that mandates central clearing and brings greater transparency, reporting and oversight.  The CFTC’s responsibility today is to regulate the derivatives markets in a manner that not only prevents the build-up of excessive risk, but also creates a foundation on which the derivatives markets can continue to thrive and work for the many businesses that rely on them.

CFTC Chief Sees Progress in Resolving Clearinghouse Dispute With Europe
Andrew Ackerman – WSJ
U.S. and European policymakers have made “great progress” in resolving a protracted cross-border dispute over derivatives regulation, CFTC Chairman Timothy Massad said on Tuesday.
Mr. Massad, speaking at an industry conference here, said the CFTC had agreed to a European request to make some of its rules more “harmonized” with those in Europe. He declined to identify which rules but said they are already broadly similar to those in Europe.

Trading firm’s lawsuit takes CME to task
Lynne Marek – Crain’s Chicago Business
Failing to get any traction in a CME Group arbitration process, Chicago trading firm HTG Capital Partners filed a federal lawsuit yesterday against another firm it says manipulated CME’s futures market.
HTG was the victim of “egregious manipulation” for at least 20 months, from January 2013 through August 2014, the firm said in its filing with the U.S. District Court for Northern Illinois, alleging that the unnamed defendant engaged in “spoofing,” or the practice of placing orders with the intent of canceling them for monetary gain. HTG pressed similar claims with CME last year.
This practice enabled the defendants “to manipulate the market to their benefit, and to the detriment of HTG and other market participants,” HTG says in the lawsuit.

Listed derivatives face MiFID II clearing threat
Helen Bartholomew – IFRAsia
As much as half of the exchange traded derivatives market is under threat from proposed regulation that would prevent clients from accessing futures and options trades without a direct clearing broker relationship.
Indirect clearing, which enables derivatives users to access clearing houses by facing a client of a clearing broker rather than the broker itself, is set to be overhauled in an attempt to boost client protection via the second version of the Markets in Financial Instruments Directive, due to be implemented in 2017.

Buy-side warms to central clearing, finds survey
The Trade News
Institutional Investors are increasingly warming towards central clearing as a means to reduce system risk, a survey from research group Greenwich Associates found.
According to the results, 80% of investors believe central clearing of derivatives mitigates risk in global financial markets. In addition, almost 70% of respondents believe clearing houses have adequate financial resources to handle a major multiple bank default, providing a strong vote of confidence in both the risk frameworks and the clearing firms operating them.  


OCC to consider tech overhaul
Philip Stafford – Financial Times
Options Clearing Corp, the US’s largest equity derivatives clearer, will examine overhauling its technology in coming months in the next stage of its root-and-branch refresh under chief executive Craig Donohue.
The group, which on Wednesday agreed to clear for Nasdaq’s new energy futures trading business, has in recent months concluded long-running talks with shareholders to bolster its corporate capital structure, to meet new rules on clearing.

OptionsCity Selected as Preferred Vendor for Nasdaq Energy Futures
Press Release via Globe Newswire
OptionsCity Software, a global provider of electronic trading solutions for professional futures and options traders, and Nasdaq today announced that OptionsCity is a preferred independent software vendor for Nasdaq Futures (NFX), the exchange group’s U.S. based designated contract market (DCM). Through NFX, Nasdaq will expand its commodities business with futures and options on key energy benchmarks including oil, natural gas and U.S. power, which will launch in 2015.


Lightning Can Strike Twice; Waiting to Pounce on the VIX at $12
Matt Nesto – The Street
It’s been said that lightning never strikes twice, but scientists have refuted that age-old adage. Evidence is growing in the market that their logic applies figuratively as well as literally.
I’m talking about the CBOE S&P 500 Volatility Index, or VIX, the market’s most closely watched and actively traded barometer of fear. There are numerous ways to invest in volatility, be they futures, index options or exchange-traded funds — including several so-called leveraged products that try to double, triple or invert the daily performance of the index — but all of them are anchored to the plain old VIX.


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